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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 10-Q 

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(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2014

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                  to

 

COMMISSION FILE NUMBER 000-29637

 

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SELECTICA, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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DELAWARE	77-0432030
(State of Incorporation)	(IRS Employer Identification No.)

 

2121 South El Camino Real, 10th Floor, San Mateo, CA  94403

(Address of Principal Executive Offices)

 

(650) 532-1500

 (Registrant’s Telephone Number, Including Area Code)

 

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Indicate by a 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  ☒    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  ☒    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. (Check one):

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☒

 

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    YES  ☐    NO  ☒

 

The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of August 8, 2014, was 6,455,680.

 

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FORM 10-Q

 

SELECTICA, INC.

 

INDEX

 

PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2014 and March 31, 2014		5
Condensed Consolidated Statements of Operations for the three months ended June 30, 2014 and 2013		6
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2014 and 2013		7
Notes to Condensed Consolidated Financial Statements		8
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk		26
ITEM 4: Controls and Procedures		26
PART II OTHER INFORMATION		26
ITEM 1: Legal Proceedings		26
ITEM 1A: Risk Factors		26
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds		26
ITEM 3: Defaults Upon Senior Securities		26
ITEM 4: Mine Safety Disclosures		26
ITEM 5: Other Information		26
ITEM 6: Exhibits		27
Signatures		27

 

 

Cautionary Statement Pursuant to Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995

 

The words “Selectica”, “we”, “our”, “ours”, “us”, and the “Company” refer to Selectica, Inc. In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in Item 1A to Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014.  You should carefully review the risks described in other documents the Company files from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding the Company’s expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report on Form 10-Q.  The Company undertakes no obligation to release publicly any updates to the forward-looking statements included herein after the date of this document.

 

 

SELECTICA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

 

 

		June 30,				March 31,
		2014				2014
ASSETS
Current assets
Cash and cash equivalents		$	12,218			$	16,907
Accounts receivable, net of allowance for doubtful accounts of $53 and $247 as of June 30, 2014 and March 31, 2014, respectively			2,494				3,006
Prepaid expenses and other current assets			1,009				689
Total current assets			15,721				20,602
Property and equipment, net			284				312
Capitalized software, net			1,280				856
Other assets			36				30
Total assets		$	17,321			$	21,800
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Credit facility		$	5,613			$	6,949
Accounts payable			1,496				1,371
Accrued payroll and related liabilities			726				648
Other accrued liabilities			283				345
Deferred revenue			4,556				5,131
Total current liabilities			12,674				14,444
Long-term deferred revenue			433				618
Other long-term liabilities			26				-
Total liabilities			13,133				15,062
Rdeemable Convertible Preferred Stock
Series D redeemable convertible preferred stock, $.0001 par value, designated, issued and outstanding shares: 0 and 680,470 shares at June 30, 2014 and March 31, 2014, respectively			-				3,653
Stockholders' Equity:
Common stock, $0.0001 par value: Authorized: 15,000 shares at June 30, 2014 and March 31, 2014; Issued: 5,541 and 4,722 shares at June 30, 2014 and March 31, 2014, respectively; Outstanding: 5,445 and 4,694 shares at June 30, 2014 and March 31, 2014, respectively			4				4
Additional paid-in capital			282,135				278,083
Treasury stock at cost - 96 shares at June 30, 2014 and March 31, 2014			(472	)			(472	)
Accumulated deficit			(277,479	)			(274,530	)
Total stockholders' equity			4,188				3,085
Total liabilities, Redeemable convertible preferred stock and stockholders' equity		$	17,321			$	21,800

 

 

SELECTICA, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands)

(Unaudited)

 

 

		Three Months Ended
		June 30,				June 30,
		2014				2013
Revenues:
Recurring revenues		$	2,694			$	3,166
Non-recurring revenues			1,068				1,206
Total revenues			3,762				4,372
Cost of revenues:
Cost of recurring revenues			771				672
Cost of non-recurring revenues			1,483				1,236
Total cost of revenues			2,254				1,908
Gross profit:
Recurring gross profit			1,923				2,494
Non-recurring gross profit			(415	)			(30	)
Total gross profit			1,508				2,464
Operating expenses:
Research and development			442				1,103
Sales and marketing			2,370				2,073
General and administrative			1,643				1,555
Total operating expenses			4,455				4,731
Loss from operations			(2,947	)			(2,267	)
Increase in fair value of warrant liability			-				(139	)
Interest and other income (expense), net			(1	)			(15	)
Net loss		$	(2,948	)		$	(2,421	)
Preferred stock accretion			-				477
Net loss applicable to common stockholders		$	(2,948	)		$	(2,898	)
Basic and diluted net loss per share		$	(0.55	)		$	(0.97	)
Weighted average shares outstanding for basic and diluted net loss per share			5,331				3,000

 

 

SELECTICA, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

		Three Months Ended
		June 30,				June 30,
		2014				2013
Operating activities
Net loss		$	(2,948	)		$	(2,421	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and Amortization			104				48
Loss on disposition of property and equipment			-				2
Stock-based compensation expense			584				485
Increase in fair value of warrant liability			-				139
Changes in assets and liabilities:
Accounts receivable (net)			512				520
Prepaid expenses and other current assets			(321	)			21
Other assets			(6	)			(50	)
Accounts payable			124				(100	)
Accrued restructuring costs			-				(197	)
Accrued payroll and related liabilities			77				(132	)
Other accrued liabilities and long term liabilities			(61	)			(102	)
Deferred revenue			(734	)			(1,119	)
Net cash used in operating activities			(2,669	)			(2,906	)
Investing activities
Purchase of property and equipment			(18	)			(44	)
Capitalized Software			(480	)			-
Net cash used in investing activities			(498	)			(44	)
Financing activities
Proceeds from sale of common stock, preferred stock and warrants, net of issuance costs			-				5,340
Borrowings under credit facility, net			(1,337	)			(439	)
Employee taxes paid in exchange for restricted stock awards forfeited			(133	)			(136	)
Conversion of Preferred Stock to Common Stock			(52	)			-
Net cash (used in) provided by financing activities			(1,522	)			4,765
Net increase/(decrease) in cash and cash equivalents			(4,689	)			1,815
Cash and cash equivalents at beginning of the period			16,907				12,098
Cash and cash equivalents at end of the period		$	12,218			$	13,913
Supplemental disclosure of cash flow information:
Cash paid for interest		$	13			$	-

