Form 10-Q

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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):

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 April 30, 2013, 22,773,505 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

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

SciQuest, Inc. (the Company) provides leading cloud-based business automation solutions for spend management. The Company’s solutions include procurement solutions that automate the source-to-settle process, spend analysis solutions that cleanse and classify spend data to drive and measure cost savings, supplier management solutions that integrate customers with their suppliers, contract lifecycle management solutions that automate the complete contract lifecycle from contract creation through maintenance and accounts payable solutions that automate the invoice processing and vendor payment processes. The Company’s solutions are designed to meet customer needs to reduce costs, simplify and improve visibility into key business processes, further strategic initiatives, enhance control over spending decisions and improve compliance and risk management. By simplifying and streamlining cumbersome, and often manual, processes and creating a comprehensive view of spending and compliance across the organization, organizations can identify and capitalize on opportunities to reduce costs by gaining control over suppliers, contracts, purchases and payments. The Company is headquartered in Cary, North Carolina.

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 three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2012 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, 2012, which was filed with the Securities and Exchange Commission on March 8, 2013.

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.

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.

The Company primarily derives its revenues from subscription fees and related services, permitting customers to access and utilize the Company’s cloud-based business automation solutions for spend management. Customers may also purchase a perpetual license for certain software products. 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.

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

The Company evaluates its SaaS subscription agreements and considers whether the associated services have standalone value to its customers. For arrangements when implementation services do not have standalone value to the customer, licenses and related implementation services are considered a single unit of accounting. Accordingly, 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. Alternatively, when services have standalone value to the customer, licenses and related services are considered separate units of accounting. For separate units of accounting, services are recognized as the services are performed and delivered to the customer and licenses are recognized over the term of the subscription arrangement, 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.

Revenue from sales of certain of the Company’s perpetual software products and related implementation services and maintenance is recognized as a single unit of accounting since VSOE of fair value does not exist for the contractual elements. Accordingly, revenue for all elements in these arrangements is recognized over the contractual maintenance term, which is typically one year.

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 multi-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 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 and allocated fixed asset depreciation and facilities costs. Cost of revenues is expensed as incurred.

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 non-cancelable subscription agreement. 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 and comprehensive (loss) income. The deferred commissions are reflected within deferred project costs in the accompanying consolidated balance sheets.

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.

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 March 31, 2013 and December 31, 2012. 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 months ended March 31, 2013 or 2012. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive (loss) income, net of tax. As of March 31, 2013 and December 31, 2012, 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 March 31, 2013 or December 31, 2012.

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 $17 and $122 at March 31, 2013 and December 31, 2012, respectively. For the three months ended March 31, 2013 and 2012, no expense was recorded for uncollectible receivables.

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 remainder of the lease term. 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.

The Company incurs certain costs associated with the development of its cloud-based 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, cloud-based solution, the Company also incurs costs in connection with the development of certain of its software products licensed to customers on a perpetual basis, which are accounted for as costs of software to be sold, leased or otherwise marketed. Under this guidance, capitalization of software development costs begins upon the establishment of technological feasibility (based on a working model approach), subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has substantially coincided; therefore, software development costs for these products that would qualify for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs related to these software products and has charged all such costs to research and development expense.

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 March 31, 2013.

Stock-based payments to employees, including grants of employee stock options, are recognized in the consolidated statements of operations and comprehensive (loss) income 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 three months ended March 31, 2013 and 2012, 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.

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 (loss) income, 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 and comprehensive (loss) income.

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.

Basic net (loss) income per share is computed by dividing net (loss) 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 (loss) income per share:

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

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.

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. The Company adopted this guidance on January 1, 2013. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

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.

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 added cloud-based software for cleansing and classifying spend data to drive and measure cost savings to the Company’s existing business automation solutions for spend management.

The purchase price consisted of $8,000 in cash and 113 shares of the Company’s common stock at a fair value of $2,087. The purchase price included $1,200 in cash and 17 shares of common stock that was deposited in escrow to satisfy potential indemnification claims. 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 performance conditions for Q4 2012 and Q1 2013 were met and the Company paid $2,400 and issued 34 shares of common stock on April 29, 2013. The cash earn-out is being recognized as compensation expense in the consolidated statement of operations and comprehensive (loss) income in the period in which it is earned. The fair value of the shares under the stock earn-out is being recognized as stock-based compensation expense in the consolidated statement of operations and comprehensive (loss) income over the requisite service period of the award. During the three months ended March 31, 2013, the Company recognized compensation expense of $1,200 and stock-based compensation expense of $313 related to this earn-out arrangement.

