10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

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.)

6501 Weston Parkway, Suite 200

Cary, North Carolina 27513

(Address of Principal Executive Offices, Including Zip Code)

(919) 659-2100

(Registrant’s Telephone Number, Including Area Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 Exchange Act).    Yes  ¨    No  x

As of October 31, 2012, 22,460 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

SCIQUEST, INC.

FORM 10-Q

FOR THE QUARTER ENDED September 30, 2012

TABLE OF CONTENTS

		Pages
	PART I. FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011		2
	Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (unaudited)		3
	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2012 (unaudited)		4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)		5
	Notes to Consolidated Financial Statements (unaudited)		6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		26
ITEM 4.	CONTROLS AND PROCEDURES		26
	PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		27
ITEM 1A.	RISK FACTORS		27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		27
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		27
ITEM 4.	MINE SAFETY DISCLOSURES		27
ITEM 5.	OTHER INFORMATION		27
ITEM 6.	EXHIBITS		27
	SIGNATURES		28

1

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SciQuest, Inc.

Consolidated Balance Sheets

(in thousands except per share amounts)

	As of September 30,			As of December 31,
	2012			2011
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	20,810		$	14,958
Short-term investments		26,545			44,685
Accounts receivable, net		6,808			10,746
Prepaid expenses and other current assets		1,587			1,015
Deferred tax asset		1,363			70
Total current assets		57,113			71,474
Property and equipment, net		6,653			4,028
Goodwill		31,613			15,719
Intangible assets, net		12,402			5,433
Deferred project costs		7,047			7,025
Deferred tax asset		11,562			12,634
Other		95			55
Total assets	$	126,485		$	116,368
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	289		$	102
Accrued liabilities		6,027			5,945
Deferred revenues		39,527			36,836
Total current liabilities		45,843			42,883
Deferred revenues, less current portion		14,851			12,778
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 50,000 shares authorized; 22,346 and 22,133 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively		22			22
Additional paid-in capital		78,004			74,083
Accumulated other comprehensive loss		(103	)		—
Accumulated deficit		(12,132	)		(13,398	)
Total stockholders’ equity		65,791			60,707
Total liabilities and stockholders’ equity	$	126,485		$	116,368

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

2

SciQuest, Inc.

Consolidated Statements of Operations and Comprehensive Income

(in thousands except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(unaudited)						(unaudited)
Revenues	$	17,173		$	13,774		$	46,761		$	39,208
Cost of revenues		5,343			3,560			13,929			9,521
Gross profit		11,830			10,214			32,832			29,687
Operating expenses:
Research and development		4,734			3,001			10,905			8,670
Sales and marketing		4,073			3,396			12,188			10,815
General and administrative		2,835			2,107			8,006			6,220
Amortization of intangible assets		318			209			736			628
Total operating expenses		11,960			8,713			31,835			26,333
(Loss) income from operations		(130	)		1,501			997			3,354
Other income:
Interest income		19			23			75			67
Other expense, net		(38	)		(24	)		(41	)		(11	)
Total other (expense) income, net		(19	)		(1	)		34			56
(Loss) income before income taxes		(149	)		1,500			1,031			3,410
Income tax benefit (expense)		862			(741	)		235			(1,651	)
Net income	$	713		$	759		$	1,266		$	1,759
Other comprehensive income:
Foreign currency translation adjustments		(109	)		—			(103	)		—
Comprehensive income	$	604		$	759		$	1,163		$	1,759
Net income per share:
Basic	$	0.03		$	0.03		$	0.06		$	0.08
Diluted	$	0.03		$	0.03		$	0.06		$	0.08
Weighted average shares outstanding used in computing per share amounts:
Basic		22,278			22,012			22,235			21,549
Diluted		22,703			22,551			22,676			22,149

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

3

SciQuest, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

(in thousands)

							Accumulated Other						Total
	Common Stock				Additional Paid-In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital		Loss			Deficit			Equity
Balance at January 1, 2012		22,133	$	22	$	74,083	$	—		$	(13,398	)	$	60,707
Exercise of common stock options		91		—		312		—			—			312
Issuance of stock in connection with business acquisition		122		—		—		—			—			—
Stock-based compensation		—		—		3,609		—			—			3,609
Foreign currency translation adjustments		—		—		—		(103	)		—			(103	)
Net income		—		—		—		—			1,266			1,266
Balance at September 30, 2012		22,346	$	22	$	78,004	$	(103	)	$	(12,132	)	$	65,791

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

4

SciQuest, Inc.

Consolidated Statements of Cash Flows

(in thousands)

	Nine Months Ended September 30,
	2012			2011
	(unaudited)
Cash flows from operating activities
Net income	$	1,266		$	1,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,673			1,551
Loss on disposal of fixed assets		36			—
Stock-based compensation expense		3,609			2,863
Deferred taxes		(221	)		947
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		6,026			557
Prepaid expenses and other current assets		(378	)		359
Deferred project costs and other assets		(30	)		(563	)
Accounts payable		189			(51	)
Accrued liabilities		(442	)		183
Deferred revenues		1,068			3,741
Net cash provided by operating activities		13,796			11,346
Cash flows from investing activities
Business acquisitions, net of cash acquired		(22,447	)		(7,346	)
Addition of capitalized software development costs		(2,179	)		(595	)
Purchase of property and equipment		(1,710	)		(761	)
Purchase of available-for-sale short-term investments		(1,200	)		(15,000	)
Maturities of available-for-sale short-term investments		19,340			7,895
Net cash used in investing activities		(8,196	)		(15,807	)
Cash flows from financing activities
Proceeds from public offering		—			15,405
Public offering costs		—			(408	)
Collection of notes receivable from stockholders		—			15
Proceeds from exercise of common stock options		312			129
Net cash provided by financing activities		312			15,141
Effect of exchange rate changes on cash and cash equivalents		(60	)		—
Net increase in cash and cash equivalents		5,852			10,680
Cash and cash equivalents at beginning of period		14,958			17,494
Cash and cash equivalents at end of period	$	20,810		$	28,174

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

5

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

1. Description of Business

SciQuest, Inc. (the Company) provides on-demand strategic procurement and supplier management solutions that integrate customers with their suppliers to improve procurement of indirect goods and services, such as office supplies, laboratory supplies, furniture, MRO (maintenance, repair and operations) supplies and food and beverages. The Company’s on-demand software enables organizations to more efficiently source indirect goods and services, manage their spend and obtain the benefits of compliance with purchasing policies and negotiating power with suppliers. The Company’s on-demand strategic procurement software suite, coupled with its managed supplier network, forms the Company’s integrated solution, which is designed to achieve rapid and sustainable savings. The Company’s solution is designed to optimize tasks throughout the cycle of finding, procuring, receiving and paying for indirect goods and services, which can result in increased efficiency, reduced costs and increased insight into an organization’s buying patterns. The Company’s core target markets for strategic procurement products are higher education, life sciences, healthcare and state and local governments. In addition, the Company markets products in the general commercial market without regard to specific verticals. The Company is headquartered in Cary, North Carolina.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Revenue Recognition

The Company primarily derives its revenues from subscription fees for its on-demand strategic procurement and supplier management software solutions and associated implementation services. Revenue is generated from subscription agreements and related services permitting customers to access and utilize the Company’s hosted software. Customers may, on occasion, also purchase a perpetual license for certain software modules. Revenue is recognized when there is persuasive evidence of an arrangement, the service has been provided or delivered to the customer, the collection of the fee is probable and the amount of the fee to be paid by the customer is fixed or determinable. The Company’s arrangements do not contain general rights of return.

In October 2009, the FASB’s Emerging Issues Task Force amended the accounting standards for multiple-element revenue arrangements. The Company adopted this accounting guidance on January 1, 2011 for applicable arrangements entered into or materially modified after this date. The adoption of this guidance did not have a material impact on its financial position, results of operations, or cash flows.

The Company’s contractual agreements generally contain multiple service elements and deliverables. These elements include access to the hosted software, implementation services and, on a limited basis, perpetual licenses for certain software modules and related maintenance and support. The Company evaluates each element in a multiple element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has stand-alone value and delivery of the undelivered element is probable and within the Company’s control.

6

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

The Company allocates revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence of selling price (“VSOE”), if available, third-party evidence of selling price (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. The Company allocates revenue among deliverables in an arrangement using the relative selling price method. Because the Company has neither VSOE nor TPE for its deliverables, the allocation of revenue has been based on ESP.

The Company’s process for determining ESP for its deliverables considers multiple factors that may vary depending upon the facts and circumstances related to each deliverable. Key factors considered in developing ESP related to deliverables include established pricing and approval policies, type and size of customer, number of products purchased, and historical transactions. The Company regularly reviews ESP and maintains internal controls over the establishment and updates of these estimates.

As implementation services do not have stand-alone value to the customer, licenses and related implementation services are considered a single unit of accounting. The consideration allocated to licenses and services is recognized ratably over the term of the subscription agreement, beginning with the later of the start date specified in the subscription agreement, or the date access to the software is provided to the customer, provided all other revenue recognition criteria have been met. Fees for professional services that are contingent upon future performance are recognized ratably over the remaining subscription term once the performance milestones have been met. The Company recognizes revenue from any professional services that are sold separately as the services are performed.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s software and services described above. For multiple-year subscription agreements, the Company generally invoices its customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year subscription agreements. The Company’s services, such as implementation, are generally sold in conjunction with subscription agreements. These services are recognized ratably over the remaining term of the subscription agreement once any contingent performance milestones have been satisfied. The portion of deferred revenue that the Company anticipates will be recognized after the succeeding 12-month period is recorded as non-current deferred revenue and the remaining portion is recorded as current deferred revenue.

Cost of Revenues

Cost of revenues primarily consists of costs related to hosting the Company’s subscription software services, compensation and related expenses for implementation services, supplier enablement services, customer support staff and client partners, amortization of capitalized software development costs, allocated fixed asset depreciation and facilities costs. Cost of revenues is expensed as incurred.

Deferred Project Costs

The Company capitalizes sales commission costs that are directly related to the execution of its subscription agreements. The commissions are deferred and amortized over the contractual term of the related subscription agreement. The deferred commission amounts are recoverable from the future revenue streams under the subscription agreements. The Company believes this is the appropriate method of accounting, as the commission costs are so closely related to the revenues from the subscription agreements that they should be recorded as an asset and charged to expense over the same period that the subscription revenues are recognized. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. The deferred commissions are reflected within deferred project costs in the accompanying consolidated balance sheets.

Cash and Cash Equivalents

The Company considers all highly-liquid debt investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains cash balances at financial institutions that may at times exceed federally insured limits. The Company maintains this cash at reputable financial institutions and, as a result, believes credit risk related to its cash is minimal.

Short-Term Investments

Management determines the appropriate classification of investments at the time of purchase and evaluates such determination at each balance sheet date. The Company’s investments are classified as available-for-sale securities and are stated at fair value at September 30, 2012 and December 31, 2011. Realized gains and losses are included in other income (expense) based on the specific identification method. There were no realized gains or losses for the three or nine months ended September 30, 2012 and 2011. Net

7

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income, net of tax. As of September 30, 2012 and December 31, 2011, there were no unrealized gains or losses on available-for-sale securities. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. Management believes no such declines in value existed at September 30, 2012 or December 31, 2011.

Accounts Receivable

The Company assesses the need for an allowance for doubtful accounts based on estimates of probable credit losses. This assessment is based on several factors, including aging of customer accounts, known customer specific risks, historical experience and existing economic conditions. The Company generally does not require collateral for receivable balances. Accounts would be charged against the allowance after all means of collection were exhausted and recovery was considered remote. Any required provisions for doubtful accounts would be recorded in general and administrative expense. Based on management’s analysis of its outstanding accounts receivable, the Company has recorded an allowance of $122 and $217 at September 30, 2012 and December 31, 2011, respectively.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are usually seven years for furniture and three to five years for computer software and equipment. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the expected term of the leases. Costs for repairs and maintenance are expensed as incurred. Upon retirement or sale, the cost of the disposed assets and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

Software Development Costs

The Company incurs certain costs associated with the development of its on-demand solution, which are accounted for as internal-use software. Certain qualifying costs incurred during the application development phase are capitalized and amortized to expense over the estimated useful life of the related applications, which is generally three years.

Although the Company’s development efforts are primarily focused on its hosted, on-demand solution, the Company also incurs costs in connection with the development of certain of its materials management software products, which are accounted for as costs of software to be sold, leased or otherwise marketed. Under this guidance, capitalization of software development costs begins upon the establishment of technological feasibility (based on a working model approach), subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has substantially coincided; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs related to its licensed software products and has charged all such costs to research and development expense.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. Additionally, the Company would also review the carrying value of goodwill whenever events or changes in circumstances indicated that its carrying amount may not be recoverable. The Company has concluded that it has one reporting unit for purposes of its annual goodwill impairment testing. To assess goodwill impairment, the first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. The results of our most recent annual assessment did not indicate any impairment of goodwill, and as such the second step of the impairment test was not required. Additionally, we do not believe there have been any triggering events that would result in potential impairment of goodwill as of September 30, 2012.

Stock-Based Compensation

Stock-based payments to employees, including grants of employee stock options, are recognized in the consolidated statements of operations based on their fair values. Stock-based compensation costs are measured at the grant date based on the fair value of the award and are recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

Stock-based compensation costs are based on the fair value of the underlying option calculated using the Black-Scholes option-pricing model on the date of grant for stock options. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates and expected term. The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term for the nine months ended September 30,

8

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

2012 and 2011, represents the average time that options that vest are expected to be outstanding based on the mid-point between the vesting date and the end of the contractual term of the award. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero. The risk-free interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the awards.

Foreign Currency and Operations

The reporting currency for all periods presented is the U.S. dollar. The functional currency for the Company’s foreign subsidiaries is their local currency. The translation of each subsidiary’s financial statements into U.S. dollars is performed for assets and liabilities using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The resulting translation adjustments are recognized in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations.

Segment Data

The Company manages its operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company has determined that it has a single reportable segment.

Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Outstanding unvested restricted stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding until vested. Diluted net income per share is computed giving effect to all potentially dilutive common stock, including options and restricted stock. The dilutive effect of outstanding awards is reflected in diluted earnings per share by application of the treasury stock method.

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

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Basic:
Net income	$	713	$	759	$	1,266	$	1,759
Weighted average common shares, basic		22,278		22,012		22,235		21,549
Basic net income per share	$	0.03	$	0.03	$	0.06	$	0.08
Diluted:
Net income	$	713	$	759	$	1,266	$	1,759
Weighted average common shares, basic		22,278		22,012		22,235		21,549
Dilutive effect of:
Options to purchase common stock		385		428		395		471
Nonvested shares of restricted stock		40		111		46		129
Weighted average common shares, diluted		22,703		22,551		22,676		22,149
Diluted net income per share	$	0.03	$	0.03	$	0.06	$	0.08

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

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Common stock options		199		322		288		260

Income Taxes

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

9

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

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

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

Recent Accounting Pronouncements

In July 2012, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that fair value of an intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company will adopt this standard in the first quarter of 2013 and does not expect the adoption will have a material impact on its financial statements.

