Covisint Corp - FORM 10-Q - February 12, 2015

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Covisint Corp	Financial_Report.xls
EX-15 - EXHIBIT 15 - Covisint Corp	exhibit15-123114.htm
EX-31.2 - EXHIBIT 31.2 - Covisint Corp	exhibit312-123114.htm
EX-32.1 - EXHIBIT 32.1 - Covisint Corp	exhibit321-123114.htm
EX-31.1 - EXHIBIT 31.1 - Covisint Corp	exhibit311-123114.htm
EX-10.1 - EXHIBIT 10.1 - Covisint Corp	a101covisintcorporationdir.htm
EX-10.2 - EXHIBIT 10.2 - Covisint Corp	a102covisintltiprsuawardag.htm
EX-10.3 - EXHIBIT 10.3 - Covisint Corp	a103covisintlease-traveler.htm

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As filed with the Securities and Exchange Commission on February 12, 2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended December 31, 2014



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

Commission file number 001-36088

Covisint Corporation

(Exact name of registrant as specified in its charter)



MICHIGAN (State or other jurisdiction of incorporation or organization)				26-2318591 (I.R.S. Employer Identification Number)

One Campus Martius, Suite 700, Detroit, Michigan 48226-5099

(313) 961-4100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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 o

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

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 o		Accelerated filer o
Non-accelerated filer x	(Do not check if a smaller reporting company)	Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:

As of February 10, 2015, there were outstanding 39,012,150 shares of Common Stock, no par value, of the registrant.

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PART I. FINANCIAL INFORMATION
Item 1. Financial statements and related notes to Condensed Consolidated financial statements	2
Report of Independent Registered Public Accounting Firm	2
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Comprehensive Loss	4
Condensed Consolidated Statements of Shareholders' Equity	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated financial statements	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosure about Market Risk	26
Item 4. Controls and Procedures	26
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 6. Exhibits	29
SIGNATURES	30

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Covisint Corporation

Detroit, Michigan

We have reviewed the accompanying condensed consolidated balance sheet of Covisint Corporation and subsidiaries (the “Company”) as of December 31, 2014, and the related condensed consolidated statements of comprehensive loss for the three-month and nine-month periods ended December 31, 2014 and 2013, of cash flows for the nine-month periods ended December 31, 2014 and 2013, and shareholders’ equity for the nine-month period ended December 31, 2014. These interim financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Covisint Corporation and subsidiaries as of March 31, 2014, and the related consolidated statements of comprehensive loss, shareholders’ equity, and cash flows, for the year then ended (not presented herein); and in our report dated May 30, 2014, we expressed an unqualified opinion on those consolidated financial statements (which report includes an explanatory paragraph referring to the financial statements prior to January 1, 2013 being prepared from the records of Compuware Corporation). In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Detroit, Michigan

February 12, 2015

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COVISINT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

(Unaudited)



	December 31, 2014			March 31, 2014
ASSETS
CURRENT ASSETS:
Cash		$43,325			$49,536
Accounts receivable, net	14,035			21,838
Deferred tax asset, net	—			1,017
Due from parent and affiliates	—			2,813
Other current assets	7,159			5,983
Total current assets	64,519			81,187
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION	6,103			4,751
CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET	19,941			23,040
OTHER:
Goodwill	25,385			25,385
Deferred costs	2,674			6,188
Deferred tax asset, net	120			131
Other assets	895			766
Total other assets	29,074			32,470
TOTAL ASSETS		$119,637			$141,448
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$5,123			$3,893
Accrued commissions	2,578			1,640
Deferred revenue	10,727			16,606
Accrued expenses	2,774			3,752
Deferred tax liability, net	201			—
Total current liabilities	21,403			25,891
DEFERRED REVENUE	5,812			11,223
ACCRUED LIABILITIES	58			56
DEFERRED TAX LIABILITY, NET	1,676			2,668
Total liabilities	28,949			39,838
COMMITMENTS AND CONTINGENCIES	—			—
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized 5,000,000 shares; none issued and outstanding	—			—
Common stock, no par value - authorized 50,000,000 shares; issued and outstanding 38,868,700 (37,490,500 issued and outstanding as of March 31, 2014)	—			—
Additional paid-in capital	156,036			140,569
Retained deficit	(65,328		)	(38,947		)
Accumulated other comprehensive income (loss)	(20		)	(12		)
Total shareholders' equity	90,688			101,610
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$119,637			$141,448

See notes to condensed consolidated financial statements.