The acquisition was accounted for under the purchase method of accounting. The operating results of Spend Radar 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 five-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 measurement period for the acquisition purchase accounting was closed December 31, 2012.

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 that provides contract lifecycle management solutions. The acquisition of Upside added a contract lifecycle management solution, which includes collaborative contract creation and maintenance technology, to the Company’s existing business automation solutions for spend management.

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 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 measurement period for the acquisition purchase accounting was closed December 31, 2012.

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 added comprehensive supplier management, sourcing and compliance reporting to the Company’s existing business automation solutions for spend management.

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 through December 31, 2013 and continued employment with the Company. The performance conditions for 2012 and 2011 were met in full, and the Company issued 122 shares of common stock on March 20, 2013 and April 14, 2012, respectively. The fair value of these shares is being recognized as stock-based compensation expense in the consolidated statement of operations and comprehensive (loss) income over the requisite service period of the award. During the three months ended March 31, 2013 and 2012, the Company recognized stock-based compensation expense of $244 and $367, respectively, related to this earn-out arrangement.

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

The components of cash equivalents and short-term investments at March 31, 2013 and December 31, 2012 are as follows:

There were no unrealized gains or losses as of March 31, 2013 or December 31, 2012.

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:

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

As of March 31, 2013 and December 31, 2012, the Company had cash equivalents of $1,750 and $3,108, respectively, which consist of money market accounts. As of March 31, 2013 and December 31, 2012, the Company had short-term investments of $35,605 and $29,740, 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 2046, 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 March 31, 2013 and December 31, 2012, 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 March 31, 2013 are as follows:

The fair value measurements of the Company’s financial assets at December 31, 2012 are as follows:

Property and equipment consist of the following as of March 31, 2013 and December 31, 2012:

Depreciation expense related to property and equipment (excluding capitalized internal-use software) was $474 and $300 for the three months ended March 31, 2013 and 2012, respectively.

Computer software and equipment includes capitalized software development costs incurred during development of the Company’s cloud-based solution. The Company capitalized software development costs of $1,079 and $589 during the three months ended March 31, 2013 and 2012, respectively. Net capitalized software development costs totaled $4,279 and $3,567 at March 31, 2013 and December 31, 2012, respectively. Amortization expense for the three months ended March 31, 2013 and 2012 related to capitalized software development costs was $367 and $148, respectively, which is classified within cost of revenues in the accompanying consolidated statements of operations and comprehensive (loss) income.

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

The changes in the carrying amount of goodwill for the three months ended March 31, 2013 were as follows:

As the functional currency of the Company’s foreign subsidiary, where goodwill is 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 (loss) income.

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 (loss) income.

Amortization expense of intangible assets was $779 and $251 for the three months ended March 31, 2013 and 2012, respectively, of which $325 and $42 is recorded in cost of revenues in the accompanying consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2013 and 2012, respectively.

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

On 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. As of March 31, 2013 and December 31, 2012, the Company had $0 outstanding under the revolving credit facility.

The Company is authorized to issue up to 5,000 shares of $0.001 par value preferred stock, of which 222 shares are designated as Series A redeemable preferred stock. The Company’s Board of Directors has the authority to issue up to 4,778 shares of preferred stock in one or more series and to fix the designations, rights, preferences and privileges and any qualifications, limitations or restrictions of the shares of each such series of preferred stock, including dividend rights and rates, conversion rights, voting rights, terms of redemption including price and sinking fund provisions, liquidation preferences and number of shares constituting any series or the designation of that series. As of March 31, 2013 and December 31, 2012, no shares of preferred stock were outstanding.

The Company adopted a stock incentive plan (the Plan) August 27, 2004. The Plan, as amended, allows the Company to grant up to 5,308 common stock options, stock appreciation rights (SARs), restricted stock units 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.