In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two step test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The Company adopted this guidance on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In June 2011, the FASB issued new guidance regarding the presentation of comprehensive income. The new guidance requires the presentation of the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

3. Business Combinations

Upside Software

On August 1, 2012, the Company completed the acquisition of substantially all of the assets of Upside Software, Inc. (“Upside”), a privately-owned Canadian corporation and a leader in contract lifecycle management solutions. The acquisition of Upside adds a contract lifecycle management solution, which includes collaborative contract creation and negotiation technology, to the Company’s existing strategic procurement and supplier management solutions.

The purchase price consisted of $22,447 in cash. The purchase price included $2,800 in cash that was deposited in escrow to satisfy potential indemnification claims. The Company incurred acquisition costs of approximately $250 during the three and nine months ended September 30, 2012, which are included in general and administrative expense in the consolidated statements of operations. The acquisition was accounted for under the purchase method of accounting. The operating results of Upside are included in the accompanying consolidated financial statements from the date of acquisition.

The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Acquired technology, trademarks and the covenant not to compete are amortized on a straight-line basis over their respective estimated useful lives. Acquired customer relationships are amortized over a ten-year estimated

10

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

life in a pattern consistent with which the economic benefit is expected to be realized. The excess of the purchase price over the net tangible and identifiable intangible assets acquired was recorded as goodwill which is deductible for tax purposes. This asset is attributed to a trained workforce and buyer-specific value resulting from synergies that are not included in the fair values of assets.

The preliminary allocation of the purchase price as of the acquisition date was as follows:

	Estimated Useful Life		Estimated Fair Value
Accounts receivable			$	2,096
Prepaid expenses and other current assets				230
Property and equipment				478
Covenant not to compete		5 years		30
Trademarks		5 years		263
Acquired technology		7 years		4,064
Customer relationships		10 years		3,594
Goodwill				15,927
Accrued expenses				(530	)
Deferred revenues				(3,705	)
Total purchase consideration			$	22,447

The initial purchase price allocation is preliminary as of September 30, 2012, pending finalization of the acquired intangible assets valuation reports.

AECsoft

On December 21, 2010, the Company entered into a Stock Purchase Agreement to acquire all of the issued and outstanding shares of capital stock of AECsoft USA, Inc., a Texas corporation, and AEC Global (Shanghai) Co., Ltd., a Chinese corporation (collectively, “AECsoft”), which together are a leading provider of supplier management and sourcing technology.

The Company completed the acquisition of AECsoft, USA, Inc. on January 1, 2011 and the acquisition of AEC Global (Shanghai) Co., Ltd. on March 31, 2011. The acquisition of AECsoft adds comprehensive supplier management, sourcing and compliance reporting to the Company’s existing strategic procurement and supplier enablement solutions.

The total purchase price of $13,795 consisted of $9,256 in cash and 351 shares of the Company’s common stock at a fair value of $4,539. The issuance of 25 of these shares, with an estimated fair value of $300, is subject to successful completion of certain performance targets under an earn-out arrangement with a former shareholder of AECsoft. Additionally, 300 shares of the Company’s common stock may be issued under an earn-out arrangement with the other former shareholders of AECsoft, upon the successful achievement of such performance targets over the next three fiscal years and continued employment with the Company. The performance conditions for 2011 were met in full, and the Company issued 122 shares of common stock on April 14, 2012. The fair value of these shares is being recognized as stock-based compensation expense in the consolidated statement of operations over the requisite service period of the award. During the three months ended September 30, 2012 and 2011, the Company recognized stock-based compensation expense of $366 and $367, respectively, and recognized $1,100 and $1,099 during the nine months ended September 30, 2012 and 2011, respectively, related to this earn-out arrangement.

The Company incurred acquisition costs of approximately $0 and $134, respectively, during the three and nine months ended September 30, 2011, which are included in general and administrative expense in the consolidated statements of operations. The acquisition was accounted for under the purchase method of accounting. The operating results of AECsoft are included in the accompanying consolidated financial statements from the date of acquisition.

The purchase consideration consisted of the following:

Cash	$	9,256
Fair value of common stock		4,539
Total purchase consideration	$	13,795
Cash acquired		1,910
Net purchase consideration	$	11,885

11

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Acquired technology and the covenant not to compete are amortized on a straight-line basis. Acquired customer relationships are amortized over a ten-year estimated life in a pattern consistent with which the economic benefit is expected to be realized. The excess of the purchase price over the net tangible and identifiable intangible assets acquired was recorded as goodwill which is not deductible for tax purposes. This asset is attributed to a trained workforce and buyer-specific value resulting from synergies that are not included in the fair values of assets.

The allocation of the purchase price as of the acquisition date was as follows:

	Estimated Useful Life		Estimated Fair Value
Accounts receivable			$	831
Prepaid expenses and other current assets				174
Property and equipment				82
Deferred tax asset				1,414
Covenant not to compete		5 years		51
Acquired technology		7 years		1,176
Customer relationships		10 years		4,200
Goodwill				8,954
Accrued expenses				(524	)
Deferred tax liability				(2,111	)
Deferred revenues				(2,362	)
Total purchase consideration			$	11,885

The measurement period for the acquisition purchase accounting was closed March 31, 2011.

On October 25, 2011, the Company made certain indemnification claims in the amount of $446 against the former shareholders of AECsoft pursuant to the Escrow Agreement with the former shareholders of AECsoft. The claims were agreed to by the former AECsoft shareholders and an escrow distribution to SciQuest consisting of $223 in cash and 18 shares of the Company’s common stock at a fair value of $223 was made. As of September 30, 2012, $1,052 in cash and 86 shares of common stock remain in escrow to satisfy potential indemnification claims.

4. Cash Equivalents and Short-Term Investments

The components of cash equivalents and short-term investments at September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012				December 31, 2011
	Cost		Fair Market Value		Cost		Fair Market Value
Cash equivalents	$	6,047	$	6,047	$	9,623	$	9,623
Short-term investments		26,545		26,545		44,685		44,685
Total	$	32,592	$	32,592	$	54,308	$	54,308

There were no unrealized gains or losses as of September 30, 2012 or December 31, 2011.

5. Fair Value Measurements

Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

• Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

12

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

• Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant input and significant value drivers are observable in active markets.

• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

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

As of September 30, 2012 and December 31, 2011, the Company had cash equivalents of $6,047 and $9,623, respectively, which consist of money market accounts. As of September 30, 2012 and December 31, 2011, the Company had short-term investments of $26,545 and $44,685, respectively, which consist of variable rate demand notes that are invested in corporate and municipal bonds. These variable rate demand notes have final maturities between 2017 and 2042, but are puttable by the Company at any time with seven days notice. These cash equivalents and short-term investments are classified within Level 1 of the fair value hierarchy since they are valued using quoted market prices. As of September 30, 2012 and December 31, 2011, the Company did not have any financial assets or liabilities with observable inputs not quoted on active markets (Level 2), or without observable market values that would require a high level of judgment to determine fair value (Level 3).

The fair value measurements of the Company’s financial assets at September 30, 2012 are as follows:

	Total		Level 1		Level 2		Level 3
Cash Equivalents	$	6,047	$	6,047		—		—
Short-term investments		26,545		26,545		—		—
Total	$	32,592	$	32,592		—		—

The fair value measurements of the Company’s financial assets at December 31, 2011 are as follows:

	Total		Level 1		Level 2		Level 3
Cash Equivalents	$	9,623	$	9,623		—		—
Short-term investments		44,685		44,685		—		—
Total	$	54,308	$	54,308		—		—

6. Property and Equipment

Property and equipment consist of the following as of September 30, 2012 and December 31, 2011:

	September 30,			December 31,
	2012			2011
Furniture and equipment	$	1,216		$	1,144
Computer software and equipment		11,011			6,824
Leasehold improvements		681			616
Total costs		12,908			8,584
Less accumulated depreciation and amortization		(6,255	)		(4,556	)
Property and equipment, net	$	6,653		$	4,028

Depreciation expense related to property and equipment (excluding capitalized internal-use software) was $407 and $188 for the three months ended September 30, 2012 and 2011, respectively, and was $1,064 and $526 for the nine months ended September 30, 2012 and 2011, respectively.

Computer software and equipment includes capitalized software development costs incurred during development of the Company’s on-demand solution. The Company capitalized software development costs of $856 and $190 during the three months ended September 30, 2012 and 2011, respectively, and $2,179 and $595 during the nine months ended September 30, 2012 and 2011, respectively. Net capitalized software development costs totaled $2,920 and $1,382 at September 30, 2012 and December 31, 2011, respectively. Amortization expense for the three months ended September 30, 2012 and 2011 related to capitalized software development costs was $299 and $105, respectively, and was $641 and $271 for the nine months ended September 30, 2012 and 2011, respectively, which is classified within cost of revenues in the accompanying consolidated statements of operations.

13

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

7. Goodwill and Other Intangible Assets

The Company acquired goodwill and certain identifiable intangible assets as part of the acquisitions in August 2012 and January 2011 and the going private transaction in July 2004.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2012 were as follows:

Balance at December 31, 2011	$	15,719
Goodwill acquired		15,927
Other adjustments		(33	)
Balance at September 30, 2012	$	31,613

Other adjustments represent foreign currency translation, as the functional currency of the Company’s foreign subsidiary, where goodwill is recorded, is its local currency. Accordingly, the foreign currency is translated into U.S. dollars using the exchange rate in effect at period end. Adjustments are included in other comprehensive income (loss).

A summary of intangible assets at September 30, 2012 and December 31, 2011 follows:

	September 30, 2012
	Weighted Average	Gross Carrying		Accumulated			Net Carrying
	AmortizationPeriod	Amount		Amortization			Amount
Acquired technology	7 years	$	13,331	$	(8,489	)	$	4,842
Customer relationships	10 years		12,987		(6,173	)		6,814
Covenant not to compete	5 years		81		(19	)		62
Acquired trademarks	5 years		262		(8	)		254
Trademarks			430		—			430
Total		$	27,091	$	(14,689	)	$	12,402

	December 31, 2011
	Weighted Average	Gross Carrying		Accumulated			Net Carrying
	AmortizationPeriod	Amount		Amortization			Amount
Acquired technology	7 years	$	9,276	$	(8,268	)	$	1,008
Customer relationships	10 years		9,400		(5,446	)		3,954
Covenant not to compete	5 years		51		(10	)		41
Trademarks			430		—			430
Total		$	19,157	$	(13,724	)	$	5,433

As the functional currency of the Company’s foreign subsidiary, where certain intangible assets are recorded, is its local currency, there are related foreign currency translation adjustments. The foreign currency is translated into U.S. dollars using the exchange rate in effect at period end, with any adjustment included in other comprehensive income (loss).

Amortization expense of intangible assets was $463 and $251 for the three months ended September 30, 2012 and 2011, respectively, of which $145 and $42 is recorded in cost of revenues in the accompanying consolidated statements of operations for the three months ended September 30, 2012 and 2011, respectively. Amortization expense of intangible assets was $965 and $754 for the nine months ended September 30, 2012 and 2011, respectively, of which $229 and $126 is recorded in cost of revenues in the accompanying consolidated statements of operations for the nine months ended September 30, 2012 and 2011, respectively.

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

2012 (remaining three months)	$	574
2013		2,242
2014		2,023
2015		1,767
2016		1,602
Thereafter		3,764
	$	11,972

14

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

8. Stockholders’ Equity

Stock Incentive Plan

The Company adopted a stock incentive plan (the Plan) August 27, 2004. The Plan, as amended, allows the Company to grant up to 5,307,736 common stock options, stock appreciation rights (SARs) and restricted stock awards to employees, board members and others who contribute materially to the success of the Company. The Company’s Board of Directors approves the terms of stock options granted. Individual option grants generally become exercisable ratably over a period of four years from the grant date. The contractual term of the options is approximately ten years from the date of grant.

The Company recognizes compensation expense associated with restricted stock and common stock options based on the grant-date fair value of the award on a straight-line basis over the requisite service period of the individual grantees, which generally equals the vesting period.

Restricted Stock

As part of the Plan, the Company has issued restricted shares of its common stock to certain employees. Upon employee termination, the Company has the option to repurchase the shares. The repurchase price is the original purchase price plus interest for unvested restricted shares and the current fair value (as determined by the Board of Directors prior to September 24, 2010, and subsequently as determined by the closing price of the Company’s shares of common stock on the NASDAQ Global Market on the date of termination) for vested restricted shares. The shares generally vest ratably over four years.

The following summarizes the activity of nonvested shares of restricted stock for the nine months ended September 30, 2012:

	Number of Shares			Weighted- Average  Grant Date Fair Value
Nonvested at January 1, 2012		63		$	1.66
Issued		—			—
Vested		(34	)		1.69
Nonvested at September 30, 2012		29		$	1.57

In conjunction with the issuance of these restricted shares, subscription note agreements were executed for certain employees. The notes are payable in four annual payments due January 1 of each calendar year and bear interest at 6%. At September 30, 2012 and December 31, 2011, the balance outstanding for these subscription note agreements was $0.

Restricted stock awards are recognized in the consolidated statements of operations based on their fair values. As a result of the notes receivable being deemed nonrecourse for accounting purposes and other contractual provisions in the agreements, the related restricted stock grants are considered stock options for accounting purposes. Stock-based compensation expense of $19 and $36 was recorded during the three months ended September 30, 2012 and 2011, respectively, and $58 and $110 was recorded during the nine months ended September 30, 2012 and 2011, respectively, in connection with these restricted stock awards. The total unrecognized compensation cost related to nonvested shares of restricted stock is approximately $47 at September 30, 2012. This amount is expected to be recognized over a weighted-average period of 0.9 years.

On March 20, 2010, the Board of Directors authorized the forgiveness of the outstanding balance of the subscription note agreements issued by certain employees in connection with their previous purchases of the Company’s restricted stock. A total of $1,016 was forgiven, which included the outstanding principal note amount plus accrued but unpaid interest. The Company accounted for the forgiveness of the outstanding note balance as a modification of a stock option for accounting purposes. Accordingly, the Company measured incremental compensation expense of $746 in connection with this modification. Incremental compensation expense of $518 related to the vested shares of restricted stock was recognized immediately at the date of modification. Incremental compensation expense of $228 related to the unvested shares is being recognized as additional compensation expense over the remaining vesting period. During the three months ended September 30, 2012 and 2011, the Company recognized compensation expense of $8 and $22, respectively, and recognized $24 and $66 during the nine months ended September 30, 2012 and 2011, respectively, related to this modification.

On April 25, 2012 and July 31, 2012, the Company granted restricted stock units covering 19 and 9 shares of common stock, respectively, to certain individuals. Restricted stock units differ from restricted stock awards in that restricted stock units represent the

15

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

right to receive shares of common stock once such shares are vested and issuable in accordance with the terms of the restricted stock units. Once issued, such shares are not subject to further restrictions. The restricted stock units vest in their entirety on the first anniversary of the grant date, subject to continuous service during the vesting period. Once vested, 50% of the shares are issuable and 50% are deferred until service termination, though the individual may elect to defer all shares until service termination. Stock-based compensation expense related to these restricted stock units is recognized in the consolidated statements of operations based on the fair value of these awards, which is the grant date market value of the Company’s common stock. Stock-based compensation expense of $96 and $147 was recorded during the three and nine months ended September 30, 2012, respectively, in connection with these restricted stock units. The total unrecognized compensation cost related to these awards is approximately $284 at September 30, 2012. This amount is expected to be recognized over a weighted-average period of 0.7 years.

