LYRIS, INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - LYRIS, INC.	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - LYRIS, INC.	v376485_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - LYRIS, INC.	v376485_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - LYRIS, INC.	v376485_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - LYRIS, INC.	v376485_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

¨ 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 333-82154

Lyris, Inc.

(Exact name of registrant as specified in its charter)

Delaware

01-0579490

(State of incorporation)

(I.R.S. Employer Identification No.)

6401 Hollis Street, Suite 125, Emeryville, CA 94608

(Address of principal executive office, including zip code)

(800) 768-2929

(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 (§232.405 of this chapter) 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller Reporting Company	x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

9,567,864 shares of $0.15 Par Value Common Stock as of May 7, 2014

LYRIS, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For Quarter Ended March 31, 2014

Item No.	Description	Page Number

	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2014 and June 30, 2013	3
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2014 and March 31, 2013	4
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended March 31, 2014 and March 31, 2013	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2014 and March 31, 2013	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
Signatures		31

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

LYRIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

	March 31,			June 30,
	2014			2013 (1)
ASSETS
Current assets:
Cash and cash equivalents	$	1,536		$	2,318
Accounts receivable, less allowances of $342 and $510, respectively		3,901			4,103
Prepaid expenses and other current assets		674			722
Deferred income taxes		988			942
Total current assets		7,099			8,085
Property and equipment, net		1,652			2,376
Capitalized software, net		7,773			6,978
Intangible assets, net		4,867			5,014
Goodwill		9,791			9,791
Other long-term assets		681			663
TOTAL ASSETS	$	31,863		$	32,907

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit	$	2,340		$	2,260
Accounts payable and accrued expenses		2,730			3,458
Capital lease obligations - short-term		602			827
Income taxes payable		149			203
Deferred revenue		3,177			3,220
Total current liabilities		8,998			9,968
Other long-term liabilities		459			436
Capital lease obligations - long-term		235			504
TOTAL LIABILITIES		9,692			10,908
Commitments and contingencies (Note 11)
Redeemable convertible Series A preferred stock: $0.01 par value, 2,000 shares authorized, issued and outstanding, liquidation preference $5,000		5,000			5,000

Stockholders' equity:
Preferred stock, $0.01 par value, 2,000 shares authorized; no shares issued and outstanding		-			-
Common stock, $0.15 par value; 40,000 shares authorized; 9,579 shares issued and outstanding		1,415			1,415
Additional paid-in capital		268,464			268,209
Accumulated deficit		(252,608	)		(252,608	)
Treasury stock, at cost; 11 shares held		(56	)		(56	)
Accumulated other comprehensive (loss) income		(44	)		39
Total stockholders' equity		17,171			16,999
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY	$	31,863		$	32,907

(1) Derived from the consolidated audited financial statements included in our annual report on Form 10-K for the year ended June 30, 2013 filed with the Securities and Exchange Commission.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

LYRIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2014			2013			2014			2013

Revenue:
Subscription	$	5,960		$	7,031		$	18,572		$	21,498
Support and maintenance		959			984			2,987			2,913
Professional services		510			589			1,688			1,845
Software		160			289			720			1,275
Total revenue		7,589			8,893			23,967			27,531
Cost of revenue:
Subscription, support and maintenance, professional services, and software		2,292			2,898			7,386			9,570
Amortization of developed technology		427			534			1,305			1,207
Total cost of revenue		2,719			3,432			8,691			10,777
Gross profit		4,870			5,461			15,276			16,754
Operating expenses:
Sales and marketing		2,453			2,653			7,694			7,423
General and administrative		1,393			2,119			4,489			6,365
Research and development		1,019			911			2,893			2,908
Amortization of customer relationships and trade names		50			50			151			151
Total operating expenses		4,915			5,733			15,227			16,847
(Loss) income from operations		(45	)		(272	)		49			(93	)
Interest expense		(39	)		(32	)		(116	)		(180	)
Interest income		-			-			-			3
Other income (expense), net		29			(289	)		43			(253	)
Loss from operations before income tax provision		(55	)		(593	)		(24	)		(523	)
Income tax (provision) benefit		71			25			25			(99	)
Net income (loss)		16			(568	)		1			(622	)
Less: income attributable to noncontrolling interest, net of tax		-			-			-			29
Net income (loss) attributable to Lyris, Inc.	$	16		$	(568	)	$	1		$	(651	)

Net income (loss) per share
Basic	$	0.00		$	(0.06	)	$	0.00		$	(0.07	)
Diluted	$	0.00		$	(0.06	)	$	0.00		$	(0.07	)

Weighted average shares outstanding
Basic		9,568			9,618			9,568			9,568
Diluted		11,568			9,618			11,568			9,568

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

LYRIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2014			2013			2014			2013
Net income (loss)	$	16		$	(568	)	$	1		$	(622	)
Other comprehensive income (loss) income, net of tax:
Foreign currency translation loss		(75	)		(47	)		(83	)		(44	)
Comprehensive loss attributable to Lyris, Inc.		(59	)		(615	)		(82	)		(666	)
Less: Comprehensive income attributable to noncontrolling interest		-			-			-			29
Comprehensive loss attributable to Lyris, Inc.	$	(59	)	$	(615	)	$	(82	)	$	(695	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

LYRIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

	Nine Months Ended March 31,
	2014			2013

Cash Flows from Operating Activities:
Net loss	$	1		$	(622	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation expense		256			675
Depreciation		1,085			1,072
Amortization of intangible assets		151			192
Amortization of capitalized software costs		1,305			1,159
Impairment of SiteWit investment		-			303
(Recovery of) provision for bad debts		(26	)		207
Deferred income taxes		(46	)		(99	)
Changes in assets and liabilities:
Accounts receivable		228			272
Prepaid expenses and other current assets		29			(246	)
Accounts payable and accrued expenses		(767	)		182
Deferred revenue		(44	)		(502	)
Income taxes payable		(60	)		244
Net cash provided by operating activities		2,112			2,837
Cash Flows from Investing Activities:
Purchases of property and equipment		(133	)		(496	)
Capitalized software expenditures		(2,100	)		(3,349	)
Purchase of noncontrolling interest		-			(15	)
Procees from long-term investments		-			56
Net cash used in investing activities		(2,233	)		(3,804	)
Cash Flows from Financing Activities:
Proceeds from issuance of redeemable convertible series A preferred stock					5,000
Proceeds from common stock issuances		-			147
Proceeds (payments) from short-term credit arrangements, net		80			(2,768	)
Payments under capital lease obligations		(658	)		(593	)
Net cash (used in) provided by financing activities		(578	)		1,786
Net effect of exchange rate changes on cash and cash equivalents		(83	)		(35	)
Net (decrease) increase in cash and cash equivalents		(782	)		784
Cash and cash equivalents, beginning of period		2,318			1,602
Cash and cash equivalents, end of period	$	1,536		$	2,386

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

LYRIS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014

Note 1 - Nature of Business and Basis of Presentation

Lyris, Inc. ("Lyris", "we", or "us") is a leading internet marketing technology company. Our Software-as-a-Service ("SaaS") or cloud-based online marketing solutions and services provide customers the ability to build, deliver and manage permission-based, online direct marketing programs and other communications to customers that use online and mobile channels to communicate to their respective customers and members. Our software products are offered to customers primarily on a subscription and license basis.

We were incorporated under the laws of the state of Delaware as J.L. Halsey Corporation and changed our name to Lyris, Inc. in October 2007. We have principal offices in Emeryville, California and conduct our business worldwide, with wholly owned subsidiaries in Canada, United Kingdom, Argentina, Brazil and Australia. Our foreign subsidiaries are generally engaged in providing sales, account management and support.

Reclassification

Certain prior year balance sheet items have been reclassified to conform to the presentation as of March 31, 2014. The reclassification did not result in any change in previously report net loss, total assets or stockholders’ equity.

Fiscal Year

Our fiscal year ends on June 30^th. References to fiscal year 2014, for example, refer to the fiscal year ending June 30, 2014.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements and prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations; however we believe that the disclosures included are adequate.