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COVISINT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In Thousands, Except Per Share Data)

(Unaudited)



	Three Months Ended December 31,						Nine Months Ended December 31,
	2014			2013			2014			2013
REVENUE		$21,755			$24,109			$65,077			$72,735
COST OF REVENUE	14,384			13,660			43,976			41,096
GROSS PROFIT	7,371			10,449			21,101			31,639
OPERATING EXPENSES:
Research and development	2,865			3,533			8,564			9,362
Sales and marketing	7,006			8,484			24,781			26,610
General and administrative	4,455			6,724			14,112			21,338
Total operating expenses	14,326			18,741			47,457			57,310
OPERATING LOSS	(6,955		)	(8,292		)	(26,356		)	(25,671		)

Other Income	15			—			54			—

LOSS BEFORE INCOME TAX PROVISION	(6,940		)	(8,292		)	(26,302		)	(25,671		)
INCOME TAX PROVISION	21			22			79			59
NET LOSS		($6,961	)		($8,314	)		($26,381	)		($25,730	)
Basic and diluted loss per share		($0.18	)		($0.22	)		($0.69	)		($0.79	)
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation adjustments		($45	)		$24			($8	)		$44
OTHER COMPREHENSIVE INCOME, NET OF TAX	(45		)	24			(8		)	44
COMPREHENSIVE LOSS		($7,006	)		($8,290	)		($26,389	)		($25,686	)

See notes to condensed consolidated financial statements.

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COVISINT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

NINE MONTHS ENDED DECEMBER 31, 2014

(In Thousands, Except Share Data)

(Unaudited)



	Common Stock			Additional Paid-In			Retained			Accumulated Other Comprehensive			Total Shareholder’s
	Shares	Amount		Capital			Deficit			Income (Loss)			Equity
BALANCE AT MARCH 31, 2014	37,490,500		$—		$140,569			($38,947	)		($12	)		$101,610
Net loss							(26,381		)				(26,381		)
Parent contribution of stock awards and related taxes, net				(25		)							(25		)
Covisint stock compensation (Note 5)				5,445									5,445
Covisint stock option exercise	1,378,200			2,404									2,404
Income taxes				7,643									7,643
Foreign currency translation										(8		)	(8		)
BALANCE AT DECEMBER 31, 2014	38,868,700		$—		$156,036			($65,328	)		($20	)		$90,688

See notes to condensed consolidated financial statements.

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COVISINT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)



	Nine Months Ended December 31,
	2014			2013
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss		($26,381	)		($25,730	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operations:
Depreciation and amortization	7,091			6,423
Deferred income taxes	(8		)	43
Stock award compensation	5,571			14,413
Net change in assets and liabilities:
Accounts receivable	7,626			6,464
Other assets	2,713			1,891
Accounts payable and accrued expenses	105			(376		)
Deferred revenue	(11,134		)	(5,730		)
Net cash used in operating activities	(14,417		)	(2,602		)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Property and equipment	(1,975		)	(1,936		)
Capitalized software	(2,298		)	(4,364		)
Net cash used in investing activities	(4,273		)	(6,300		)
CASH FLOWS PROVIDED BY FINANCING ACTIVITES:
Cash payments from parent company	23,999			53,208
Cash payments to parent company	(13,879		)	(57,942		)
Proceeds from initial public offering	—			68,448
Initial public offering costs	—			(1,397		)
Net proceeds from exercise of stock awards	2,404			332
Net cash provided by financing activities	12,524			62,649
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(45		)	57
NET CHANGE IN CASH	(6,211		)	53,804
CASH AT BEGINNING OF PERIOD	49,536			966
CASH AT END OF PERIOD		$43,325			$54,770

See notes to condensed consolidated financial statements.