Stock Options

The Company also issues common stock options under the terms of the Plan. The following summarizes stock option activity for the nine months ended September 30, 2012:

	Number of  Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (In Years)		Aggregate Intrinsic  Value at September 30, 2012  (Unaudited)
Balance at January 1, 2012		1,323		$	9.53		8.3	$	6,864
Options granted		536		$	14.88
Options exercised		(91	)	$	3.40
Options canceled		(118	)	$	15.10
Balance at September 30, 2012		1,650		$	11.21		8.3	$	11,531
Vested and expected to vest at September 30, 2012		1,457		$	10.93		8.2	$	11,092
Exercisable at September 30, 2012		685		$	8.18		7.4	$	6,868

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying awards and the estimated fair value of the Company’s common stock at September 30, 2012 multiplied by the number of shares that would have been received by the option holders had all option holders exercised their options on September 30, 2012. The aggregate intrinsic value of options exercised during the three months ended September 30, 2012 and 2011 was $229 and $233, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2012 and 2011 was $888 and $1,698, respectively.

The total unrecognized compensation cost related to outstanding stock options is $8,482 at September 30, 2012. This amount is expected to be recognized over a weighted-average period of 3.0 years.

The following table summarizes information about stock options outstanding and exercisable at September 30, 2012:

	Options Outstanding at September 30, 2012						Options Exercisable at September 30, 2012
Range of Exercise Price	Number		Weighted-Average Remaining Contractual Life (Yrs.)		Weighted- Average Exercise Price		Number		Weighted- Average Exercise Price
$  0.08 — $  0.14		49		2.9	$	0.10		49	$	0.10
$  0.14 — $  1.90		10		6.6		1.71		8		1.67
$  2.04 — $  8.18		397		7.0		3.16		296		2.93
$11.45 — $17.50		1,185		8.9		14.40		332		14.23
$17.73 — $18.10		9		9.8		17.85		—		—
Total		1,650		8.3	$	11.21		685	$	8.18

The fair value of common stock options for employees and non-employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	Nine Months Ended September 30,
	2012			2011
Estimated dividend yield		0	%		0	%
Expected stock price volatility		60.0 – 80.0	%		80.0 – 90.0	%
Weighted-average risk-free interest rate		0.8 – 1.5	%		1.2 – 2.7	%
Expected life of options (in years)		6.25			6.25

16

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

Stock-based compensation expense of $782 and $730 was recorded during the three months ended September 30, 2012 and 2011, respectively, and $2,221 and $1,588 was recorded during the nine months ended September 30, 2012 and 2011, respectively, related to the Company’s outstanding stock options. The weighted average grant date fair value per share for stock options granted in the nine months ended September 30, 2012 and 2011 was $9.23 and $10.71, respectively.

As discussed in Note 3, the Company recognized stock-based compensation expense of $366 and $367 in the accompanying consolidated statement of operations during the three months ended September 30, 2012 and 2011, respectively, and $1,100 and $1,099 during the nine months ended September 30, 2012 and 2011, respectively, related to the earn-out arrangement with certain former shareholders of AECsoft.

Employee Stock Purchase Plan

The Company adopted an Employee Stock Purchase Plan (the “Purchase Plan”) effective June 1, 2012. In order to qualify the Purchase Plan in accordance with the Internal Revenue Code of 1986, as amended, the Company’s stockholders must approve the Purchase Plan within 12 months following its commencement. The Company anticipates submitting the Purchase Plan to a vote of its stockholders at the 2013 annual meeting, which is expected to occur in April 2013. If the stockholders do not approve the Purchase Plan at the 2013 annual meeting, the Purchase Plan will be terminated and all contributions made by participants will be returned. Any person that is employed by the Company for the thirty day period immediately preceding the offering date in a given purchase period will be eligible to participate in the plan for that purchase period. Eligible employees can contribute up to 10% of their gross earnings for each pay period, up to a maximum of $25,000 for any calendar year. The initial offering period that commenced on June 1, 2012 is a period of 12 months, and thereafter six month offering periods begin on December 1 and June 1 of each year. During the offering period eligible employees may elect to purchase shares of the Company’s common stock according to the terms of the offering. The per share purchase price is equal to the lessor of 85% of the fair market value of the Company’s common stock on the offering date or 85% of the fair market value of the Company’s common stock on the purchase date. As of September 30, 2012, 1,000,000 shares of common stock were available for issuance to participating employees under the Purchase Plan. During the three and nine months ended September 30, 2012, the Company recognized stock-based compensation expense of $44 and $59, respectively, related to the Purchase Plan.

The fair value of stock purchase rights granted under the Purchase Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	Nine Months Ended September 30, 2012
Estimated dividend yield		0	%
Expected stock price volatility		57.3	%
Weighted-average risk-free interest rate		0.17	%
Expected life of options (in years)		1

9. Income Taxes

The Company computes its provision for income taxes by applying the estimated annual effective tax rate, adjusted for any material items. The current year dilutive impact of the Company’s acquisitions, as well as the related additional amortization of acquired intangible assets and anticipated contingent payment, has resulted in expected pre-tax net loss for 2012, thereby reducing the Company’s effective tax rate from historical norms to (578)% and 23% for the three and nine months ended September 30, 2012. The Company anticipates incurring tax expense for the full year. The Company’s effective tax rate for the three and nine months ended September 30, 2011 was 49.4% and 48.4%, respectively, which was higher than the federal statutory rate of 34% primarily due to state income taxes and non-deductible expenses, including stock-based compensation, stock-based compensation associated with the earn-out arrangement and amortization of acquired intangible assets.

10. Commitments and Contingencies

Legal Contingencies

From time to time, the Company is subject to legal proceedings and claims that arise in the ordinary course of business. The Company records an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

17

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except per share amounts)

In 2001, the Company was named as a defendant in several securities class action complaints filed in the United States District Court for the Southern District of New York originating from its December 1999 initial public offering. On January 9, 2012, this litigation was dismissed.

On January 31, 2012, a lawsuit alleging patent infringement was filed against the Company and certain customers and suppliers that participate in the SciQuest Supplier Network. On March 31, 2012, SciQuest, Inc. entered into a settlement agreement with the plaintiff. The settlement amount, which did not have a material adverse effect on the Company’s financial position, results of operations, or cash flows, is recorded in operating expenses in the accompanying consolidated statement of operations for the nine months ended September 30, 2012.

Warranties and Indemnification

The Company’s hosting service is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable under normal use and circumstances. The Company’s arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. Except as noted in the preceding paragraph, the Company to date has not incurred costs to settle claims or pay awards under these indemnification obligations. The Company accounts for these indemnity obligations as contingencies and records a liability for these obligations when a loss is probable and reasonably estimable. To date, the Company has not incurred any material costs as a result of these indemnifications and has not accrued any liabilities related to the obligations in the accompanying consolidated financial statements.

The Company enters into service level agreements with its on-demand solution customers warranting certain levels of uptime reliability. To date, the Company has not incurred any material costs and has not accrued any liabilities related to such obligations.

11. Subsequent Events

Acquisition

On October 1, 2012, the Company completed the acquisition of substantially all of the assets of Spend Radar LLC (“Spend Radar”), a leading provider of spend analysis solutions. The acquisition of Spend Radar adds cloud-based software for aggregating and analyzing data to the Company’s existing strategic procurement and supplier management solutions.

The purchase price consisted of $8,000 in cash and 113 shares of the Company’s common stock at a fair value of approximately $2,000. Additionally, up to $6,000 in cash may be paid and 85 shares of the Company’s common stock may be issued based on the successful achievement of certain performance targets and continued employment with the Company from the closing date to December 31, 2013.

The acquisition of Spend Radar occurred subsequent to September 30, 2012. Accordingly, the results of operations of the acquired entity are not included in the consolidated statements of operations of SciQuest, Inc. for the three and nine months ended September 30, 2012. The Company is currently in the process of determining the initial accounting for this acquisition.

Revolving Credit Facility

As of November 2, 2012, the Company established a $30,000 revolving credit facility which will be available for use until November 2, 2015. The revolving credit facility will be used for general corporate purposes. The facility consists of a $20,000 securities secured revolving credit facility and a $10,000 receivables secured revolving credit facility. The securities secured revolving credit facility and the receivables secured revolving credit facility bear interest equal to the BBA LIBOR Daily Floating Rate plus 0.75% and the BBA LIBOR Daily Floating Rate plus 1.50%, respectively. In addition, the Company pays a quarterly fee equal to 0.10% on any unused funds under the facility. As collateral for extension of credit under the facility, the Company and its domestic subsidiary granted security interests in substantially all of their assets, and the Company pledged the stock of its domestic subsidiary and 66% of the shares of one of its foreign subsidiaries.

18

SCIQUEST, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in our Annual Report on Form 10-K under “Part II, Other Information—Item 1A, Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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

Overview

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

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

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

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

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

Key Financial Terms and Metrics

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

Critical Accounting Policies

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

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

• revenue recognition;

• stock-based compensation;

• deferred project costs;

• goodwill; and

• income taxes.

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

Results of Operations

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012		2011
Revenues	$	17,173		$	13,774		$	46,761	$	39,208
Cost of revenues (1) (2)		5,343			3,560			13,929		9,521
Gross profit		11,830			10,214			32,832		29,687
Operating expenses: (1)
Research and development		4,734			3,001			10,905		8,670
Sales and marketing		4,073			3,396			12,188		10,815
General and administrative		2,835			2,107			8,006		6,220
Amortization of intangible assets		318			209			736		628
Total operating expenses		11,960			8,713			31,835		26,333
(Loss) Income from operations		(130	)		1,501			997		3,354
Interest and other (expense) income, net		(19	)		(1	)		34		56
(Loss) income before income taxes		(149	)		1,500			1,031		3,410
Income tax benefit (expense)		862			(741	)		235		(1,651	)
Net income	$	713		$	759		$	1,266	$	1,759

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Cost of revenues	$	109	$	105	$	191	$	213
Research and development		274		279		773		794
Sales and marketing		359		295		1,009		854
General and administrative		573		476		1,636		1,002
	$	1,315	$	1,155	$	3,609	$	2,863

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Amortization of capitalized software development costs	$	299	$	105	$	641	$	271
Amortization of acquired software		145		42		229		126
	$	444	$	147	$	870	$	397

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues		100	%		100	%		100	%		100	%
Cost of revenues (1) (2)		31			26			30			24
Gross profit		69			74			70			76
Operating expenses: (1)
Research and development		28			22			23			22
Sales and marketing		24			25			26			27
General and administrative		16			15			17			16
Amortization of intangible assets		2			1			2			2
Total operating expenses		70			63			68			67
Income from operations		(1	)		11			2			9
Interest and other income, net		—			—			—			—
Income before income taxes		(1	)		11			2			9
Income tax expense		5			(5	)		1			(4	)
Net income		4	%		6	%		3	%		5	%

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

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

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

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

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

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

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

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

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

Revenues. Revenues for the nine months ended September 30, 2012 were $46.8 million, an increase of $7.6 million, or 19%, over revenues of $39.2 million for the nine months ended September 30, 2011. The increase in revenues resulted primarily from the recognition of revenue for a full nine-month period for the new customers added in, and subsequent to, the nine months ended September 30, 2011, as well as the acquisition of Upside in August 2012.

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

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

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

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

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

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

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

Liquidity

Net Cash Flows from Operating Activities

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

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

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

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

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income tax payments at that time. In addition, the limitations on utilizing net operating loss carryforwards and other minimum state taxes may also increase our overall tax obligations. We expect that if we generate taxable income and/or we are not allowed to use net operating loss carryforwards for federal/state income tax purposes, our cash generated from operations will be adequate to meet our income tax obligations.

Net Cash Flows from Investing Activities

For the nine months ended September 30, 2012, net cash used in investing activities was $8.2 million, consisting of the acquisition of Upside of $22.4 million, net maturities of $18.1 million of short-term investments, less various capital expenditures of $1.7 million and capitalization of $2.2 million of software development costs. In general, our capital expenditures are for our network infrastructure to support our increasing customer base and growth in new business and for internal use, such as equipment for our increasing employee headcount.

For the nine months ended September 30, 2011, net cash used in investing activities was $15.8 million, consisting of the acquisition of AECsoft, net of cash acquired, of $7.3 million, the net purchase of $7.1 million of short-term investments, various capital expenditures of $0.8 million and capitalization of $0.6 million of software development costs.

Net Cash Flows from Financing Activities

For the nine months ended September 30, 2012, net cash provided by financing activities was $0.3 million, representing proceeds from the exercise of common stock options.

For the nine months ended September 30, 2011, net cash provided by financing activities was $15.1 million, consisting primarily of $15.4 million in proceeds from our public offering net of underwriting costs, offset by $0.4 million expenditures for public offering costs.

Off-Balance Sheet Arrangements

As of September 30, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space, we do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Capital Resources

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

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

During the last three years, inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

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Contractual and Commercial Commitment Summary

We have contractual obligations that require us to make future cash payments. On August 1, 2012, we acquired Upside Software and assumed its lease of 24,704 square feet through May 31, 2016. As a result, the contractual and commercial commitments that are discussed in more detail under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual and Commercial Commitment Summary” included in our annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012 have been updated as follows:

			Payments Due by Period
Contractual Obligations	Total		Less Than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years
					(In thousands)
Operating lease commitments	$	7,146	$	1,833	$	3,264	$	2,049	$	—

Seasonality

Our new business sales normally fluctuate as a result of seasonal variations in our business, principally due to the timing of client budget cycles. Our expenses, however, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures. Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of new business and the payment of annual bonuses. Historically, due to lower new sales in our first quarter, combined with the payment of annual bonuses from the prior year in our first quarter, our cash flow from operations is lowest in our first quarter, and due to the timing of client budget cycles, our cash flow from operations is lower in our second quarter as compared to our third and fourth quarters. In addition, deferred revenues can vary on a seasonal basis for the same reasons. This pattern may change, however, as a result of acquisitions, new market opportunities or new product introductions.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk.

We bill and receive payments from our customers predominately in U.S. dollars as well as make payments predominately in U.S. dollars. With the acquisition of Upside, the amount of payments received in Canadian dollars is expected to increase slightly while remaining an immaterial portion of total payments received, but the amount of payments made in Canadian dollars, primarily payroll, is expected to be a material portion of our total payments made. Given our limited exposure to foreign currencies, the relative stability of currency exchange rates between the U.S. dollar and the Canadian dollar and our ability to monitor a single exchange rate, we believe that our results of operations and cash flows are not materially subject to fluctuations due to changes in foreign currency exchange rates. If we further grow sales of our solution outside the United States or establish other operations outside the United States, we may become subject to greater risks with respect to changes in currency exchange rates.

Interest Rate Sensitivity.

Interest income and expense are sensitive to changes in the general level of U.S. interest rates. However, based on the nature and current level of our investments, which are primarily cash and cash equivalents and short-term investments, we believe there is no material risk of exposure.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, an evaluation as of September 30, 2012 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of September 30, 2012, were effective for the purposes stated above.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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SCIQUEST, INC.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 1A. RISK FACTORS

There have been no material changes to the Risk Factors we previously disclosed in our annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Exhibit Number	Description
31.1*	Rule 13a-14(a)/15d-14(a) Certification, executed by Stephen J. Wiehe, President, Chief Executive Officer and Director of SciQuest.
31.2*	Rule 13a-14(a)/15d-14(a) Certification, executed by Rudy C. Howard, Chief Financial Officer of SciQuest.
32.1**	Section 1350 Certification, executed by Stephen J. Wiehe, President, Chief Executive Officer and Director of SciQuest.
32.2**	Section 1350 Certification, executed by Rudy C. Howard, Chief Financial Officer of SciQuest.
101***	Interactive Data Files pursuant to Rule 405 of Regulation S-T (XBRL)

* Filed herewith.