 

 

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

 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.	Basis of Presentation

 

The condensed consolidated balance sheet as of June 30, 2014, the condensed consolidated statements of operations for the three months ended June 30, 2014, and the condensed consolidated statements of cash flows for the three months ended June 30, 2014 have been prepared by the Company and are unaudited. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial position at June 30, 2014, and the results of operations and cash flows for the three months ended June 30, 2014 and 2013, respectively. Interim results are not necessarily indicative of the results for a full fiscal year. The condensed consolidated balance sheet as of March 31, 2014 has been derived from the audited consolidated financial statements at that date.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2014.

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

2.	Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Fair value of financial instruments

 

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their fair values.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, and accounts receivable. The Company places its short-term investments in high-credit quality financial institutions. The Company is exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet. The Company’s cash balances periodically exceed the FDIC insured amounts.  Accounts receivable are derived from revenue earned from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral. The Company maintains reserves for potential credit losses, and historically, such losses have not been significant.

 

Cash Equivalents and Short-term Investments

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash equivalents consist of money market funds, certificates of deposits, and commercial paper.  Fair values of cash equivalents approximated original cost due to the short period of time to maturity. The cost of securities sold is based on the specific identification method. The Company’s investment policy limits the amount of credit exposure to any one issuer of debt securities.

 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The Company monitors its investments for impairment on a quarterly basis and determines whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the issuers, the length of time an investment has been below the Company’s carrying value, and the Company’s ability and intent to hold the investment to maturity. If a decline in fair value, caused by factors other than changes in interest rates, is determined to be other-than-temporary, an adjustment is recorded and charged to operations.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company evaluates the collectability of its accounts receivable based on a combination of factors. When the Company believes a collectability issue exists with respect to a specific receivable, the Company records an allowance to reduce that receivable to the amount that it believes to be collectible. In making the evaluations, the Company will consider the collection history with the customer, the customer’s credit rating, communications with the customer as to reasons for the delay in payment, disputes or claims filed by the customer, warranty claims, non-responsiveness of customers to collection calls, and feedback from the responsible sales contact. In addition, the Company will also consider general economic conditions, the age of the receivable and the quality of the collection efforts.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives. The estimated useful lives for computer software and equipment is three years, furniture and fixtures is five years, and leasehold improvements is the shorter of the applicable lease term or estimated useful life.

 

Customer Concentrations

 

A limited number of customers have historically accounted for a substantial portion of the Company’s revenues. The following table presents customers that accounted for more than 10% of revenue:

 

		Three Months Ended
		June 30,				June 30,
		2014				2013
		(in thousands, except percentages)
Revenues from Customer A			14	%			13	%
Revenues from Customer B			12	%			-

 

 

Customers who accounted for at least 10% of gross accounts receivable were as follows:

 

		Three Months Ended
		June 30,				June 30,
		2014				2013
Accounts Receivable from Customer B			23	%			*
Accounts Receivable from Customer C			10	%			*
Accounts Receivable from Customer D			*				17	%

 

 

Revenue Recognition

 

The Company generates revenues by providing its SaaS solutions through subscription license arrangements and related professional services, as well as through perpetual and term licenses and related software maintenance and professional services. The Company presents revenue net of sales taxes and any similar assessments.

 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Revenue recognition criteria. The Company recognizes revenue when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) fees are fixed or determinable and (4) collectability is probable. If we determine that any one of the four criteria is not met, the Company will defer recognition of revenue until all the criteria are met.

 

Multiple-Deliverable Arrangements. The Company enters into arrangements with multiple-deliverables that generally include subscription, support and professional services. If a deliverable has standalone value, and delivery is probable and within the Company’s control, the Company accounts for the deliverable as a separate unit of accounting. Subscription services have standalone value as such services are often sold separately, primarily through renewals. Professional services have standalone value as such services are often sold separately, and are available from other vendors.

 

Upon separating the multiple-deliverables into separate units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or its best estimate of selling price (“BESP”), if VSOE is not available. The Company has determined that third-party evidence of selling price (“TPE”) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.

 

For professional services, the Company has established VSOE as a consistent number of standalone sales of this deliverable have been priced within a reasonably narrow range. The Company has not established VSOE for its subscription services due to lack of pricing consistency, and other factors. Accordingly, the Company uses its BESP to determine the relative selling price.

 

The Company determined BESP by considering its price list, as well as overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, contract prices per user, the size and volume of the Company’s transactions, the customer demographic, and its market strategy.

 

Recurring revenues. Recurring revenues consist of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues. Recurring revenues are recognized ratably over the stated contractual period.

 

Non-recurring revenues.  Non-recurring revenues are comprised of revenues from professional services for system implementations, enhancements, and training, and perpetual license sales prior to fiscal 2014. For professional services arrangements billed on a time-and-materials basis, services are recognized as revenue as the services are rendered. For fixed-fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion. The Company recognizes a loss for a fixed-fee professional service if the total estimated project costs exceed project revenues. Perpetual license sales are recognized upon delivery of the product, assuming all the other conditions for revenue recognition have been met.

 

In certain arrangements with non-standard acceptance criteria, the Company defers the revenue until the acceptance criteria are satisfied. Reimbursements, including those related to travel and out-of-pocket expenses are included in non-recurring revenues, and an equivalent amount of reimbursable expenses is included in non-recurring cost of revenues.

 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

 

Warranties and Indemnifications

 

The Company’s products are generally warranted to perform substantially in accordance with the functional specifications set forth in the associated product documentation for a period of 90 days. In the event there is a failure of such warranties, the Company generally is obligated to correct the product to conform to the product documentation or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company has not provided for a warranty accrual as of the three months ended June 30, 2014 or 2013 respectively. To date, the Company has not refunded any amounts in relation to the warranty.