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COVISINT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited condensed consolidated financial statements (“Financial Statements”) include the accounts of Covisint Corporation and subsidiaries, a Michigan corporation.

On October 31, 2014, Compuware Corporation (“Compuware”) completed its distribution of 31,384,920 shares of common stock of Covisint Corporation (“Covisint” or "the Company") to its shareholders. Prior to October 31, 2014, Covisint Corporation was majority-owned by Compuware.

The Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), for interim financial information and with the instructions of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based its assumptions and estimates on the facts and circumstances existing at December 31, 2014, final amounts may differ from these estimates. In the opinion of the Company’s management, the accompanying Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented.

The Company has evaluated subsequent events through the date these financial statements were issued.

These financial statements should be read in conjunction with the Company's 2014 Annual Report on Form 10-K. Prior to April 1, 2014, Compuware expense allocations were recorded within general and administrative expense. Effective April 1, 2014, the allocations were replaced with actual expenses incurred by the Company and these have been recorded in each respective income statement line item. Other than the change in the presentation of the expenses, there have been no significant changes to the Company’s accounting policies as disclosed in the Company’s 2014 Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 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.” The amendments in this ASU provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted this ASU effective April 1, 2014, and the adoption did not have a significant impact on the Company's financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," a new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that revenue should be recognized as goods or services are transferred to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual and interim periods beginning on or after December 15, 2016, and early adoption is not permitted. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in the ASU. The Company is currently evaluating the impact of adopting this guidance.

The Company has evaluated recent pronouncements through ASU 2015-01 and believes that none of them will have a material impact on the Company’s financial position, results of operations or cash flows.

2. CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS

The components of the Company’s intangible assets are as follows (in thousands):

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	December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Indefinite-lived intangible assets:
Trademarks(1)		$358					$358
Amortizing intangible assets:
Capitalized software(2)		$51,287		($32,233	)		$19,054
Customer relationship agreements(3)	4,715		(4,186		)	529
Trademarks(4)	340		(340		)	—
Total amortizing intangible assets		$56,342		($36,759	)		$19,583



	March 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Indefinite-lived intangible assets:
Trademarks(1)		$358					$358
Amortizing intangible assets:
Capitalized software(2)		$48,989		($27,067	)		$21,922
Customer relationship agreements(3)	4,715		(3,955		)	760
Trademarks(4)	340		(340		)	—
Total amortizing intangible assets		$54,044		($31,362	)		$22,682

_____________________________________________________


(1)	The Covisint trademarks were acquired by Compuware in an acquisition in March 2004 and contributed to Covisint by Compuware effective January 1, 2013. These trademarks are deemed to have an indefinite life and therefore are not being amortized.


(2)	Amortization of capitalized software is included in “cost of revenue” in the condensed consolidated statements of comprehensive loss. Capitalized software is generally amortized over five years.


(3)	Amortization of customer relationship agreements is included in “sales and marketing” in the condensed consolidated statements of comprehensive loss. Customer relationship agreements were acquired as part of acquisitions and are being amortized over periods up to six years.


(4)	Amortization of trademarks is included in “general and administrative” in the condensed consolidated statements of comprehensive loss. Trademarks were acquired as part of acquisitions and are being amortized over three years.

Amortization expense of intangible assets was $1.8 million and $1.8 million for the three months ended December 31, 2014 and 2013, respectively, and $5.4 million and $5.3 million for the nine months ended December 31, 2014 and 2013, respectively. Estimated future amortization expense, based on identified intangible assets at December 31, 2014, is expected to be as follows (in thousands):



	At December 31, 2014 for the Year Ending March 31,
	2015		2016		2017		2018		2019
Capitalized software		$1,691		$6,528		$5,578		$3,540		$1,235
Customer relationships	77		308		144		—		—
Total		$1,768		$6,836		$5,722		$3,540		$1,235

3. EARNINGS PER COMMON SHARE

Basic earnings per common share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS assumes the issuance of common stock for all potentially dilutive equivalent shares outstanding using the treasury method.

