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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     .

Commission file number: 001-34875

 

SCIQUEST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

56-2127592

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

3020 Carrington Mill Boulevard, Suite 100

Morrisville, North Carolina

 

27560

(Address of principal executive offices)

 

(Zip Code)

(919) 659-2100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Exchange on Which Registered

Common Stock, $0.001 par value

 

The NASDAQ Stock Market LLC

(NASDAQ Global Market)

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

¨

Accelerated filer

x

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  x 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the NASDAQ Global Market as of the last business day of its most recently completed second fiscal quarter was $411,904,265.

As of January 31, 2016, 27,850,978 shares of the registrant’s common stock, par value $0.001 per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III — Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s 2015 fiscal year. Except as expressly incorporated by reference, the registrant’s Proxy Statement shall not be deemed to be a part of this report on Form 10-K.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

Page

 

PART I

 

Item 1.

Business

1

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

26

Item 2.

Properties

26

Item 3.

Legal Proceedings

27

Item 4. 

Mine Safety Disclosures 

27

 

PART II

 

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

27

Item 6.

Selected Financial Data

30

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

49

Item 8.

Financial Statements and Supplementary Data

49

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

49

Item 9A.

Controls and Procedures

49

Item 9B. 

Other Information 

52

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

52

Item 11.

Executive Compensation

52

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

52

Item 13.

Certain Relationships and Related Transactions, and Director Independence

52

Item 14. 

Principal Accounting Fees and Services 

52

 

PART IV

 

Item 15. 

Exhibits and Financial Statement Schedules 

52

 

SignatureS

56

 

 

 

- i -


 

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in “Part I, Item 1, Business,” “Part I, Item 1A, Risk Factors” and “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K (this “Report”). Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements consist of all statements that are not historical facts and can be identified by terms such as “accelerates,” “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Part I, Item 1A, Risk Factors” and elsewhere in this Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Report. You should read this Report and the documents that we have filed as exhibits to this Report completely and with the understanding that our actual future results may be materially different from what we expect. 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.

PART I

 

ITEM 1. BUSINESS

Overview

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

 

·

spend analytics solutions that cleanse and classify spend data from a wide variety of sources and formats putting data and analytics to work to drive and measure cost savings;

 

·

sourcing solutions that create events, manage bids and award contracts automatically to simplify and optimize the bidding process;

 

·

supplier management solutions that facilitate on-boarding, maintaining and managing supplier relationships and give visibility into which suppliers are best able to support goals;

 

·

contract lifecycle management solutions that automate the contract lifecycle from contract authoring, automated workflow approvals to a fully searchable archive of executed contracts;

 

·

procurement solutions that automate the purchasing process and drive contract compliance;

 

·

inventory management solutions that facilitate finding, sourcing and tracking chemicals and research supplies;

 

·

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

 

·

a supplier network that provides a single platform for all supplier interactions.

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

Our spend management solutions provide a significant return on investment for our customers by facilitating the reduction of spending on goods and services, enhancing visibility and control over spending decisions and practices as well as optimizing the

- 1 -


 

efficiency of key business processes.  As a result of these benefits, our customers have the tools to focus on strategic initiatives that result in even greater value to their organizations.

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

We deliver our cloud-based solutions using a Software-as-a-Service, or SaaS, model, which enables us to offer greater functionality, faster innovation, easier integration and improved reliability with less cost and risk to the organization than traditional on-premise solutions. Customers pay us subscription fees and implementation service fees for the use of our solutions under either multi-year contracts that are generally three to five years in length or one-year contracts with annual renewal provisions. Subscription payments are typically payable annually in advance. A portion of the implementation service fees are typically payable in advance with the remainder payable as the services are performed, usually within the first three to eight months of contract execution.

As of December 31, 2015, we served 527 customers, excluding customers that spend less than $10,000 per year with us. For the fiscal year ended December 31, 2015, revenues increased 3% to $105.4 million from $101.9 million for the fiscal year ended December 31, 2014. For the fiscal year ended December 31, 2014, revenues increased 13% to $101.9 million from $90.2 million for the fiscal year ended December 31, 2013. No customer accounted for more than 10% of our revenues during 2013, 2014 or 2015. Our high customer retention, combined with our long-term contracts, increases the visibility and predictability of our revenues compared with traditional perpetual license-based software businesses.

Company Background

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

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

Industry Background

Spend Management

Spend management is the method by which organizations control and optimize their spending and spending-related processes to improve their financial results and value to the organization. A comprehensive approach to spend management requires a provider to address multiple unique business processes and needs in order to identify and realize cost savings, including procurement, spend analysis, supplier management, contract lifecycle management and accounts payable.  Buyers generally follow a sequential set of processes, referred to as the “source-to-settle” cycle, which is comprised of the following steps:

 

·

identify which suppliers have the required goods and services;

 

·

negotiate purchasing or contractual relationships;

 

·

establish a mechanism to transact business;

 

·

find, compare, approve and order the necessary goods and services; and

 

·

receive, inspect and pay for the goods and services.

We believe that the market for spend management solutions is fragmented among relatively small specialty vendors offering point solutions that address certain aspects of spend management, large enterprise resource planning, or ERP, vendors and internally developed and maintained solutions.

- 2 -


 

Spend Analytics. In the course of their procurement activities, organizations typically generate large amounts of spend data, the analysis of which is essential in order to identify spending patterns and savings opportunities. This spend data, however, is typically derived from a variety of sources in different formats, which is then extremely complex and time-consuming to collect, cleanse and classify based on specific business requirements. Many organizations are dependent upon manual processes to extract this spend data from multiple sources and to compile it within spreadsheets that provide minimal analytic capabilities and are error-prone. The resulting information is often incomplete, inaccurate and insufficient to conduct meaningful spend analysis. With complete spend data that is accurately classified, organizations are capable of identifying targets for improved contracted pricing, identifying non-compliant purchasing behavior, verifying supplier compliance with contract terms and measuring effectiveness of ongoing strategic sourcing initiatives.

Sourcing.  Organizations typically identify and select vendors from whom to acquire goods and services through competitive sourcing events to elicit best offers from potential vendors.  The sourcing process has traditionally been extremely inefficient and complex due both to the wide variety of sourcing events and the multiple steps required in any sourcing process.  Sourcing events can vary significantly and include requests for information (RFI), requests for proposal (RFP), requests for quotes (RFQ), reverse auctions and multi-stage events.  The sourcing process includes defining the scope of the sourcing event, identifying and inviting potential vendors to participate in the event, creating and distributing event materials to participating vendors and evaluating supplier responses.  Automated sourcing tools can bring efficiencies to the sourcing process by facilitating the use of templates and libraries to create and reuse event materials, automating and streamlining vendor communications and collecting, normalizing and comparing supplier responses for more efficient evaluation.  Advanced sourcing tools will allow organizations to optimize outcomes and uncover savings opportunities beyond simply choosing the lowest price by balancing total cost of ownership with enterprisewide value.

Supplier Management. Organizations often have difficulties understanding, monitoring and managing not only their large and often diverse supplier base but also having clear insights into their more strategic suppliers. Typically, many departments in an organization work with the same supplier but have separate interactions independent from each other and have limited resources to manage these suppliers. This often results in duplication of efforts, inaccurate and fragmented supplier records spread across multiple, disconnected systems, inconsistent or non-existent processes to on-board new suppliers and lack of visibility into supplier performance, risk exposures and financial metrics. By managing supplier information and interaction centrally, the organization can reduce costs through more focused buying power, increased competition among its suppliers, greater collaboration with suppliers, greater visibility and control over supply chain risk and better management of supply chain performance.

Contract Lifecycle Management. The process of creating and managing contracts, known as contract lifecycle management, is largely a manual and disjointed function in many organizations that involves disparate departments in the organization, such as procurement, legal, sales and finance. This can result in significant inefficiencies and limitations, such as cumbersome contract creation, negotiation and approval processes; greater risk of contract errors; the inability to effectively enforce contracting policies; the inability to easily track contract requirements, milestones, expirations or renewals; the inability to measure contract performance; and difficulty in enforcing internal contracting policies. By streamlining contract processes, reducing contract inaccuracies and improving contract compliance, organizations can reduce costs and liability risks and increase cycle times.

Procurement. The procurement process for goods and services, especially with regard to indirect spend, is often not well-managed or controlled. As a result, many purchases are not made from preferred suppliers and/or purchases are conducted “off-contract,” a behavior sometimes referred to as “maverick spending.”  Traditionally, procurement organizations and employees have relied on manual, paper-based processes to procure goods and services, resulting in inaccuracies, inefficiencies, poor control and reduced user productivity. Automated processes can provide procurement departments with greater visibility and control over purchasing, maverick spending and the ability to realize cost-savings by negotiating price discounts and driving spend to lower priced goods. According to Gartner, the global procurement software market, which is a subset of the spend management market, is forecast to grow at an average annual growth rate of 10% to $4.8 billion in 2019.  

Inventory Management.  Research organizations face specific challenges to maintain their internal research supply chain that are not addressed by typical stockroom solutions.  For instance, fire code and safety regulations require these organizations to restrict and/or report inventory levels of certain chemicals.  Furthermore, the Department of Homeland Security requires monitoring access to certain regulated materials.  Compliance failures can result in significant fines and other penalties.  Research organizations require tools to enable the efficient and effective management of bulk materials, chemicals, lab equipment and other supplies in multiple stockrooms.  Effective tools will be integrated with procurement solutions to include stockroom searches in purchasing workflows to improve stockroom utilization and eliminate unnecessary outside purchases.

Accounts Payable. Historically, accounts payable processes have been highly manual and inefficient. Inefficient accounts payable processes can lead to late payment penalties due to lengthy invoice processing cycle times, duplicate or incorrect payments due to manual data entry errors, the inability to capitalize on prompt payment discounts, lack of visibility into outstanding liabilities and increased supply chain risks due to frustrated suppliers. Technology solutions to automate accounts payable processes enable organizations to reduce invoice processing errors, late payment penalties, duplicate payments and overpayments as well as realize

- 3 -


 

prompt payment discounts. Through automation, organizations can also reduce the number of employees dedicated to the accounts payable function and redirect them to more strategic roles.

Business Automation Efforts

Efforts to automate these functions initially consisted of add-on modules to ERP systems and first generation systems. While these systems provide some business automation benefits, most have limited effectiveness, because they are implemented on-premise and lack managed service capabilities to enable suppliers. Many of these systems are also point solutions that only address a single aspect of spend management and do not offer a comprehensive approach.

The introduction of SaaS-based spend management solutions within the past several years has enabled commercial transactions and other business processes to be conducted online more efficiently. These systems provide better access both within an organization and suppliers and other third parties and offer lower implementation and ongoing maintenance and upgrade costs. We believe there is a substantial market for focused, easy-to-use solutions that establish and maintain strong and efficient commercial relationships between organizations and their suppliers and other third parties.