** Furnished herewith.

*** Pursuant to Rule 406T of SEC Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

27

SCIQUEST, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SCIQUEST, INC.
(Registrant)
By:	/s/ Rudy C. Howard
	Rudy C. Howard
	Chief Financial Officer
	(Principal Financial and Accounting Officer)
	Date: November 9, 2012

28

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Stephen J. Wiehe, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of SciQuest, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ Stephen J. Wiehe
	Stephen J. Wiehe
	President, Chief Executive Officer and Director (Principal Executive Officer)
Date:	November 9, 2012

29

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Rudy C. Howard, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of SciQuest, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ Rudy C. Howard
	Rudy C. Howard
	Chief Financial Officer (Principal Financial and Accounting Officer)
Date:	November 9, 2012

30

EX-32.1

Exhibit 32.1

STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the United States Code and shall not be relied on by any other person for any other purpose.

In connection with the Quarterly Report on Form 10-Q of SciQuest, Inc. (the “Company”) for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Stephen J. Wiehe, President, Chief Executive Officer and Director of the Company, certifies that:

• the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2012

/s/ Stephen J. Wiehe

Stephen J. Wiehe

President, Chief Executive Officer and Director

(Principal Executive Officer)

The foregoing certification is being furnished with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2012, pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general information language in such filing.

31

EX-32.2

Exhibit 32.2

STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the United States Code and shall not be relied on by any other person for any other purpose.

In connection with the Quarterly Report on Form 10-Q of SciQuest, Inc. (the “Company”) for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Rudy C. Howard, Chief Financial Officer of the Company, certifies that:

• the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2012

/s/ Rudy C. Howard

Rudy C. Howard

Chief Financial Officer

(Principal Financial and Accounting Officer)

The foregoing certification is being furnished with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2012, pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general information language in such filing.

32

XML

Goodwill and Other Intangible Assets (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012
Future amortization expense related to intangible assets
2012 (remaining three months)	$ 574
2013	2,242
2014	2,023
2015	1,767
2016	1,602
Thereafter	3,764
Total	$ 11,972

XML

Subsequent Events (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		3 Months Ended			3 Months Ended
	Dec. 31, 2012 Spend Radar [Member]	Oct. 01, 2012 Spend Radar [Member]	Dec. 31, 2012 Revolving Credit Facility [Member]	Dec. 31, 2012 Securities Secured Revolving Credit Facility [Member]	Nov. 02, 2012 Securities Secured Revolving Credit Facility [Member]	Dec. 31, 2012 Receivables Secured Revolving Credit Facility [Member]	Nov. 02, 2012 Receivables Secured Revolving Credit Facility [Member]
Subsequent Events (Textual) [Abstract]
Maximum available borrowing capacity					$ 20,000		$ 10,000
Interest rate				BBA LIBOR Daily Floating Rate plus 0.75%		BBA LIBOR Daily Floating Rate plus 1.50%
Unused fee			0.10%
Maturity date of revolving credit facility			Nov. 02, 2015
Acquisition purchase price, cash		8,000
Fair value of common stock, shares	113
Fair value of common stock		2,000
Compensation potentially payable under earn-out arrangement		$ 6,000
Common stock shares potentially issuable under earn-out arrangement	85

XML

Income Taxes (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Income Taxes (Textual) [Abstract]
Effective tax rate	49.40%	23.00%	(578.00%)	48.40%
Federal statutory rate	34.00%	34.00%	34.00%	34.00%

XML

Fair Value Measurements (Details) (Fair value measurements [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Fair value measurements
Total assets measured at fair value	$ 32,592	$ 54,308
Cash equivalents [Member]
Fair value measurements
Total assets measured at fair value	6,047	9,623
Short-term investments [Member]
Fair value measurements
Total assets measured at fair value	26,545	44,685
Level 1 [Member]
Fair value measurements
Total assets measured at fair value	32,592	54,308
Level 1 [Member] | Cash equivalents [Member]
Fair value measurements
Total assets measured at fair value	6,047	9,623
Level 1 [Member] | Short-term investments [Member]
Fair value measurements
Total assets measured at fair value	26,545	44,685
Level 2 [Member]
Fair value measurements
Total assets measured at fair value
Level 2 [Member] | Cash equivalents [Member]
Fair value measurements
Total assets measured at fair value
Level 2 [Member] | Short-term investments [Member]
Fair value measurements
Total assets measured at fair value
Level 3 [Member]
Fair value measurements
Total assets measured at fair value
Level 3 [Member] | Cash equivalents [Member]
Fair value measurements
Total assets measured at fair value
Level 3 [Member] | Short-term investments [Member]
Fair value measurements
Total assets measured at fair value

XML

Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2012

Stockholders' Equity [Abstract]

Schedule of nonvested restricted stock activity

The following summarizes the activity of nonvested shares of restricted stock for the nine months ended September 30, 2012:

	Number of Shares			Weighted- Average  Grant Date Fair Value
Nonvested at January 1, 2012		63		$	1.66
Issued		—			—
Vested		(34	)		1.69
Nonvested at September 30, 2012		29		$	1.57

Schedule of stock option activity

The Company also issues common stock options under the terms of the Plan. The following summarizes stock option activity for the nine months ended September 30, 2012:

	Number of  Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (In Years)		Aggregate Intrinsic  Value at September 30, 2012  (Unaudited)
Balance at January 1, 2012		1,323		$	9.53		8.3	$	6,864
Options granted		536		$	14.88
Options exercised		(91	)	$	3.40
Options canceled		(118	)	$	15.10
Balance at September 30, 2012		1,650		$	11.21		8.3	$	11,531
Vested and expected to vest at September 30, 2012		1,457		$	10.93		8.2	$	11,092
Exercisable at September 30, 2012		685		$	8.18		7.4	$	6,868

Schedule of stock options outstanding and exercisable

The following table summarizes information about stock options outstanding and exercisable at September 30, 2012:

	Options Outstanding at September 30, 2012						Options Exercisable at September 30, 2012
Range of Exercise Price	Number		Weighted-Average Remaining Contractual Life (Yrs.)		Weighted- Average Exercise Price		Number		Weighted- Average Exercise Price
$  0.08 — $  0.14		49		2.9	$	0.10		49	$	0.10
$  0.14 — $  1.90		10		6.6		1.71		8		1.67
$  2.04 — $  8.18		397		7.0		3.16		296		2.93
$11.45 — $17.50		1,185		8.9		14.40		332		14.23
$17.73 — $18.10		9		9.8		17.85		—		—
Total		1,650		8.3	$	11.21		685	$	8.18

Schedule of assumptions used to calculate fair value of common stock options

The fair value of common stock options for employees and non-employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	Nine Months Ended September 30,
	2012			2011
Estimated dividend yield		0	%		0	%
Expected stock price volatility		60.0 – 80.0	%		80.0 – 90.0	%
Weighted-average risk-free interest rate		0.8 – 1.5	%		1.2 – 2.7	%
Expected life of options (in years)		6.25			6.25

Schedule of assumptions used to calculate fair value of stock purchase rights

The fair value of stock purchase rights granted under the Purchase Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	Nine Months Ended September 30, 2012
Estimated dividend yield		0	%
Expected stock price volatility		57.3	%
Weighted-average risk-free interest rate		0.17	%
Expected life of options (in years)		1

XML

Stockholders' Equity (Details 1) (USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Schedule of stock option activity
Number of options outstanding, beginning	1,323
Weighted-average exercise price, beginning	$ 9.53
Weighted-average remaining contractual life (in years), beginning	8 years 3 months 18 days	8 years 3 months 18 days
Aggregate intrinsic value, beginning	$ 6,864
Number of options outstanding, options granted	536
Weighted-average exercise price, options granted	$ 14.88
Number of options outstanding, options exercised	(91)
Weighted-average exercise price, options exercised	$ 3.40
Number of options outstanding, options canceled	(118)
Weighted-average exercise price, options canceled	$ 15.10
Number of options outstanding, ending	1,650	1,323
Weighted-average exercise price, ending	$ 11.21	$ 9.53
Weighted-average remaining contractual life (in years), ending	8 years 3 months 18 days	8 years 3 months 18 days
Aggregate intrinsic value, ending	11,531	6,864
Number of options outstanding, vested and expected to vest	1,457
Weighted-average exercise price, vested and expected to vest	$ 10.93
Weighted-average remaining contractual term (in years), vested and expected to vest	8 years 2 months 12 days
Aggregate intrinsic value, vested and expected to vest	11,092
Number of options outstanding, exercisable	685
Weighted-average exercise price, exercisable	$ 8.18
Weighted-average remaining contractual term (in years), exercisable	7 years 4 months 24 days
Aggregate intrinsic value, exercisable	$ 6,868

XML

Goodwill and Other Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Carrying amount of goodwill
Goodwill, beginning balance	$ 15,719
Goodwill acquired	15,927
Other adjustments	(33)
Goodwill, ending balance	$ 31,613

XML

Commitments and Contingencies (Details)	9 Months Ended
	Sep. 30, 2012
Commitments and Contingencies (Textual) [Abstract]
Dismissal of litigation	Jan. 09, 2012
Filing date of lawsuit	2012-01-31
Settlement agreement date	2012-03-31

XML

Business Combinations

9 Months Ended

Sep. 30, 2012

Business Combinations [Abstract]

Business Combinations

3. Business Combinations

Upside Software

On August 1, 2012, the Company completed the acquisition of substantially all of the assets of Upside Software, Inc. (“Upside”), a privately-owned Canadian corporation and a leader in contract lifecycle management solutions. The acquisition of Upside adds a contract lifecycle management solution, which includes collaborative contract creation and negotiation technology, to the Company’s existing strategic procurement and supplier management solutions.

The purchase price consisted of $22,447 in cash. The purchase price included $2,800 in cash that was deposited in escrow to satisfy potential indemnification claims. The Company incurred acquisition costs of approximately $250 during the three and nine months ended September 30, 2012, which are included in general and administrative expense in the consolidated statements of operations. The acquisition was accounted for under the purchase method of accounting. The operating results of Upside are included in the accompanying consolidated financial statements from the date of acquisition.

The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Acquired technology, trademarks and the covenant not to compete are amortized on a straight-line basis over their respective estimated useful lives. Acquired customer relationships are amortized over a ten-year estimated life in a pattern consistent with which the economic benefit is expected to be realized. The excess of the purchase price over the net tangible and identifiable intangible assets acquired was recorded as goodwill which is deductible for tax purposes. This asset is attributed to a trained workforce and buyer-specific value resulting from synergies that are not included in the fair values of assets.

The preliminary allocation of the purchase price as of the acquisition date was as follows:

	Estimated Useful Life		Estimated Fair Value
Accounts receivable			$	2,096
Prepaid expenses and other current assets				230
Property and equipment				478
Covenant not to compete		5 years		30
Trademarks		5 years		263
Acquired technology		7 years		4,064
Customer relationships		10 years		3,594
Goodwill				15,927
Accrued expenses				(530	)
Deferred revenues				(3,705	)
Total purchase consideration			$	22,447

The initial purchase price allocation is preliminary as of September 30, 2012, pending finalization of the acquired intangible assets valuation reports.

AECsoft

On December 21, 2010, the Company entered into a Stock Purchase Agreement to acquire all of the issued and outstanding shares of capital stock of AECsoft USA, Inc., a Texas corporation, and AEC Global (Shanghai) Co., Ltd., a Chinese corporation (collectively, “AECsoft”), which together are a leading provider of supplier management and sourcing technology.

The Company completed the acquisition of AECsoft, USA, Inc. on January 1, 2011 and the acquisition of AEC Global (Shanghai) Co., Ltd. on March 31, 2011. The acquisition of AECsoft adds comprehensive supplier management, sourcing and compliance reporting to the Company’s existing strategic procurement and supplier enablement solutions.

The total purchase price of $13,795 consisted of $9,256 in cash and 351 shares of the Company’s common stock at a fair value of $4,539. The issuance of 25 of these shares, with an estimated fair value of $300, is subject to successful completion of certain performance targets under an earn-out arrangement with a former shareholder of AECsoft. Additionally, 300 shares of the Company’s common stock may be issued under an earn-out arrangement with the other former shareholders of AECsoft, upon the successful achievement of such performance targets over the next three fiscal years and continued employment with the Company. The performance conditions for 2011 were met in full, and the Company issued 122 shares of common stock on April 14, 2012. The fair value of these shares is being recognized as stock-based compensation expense in the consolidated statement of operations over the requisite service period of the award. During the three months ended September 30, 2012 and 2011, the Company recognized stock-based compensation expense of $366 and $367, respectively, and recognized $1,100 and $1,099 during the nine months ended September 30, 2012 and 2011, respectively, related to this earn-out arrangement.

The Company incurred acquisition costs of approximately $0 and $134, respectively, during the three and nine months ended September 30, 2011, which are included in general and administrative expense in the consolidated statements of operations. The acquisition was accounted for under the purchase method of accounting. The operating results of AECsoft are included in the accompanying consolidated financial statements from the date of acquisition.

The purchase consideration consisted of the following:

Cash	$	9,256
Fair value of common stock		4,539
Total purchase consideration	$	13,795
Cash acquired		1,910
Net purchase consideration	$	11,885

The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Acquired technology and the covenant not to compete are amortized on a straight-line basis. Acquired customer relationships are amortized over a ten-year estimated life in a pattern consistent with which the economic benefit is expected to be realized. The excess of the purchase price over the net tangible and identifiable intangible assets acquired was recorded as goodwill which is not deductible for tax purposes. This asset is attributed to a trained workforce and buyer-specific value resulting from synergies that are not included in the fair values of assets.

The allocation of the purchase price as of the acquisition date was as follows:

	Estimated Useful Life		Estimated Fair Value
Accounts receivable			$	831
Prepaid expenses and other current assets				174
Property and equipment				82
Deferred tax asset				1,414
Covenant not to compete		5 years		51
Acquired technology		7 years		1,176
Customer relationships		10 years		4,200
Goodwill				8,954
Accrued expenses				(524	)
Deferred tax liability				(2,111	)
Deferred revenues				(2,362	)
Total purchase consideration			$	11,885

The measurement period for the acquisition purchase accounting was closed March 31, 2011.

On October 25, 2011, the Company made certain indemnification claims in the amount of $446 against the former shareholders of AECsoft pursuant to the Escrow Agreement with the former shareholders of AECsoft. The claims were agreed to by the former AECsoft shareholders and an escrow distribution to SciQuest consisting of $223 in cash and 18 shares of the Company’s common stock at a fair value of $223 was made. As of September 30, 2012, $1,052 in cash and 86 shares of common stock remain in escrow to satisfy potential indemnification claims.