EPS data were computed as follows (in thousands, except for per share data):

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	Three Months Ended December 31,						Nine Months Ended December 31,
	2014			2013			2014			2013
Basic loss per share:
Numerator: Net loss		($6,961	)		($8,314	)		($26,381	)		($25,730	)
Denominator:
Weighted-average common shares outstanding	38,423			37,363			37,962			32,599
Basic loss per share		($0.18	)		($0.22	)		($0.69	)		($0.79	)
Diluted loss per share:
Numerator: Net loss		($6,961	)		($8,314	)		($26,381	)		($25,730	)
Denominator:
Weighted-average common shares outstanding	38,423			37,363			37,962			32,599
Dilutive effect of stock awards	—			—			—			—
Total shares	38,423			37,363			37,962			32,599
Diluted loss per share		($0.18	)		($0.22	)		($0.69	)		($0.79	)

Stock awards to purchase approximately 4,927,000 and 4,342,000 shares for the three months ended December 31, 2014 and 2013, respectively, and 4,800,000 and 4,314,000 shares for the nine months ended December 31, 2014 and 2013, respectively, were excluded from the diluted EPS calculation because they were anti-dilutive.

4. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

The Company entered into standalone operating lease agreements for its Shanghai, China and Detroit locations in the first quarter of our fiscal year 2015. The Shanghai lease expires on April 30, 2017 and does not contain any purchase obligations associated with the lease. The total future minimum lease obligation of the Shanghai lease is approximately $1.3 million as of December 31, 2014. The lease agreement for the Company's Detroit location expires May, 2015.

On December 18, 2014, the Company entered into a new lease for its headquarters in Southfield, Michigan. The 11 year term of the lease will commence in May, 2015. The Company will be obligated to pay approximately $0.0 for the year ending March 31, 2016, $0.5 million for 2017, $0.6 million for 2018, $0.6 million for 2019, and $0.6 million for 2020 for total obligated lease payments of $2.3 million for the five years ending March 31, 2020. The lease is an operating lease whereby rent expense will be recognized ratably over the lease term, irrespective of cash payments.

Legal Matters

The Company is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business. In accordance with U.S. GAAP, the Company makes a provision for a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.

Beginning on May 30, 2014, two putative class actions were filed in the U.S. District Court for the Southern District of New York against the Company, directors and certain officers at the time of the Company's initial public offering ("IPO") alleging violation of securities laws in connection with the Company's IPO and seeking unspecified damages. On August 15, 2014, the cases were consolidated with Charles Rankin appointed lead plaintiff. On October 15, 2014, the lead plaintiff filed an amended complaint. We believe these lawsuits are without merit, and we intend to vigorously defend them. The Company currently has no other outstanding material litigation.

5. BENEFIT PLANS

Compuware Stock-Based Compensation Plans

Prior to fiscal year 2014, while the Company was a majority-owned subsidiary of Compuware, certain Covisint employees were granted Compuware stock compensation awards. In accordance with the provisions of Staff Accounting Bulletin (“SAB”)

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1.B.1, “Costs Reflected in Historical Financial Statements,” the expense for these awards is included within the condensed consolidated statements of comprehensive loss.

Compuware Stock Option Activity

A summary of option activity for Covisint employees under Compuware’s stock-based compensation plans as of December 31, 2014, and changes during the nine months then ended is presented below. Due to the spin-off of Covisint from Compuware, all Compuware options held by Covisint employees had to be exercised or they would be terminated 30 days after the completion of the spin-off. All vested options were exercised. All non-vested Compuware options terminated in the third quarter of fiscal 2015. Shares and intrinsic value are presented in thousands.