Our Solutions

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

 

·

spend analytics solutions that cleanse and classify spend data from a wide variety of sources and formats putting data and analytics to work to drive and measure cost savings;

 

·

sourcing solutions that create events, manage bids and award contracts automatically to simplify and optimize the bidding process;

 

·

supplier management solutions that facilitate on-boarding, maintaining and managing supplier relationships and give visibility into which suppliers are best able to support goals;

 

·

contract lifecycle management solutions that automate the contract lifecycle from contract authoring, automated workflow approvals to a fully searchable archive of executed contracts;

 

·

procurement solutions that automate the purchasing process and drive contract compliance;

 

·

inventory management solutions that facilitate finding, sourcing and tracking chemicals and research supplies;

 

·

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

 

·

a supplier network that provides a single platform for all supplier interactions.

Our solutions are designed to reduce costs, simplify and improve visibility into key business processes, further strategic initiatives, enhance control over spending decisions and improve compliance and risk management. By simplifying and streamlining cumbersome, and often manual, processes and creating a comprehensive, intelligent view of spending and compliance, organizations can identify and capitalize on opportunities to reduce costs and optimize processes by gaining control over suppliers, contracts, purchases and payments. Our procurement, supplier management and accounts payable solutions leverage our managed SciQuest Supplier Network, which facilitates our customers doing business with many thousands of unique suppliers and spending billions of dollars annually. We deliver our cloud-based solutions using a Software-as-a-Service, or SaaS, model, which enables us to offer greater functionality, easier integration and improved reliability with less cost and risk to the organization than traditional on-premise solutions.

Our solutions provide a significant return on investment for our customers through the following key benefits:

 

·

Enhanced visibility and control. SciQuest solutions provide greater visibility into, and control over, the management of suppliers, contracts, purchases and payments to help customers identify savings opportunities and manage risk. Our procurement and spend analysis solutions provide granular detail into user spending behavior and provides detailed analytics that allow organizations to continually improve their purchasing practices. Our supplier information management solution provide customers with greater insight into their supplier base by identifying supplier data and qualities that may impact purchasing decisions, including supplier capabilities and diversity qualifications. Our contract lifecycle management solution provides greater visibility into contract negotiation and compliance, enabling risk reduction and greater control over contractual rights and obligations. Our accounts payable solution provides greater visibility with respect to outstanding liabilities and available payment discounts.

 

·

Achieve Savings Objectives. SciQuest solutions ultimately help customers reduce spend through organization-wide transparency, automation, compliance and analysis. Our procurement solution enables organizations to realize the benefits

- 4 -


 

 

of spend management by identifying and establishing contracts with preferred suppliers, negotiating pricing discounts, driving spend to those preferred contracts and promoting process efficiencies through electronic transactions. Our contract lifecycle management solution facilitates more effective contract negotiation and compliance that can result in better contract terms. Our accounts payable solution can help organizations better manage and realize prompt payment discounts and avoid late payment penalties. As a result, customers are able to achieve significant savings associated with their spending activities.  

 

·

Optimize processes and gain efficiencies. SciQuest solutions deliver sustainable value through process transformation that reduces complexity, eliminates waste and errors and promotes ease of use. By automating cumbersome and time-consuming procurement, supplier management, contracting and accounts payable processes, organizations can reduce processing costs, increase cycle times and redirect personnel to more valuable activities.

Business Strengths and Success Factors

We believe that there are a number of characteristics that have facilitated, and are expected to continue to facilitate, our growth, including:

 

·

Large and growing addressable market. According to Gartner, the global procurement software market, which is a subset of the spend management market, is forecast to grow at an average annual growth rate of 10% to $4.8 billion in 2019. We believe that this large and growing market presents a significant opportunity to continue our revenue growth. Furthermore, our expansion into the general commercial market together with our past acquisitions have increased our addressable market and growth opportunities. We have significantly increased the size of our sales force over the past several years to capitalize on our growth opportunities.

 

·

Broad comprehensive portfolio on a differentiated and unified cloud-based platform. We believe that we are uniquely positioned as a full-suite provider of cloud based spend management solutions on a unified technology platform that can also provide best-in-class point solutions as needed.  This duality is contrasted with (i) large full-suite and ERP providers that primarily offer only full-suite solutions and/or implement their products on-premise, (ii) specialty providers that address only certain aspects of spend management and (iii) providers of suite portfolios where the products are not natively built on a unified platform. The flexibility to offer both full suite and point solutions not only differentiates us but also offers cross-selling and other growth opportunities. Our unified cloud-based platform enables us to offer greater cross-product differentiated functionality, easier integration and improved reliability with less cost and risk and more benefit to the customer. We have 37 issued U.S. patents covering our products with additional U.S. patent applications pending.

 

·

Unique global supplier network that encourages supplier participation and collaboration between buyers and suppliers. Through the SciQuest Supplier Network, we have built a critical mass of suppliers that enables efficient and automated transaction interactions for our customers. Unlike many other providers, we do not charge suppliers any fees for the use of our network. This approach encourages suppliers to participate in the network and facilitates customers consolidating more of their spending through our solutions. Upon signing of a new customer, we seek to add that customer’s suppliers to our supplier network. Therefore, to the extent that a customer’s suppliers are already on our supplier network, our costs to enable these suppliers are reduced, allowing us to benefit from improved operating margins and other economies of scale. We believe that the SciQuest Supplier Network and the large number of suppliers who currently participate in it is a significant competitive advantage over potential competitors who do not have a robust supplier network.

 

·

Focus on customer value. Delivering value to our customers is at the core of our business philosophy. We focus extensively on ensuring that customers achieve a demonstrated return on investment from our solutions, and we proactively engage with our customers to continually improve our software and services. To this end, many of our customers are paired with a member of our client partner organization that proactively assists that customer to maximize its return on investment and related benefits from their implementation of our solutions. Our value proposition and high customer satisfaction rates have led to strong recurring revenue retention rates of approximately 100%, 96% and 98% for 2013, 2014 and 2015, respectively. We calculate recurring revenue retention rates for a particular period by dividing one by the subscription revenue for all customers at the end of the prior period multiplied by the subscription revenue for those same customers at the end of the current period.

 

·

Maximize long-term customer revenue. A key aspect of our SaaS business model is to maximize the recurring revenue stream from each customer through price increases upon renewal and the sale of new products, which result in increased annual subscription fees and additional implementation service fees. In 2013, 2014 and 2015, approximately 41%, 55% and 48%, respectively, of new sales consisted of sales of additional products or services to existing customers.  We believe that our integrated suite of spend management products on a unified technology platform significantly enhances our ability to sell additional products to existing customers.

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·

High visibility business model. Our customers pay us subscription fees and implementation service fees for the use of our solutions under either multi-year contracts that are generally three to five years in length or one-year contracts with annual renewal provisions. In each case, we typically receive cash payments annually in advance. The recurring nature of our revenues provides high visibility into future performance, and the upfront payments result in cash flow generation in advance of revenue recognition. For each of the last three years, 80% or more of our revenues were recognized from contracts that were in place at the beginning of the year.  

Our Growth Strategy

We seek to become the leading provider of business automation solutions for spend management. Our key strategic initiatives include:

 

·

Commercial Market Expansion. Over the past several years through acquisitions as well as our own marketing efforts, we have broadened our market focus beyond our historical vertical markets to include the general commercial market. We believe the general commercial market represents a significant market opportunity for our solutions. We intend to pursue this opportunity through focused sales and marketing efforts to expand our reach and brand awareness into key segments of the commercial market. We also intend to expand our product portfolio through either acquisitions or internal development to add products that will strengthen our competitive position in the commercial market.

 

·

Capitalize on cross-selling opportunities into our installed customer base. As of December 31, 2015, our solutions were being used by 527 customers, excluding customers that spend less than $10,000 per year with us, and most of these customers do not currently utilize all, or even a majority, of our solutions. Our existing customer base provides us with a significant opportunity to sell additional products, including new products that we develop or acquire. For the years ended December 31, 2013, 2014 and 2015, approximately 41%, 55% and 48%, respectively, of new sales have consisted of sales of additional products with services to existing customers. In addition to marketing our existing products, we also plan to develop and/or acquire additional products to sell to our existing customers by leveraging our position as a trusted spend management solution vendor.

 

·

Invest in new and current products. We have invested, and will continue to invest, significantly in the development of new products to expand our market presence and the features and functionality of our existing products to enhance their marketability through both acquisitions and internal development. In 2011 we added our supplier management solutions, in 2012 we added our spend analysis, contract lifecycle management and accounts payable solutions and in 2013 we added our advanced sourcing product. In 2015, we rebuilt these acquired products, with the exception of advanced sourcing, onto our unified platform.  We believe that investing in our product portfolio and our unified platform will continue to drive sales to new and existing customers and further our market differentiation.

 

·

Invest in direct and indirect sales channels.  We believe that our current markets, particularly given our expansion into the general commercial market, offer significant growth opportunities.  We have invested, and will continue to invest, in our direct and indirect sales channels in order to capitalize on these growth opportunities.  We are also increasing our emphasis on indirect sales channels and are developing plans to strengthen and expand our indirect sales relationships, including our channel partner, consultant and systems integrator relationships, in order to further support our revenue growth.

 

·

Selectively pursuing acquisitions. We expect to pursue acquisitions of businesses, technologies and solutions that complement our existing offerings in an effort to accelerate our growth, enhance the capabilities of our existing solutions and/or broaden our solution offerings. For example, in 2013, we acquired CombineNet, a leading provider of advanced sourcing software to large companies with complex procurement needs, and in 2012 we acquired Upside, a leading provider of contract lifecycle management solutions, and Spend Radar, a leading provider of spend analysis solutions. We also may pursue acquisitions that allow us to expand into new markets or geographies where we do not have a significant presence.

 

·

Invest in international expansion to acquire new customers. We believe that the market outside the United States offers us significant growth potential. Our past international growth has been primarily incremental through leveraging sales to multinational organizations with operations in the United States and our acquisition of Upside Software in Canada. We have also enhanced our European presence through our 2013 acquisition of CombineNet. We intend to accelerate our international expansion through our direct sales force and by establishing additional third-party sales relationships in an effort to leverage our leadership position and reputation as a leading provider of spend management solutions to organizations with global operations.


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Our Products and Services

Our solutions automate business processes that are essential to spend management. We provide our solutions on-demand over the Internet using a SaaS model, which enables us to offer greater functionality, integration and reliability with less cost and risk than traditional on-premise solutions. We continue to evolve our solutions based on our interaction with our customers around the world.

Our solutions are priced based primarily on the products purchased and the size of the organization. Sales vary between multi-product sales and single-product sales. Our total subscription fees over a three to five year term of the subscription agreement for sales of single products typically range from $150,000 to $500,000 ($50,000 to $100,000 per year) while a multi-product sale range can typically range from $480,000 to $1.5 million ($160,000 to $300,000 per year). Our typical one-time implementation service fees are generally equivalent to one year of license fees. Generally, customers are not charged based on the number of users or transaction volume, which encourages organizations to maximize the number of employees using our solutions, resulting in enhanced efficiencies and customer satisfaction.

The following diagram provides an overview of our solutions:

 

 

Our cloud-based spend management solutions provides customers with a set of products and services that enable them to automate key business processes. These integrated products allow our customers to more efficiently communicate and transact with their suppliers and better manage their spending.

Our software suite optimizes processes to reduce costs, improve productivity and increase visibility for enterprise spend management. The individual products within our solutions can be deployed together or separately and integrate with many leading ERP systems.