As discussed in Note 12 to the Consolidated Financial Statements, on April 24, 2013, the Company adopted the SciQuest, Inc. 2013 Stock Incentive Plan.

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.

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) 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 three months ended March 31, 2013:

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 March 31, 2013 and December 31, 2012, the balance outstanding for these subscription note agreements was $0.

Restricted stock awards are recognized in the consolidated statements of operations and comprehensive (loss) income 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 $7 and $19 was recorded during the three months ended March 31, 2013 and 2012, respectively, in connection with these restricted stock awards. The total unrecognized compensation cost related to nonvested shares of restricted stock is approximately $21 at March 31, 2013. This amount is expected to be recognized over a weighted-average period of 0.8 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 March 31, 2013 and 2012, the Company recognized compensation expense of $4 and $8, respectively, related to this modification.

As part of the Plan, the Company issues restricted stock units to certain employees and non-employee directors. 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. Stock-based compensation expense related to these restricted stock units is recognized in the consolidated statements of operations and comprehensive (loss) income 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 $128 was recorded during the three months ended March 31, 2013 in connection with these restricted stock units. The total unrecognized compensation cost related to these awards is approximately $718 at March 31, 2013. This amount is expected to be recognized over a weighted-average period of 3.5 years.

The following summarizes the activity of restricted stock units for the three months ended March 31, 2013:

The Company also issues common stock options under the terms of the Plan. The following summarizes stock option activity for the three months ended March 31, 2013:

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 March 31, 2013 multiplied by the number of shares that would have been received by the option holders had all option holders exercised their options on March 31, 2013. The aggregate intrinsic value of options exercised during the three months ended March 31, 2013 and 2012 was $1,098 and $319, respectively.

The total unrecognized compensation cost related to outstanding stock options is $9,574 at March 31, 2013. This amount is expected to be recognized over a weighted-average period of 2.9 years.

The following table summarizes information about stock options outstanding and exercisable at March 31, 2013:

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:

Stock-based compensation expense of $789 and $759 was recorded during the three months ended March 31, 2013 and 2012, respectively, related to the Company’s outstanding stock options. The weighted average grant date fair value per share for stock options granted in the three months ended March 31, 2013 and 2012 was $8.62 and $9.27, respectively.

As discussed in Note 3, the Company recognized stock-based compensation expense of $313 in the accompanying consolidated statement of operations and comprehensive (loss) income during the three months ended March 31, 2013 related to the earn-out arrangement associated with the Spend Radar acquisition. In addition, the Company recognized stock-based compensation of $244 and $367 in the accompanying consolidated statement of operations and comprehensive (loss) income during the three months ended March 31, 2013 and 2012, respectively, related to the earn-out arrangement with certain former shareholders of AECsoft.

The Company adopted an Employee Stock Purchase Plan (the “Purchase Plan”) effective June 1, 2012. Eligible employees can contribute up to 10% of their gross earnings for each pay period, up to a maximum of $25 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 lesser 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. 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. As of March 31, 2013, 1,000 shares of common stock were available for issuance to participating employees under the Purchase Plan. During the three months ended March 31, 2013, the Company recognized stock-based compensation expense of $77 related to the Purchase Plan.

The following table summarizes the number of shares outstanding and the number of shares available for future grant under the stock incentive plan at March 31, 2013:

The Company computes its provision for income taxes by applying the estimated annual effective tax rate, adjusted for any material items. The Company’s effective tax rate for the three months ended March 31, 2013 was (53.5)%, which was lower than the federal statutory rate of 34% primarily due to research and development credits generated, non-deductible expenses, including stock-based compensation and stock-based compensation associated with the earn-out arrangement. The Company’s effective tax rate for the three months ended March 31, 2012 was 55.8%, which was higher than the federal statutory rate of 34% primarily due to state income taxes and non-deductible expenses, including stock-based compensation and stock-based compensation associated with the earn-out arrangement.

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.

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 and comprehensive (loss) income for the three months ended March 31, 2012.

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.

On April 24, 2013, the SciQuest, Inc. 2013 Stock Incentive Plan (the “2013 Plan”) was approved by the Company’s stockholders. The 2004 Stock Incentive Plan was terminated following approval of the 2013 Plan. The number of shares of common stock reserved for issuance under the 2013 Plan is 3,500, plus the number of shares remaining available for issuance under the 2004 Plan and shares forfeited or otherwise not issued on exercise of outstanding awards under the 2004 Plan.