 

The Company generally agrees to indemnify its customers against legal claims that the Company’s software infringes certain third-party intellectual property rights. In the event of such a claim, the Company is obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of the infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably possible, to refund the purchase price of the software. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers. As such, the Company has not provided for an indemnification accrual as of June 30, 2014 and 2013.

 

Software Development Costs

 

Software development costs incurred prior to the establishment of technological feasibility are included in research and development expenses. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the products are capitalized, if material, after consideration of various factors, including net realizable value.  

 

The Company capitalizes software development costs upon achieving technological feasibility of the related products. Software development costs incurred prior to achieving technological feasibility are charged to engineering and product development expense as incurred.

   

Capitalized software will be amortized once the product is available for general release, using the straight-line method over the estimated useful lives of the assets, which is three years. The recoverability of capitalized software is evaluated for recoverability based on estimated future gross revenues reduced by the associated costs. If gross revenues were to be significantly less than estimated, the net realizable value of the capitalized software intended for sale would be impaired, which could result in the write-off of all or a portion of the unamortized balance of such capitalized software.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB and the International Accounting Standards Board (IASB) issued, ASU 2014-09 (Topic 606) Revenue from Contracts with Customers. The guidance substantially converges final standards on revenue recognition between the FASB and IASB providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. The ASU is effective for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting ASU 2014-09 to determine the impact, if any, it may have on our current practices.

 

3.	Private Placement Funding with Redeemable Convertible Preferred Stock and Warrants

 

On January 24, 2014, in connection with the closing of an additional private placement equity financing (the “January 2014 Financing”), the Company sold and issued 765,605 shares of its common stock and 68,047.0 shares of its newly created Series D Convertible Preferred Stock (“Series D Stock”) to certain institutional funds and other accredited investors (the “2014 Investors”) at a purchase price of $6.00 per share of common stock and $60.00 per whole share of Series D Stock (or $6.00 per one-tenth (1/10) of a share of Series D Stock, which would convert into one share of common stock as described below). In addition, the Company issued to the 2014 Investors warrants to purchase common stock, initially exercisable for an aggregate of 723,030 shares of common stock (the “2014 Warrants”). The exercise price of the 2014 Warrants is $7.00 per share. The 2014 Warrants have a five-year term and became exercisable on July 24, 2014, six months following the date of issuance.

 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

In connection with the January 2014 Financing, the Company issued to Lake Street Capital Markets, LLC, who served as the placement agent in the financing, 11,029 shares of common stock, 980.4 shares of Series D Stock, and a warrant to purchase 10,416 shares of common stock.

 

(a)

Presentation of Series D and 2014 Warrants

 

The Company has evaluated the 2014 Warrants and has concluded that equity classification is appropriate as all such 2014 Warrants are considered to be indexed to the Company’s equity and there are no settlement provisions that would result in classification as a debt instrument.

 

(b)

Presentation of Redeemable Convertible Preferred Stock

 

On April 10, 2014, following approval by the Company’s stockholders, each whole share of Series D Stock converted automatically into ten shares of common stock at an initial conversion price of $6.00 per share of common stock, for a total of 690,274 shares of Common Stock issued upon such conversion (including the conversion of the shares of Series D Stock issued to Lake Street as described above).

 

(c)

Beneficial Conversion Feature (“BCF”)

 

The Series D Stock was assessed under ASC 470, “Debt,” and the Company determined that the conversion to common stock qualifies as a BCF since it had a nondetachable conversion feature that was in the money at the commitment date. The BCF computation compares the carrying value of the preferred stock after the value of any derivatives has been allocated from the proceeds (in this case, the warrant liability) to the transaction date value of the number of shares that the holder can convert into. The calculation resulted in a BCF of $0.8 million. The BCF was recorded in additional paid-in capital.

 

(d)

Carrying Values

 

The proceeds of the 2014 Financing for Series D Stock were allocated to the common stock, the 2014 Warrants and Series D Stock sold on a pro rata basis.

  

The following table shows the allocation of proceeds from the 2014 Investors and carrying value of the Series D Stock. Series D Stock was reclassified to stockholders’ equity upon conversion to common stock on April 10, 2014 (in thousands, except per share amounts):

 

Gross proceeds on January 24, 2014		$	8,676
Fair value of warrants on January 24,2014			(1,789	)
Gross proceeds to allocate to common stock and Series D Stock		$	6,887
Gross proceeds allocated to common shares sold		$	3,646
Related transaction costs allocated			(151	)
Net value allocated to common shares sold		$	3,495
Gross proceeds allocated to Series D Stock sold on January 24, 2014		$	3,241
Related transaction costs allocated			(135	)
Net value allocated to Series D Stock sold prior to BCF			3,106
Calculated BCF value			(1,345	)
Accretion of Series D Stock through January 24, 2014			1,892
Carrying value of Series D Stock as of March 31, 2014			3,653
Conversion of Series D stock into common stock			(3,653	)
Carrying value of Series D Stock as of June 30, 2014		$	-

 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

 

 

4.	Property and Equipment

 

Property and equipment consist of the following:

 

		June 30,				March 31,
		2014				2014
		(in thousands)
Computers and software		$	403			$	2,381
Furniture and equipment			219				774
Leasehold improvements			48				117
			670				3,272
Less: accumulated depreciation			(387	)			(2,960	)
Total property and equipment, net		$	283			$	312

 

Depreciation expense related to property and equipment was approximately $0.05 million for the three months ended June 30, 2014 and 2013. 

 

 

5.	Capitalized Software

 

The Company capitalizes software development costs upon achieving technological feasibility of the related products. Software development costs incurred prior to achieving technological feasibility are charged to engineering and product development expense as incurred. The Company capitalized $0.5 million of Research and Development costs during the three months ended June 30, 2014.