The following is an overview of the products comprising our solutions:

Spend Radar:

 

·

Collects and cleanses organization-wide spend and spend-related data to improve accuracy and ease of analysis;

 

·

Classifies organization-wide spend and spend-related data to analyze and report on true and accurate totals; and

 

·

Refreshes data analysis on an ongoing basis according to customer specifications.

 

·

Provides analysis and reporting of spend data through both standard and custom reports;

 

·

Visual, interactive reports that simplify complex analysis; and

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·

Ability to export spend data to Excel, PowerPoint, PDF or CSV.  

Sourcing Director:

 

·

Expedite bid creation, addendum, extension and distribution process for RFxs;

 

·

Self-service supplier portal for registration, event alerting and participation;

 

·

Analyze bid events with side-by-side and scenario analysis

 

·

Automatic scoring and cost analysis; and

 

·

RFx template library to create efficiencies.

Advanced Sourcing Optimizer:

 

·

Manage complex sourcing events requiring flexible bidding capabilities and analytical power;

 

·

Optimizes award decisions based on costs, value, risk profiles, business rules and other preferences;

 

·

Robust “what if” bid analysis scenario development;

 

·

Conduct sealed-bid RFx and a variety of eAuction types; and

 

·

Supports expressive bidding and feedback to create a collaborative marketplace.

Total Supplier Manager:

 

·

Supplier registration and profile management portal for suppliers;

 

·

Pre-qualification process to provide insight into supplier capabilities during initial registration process;

 

·

Automate on-boarding supplier setup processes for payables;

 

·

Diversity certification tracking and verification and 2nd tier reporting; and

 

·

Collect, review and manage supplier compliance information.

Total Contract Manager:

 

·

Supports all contract types, including procurement, sales, manufacturer, distributor and others;

 

·

Contract authoring supported by a guided ‘wizard’-like process;

 

·

Template and clause library to support central management of standard contract terms and conditions;

 

·

Flexible workflow approvals and editing rights;

 

·

Central contract repository with alerting and compliance monitoring for amendments, renewals and milestones; and

 

·

Supports electronic signatures.

Spend Director:

 

·

A one-stop marketplace for all goods and services with familiar e-commerce shopping cart functionality;

 

·

Preferred positioning for suppliers to promote best contracts or other spending priorities;

 

·

Budget and spend tracking by contract as well as contract price validation;

 

·

Enhances existing procurement processes;

 

·

Exchange purchase documents electronically and securely with suppliers;

 

·

Consolidates requisitions to maximize discounts; and

 

·

Analyzes requisition and order data to identify savings opportunities and audit contract compliance; and

 

·

Spend, cycle time and site usage reporting and dashboard.

Enterprise Reagent Manager:

 

·

One-stop chemical reagent shopping;

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·

Integrated, automated purchasing and receipt;  

 

·

Enforced health and safety compliance;

 

·

Reduced material and disposal costs; and

 

·

Configurable inventory and operations reporting.

Accounts Payable Director:

 

·

Electronic invoicing through cXML or EDI eInvoicing, portal invoicing and OCR outsourcing capabilities;

 

·

Automated, intuitive receiving to minimize the risk of goods not received, damaged or returned;

 

·

Flexible two-way or three-way matching of invoices, purchase orders and contracts customizable to customer requirements;

 

·

Accelerated invoice approval process;

 

·

Reduced labor-intensive vendor support through a comprehensive supplier self-service portal; and

 

·

Standard reports for review, analysis and management of invoice exceptions and performance.

SciQuest Supplier Network

The SciQuest Supplier Network is an open community of suppliers within one centralized portal, providing a single venue for customers to conduct vendor discovery and for suppliers to manage their customer relationships. It is a SaaS communications hub that enables efficient and automated transaction interactions between our customers and their suppliers through our procurement, accounts payable and supplier management solutions. It is the single integration point between our customers and their suppliers that provides customers with comprehensive and up-to-date supplier information, including supplier catalogs. By utilizing the SciQuest Supplier Network, our customers and their suppliers can connect in a hub-and-spoke configuration versus a one-to-one configuration, dramatically reducing the cost of integration. The SciQuest Supplier Network also provides customers with the infrastructure to add additional suppliers as needed. By creating a tight connection between customer and their key suppliers, the SciQuest Supplier Network is an important contributing factor to our high customer retention. In addition, we believe that the SciQuest Supplier Network and the large number of suppliers who currently participate in it is a significant competitive advantage over potential competitors who do not have a robust supplier network.

Our Service Offerings

We offer our customers a number of services, some of which are included as part of their annual subscription fee and others, such as implementation services, are billed separately.

Client Partners. Our client partner organization proactively assists customers to maximize the benefit from their SciQuest solutions. Our customers may be paired with a member of our client partner organization, who monitors the customer’s utilization of our solutions and tracks performance metrics. Our client partners can identify underuse of the solutions within the organization and proactively assist customers to better integrate our solutions into their processes. Client partners also promote best practices for maximizing the value of our solutions throughout our customer base.

Supplier Enablement Services. Our supplier enablement organization manages the SciQuest Supplier Network and all supplier connections to our customers. This organization’s role is to ease the integration of suppliers into our network and to increase the efficiency of communication between our customers and their suppliers. These efforts include enabling each new customer’s suppliers on the SciQuest Supplier Network, assisting suppliers in loading and updating product catalogs and adding new suppliers of existing customers.

Implementation Services. Our client delivery organization is responsible for implementing and deploying our solutions with customers. These services are designed primarily to enhance the usability of the software for our customers and to assist them with configuration, integration, training and change management. Our implementation services include analyzing a customer’s current processes, identifying specific high-value needs, configuring our software products to the customer’s specific business and providing guidance on implementing and reinforcing best practices. In order to provide reliable, repeatable and cost-effective implementation and use of our products, we have developed a standard methodology to deliver implementation services that is milestone-based and emphasizes early knowledge transfer and solution usage. We develop project requirements based on the customer’s specific needs and set objective project goals, such as usage levels, in order to measure success. Successful implementation projects can be critical to maintaining our high customer satisfaction rates and can also lower support costs.

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Customer Support. Our customer support organization provides technical product support to our customers by phone, email and through our online Solutions Portal. Our Solutions Portal provides instant 24-hour Internet access to a searchable solutions database that includes release notes, answers to frequently asked questions, links to release preview webinars and product documentation. The portal allows customers to notify us of product software defects and incidents and to track our resolutions of such incidents in a centralized location.

Business Process Optimization Services. Our business process optimization services organization provides services to promote best practices in the areas of spend analytics and sourcing.  While customers can use our spend analysis products to collect, cleanse and classify their spend data themselves, we also offer solution consultants who collect, cleanse and classify spend data on behalf of the customer. Following the initial classification, our spend analysis organization can perform periodic refreshes of the spend data. Most customers will rely upon our services organization to perform the initial data classification and then utilize them for ongoing management and maintenance to varying degrees.  Organizations also leverage our business process optimization offering to implement industry-specific best practices to optimize sourcing events.

Customers

As of December 31, 2015, we served 527 customers, excluding customers that spend less than $10,000 per year with us. In 2013, 2014 and 2015, substantially all of our revenues were derived from customers in the United States or United States-based multinational companies. No customer accounted for more than 10% of our total revenues in 2013, 2014 and 2015. Our ten largest customers accounted for no more than 15% of our total revenues in each of 2013, 2014 or 2015. Our value proposition and high customer satisfaction rates have led to strong recurring revenue retention rates of approximately 100%, 96% and 98% for 2013, 2014 and 2015, respectively. We calculate recurring revenue retention rates for a particular period by comparing the subscription revenue for all customers at the end of the prior period to the subscription revenue for those same customers at the end of the current period.

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

Sales and Marketing

We market and sell our solutions primarily through a direct sales force, which represents the largest source of our total revenues. Our sales force is generally organized by market, including general commercial, higher education and state and local government, as well as by region and size of customer.

We supplement our direct sales efforts with strategic partner relationships principally in order to increase market awareness and generate sales leads. Our strategic partners generally consist of suppliers, consulting firms, technology providers, ERP providers and purchasing consultants and consortia. The relationships may include referral and re-seller relationships. We have a business development group within our sales organization to manage these relationships.

Our marketing efforts focus on increasing awareness of our brand and products, highlighting the value and return on investment be bring to customers, establishing SciQuest as a thought leader for spend management and generating qualified sales leads. Our principal marketing initiatives target key executives and decision makers within our existing and prospective customer base.  Tactics include advertising, social media participation, web marketing and sponsorship of, and participation in, industry events including user conferences, trade shows and webinars. We also participate in cooperative marketing efforts with our strategic partners and other providers of complementary services or technology.

As of December 31, 2015, our sales and marketing organization consisted of 103 employees.

We also conduct NextLevel, an annual event that brings the spend management community, including industry experts, thought leaders and suppliers, together to discuss the latest thinking, newest strategies and most innovative solutions. The 2016 NextLevel conference will occur in late August.  It is attended by customers, prospects, suppliers, partners and other attendees.

Historically, we had higher new sales in our second and fourth quarters than in the remainder of our year as a result of seasonal variations in our business, principally due to the timing of client budget cycles in the higher education and state and local government vertical markets.  Due in large part to the expansion of our product portfolio and market focus, we do not believe that we currently experience material seasonality.


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Competition

The market for spend management solutions is competitive, highly fragmented, rapidly evolving and subject to changes in technology. We compete primarily with relatively small specialty software vendors, large ERP vendors and internally developed and maintained solutions. Our current principal competitors include:

 

·

Specialty vendors or niche providers that compete with one or more or our solutions, including Aravo, Basware, BravoSolution, Coupa, Determine, ESM Solutions, GXS, Hubwoo, OB10, Perfect Commerce, Periscope,  Verian and Zycus; and

 

·

Enterprise software application vendors, including SAP AG, Oracle, IBM, Infor and Workday.

We believe the principal competitive factors and market demands in our industry include the following:

 

·

breadth and depth of capabilities;

 

·

cross-product integration or native residence on a single platform;

 

·

ease of use and overall user experience;

 

·

price;

 

·

measurability of results, demonstrable return-on-investment and perceived value;

 

·

ease and speed of implementation;

 

·

solution configurability;

 

·

performance and reliability of the software;

 

·

ability to integrate with existing systems;

 

·

reputation and brand name recognition;

 

·

satisfaction of customer base; and

 

·

managed network and supplier services.

We believe we compete favorably with our competitors on the basis of these factors. However, some of our existing and potential competitors have greater financial resources, longer operating histories and more name recognition. We may face future competition in our markets from other large, established companies, as well as emerging companies.

Technology

Our product suite is cloud-based and mobile enabled, requiring only a standard Web browser and access to the Internet, with no behind-the-firewall components. We also have one specialty inventory management product that can be deployed behind the customer’s firewall.

Our products operate in a multi-tenant, on-demand applications environment using Java-based application code, IBM’s DB2 database management system, and an open source operating environment., other than our Advanced Sourcing Optimizer product which operates in a multi-tenant, on-demand applications environment using Java-based application code and Perl-based application code, Oracle’s MySQL database management system and an open source operating environment.