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

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

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

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

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

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

Due to our historical focus on vertical markets, we have a relatively high concentration in certain sectors, particularly higher education. A significant number of our customers now span the general commercial market as a result of our acquisitions as well as our own marketing efforts. We currently market our solutions across the entire addressable market for spend management solutions.

We have several key financial terms and metrics. During the three months ended March 31, 2013, 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, 2012, which was filed with the Securities and Exchange Commission on March 8, 2013.

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:

During the three months ended March 31, 2013, 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, 2012, which was filed with the Securities and Exchange Commission on March 8, 2013, for additional information regarding our critical accounting policies, as well as a description of our other significant accounting policies.

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

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

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenues. Revenues for the three months ended March 31, 2013 were $20.7 million, an increase of $6.3 million, or 44%, over revenues of $14.4 million for the three months ended March 31, 2012. The increase in revenues resulted primarily from the recognition of revenue for a full three-month period for the new customers added in, and subsequent to, the three months ended March 31, 2012, as well as revenue relating to customers acquired as a result of our acquisitions of Spend Radar and Upside in October 2012 and August 2012, respectively.

Cost of Revenues. Cost of revenues for the three months ended March 31, 2013 was $6.6 million, an increase of $2.4 million, or 57%, over cost of revenues of $4.2 million for the three months ended March 31, 2012. As a percentage of revenues, cost of revenues increased to 32% for the three months ended March 31, 2013 from 29% from the three months ended March 31, 2012. The increase in dollar amount primarily resulted from a $1.4 million increase in employee-related costs attributable to our existing and additional implementation service and customer support personnel plus additional costs associated with our acquisitions, a $0.2 million increase in amortization of capitalized software, a $0.3 million increase in amortization of acquired software due to our acquisitions of Spend Radar and Upside, and a $0.4 million increase in other cost of revenues spend. We had 188 full-time equivalents in our implementation services, supplier enablement services, customer support, and client partner organizations at March 31, 2013 compared to 115 full-time equivalents at March 31, 2012.

Research and Development Expenses. Research and development expenses for the three months ended March 31, 2013 were $6.5 million, an increase of $3.5 million, or 117%, from research and development expenses of $3.0 million for the three months ended March 31, 2012. As a percentage of revenues, research and development expense increased to 31% for the three months ended March 31, 2013 from 21% for the three months ended March 31, 2012. The increase in dollar amount was due primarily to a $2.9 million net increase in employee-related costs attributable to our existing and additional research and development personnel plus additional costs associated with our acquisitions, which were offset by increases in capitalized software development costs, a $0.2 million increase in stock-based compensation expense and a $0.2 million increase in other research and development spend. We had 184 full-time equivalents in our research and development organization at March 31, 2013 compared to 86 full-time equivalents at March 31, 2012.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2013 were $5.5 million, an increase of $1.4 million, or 34%, over sales and marketing expenses of $4.1 million for the three months ended March 31, 2012. As a percentage of revenues, sales and marketing expenses decreased to 27% for the three months ended March 31, 2013 from 28% for the three months ended March 31, 2012. The increase in dollar amount was due primarily to a $1.0 million increase in employee-related costs attributable to our existing and additional sales and marketing personnel plus additional costs associated with our acquisitions, a $0.1 million increase in stock-based compensation expense, and a $0.2 million increase in other sales and marketing spend. We had 68 full-time equivalents in our sales and marketing organization at March 31, 2013 compared to 55 full-time equivalents at March 31, 2012.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2013 were $2.9 million, an increase of $0.3 million, or 12%, over general and administrative expenses of $2.6 million for the three months ended March 31, 2012. As a percentage of revenues, general and administrative expenses decreased to 14% for the three months ended March 31, 2013, from 18% for the three months ended March 31, 2012. The increase in dollar amount was primarily due to a $0.2 million increase in employee-related costs, attributable to our existing and additional general and administrative personnel plus additional costs associated with our acquisitions, and a $0.1 million increase in stock-based compensation expense. We had 24 full-time equivalents in our general and administrative organization at March 31, 2013 compared to 17 full-time equivalents at March 31, 2012.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended March 31, 2013 were $0.5 million, an increase of $0.3 million, or 150%, over amortization of intangible assets of $0.2 million for the three months ended March 31, 2012. As a percentage of revenues, amortization of intangible assets increased to 2% for the three months ended March 31, 2013, from 1% for the three months ended March 31, 2012. The increase in dollar amount was due to amortization attributable to intangible assets acquired in connection with our Spend Radar and Upside acquisitions in October 2012 and August 2012, respectively.