These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our consolidated financial statements and notes thereto filed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013, or fiscal year 2013, filed with the SEC on September 19, 2013. Interim information presented in the unaudited condensed consolidated financial statements has been prepared by management. In the opinion of management, statements include all adjustments necessary for a fair presentation and that all such adjustments are of a normal, recurring nature and necessary for the fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with GAAP. There are certain reclassifications that have been made to the prior year condensed consolidated financial statements to conform to the current year presentation. These reclassifications had no impact on net loss, total assets or stockholders’ equity. Interim results of operations for the nine months ended March 31, 2014 are not necessarily indicative of results to be expected for the year ending June 30, 2014, or fiscal year 2014, or for any future period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues, expenses and related disclosures during the reporting period. On an ongoing basis, management evaluates these estimates, judgments and assumptions, including those related to revenue recognition, stock-based compensation, goodwill and acquired intangible assets, capitalization of software, allowances for bad debt and income taxes. We base these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

The condensed consolidated financial statements include the accounts of Lyris and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

In April 2010, we acquired interest in an Australian reseller, Cogent Online PTY Ltd (‘‘Cogent’’) to assist us with our sales efforts and global expansion in Australia. During June 2011, we acquired additional shares of Cogent and increased our ownership from 33.3 percent to 80 percent. In December 2012, we acquired the remaining shares of Cogent and obtained 100 percent ownership.

On July 23, 2010, we entered into a Strategic Partnership Agreement and a Stock Purchase Agreement (together, the “SiteWit Agreements”) with SiteWit Corp. (“SiteWit”), a privately held company that provides an online marketing search engine to its customers. We invested in SiteWit to secure the right to use SiteWit’s online marketing search engine technology, and to develop and market certain services related to SiteWit’s product. Pursuant to the SiteWit Agreements, we had invested $750,000 in SiteWit and owned less than 50% of SiteWit’s outstanding stock. In fiscal year 2012, we entered into a Termination Agreement (the “Termination Agreement”) with SiteWit. Pursuant to the Termination Agreement, the SiteWit Agreements were terminated effective as of August 17, 2011. From our termination agreement we returned to SiteWit approximately 75% of the SiteWit shares that were issued to us pursuant to the Sitewit Agreements. We will have a one-time right to require SiteWit to repurchase all the remaining SiteWit shares that we hold when Sitewit enters into a Qualified Financing of $6.0 million. We plan on exercising this right when these circumstances occur.

Fair Value of Financial Instruments

The carrying amounts of certain financial instruments, including cash, accounts receivable and accounts payable, and certain other accrued liabilities approximate their fair values, due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying amounts of capital lease obligations approximate their fair value. The revolving line of credit approximates fair value due to its market interest rate and short-term nature.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Financial Accounting Standards Board (“FASB”) has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels of the fair value hierarchy under the guidance for fair value measurement are described below:

Level 1: Pricing inputs are based upon quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. As of March 31, 2014, we used Level 1 assumptions for our cash equivalents which were $0 at March 31, 2014 and $0.3 million at June 30, 2013. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required.

Level 2: Pricing inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of March 31, 2014 we do not have any Level 2 financial assets or liabilities.

Level 3: Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. As of March 31, 2014, we did not have any significant Level 3 financial assets or liabilities.

Revenue Recognition

We recognize revenue from hosting and professional services and licensing our software products to our customers.

We generally recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer (for software licenses, revenue is recognized when the customer is given electronic access to the licensed software); (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of fees is probable.

Subscription and Other Service Revenue

We generate service revenue from several sources, including hosted software services bundled with technical support (maintenance) services and professional services. We recognize subscription revenue in two ways: (1) based on the subscription plan defined in the agreement with specified monthly volume, and (2) based on actual usages at rates specified in the agreement. Additionally, we invoice excess usage and recognize it as revenue when incurred.

We follow Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU No. 2009-13”) for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Although our professional services that are a part of multiple element arrangement have standalone value to the customer, such services could not be accounted as separate units of accounting under the previous guidance, as vendor-specific objective evidence (“VSOE”) did not exist for the undelivered element. The VSOE for subscription services could not be established based on the historical pricing trends to date, which indicate that the price of the majority of standalone sales does not yet fall within a narrow range around the median price. Since our subscription services have standalone value as such services are often sold separately, but do not have VSOE, we use estimate of selling price (“ESP”) to determine fair value for our subscription services when sold in a multiple-element arrangement and recognize revenue based on ASU No. 2009-13. Third-party evidence (“TPE”) was concluded to be an impractical alternative due to differences in features and functionality of other companies’ offerings and lack of access to the actual selling price of competitor standalone sales. If new subscription service products are acquired or developed that require significant professional services in order to deliver the subscription service and the subscription service and professional services cannot support standalone value, then such subscription services and professional services will be evaluated as one unit of accounting. We determined ESP of fair value for subscription services based on the following:

We have defined processes and controls to ensure our pricing integrity. Such controls include oversight by a cross-functional team and members of executive management. Significant factors considered when establishing pricing include market conditions, underlying costs, promotions and pricing history of similar services. Based on this information and actual pricing trends, management establishes or modifies the pricing.

We identified the population of transactions to serve as the basis for establishing ESP, including subscription services and professional services pricing history in transactions with multiple element arrangements and those sold on a standalone basis.

We analyzed the population of items sold by stratifying the population by product type and level and considered several data points, such as (1) average price charged, (2) weighted average price to incorporate the frequency of each item sold at any given price, and (3) the median price charged. These three price points were then compared with the existing price list that is used as a point of reference to negotiate contracts and does not represent fair value. Additionally, we gathered and analyzed sales’ team feedback gained from interaction with customers and similar activities. This feedback included consideration of current market trends for pricing charged by companies offering similar services, competitive advantage of the products we offer and recent economic pressures that have resulted in lower spending on marketing activities. ESP for each item in the population was established based on the factors noted above and was reviewed by management.

We defer technical support (maintenance) revenue, including revenue that is part of a multiple element arrangement, and recognizes it ratably over the term of the agreement, which is generally one year.

For professional services sold separately from subscription services, we recognize professional service revenues as the services are delivered. Expenses associated with delivering all professional services are recognized as incurred when the services are performed. Associated out-of-pocket travel costs and expenses related to the delivery of professional services are typically reimbursed by the customer and are accounted for as both revenue and expense in the period the cost is incurred.

Software Revenue

We enter into certain revenue arrangements for which we are obligated to deliver multiple products and/or services (multiple elements). For these arrangements, which generally include software products and technical support (maintenance), we allocate and defer revenue for the undelivered elements based on their VSOE. We allocate total earned revenue under the agreement among the various elements based on their relative fair value. In the event that VSOE cannot be established, we defer the entire amount until all elements of the arrangements have been delivered.

We determine VSOE based on actual prices charged for standalone sales of maintenance. To accomplish this, we track sales for the maintenance product when sold on a standalone basis for a one year term and compares to the established price list to ensure that the prices charged on the invoices align with the prices per price list.

We perform a quarterly analysis of the actual sales for standalone maintenance to establish the VSOE. We consider VSOE established if prices charged per invoice of least 75% of all standalone deals for maintenance fall within +/-20% of the prices charged per price list. If the condition is satisfied, the price list is considered to represent VSOE as prices charged per majority of the invoices agree to the established price list. Software is then recognized based on a residual method unless the price for maintenance exceeds the price for price list (which rarely happens), in which case portion of maintenance fee would be allocated to SW.

Note 2 – Recent Accounting Standards

In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11) to provide guidance on the presentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for us in our first quarter of fiscal year 2015 with earlier adoption permitted. ASU 2013-11 should be applied prospectively with retroactive application permitted. We are currently evaluating the impact of our pending adoption of ASU 2013-11 on our condensed consolidated financial statements.