The single code-base for each product supports thousands of users and delivers robust, scalable, secure solutions for customers. Our solutions have multiple layers of security, with all production operating systems protected against unauthorized access, sensitive data encrypted, all network/firewall devices actively monitored and updated, and user authentication required for system access.

We use commercially available operating, application and database management systems. We support key industry standards and have an overall technology architecture that is highly redundant and designed to be highly available, while supporting rapid development and deployment of new releases. We have implemented standard practices in the areas of development, deployment, production control, administration and monitoring.

Our integration layer is based on technology provided by a technology partner, providing flexible, scalable, and deep integrations to customers’ existing IT systems infrastructure (e.g., into customers’ authentication, financial or ERP systems). This technical architecture facilitates true Internet-native standards support, scalability, reliability, recoverability, security and ease of maintenance.

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We generally own and administer all of our hosted production servers and hardware, which physically reside in a tier-2 or above data center hosting facilities. Our primary data center facilities offer physical security, redundant power systems, and multiple internet network connections and are located in Durham, North Carolina, Houston, Texas and Pittsburgh, Pennsylvania. We also have a disaster recovery platform in a data center facility in Scottsdale, Arizona.

Product Development

Our product development organization is responsible for the design, development and testing of our software. Our current product development efforts are focused on maintenance and enhancements of existing products as well as development of new products.

Our development teams follow an agile Scrum methodology, which allows for a tight feedback loop. Our customer community provides extensive input that we incorporate into our products through regular reviews and demonstration-based focus groups. Typically, our product development organization will conduct four to six focus groups and 30 to 40 customer interviews during a release cycle and works closely with our implementation and customer support organization.

As of December 31, 2015, our product development organization consisted of 198 employees.

Our research and development expenses were $28.3 million, $28.3 million and $27.3 million in 2013, 2014 and 2015, respectively.

Intellectual Property

Our success and ability to compete is dependent in part on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing upon the proprietary rights of others. We rely primarily on a combination of patent, copyright, trade secret, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information.

We have registered trademarks and service marks in the United States and abroad, and have applied for the registration of additional trademarks and service marks. Our principal trademark is “SciQuest.”

We have 37 issued U.S. patents (with expiration dates ranging from 2018 to 2031) with additional U.S. patent applications pending. We have no foreign patents or patent applications. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims.

We also use contractual provisions to protect our intellectual property rights. We license our software products directly to customers. These license agreements, which address our technology, documentation and other proprietary information, include restrictions intended to protect and defend our intellectual property. We also require all of our employees, contractors and many of those with whom we have business relationships to sign non-disclosure and confidentiality agreements.

The legal protections described above afford only limited protection for our technology. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product and service developments and enhancements to existing products and services are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position.

Our products also include third-party software that we obtain the rights to use through license agreements. These third-party software applications are commercially available on reasonable terms. We believe that we could obtain substitute software, or in certain cases develop substitute software, to replace these third-party software applications if they were no longer available on reasonable terms.

Employees

As of December 31, 2015, we had 510 full-time employees. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.

 

ITEM 1A. RISK FACTORS

We operate in a business environment that involves numerous known and unknown risks and uncertainties that could have a materially adverse impact on our operations. The risks described below highlight some of the factors that have affected, and in the

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future could affect, our operations. You should carefully consider these risks. These risks are not the only ones we may face. Additional risks and uncertainties of which we are unaware or that we currently deem immaterial also may become important factors that affect us. If any of the events or circumstances described in the followings risks occurs, our business, financial condition, results of operations, cash flows, or any combination of the foregoing, could be materially and adversely affected.

Our risks are described in detail below; however, the more significant risks we face include the following:

 

·

if we are unable to attract new customers, or if our existing customers do not purchase additional products or services, the growth of our business and cash flows will be adversely affected;

 

·

our failure to sustain our historical renewal rates, pricing and terms of our customer contracts would adversely affect our operating results;

 

·

to the extent that future sales opportunities trend towards individual product sales rather than multi-product sales, the average sales price per customer of our solutions would likely decrease, which could have an adverse effect on our ability to increase future revenue and profitability;

 

·

we are subject to a lengthy sales cycle and delays or failures to complete sales may harm our business and result in slower growth;

 

·

we expect to continue to develop and acquire new product and service offerings with no guarantee that we will be able to market, develop or integrate any new products effectively or efficiently;

 

·

if we do not successfully maintain the SciQuest brand, our revenues and earnings could be materially adversely affected.;

 

·

economic factors can cause reductions in spending by our customers and potential customers, which in turn could adversely affect our business, lengthen our sales cycles and make it difficult for us to forecast operating results accurately;

 

·

if we are unable to adapt our products and services to rapid technological change, our revenues and profits could be materially and adversely affected;

 

·

a failure to protect the integrity and security of our customers’ information could expose us to litigation, materially damage our reputation and harm our business, and the costs of preventing such a failure could adversely affect our results of operations;

 

·

if we are not able to satisfy data protection, security, privacy, and other government and industry-specific requirements, we could incur liability and our reputation and operating results could be harmed;

 

·

our future profitability and cash flows are dependent upon our ability to control expenses; and

 

·

our future revenue growth could be impaired if our investment in direct and indirect sales channels for our products is unsuccessful.

 

Risks Related to Our Business and Industry

If we are unable to attract new customers, or if our existing customers do not purchase additional products or services, the growth of our business and cash flows will be adversely affected.

To increase our revenues and cash flows, we must regularly add new customers and sell additional products and services to our existing customers. If we are unable to hire or retain quality sales personnel, unable to generate sufficient sales leads through our marketing programs, unable to sell our products and services to potential or current customers or if our existing or new customers do not perceive our solutions to be of sufficiently high value and quality, we may not be able to increase sales and our operating results would be adversely affected. In addition, our revenue growth is partially dependent on the continued sale of our products across the entire addressable market for spend management solutions without regard to our historical vertical markets. If we are unsuccessful in our efforts to sell our products services outside of our historical vertical markets, our revenue growth, cash flows and profitability may be materially and adversely affected. If we fail to sell new products and services to existing or new customers, our operating results will suffer, and our revenue growth, cash flows and profitability may be materially and adversely affected.

Our failure to sustain our historical renewal rates, pricing and terms of our customer contracts would adversely affect our operating results.

We derive, and expect to continue to derive, substantially all of our license revenues from recurring subscription fees for our spend management solutions. Should our current customers lose confidence in the value or effectiveness of our solutions, the demand for our products and services will likely decline, which could materially and adversely affect our renewal rates, pricing and contract

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terms. Our subscription agreements with customers are typically for either a term of ranging from three to five years in length or a one-year term with automatic renewal provisions. Our value proposition and high customer satisfaction rates have led to strong recurring revenue retention rates of approximately 100%, 96% and 98% for 2013, 2014 and 2015, respectively. We calculate recurring revenue retention rates for a particular period by dividing one by the subscription revenue for all customers at the end of the prior period multiplied by the subscription revenue for those same customers at the end of the current period. If our customers choose not to renew their subscription agreements with us at similar rates and on similar or more favorable terms, our business, operating results and financial condition may be materially and adversely affected.

To the extent that future sales opportunities trend towards individual product sales rather than multi-product sales, the average sales price per customer of our solutions would likely decrease, which could have an adverse effect on our ability to increase future revenue and profitability.

Our solutions consist of individual products that can be deployed together as an integrated software suite or separately as individual solutions. We price our solutions in part based on the number of products purchased. Accordingly, multi-product sales of an integrated software suite will likely result in significantly higher subscription and service fees than sales of individual products even though the sales cycle will often be similar in terms of length and effort. Most of our customers do not currently utilize all, or even a majority, of our solutions, and we anticipate that many of the cross-selling opportunities into our installed customer base will be individual product sales as opposed to multi-product sales. To the extent that future sales opportunities trend towards individual product sales rather than multi-product sales, then the average sales price per customer of our solutions will likely decrease. Decreases in our average sales price per customer will require us to convert a greater number of sales opportunities, at potentially greater expense, in order to meet our revenue objectives. Thus, an increase in the number of individual product sales as compared to multi-product sales could have an adverse effect on our ability to increase future revenue and profitability.

We are subject to a lengthy sales cycle and delays or failures to complete sales may harm our business and result in slower growth.

Our sales cycle may take several months to over a year. We may also experience unexpected delays that may lengthen the sales cycle for particular customers or potential customers. Such delays also make it more difficult to predict sales cycles and the timing of future revenues. During this sales cycle, we may expend substantial resources with no assurance that a sale will ultimately result. The length of a customer’s sales cycle depends on a number of factors, many of which we may not be able to control, including the following:

 

·

potential customers’ internal approval processes;

 

·

budgetary constraints for technology spending;

 

·

customers’ concerns about implementing new procurement methods and strategies; and

 

·

seasonal and other timing effects.

Any lengthening of the sales cycle or unexpected delays with respect to particular customers or potential customers could delay our revenue recognition and cash generation and could cause us to expend more resources than anticipated. If we are unsuccessful in closing sales or if we experience delays, it could have a material adverse effect on our operating results.

We expect to continue to develop and acquire new product and service offerings with no guarantee that we will be able to market, develop or integrate any new products effectively or efficiently.

Expanding our product and service offerings is an important component of our business strategy. Any new offerings that are not favorably received by prospective customers could damage our reputation or brand name. Expansion of our offerings will require us to devote a significant amount of time and money and may strain our management, financial and operating resources. We cannot be assured that our development or acquisition efforts will result in commercially viable products or services. In addition, we may bear development and acquisition costs in current periods that do not generate revenues until future periods, if at all. To the extent that we incur expenses that do not result in increased current or future revenues, our earnings may be materially and adversely affected.

If we do not successfully maintain the SciQuest brand, our revenues and earnings could be materially adversely affected.

We believe that developing, maintaining and enhancing the SciQuest brand in a cost-effective manner is critical in expanding our customer base, particularly in the general commercial market. Some of our competitors have well-established brands. Although we believe that the SciQuest brand is well established in certain markets where we have a significant operating history, our brand may not be as well established throughout our entire addressable market. Promotion of our brand will depend largely on continuing our sales and marketing efforts and providing high-quality products and services to our customers. Maintaining and enhancing our brand may require us to make substantial investments. We cannot be assured that these efforts will be successful in marketing the SciQuest brand.

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Furthermore, our marketing efforts may be complicated by the third party actions, including the marketing efforts of our competitors, which may include incomplete, inaccurate and false statements about our company and our services.  Our ability to respond to any misleading marketing efforts or other false statements may be limited under certain circumstances.  If we are unable to successfully promote our brand, or if we incur substantial expenses in attempting to do so, our revenues and earnings could be materially and adversely affected.

Economic factors can cause reductions in spending by our customers and potential customers, which in turn could adversely affect our business, lengthen our sales cycles and make it difficult for us to forecast operating results accurately.