Income Tax Benefit (Expense). Income tax benefit for the three months ended March 31, 2013 was $0.7 million compared to income tax expense of ($0.2) million for the three months ended March 31, 2012. The change in income tax benefit (expense) was due to a difference in our pre-tax net (loss) income for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.

Net cash provided by operating activities was $2.4 million during the three months ended March 31, 2013. 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 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 $23 million during the three months ended March 31, 2013. 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 $13 million during the three months ended March 31, 2013.

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

For the three months ended March 31, 2012, net cash provided by operating activities of $1.6 million was primarily the result of $0.2 million of net income plus a $2.7 million decrease in accounts receivable, $1.2 million of stock-based compensation, and $0.7 million of depreciation and amortization, less a $1.8 million decrease in accrued liabilities, a $1.1 million decrease in deferred revenues, and a $0.2 million decrease in deferred project costs.

As of March 31, 2013, we had net operating loss carryforwards of approximately $177.4 million available to reduce future federal taxable income. Use of these carryforwards is subject to significant limitations. In the future, we may fully utilize our available net operating loss carryforwards and would begin making income tax payments at that time. In addition, the limitations on utilizing net operating loss carryforwards and other minimum state taxes may also increase our overall tax obligations. We expect that if we generate taxable income and/or we are not allowed to use net operating loss carryforwards for federal/state income tax purposes, our cash generated from operations will be adequate to meet our income tax obligations.

For the three months ended March 31, 2013, net cash used in investing activities was $7.8 million, consisting of net purchases of $5.9 million of short-term investments, various capital expenditures of $0.9 million and capitalization of $1.1 million of software development costs. In general, our capital expenditures are for our network infrastructure to support our increasing customer base and growth in new business and for internal use, such as equipment for our increasing employee headcount.

For the three months ended March 31, 2012, net cash provided by investing activities was $2.2 million, consisting of net maturities of $3.8 million of short-term investments, less various capital expenditures of $1.0 million and capitalization of $0.6 million of software development costs.

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

For the three months ended March 31, 2012, net cash provided by financing activities was $0.2 million, representing proceeds from the exercise of common stock options.

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

As of March 31, 2013, 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.

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

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

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

We have contractual obligations that require us to make future cash payments. During the three months ended March 31, 2013, there were no material changes in the contractual and commercial commitments that are discussed in more detail under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual and Commercial Commitment Summary” included in our annual report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission on March 8, 2013.

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

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 has increased slightly while remaining an immaterial portion of total payments received, but the amount of payments made in Canadian dollars, primarily payroll, is 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 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.

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 March 31, 2013 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 March 31, 2013, were effective for the purposes stated above.

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.

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.

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, 2012, which was filed with the Securities and Exchange Commission on March 8, 2013.

On March 20, 2013, we issued an aggregate of 121,951 shares of common stock to the former stockholders of AECsoft USA, Inc. pursuant to a Stock Purchase Agreement, dated December 21, 2010, by and among SciQuest and Tom (Yitao) Ren, Ying (Lily) Xiong, John Paul Gutierrez and Ronald Dressin (the “Purchase Agreement”). Such shares constitute a portion of the purchase price payable by SciQuest for the purchase of the outstanding capital stock of AECsoft USA, Inc. pursuant to the Purchase Agreement and were issuable based upon the successful achievement of certain performance targets through December 31, 2013 and continued employment with the Company. Such shares were issued in a private placement under Section 4(2) of the Securities Act and/or Regulation D under the Securities Act. Each recipient meets the accredited investor definition of Rule 501 of the Securities Act. The offering was not conducted in connection with a public offering and no public solicitation or advertisement was made or relied upon by the investor in connection with the offering.