XML

Stockholders' Equity (Details 2) (USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Schedule of stock options outstanding and exercisable
Options outstanding, number	1,650
Weighted-average remaining contractual life (in years)	8 years 3 months 18 days	8 years 3 months 18 days
Options outstanding, weighted-average exercise price	$ 11.21
Options exercisable, number	685
Options exercisable, weighted-average exercise price	$ 8.18
$0.08 - $0.14 [Member]
Schedule of stock options outstanding and exercisable
Options outstanding, number	49
Weighted-average remaining contractual life (in years)	2 years 10 months 24 days
Options outstanding, weighted-average exercise price	$ 0.10
Options exercisable, number	49
Options exercisable, weighted-average exercise price	$ 0.10
$0.14 - $1.90 [Member]
Schedule of stock options outstanding and exercisable
Options outstanding, number	10
Weighted-average remaining contractual life (in years)	6 years 7 months 6 days
Options outstanding, weighted-average exercise price	$ 1.71
Options exercisable, number	8
Options exercisable, weighted-average exercise price	$ 1.67
$2.04 - $8.18 [Member]
Schedule of stock options outstanding and exercisable
Options outstanding, number	397
Weighted-average remaining contractual life (in years)	7 years
Options outstanding, weighted-average exercise price	$ 3.16
Options exercisable, number	296
Options exercisable, weighted-average exercise price	$ 2.93
$11.45 - $17.50 [Member]
Schedule of stock options outstanding and exercisable
Options outstanding, number	1,185
Weighted-average remaining contractual life (in years)	8 years 10 months 24 days
Options outstanding, weighted-average exercise price	$ 14.40
Options exercisable, number	332
Options exercisable, weighted-average exercise price	$ 14.23
$17.73 - $18.10 [Member]
Schedule of stock options outstanding and exercisable
Options outstanding, number	9
Weighted-average remaining contractual life (in years)	9 years 9 months 18 days
Options outstanding, weighted-average exercise price	$ 17.85
Options exercisable, number
Options exercisable, weighted-average exercise price

XML

Business Combinations (Details) (USD $) In Thousands, unless otherwise specified			3 Months Ended		3 Months Ended		3 Months Ended		3 Months Ended		3 Months Ended		3 Months Ended		3 Months Ended
	Aug. 01, 2012 Upside Software [Member]	Jan. 02, 2011 AECsoft [Member]	Sep. 30, 2012 Covenant not to compete [Member] Upside Software [Member]	Aug. 01, 2012 Covenant not to compete [Member] Upside Software [Member]	Mar. 31, 2011 Covenant not to compete [Member] AECsoft [Member]	Jan. 02, 2011 Covenant not to compete [Member] AECsoft [Member]	Sep. 30, 2012 Acquired technology [Member] Upside Software [Member]	Aug. 01, 2012 Acquired technology [Member] Upside Software [Member]	Mar. 31, 2011 Acquired technology [Member] AECsoft [Member]	Jan. 02, 2011 Acquired technology [Member] AECsoft [Member]	Sep. 30, 2012 Customer relationships [Member] Upside Software [Member]	Aug. 01, 2012 Customer relationships [Member] Upside Software [Member]	Mar. 31, 2011 Customer relationships [Member] AECsoft [Member]	Jan. 02, 2011 Customer relationships [Member] AECsoft [Member]	Sep. 30, 2012 Trademarks [Member] Upside Software [Member]	Aug. 01, 2012 Trademarks [Member] Upside Software [Member]
Schedule of purchase price allocation
Accounts receivable	$ 2,096	$ 831
Prepaid expenses and other current assets	230	174
Property and equipment	478	82
Deferred tax asset		1,414
Amortizable intangible assets				30		51		4,064		1,176		3,594		4,200		263
Goodwill	15,927	8,954
Accrued expenses	(530)	(524)
Deferred tax liability		(2,111)
Deferred revenues	(3,705)	(2,362)
Total purchase consideration	$ 22,447	$ 11,885
Estimated Useful Life			5 years		5 years		7 years		7 years		10 years		10 years		5 years

XML

Summary of Significant Accounting Policies (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Summary of Significant Accounting Policies (Additional Textual) [Abstract]
Realized gains or losses on available-for-sale securities	$ 0	$ 0	$ 0	$ 0
Unrealized gains or losses	0		0		0
Allowance for doubtful accounts receivable	$ 122		$ 122		$ 217
Furniture [Member]
Summary of Significant Accounting Policies (Textual) [Abstract]
Estimated useful life			7 years
Computer software and equipment [Member] | Maximum [Member]
Summary of Significant Accounting Policies (Textual) [Abstract]
Estimated useful life			5 years
Computer software and equipment [Member] | Minimum [Member]
Summary of Significant Accounting Policies (Textual) [Abstract]
Estimated useful life			3 years
Software Development Costs [Member]
Summary of Significant Accounting Policies (Textual) [Abstract]
Estimated useful life			3 years

XML

Stockholders' Equity (Details 3)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Stock options [Member]
Schedule of assumptions used to calculate fair value of common stock options
Estimated dividend yield	0.00%	0.00%
Expected stock price volatility, minimum	60.00%	80.00%
Expected stock price volatility, maximum	80.00%	90.00%
Weighted-average risk-free interest rate, minimum	0.80%	1.20%
Weighted-average risk-free interest rate, maximum	1.50%	2.70%
Expected life of options (in years)	6 years 3 months	6 years 3 months
Employee stock purchase plan [Member]
Schedule of assumptions used to calculate fair value of common stock options
Estimated dividend yield	0.00%
Expected stock price volatility	57.30%
Weighted-average risk-free interest rate	0.17%
Expected life of options (in years)	1 year

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Business Combinations (Details 1) (AECsoft [Member], USD $) In Thousands, unless otherwise specified	Jan. 02, 2011
AECsoft [Member]
Schedule of acquisition purchase price
Cash	$ 9,256
Fair value of common stock	4,539
Total purchase consideration	13,795
Cash acquired	1,910
Net purchase consideration	$ 11,885

XML

Business Combinations (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended		0 Months Ended	3 Months Ended			9 Months Ended				3 Months Ended
	Sep. 30, 2012 Upside Software [Member]	Sep. 30, 2012 Upside Software [Member]	Aug. 01, 2012 Upside Software [Member]	Apr. 14, 2012 AECsoft [Member]	Sep. 30, 2012 AECsoft [Member]	Sep. 30, 2011 AECsoft [Member]	Mar. 31, 2011 AECsoft [Member]	Sep. 30, 2012 AECsoft [Member]	Sep. 30, 2011 AECsoft [Member]	Oct. 25, 2011 AECsoft [Member]	Jan. 02, 2011 AECsoft [Member]	Sep. 30, 2012 Customer relationships [Member] Upside Software [Member]	Mar. 31, 2011 Customer relationships [Member] AECsoft [Member]
Business Combinations (Textual) [Abstract]
Estimated useful life of acquired customer relationships												10 years	10 years
Fair value of common stock											$ 4,539
Fair value of common stock, shares							351
Cash			22,447								9,256
Common stock shares issued under earn-out arrangement				122
Contingent consideration, fair value of common stock											300
Stock-based compensation expense related to earn-out arrangement					366	367		1,100	1,099
Cash balance in escrow					1,052			1,052
Acquisition costs	250	250				0			134
Acquisition escrow distribution, shares										18
Acquisition escrow claims										446
Acquisition escrow distribution, cash										223
Contingent consideration, common stock shares							25
Fair value of acquisition escrow distribution, shares										223
Common stock in escrow					86			86
Common stock shares potentially issuable under earn-out arrangement											300
Purchase price cash consideration amount deposited in escrow			2,800
Business Combinations (Additional Textual) [Abstract]
Total purchase consideration											$ 13,795

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Revenue Recognition

The Company primarily derives its revenues from subscription fees for its on-demand strategic procurement and supplier management software solutions and associated implementation services. Revenue is generated from subscription agreements and related services permitting customers to access and utilize the Company’s hosted software. Customers may, on occasion, also purchase a perpetual license for certain software modules. Revenue is recognized when there is persuasive evidence of an arrangement, the service has been provided or delivered to the customer, the collection of the fee is probable and the amount of the fee to be paid by the customer is fixed or determinable. The Company’s arrangements do not contain general rights of return.

In October 2009, the FASB’s Emerging Issues Task Force amended the accounting standards for multiple-element revenue arrangements. The Company adopted this accounting guidance on January 1, 2011 for applicable arrangements entered into or materially modified after this date. The adoption of this guidance did not have a material impact on its financial position, results of operations, or cash flows.

The Company’s contractual agreements generally contain multiple service elements and deliverables. These elements include access to the hosted software, implementation services and, on a limited basis, perpetual licenses for certain software modules and related maintenance and support. The Company evaluates each element in a multiple element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has stand-alone value and delivery of the undelivered element is probable and within the Company’s control.

The Company allocates revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence of selling price (“VSOE”), if available, third-party evidence of selling price (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. The Company allocates revenue among deliverables in an arrangement using the relative selling price method. Because the Company has neither VSOE nor TPE for its deliverables, the allocation of revenue has been based on ESP.

The Company’s process for determining ESP for its deliverables considers multiple factors that may vary depending upon the facts and circumstances related to each deliverable. Key factors considered in developing ESP related to deliverables include established pricing and approval policies, type and size of customer, number of products purchased, and historical transactions. The Company regularly reviews ESP and maintains internal controls over the establishment and updates of these estimates.

As implementation services do not have stand-alone value to the customer, licenses and related implementation services are considered a single unit of accounting. The consideration allocated to licenses and services is recognized ratably over the term of the subscription agreement, beginning with the later of the start date specified in the subscription agreement, or the date access to the software is provided to the customer, provided all other revenue recognition criteria have been met. Fees for professional services that are contingent upon future performance are recognized ratably over the remaining subscription term once the performance milestones have been met. The Company recognizes revenue from any professional services that are sold separately as the services are performed.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s software and services described above. For multiple-year subscription agreements, the Company generally invoices its customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year subscription agreements. The Company’s services, such as implementation, are generally sold in conjunction with subscription agreements. These services are recognized ratably over the remaining term of the subscription agreement once any contingent performance milestones have been satisfied. The portion of deferred revenue that the Company anticipates will be recognized after the succeeding 12-month period is recorded as non-current deferred revenue and the remaining portion is recorded as current deferred revenue.

Cost of Revenues

Cost of revenues primarily consists of costs related to hosting the Company’s subscription software services, compensation and related expenses for implementation services, supplier enablement services, customer support staff and client partners, amortization of capitalized software development costs, allocated fixed asset depreciation and facilities costs. Cost of revenues is expensed as incurred.

Deferred Project Costs

The Company capitalizes sales commission costs that are directly related to the execution of its subscription agreements. The commissions are deferred and amortized over the contractual term of the related subscription agreement. The deferred commission amounts are recoverable from the future revenue streams under the subscription agreements. The Company believes this is the appropriate method of accounting, as the commission costs are so closely related to the revenues from the subscription agreements that they should be recorded as an asset and charged to expense over the same period that the subscription revenues are recognized. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. The deferred commissions are reflected within deferred project costs in the accompanying consolidated balance sheets.

Cash and Cash Equivalents

The Company considers all highly-liquid debt investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains cash balances at financial institutions that may at times exceed federally insured limits. The Company maintains this cash at reputable financial institutions and, as a result, believes credit risk related to its cash is minimal.

Short-Term Investments

Management determines the appropriate classification of investments at the time of purchase and evaluates such determination at each balance sheet date. The Company’s investments are classified as available-for-sale securities and are stated at fair value at September 30, 2012 and December 31, 2011. Realized gains and losses are included in other income (expense) based on the specific identification method. There were no realized gains or losses for the three or nine months ended September 30, 2012 and 2011. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income, net of tax. As of September 30, 2012 and December 31, 2011, there were no unrealized gains or losses on available-for-sale securities. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. Management believes no such declines in value existed at September 30, 2012 or December 31, 2011.

Accounts Receivable

The Company assesses the need for an allowance for doubtful accounts based on estimates of probable credit losses. This assessment is based on several factors, including aging of customer accounts, known customer specific risks, historical experience and existing economic conditions. The Company generally does not require collateral for receivable balances. Accounts would be charged against the allowance after all means of collection were exhausted and recovery was considered remote. Any required provisions for doubtful accounts would be recorded in general and administrative expense. Based on management’s analysis of its outstanding accounts receivable, the Company has recorded an allowance of $122 and $217 at September 30, 2012 and December 31, 2011, respectively.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are usually seven years for furniture and three to five years for computer software and equipment. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the expected term of the leases. Costs for repairs and maintenance are expensed as incurred. Upon retirement or sale, the cost of the disposed assets and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

Software Development Costs

The Company incurs certain costs associated with the development of its on-demand solution, which are accounted for as internal-use software. Certain qualifying costs incurred during the application development phase are capitalized and amortized to expense over the estimated useful life of the related applications, which is generally three years.

Although the Company’s development efforts are primarily focused on its hosted, on-demand solution, the Company also incurs costs in connection with the development of certain of its materials management software products, which are accounted for as costs of software to be sold, leased or otherwise marketed. Under this guidance, capitalization of software development costs begins upon the establishment of technological feasibility (based on a working model approach), subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has substantially coincided; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs related to its licensed software products and has charged all such costs to research and development expense.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. Additionally, the Company would also review the carrying value of goodwill whenever events or changes in circumstances indicated that its carrying amount may not be recoverable. The Company has concluded that it has one reporting unit for purposes of its annual goodwill impairment testing. To assess goodwill impairment, the first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. The results of our most recent annual assessment did not indicate any impairment of goodwill, and as such the second step of the impairment test was not required. Additionally, we do not believe there have been any triggering events that would result in potential impairment of goodwill as of September 30, 2012.

Stock-Based Compensation

Stock-based payments to employees, including grants of employee stock options, are recognized in the consolidated statements of operations based on their fair values. Stock-based compensation costs are measured at the grant date based on the fair value of the award and are recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

Stock-based compensation costs are based on the fair value of the underlying option calculated using the Black-Scholes option-pricing model on the date of grant for stock options. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates and expected term. The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term for the nine months ended September 30, 2012 and 2011, represents the average time that options that vest are expected to be outstanding based on the mid-point between the vesting date and the end of the contractual term of the award. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero. The risk-free interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the awards.

Foreign Currency and Operations

The reporting currency for all periods presented is the U.S. dollar. The functional currency for the Company’s foreign subsidiaries is their local currency. The translation of each subsidiary’s financial statements into U.S. dollars is performed for assets and liabilities using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The resulting translation adjustments are recognized in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations.

Segment Data

The Company manages its operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company has determined that it has a single reportable segment.

Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Outstanding unvested restricted stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding until vested. Diluted net income per share is computed giving effect to all potentially dilutive common stock, including options and restricted stock. The dilutive effect of outstanding awards is reflected in diluted earnings per share by application of the treasury stock method.

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

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Basic:
Net income	$	713	$	759	$	1,266	$	1,759
Weighted average common shares, basic		22,278		22,012		22,235		21,549
Basic net income per share	$	0.03	$	0.03	$	0.06	$	0.08
Diluted:
Net income	$	713	$	759	$	1,266	$	1,759
Weighted average common shares, basic		22,278		22,012		22,235		21,549
Dilutive effect of:
Options to purchase common stock		385		428		395		471
Nonvested shares of restricted stock		40		111		46		129
Weighted average common shares, diluted		22,703		22,551		22,676		22,149
Diluted net income per share	$	0.03	$	0.03	$	0.06	$	0.08

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

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Common stock options		199		322		288		260

Income Taxes

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

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

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

Recent Accounting Pronouncements

In July 2012, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that fair value of an intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company will adopt this standard in the first quarter of 2013 and does not expect the adoption will have a material impact on its financial statements.