Note 3 – Stock Acquisition

Pursuant to the provisions of the Stock Purchase Agreement dated June 1, 2011(“SPA”) with Cogent, Lyris exercised its option to purchase an aggregate of 66 shares at a price of $1 per share from Cogent’s minority Shareholders (as that term is defined in the SPA). We made a determination to purchase these shares equally from the shareholdings of Damien Saunders and Lucid Online Pty Ltd (an entity controlled by Adrian Saunders). After the exercise, Damian Saunders continued to own 66.7 shares and Lucid Online Pty Ltd, continued to own 66.7 shares. Damian Saunders transferred the remaining 66.7 shares held by him to us in exchange for the satisfaction of $15 thousand owed by Damian Saunders to us. Adrian Saunders’ employment terminated with Lyris on July 19, 2012 and Lyris purchased the remaining shares held by Lucid Online Pty Ltd for an aggregate purchase price of $67. On December 3, 2012, the transfer of Damien and Adrian Saunders’ remaining shares was completed and we obtained 100 percent ownership of Cogent.

Note 4 – Other Long-term Assets

During the first quarter of fiscal year 2012, we changed our accounting in SiteWit from the equity method to the cost method due to the decrease in ownership that resulted from the Termination Agreement. Periodically, we assess whether this investment has been other-than-temporarily impaired by considering factors such as trends and future prospects of the investee, ability to pay dividends annually, general market conditions, and other economic factors. When a decline in fair value is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the other-than-temporary impairment is included in earnings.

During the third quarter of fiscal year 2013, we performed an impairment analysis for our SiteWit investment. First, we compared our carrying value to the estimated fair value of SiteWit. Since our carrying value exceeds the estimated fair value it was an indicator of impairment. Second, we deemed the impairment is other-than-temporary from the series of net loss in our investment and the substantial decrease in our carrying value. Based on our results, we impaired and wrote down $0.3 million from our investment, SiteWit, during the third quarter of fiscal year 2013.

In June 30, 2012, we had $0.1 million in irrevocable letter of credit issued by Comerica Bank, in favor of the Hartford Insurance Company (“Hartford”) for workers’ compensation insurance obligations. The Hartford letter of credit is held by Hartford as collateral for deductible payments that may become due under a worker’s compensation insurance policy. During the fourth quarter of fiscal year 2013, we fully repaid the outstanding line of credit with Comerica Bank and entered into a Loan and Security agreement with Silicon Valley Bank. As such, we cancelled the line of credit with Comerica Bank and issued $0.1 million to Hartford as the Hartford letter of credit (“Hartford LOC”) and is held by as collateral for deductible payments that may become due under a worker’s compensation insurance policy. We classify the Hartford LOC as a restricted cash account of $0.1 million. Any amounts drawn on the account will be expensed during that fiscal year.

Other long-term assets at March 31, 2014 included $0.4 million related to the investment in SiteWit, and $0.2 million related to security deposits for leases entered in by us and $0.1 million in restricted cash. Other long-term assets at June 30, 2013 included $0.4 million related to the SiteWit investment, $0.2 million related to security deposits for leases entered in by us, and $0.1 million related restricted cash.

Note 5 – Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in connection with our business combinations accounted for using the acquisition method of accounting.

There was no change in goodwill activity during the nine months ended March 31, 2014. The following table outlines our goodwill, by acquisition:

	As of March 31, 2014		As of June 30, 2013
	(In thousands)
Lyris Technologies	$	9,707	$	9,707
Cogent		84		84
Total	$	9,791	$	9,791

We considered various events and circumstances when we evaluated whether it is more likely than not that the fair value of our reporting unit is less than our carrying value. We considered events and circumstances such as macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and our share price relative to our peers. Based on our assessment of relevant events and circumstances conducted, we concluded that there was no impairment of goodwill as of March 31, 2014.

Note 6 – Credit Facility

On December 9, 2013 Lyris, Inc. and our wholly owned subsidiaries, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. (each a “Borrower” and collectively, the “Borrowers”), entered into a First Amendment (“Amendment”) to the Loan and Security Agreement (“SVB Agreement”) with Silicon Valley Bank. Under the amendment, the definitions of certain terms used to calculate the amount available to Lyris under the Agreement are restated. The revolving line of credit (“SVB Revolving Line”) of up to $5,000,000 remains the same under the Agreement. The amount available under the SVB Revolving Line is limited by a borrowing base formula based on each Borrower’s recurring revenue and customer retention rate. The SVB Revolving Line matures on May 6, 2015.

Advances under the SVB Revolving Line will accrue interest at a per annum floating rate equal to the greater of 6.25% or Silicon Valley Bank’s prime rate plus 3%. Interest is due monthly, and all unpaid principal and accrued but unpaid interest is due upon maturity.

The SVB Agreement contains typical negative covenants for a credit facility of this size and type, including covenants that prevent or restrict our and our subsidiaries’ ability to take certain actions, including, without limitation, changing principal executive offices, entering into mergers and acquisitions, disposing of property or other assets, and incurring additional indebtedness. Under the SVB Agreement, we are required to comply with financial covenants to maintain a liquidity ratio of not less than 1.25 to 1.00, and to maintain a minimum EBITDA (maximum loss) for the trailing three month period according to the following schedule:

Trailing Three Month Period Ending	Minimum EBITDA (maximum loss)

June 30, 2013, July 31, 2013 and August 31, 2013	$	(400,000	)
September 30, 2013, October 31, 2013 and November 30, 2013	$	(350,000	)
December 31, 2013, January 31, 2014 and February 28, 2014	$	(150,000	)
March 31, 2014, April 30, 2014 and May 31, 2014	$	(400,000	)
June 30, 2014, July 31, 2014 and August 31, 2014	$	(350,000	)
September 30, 2014, October 31, 2014 and November 30, 2014	$	(200,000	)
December 31, 2014, January 31, 2015 and February 28, 2015	$	75,000

Payment and performance of our obligations with respect to the SVB Revolving Line is secured by a security interest in substantially all of our assets and the assets of the additional Borrowers, including our and their intellectual property.

The SVB Agreement contains typical default provisions for a credit facility of this size and type, that include, among others, defaults in the event of non-payment or non-performance of covenants, a material adverse change, an attachment of our assets or entry of an injunction against doing business, occurrence of certain bankruptcy and insolvency events, cross-defaults to certain other material indebtedness, entry of material judgment and inaccuracy of representations and warranties. The occurrence of an event of default could result in, among other things, acceleration of all obligations under the SVB Revolving Line, Silicon Valley Bank ceasing to advance money or extending credit under the SVB Revolving Line, and a right by Silicon Valley Bank to exercise all remedies available to it under the SVB Agreement, including the disposition of any or all collateral.

On May 6, 2013, in connection with entering into the SVB Agreement, Lyris paid all amounts outstanding and owed under its Amended and Restated Loan and Security Agreement with Comerica Bank, which terminated on April 30, 2013 according to its terms.

As of March 31, 2014, we are in compliance with all of the covenants of the SVB Agreement for all applicable measurement periods in the third quarter of fiscal year 2014. Our outstanding borrowings totaled $2.3 million with $1.5 million in available credit remaining as of March 31, 2014.

Note 7 - Income Taxes

Our effective tax rates for the nine months ended March 31, 2014 and 2013 were 101.6% and (18.0%), respectively. The following table provides a reconciliation of the income tax provision at the statutory U.S. federal rate to our actual income tax provisions for the nine months ended March 31, 2014 and 2013:

	Nine Months Ended March 31,
	2014			%			2013			%
	(In thousands)
Income tax expense (benefit) at the statutory rate	$	9			35.0	%	$	193			35.0	%
State income taxes, net of federal benefit		(5	)		(20.2	)%		71			12.8	%
Utilization of NOL carryover		218			886.4	%		(73	)		(13.2	)%
Amortization of intangible assets		(53	)		(215.0	)%		(70	)		(12.6	)%
Impact of Foreign Operations		(73	)		(295.0	)%		(226	)		(40.8	)%
Difference between AMT and statutory federal income tax rates		9			38.4	%		124			22.4	%
Change in valuation provision allowance		(1	)		(4.5	)%		(49	)		(8.9	)%
Permanent difference		(5	)		(20.9	)%		(11	)		(2.0	)%
Other, net		(74	)		(302.6	)%		(58	)		(10.7	)%
Income tax (provision) benefit	$	25			101.6	%	$	(99	)		(18.0	)%

In accordance with FASB standards, we establish a valuation allowance if we believe that it is more likely than not that some or all of our deferred tax assets will not be realized. We do not recognize a tax benefit unless we determine that it is more likely than not that the benefit will be sustained upon external examination, such as an audit by a taxing authority. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

Note 8 – Earnings/ Income (Loss) Per Share

Accounting standards established by the FASB require the presentation of the basic net income (loss) per common share and diluted net income (loss) per common share. Basic net income (loss) per common share excludes any dilutive effects of options and convertible securities. Dilutive net income (loss) per common share is the same as basic net income (loss) per common share for all periods.