	Nine Months Ended December 31, 2014
	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Options outstanding as of April 1, 2014	472			$9.23
Granted	—
Exercised	(301	)	$	8.28			$627
Forfeited/Cancelled	(171	)
Options outstanding as of December 31, 2014	—			$—	0
Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2014	—			$—	0
Options exercisable as of December 31, 2014	—			$—	0

The vesting schedule of options has varied over the years with the following vesting terms being the most common: (1) 50 percent of shares vest on the third anniversary date and 25 percent on the fourth and fifth anniversary dates; (2) 25 percent of shares vest on each annual anniversary date over four years; or (3) 30 percent of shares vest on the first and second anniversary dates and 40 percent vest on the third anniversary date.

All options were granted with exercise prices at or above fair market value on the date of grant and expire ten years from the date of grant. Option expense is recognized on a straight-line basis over the vesting period unless the options vest more quickly than the expense would be recognized. In this case, additional expense is taken to ensure the expense is proportionate to the percent of options vested at any point in time.

Compuware Restricted Stock Units

Due to the spin-off of Covisint from Compuware, all non-vested Compuware RSU's terminated on October 31, 2014. A summary of non-vested restricted stock units (“RSUs”) activity for Covisint employees and directors under the Compuware LTIP as of December 31, 2014, and changes during the nine months then ended is presented below. Shares and intrinsic value are presented in thousands.



	Nine Months Ended December 31, 2014
	Shares		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value
Non-vested RSU outstanding at April 1, 2014	182
Granted	—
Released	(156	)				$1,514
Forfeited	(26	)
Dividend equivalents, net	—			$—
Non-vested RSU outstanding at December 31, 2014	—

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RSUs have various vesting terms related to the purpose of the award. The most common vesting term is 25 percent of shares vest on each annual anniversary date over four years. The awards are settled by the issuance of one common share of Compuware stock for each unit upon vesting and vesting accelerates upon death, disability or a change in control of Compuware.

Covisint Stock-Based Compensation Plan

In August 2009, Covisint established a 2009 Long-Term Incentive Plan (“2009 Covisint LTIP”) allowing the Board of Directors of Covisint to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and annual cash incentive awards to employees and directors of Covisint and its affiliates. The 2009 Covisint LTIP reserves 4.5 million common shares of Covisint for issuance under this plan. On December 30, 2013, the Board of Directors of Covisint Corporation adopted the First Amendment to the 2009 Covisint LTIP, subject to shareholder approval. The Amendment increased the number of shares of Covisint’s common stock available for issuance pursuant to stock-based awards granted under the LTIP by 3 million shares (increasing the number of shares available for issuance under the LTIP from 4.5 million to 7.5 million). On January 2, 2014, Compuware approved the Amendment to increase the shares available. The increase in shares set forth in the Amendment became effective on February 13, 2014, twenty (20) days after the date of mailing of the Company’s Schedule 14C Information Statement to the Company's shareholders.

As of December 31, 2014, there were 4.6 million stock options and 0.3 million RSUs outstanding from the 2009 Covisint LTIP. The Company recognized stock compensation expense of $1.7 million and $5.6 million for the three and nine months ended December 31, 2014 related to awards granted under the 2009 Covisint LTIP.

Certain individuals, who received stock options from the 2009 Covisint LTIP, were also eligible to be awarded performance stock awards ("PSAs") from the Compuware 2007 LTIP. There were 681,000 PSAs that were cancelled upon the closing of the Covisint IPO. As a result, $2.9 million of expense associated with the PSAs was reversed during the quarter ended September 30, 2013. PSA credit totaling $2.8 million and $2.5 million was recorded to “general and administrative” during the three and nine months ended September 30, 2013, respectively.