In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two step test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The Company adopted this guidance on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In June 2011, the FASB issued new guidance regarding the presentation of comprehensive income. The new guidance requires the presentation of the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

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Cash Equivalents and Short-Term Investments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Cash equivalents and short-term investments
Cash equivalents, cost	$ 6,047	$ 9,623
Short-term investments, cost	26,545	44,685
Total, cost	32,592	54,308
Cash equivalents, fair value	6,047	9,623
Short-term investments, fair value	26,545	44,685
Total, fair value	32,592	54,308
Cash Equivalents and Short-Term Investments (Textual) [Abstract]
Unrealized gains or losses	$ 0	$ 0

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Goodwill and Other Intangible Assets (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Goodwill and Other Intangible Assets (Textual) [Abstract]
Amortization of intangible assets	$ 463	$ 251	$ 965	$ 754
Amortization of intangible assets recorded in cost of revenues	$ 145	$ 42	$ 229	$ 126

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 20,810	$ 14,958
Short-term investments	26,545	44,685
Accounts receivable, net	6,808	10,746
Prepaid expenses and other current assets	1,587	1,015
Deferred tax asset	1,363	70
Total current assets	57,113	71,474
Property and equipment, net	6,653	4,028
Goodwill	31,613	15,719
Intangible assets, net	12,402	5,433
Deferred project costs	7,047	7,025
Deferred tax asset	11,562	12,634
Other	95	55
Total assets	126,485	116,368
Current liabilities:
Accounts payable	289	102
Accrued liabilities	6,027	5,945
Deferred revenues	39,527	36,836
Total current liabilities	45,843	42,883
Deferred revenues, less current portion	14,851	12,778
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; 50,000 shares authorized; 22,346 and 22,133 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively	22	22
Additional paid-in capital	78,004	74,083
Accumulated other comprehensive loss	(103)
Accumulated deficit	(12,132)	(13,398)
Total stockholders' equity	65,791	60,707
Total liabilities and stockholders' equity	$ 126,485	$ 116,368

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Stockholders' Equity (Details Textual) (USD $) In Thousands, except Share data, unless otherwise specified		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended				3 Months Ended	9 Months Ended	0 Months Ended		3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012 AECsoft [Member]	Sep. 30, 2011 AECsoft [Member]	Sep. 30, 2012 AECsoft [Member]	Sep. 30, 2011 AECsoft [Member]	Sep. 30, 2012 Employee Stock Options [Member]	Sep. 30, 2011 Employee Stock Options [Member]	Sep. 30, 2012 Employee Stock Options [Member]	Sep. 30, 2011 Employee Stock Options [Member]	Sep. 30, 2012 Restricted stock [Member]	Sep. 30, 2011 Restricted stock [Member]	Sep. 30, 2012 Restricted stock [Member]	Sep. 30, 2011 Restricted stock [Member]	Dec. 31, 2011 Restricted stock [Member]	Mar. 20, 2010 Restricted stock [Member]	Sep. 30, 2012 Employee Stock Purchase Plan [Member]	Sep. 30, 2012 Employee Stock Purchase Plan [Member]	Jul. 31, 2012 Restricted Stock Units [Member]	Apr. 25, 2012 Restricted Stock Units [Member]	Sep. 30, 2012 Restricted Stock Units [Member]	Sep. 30, 2012 Restricted Stock Units [Member]
Stockholders' Equity (Textual) [Abstract]
Stock incentive plan, shares authorized for grant	5,307,736
Vesting period								4 years				4 years
Contractual term of options								10 Years
Subscription note agreements, interest rate										6.00%		6.00%
Subscription note agreements, outstanding balance										$ 0		$ 0		$ 0
Restricted stock units granted																		9	19
Stock-based compensation expense						782	730	2,221	1,588	19	36	58	110			44	59			96	147
Unrecognized compensation cost						8,482		8,482		47		47								284	284
Weighted average period over which unrecognized compensation cost is expected to be recognized								3 years				10 months 24 days									10 months 24 days
Forgiven subscription note agreements															1,016
Incremental compensation expense related to forgiven subscription note agreements															746
Incremental compensation expense recognized at modification date															518
Incremental compensation expense related to unvested shares															228
Recognized compensation expense related to modification										8	22	24	66
Percentage of shares issuable upon restricted stock unit vesting																			50.00%
Percentage of share issuance deferred upon restricted stock unit vesting																			50.00%
Aggregate intrinsic value of options exercised						229	233	888	1,698
Weighted average grant date fair value per share for stock options granted								$ 9.23	$ 10.71
Stock-based compensation expense related to earn-out arrangement		366	367	1,100	1,099
Employee stock purchase plan, maximum contribution rate																10.00%	10.00%
Employee stock purchase plan, percentage of per share purchase price, lessor of fair market value on offering date or purchase date																lessor of 85%	lessor of 85%
Employee stock purchase plan, shares available for issuance																1,000,000	1,000,000
Employee stock purchase plan, maximum annual contribution																$ 25,000	$ 25,000

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities
Net income	$ 1,266	$ 1,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,673	1,551
Loss on disposal of fixed assets	36
Stock-based compensation expense	3,609	2,863
Deferred taxes	(221)	947
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	6,026	557
Prepaid expenses and other current assets	(378)	359
Deferred project costs and other assets	(30)	(563)
Accounts payable	189	(51)
Accrued liabilities	(442)	183
Deferred revenues	1,068	3,741
Net cash provided by operating activities	13,796	11,346
Cash flows from investing activities
Business acquisitions, net of cash acquired	(22,447)	(7,346)
Addition of capitalized software development costs	(2,179)	(595)
Purchase of property and equipment	(1,710)	(761)
Purchase of available-for-sale short-term investments	(1,200)	(15,000)
Maturities of available-for-sale short-term investments	19,340	7,895
Net cash used in investing activities	(8,196)	(15,807)
Cash flows from financing activities
Proceeds from public offering		15,405
Public offering costs		(408)
Collection of notes receivable from stockholders		15
Proceeds from exercise of common stock options	312	129
Net cash provided by financing activities	312	15,141
Effect of exchange rate changes on cash and cash equivalents	(60)
Net increase in cash and cash equivalents	5,852	10,680
Cash and cash equivalents at beginning of period	14,958	17,494
Cash and cash equivalents at end of period	$ 20,810	$ 28,174

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Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Property and equipment
Total costs	$ 12,908	$ 8,584
Less accumulated depreciation and amortization	(6,255)	(4,556)
Property and equipment, net	6,653	4,028
Furniture and equipment [Member]
Property and equipment
Total costs	1,216	1,144
Computer software and equipment [Member]
Property and equipment
Total costs	11,011	6,824
Leasehold improvements [Member]
Property and equipment
Total costs	$ 681	$ 616

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair value measurements

The fair value measurements of the Company’s financial assets at September 30, 2012 are as follows:

	Total		Level 1		Level 2		Level 3
Cash Equivalents	$	6,047	$	6,047		—		—
Short-term investments		26,545		26,545		—		—
Total	$	32,592	$	32,592		—		—

The fair value measurements of the Company’s financial assets at December 31, 2011 are as follows:

	Total		Level 1		Level 2		Level 3
Cash Equivalents	$	9,623	$	9,623		—		—
Short-term investments		44,685		44,685		—		—
Total	$	54,308	$	54,308		—		—

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Property and Equipment (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Property and Equipment (Textual) [Abstract]
Property and equipment, depreciation	$ 407	$ 188	$ 1,064	$ 526
Capitalized software development costs	856	190	2,179	595
Amortization expense related to capitalized software development costs	299	105	641	271
Net capitalized software development costs	$ 2,920		$ 2,920		$ 1,382

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2012

Goodwill and Other Intangible Assets [Abstract]

Carrying amount of goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2012 were as follows:

Balance at December 31, 2011	$	15,719
Goodwill acquired		15,927
Other adjustments		(33	)
Balance at September 30, 2012	$	31,613

Summary of intangible assets

A summary of intangible assets at September 30, 2012 and December 31, 2011 follows:

	September 30, 2012
	Weighted Average	Gross Carrying		Accumulated			Net Carrying
	AmortizationPeriod	Amount		Amortization			Amount
Acquired technology	7 years	$	13,331	$	(8,489	)	$	4,842
Customer relationships	10 years		12,987		(6,173	)		6,814
Covenant not to compete	5 years		81		(19	)		62
Acquired trademarks	5 years		262		(8	)		254
Trademarks			430		—			430
Total		$	27,091	$	(14,689	)	$	12,402

	December 31, 2011
	Weighted Average	Gross Carrying		Accumulated			Net Carrying
	AmortizationPeriod	Amount		Amortization			Amount
Acquired technology	7 years	$	9,276	$	(8,268	)	$	1,008
Customer relationships	10 years		9,400		(5,446	)		3,954
Covenant not to compete	5 years		51		(10	)		41
Trademarks			430		—			430
Total		$	19,157	$	(13,724	)	$	5,433

Future amortization expense related to intangible assets

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

2012 (remaining three months)	$	574
2013		2,242
2014		2,023
2015		1,767
2016		1,602
Thereafter		3,764
	$	11,972

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Description of Business

9 Months Ended

Sep. 30, 2012

Description of Business [Abstract]

Description of Business

1. Description of Business

SciQuest, Inc. (the Company) provides on-demand strategic procurement and supplier management solutions that integrate customers with their suppliers to improve procurement of indirect goods and services, such as office supplies, laboratory supplies, furniture, MRO (maintenance, repair and operations) supplies and food and beverages. The Company’s on-demand software enables organizations to more efficiently source indirect goods and services, manage their spend and obtain the benefits of compliance with purchasing policies and negotiating power with suppliers. The Company’s on-demand strategic procurement software suite, coupled with its managed supplier network, forms the Company’s integrated solution, which is designed to achieve rapid and sustainable savings. The Company’s solution is designed to optimize tasks throughout the cycle of finding, procuring, receiving and paying for indirect goods and services, which can result in increased efficiency, reduced costs and increased insight into an organization’s buying patterns. The Company’s core target markets for strategic procurement products are higher education, life sciences, healthcare and state and local governments. In addition, the Company markets products in the general commercial market without regard to specific verticals. The Company is headquartered in Cary, North Carolina.

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	50,000	50,000
Common stock, shares issued	22,346	22,133
Common stock, shares outstanding	22,346	22,133

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Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events [Abstract]

Subsequent Events

11. Subsequent Events

Acquisition

On October 1, 2012, the Company completed the acquisition of substantially all of the assets of Spend Radar LLC (“Spend Radar”), a leading provider of spend analysis solutions. The acquisition of Spend Radar adds cloud-based software for aggregating and analyzing data to the Company’s existing strategic procurement and supplier management solutions.

The purchase price consisted of $8,000 in cash and 113 shares of the Company’s common stock at a fair value of approximately $2,000. Additionally, up to $6,000 in cash may be paid and 85 shares of the Company’s common stock may be issued based on the successful achievement of certain performance targets and continued employment with the Company from the closing date to December 31, 2013.

The acquisition of Spend Radar occurred subsequent to September 30, 2012. Accordingly, the results of operations of the acquired entity are not included in the consolidated statements of operations of SciQuest, Inc. for the three and nine months ended September 30, 2012. The Company is currently in the process of determining the initial accounting for this acquisition.

Revolving Credit Facility

As of November 2, 2012, the Company established a $30,000 revolving credit facility which will be available for use until November 2, 2015. The revolving credit facility will be used for general corporate purposes. The facility consists of a $20,000 securities secured revolving credit facility and a $10,000 receivables secured revolving credit facility. The securities secured revolving credit facility and the receivables secured revolving credit facility bear interest equal to the BBA LIBOR Daily Floating Rate plus 0.75% and the BBA LIBOR Daily Floating Rate plus 1.50%, respectively. In addition, the Company pays a quarterly fee equal to 0.10% on any unused funds under the facility. As collateral for extension of credit under the facility, the Company and its domestic subsidiary granted security interests in substantially all of their assets, and the Company pledged the stock of its domestic subsidiary and 66% of the shares of one of its foreign subsidiaries.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Oct. 31, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	SCIQUEST INC
Entity Central Index Key	0001082526
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		22,460

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Revenue Recognition

Revenue Recognition

The Company primarily derives its revenues from subscription fees for its on-demand strategic procurement and supplier management software solutions and associated implementation services. Revenue is generated from subscription agreements and related services permitting customers to access and utilize the Company’s hosted software. Customers may, on occasion, also purchase a perpetual license for certain software modules. Revenue is recognized when there is persuasive evidence of an arrangement, the service has been provided or delivered to the customer, the collection of the fee is probable and the amount of the fee to be paid by the customer is fixed or determinable. The Company’s arrangements do not contain general rights of return.

In October 2009, the FASB’s Emerging Issues Task Force amended the accounting standards for multiple-element revenue arrangements. The Company adopted this accounting guidance on January 1, 2011 for applicable arrangements entered into or materially modified after this date. The adoption of this guidance did not have a material impact on its financial position, results of operations, or cash flows.

The Company’s contractual agreements generally contain multiple service elements and deliverables. These elements include access to the hosted software, implementation services and, on a limited basis, perpetual licenses for certain software modules and related maintenance and support. The Company evaluates each element in a multiple element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has stand-alone value and delivery of the undelivered element is probable and within the Company’s control.

The Company allocates revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence of selling price (“VSOE”), if available, third-party evidence of selling price (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. The Company allocates revenue among deliverables in an arrangement using the relative selling price method. Because the Company has neither VSOE nor TPE for its deliverables, the allocation of revenue has been based on ESP.

The Company’s process for determining ESP for its deliverables considers multiple factors that may vary depending upon the facts and circumstances related to each deliverable. Key factors considered in developing ESP related to deliverables include established pricing and approval policies, type and size of customer, number of products purchased, and historical transactions. The Company regularly reviews ESP and maintains internal controls over the establishment and updates of these estimates.

As implementation services do not have stand-alone value to the customer, licenses and related implementation services are considered a single unit of accounting. The consideration allocated to licenses and services is recognized ratably over the term of the subscription agreement, beginning with the later of the start date specified in the subscription agreement, or the date access to the software is provided to the customer, provided all other revenue recognition criteria have been met. Fees for professional services that are contingent upon future performance are recognized ratably over the remaining subscription term once the performance milestones have been met. The Company recognizes revenue from any professional services that are sold separately as the services are performed.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s software and services described above. For multiple-year subscription agreements, the Company generally invoices its customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year subscription agreements. The Company’s services, such as implementation, are generally sold in conjunction with subscription agreements. These services are recognized ratably over the remaining term of the subscription agreement once any contingent performance milestones have been satisfied. The portion of deferred revenue that the Company anticipates will be recognized after the succeeding 12-month period is recorded as non-current deferred revenue and the remaining portion is recorded as current deferred revenue.

Cost of Revenues

Cost of Revenues

Cost of revenues primarily consists of costs related to hosting the Company’s subscription software services, compensation and related expenses for implementation services, supplier enablement services, customer support staff and client partners, amortization of capitalized software development costs, allocated fixed asset depreciation and facilities costs. Cost of revenues is expensed as incurred.