 

Amortization expense was $0.05 million for the three months ended June 30, 2014 and is included in the product cost of revenue. Prior to the twelve months ended March 31, 2014, these costs were not capitalized due to the short length of time between technological feasibility and general availability of software versions. The unamortized balance of capitalized software was $1.3 million as of June 30, 2014.

 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

6.	Stockholders’ Equity

 

Equity Incentive Program

 

The Company’s equity incentive program is a broad-based, retention program comprised of stock options, restricted stock units and an employee stock purchase plan designed to align stockholder and employee interests. For a description of the Company’s equity plans, see the notes to consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2014.

 

During the three months ended June 30, 2014 and 2013, there were 76,739 and 160,585 restricted stock units granted, respectively.

 

The Company did not issue employee stock options during the three months ended June 30, 2014. 

  

The following tables summarize activity under the equity incentive plans: 

 

		Options Outstanding								Restricted Stock Units Outstanding
		Number of shares				Weighted average exercise price per share				Number of shares				Weighted average fair value per share
Outstanding at March 31, 2014			386			$	6.40				639			$	6.88
Granted			-				-				77			$	6.15
Exercised			-				-				(121	)		$	6.57
Cancelled			(3	)		$	6.30				(24	)		$	16.86
Outstanding at June 30, 2014			383			$	6.40				571			$	6.44
Vested and expected to vest			349			$	6.41

 

On December 3, 2012, the Compensation Committee of the Board of Directors of the Company adopted a Long Term Performance Incentive Plan (the “LTPIP”) within the 1999 Equity Incentive Plan (the “1999 Plan”), under which restricted stock units would be granted to the Company’s executives. Under the LTPIP, sixty percent (60%) of the restricted stock units will vest based upon achievement of contracted monthly recurring revenue targets over a period of three years, with fifty percent (50%) of the amount withheld from vesting until the Company achieves profitability, and forty percent (40%) vest based upon operating profit targets over a period of three years. The restricted stock units granted under the LTPIP include 420,000 shares granted to the Company’s executives, under which the Company’s Chief Executive Officer received a grant of 220,000 restricted stock units, and the Company’s Chief Financial Officer, Chief Strategy Officer, Chief Operating Officer and Chief Commercial Officer each received a grant of 50,000 restricted stock units. The Company is amortizing the related compensation expense on a straight-line basis over the expected vesting period. The Company booked $0.1 million expense in the three months ended June 30, 2014. The Company did not book any expense in the three months ended June 30, 2013.

 

In fiscal 2014, under the 2001 Long-Term Equity Incentive Plan, the Company provided issuance of stock appreciation rights to the Odessa consultants in Ukraine. To date, the Company has issued 11,350 shares under stock appreciation rights for the exercise price of $6.98. The shares will vest over four years starting from the grant date of January 21, 2014. The contractors will get 50 more shares at every anniversary of their employment. The Company reserves the right to modify this over time. The Company did not book any expense for the three months ended as of June 30, 2014 as the financial impact was immaterial.

 

 

SELECTICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

		Shares Available for Grant
			(in thousands)
Balance at March 31, 2014			555
Options:
Granted			-
Cancelled			3
Restricted Stock Units:
Granted			(77	)
Cancelled			24
Released shares repurchased			22
Balance at June 30, 2014			527

 

 

The weighted average remaining contractual term for exercisable options is 7.2 years. The intrinsic value is calculated as the difference between the market value as of June 30, 2014 and the exercise price of the shares. The market value of the Company’s common stock as of June 30, 2014 was $6.44 as reported by the NASDAQ Capital Market. The aggregate intrinsic value of stock options outstanding at June 30, 2014 and 2013 was $141,000 and $482,000, respectively. The aggregate intrinsic value of restricted stock units outstanding at June 30, 2014 and 2013 was $3.5 million and $7.3 million, respectively.  

 

The options outstanding and exercisable at June 30, 2014 were in the following exercise price ranges:

 

										Options Outstanding								Options Vested
Range of Exercise Prices per share										Number of Shares (in thousands)				Weighted-Average Remaining Contractual Life				Number of Shares				Weighted-Average Exercise Price Per Share
$3.70			—	$5.72							106				7.86				66			$	5.26
$5.93			-	$5.93							-				-				-				-
$6.28			—	$6.28							187				9.43				-				-
$6.30			—	$31.30							88				8.75				29				9.07
$34.00			—	$34.00							2				0.55				2				34.00
$3.70			—	$34.00							383				8.8				96			$	6.85

 

1999 Employee Stock Purchase Plan (“ESPP”)

 

The price paid for the Company’s common stock purchased under the ESPP is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each offering period.   During the three months ended June 30, 2014 and 2014, there were no shares issued under the ESPP.

 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

7.  Computation of Basic and Diluted Net Loss per Share

 

Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period.

 

The Company excludes securities from its diluted net loss per share computation when their effect would be antidilutive to net loss per share amounts. The following common stock equivalents were excluded from the net loss per share computation:

 

		Three Months Ended June 30,
		2014				2013
		(in thousands)
Options			106				133
Unvested restricted stock units			494				741
Total common stock equivalents excluded from diluted net loss per common share			600				874

 

8.  Operating Lease Commitments

 

On May 15, 2014, Selectica, Inc. (the “Company”) entered into a First Amendment to Lease (the “Lease Amendment”) with SKBGS I, L.L.C. amending the Office Lease dated July 8, 2011 whereby the Company is leasing approximately 10,516 square feet of office space at a premises located at 2121 South El Camino Real, Suite 1000, San Mateo, California where the Company maintains its headquarters. The Lease Amendment extends the lease term to cover a 25 month period expiring January 31, 2017 and carries a base rent of $2.85 per rentable square foot, escalating 3% each year.

 

9.  Litigation and Contingencies

 

From time to time the Company is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of its business. The Company believes that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect its financial position, results of operations or liquidity.

 

10.  Income Taxes

 

At June 30, 2014 there was no material increase in the liability for unrecognized tax benefits nor any accrued interest and penalties related to uncertain tax positions.