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: May 8, 2013


	Pages

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012		2

Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended March 31, 2013 and 2012 (unaudited)		3

Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2013 (unaudited)		4

Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)		5

Notes to Consolidated Financial Statements (unaudited)		6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		21

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


	As of			As of
	March 31,			December 31,
	2013			2012
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	10,521		$	15,606
Short-term investments		35,605			29,740
Accounts receivable, net		8,537			12,916
Prepaid expenses and other current assets		2,098			1,434
Deferred tax asset		82			77

Total current assets		56,843			59,773
Property and equipment, net		8,213			7,093
Goodwill		37,064			37,295
Intangible assets, net		15,461			16,346
Deferred project costs		6,802			6,962
Deferred tax asset, less current portion		13,313			12,682
Other		122			173

Total assets	$	137,818		$	140,324

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,140		$	1,864
Accrued liabilities		7,919			8,771
Deferred revenues		46,573			47,821

Total current liabilities		55,632			58,456
Deferred revenues, less current portion		13,992			14,640
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 50,000 shares authorized; 22,727 and 22,525 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively		23			23
Additional paid-in capital		83,796			81,894
Accumulated other comprehensive loss		(439	)		(115	)
Accumulated deficit		(15,186	)		(14,574	)

Total stockholders’ equity		68,194			67,228

Total liabilities and stockholders’ equity	$	137,818		$	140,324


	Three Months Ended March 31,
	2013			2012
	(unaudited)
Revenues	$	20,665		$	14,408
Cost of revenues		6,614			4,177

Gross profit		14,051			10,231

Operating expenses:
Research and development		6,542			3,037
Sales and marketing		5,471			4,106
General and administrative		2,895			2,572
Amortization of intangible assets		454			209

Total operating expenses		15,362			9,924

(Loss) income from operations		(1,311	)		307
Other (expense) income:
Interest income		20			24
Other (expense) income, net		(26	)		15

Total other (expense) income, net		(6	)		39

(Loss) income before income taxes		(1,317	)		346
Income tax benefit (expense)		705			(193	)

Net (loss) income	$	(612	)	$	153

Other comprehensive (loss) income:
Foreign currency translation adjustments		(324	)		6
Comprehensive (loss) income	$	(936	)	$	159

Net (loss) income per share:
Basic	$	(0.03	)	$	0.01
Diluted	$	(0.03	)	$	0.01
Weighted average shares outstanding used in computing per share amounts:
Basic		22,564			22,190
Diluted		22,564			22,643


							Accumulated Other						Total
	Common Stock				Additional Paid-In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital		Loss			Deficit			Equity
Balance at December 31, 2012		22,525	$	23	$	81,894	$	(115	)	$	(14,574	)	$	67,228
Exercise of common stock options		80		—		340		—			—			340
Issuance of stock in connection with business acquisition		122		—		—		—			—			—
Stock-based compensation		—		—		1,562		—			—			1,562
Foreign currency translation adjustments		—		—		—		(324	)		—			(324	)
Net loss		—		—		—		—			(612	)		(612	)

Balance at March 31, 2013		22,727	$	23	$	83,796	$	(439	)	$	(15,186	)	$	68,194

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company


	Three Months Ended March 31,
	2013			2012
	(unaudited)
Cash flows from operating activities
Net (loss) income	$	(612	)	$	153
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		1,620			699
Stock-based compensation expense		1,562			1,153
Deferred taxes		(636	)		163
Changes in operating assets and liabilities:
Accounts receivable		4,334			2,699
Prepaid expenses and other current assets		(665	)		(53	)
Deferred project costs and other assets		211			(203	)
Accounts payable		(719	)		(102	)
Accrued liabilities		(844	)		(1,804	)
Deferred revenues		(1,835	)		(1,099	)

Net cash provided by operating activities		2,416			1,606
Cash flows from investing activities
Addition of capitalized software development costs		(1,079	)		(589	)
Purchase of property and equipment		(887	)		(1,002	)
Purchase of available-for-sale short-term investments		(12,425	)		(1,200	)
Maturities of available-for-sale short-term investments		6,560			5,020

Net cash (used in) provided by investing activities		(7,831	)		2,229
Cash flows from financing activities
Proceeds from exercise of common stock options		340			172