Deferred Project Costs

Deferred Project Costs

The Company capitalizes sales commission costs that are directly related to the execution of its subscription agreements. The commissions are deferred and amortized over the contractual term of the related subscription agreement. The deferred commission amounts are recoverable from the future revenue streams under the subscription agreements. The Company believes this is the appropriate method of accounting, as the commission costs are so closely related to the revenues from the subscription agreements that they should be recorded as an asset and charged to expense over the same period that the subscription revenues are recognized. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. The deferred commissions are reflected within deferred project costs in the accompanying consolidated balance sheets.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly-liquid debt investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains cash balances at financial institutions that may at times exceed federally insured limits. The Company maintains this cash at reputable financial institutions and, as a result, believes credit risk related to its cash is minimal.

Short-Term Investments

Short-Term Investments

Management determines the appropriate classification of investments at the time of purchase and evaluates such determination at each balance sheet date. The Company’s investments are classified as available-for-sale securities and are stated at fair value at September 30, 2012 and December 31, 2011. Realized gains and losses are included in other income (expense) based on the specific identification method. There were no realized gains or losses for the three or nine months ended September 30, 2012 and 2011. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income, net of tax. As of September 30, 2012 and December 31, 2011, there were no unrealized gains or losses on available-for-sale securities. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. Management believes no such declines in value existed at September 30, 2012 or December 31, 2011.

Accounts Receivable

Accounts Receivable

The Company assesses the need for an allowance for doubtful accounts based on estimates of probable credit losses. This assessment is based on several factors, including aging of customer accounts, known customer specific risks, historical experience and existing economic conditions. The Company generally does not require collateral for receivable balances. Accounts would be charged against the allowance after all means of collection were exhausted and recovery was considered remote. Any required provisions for doubtful accounts would be recorded in general and administrative expense. Based on management’s analysis of its outstanding accounts receivable, the Company has recorded an allowance of $122 and $217 at September 30, 2012 and December 31, 2011, respectively.

Property and Equipment

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are usually seven years for furniture and three to five years for computer software and equipment. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the expected term of the leases. Costs for repairs and maintenance are expensed as incurred. Upon retirement or sale, the cost of the disposed assets and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

Software Development Costs

Software Development Costs

The Company incurs certain costs associated with the development of its on-demand solution, which are accounted for as internal-use software. Certain qualifying costs incurred during the application development phase are capitalized and amortized to expense over the estimated useful life of the related applications, which is generally three years.

Although the Company’s development efforts are primarily focused on its hosted, on-demand solution, the Company also incurs costs in connection with the development of certain of its materials management software products, which are accounted for as costs of software to be sold, leased or otherwise marketed. Under this guidance, capitalization of software development costs begins upon the establishment of technological feasibility (based on a working model approach), subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has substantially coincided; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs related to its licensed software products and has charged all such costs to research and development expense.

Goodwill

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. Additionally, the Company would also review the carrying value of goodwill whenever events or changes in circumstances indicated that its carrying amount may not be recoverable. The Company has concluded that it has one reporting unit for purposes of its annual goodwill impairment testing. To assess goodwill impairment, the first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. The results of our most recent annual assessment did not indicate any impairment of goodwill, and as such the second step of the impairment test was not required. Additionally, we do not believe there have been any triggering events that would result in potential impairment of goodwill as of September 30, 2012.

Stock-Based Compensation

Stock-Based Compensation

Stock-based payments to employees, including grants of employee stock options, are recognized in the consolidated statements of operations based on their fair values. Stock-based compensation costs are measured at the grant date based on the fair value of the award and are recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

Stock-based compensation costs are based on the fair value of the underlying option calculated using the Black-Scholes option-pricing model on the date of grant for stock options. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates and expected term. The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term for the nine months ended September 30, 2012 and 2011, represents the average time that options that vest are expected to be outstanding based on the mid-point between the vesting date and the end of the contractual term of the award. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero. The risk-free interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the awards.

Foreign currency and operations

Foreign Currency and Operations

The reporting currency for all periods presented is the U.S. dollar. The functional currency for the Company’s foreign subsidiaries is their local currency. The translation of each subsidiary’s financial statements into U.S. dollars is performed for assets and liabilities using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The resulting translation adjustments are recognized in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations.

Segment Data

Segment Data

The Company manages its operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company has determined that it has a single reportable segment.

Income Per Share

Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Outstanding unvested restricted stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding until vested. Diluted net income per share is computed giving effect to all potentially dilutive common stock, including options and restricted stock. The dilutive effect of outstanding awards is reflected in diluted earnings per share by application of the treasury stock method.

Income Taxes

Income Taxes

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

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

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

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In July 2012, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that fair value of an intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company will adopt this standard in the first quarter of 2013 and does not expect the adoption will have a material impact on its financial statements.

In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two step test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The Company adopted this guidance on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In June 2011, the FASB issued new guidance regarding the presentation of comprehensive income. The new guidance requires the presentation of the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

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Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements of Operations and Comprehensive Income [Abstract]
Revenues	$ 17,173	$ 13,774	$ 46,761	$ 39,208
Cost of revenues	5,343	3,560	13,929	9,521
Gross profit	11,830	10,214	32,832	29,687
Operating expenses:
Research and development	4,734	3,001	10,905	8,670
Sales and marketing	4,073	3,396	12,188	10,815
General and administrative	2,835	2,107	8,006	6,220
Amortization of intangible assets	318	209	736	628
Total operating expenses	11,960	8,713	31,835	26,333
(Loss) income from operations	(130)	1,501	997	3,354
Other income:
Interest income	19	23	75	67
Other expense, net	(38)	(24)	(41)	(11)
Total other (expense) income, net	(19)	(1)	34	56
(Loss) income before income taxes	(149)	1,500	1,031	3,410
Income tax benefit (expense)	862	(741)	235	(1,651)
Net income	713	759	1,266	1,759
Other comprehensive income:
Foreign currency translation adjustments	(109)		(103)
Comprehensive income	$ 604	$ 759	$ 1,163	$ 1,759
Net income per share:
Basic	$ 0.03	$ 0.03	$ 0.06	$ 0.08
Diluted	$ 0.03	$ 0.03	$ 0.06	$ 0.08
Weighted average shares outstanding used in computing per share amounts:
Basic	22,278	22,012	22,235	21,549
Diluted	22,703	22,551	22,676	22,149

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Property and Equipment

9 Months Ended

Sep. 30, 2012

Property and Equipment [Abstract]

Property and Equipment

6. Property and Equipment

Property and equipment consist of the following as of September 30, 2012 and December 31, 2011:

	September 30,			December 31,
	2012			2011
Furniture and equipment	$	1,216		$	1,144
Computer software and equipment		11,011			6,824
Leasehold improvements		681			616
Total costs		12,908			8,584
Less accumulated depreciation and amortization		(6,255	)		(4,556	)
Property and equipment, net	$	6,653		$	4,028

Depreciation expense related to property and equipment (excluding capitalized internal-use software) was $407 and $188 for the three months ended September 30, 2012 and 2011, respectively, and was $1,064 and $526 for the nine months ended September 30, 2012 and 2011, respectively.

Computer software and equipment includes capitalized software development costs incurred during development of the Company’s on-demand solution. The Company capitalized software development costs of $856 and $190 during the three months ended September 30, 2012 and 2011, respectively, and $2,179 and $595 during the nine months ended September 30, 2012 and 2011, respectively. Net capitalized software development costs totaled $2,920 and $1,382 at September 30, 2012 and December 31, 2011, respectively. Amortization expense for the three months ended September 30, 2012 and 2011 related to capitalized software development costs was $299 and $105, respectively, and was $641 and $271 for the nine months ended September 30, 2012 and 2011, respectively, which is classified within cost of revenues in the accompanying consolidated statements of operations.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

5. Fair Value Measurements

Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

• Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

• Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant input and significant value drivers are observable in active markets.

• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

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

As of September 30, 2012 and December 31, 2011, the Company had cash equivalents of $6,047 and $9,623, respectively, which consist of money market accounts. As of September 30, 2012 and December 31, 2011, the Company had short-term investments of $26,545 and $44,685, respectively, which consist of variable rate demand notes that are invested in corporate and municipal bonds. These variable rate demand notes have final maturities between 2017 and 2042, but are puttable by the Company at any time with seven days notice. These cash equivalents and short-term investments are classified within Level 1 of the fair value hierarchy since they are valued using quoted market prices. As of September 30, 2012 and December 31, 2011, the Company did not have any financial assets or liabilities with observable inputs not quoted on active markets (Level 2), or without observable market values that would require a high level of judgment to determine fair value (Level 3).

The fair value measurements of the Company’s financial assets at September 30, 2012 are as follows:

	Total		Level 1		Level 2		Level 3
Cash Equivalents	$	6,047	$	6,047		—		—
Short-term investments		26,545		26,545		—		—
Total	$	32,592	$	32,592		—		—

The fair value measurements of the Company’s financial assets at December 31, 2011 are as follows:

	Total		Level 1		Level 2		Level 3
Cash Equivalents	$	9,623	$	9,623		—		—
Short-term investments		44,685		44,685		—		—
Total	$	54,308	$	54,308		—		—

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2012

Property and Equipment [Abstract]

Property and equipment

Property and equipment consist of the following as of September 30, 2012 and December 31, 2011:

	September 30,			December 31,
	2012			2011
Furniture and equipment	$	1,216		$	1,144
Computer software and equipment		11,011			6,824
Leasehold improvements		681			616
Total costs		12,908			8,584
Less accumulated depreciation and amortization		(6,255	)		(4,556	)
Property and equipment, net	$	6,653		$	4,028

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Calculation of basic and diluted net income per share

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

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Basic:
Net income	$	713	$	759	$	1,266	$	1,759
Weighted average common shares, basic		22,278		22,012		22,235		21,549
Basic net income per share	$	0.03	$	0.03	$	0.06	$	0.08
Diluted:
Net income	$	713	$	759	$	1,266	$	1,759
Weighted average common shares, basic		22,278		22,012		22,235		21,549
Dilutive effect of:
Options to purchase common stock		385		428		395		471
Nonvested shares of restricted stock		40		111		46		129
Weighted average common shares, diluted		22,703		22,551		22,676		22,149
Diluted net income per share	$	0.03	$	0.03	$	0.06	$	0.08

Anti-dilutive equity instruments excluded from diluted net income per share

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

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Common stock options		199		322		288		260

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Income Taxes

9 Months Ended

Sep. 30, 2012

Income Taxes [Abstract]

Income Taxes

9. Income Taxes

The Company computes its provision for income taxes by applying the estimated annual effective tax rate, adjusted for any material items. The current year dilutive impact of the Company’s acquisitions, as well as the related additional amortization of acquired intangible assets and anticipated contingent payment, has resulted in expected pre-tax net loss for 2012, thereby reducing the Company’s effective tax rate from historical norms to (578)% and 23% for the three and nine months ended September 30, 2012. The Company anticipates incurring tax expense for the full year. The Company’s effective tax rate for the three and nine months ended September 30, 2011 was 49.4% and 48.4%, respectively, which was higher than the federal statutory rate of 34% primarily due to state income taxes and non-deductible expenses, including stock-based compensation, stock-based compensation associated with the earn-out arrangement and amortization of acquired intangible assets.

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2012

Goodwill and Other Intangible Assets [Abstract]

Goodwill and Other Intangible Assets

7. Goodwill and Other Intangible Assets

The Company acquired goodwill and certain identifiable intangible assets as part of the acquisitions in August 2012 and January 2011 and the going private transaction in July 2004.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2012 were as follows:

Balance at December 31, 2011	$	15,719
Goodwill acquired		15,927
Other adjustments		(33	)
Balance at September 30, 2012	$	31,613

Other adjustments represent foreign currency translation, as the functional currency of the Company’s foreign subsidiary, where goodwill is recorded, is its local currency. Accordingly, the foreign currency is translated into U.S. dollars using the exchange rate in effect at period end. Adjustments are included in other comprehensive income (loss).

A summary of intangible assets at September 30, 2012 and December 31, 2011 follows:

	September 30, 2012
	Weighted Average	Gross Carrying		Accumulated			Net Carrying
	AmortizationPeriod	Amount		Amortization			Amount
Acquired technology	7 years	$	13,331	$	(8,489	)	$	4,842
Customer relationships	10 years		12,987		(6,173	)		6,814
Covenant not to compete	5 years		81		(19	)		62
Acquired trademarks	5 years		262		(8	)		254
Trademarks			430		—			430
Total		$	27,091	$	(14,689	)	$	12,402

	December 31, 2011
	Weighted Average	Gross Carrying		Accumulated			Net Carrying
	AmortizationPeriod	Amount		Amortization			Amount
Acquired technology	7 years	$	9,276	$	(8,268	)	$	1,008
Customer relationships	10 years		9,400		(5,446	)		3,954
Covenant not to compete	5 years		51		(10	)		41
Trademarks			430		—			430
Total		$	19,157	$	(13,724	)	$	5,433

As the functional currency of the Company’s foreign subsidiary, where certain intangible assets are recorded, is its local currency, there are related foreign currency translation adjustments. The foreign currency is translated into U.S. dollars using the exchange rate in effect at period end, with any adjustment included in other comprehensive income (loss).

Amortization expense of intangible assets was $463 and $251 for the three months ended September 30, 2012 and 2011, respectively, of which $145 and $42 is recorded in cost of revenues in the accompanying consolidated statements of operations for the three months ended September 30, 2012 and 2011, respectively. Amortization expense of intangible assets was $965 and $754 for the nine months ended September 30, 2012 and 2011, respectively, of which $229 and $126 is recorded in cost of revenues in the accompanying consolidated statements of operations for the nine months ended September 30, 2012 and 2011, respectively.

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

2012 (remaining three months)	$	574
2013		2,242
2014		2,023
2015		1,767
2016		1,602
Thereafter		3,764
	$	11,972

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Stockholders' Equity

9 Months Ended

Sep. 30, 2012

Stockholders' Equity [Abstract]

Stockholders' Equity

8. Stockholders’ Equity

Stock Incentive Plan

The Company adopted a stock incentive plan (the Plan) August 27, 2004. The Plan, as amended, allows the Company to grant up to 5,307,736 common stock options, stock appreciation rights (SARs) and restricted stock awards to employees, board members and others who contribute materially to the success of the Company. The Company’s Board of Directors approves the terms of stock options granted. Individual option grants generally become exercisable ratably over a period of four years from the grant date. The contractual term of the options is approximately ten years from the date of grant.

The Company recognizes compensation expense associated with restricted stock and common stock options based on the grant-date fair value of the award on a straight-line basis over the requisite service period of the individual grantees, which generally equals the vesting period.

Restricted Stock

As part of the Plan, the Company has issued restricted shares of its common stock to certain employees. Upon employee termination, the Company has the option to repurchase the shares. The repurchase price is the original purchase price plus interest for unvested restricted shares and the current fair value (as determined by the Board of Directors prior to September 24, 2010, and subsequently as determined by the closing price of the Company’s shares of common stock on the NASDAQ Global Market on the date of termination) for vested restricted shares. The shares generally vest ratably over four years.