The following table sets forth the computation and reconciliation of net income (loss) per share:

	Three Months Ended March 31,					Nine Months Ended March 31,
	2014		2013			2014		2013
	(In thousands)
Net income (loss)	$	16	$	(568	)	$	1	$	(622	)

Weighted average shares outstanding:
Basic		9,568		9,618			9,568		9,568
Effect of dilutive redeemable convertible Seies A Preferred Stock		2,000		-			2,000		-
Diluted		11,568		9,618			11,568		9,568
Net loss per share
Basic	$	0.00	$	(0.06	)	$	0.00	$	(0.07	)
Diluted	$	0.00	$	(0.06	)	$	0.00	$	(0.07	)

No shares were excluded in the dilutive income per common share calculation for the three months ended March 31, 2014. Potentially anti-dilutive stock options to purchase 35,953 shares of common stock were excluded in the dilutive loss per common share for the three months ended March 31, 2013. No shares were excluded in the dilutive income per common share calculation for the nine months ended March 31, 2014. Potentially anti-dilutive stock options to purchase 42,243 shares of common stock were excluded in the dilutive loss per common share for the nine months ended March 31, 2013.

Note 9 - Stock-Based Compensation

Stock Options

We recognize stock-based compensation costs, including employee stock awards and purchases under stock purchase plans, at the grant date fair value of the award. Determining the fair value of stock-based awards at the grant date requires judgment. Judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be impacted.

The following table summarizes the allocation of stock-based compensation expense included in the Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2014 and 2013:

	Three Months Ended March 31,					Nine Months Ended March 31,
	2014			2013		2014		2013
	(In thousands)					(In thousands)
Cost of revenues	$	7		$	1	$	19	$	56
General and administrative		67			101		97		502
Research and development		(5	)		6		58		61
Sales and marketing		31			25		82		56
Total	$	100		$	133	$	256	$	675

For the three months ended March 31, 2014, total stock-based compensation was $0.1 million. For the three months ended March 31, 2013, total stock-based compensation expense of $87 thousand related to stock options and $46 thousand in expense related to restricted stock units. For the nine months ended March 31, 2014, total stock-based compensation was $0.3 million. For the nine months ended March 31, 2013, total stock-based compensation expense of $0.5 million related to stock options and $0.2 million in expense related to restricted stock units. We determine the fair value of each option grant using a Black-Scholes model. The Black-Scholes model utilizes multiple assumptions including expected volatility, expected life, expected dividends and interest rates. The expected term of the options is based on the period of time that options are expected to be outstanding and is derived by analyzing historical exercise behavior of employees in Lyris’ peer group as well as the options’ contractual terms. Expected volatilities are based on implied volatilities from traded options on Lyris’ peer group’s common stock, Lyris’ historical volatility and other factors. The risk-free rates are for the period matching the expected term of the option and are based on the U.S. Treasury yield curve rates as published by the Federal Reserve in effect at the time of grant. The dividend yield is zero based on the fact we have no intention of paying dividends in the near term.

We recognize stock-based compensation expense on a straight-line basis over the requisite service period of the award, which is typically the option vesting term of four years.

Stock-based compensation expense as part of capitalized software development costs was not significant for the quarter ended March 31, 2014.

As of March 31, 2014, unamortized stock-based compensation expense associated with common stock options was $1.2 million which we expect to recognize over a weighted-average period of 2.83 years.

The following table summarizes stock option activity from July 1, 2013 to March 31, 2014:

	Number of options			Weighted- Average Fair Value		Weighted-Average Remaining Contractual Life in Years
	(In thousands)
Outstanding at July 1, 2013		1,663		$	2.10		8.5
Granted		274		$	1.79
Forfeited/expired		(100	)	$	1.91
Outstanding at September 30, 2013		1,837		$	2.06		8.5
Vested and expected to vest at September 30, 2013		1,342		$	2.01		8.1
Exercisable at September 30, 2013		371		$	2.01		5.3
Granted		303		$	1.42
Forfeited/expired		(596	)	$	2.16
Outstanding at December 31, 2013		1,544		$	1.89		8.3
Vested and expected to vest at December 31, 2013		1,155		$	2.04		8.0
Exercisable at December 31, 2013		396		$	2.04		5.8
Granted		81		$	1.17
Forfeited/expired		(158	)	$	1.75
Outstanding at March 31, 2014		1,467		$	1.87		8.7
Vested and expected to vest at March 31, 2014		1,108		$	2.18		8.5
Exercisable at March 31, 2014		342		$	2.18		7.5

As March 31, 2014, the calculated aggregate intrinsic value of options outstanding and options exercisable was $418,315. The intrinsic value represents the pre-tax intrinsic value, based on our closing stock price on March 31, 2014 which would have been received by the option holders had all option holders exercised their options as of that date.

Options to purchase 658,300 shares of our common stock were granted under our equity compensation plan for the nine months ended March 31, 2014. The weighted-average fair value of the options granted under the equity compensation plan was $1.17 per option and $1.54 per option for the three and nine months ended March 31, 2014, respectively. The weighted-average fair value of options granted under the share plans was $2.12 per option and $2.37 per option for the three and nine months ended March 31, 2013, respectively.

Reserved Shares of Common Stock

On August 8, 2012, we amended our 2005 Equity-Based Compensation Plan (“Plan”) to increase the number of shares available under the Plan by an additional 775,000 shares. As of March 31, 2014, we had 869,645 shares of common stock under our Plan reserved for future equity awards.

Note 10 – Segment Information

ASC 280 “Segment Reporting,” (“ASC 280”), establishes standards for the way public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. We concluded that there is only one reportable segment as it is a SaaS-based online marketing solutions and service provider and uses an integrated approach in developing and selling our solutions and services. Our Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by ASC 280.

Note 11 - Commitments and Contingencies

Our commitments consist of obligations under operating leases for corporate office space and co-location facilities for data center capacity for research and test data centers. We have also entered into capital leases in connection with acquiring computer equipment for our data center operations which is included in property and equipment. We used an average of 6.78% interest rate to calculate the present value of the future principal payments and interest expense related to our capital leases. Additionally, in the ordinary course of business, we enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms.

	Operating Leases
	Facilities		Co-location Hosting Facilities		Other		Total Operating		Capital Leases			Total
	(In thousands)
Fiscal Year 2014	$	635	$	141	$	99	$	875	$	228		$	1,103
Fiscal Year 2015		1,140		185		182		1,507		484			1,991
Fiscal Year 2016		808		-		17		825		137			962
Fiscal Year 2017		216		-				216		33			249
Total	$	2,799	$	326	$	298	$	3,423		882		$	4,305
Less: amounts representing interest										(45	)
Present value of capital lease obligations										837
Less: short-term portion										(602	)
Long-term portion									$	235

We entered into capital leases of $0.1 million in the third quarter of fiscal year 2014 in connection with acquiring computer equipment for our data center operations.

Legal claims

On February 14, 2012, David R. and Janet H. Burt filed suit against Wolfgang Maasberg, our former Chief Executive Officer, one other employee, several current or former directors, and certain of our stockholders in the U.S. District Court for the District of Maryland, Baltimore Division. The plaintiffs alleged various facts and make claims of federal and state securities law violations, as well as breach of fiduciary duty under Delaware law and intentional infliction of emotional distress. The plaintiffs sought unspecified damages, punitive damages, costs, and injunctive relief. The lawsuit was dismissed in April, 2013; however, the Burts filed an amended complaint in May 2013. As of March 31, 2014, we are awaiting a ruling from the court.