Our revenues depend significantly on economic conditions in our addressable market as well as the economy as a whole. We have experienced, and may experience in the future, spending constraints by our customers and potential customers due to economic factors affecting particular customers, industries or the U.S. or global economy as a whole. Many of our customers and potential customers face significant budgetary constraints that have limited spending on technology solutions. Continued spending constraints may result in slower growth, or reductions, in revenues and profits in the future. In addition, economic factors or uncertainty may cause customers and potential customers to reduce or delay technology purchases, including purchases of our solutions. Our sales cycle may lengthen if purchasing decisions are delayed as a result of uncertain budget availability or if contract negotiations become more protracted or difficult as customers institute additional internal approvals for information technology purchases. Economic factors could also cause customers to attempt to cancel or not renew existing contracts. These economic factors could result in reductions in sales of our products and services, longer sales cycles, difficulties in collecting accounts receivable or delayed payments, slower adoption of new technologies and increased price competition. Any of these events or any significant reduction in spending by our customers and potential customers would likely harm our business, financial condition, operating results and cash flows.

If we are unable to adapt our products and services to rapid technological change, our revenues and profits could be materially and adversely affected.

Rapid changes in technology, products and services, customer requirements and operating standards occur frequently. These changes could render our proprietary technology and systems obsolete. Any technological changes that reduce or eliminate the need for spend management solutions could harm our business. We must continually improve the performance, features and reliability of our products and services, particularly in response to our competition.

Our success will depend, in part, on our ability to:

 

·

enhance our existing products and services;

 

·

develop new products, services and technologies that address the increasingly sophisticated and varied needs of our customers and potential customers; and

 

·

respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

We cannot be certain of our success in accomplishing the foregoing. If we are unable, for technical, legal, financial or other reasons, to adapt to changing market conditions or buyer requirements, our market share, business and operating results could be materially and adversely affected.

A failure to protect the integrity and security of our customers’ information could expose us to litigation, materially damage our reputation and harm our business, and the costs of preventing such a failure could adversely affect our results of operations.

Our business involves the collection and use of confidential information of our customers and their trading partners. We cannot be assured that our efforts to protect this confidential information will be successful. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Malicious third-parties may also conduct attacks designed to temporarily deny customers access to our services.  If any compromise of this information security were to occur, we could be subject to legal claims and government action, experience an adverse effect on our reputation and need to incur significant additional costs to protect against similar information security breaches in the future, each of which could adversely affect our financial condition, results of operations and growth prospects. In addition, because of the critical nature of data security, any perceived breach of our security measures could cause existing or potential customers not to use our solutions and could harm our reputation.

If we are not able to satisfy data protection, security, privacy, and other government and industry-specific requirements, we could incur liability and our reputation and operating results could be harmed.

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There are a number of data protection, security, privacy and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. Any failure to comply with such requirements could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers or cause existing customers to not renew their agreements with us. In addition, some of the industries we serve have industry-specific requirements relating to compliance with certain security and regulatory standards. If we cannot comply or if we incur a violation in one or more of these requirements, which could result in significant liability and harm our reputation and operating results.

Our future profitability and cash flows are dependent upon our ability to control expenses.

Our operating plan to maintain profitability is based upon estimates of our future expenses. For instance, we expect our operating expenses to increase in 2016 as compared to 2015 in order to support anticipated revenue growth.  If our future expenses are greater than anticipated, our ability to maintain profitability may be negatively impacted. Greater than anticipated expenses may negatively impact our cash flows, which could cause us to expend our capital faster than anticipated. Also, a large percentage of our expenses are relatively fixed, which may make it difficult to reduce expenses significantly in the future.

Our future revenue growth could be impaired if our investment in direct and indirect sales channels for our products is unsuccessful.

We have invested significant time and resources in developing our direct sales force and our indirect sales channels. Sales through our direct sales force represent the primary source of our revenues. We supplement our direct sales force with indirect sales channels for our products through relationships with suppliers, technology providers, consultants, ERP providers and purchasing consortia. We cannot be assured that our direct or indirect sales channels will be successful or that we will be able to develop additional indirect sales channels to support our direct sales channel. If our direct sales efforts, and to a lesser extent our indirect sales efforts, are not effective, our ability to achieve revenue growth may be impaired. As we develop additional indirect sales channels, we may experience conflicts with our direct sales force to the extent that these sales channels target the same customer bases. Successful management of these potential conflicts will be necessary in order to maximize our revenue growth.

We have been, and may continue to be, subject to claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party. Any such claims may require us to incur significant costs, to enter into royalty or licensing agreements or to develop or license substitute technology, which may harm our business.

The spend management market is characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by litigation based on allegations of infringement or other violations of intellectual property rights. As we seek to extend our solutions, we could be constrained by the intellectual property rights of others. We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party. While we believe that our products do not infringe upon the proprietary rights of third parties, we cannot guarantee that third parties will not assert infringement claims against us in the future, particularly with respect to technology that we acquire through acquisitions of other companies.

We might not prevail in any intellectual property infringement litigation, given the complex technical issues and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays, or require us to enter into royalty or licensing agreements. We generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant additional amounts. If our products are found to have violated any third-party proprietary rights, we could be required to withdraw those products from the market, re-develop those products or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-develop our products, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and operating results. Withdrawal of any of our products from the market could have a material adverse effect on our business, financial condition and operating results.

We may experience service failures or interruptions due to defects in the hardware, software, infrastructure, third-party components or processes that comprise our solutions, any of which could adversely affect our business.

Technology solutions as complex as ours may contain undetected defects in the hardware, software, infrastructure, third-party components or processes that are part of the solutions we provide. If these defects lead to service failures, we could experience delays or lost revenues during the period required to correct the cause of the defects. Furthermore, from time to time, we have experienced immaterial service disruptions in the ordinary course of business. We cannot be certain that defects will not be found in new or

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upgraded products or that service disruptions will not occur in the future, resulting in loss of, or delay in, market acceptance, which could have an adverse effect on our business, results of operations and financial condition.

Because customers use our spend management solutions for critical business processes, any defect in our solutions, any disruption to our solutions or any error in execution could cause customers to not renew their contracts with us, prevent potential customers from purchasing our solutions and harm our reputation. Although most of our contracts with our customers limit our liability to our customers for these defects, disruptions or errors, we nonetheless could be subject to litigation for actual or alleged losses to our customers’ businesses, which may require us to spend significant time and money in litigation or arbitration or to pay significant settlements or damages. We do not currently maintain any warranty reserves. Defending a lawsuit, regardless of its merit, could be costly and divert management’s attention and could cause our business to suffer.

The insurers under our liability insurance policy could deny coverage of a future claim for actual or alleged losses to our customers’ businesses that results from an error or defect in our technology or a resulting disruption in our solutions, or our liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot be assured that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceeds our insurance coverage, or the occurrence of changes in our liability insurance policy, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

Product development delays could damage our reputation and sales efforts.

Developing new products and updated versions of our existing products for release at regular intervals is important to our business efforts. At times, we may experience delays in our development process that result in new releases being delayed or lacking expected features or functionality. In addition, we have undertaken, and may in the future undertake, significant development efforts with respect to acquired products in order for these products to better integrate with our full product suite, which may cause interruptions or delays in our ability to sell these acquired products. New product or version releases that are delayed or do not meet expectations may result in customer dissatisfaction, which in turn could damage significantly our reputation and sales efforts. Such damage to our reputation and sales efforts could negatively impact our operating results.

The market for cloud-based spend management solutions is at a relatively early stage of development. If the market for our solutions develop more slowly than we expect, our revenues may decline or fail to grow and we may incur operating losses.

We derive, and expect in the near-term to continue to derive, substantially all of our revenues from our spend management solutions. Our current expectations with respect to growth may not prove to be correct. The market for our solutions is at a relatively early stage of development, making our business and future prospects difficult to evaluate. Should our prospective customers fail to recognize, or our current customers lose confidence in, the value or effectiveness of our solutions, the demand for our products and services will likely decline. Any significant price compression as a result of newly introduced solutions or consolidation among our competitors could have a material adverse effect on our business. A number of factors could affect our customers’ assessment of the value or effectiveness of our solutions, including the following:

 

·

their comfort with current purchasing and spend management procedures;

 

·

the costs and resources required to adopt new business procedures;

 

·

reductions in capital expenditures or technology spending budgets;

 

·

the price, performance and availability of competing solutions or delivery platforms; or

 

·

security and privacy concerns.

The failure to successfully integrate businesses that we have acquired or may acquire could adversely affect our business.

An element of our strategy is to broaden the scope and content of our products and services through the acquisition of existing products, technologies, services and businesses. Acquisitions entail numerous risks, including:

 

·

the integration of new operations, products, services and personnel;

 

·

the diversion of resources from our existing businesses, sites and technologies;

 

·

the inability to generate revenues from new products and services sufficient to offset associated acquisition costs;

 

·

the maintenance of uniform standards, controls, procedures and policies;

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·

the acquired business requiring greater resources than anticipated;  

 

·

accounting effects that may adversely affect our financial results;

 

·

the impairment of employee and customer relations as a result of any integration of new management personnel;

 

·

dilution to existing stockholders from the issuance of equity securities; and

 

·

liabilities or other problems associated with an acquired business.

We may also have difficulty in effectively assimilating and integrating future acquired businesses, or any future joint ventures, acquisitions or alliances, into our operations, and such integration may require a significant amount of time and effort by our management team. To the extent we do not successfully avoid or overcome the risks or problems related to any acquisitions, our business, results of operations and financial condition could be adversely affected. Future acquisitions also could impact our financial position and capital needs and could cause substantial fluctuations in our quarterly and yearly results of operations. Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would reduce our stated earnings.

Our growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we will not be able to implement our business plan successfully.

We have experienced a period of significant growth in our operations and personnel, which places a significant strain on our management, administrative, operational and financial infrastructure. Our business strategy includes preparing for significant future growth and expanding our management, administrative, operational and financial infrastructure to facilitate this growth. Our success will depend in part upon the ability of our senior management to prepare for and manage this growth effectively. To do so, we must continue to hire, train and manage new employees, including managers, as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business would be materially harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. There is no assurance that we will do so effectively. The additional headcount and operating systems that we may add will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

If we are unable to facilitate the use of our implementation services by our customers in an optimal manner, the effectiveness of our customers’ use of our solutions would be negatively impacted, resulting in harm to our reputation, business and financial performance.

The use of our solutions typically includes implementation services to facilitate the optimal use of our solutions. Successful implementation projects can be critical to maintaining our high customer satisfaction rates and can also lower support costs. These activities require substantial involvement and cooperation from both our customers and their suppliers. For example, we typically work closely with customer personnel to improve the customer’s business processes, enable the customer’s suppliers on the SciQuest Supplier Network and support organizational activities to assist our customer’s transition to our spend management solutions. In addition, our implementation services often include extensive end-user training in order to facilitate product adoption and maximize the benefits for the organization. If we do not receive sufficient support from either the customer or its suppliers, then the optimal use of our services by the customer may be adversely impacted, resulting in lower customer satisfaction and negatively affecting our renewal rates, business, reputation and financial performance.

If we are not able to successfully create internal efficiencies for our customers and their suppliers, our operating costs and relationships with our customers and their suppliers will be adversely affected.