 

In addition, at June 30, 2014, the Company had approximately $2 million of unrecognized tax benefits which was netted against deferred tax assets with a full valuation allowance. If these amounts are recognized there will be no effect on the Company’s effective tax rate due to the full valuation allowance.

 

The Company's Federal, state, and foreign tax returns may be subject to examination by the tax authorities for fiscal years ended from 1998 to 2013 due to net operating losses and tax carryforwards unutilized from such years.
 

 

SELECTICA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

11.  Credit Facility

 

On September 29, 2011, the Company entered into a Business Financing Agreement with Bridge Bank, National Association, which was modified during fiscal 2013 (as amended, the “Credit Facility”).  The Credit Facility provides a revolving receivables financing facility in an amount up to $3.0 million (the “Receivables Financing Facility”) and a revolving cash secured financing facility in an amount up to $4.0 million (the “Working Capital Facility”), for an aggregate revolving credit facility of up to $7.0 million.

 

The Receivables Financing Facility may be drawn in amounts up to $3.0 million in the aggregate, subject to a minimum borrowing base requirement equal to 80% of the Company’s eligible accounts receivable as determined under the Credit Facility. The Working Capital Facility may be drawn in such amounts as requested by the Company, not to exceed $4.0 million in the aggregate. The Credit Facility terminates on February 20, 2014, provided, however, that in the event of an early termination by the Company, a penalty of 1.0% of the total credit facility would be triggered.

 

All amounts borrowed under the Credit Facility are secured by a general security interest on the assets of the Company and are subject to a 1.75 Current Ratio of (i) cash and cash equivalents plus all eligible receivables in relation to (ii) the Company’s current liabilities excluding current deferred revenue.

 

Except as otherwise set forth in the Credit Facility, borrowings made under the Receivables Financing Facility will bear interest at a rate equal to the prime rate or 3.25%, whichever is greater, plus 0.25%, and borrowings made under the Working Capital Facility will bear interest at a rate equal to the financial institution’s certificate of deposit 30-day rate plus 200 basis points, with the total minimum monthly interest to be charged being $2,000.

As of June 30, 2014 and March 31, 2014, the Company owed $5.6 million and $6.9 million, respectively, under the Credit Facility, and no amounts were available for future borrowings.

 

12. Subsequent Events

 

Entry into an Agreement to Acquire Iasta

 

On July 2, 2014, the Company completed its acquisition of Iasta.com, Inc. and Iasta Resources, Inc. (together, “Iasta”) pursuant to the Agreement and Plan of Merger, dated as of June 2, 2014 (the “Merger Agreement”), by and among the Company, Selectica Sourcing, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Selectica Sourcing”), Iasta and the shareholders of Iasta (the “Iasta Shareholders”). Pursuant to the Merger Agreement, Iasta merged with and into Selectica Sourcing, with Selectica Sourcing continuing as a wholly owned subsidiary of the Company (the “Acquisition”).

 

The aggregate purchase price for the Acquisition was 1,000,000 shares of common stock of the Company, par value $0.0001 (the “Acquisition Shares”), and $7.0 million in cash, less amounts related to the repayment of indebtedness and payment of transaction costs and certain other adjustments (collectively, the “Purchase Price”). The Purchase Price is subject to a $1.4 million cash escrow (the “Escrow”) to cover any post-closing adjustments to the Purchase Price and indemnification obligations of the Iasta Shareholders. A portion of the Escrow will be released on the 12-month anniversary of the closing of the Acquisition, and the remainder of the Escrow will be released on the 18-month anniversary of the closing of the Acquisition, in each case after deducting any claims or adjustments.

 

In connection with the closing of the Acquisition, the Company entered into employment agreements with certain key employees of Iasta. Following the closing of the Acquisition, the Company issued options to certain Iasta employees to purchase up to an aggregate of 700,000 shares of Common Stock of the Company, which awards were employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4).

 

The Acquisition Shares issued to the Iasta Shareholders at the closing of the Acquisition have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. At the closing of the Acquisition, the Company and the Shareholders entered into a Registration Rights Agreement with respect to registration of the resale of the Acquisition Shares.

 

 

SELECTICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The combined Selectica and Iasta customers and partners are anticipated to directly benefit from the acquisition through easier access to contract management, strategic sourcing, spend management, and configuration solutions and market coverage in more locations worldwide.

 

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and acquired patents and developed technology; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed on July 2, 2014 and required disclosures will be provided upon the completion of the valuation in the second quarter of 2015.

 

Completion of Private Placement Financing

 

On July 2, 2014, the Company completed a private placement equity financing (the “2014 Second Financing”) with certain institutional and other accredited investors (the “2014 Second Investors”), pursuant to a Purchase Agreement, dated June 5, 2014, in which the 2014 Second Investors purchased 124,890.5 shares of Series E Convertible Preferred Stock, par value $0.0001 per share (the “Series E Stock”), at a purchase price of $60.00 per whole share (or $6.00 per one-tenth (1/10) of a share of Series E Stock, which would convert into one share of the Company’s common stock), which Series E Stock would be converted upon stockholder approval to 1,248,905 shares of Common Stock (subject to adjustment as described below). The total proceeds raised in the 2014 Second Financing equal approximately $7.5 million.

 

Certificate of Designation for Series E Stock

 

Pursuant to a Certificate of Designations, Preferences and Rights of Series E Convertible Preferred Stock filed by the Company with the Delaware Secretary of State (the “Certificate of Designation”) at the closing of the 2014 Second Financing, after stockholder approval, each whole share of Series E Stock would be converted automatically into ten shares of Common Stock at an initial conversion price of $6.00 per share of Common Stock, subject to broad-based weighted-average anti-dilution adjustment in the event the Company issues securities, other than certain excepted issuances and subject to certain limitations, at a price below the then current conversion price.