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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended June 30, 2013, or fiscal year 2013, included in our Annual Report on Form 10-K for fiscal year 2013, filed with the SEC on September 19, 2013 .

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements identify prospective information, particularly statements referencing our expectations regarding revenue and operating expenses, cost of revenue, tax and accounting estimates, cash, cash equivalents and cash provided by operating activities, the demand and expansion opportunities for our products, our customer base, our competitive position and the impact of the current economic environment on our business. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “would,” “might,” “will,” “should,” “expect,” “forecast,” “predict,” “potential,” “continue,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “is scheduled for,” “targeted,” and variations of such words and similar expressions. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management’s beliefs, and assumptions made by management. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth under “Risk Factors” or included elsewhere in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a leading provider of digital marketing software solutions that help organizations engage with their customers across multiple interactive channels. Our solutions empower marketers to design, automate and optimize data-driven campaigns that generate superior engagement, increased business value through greater customer conversions and measurable return on marketing investment.

Lyris' high-performance, secure and flexible digital marketing applications improve marketing efficiency by providing automated digital message delivery, robust segmentation, and real-time social, mobile, and interaction analytics. The Lyris solutions portfolio is comprised of both in-the-cloud and on-premises solutions – Lyris HQ, Lyris ListManager - combined with customer-focused services and support, and delivered on a powerful integration platform that connects data and marketing workflows across the enterprise.

We announced a new Software as a Service product, Lyris ONE in September 2012. Since announcing Lyris ONE, we have worked to connect all Lyris product capabilities on our integration platform , empowering marketers to fully orchestrate multi-channel marketing services for customer-centric campaign planning, testing, execution, and measurement. We extended our delivery timelines for the Lyris ONE product in order to execute against our expanded platform vision, and achieve the significant and needed benefits of a flexible and extensible architecture that the market has uniformly validated as critical.

Lyris HQ is our proven in-the-cloud digital marketing solution that combines enterprise-class email marketing with web analytics. Lyris HQ helps marketers manage complex email marketing campaigns and provides real-time access to revenue and conversion events to inform message targeting, relevancy, and timeliness. Lyris ListManager is our on-premises solution for advanced email marketing. It includes powerful automation features and reporting capabilities, and its flexible and configurable architecture integrates seamlessly with in-house databases so that digital marketers can leverage existing data stores to target customers and prospects more effectively.

Lyris HQ and Lyris ListManager are deployed on an open, flexible, and powerful environment for enabling multichannel digital marketing automation across the enterprise. With a foundation in email marketing, our platform architecture enables organizations to integrate and orchestrate complex digital marketing campaigns involving multiple systems. The Lyris platform seamlessly integrates with complementary systems via Lyris Enterprise Connectors that provide a visually-oriented environment for connecting data and application workflows.

Our solutions help companies increase customer conversions and grow revenues by allowing enterprise companies to create synergistic value across the entire ecosystem of multi-channel campaign management systems. Our in-the-cloud technology stack is architected for “big data” to consolidate and analyze large amounts of vital behavioral and transactional information from online activities in order to increase the relevance of every customer message. With almost 20 years’ experience and billions of digital messages processed by our solutions, we are continuously expanding ways companies deliver value to their customers.

The majority of our revenues are recurring, comprised of subscription revenue and support and maintenance revenue. We derive revenue from subscriptions to our SaaS solutions (Lyris HQ), software (Lyris ListManager), support and maintenance, and related professional services.

Critical Accounting Policies and Use of Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in our application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. Our management has reviewed these critical accounting policies, our use of estimates and any related disclosures with our audit committee.

Revenue Recognition

We recognize revenue from hosting and professional services and licensing our software products to our customers.

Subscription and Other Service Revenue

We follow Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU No. 2009-13”) for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Although our professional services that are a part of multiple element arrangement have standalone value to the customer, such services could not be accounted as separate units of accounting under the previous guidance, as vendor-specific objective evidence (“VSOE”) did not exist for the undelivered element. The VSOE for subscription services could not be established based on the historical pricing trends to date, which indicate that the price of the majority of standalone sales does not yet fall within a narrow range around the median price. Since our subscription services have standalone value as such services are often sold separately, but do not have VSOE, we use estimate of selling price (“ESP”) to determine fair value for our subscription services when sold in a multiple-element arrangement and recognize revenue based on ASU No. 2009-13. Third-party evidence was concluded to be an impractical alternative due to differences in features and functionality of other companies’ offerings and lack of access to the actual selling price of competitor standalone sales. If new subscription service products are acquired or developed that require significant professional services in order to deliver the subscription service and the subscription service and professional services cannot support standalone value, then such subscription services and professional services will be evaluated as one unit of accounting. We determined ESP of fair value for subscription services based on the following:

Software Revenue

We determine VSOE based on actual prices charged for standalone sales of maintenance. To accomplish this, we track sales for the maintenance product when sold on a standalone basis for a one year term and compare to the established price list to ensure that the prices charged on the invoices align with the prices per price list.

We perform a quarterly analysis of the actual sales for standalone maintenance to establish the VSOE. We consider VSOE established if prices charged per invoice of least 75% of all standalone deals for maintenance fall within 20% of the prices charged per price list. If the condition is satisfied, the price list is considered to represent VSOE as prices charged per majority of the invoices agree to the established price list. Software is then recognized based on a residual method (As per ASU 985-605-25-10e) unless the price for maintenance exceeds the price for price list (which rarely happens), in which case portion of maintenance fee would be allocated to SW.

Financial Results of Operations

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

The following tables set forth our condensed consolidated statements of operations data as a percentage of total revenue for the three and nine months ended March 31, 2014 and 2013:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2014			2013			2014			2013

Revenue:
Subscription		79	%		79	%		77	%		78	%
Support and maintenance		13	%		11	%		12	%		11	%
Professional services		7	%		7	%		7	%		7	%
Software		2	%		3	%		3	%		5	%
Total revenue		100	%		100	%		100	%		100	%
Cost of revenue		36	%		39	%		36	%		39	%
Gross profit		64	%		61	%		64	%		61	%
Operating expenses:
Sales and marketing		32	%		30	%		32	%		27	%
General and administrative		18	%		23	%		19	%		23	%
Research and development		13	%		10	%		12	%		11	%
Amortization of customer relationships and trade names		1	%		1	%		1	%		1	%
Total operating expenses		65	%		64	%		64	%		62	%
Loss from operations		-1	%		-3	%		0	%		-1	%
Interest expense		-1	%		0	%		0	%		0	%
Interest income		0	%		0	%		0	%		0	%
Other (expense) income, net		0	%		-3	%		0	%		-1	%
Loss from operations before income taxes		-1	%		-6	%		0	%		-2	%
Income tax (provision) benefit		0	%		0	%		0	%		0	%
Net loss		-1	%		-6	%		0	%		-2	%

Revenue

	Three Months Ended March 31				Change
	2014		2013		$			Percent
	(In thousands, except percentages)
Subscription:
Lyris HQ	$	4,721	$	5,442	$	(721	)		(13	)%
Legacy		1,239		1,589		(350	)		(22	)%
Total subscription		5,960		7,031		(1,071	)		(15	)%
Support and maintenance		959		984		(25	)		(3	)%
Professional services		510		589		(79	)		(13	)%
Software		160		289		(129	)		(45	)%
Total revenue	$	7,589	$	8,893	$	(1,304	)		(15	)%

	Nine Months Ended March 31,				Change
	2014		2013		$			Percent
	(In thousands, except percentages)
Subscription
Lyris HQ	$	14,601	$	16,449	$	(1,848	)		(11	)%
Legacy		3,971		5,049		(1,078	)		(21	)%
Total subscription		18,572		21,498		(2,926	)		(14	)%
Support and maintenance		2,987		2,913		74			3	%
Professional services		1,688		1,845		(157	)		(9	)%
Software		720		1,275		(555	)		(44	)%
Total revenue	$	23,967	$	27,531	$	(3,564	)		(13	)%

Subscription revenue

Subscription revenue is primarily comprised of subscription fees from customers accessing our hosted services application and from customers purchasing additional offerings that are not included in the standard hosting agreement. Our subscription revenue includes revenue from our Lyris HQ product, and a variety of legacy products which are in the process of reaching their end of life. We did not recognize material amounts of revenue from Lyris ONE, which was introduced in September 2012. Subscription revenue was $6.0 million or 79% of our total revenue for the three months ended March 31, 2014, compared to $7.0 million or 79% of our total revenue for the same period in fiscal year 2013, a decrease of $1.0 million or 15%. Subscription revenue was $18.6 million or 77% of our total revenue for the nine months ended March 31, 2014, compared to $21.5 million or 78% of our total revenue for the same period in fiscal year 2013, a decrease of $2.9 million or 14%.