A key component of our products and services is the efficiencies created for our customers and their suppliers. In order to create these efficiencies, it is typically necessary for our solutions to work together with our customer’s internal systems such as inventory, customer service, technical service, ERP systems and financial systems. If these systems do not create the anticipated efficiencies, relationships with our customers will be adversely affected, which could have a material adverse affect on our financial condition and results of operations.

Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies could reduce our ability to compete successfully and adversely affect our results of operations.

To date, we have funded our business through our cash flows from operations, and the proceeds of our initial public offering in September 2010 and our follow-on public offerings in April 2011 and March 2014. In February 2014, we filed a shelf registration

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statement on Form S-3 covering 8,000,000 shares of common stock, which may be offered and sold in one or more public offerings in the future. We sold 3,450,000 shares of common stock in our March 2014 follow-on public offering pursuant to such shelf registration statement. There can be no assurance as to whether all or any portion of the remaining shares covered by this registration statement will be offered or sold in the future. However, we may need to raise additional funds to achieve our future strategic objectives, including the execution of our strategy to pursue acquisitions. We may not be able to obtain additional debt or equity financing on favorable terms, if at all. Decreases in our stock price could adversely affect our ability to raise capital or complete acquisitions. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests and the value of shares of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

·

develop and enhance our solutions;

 

·

pursue acquisitions;

 

·

continue to expand our technology development, sales and/or marketing organizations;

 

·

hire, train and retain employees; or

 

·

respond to competitive pressures or unanticipated working capital requirements.

Our inability to do any of the foregoing could reduce our ability to compete successfully and adversely affect our results of operations.

The market for spend management solutions is highly competitive, which makes achieving market share and profitability more difficult.

The market for spend management solutions is rapidly evolving and intensely competitive. We experience competition from multiple sources, which makes it difficult for us to develop a comprehensive business strategy that addresses all of these competitive factors. We face competition primarily from relatively small specialty software vendors, large ERP vendors and internally developed and maintained solutions. Competition is likely to intensify as this market matures.

As competitive conditions intensify, competitors may:

 

·

devote greater resources to marketing and promotional campaigns;

 

·

reduce prices of their competing products and services;

 

·

devote substantially more resources to product development;

 

·

secure exclusive arrangements with indirect sales channels that impede our sales;

 

·

develop more extensive client bases and broader client relationships than we have; and

 

·

enter into strategic or commercial relationships with larger, more established and well-financed companies.

In addition, some of our competitors may have longer operating histories and greater name recognition than us. New technologies and the expansion of existing technologies may increase competitive pressures. As a result of increased competition, we may experience reduced operating margins, as well as loss of market share and brand recognition. We may not be able to compete successfully against current and future competitors. These competitive pressures could have a material adverse effect on our revenue growth and results of operations.

We continue to have revenue concentration in the higher education market, which could make us vulnerable to adverse trends or events affecting those markets.

Due to our historical focus on vertical markets, we continue to have a significant portion of our revenue concentrated in the higher education market. Many of our customers and potential customers in the higher education market have been facing significant budgetary constraints that have limited spending on technology solutions. Continued spending constraints in this market may result in slower growth, or reductions, in our revenues and profits in the future. In addition, the number of potential customers in this market is relatively finite, which could limit our future growth prospects. Furthermore, many of our sales opportunities are generated by referrals from existing customers due to the collaborative nature of these markets, and therefore, our failure to provide a beneficial solution to our existing customers could adversely impact our reputation in these markets and our ability to generate new referral customers. If any of these circumstances result in decreased revenues or profitability from our existing customers in the higher

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education market or reduce our ability to generate new customers in this market, our overall revenues and profits could be materially and adversely affected.

Our international sales efforts will require financial resources and management attention and could have a negative effect on our earnings.

We are investing resources and capital to expand our sales internationally. This will require financial resources and management attention and may subject us to new or increased levels of regulatory, economic, tax and political risks, all of which could have a negative effect on our earnings. We cannot be assured that we will be successful in creating international demand for our products and services. In addition, our international business may be subject to a variety of risks, including, among other things, increased costs associated with maintaining international marketing efforts, applicable government regulation, conflicting and changing tax laws, economic and political conditions and potential instability in various parts of the world, fluctuations in foreign currency, increased financial accounting and reporting burdens and complexities, difficulties in collecting international accounts receivable and the enforcement of intellectual property rights. If we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could adversely affect our operating results as a result of increased operating costs.

Mergers or other strategic transactions involving our competitors could weaken our competitive position, limit our growth prospects or reduce our revenues.

We believe that our industry is highly fragmented and that there is likely to be consolidation, which could lead to increased price competition and other forms of competition. Increased competition may cause pricing pressure and loss of market share, either of which could have a material adverse effect on our business, limit our growth prospects or reduce our revenues. Our competitors may establish or strengthen cooperative relationships with strategic partners or other parties. Established companies may not only develop their own products but may also merge with or acquire our current competitors. It is also possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Any of these circumstances could materially and adversely affect our business and operating results.

Interruptions or delays from third-party data centers could impair the delivery of our solutions, which could cause our business to suffer.

We use third-party data centers to conduct our operations, including our primary operating centers located in Durham, North Carolina, Houston, Texas and Pittsburgh, Pennsylvania and a redundant disaster recovery platform located in Scottsdale, Arizona. Generally, our solutions reside on hardware that we own and operate in these and other locations. Our operations depend on the protection of the equipment and information we store in these third-party data centers against damage or service interruptions that may be caused by fire, flood, severe storm, power loss, telecommunications failures, unauthorized intrusion, computer viruses and disabling devices, natural disasters, war, criminal acts, military action, terrorist attacks and other similar events beyond our control. A prolonged service disruption affecting the availability of our solutions for any of the foregoing reasons could damage our reputation with current and potential customers, expose us to liability and cause us to lose recurring revenue customers or otherwise adversely affect our business. We may also incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to, events that damage the data centers we use.

Our cloud-based spend solutions are accessed by a large number of customers at the same time. As we continue to expand the number of our customers and products and services available to our customers, we may not be able to scale our technology to accommodate the increased capacity requirements, which may result in interruptions or delays in service. In addition, the failure of our third-party data centers to meet our capacity requirements could result in interruptions or delays in our solutions or impede our ability to scale our operations. In the event that our data center arrangements are terminated, or there is a lapse of service or damage to such facilities, we could experience interruptions in our solutions as well as delays and additional expenses in arranging new facilities and services.

 

We provide service-level commitments to our customers, which could cause us to issue credits for future services if the stated service levels are not met for a given period and could materially and adversely affect our operating results.

 

Our customer agreements provide service-level commitments. If we are unable to meet the stated service-level commitments or suffer extended periods of unavailability for our service, we may be contractually obligated to provide these customers with credits for future services. Our revenue could be significantly impacted if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. In light of our historical experience with meeting our service-level commitments, we do not currently have any liabilities on our balance sheet for these commitments. Any failure to meet our service-level commitments may require us to issue service credits.  Any extended service outages could harm our reputation, revenue and operating results.

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If we are unable to protect our intellectual property rights, our business could be materially and adversely affected.

Any misappropriation of our technology or the development of competing technology could seriously harm our business. We regard a substantial portion of our software products as proprietary and rely on a combination of patent, copyright, trademark, trade secrets, customer license agreements and employee and third-party confidentiality agreements to protect our intellectual property rights. These protections may not be adequate, and we cannot be assured that they will prevent misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect proprietary rights as fully as do the laws of the U.S. Other companies could independently develop similar or competing technology without violating our proprietary rights. The process of enforcing our intellectual property rights through legal proceedings would likely be burdensome and expensive, and our ultimate success cannot be assured. Our failure to protect adequately our intellectual property and proprietary rights could adversely affect our business, financial condition and results of operations.

We utilize proprietary technology licensed from third parties, the loss of which could be costly.

We license a portion of the proprietary technology for our products and services from third parties. These third-party licenses may not be available to us on favorable terms, or at all, in the future. In addition, we must be able to integrate successfully this proprietary technology in a timely and cost-effective manner to create an effective finished product. If we fail to obtain the necessary third-party licenses on favorable terms or are unable to integrate successfully this proprietary technology on favorable terms, it could have a material adverse effect on our business operations.

Our SciQuest Supplier Network incorporates content from suppliers that is critical to the effectiveness of our products.

A critical component of our solutions is the SciQuest Supplier Network, which is the single integration point between our customers and all of their suppliers that provides customers with on-demand access to comprehensive and up-to-date supplier information, including supplier catalogs. These catalogs and other content are provided to us by each supplier for integration into our platform, which requires a high degree of involvement and cooperation from the suppliers. We must be able to integrate successfully this content in a timely manner in order for our customers to realize the full benefit of our solutions. Also, any errors or omissions in the content provided by the suppliers may reflect poorly on our solutions. If we are unable to successfully incorporate supplier content into our platform or if such content contains errors or omissions, then our products may not meet customer needs or expectations, and our business and reputation may be materially and adversely affected.

If we fail to attract and retain key personnel, our business may suffer.

Given the complex nature of the technology on which our business is based and the speed with which such technology advances, our future success is dependent, in large part, upon our ability to attract and retain highly qualified managerial, technical and sales personnel. A key factor of our success will be the continued services and performance of our executive officers and other key personnel. If we lose the services of any of our executive officers or other key personnel, our financial condition and results of operations could be materially and adversely affected. Our success also depends upon our ability to identify, hire and retain other highly skilled technical, managerial, editorial, sales, marketing and customer service professionals. Competition for such personnel is intense. We cannot be certain of our ability to identify, hire and retain adequately qualified personnel. Failure to identify, hire and retain necessary key personnel could have a material adverse effect on our business and results of operations.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investor views of us.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We cannot assure you that we will not experience material weaknesses in internal controls. We have reviewed and documented our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which requires annual management assessment of the effectiveness of our internal control over financial reporting. To the extent that we are not or do not remain in compliance with Section 404, we may be required to implement new internal control procedures and re-evaluate our financial reporting. We may experience higher than anticipated operating expenses as well as increased independent auditor fees during the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order for us to comply with Section 404. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, harm our ability to operate our business and reduce the trading price of our stock.

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Because we recognize revenue from subscriptions over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.

We generally recognize revenue from customers ratably over the terms of their subscription agreements, which are typically either multi-year contracts that are generally three to five years in length or one-year contracts with annual renewal provisions. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. However, any such decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services, and potential changes in our retention rate may not be fully reflected in our operating results until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way in which we conduct our business.

Our costs and demands upon management may continue to increase as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

We incur significant legal, accounting, investor relations and other expenses as a result of being a public company. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the Securities and Exchange Commission, or SEC, and the Nasdaq Listing Rules. The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically over the past several years. These rules and regulations have increased our legal and financial compliance costs substantially and have made some activities more time-consuming and costly. If these costs increase significantly in the future, our operating results could be materially and adversely affected.

Our business and financial performance could be negatively impacted by changes in tax laws or regulations.

New sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Those enactments could adversely affect our domestic and international business operations, and our business and financial performance. Further, we may become subject to new sales, use or other tax laws, statutes, rules, regulations or ordinances as we expand our geographic reach and product offerings. In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts deemed to be due. If we raise our product and maintenance prices to offset the costs of these changes, existing customers may elect not to renew their agreements and potential customers may elect not to purchase our services. Additionally, new, modified or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our services. Further, these events could decrease the capital we have available to operate our business. Any or all of these events could adversely impact our business and financial performance.