 

The Series E Stock is not entitled to a liquidation or dividend preference. Beginning on August 31, 2014, the Series E Stock is entitled to 10% accruing dividends per annum. The dividends are payable quarterly in cash, beginning on September 30, 2014. Beginning on June 5, 2015, the shares of Series E Stock are redeemable by the Company upon the request of the holders of at least a majority of the then outstanding Series E Stock, to the extent funds are legally available for such redemption. The redemption price is equal to the product of (i) the number of shares or fraction of a share of Series E Preferred Stock to be redeemed from each such holder multiplied by (ii) ten (10) times the conversion price then in effect, plus any accrued and unpaid dividends up to, but not including, the redemption date.

 

The holders of Series E Stock have the right to vote together with the holders of the Company’s Common Stock as a single class on any matter on which the holders of Common Stock are entitled to vote, except that the holders of Series E Stock are not eligible to vote their shares of Series E Stock on the proposal to be submitted to the Company’s stockholders for approval of the issuance and sale of the securities in the 2014 Second Financing and the conversion of the Series E Stock and the exercisability of the 2014 Second Warrants (as defined below). Holders of Series E Stock are entitled to cast a fraction of one vote for each share of Common Stock issuable to such holder on the record date for the determination of stockholders entitled to vote at a conversion rate the numerator of which is $60.00 (as may be adjusted for any subdivision by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or similar event occurring prior to such record date) and the denominator of which is the closing bid price per share of the Common Stock on June 5, 2014, as reported by Bloomberg Financial Markets.

 

Warrants

 

In addition to the issuance of the Series E Stock, at the closing of the 2014 Second Financing, the Company issued to each 2014 Second Investor a warrant to purchase shares of common stock (each a “2014 Second Warrant”). The 2014 Second Warrants are initially exercisable for an aggregate of 312,223 share of Common Stock at an exercise price of $7.00 per share.

 

 

SELECTICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The 2014 Second Warrants have a five-year term, are exercisable after stockholder approval and include a cashless exercise provision which is only applicable if the Common Stock underlying the 2014 Second Warrants is not subject to an effective registration statement or otherwise cannot be sold without restriction pursuant to Rule 144.

 

In connection with the 2014 Second Financing, the Company issued to Lake Street Capital Markets, LLC, who served as the placement agent in the 2014 Second Financing, a 2014 Second Warrant to purchase 37,467 shares of common stock of the Company.

 

 

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

 

In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in the “Risk Factors” in Item 1A to Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014 (the “Form 10-K”). They include the following: the level of demand for Selectica’s products and services; the intensity of competition; Selectica’s ability to effectively manage product transitions and to continue to expand and improve internal infrastructure; the impact of current economic conditions on our customers and our business; and our reliance on a relatively small number of customers for a substantial portion of our revenue. For a more detailed discussion of the risks relating to our business, readers should refer to Item 1A to Part 1 in the Form 10-K entitled “Risk Factors.” Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report. We assume no obligation to update these forward-looking statements. 

 

Overview

 

We provide cloud-based software solutions that help growing companies to close deals faster, more profitably, and with lower risk.

 

Selectica Contract Lifecycle Management (CLM) combines a single, company-wide contract repository with a flexible workflow engine capable of supporting each organization’s unique contract management processes. Our cloud-based solution streamlines contract processes, from request, authoring, negotiation, and approval through ongoing obligations management, analysis, reporting, and renewals.  It helps companies take control of their contract management processes by converting from paper-based to electronic repositories and by unlocking multiple layers of critical business data, making it available for the evaluation of risk, the exposure of lost revenue, the evaluation of supplier performance, and other purposes.  The solution helps to improve the customer buying experience for sales organizations, improve the control of risk and decrease time spent drafting, monitoring and managing contracts, and gain access to previously hidden discounts through the exposure and elimination of unfavorable agreements for procurement and sourcing organizations.

 

Selectica Configuration Software streamlines the management and dissemination of complex product information enabling companies to streamline the opportunity-to-order process for manufacturers, service providers, and financial services companies. Our Configuration software solution can be seamlessly integrated with leading CRM systems, as well as ERP systems like Oracle and SAP, to ensure that the latest product, customer, and pricing data is always being used.  This helps to simplify and automate the configuration, pricing, and quoting of complex products and services.  By empowering customers, product management, marketing, sales leadership, sales operations, salespeople, and channel partners to generate error-free sales proposals for their unique requirements, we believe our cloud-based solution helps companies to close sales faster, accelerate revenue generation and enhance customer relationships.

 

We acquired Iasta.com, Inc. and Iasta Resources, Inc. (together, “Iasta”) on July 2, 2014. Iasta is an industry leading SaaS-based sourcing and spend management solutions company focused improving spend analysis, procurement intelligence, sourcing, and supplier lifecycle management. We believe the acquisition positions Selectica to provide easier access to contract management, strategic sourcing, spend management, and configuration solutions and market coverage in more locations worldwide to the combined customers of Selectica and Iasta.

 

Quarterly Financial Overview

 

For the three months ended June 30, 2014, our total revenues decreased by 14%, or $0.6 million, to $3.8 million compared with total revenues of $4.4 million for the three months ended June 30, 2013. Recurring revenues, comprised of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues, totaled $2.7 million, or 72% of total revenues, representing a decrease of $0.5 million, or 15%, over the three months ended June 30, 2013. Non-recurring revenues, comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training, totaled $1.1 million, or 28% of total revenues, representing a decrease of $0.1 million, or 11%, over the three months ended June 30, 2013. The decrease in recurring revenues year over year resulted primarily from the customers who did not renew their subscription licenses during the interim twelve months. 

 

 

          During the quarter ended June 30, 2014, our net loss totaled approximately $3.0 million, representing an increase in net loss of $0.6 million, or 25%, more than our net loss of $2.4 million for the three months ended June 30, 2013.  The increase in net loss relates primarily to a $0.1 million decrease in non-recurring revenue and a $0.5 million decrease in recurring revenues. See “Results of Operations” below for further discussion on the components of net loss.

  

 

Critical Accounting Policies and Estimates

 

Other than the significant policies added below, there have been no material changes to any of our significant accounting policies and estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2014.