Subscription revenue related to Lyris HQ for the three and nine months ended March 31, 2014 decreased compared to the same periods in fiscal year 2013, primarily as a result of existing customer turnover and decrease in new sales. Subscription revenue related to legacy products decreased for the three and nine months ended March 31, 2014 compared to the same period in fiscal year 2013, primarily due to termination of contracts with low priced subscriptions, existing customer turnover, and management’s decision to phase out low margin legacy products.

Support and maintenance revenue

Support and maintenance revenue is primarily comprised of customer service and support for our products. Support and maintenance revenue was $1.0 million or 13% of our total revenue for the three months ended March 31, 2014 compared to $1.0 million or 11% of our total revenue for the same period in fiscal year 2013, a decrease of $25 thousand or 3%. The slight decrease during the three months ended was a result of end of customer contracts. Support and maintenance revenue was $3.0 million or 12% of our total revenue for the nine months ended March 31, 2014 compared to $2.9 million or 11% of our total revenue for the same period in fiscal year 2013, an increase of $0.1 million or 3%.The slight increase during the nine months ended in support and maintenance revenue was a result of our proactive effort toward customer support rescues, and customer upsells.

Professional services revenue

Professional services revenue is primarily comprised of training, campaigning services which includes web analytics and reporting, web design, email deliverability and search engine marketing. Professional services revenue was $0.5 million or 7% of our total revenue for the three months ended March 31, 2014, compared to $0.6 million or 7% of our total revenue for the same period in fiscal year 2013, a decrease of $0.1 million or 13%. Professional services revenue was $1.7 million or 7% of our total revenue for the nine months ended March 31, 2014, compared to $1.9 million or 7% of our total revenue for the same period in fiscal year 2013, a decrease of $0.2 million or 9%.

Professional services revenue decreased for the three months ended March 31, 2014 compared to the same periods in fiscal year 2013 primarily due to reduced professional services in existing customer contracts and a decrease in new sales of our professional service. Professional service revenue decreased for the nine months ended March 31, 2014 compared to the same periods in fiscal year 2013 primarily due to management’s decision to terminate our low margin list building service which was obtained in our Cogent acquisition in June 2011, customer turnover and reduced professional services in existing customer contracts.

Software revenue

Software revenue is derived from perpetual licensing rights of our software that we sell to our customers. Software revenue was $0.2 million or 2% of our total revenue for the three months ended March 31, 2014 compared to $0.3 million or 3% of our total revenue for the same period in fiscal year 2013, a decrease of $0.1 million or 45%. Software revenue was $0.7 million or 3% of our total revenue for the nine months ended March 31, 2014 compared to $1.3 million or 5% of our total revenue for the same period in fiscal year 2013, a decrease of $0.6 million or 44%.

Software revenue decreased for the three and nine months ended March 31, 2014 as compared to the same period in fiscal year 2013 primarily due to a decrease in new sales of our software product and decreases in software upgrades.

Cost of revenue

Cost of revenue consists primarily of the amortization of intangible assets related to internally developed software to support our cloud-based marketing products, amortization of our intangibles and software acquired from our strategic acquisitions, payroll-related expenses related to our engineers assigned to product-and revenue-support projects, data center and depreciation costs associated with our supporting hardware, various support costs such as website development, processing fees, and allocated overhead.

	Three Months Ended March 31,				Change
	2014		2013		$			Percent
	(In thousands, except percentages)
Cost of revenue	$	2,719	$	3,432	$	(713	)		(21	)%

	Nine Months Ended March 31,				Change
	2014		2013		$			Percent
	(In thousands, except percentages)
Cost of revenue	$	8,691	$	10,777	$	(2,086	)		(19	)%

Cost of revenue was $2.7 million for the three months ended March 31, 2014, compared to $3.4 million for the same period in fiscal year 2013. As a percentage of total revenue, cost of revenue decreased to 36% for the three months ended March 31, 2014 from 39% for the same period in fiscal year 2013. Cost of revenue for the three months ended March 31, 2014 compared to the same period in fiscal year 2013 decreased due to a decrease in headcount. The decrease consisted of a $0.5 million in compensation expense, $0.1 million in overhead and other expenses and $0.1 million in amortization and depreciation expense from our internally developed software.

Cost of revenue was $8.7 million for the nine months ended March 31, 2014 and compared to $10.8 million for the same period in fiscal year 2013. As a percentage of total revenue, cost of revenue decreased to 36% for the nine months ended March 31, 2014 from 39% for the same period in fiscal year 2013. Cost of revenue for the nine months ended March 31, 2014 compared to the same period in fiscal year 2013 decreased due to a decrease in headcount. The decrease consisted of a $1.6 million in compensation expense, $0.4 million in consultant expenses, $0.3 million in facility expenses, and $0.2 million in recruiting expense. The decrease in cost of revenue was offset by an increase of $0.3 million in overheard and other expense and $0.1 million in amortization and depreciation expense primarily due to amortization of our internally developed software.

Gross profit

	Three Months Ended March 31,				Change
	2014		2013		$			Percent
	(In thousands, except percentages)
Gross profit	$	4,870	$	5,461	$	(591	)		(11	)%

	Nine Months Ended March 31,				Change
	2014		2013		$			Percent
	(In thousands, except percentages)
Gross profit	$	15,276	$	16,754	$	(1,478	)		(9	)%

Gross profit was $4.9 million for the three months ended March 31, 2014, compared to $5.5 million for the same period in fiscal year 2013. As a percentage of net revenue, gross profit increased to 64% for the three months ended March 31, 2014 from 61% for the same period in fiscal year 2013. Gross profit was $15.3 million for the nine months ended March 31, 2014, compared to $16.8 million for the same period in fiscal year 2013. As a percentage of net revenue, gross profit increased to 64% for the nine months ended March 31, 2014 compared 61% for the same period in fiscal year 2013.

Operating expenses

	Three Months Ended March 31,				Change
	2014		2013		$			Percent
	(In thousands, except percentages)
Sales and marketing	$	2,453	$	2,653	$	(200	)		(8	)%
General and administrative		1,393		2,119		(726	)		(34	)%
Research and development		1,019		911		108			12	%
Amortization of customer relationships and trade names		50		50		-			0	%
Total operating expenses	$	4,915	$	5,733	$	(818	)		(14	)%

	Nine Months Ended March 31				Change
	2014		2013		$			Percent
	(In thousands, except percentages)
Sales and marketing	$	7,694	$	7,423	$	271			4	%
General and administrative		4,489		6,365		(1,876	)		(29	)%
Research and development		2,893		2,908		(15	)		(1	)%
Amortization and impairment of customer relationships and trade names		151		151		-			0	%
Total operating expenses	$	15,227	$	16,847	$	(1,620	)		(10	)%

Sales and marketing

Sales and marketing includes expenses primarily related to employee salaries and related costs, costs associated with advertising and other promotional programs, and allocated facilities costs.

Sales and marketing expense was $2.5 million for the three months ended March 31, 2014, compared to $2.7 million for the same period in fiscal year 2013, a decrease of $0.2 million or 8%. As a percentage of total revenue, sales and marketing expense increased to 32% for the three months ended March 31, 2014 from 30% for same period in fiscal year 2013. The decrease in sales and marketing expense was primarily due to a decrease of $0.2 million in sales and marketing compensation, $0.1 million spending for advertising and promotional programs and is offset by an increase of $0.1 million in overhead and other expenses.