Our use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible litigation.

A portion of the technologies licensed by us incorporate so-called “open source” software, and we may incorporate other open source software in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. If we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we offer the portion of our solutions that incorporates the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and/or that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our solutions that contained the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of our solutions.

Further, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and although we believe we comply with the terms of those licenses, there is a risk that those licenses could be construed in a manner that

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imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to seek licenses from third parties, re-develop our solutions, discontinue sales of our solutions, or release our proprietary software code under the terms of an open source license, any of which could adversely affect our business.

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or our failure to comply with regulations could harm our operating results.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. For example, we believe increased regulation is likely in the area of data privacy. Laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for our products or requiring modifications to our products. In addition, taxation of products and services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services and product offerings, which could harm our business and operating results.

We may be subject to legal proceedings and claims in the conduct of our business, which may require us to spend significant time and money in litigation or arbitration or to pay significant settlements or damages.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. For instance, we may have claims against customers for nonpayment of subscription fees or customers may pursue claims against us for our errors or omissions. In addition, disputes may arise from strategic business relationships, acquisitions or other business transactions. As our business grows, the likelihood of disputes arising may increase. Litigation or arbitration, whether as a plaintiff or a defendant, could be costly and divert management’s attention and could cause our business to suffer, regardless of the outcome. Failing to prevail in any legal proceeding could result in us paying significant damages or being unable to recover for damages incurred, either of which could harm our financial position.

Our ability to use U.S. net operating loss carryforwards might be limited.

As of December 31, 2015, we had net operating loss carryforwards of approximately $207.5 million for U.S. federal tax purposes, the use of which may be substantially limited. The Company believes that $8.9 million of the federal net operating loss carryforwards will be available for future utilization to the extent of future income. The Company has provided a valuation allowance for the remaining federal losses of $198.6 million due to uncertainty regarding the Company’s ability to fully realize these assets. These loss carryforwards will begin to expire in 2018. To the extent these net operating loss carryforwards are available, we intend to use them to reduce the corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. As a result, prior or future changes in ownership could put limitations on the availability of our net operating loss carryforwards. To the extent our use of net operating loss carryforwards is significantly limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

Risks Related to the Ownership of Our Common Stock

Our cash flows, quarterly revenues and operating results have fluctuated in the past and may fluctuate in the future due to a number of factors. As a result, we may fail to meet or exceed the expectations of securities analysts or investors, which could cause our stock price to decline.

Our cash flows, quarterly revenues and operating results have varied in the past and may fluctuate in the future. As a result, you should not rely on the results of any one quarter as an indication of future performance and period-to-period comparisons of our revenues and operating results may not be meaningful.

Fluctuations in our quarterly results of operations may be due to a number of factors including, but not limited to, those listed below and others identified throughout this “Risk Factors” section:

 

·

our ability to retain and increase sales to existing customers and to attract new customers;

 

·

the timing and success of new product introductions or upgrades by us or our competitors;

 

·

changes in our pricing policies or those of our competitors;

 

·

mix of sales between single solution and multi-solution sales;

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·

renewal rates of existing customers;  

 

·

potential consolidation among our customers;

 

·

potential foreign currency exchange gains and losses associated with expenses and sales denominated in currencies other than the U.S. dollar;

 

·

the amount and timing of expenditures related to development, adaptation or acquisition of technologies, products or businesses;

 

·

competition, including entry into the industry by new competitors and new offerings by existing competitors; and

 

·

general economic, industry and market conditions that impact expenditures for technology solutions in our target markets.

Such fluctuations might lead analysts to change their models for valuing our common stock. As a result, our stock price could decline rapidly and we could face costly securities class action suits or other unanticipated issues.

Our actual operating results may differ significantly from our guidance.

From time to time, we may release guidance in our quarterly earnings releases, quarterly earnings conference calls or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance contains forward-looking statements and will be based on projections prepared by our management.

Neither our independent registered public accounting firm nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.

Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. These projections are also based upon specific assumptions with respect to future business decisions, some of which will change. We may state possible outcomes as high and low ranges, which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by analysts.

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from our guidance, and the variations may be material. In light of the foregoing, investors are urged not to rely upon, or otherwise consider, our guidance in making an investment decision regarding our common stock.

Any failure to implement our operating strategy successfully or the occurrence of any of the events or circumstances set forth in this “Part I, Item 1A, Risk Factors” section of this Report could result in our actual operating results being different from our guidance, and those differences may be adverse and material.

Our stock price may be volatile, and investors may be unable to sell their shares at or above their purchase price.

The market price of our common stock has been and could be subject to wide fluctuations in response to, among other things, the factors described in this “Part I, Item 1A, Risk Factors” section or elsewhere in this Report, and other factors beyond our control, including the following:

 

·

variations in our quarterly operating results;

 

·

decreases in market valuations of similar companies;

 

·

the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts who cover us, our competitors or our industry;

 

·

failure by us or our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market; and

 

·

fluctuations in stock market prices and volumes.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the

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operating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes and international currency fluctuations, may negatively affect the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have become subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. All of these factors could cause the market price of our stock to decline, and you may lose some or all of your investment.

Our business could be negatively affected as a result of actions by activist shareholders.

Campaigns by stockholders to effect changes in publicly traded companies are sometimes led by activist investors through various corporate actions, including proxy contests.  Responding to actions by activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Shareholder activism could create perceived uncertainties as to our future direction, which could result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners.  Furthermore, the election of individuals to our board of directors with a specific agenda could adversely affect our ability to effectively and timely implement our strategic plans.

The continued concentration of our capital stock ownership with insiders will limit your ability to influence corporate matters.

As of December 31, 2015, our directors and executive officers, together with their affiliates, beneficially owned, in the aggregate, approximately 5% of our common stock. In addition, as of December 31, 2015, approximately 35% of our outstanding common stock was held by holders of more than 5% of our common stock. These stockholders may have interests that differ from yours, and they may vote in a way with which you disagree and that may be adverse to your interests. This concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with significant concentration of ownership. Also, these stockholders, acting together, may be able to control the outcome of matters submitted to our stockholders for approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. In addition, these stockholders, acting together, could have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

 

·

delaying, deferring or preventing a change in corporate control;

 

·

impeding a merger, consolidation, takeover or other business combination involving us; or

 

·

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of our common stock could also depress the market price of our common stock. As of December 31, 2015, we had approximately 6,200,000 shares of our common stock issuable under approved equity compensation plans that are covered by effective registration statements.

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could delay or discourage a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

 

·

a classified board of directors with three-year staggered terms;

 

·

not providing for cumulative voting in the election of directors;

 

·

authorizing the board of directors to issue, without stockholder approval, preferred stock with rights senior to those of our common stock;

 

·

prohibiting stockholder action by written consent; and

 

·

requiring advance notification of stockholder nominations and proposals.

- 25 -


 

These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions.

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Our amended and restated certificate of incorporation provides that we will indemnify and advance expenses to our directors, officers, employees and other agents to the fullest extent permitted by the Delaware General Corporation Law. Therefore, we will be obligated to indemnify such persons if they acted in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of the company and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful, except that, in the case of an action by or in right of the company, no indemnification may generally be made in respect of any claim as to which such person is adjudged to be liable to the company. Furthermore, our amended and restated certificate of incorporation provides that our directors are not personally liable for breaches of fiduciary duties to the fullest extent permitted by the Delaware General Corporation Law. Therefore, our directors shall not be personally liable to the company or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:

 

·

breach of a director’s duty of loyalty to the corporation or its stockholders;

 

·

act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

·

unlawful payment of dividends or redemption of shares; or

 

·

transaction from which the director derives an improper personal benefit.

As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our amended and restated certificate of incorporation or that might exist with other companies.

If securities analysts do not continue to publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

We believe that the trading price for our common stock will be affected by research or reports that industry or financial analysts publish about us or our business. If one or more of the analysts who may elect to cover us downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

We do not intend to pay dividends on our common stock in the foreseeable future.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for working capital and other general corporate purposes. Any payment of future dividends will be at the discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, debt levels, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Investors seeking cash dividends should not purchase our common stock.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our corporate headquarters are located in Morrisville, North Carolina, where we currently lease approximately 78,500 square feet of office space. This lease expires in July 2024.

We also maintain the following office leases:

Office Location

 

Square Footage

 

 

Lease Expiration

Edmonton, Alberta

 

 

24,700

 

 

May 2016

Pittsburgh, Pennsylvania

 

 

15,200

 

 

June 2016

Newtown Square, Pennsylvania

 

 

5,500

 

 

June 2021

Houston, Texas

 

 

4,700

 

 

March 2019

- 26 -


 

 

We believe that our current facilities are suitable and adequate to meet our current needs and that suitable additional or substitute space will be available as needed to accommodate future growth.

 

ITEM 3. LEGAL PROCEEDINGS

We are not party to any material legal proceedings at this time. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has been listed on the NASDAQ Global Market under the symbol “SQI” since September 24, 2010. The following table presents, for the periods indicated, the range of high and low per share sales prices of our common stock, as reported on the NASDAQ Global Market. Our fiscal year ends on December 31.  

Year Ended December 31, 2015:

 

High

 

 

Low

 

October 1, 2015 through December 31, 2015

 

$

14.05

 

 

$

9.49

 

July 1, 2015 through September 30, 2015

 

 

14.97

 

 

 

9.60

 

April 1, 2015 through June 30, 2015

 

 

16.93

 

 

 

14.50

 

January 1, 2015 through March 31, 2015

 

 

18.26

 

 

 

13.33

 

 

Year Ended December 31, 2014:

 

High

 

 

Low

 

October 1, 2014 through December 31, 2014

 

$

17.21

 

 

$

13.31

 

July 1, 2014 through September 30, 2014

 

 

19.10

 

 

 

14.46

 

April 1, 2014 through June 30, 2014

 

 

27.50

 

 

 

15.74

 

January 1, 2014 through March 31, 2014

 

 

32.69

 

 

 

24.45

 

 

As of December 31, 2015, we had approximately 50 stockholders of record of our common stock, including Cede & Co., which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.

We have not historically declared or paid dividends on our common stock, and we do not expect to declare or pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings will be used for the operation and growth of our business. Any future determination to pay dividends on our common stock would be subject to the discretion of our board of directors and would depend upon various factors, including our earnings, financial condition, capital requirements, debt levels, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant.