The following summarizes the activity of nonvested shares of restricted stock for the nine months ended September 30, 2012:

	Number of Shares			Weighted- Average  Grant Date Fair Value
Nonvested at January 1, 2012		63		$	1.66
Issued		—			—
Vested		(34	)		1.69
Nonvested at September 30, 2012		29		$	1.57

In conjunction with the issuance of these restricted shares, subscription note agreements were executed for certain employees. The notes are payable in four annual payments due January 1 of each calendar year and bear interest at 6%. At September 30, 2012 and December 31, 2011, the balance outstanding for these subscription note agreements was $0.

Restricted stock awards are recognized in the consolidated statements of operations based on their fair values. As a result of the notes receivable being deemed nonrecourse for accounting purposes and other contractual provisions in the agreements, the related restricted stock grants are considered stock options for accounting purposes. Stock-based compensation expense of $19 and $36 was recorded during the three months ended September 30, 2012 and 2011, respectively, and $58 and $110 was recorded during the nine months ended September 30, 2012 and 2011, respectively, in connection with these restricted stock awards. The total unrecognized compensation cost related to nonvested shares of restricted stock is approximately $47 at September 30, 2012. This amount is expected to be recognized over a weighted-average period of 0.9 years.

On March 20, 2010, the Board of Directors authorized the forgiveness of the outstanding balance of the subscription note agreements issued by certain employees in connection with their previous purchases of the Company’s restricted stock. A total of $1,016 was forgiven, which included the outstanding principal note amount plus accrued but unpaid interest. The Company accounted for the forgiveness of the outstanding note balance as a modification of a stock option for accounting purposes. Accordingly, the Company measured incremental compensation expense of $746 in connection with this modification. Incremental compensation expense of $518 related to the vested shares of restricted stock was recognized immediately at the date of modification. Incremental compensation expense of $228 related to the unvested shares is being recognized as additional compensation expense over the remaining vesting period. During the three months ended September 30, 2012 and 2011, the Company recognized compensation expense of $8 and $22, respectively, and recognized $24 and $66 during the nine months ended September 30, 2012 and 2011, respectively, related to this modification.

On April 25, 2012 and July 31, 2012, the Company granted restricted stock units covering 19 and 9 shares of common stock, respectively, to certain individuals. Restricted stock units differ from restricted stock awards in that restricted stock units represent the right to receive shares of common stock once such shares are vested and issuable in accordance with the terms of the restricted stock units. Once issued, such shares are not subject to further restrictions. The restricted stock units vest in their entirety on the first anniversary of the grant date, subject to continuous service during the vesting period. Once vested, 50% of the shares are issuable and 50% are deferred until service termination, though the individual may elect to defer all shares until service termination. Stock-based compensation expense related to these restricted stock units is recognized in the consolidated statements of operations based on the fair value of these awards, which is the grant date market value of the Company’s common stock. Stock-based compensation expense of $96 and $147 was recorded during the three and nine months ended September 30, 2012, respectively, in connection with these restricted stock units. The total unrecognized compensation cost related to these awards is approximately $284 at September 30, 2012. This amount is expected to be recognized over a weighted-average period of 0.7 years.

Stock Options

The Company also issues common stock options under the terms of the Plan. The following summarizes stock option activity for the nine months ended September 30, 2012:

	Number of  Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (In Years)		Aggregate Intrinsic  Value at September 30, 2012  (Unaudited)
Balance at January 1, 2012		1,323		$	9.53		8.3	$	6,864
Options granted		536		$	14.88
Options exercised		(91	)	$	3.40
Options canceled		(118	)	$	15.10
Balance at September 30, 2012		1,650		$	11.21		8.3	$	11,531
Vested and expected to vest at September 30, 2012		1,457		$	10.93		8.2	$	11,092
Exercisable at September 30, 2012		685		$	8.18		7.4	$	6,868

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying awards and the estimated fair value of the Company’s common stock at September 30, 2012 multiplied by the number of shares that would have been received by the option holders had all option holders exercised their options on September 30, 2012. The aggregate intrinsic value of options exercised during the three months ended September 30, 2012 and 2011 was $229 and $233, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2012 and 2011 was $888 and $1,698, respectively.

The total unrecognized compensation cost related to outstanding stock options is $8,482 at September 30, 2012. This amount is expected to be recognized over a weighted-average period of 3.0 years.

The following table summarizes information about stock options outstanding and exercisable at September 30, 2012:

	Options Outstanding at September 30, 2012						Options Exercisable at September 30, 2012
Range of Exercise Price	Number		Weighted-Average Remaining Contractual Life (Yrs.)		Weighted- Average Exercise Price		Number		Weighted- Average Exercise Price
$  0.08 — $  0.14		49		2.9	$	0.10		49	$	0.10
$  0.14 — $  1.90		10		6.6		1.71		8		1.67
$  2.04 — $  8.18		397		7.0		3.16		296		2.93
$11.45 — $17.50		1,185		8.9		14.40		332		14.23
$17.73 — $18.10		9		9.8		17.85		—		—
Total		1,650		8.3	$	11.21		685	$	8.18

The fair value of common stock options for employees and non-employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	Nine Months Ended September 30,
	2012			2011
Estimated dividend yield		0	%		0	%
Expected stock price volatility		60.0 – 80.0	%		80.0 – 90.0	%
Weighted-average risk-free interest rate		0.8 – 1.5	%		1.2 – 2.7	%
Expected life of options (in years)		6.25			6.25

Stock-based compensation expense of $782 and $730 was recorded during the three months ended September 30, 2012 and 2011, respectively, and $2,221 and $1,588 was recorded during the nine months ended September 30, 2012 and 2011, respectively, related to the Company’s outstanding stock options. The weighted average grant date fair value per share for stock options granted in the nine months ended September 30, 2012 and 2011 was $9.23 and $10.71, respectively.

As discussed in Note 3, the Company recognized stock-based compensation expense of $366 and $367 in the accompanying consolidated statement of operations during the three months ended September 30, 2012 and 2011, respectively, and $1,100 and $1,099 during the nine months ended September 30, 2012 and 2011, respectively, related to the earn-out arrangement with certain former shareholders of AECsoft.

Employee Stock Purchase Plan

The Company adopted an Employee Stock Purchase Plan (the “Purchase Plan”) effective June 1, 2012. In order to qualify the Purchase Plan in accordance with the Internal Revenue Code of 1986, as amended, the Company’s stockholders must approve the Purchase Plan within 12 months following its commencement. The Company anticipates submitting the Purchase Plan to a vote of its stockholders at the 2013 annual meeting, which is expected to occur in April 2013. If the stockholders do not approve the Purchase Plan at the 2013 annual meeting, the Purchase Plan will be terminated and all contributions made by participants will be returned. Any person that is employed by the Company for the thirty day period immediately preceding the offering date in a given purchase period will be eligible to participate in the plan for that purchase period. Eligible employees can contribute up to 10% of their gross earnings for each pay period, up to a maximum of $25,000 for any calendar year. The initial offering period that commenced on June 1, 2012 is a period of 12 months, and thereafter six month offering periods begin on December 1 and June 1 of each year. During the offering period eligible employees may elect to purchase shares of the Company’s common stock according to the terms of the offering. The per share purchase price is equal to the lessor of 85% of the fair market value of the Company’s common stock on the offering date or 85% of the fair market value of the Company’s common stock on the purchase date. As of September 30, 2012, 1,000,000 shares of common stock were available for issuance to participating employees under the Purchase Plan. During the three and nine months ended September 30, 2012, the Company recognized stock-based compensation expense of $44 and $59, respectively, related to the Purchase Plan.

The fair value of stock purchase rights granted under the Purchase Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	Nine Months Ended September 30, 2012
Estimated dividend yield		0	%
Expected stock price volatility		57.3	%
Weighted-average risk-free interest rate		0.17	%
Expected life of options (in years)		1

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

10. Commitments and Contingencies

Legal Contingencies

From time to time, the Company is subject to legal proceedings and claims that arise in the ordinary course of business. The Company records an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

In 2001, the Company was named as a defendant in several securities class action complaints filed in the United States District Court for the Southern District of New York originating from its December 1999 initial public offering. On January 9, 2012, this litigation was dismissed.

On January 31, 2012, a lawsuit alleging patent infringement was filed against the Company and certain customers and suppliers that participate in the SciQuest Supplier Network. On March 31, 2012, SciQuest, Inc. entered into a settlement agreement with the plaintiff. The settlement amount, which did not have a material adverse effect on the Company’s financial position, results of operations, or cash flows, is recorded in operating expenses in the accompanying consolidated statement of operations for the nine months ended September 30, 2012.

Warranties and Indemnification

The Company’s hosting service is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable under normal use and circumstances. The Company’s arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. Except as noted in the preceding paragraph, the Company to date has not incurred costs to settle claims or pay awards under these indemnification obligations. The Company accounts for these indemnity obligations as contingencies and records a liability for these obligations when a loss is probable and reasonably estimable. To date, the Company has not incurred any material costs as a result of these indemnifications and has not accrued any liabilities related to the obligations in the accompanying consolidated financial statements.

The Company enters into service level agreements with its on-demand solution customers warranting certain levels of uptime reliability. To date, the Company has not incurred any material costs and has not accrued any liabilities related to such obligations.

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Fair Value Measurements (Details Textual) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Fair Value Measurements (Textual) [Abstract]
Short-term investments	$ 26,545	$ 44,685
Cash equivalents	$ 6,047	$ 9,623
Investment maturity date range, start	2017
Investment maturity date range, end	2042

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Cash Equivalents and Short-Term Investments (Tables)

9 Months Ended

Sep. 30, 2012

Cash Equivalents and Short-Term Investments [Abstract]

Cash equivalents and short-term investments

The components of cash equivalents and short-term investments at September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012				December 31, 2011
	Cost		Fair Market Value		Cost		Fair Market Value
Cash equivalents	$	6,047	$	6,047	$	9,623	$	9,623
Short-term investments		26,545		26,545		44,685		44,685
Total	$	32,592	$	32,592	$	54,308	$	54,308

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Summary of Significant Accounting Policies (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Basic:
Net income	$ 713	$ 759	$ 1,266	$ 1,759
Weighted average common shares, basic	22,278	22,012	22,235	21,549
Basic net income per share	$ 0.03	$ 0.03	$ 0.06	$ 0.08
Diluted:
Net income	$ 713	$ 759	$ 1,266	$ 1,759
Weighted average common shares, basic	22,278	22,012	22,235	21,549
Dilutive effect of:
Options to purchase common stock	385	428	395	471
Nonvested shares of restricted stock	40	111	46	129
Weighted average common shares, diluted	22,703	22,551	22,676	22,149
Diluted net income per share	$ 0.03	$ 0.03	$ 0.06	$ 0.08

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Stockholders' Equity (Details) (Restricted stock [Member], USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Restricted stock [Member]
Schedule of nonvested restricted stock activity
Nonvested, number of shares, beginning balance	63
Nonvested, weighted-average grant date fair value, beginning balance	$ 1.66
Issued, number of shares
Issued, weighted-average grant date fair value
Vested, number of shares	(34)
Vested, weighted-average grant date fair value	$ 1.69
Nonvested, number of shares, ending balance	29
Nonvested, weighted-average grant date fair value, ending balance	$ 1.57

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Consolidated Statements of Stockholders' Equity (Unaudited) (USD $) In Thousands	Total	Common Stock	Additional Paid-In Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit
Beginning balance at Dec. 31, 2011	$ 60,707	$ 22	$ 74,083		$ (13,398)
Beginning balance, shares at Dec. 31, 2011		22,133
Exercise of common stock options	312		312
Exercise of common stock options, shares	91	91
Issuance of stock in connection with business acquisition, shares		122
Stock-based compensation	3,609		3,609
Foreign currency translation adjustments	(103)			(103)
Net income	1,266				1,266
Ending balance at Sep. 30, 2012	$ 65,791	$ 22	$ 78,004	$ (103)	$ (12,132)
Ending balance, shares at Sep. 30, 2012		22,346

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Cash Equivalents and Short-Term Investments

9 Months Ended

Sep. 30, 2012

Cash Equivalents and Short-Term Investments [Abstract]

Cash Equivalents and Short-Term Investments

4. Cash Equivalents and Short-Term Investments

The components of cash equivalents and short-term investments at September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012				December 31, 2011
	Cost		Fair Market Value		Cost		Fair Market Value
Cash equivalents	$	6,047	$	6,047	$	9,623	$	9,623
Short-term investments		26,545		26,545		44,685		44,685
Total	$	32,592	$	32,592	$	54,308	$	54,308

There were no unrealized gains or losses as of September 30, 2012 or December 31, 2011.

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Summary of Significant Accounting Policies (Details 1) (Common stock options [Member]) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Common stock options [Member]
Anti-dilutive equity instruments excluded from diluted net income per share
Common stock options	199	322	288	260

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Goodwill and Other Intangible Assets (Details 1) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Summary of intangible assets
Gross carrying amount	$ 27,091	$ 19,157
Accumulated amortization	(14,689)	(13,724)
Net carrying amount	12,402	5,433
Acquired technology [Member]
Summary of intangible assets
Weighted average amortization period	7 years	7 years
Gross carrying amount	13,331	9,276
Accumulated amortization	(8,489)	(8,268)
Net carrying amount	4,842	1,008
Customer relationships [Member]
Summary of intangible assets
Weighted average amortization period	10 years	10 years
Gross carrying amount	12,987	9,400
Accumulated amortization	(6,173)	(5,446)
Net carrying amount	6,814	3,954
Covenant not to compete [Member]
Summary of intangible assets
Weighted average amortization period	5 years	5 years
Gross carrying amount	81	51
Accumulated amortization	(19)	(10)
Net carrying amount	62	41
Acquired Trademarks [Member]
Summary of intangible assets
Weighted average amortization period	5 years
Gross carrying amount	262
Accumulated amortization	(8)
Net carrying amount	254
Trademarks [Member]
Summary of intangible assets
Gross carrying amount	430	430
Accumulated amortization
Net carrying amount	$ 430	$ 430

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Business Combinations (Tables)

9 Months Ended

Sep. 30, 2012

Upside Software [Member]

Business Acquisition [Line Items]

Schedule of purchase price allocation

The preliminary allocation of the purchase price as of the acquisition date was as follows:

	Estimated Useful Life		Estimated Fair Value
Accounts receivable			$	2,096
Prepaid expenses and other current assets				230
Property and equipment				478
Covenant not to compete		5 years		30
Trademarks		5 years		263
Acquired technology		7 years		4,064
Customer relationships		10 years		3,594
Goodwill				15,927
Accrued expenses				(530	)
Deferred revenues				(3,705	)
Total purchase consideration			$	22,447

AECsoft [Member]

Business Acquisition [Line Items]

Schedule of acquisition purchase price

The purchase consideration consisted of the following:

Cash	$	9,256
Fair value of common stock		4,539
Total purchase consideration	$	13,795
Cash acquired		1,910
Net purchase consideration	$	11,885

Schedule of purchase price allocation

The allocation of the purchase price as of the acquisition date was as follows:

	Estimated Useful Life		Estimated Fair Value
Accounts receivable			$	831
Prepaid expenses and other current assets				174
Property and equipment				82
Deferred tax asset				1,414
Covenant not to compete		5 years		51
Acquired technology		7 years		1,176
Customer relationships		10 years		4,200
Goodwill				8,954
Accrued expenses				(524	)
Deferred tax liability				(2,111	)
Deferred revenues				(2,362	)
Total purchase consideration			$	11,885