 

Capitalized Software

 

The Company capitalizes software development costs related to software developed for external use in accordance with ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed upon achieving technological feasibility of the related products. Software development costs incurred prior to achieving technological feasibility are charged to engineering and product development expense as incurred.

 

Capitalized software will be amortized once the product is available for general release, using the straight-line method over the estimated useful lives of the assets, which is three years. The recoverability of capitalized software is evaluated for recoverability based on estimated future gross revenues reduced by the associated costs. If gross revenues were to be significantly less than estimated, the net realizable value of the capitalized software intended for sale would be impaired, which could result in the write-off of all or a portion of the unamortized balance of such capitalized software.

 

Capitalized costs are amortized on a straight-line basis over the economic lives of the related products, generally three years. Amortization expense was $0.05 million for the three months ended June 30, 2014 and is included in the product cost of sales. Prior to year ended March 31, 2014, these costs were not capitalized due to the short length of time between technological feasibility and general availability of software versions. The unamortized balance of capitalized software was $1.3 million as of June 30, 2014.

 

Factors Affecting Operating Results

 

A small number of customers continue to account for a significant portion of our total revenues. We expect that our revenues will continue to depend upon a limited number of customers. If we were to lose a large customer, it would have a significant impact upon future revenues. Customers who accounted for at least 10% of total revenues were as follows:

 

		Three Months Ended
		June 30,				June 30,
		2014				2013
		(in thousands, except percentages)
Revenues from Customer A			14	%			13	%
Revenues from Customer B			12	%			-

 

 

We do not have significant foreign activities. Sales to foreign customers accounted for only 3% of total revenue during the first three months of fiscal 2015, of which the majority is denominated in US dollars. We anticipate that any exposure to foreign currency fluctuations will not be significant in the foreseeable future.

 

		Three Months Ended
		June 30,				June 30,
		2014				2013
International revenues			3	%			13	%
Domestic revenues			97	%			87	%
Total revenues			100	%			100	%

 

 

Results of Operations:

 

		Three Months Ended
		June 30,				June 30,
		2014				2013				Change
		(in thousands, except percentages)
Recurring revenues		$	2,694			$	3,166			$	(472	)
Percentage of total revenues			72	%			72	%			(15%	)
Non-recurring revenues		$	1,068			$	1,206			$	(138	)
Percentage of total revenues			28	%			28	%			(11%	)
Total revenues		$	3,762			$	4,372			$	(610	)

 

 

Recurring revenues.  Recurring revenues, comprised of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues, totaled $2.7 million, or 72% of total revenues, representing a decrease of $0.5 million, or 15%, over the three months ended June 30, 2013. The decrease in recurring revenues year over year resulted primarily from customers who did not renew their subscription licenses during the interim twelve months.

  

Non-recurring revenues. Non-recurring revenues, comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training, totaled $1.1 million, or 28% of total revenues, representing a decrease of $0.1 million or 11% , over the three months ended June 30, 2013. The decrease in non-recurring revenues year over year was primarily due to a customer terminating its agreement with the Company.

 

We expect non-recurring revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on the number and size of new software implementations and follow-on services to our existing customers. We expect recurring revenues to increase in absolute dollars and as a percentage of total revenues as we continue to emphasize our cloud-based solutions. This will depend in part on the number of maintenance renewals, and the number and size of new subscription license contracts. In addition, maintenance renewals are extremely dependent upon economic conditions, customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers. Fluctuations in revenue are also due to timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope or renegotiated terms, and additional services.

  

 

Cost of revenues  

 

 

		Three Months Ended
		June 30,				June 30,
		2014				2013				Change
Cost of recurring revenues		$	771			$	672			$	99
Percentage of total cost of revenue			34	%			35	%			15	%
Cost of non-recurring revenues		$	1,483			$	1,236			$	247
Percentage of total cost of revenue			66	%			65	%			20	%
Total cost of revenues		$	2,254			$	1,908			$	346

 

Cost of recurring revenues. Cost of recurring revenues consist of costs associated with supporting our data centers, the cost of bug fixes, maintenance and support, and salaries and related expenses of our support organization. During the three months ended June 30, 2014, cost of recurring revenues increased $0.1 million compared to the same period in the prior year, primarily due to an increase in license and support costs in our data centers, as well as higher compensation expenses in our support organization.

 

We expect cost of recurring revenues to remain relatively flat as a percentage of recurring revenues in throughout the remainder of fiscal 2015.

 

Cost of non-recurring revenues. Non-recurring cost of revenues is comprised mainly of salaries and related expenses of our services organization, fees paid to resellers, costs of purchased third party licenses sold to customers as part of a bundled arrangement, and certain allocated corporate expenses. During the three months ended June 30, 2014, these costs increased $0.2 million, compared to the same period in the prior year.

 

 

We expect cost of non-recurring revenues to remain relatively flat as a percentage of recurring revenues throughout the remainder of fiscal 2015.

 

Gross Margin

 

		Three Months Ended
		June 30,				June 30,
		2014				2013
Gross margin, recurring revenues			71	%			79	%
Gross margin, non-recurring revenues			(39%	)			(2%	)
Gross margin, total revenues			40	%			56	%

 

Gross profit was $1.5 million, or 40%, during the three months ended June 30, 2014, compared with $2.5 million, or 56%, during the three months ended June 30, 2013. This decrease in our gross margin was primarily due to a decrease in non-recurring revenues as discussed above. Additionally, gross margins on recurring revenues decreased from the prior year as we continued to invest in our data center.

 

We expect that our overall gross margins will continue to fluctuate primarily due to the timing of service revenue recognized and will continue to be adversely affected by lower margins associated with service revenues. The impact on our gross margin will depend on the mix of services we provide, whether the services are performed by our professional services employees or third party consultants, and the overall utilization rates of our professional services organization.