- 27 -


 

The following table provides information regarding our current equity compensation plans as of December 31, 2015:  

 

Equity Compensation Plan Information

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

 

 

 

 

 

 

 

 

 

remaining

 

 

 

 

 

 

 

 

 

 

 

available for

 

 

 

 

 

 

 

 

 

 

 

future issuance

 

 

 

 

 

 

 

 

 

 

 

under equity

 

 

 

 

 

 

 

 

 

 

 

compensation

 

 

 

Number of securities

 

 

 

 

 

 

plans (excluding

 

 

 

to be issued upon

 

 

Weighted-average

 

 

securities

 

 

 

exercise of

 

 

exercise price of

 

 

reflected in

 

 

 

outstanding options

 

 

outstanding options

 

 

column (a))

 

Plan category

 

(a)

 

 

(b)

 

 

(c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

2,559,459

 

 

$

16.26

 

 

 

-

 

Restricted stock units

 

 

304,022

 

 

 

-

 

 

 

-

 

Subtotal

 

 

2,863,481

 

 

 

16.26

 

 

 

2,540,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock purchase plan

 

 

-

 

 

 

-

 

 

 

816,645

 

Total

 

 

2,863,481

 

 

$

16.26

 

 

 

3,357,228

 

(1)

In column b, the weighted-average exercise price is only applicable to stock options. In column c, the number of securities remaining available for future issuance for stock options and restricted stock units is shown in total and not individually with respect to these items.

See Note 10 to the financial statements provided under “Part II, Item 8, Financial Statements and Supplementary Data” of this Report for a description of the material features of our equity compensation plans.


- 28 -


 

Stock Performance Graph

The following graph compares, for the period from January 1, 2011 through December 31, 2015, the cumulative total stockholder return on our common stock with that of the NASDAQ Composite Index and the NASDAQ Computer Index. The graph assumes that $100 was invested on January 1, 2011 and assumes reinvestment of any dividends. Our fiscal year ends on December 31. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing we make under the Securities Act of 1933, as amended, or the Exchange Act.  

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG SCIQUEST, INC.,

NASDAQ COMPOSITE INDEX AND NASDAQ COMPUTER INDEX

 

 

 

 

 

 

 

 

- 29 -


 

ITEM 6. SELECTED FINANCIAL DATA

You should read the following selected financial data together with our financial statements and the related notes provided under “Part II, Item 8, Financial Statements and Supplementary Data” of this Report as well as “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report. Our historical results are not necessarily indicative of our results to be expected in any future period.

The selected financial data under the heading “Statements of Operations Data” for each of the three years ended December 31, 2013, 2014 and 2015, under the heading “Non-GAAP Operating Data” relating to Non-GAAP Net Income, Adjusted EBITDA and Adjusted Free Cash Flow for each of the three years ended December 31, 2013, 2014 and 2015 and under the heading “Balance Sheet Data” as of December 31, 2014 and 2015 have been derived from our audited financial statements, which are provided under “Part II, Item 8, Financial Statements and Supplementary Data” of this Report. The selected financial data under the heading “Statements of Operations Data” for each of the two years ended December 31, 2011 and 2012, under the heading “Non-GAAP Operating Data” relating to Non-GAAP Net Income, Adjusted EBITDA and Adjusted Free Cash Flow for each of the two years ended December 31, 2011 and 2012 and under the heading “Balance Sheet Data” as of December 31, 2011, 2012 and 2013 have been derived from our audited financial statements not included in this Report.  

 

 

 

Year Ended December 31,

 

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

 

(In thousands, except per share data)

 

Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

53,438

 

 

$

66,465

 

 

$

90,231

 

 

$

101,932

 

 

$

105,353

 

Cost of revenues(1)(2)

 

 

13,340

 

 

 

20,270

 

 

 

27,411

 

 

 

31,497

 

 

 

33,567

 

Gross profit

 

 

40,098

 

 

 

46,195

 

 

 

62,820

 

 

 

70,435

 

 

 

71,786

 

Operating expenses:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,233

 

 

 

17,188

 

 

 

28,267

 

 

 

28,307

 

 

 

27,303

 

Sales and marketing

 

 

14,282

 

 

 

17,907

 

 

 

24,261

 

 

 

25,617

 

 

 

26,928

 

General and administrative

 

 

8,403

 

 

 

10,918

 

 

 

13,033

 

 

 

14,045

 

 

 

12,295

 

Amortization of intangible assets

 

 

864

 

 

 

1,268

 

 

 

2,382

 

 

 

3,154

 

 

 

2,753

 

Total operating expenses

 

 

34,782

 

 

 

47,281

 

 

 

67,943

 

 

 

71,123

 

 

 

69,279

 

Income (loss) from operations

 

 

5,316

 

 

 

(1,086

)

 

 

(5,123

)

 

 

(688

)

 

 

2,507

 

Interest and other income (expense), net

 

 

298

 

 

 

13

 

 

 

13

 

 

 

150

 

 

 

296

 

Income (loss) before income taxes

 

 

5,614

 

 

 

(1,073

)

 

 

(5,110

)

 

 

(538

)

 

 

2,803

 

Income tax (expense) benefit

 

 

(2,780

)

 

 

(103

)

 

 

376

 

 

 

469

 

 

 

(941

)

Net income (loss)

 

$

2,834

 

 

$

(1,176

)

 

$

(4,734

)

 

$

(69

)

 

$

1,862

 

Net income (loss) attributable to common stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

(0.05

)

 

$

(0.20

)

 

$

(0.00

)

 

$

0.07

 

Diluted

 

$

0.13

 

 

$

(0.05

)

 

$

(0.20

)

 

$

(0.00

)

 

$

0.07

 

Weighted average shares outstanding used in computing per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,673

 

 

 

22,285

 

 

 

23,044

 

 

 

26,609

 

 

 

27,721

 

Diluted

 

 

22,241

 

 

 

22,285

 

 

 

23,044

 

 

 

26,609

 

 

 

27,889

 

 

 

 

 

Year Ended December 31,

 

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

 

(In thousands)

 

Non-GAAP Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Net Income (3)

 

$

6,416

 

 

$

5,460

 

 

$

8,845

 

 

$

7,987

 

 

$

8,169

 

Adjusted EBITDA (4)

 

$

11,541

 

 

$

11,388

 

 

$

18,472

 

 

$

18,547

 

 

$

20,168

 

Adjusted Free Cash Flow (5)

 

$

14,256

 

 

$

15,748

 

 

$

14,468

 

 

$

10,647

 

 

$

9,308

 

- 30 -


 

 

 

 

December 31,

 

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

 

(In thousands)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,958

 

 

$

15,606

 

 

$

19,117

 

 

$

59,419

 

 

$

67,893

 

Short-term investments

 

 

44,685

 

 

 

29,740

 

 

 

15,105

 

 

 

71,493

 

 

 

74,612

 

Working capital excluding deferred revenues

 

 

65,427

 

 

 

49,138

 

 

 

36,261

 

 

 

135,584

 

 

 

147,201

 

Total assets

 

 

116,368

 

 

 

140,324

 

 

 

173,445

 

 

 

265,215

 

 

 

271,901

 

Deferred revenues

 

 

49,614

 

 

 

62,461

 

 

 

70,760

 

 

 

71,101

 

 

 

70,176

 

Total stockholders' equity

 

 

60,707

 

 

 

67,228

 

 

 

88,179

 

 

 

181,661

 

 

 

188,587

 

 

(1)

Amounts include stock-based compensation expense, as follows:

 

 

Year Ended December 31,

 

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

 

(In thousands)

 

Cost of revenues

 

$

313

 

 

$

300

 

 

$

499

 

 

$

712

 

 

$

810

 

Research and development

 

 

1,014

 

 

 

1,217

 

 

 

1,714

 

 

 

714

 

 

 

560

 

Sales and marketing

 

 

1,142

 

 

 

1,510

 

 

 

1,992

 

 

 

1,491

 

 

 

1,641

 

General and administrative

 

 

1,480

 

 

 

2,170

 

 

 

2,727

 

 

 

3,272

 

 

 

2,777

 

 

 

$

3,949

 

 

$

5,197

 

 

$

6,932

 

 

$

6,189

 

 

$

5,788

 

 

(2)

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

 

 

Year Ended December 31,

 

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

 

(In thousands)

 

Amortization of capitalized software development costs

 

$

390

 

 

$

928

 

 

$

1,842

 

 

$

2,934

 

 

$

4,284

 

Amortization of acquired software

 

 

168

 

 

 

553

 

 

 

1,580

 

 

 

2,078

 

 

 

1,987

 

 

 

$

558

 

 

$

1,481

 

 

$

3,422

 

 

$

5,012

 

 

$

6,271

 

 

(3)

Non-GAAP Net Income, a non-GAAP operating measure, consists of net income (loss) plus our non-cash, stock-based compensation expense, amortization of intangible assets, amortization of acquired software, headquarter relocation costs in 2014, purchase accounting deferred revenue adjustments in 2012, 2013, 2014, and 2015, acquisition related costs incurred in 2011, 2012 and 2013, less the acquisition related escrow distribution received in 2011. Non-GAAP Net Income is determined on a tax-effected basis. Due to the impact that non-taxable expenses, e.g. stock-based compensation, had on our effective tax rate, we determined the tax effect of Non-GAAP Net Income by arriving at Non-GAAP Income before taxes, multiplying this by our statutory rate of 38.9% and the difference between our statutory tax expense and our book tax expense is the tax effect of adjustments to arrive at Non-GAAP Net Income. We use Non-GAAP Net Income as a measure of operating performance because it assists us in comparing performance on a consistent basis, as it removes from our operating results the impact of our capital structure, acquisition related costs, the one-time costs associated with non-recurring events and such non-cash items such as stock-based compensation expense and amortization of intangible assets, which can vary depending upon accounting methods. We believe Non-GAAP Net Income is useful to an investor in evaluating our operating performance because it is widely used by investors, securities analysts and other interested parties in our industry to measure a company’s operating performance without regard to non-cash items such as stock-based compensation expense and amortization of intangible assets, which can vary depending upon accounting methods, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired.

Our use of Non-GAAP Net Income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

·

Non-GAAP Net Income does not reflect changes in, or cash requirements for, our working capital needs;

 

·

Non-GAAP Net Income does not consider the potentially dilutive impact of equity-based compensation;

 

·

Non-GAAP Net Income does not reflect acquisition related costs, which reduced the cash available to us;

- 31 -


 

 

·

we must make certain assumptions in order to determine the tax effect adjustments for Non-GAAP Net Income, which assumptions may not prove to be accurate; and  

 

·

other companies, including companies in our industry, may calculate Non-GAAP Net Income differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Non-GAAP Net Income alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. Our management reviews Non-GAAP Net Income along with these other measures in order to fully evaluate our financial performance.

The following table provides a reconciliation of net income (loss) to Non-GAAP Net Income:

 

 

 

Year Ended December 31,

 

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

 

(In thousands)

 

Net income (loss)

 

$

2,834

 

 

$

(1,176

)

 

$

(4,734

)

 

$

(69

)

 

$

1,862

 

Stock-based compensation

 

 

3,949

 

 

 

5,197

 

 

 

6,932

 

 

 

6,189

 

 

 

5,788

 

Amortization of intangible assets

 

 

864

 

 

 

1,268

 

 

 

2,382

 

 

 

3,154

 

 

 

2,753

 

Amortization of acquired software

 

 

168

 

 

 

553

 

 

 

1,580

 

 

 

2,078

 

 

 

1,987

 

Purchase accounting deferred revenue adjustment

 

 

-

 

 

 

1,490

 

 

 

3,323

 

 

 

1,365

 

 

 

46

 

Distribution of acquisition escrow

 

 

(223

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Headquarter relocation costs

 

 

-

 

 

 

-

 

 

 

-