Sales and marketing expense was $7.7 million for the nine months ended March 31, 2014, compared to $7.4 million for the same period in fiscal year 2013, an increase of $0.3 million or 4%. As a percentage of total revenue, sales and marketing expense increased to 32% for the nine months ended March 31, 2014 from 27% for same period in fiscal year 2013. The increase in sales and marketing expense was primarily due to a $0.5 million increase in sales and marketing compensation due to an increase in headcount in sales and marketing department, $0.2 million increase in overhead and other expenses. The increase is offset by a decrease of advertising and promotional expenses of $0.4 million.

General and administrative

General and administrative expense consists primarily of salaries and related costs for administrative personnel, professional services such as consultants, legal fees and accounting, audit and tax fees, and related allocation of overhead including stock-based compensation and other corporate development costs.

General and administrative expense was $1.4 million for the three months ended March 31, 2014, compared to $2.1 million for the same period in fiscal year 2013, a decrease of $0.7 million or 34%. As a percentage of total revenue, general and administrative expense decreased to 18% for the three months ended March 31, 2014 from 23% for the same period in fiscal year 2013. The decrease was primarily due to $0.6 million decrease in salary expenses due to a decrease in headcount, decrease of $0.3 million in overhead and other expenses, and $0.1 million in bad debt expense as a result of our improvement in collection. The decrease is offset by an increase of $0.2 million in facility expenses.

General and administrative expense was $4.5 million for the nine months ended March 31, 2014, compared to $6.4 million for the same period in fiscal year 2013, a decrease of $1.9 million or 29%. As a percentage of total revenue, general and administrative expense decreased to 19% for the nine months ended March 31, 2014 from 23% for the same period in fiscal year 2013. The decrease was primarily due to $1.3 million decrease in salary expenses due to a decrease in headcount, a $0.2 million decrease in consultant expense, and decrease of $0.2 million in bad debt expense as a result of our improvement in collection and $0.1 million decrease in overhead and other expenses.

Research and development

Research and development expense consists of salaries and related costs for engineering personnel, stock-based compensation and other headcount-related expenses associated with development of our next generation product line and increasing the functionality of current lines. We capitalize product development expenses incurred during the application development stage until the product is available for general release, provided we can ascertain that there is future economic value. We expense engineering costs in cost of revenue if the expense is related to supporting on-going platforms and is more related to product support activities. Management’s judgment is used to determine the allocation between these three categories, and we refer to these three categories in aggregate as ‘‘product investment.’’

Research and development expense was $1.0 million for the three months ended March 31, 2014 compared to $0.9 million for the same period in fiscal year 2013, an increase of $0.1 million. As a percentage of total revenue, research and development expense increased to 13% for the three months ended March 31, 2014 from 10% for the same period in fiscal year 2013. The increase was primarily related to $0.3 million in consultant expenses in relation to outsourcing the quality and assurance engineering department and is offset by $0.3 million decrease in compensation and benefits.

Research and development expense was $2.9 million for the nine months ended March 31, 2014, compared to $2.9 million for the same period in fiscal year 2013, a decrease of $15 thousand or 1%. As a percentage of total revenue, research and development expense increased to 12% for the nine months ended March 31, 2014 from 11% for the same period in fiscal year 2013. Our research and development department expenses remained relatively flat during the nine months ended March 31, 2014 compared to the same period in fiscal year 2013, mainly due to an increase in consulting expenses from outsourcing our quality assurance engineering department offset by a relatively similar decrease in compensation and benefits.

Amortization of customer relationships and trade names

Amortization of customer relationships and trade names expenses consist of intangibles that we obtained through the acquisition of other businesses.

Amortization of customer relationships and trade names expense was $50 thousand for the three months ended March 31, 2014 and 2013. As a percentage of total revenue, amortization of customer relationships and trade names expense remained at 1% for the three months ended March 31, 2014 and 2013.

Amortization of customer relationships and trade names expense was $0.2 million for the nine months ended March 31, 2014 and 2013. As a percentage of total revenue, amortization of customer relationships and trade names expense remained at 1% for the nine months ended March 31, 2014 and 2013

Interest expense

	Three Months Ended March 31,						Change
	2014			2013			$		Percent
	(In thousands, except percentages)
Interest expense	$	(39	)	$	(32	)	$	7		22	%

	Nine Months Ended March 31,						Change
	2014			2013			$			Percent
	(In thousands, except percentages)
Interest expense	$	(116	)	$	(180	)	$	(64	)		(36	)%

Interest expense relates to our revolving line of credit with Silicon Valley Bank and our short and long-term capital lease obligations in connection with acquiring computer equipment for our data center operations which is included in property and equipment.

Interest expense was $39 thousand for the three months ended March 31, 2014, compared to $32 thousand for the same period in fiscal year 2013, an increase of $7 thousand or 22%. The slight increase was primarily due to a slightly higher average balance in our revolving line of credit of $2.3 million at March 31, 2014 compared to an average balance of $0.9 million at March 31, 2013.

Interest expense was $0.1 million for the nine months ended March 31, 2014, compared to $0.2 million for the same period in fiscal year 2013, a decrease of $0.1 million or 36%. The decrease was primarily due to a decrease in our short and long term capital lease obligations.

Income Tax (Provision) Benefit

Our effective tax rates for the nine months ended March 31, 2014 and 2013 were 101.6% and (18.0%), respectively. For additional information about income taxes, refer to Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Goodwill, Long-lived Assets and Other Intangible Assets

We classify our intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill.

Periodically, we evaluate our fixed assets and intangible assets with definite lives for impairment. If the carrying amount of an asset or asset group (in use or under development) is evaluated and found not to be recoverable (carrying amount exceeds the gross, undiscounted cash flows from use and disposition), then an impairment loss must be recognized. The impairment loss is measured as the excess of the carrying amount over the asset’s or asset group’s fair value. In addition, the potential impairment of finite life intangibles is assessed whenever events or a change in circumstances indicate the carrying value may not be recoverable.

ASU No. 2011-08 “Intangibles - Goodwill and Other (Topic 350) Testing Goodwill for Impairment” provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of our qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than our carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.

We adopted ASU No. 2011-08 in the first quarter of fiscal year 2012 and considered various events and circumstances when we evaluated whether it is more likely than not that the fair value of our reporting unit is less than our carrying value. We considered events and circumstances such as macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and our share price relative to our peers. Based on our assessment of relevant events and circumstances conducted on March 31, 2014, we concluded that there was no impairment of goodwill for the nine months ended for fiscal year 2014.

Liquidity, Capital Resources and Financial Condition

Our primary sources of liquidity to fund our operations as of March 31, 2014 were the collection of accounts receivable balances generated from net sales and proceeds from our revolving line of credit.

For additional operational funds requirements, we have available a revolving line of credit with Silicon Valley Bank which matures on May 6, 2015, (refer to Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional detail). As of March 31, 2014, our availability under this credit facility was approximately $1.5 million. As of March 31, 2014, our cash and cash equivalents totaled $1.5 million compared to $2.4 million at March 31, 2013. As of March 31, 2014, our accounts receivable, less allowances, totaled $3.9 million compared to $4.1 million at June 30, 2013.

							Change
	March 31, 2014			June 30, 2013			$			Percent
	(In thousands, except percentages)
Accounts receivable	$	4,243		$	4,613		$	(370	)		(8	)%
Allowance for doubtful accounts		(342	)		(510	)		168			(33	)%
Total - Accounts receivable	$	3,901		$	4,103		$	(202	)		(5	)%

Accounts receivables decreased $0.4 million or 8% for the nine months ended March 31, 2014 due to decreased sales in our subscription, professional service and software. Allowance for doubtful accounts (“Allowance”) decreased by $0.2 million or 33% for the nine months ended March 31, 2014 as a result of our routine evaluation of customer balances. We adjusted the Allowance as appropriate based upon the collectability of the receivables in light of historical trends, adverse situations that may affect our customers’ ability to repay, and prevailing economic conditions. This evaluation was done in order to identify issues which may impact the collectability of receivables and reserve estimates. Revisions to the Allowance are recorded as an adjustment to bad debt expense. After appropriate collection efforts are exhausted, specific receivables deemed to be uncollectible are charged against the Allowance in the period they are deemed uncollectible. Recoveries of receivables previously written-off are recorded as credits to the Allowance.