 

Operating Expenses

 

Research and Development Expenses

 

		Three Months Ended
		June 30,				June 30,
		2014				2013				Change
Total research and development		$	442			$	1,103				(661	)
Percentage of total revenues			12	%			25	%			(13	)%

  

 

Research and development expenses consist primarily of salaries and related costs of our engineering, quality assurance, technical publication efforts and certain allocated expenses.  Research and development expenses decreased $0.7 million during the three months ending June 30, 2014 compared to the same period in 2013. This decrease relates to capitalization of $0.5 million of software development costs. Previously, these costs were not capitalized due to the short length of time between technological feasibility and general availability of software versions.

 

We expect research and development expenditures to increase modestly during the remainder of fiscal 2015 due to increased headcount.

  

Sales and Marketing

 

		Three Months Ended
		June 30,				June 30,
		2014				2013				Change
Sales and marketing		$	2,370			$	2,073				297
Percentage of total revenues			63	%			47	%			16	%

 

Sales and marketing expenses consist primarily of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, trade shows, public relations, collateral sales materials, advertising and certain allocated expenses. For the three months ended June 30, 2014, sales and marketing expenses increased $0.3 million, or 16% compared to the same period in 2013. The increase is primarily due to higher employee compensation expenses.

 

We expect sales and marketing expenses to remain relatively flat during the remainder of fiscal 2015.

 

 

General and Administrative

 

		Three Months Ended
		June 30,				June 30,
		2014				2013				Change
General and administrative		$	1,643			$	1,555			$	88
Percentage of total revenues			44	%			36	%			8	%

 

General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses.  General and administrative expense increased $0.1 million during the three months ended June 30, 2014 compared to the same period in 2013. Spending was similar in each period, with the exception of increased in stock-based compensation expense which was offset by the decrease in bad debt expense in the first quarter.

 

 

Interest and Other Income (Expense), Net

 

Interest and other income (expense), net consists primarily of interest earned on cash balances and short-term investments, foreign currency fluctuations, and other miscellaneous expenditures. During the three months ended June 30, 2014 and 2013, interest and other income (expense), net was immaterial for all periods presented.

  

Provision for Income Taxes

 

During the three months ended June 30, 2014 and 2013, we did not recognize an income tax provision or benefit due to the lack of taxable income. 

 

Liquidity and Capital Resources

 

		June 30,				March 31,
		2014				2014
Cash, cash equivalents and short-term investments		$	12,218			$	16,907
Working capital		$	3,047			$	6,158

 

		June 30,				June 30,
		2014				2013
Net cash used for operating activities		$	(2,669	)		$	(2,906	)
Net cash used for investing activities		$	(498	)		$	(44	)
Net cash (used for) provided by financing activities		$	(1,522	)		$	4,765

 

 

Our primary sources of liquidity consisted of approximately $12.2 million in cash and cash equivalents as of June 30, 2014, $5.6 million of which was received from our short-term credit facility which expires in September 2014.  This compares to approximately $16.9 million in cash, cash equivalents and short-term investments as of March 31, 2014, $6.9 million of which was also received from our short-term credit facility.

 

Net cash used in operating activities was $2.7 million for the three months ended June 30, 2014, resulting primarily from our year-to-date net loss of $3.0 million, $0.5 million decrease in accounts receivable and a $0.7 million decrease in deferred revenue, as well as other changes in working capital items.

 

Net cash used in investing activities includes $0.5 million related to capitalized software during the quarter ended June 30, 2014. Other activity was not significant for the three months ended June 30, 2014 or 2013, resulting primarily from capital asset purchases offset by proceeds from maturities of short-term investments in the prior year period.

 

Net cash used in financing activities was $1.5 million for the three months ended June 30, 2014, resulting primarily from $1.3 million decrease in credit facility borrowing. Net cash provided by financing activities for the three months ended June 30, 2013 is $4.8 million primarily $5.3 million cash proceeds from sale of stock, net of issuance costs.

 

 

We expect to incur significant operating costs for the foreseeable future. We expect to fund our operating costs, as well as our future capital expenditures and liquidity needs, from a combination of available cash balances, internally generated funds, additional equity financing, and our short-term credit facility. We have no outside debt other than our short-term credit facility, and do not have any plans to enter into any additional borrowing arrangements. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues, and our ability to manage costs.

 

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.

 

 

ITEM 4: CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the period ending June 30, 2014. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2014.

 

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act that was conducted during the quarter ended June 30, 2014 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

 

Not applicable.

 

ITEM 1A: RISK FACTORS

 

Not applicable.

 

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

 

Not applicable.

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4: MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5: OTHER INFORMATION

 

Not applicable. 

 

 

 

ITEM 6: EXHIBITS

 

Exhibit No.		Description
3.1 †		Certificate of Designation, Preferences and Rights of Series E Convertible Preferred Stock.
10.1 †		Registration Rights Agreement, dated July 2, 2014.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

	101.INS	-	XBRL Instance
	101.SCH	-	XBRL Taxonomy Extension Schema
	101.CAL	-	XBRL Taxonomy Extension Calculation
	101.DEF	-	XBRL Taxonomy Extension Definition
	101.LAB	-	XBRL Taxonomy Extension Labels
	101.PRE	-	XBRL Taxonomy Extension Presentation

 

† Previously filed in the Company’s Current Report on Form 8-K filed on July, 2014.

 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

Date: August 14, 2014	By:	/s/ TODD SPARTZ
		Todd Spartz
		Chief Financial Officer

 

  

 

 

EXHIBIT INDEX

 

Exhibit No.		Description

3.1 †		Certificate of Designation, Preferences and Rights of Series E Convertible Preferred Stock.
10.1 †		Registration Rights Agreement, dated July 2, 2014.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

	101.INS	-	XBRL Instance
	101.SCH	-	XBRL Taxonomy Extension Schema
	101.CAL	-	XBRL Taxonomy Extension Calculation
	101.DEF	-	XBRL Taxonomy Extension Definition
	101.LAB	-	XBRL Taxonomy Extension Labels
	101.PRE	-	XBRL Taxonomy Extension Presentation

 

†     Previously filed in the Company’s Current Report on Form 8-K filed on July, 2014.

 

 

 

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