Net cash provided by financing activities		340			172
Effect of exchange rate changes on cash and cash equivalents		(10	)		6

Net (decrease) increase in cash and cash equivalents		(5,085	)		4,013
Cash and cash equivalents at beginning of period		15,606			14,958

Cash and cash equivalents at end of period	$	10,521		$	18,971


Cash	$	8,000
Fair value of common stock		2,087

Total purchase consideration	$	10,087
Cash acquired		259

Net purchase consideration	$	9,828


	Estimated Useful Life		Estimated Fair Value
Accounts receivable			$	634
Prepaid expenses and other current assets				100
Property and equipment				147
Covenant not to compete		5 years		203
Trademarks		5 years		566
Acquired technology		7 years		2,693
Customer relationships		5 years		1,338
Goodwill				5,682
Accrued expenses				(305	)
Deferred revenues				(1,230	)

Total purchase consideration			$	9,828


Cash	$	9,256
Fair value of common stock		4,539

Total purchase consideration	$	13,795

Cash acquired		1,910

Net purchase consideration	$	11,885


	March 31, 2013				December 31, 2012
			Fair Market				Fair Market
	Cost		Value		Cost		Value
Cash equivalents:
Money market accounts	$	1,750	$	1,750	$	3,108	$	3,108
Short-term investments:
Variable rate demand notes		35,605		35,605		29,740		29,740

Total	$	37,355	$	37,355	$	32,848	$	32,848


	Total		Level 1		Level 2		Level 3
Cash Equivalents	$	1,750	$	1,750		—		—
Short-term investments		35,605		35,605		—		—

Total	$	37,355	$	37,355		—		—


Balance at December 31, 2012	$	37,295
Foreign currency translation		(231	)

Balance at March 31, 2013	$	37,064


	March 31, 2013
	Weighted Average Amortization Period		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Acquired technology		7 years		15,965		(9,050	)		6,915
Customer relationships		10 years		12,935		(6,904	)		6,031
Customer relationships		5 years		1,338		(223	)		1,115
Covenant not to compete		5 years		283		(47	)		236
Acquired trademarks		5 years		825		(91	)		734
Trademarks				430		—			430

Total			$	31,776	$	(16,315	)	$	15,461


2013 (remaining nine months)	$	2,376
2014		2,877
2015		2,534
2016		2,281
2017		1,993
Thereafter		2,970

	$	15,031


	Number of Shares			Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2012		17		$	1.58
Vested		(4	)		1.58

Nonvested at March 31, 2013		13		$	1.58


	Number of Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (In Years)		Aggregate Intrinsic Value at March 31, 2013 (Unaudited)
Balance at December 31, 2012		1,553		$	11.50		8.1	$	6,866

Options granted		355		$	16.41
Options exercised		(80	)	$	4.27
Options canceled		(18	)	$	13.87

Balance at March 31, 2013		1,810		$	12.76		8.3	$	20,415

Vested and expected to vest at March 31, 2013		1,592		$	12.51		8.2	$	19,484

Exercisable at March 31, 2013		721		$	9.99		7.4	$	10,126


							Options Exercisable at
	Options Outstanding at March 31, 2013						March 31, 2013
			Weighted-Average
			Remaining		Weighted-				Weighted-
Range of			Contractual Life		Average				Average
Exercise Price	Number		(Yrs.)		Exercise Price		Number		Exercise Price
$0.08 — $ 0.14		37		2.4	$	0.10		37	$	0.10
$0.14 — $ 1.90		7		6.0		1.65		7		1.64
$2.04 — $ 8.18		285		6.7		3.46		227		3.31
$11.45 — $17.41		1,452		8.8		14.85		447		14.27
$17.50 — $21.89		29		9.3		18.47		3		17.50

Total		1,810		8.3	$	12.76		721	$	9.99


	March 31, 2013
Number of stock options outstanding		1,810
Weighted average exercise price	$	12.76
Weighted average term (in years)		8.3
Number of shares under full-value awards outstanding
Vested		2,171
Unvested		82
Number of shares issued pursuant to exercised stock options		451
Number of shares remaining for future grants
SciQuest, Inc. 2004 Stock Incentive Plan		794


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)