Our short-term and long-term liquidity requirements primarily arise from: (i) interest and principal payments related to our debt obligations; (ii) working capital requirements; and (iii) capital expenditures, including periodic acquisitions.

As of March 31, 2014, our existing cash and cash equivalents, cash flow from operations, and the availability from our revolving credit facility, provides sufficient liquidity to fund our projected working capital requirements, and capital spending for at least the next 12 months at our current growth and spending rate. We anticipate that we will continue to improve our cash flow from operations through both expense reductions and stabilization of our customer base, and we intend to continue building our cash reserves. See Notes 6 “Credit Facility” of the Notes to Unaudited Condensed Consolidated Financial Statements.

Our ability to service any indebtedness we incur under our revolving credit facility will depend on our ability to generate cash in the future. We may not have significant cash available to meet any large unanticipated liquidity requirements, other than from available borrowings, if any, under our revolving credit facility. As a result, we may not retain a sufficient amount of cash to finance growth opportunities, including acquisitions, or unanticipated capital expenditures or to fund our operations. If we do not have sufficient cash for these purposes, our financial condition and our business could suffer.

While the first half of fiscal year 2014 had its challenges, we still expect to maintain long-term growth in our hosted revenue offerings through the marketing of our products, Lyris ONE, Lyris HQ and Lyris ListManager, and to increase efficiency through aggressive management of our operating expenses in order to generate available cash to satisfy our capital needs and debt obligations. To the extent that existing cash, cash equivalents, and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additionally, we may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, applications or technologies in the future, which could also require us to seek additional equity or debt financing.

Our cash flows were as follows for the nine months ended March 31, 2014 and 2013 (in thousands):

	Nine Months Ended March 31,
	2014			2013
	(In thousands)
Net cash provided by operating activities	$	2,112		$	2,837
Net cash used in investing activities		(2,233	)		(3,804	)
Net cash (used in) provided by in financing activities		(578	)		1,786
Effect of exchange rate changes on cash		(83	)		(35	)
Net (decrease) increase in cash and cash equivalents	$	(782	)	$	784

Cash Flows for the Nine Months Ended March 31, 2014 Compared to the Nine Months Ended March 31, 2013

Operating Activities

Net cash flows provided by operating activities was $2.1 million for the nine months ended March 31, 2014 compared to net cash flows provided by operating activities of $2.8 million compared to the same period in fiscal year 2013.

Adjustments had a $2.7 million positive effect on cash flows from operating activities for the nine months ended March 31, 2014 including $0.3 million stock-based compensation; $2.5 million of depreciation and amortization and is offset by decrease of $46 thousand in deferred income tax and $26 thousand in provision for bad debt. Changes in assets and liabilities had a $0.6 million negative effect on cash flows provided by operating activities for the nine months ended March 31, 2014 due to a decrease of $0.8 million in accounts payable and accrued expense, $0.1 million in income tax payable and $0.3 million increase in accounts receivable.

Investing Activities

Net cash flows used in investing activities were $2.2 million for the nine months ended March 31, 2014 compared to net cash flow used in investing activities of $3.8 million compared to the same period in fiscal year 2013. Net cash flows used in investing activities primarily reflects capitalized software expenditures. The net cash flow used in investing activities for the nine months ended March 31, 2014 consisted of a $2.1 million in capitalized software expenditures and $0.1 million used in purchasing property and equipment.

Financing Activities

Net cash flows used in financing activities was $0.6 million for the nine months ended March 31, 2014 compared to net cash flows provided by financing activities of $1.8 million compared to the same period in fiscal year 2013. Financing cash flows for the nine months ended March 31, 2014 consisted primarily of $0.7 million payments under our capital lease obligations in connection with acquiring computer equipment for our data center operations and is offset by $0.1 million proceeds from our revolving line of credit.

Off-Balance Sheet Arrangements

As of March 31, 2014, we have a $40 thousand irrevocable letter of credit (“LOC”) issued by Silicon Valley Bank in favor of Legacy Partners I SJ North Second, LLC (“Legacy”), for obligations under our San Jose, California office lease.

We issued $0.1 million to The Hartford for a letter of credit (“ Hartford LOC”) which is held by as collateral for deductible payments that may become due under a worker’s compensation insurance policy. We classify Hartford LOC as a restricted cash account of $0.1 million. Any amounts drawn on the account will be expensed during that fiscal year. As of March 31, 2014 no amount was drawn under the account.

We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance activities.

Revolving Line of Credit

For summary description of our revolving credit facility with Silicon Valley Bank, please refer to Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

As of March 31, 2014, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 ( “Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded at that time that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the third quarter of fiscal year 2014, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in litigation as discussed under the caption “Legal claims” in Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements disclosed in this Quarterly Report on Form 10-Q and incorporated herein by reference.

In addition, from time to time, we are subject to legal proceedings and claims with respect to such matters as patents, intellectual property rights, and contractual disputes with customers, marketing service providers, and others, arising out of the normal course of business. Litigating claims of these types, whether or not ultimately determined in our favor or settled by us, is costly and diverts the efforts of management and other personnel from normal business operations. The results of legal proceedings cannot be predicted with certainty. We do not believe the final disposition of these matters will have a material effect on our financial statements and future cash flows.

ITEM 1A. RISK FACTORS

Careful consideration should be given to the risk factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. This Quarterly Report on Form 10-Q is qualified in its entirety by these risks. This Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described in the Form 10-K and elsewhere in this Form 10-Q. The market price of our common stock could decline due to any of these risks and uncertainties, or for other reasons, and a stockholder may lose part or all of its investment.

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for fiscal year ended June 30, 2013.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

			Incorporated by Reference
Exhibit No.	Description	Form	Date of First Filing	Exhibit Number	Filed Herewith

3.1	Certificate of Incorporation of the Company.	10-K	9/26/07	3(a)(i)

3.2	Certificate of Amendment to Certificate of Incorporation of the Company.	10-K	9/26/07	3(a)(ii)

3.3	Certificate of Amendment to Certificate of Incorporation of the Company.	8-K	3/5/12	3.1

3.4	Certificate of Ownership and Merger, merging NAHC, Inc. with and into J.L. Halsey Corporation.	10-K	9/26/07	3(a)(iii)

3.5	Certificate of Ownership and Merger, merging Lyris, Inc., with and into J.L. Halsey Corporation.	8-K	10/31/07	3.2

3.6	First Amended and Restated Bylaws of the Company	8-K	2/21/07	3.3

3.7	Amendments to First Amended and Restated Bylaws of the Company	8-K	2/21/07	3.1

3.8	Amendments No.2 to First Amended and Restated Bylaws of the Company	8-K	9/17/13	3.1

4.1	Certificate of Designation, as filed with the Delaware Secretary of State on October 17, 2012.	8-K	10/18/12	4.1

10.1	Promotion Letter, dated October 7, 2013, between the Company and John Philbin	8-K	10/10/2013	99.2

10.2	First Amendment to Loan and Security Agreement effective as of December 9, 2013 by and among Silicon Valley Bank and the Company, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc.	8-K	12/10/2013	99.1

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)	X

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)	X

32.1	Section 1350 Certification of Chief Executive Officer	X

32.2	Section 1350 Certification of Chief Financial Officer	X

101.INS	XBRL Taxonomy Extension Schema	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase	X

101.LAB	XBRL Taxonomy Extension Label Linkbase	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase	X

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: May 7, 2014
	By:	/s/ John Philpin
		John Philpin
		Chief Executive Officer and President


	By:	/s/ Deborah Eudaley
		Deborah Eudaley
		Chief Financial Officer and Chief Operating Officer

LYRIS, INC. - FORM 10-Q - May 7, 2014

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LYRIS, INC. Reports