Stock Option Activity

A summary of option activity under the Company’s stock-based compensation plans as of December 31, 2014, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):



	Nine Months Ended December 31, 2014
	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Options outstanding as of April 1, 2014	4,458			$3.48
Granted	1,695		4.04
Exercised	(1,378	)	1.85
Forfeited	(194	)	7.30
Options outstanding as of December 31, 2014	4,581			$4.01	5.84		$1,680
Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2014	4,351			$3.98	5.64		$1,670
Options exercisable as of December 31, 2014	454			$6.76	8.19		$—

All options were originally granted at estimated fair market value for those granted prior to IPO, and at fair market value for those granted post IPO. Options expire ten years from the date of grant unless expiration has been otherwise accelerated in accordance with a termination and/or separation agreement.

On April 7, 2014, 140,000 stock options with an estimated fair market value of $3.58 per option were granted to an employee. On July 1, 2014, 750,000 stock options with an estimated fair market value of $2.25 per option were granted to an employee. During November, 2014, 685,000 stock options with an estimated fair market value of $1.30 per option were granted to employees and directors. On December 1, 2014, 120,000 stock options with an estimated fair market value of $1.08 per option were granted to one employee.

For the nine months ending December 31, 2014, 1,378,200 options were exercised by participants of the 2009 Covisint LTIP.

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Restricted Stock Unit Activity

A summary of non-vested restricted stock units (“RSUs”) activity as of December 31, 2014, and changes during the nine months then ended is presented below. Shares and intrinsic value are presented in thousands.



	Nine Months Ended December 31, 2014
	Shares	Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value
Non-vested RSU outstanding at April 1, 2014	—
Granted	338	$	3.91
Released	—
Forfeited	—
Dividend equivalents, net	—
Non-vested RSU outstanding at December 31, 2014	338			$	896

On July 1, 2014, 182,193 restricted stock units with a fair market value as of the grant date of $4.86 were granted to an employee. The restricted stock instruments granted on July 1, 2014 vest at 33.3% on each the first, second and third anniversary of the grant date. On November 17, 2014 a total 155,795 restricted stock units with a fair market value as of the grant date of $2.79 were granted to five directors. The restricted stock instruments granted November 17, 2014 vest at 100% on August 25, 2015. There are no other outstanding Covisint restricted stock units as of December 31, 2014.

Stock Awards Compensation

For the three months ended December 31, 2014 and 2013, respectively, and for the nine months ended December 31, 2014 and 2013, respectively, stock awards compensation expense was recorded as follows in thousands:



	Three Months Ended December 31,					Nine Months Ended December 31,
	2014			2013		2014		2013
Stock awards compensation classified as:
Cost of revenue		($1	)		$137		$583		$735
Research and development	55			158		149		656
Sales and marketing	424			1,117		1,369		5,153
Administrative and general	1,221			2,495		3,470		7,869
Total stock awards compensation expense before income taxes		$1,699			$3,907		$5,571		$14,413

As of December 31, 2014, total unrecognized compensation cost of $6.1 million, net of estimated forfeitures, related to nonvested equity awards granted is expected to be recognized over a weighted-average period of approximately 2.6 years. The following table summarizes the Company’s estimated future recognition of its unrecognized compensation cost related to stock awards as of December 31, 2014 (in thousands).



	Year Ending March 31,
Covisint Stock-Based Compensation Plan:	Total		2015		2016		2017		2018
Stock Compensation Expense		$6,128		$846		$2,757		$1,674		$851

6. RELATED PARTY TRANSACTIONS

On October 31, 2014, Covisint ceased being a subsidiary of Compuware Corporation as a result of Compuware's distribution of its holdings of Covisint common stock to Compuware shareholders.

Prior to October 31, 2014, Covisint was a member of the Compuware Consolidated Group for tax purposes. Compuware Corporation, under a tax sharing agreement, used Covisint's tax losses and paid Covisint in cash for the tax losses utilized by the

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Compuware Consolidated Group. For fiscal 2015, Covisint was paid by Compuware based upon estimates of the losses utilized, which are subject to a true-up based upon filing actual federal and state income tax returns.

On December 15, 2014, Compuware Corporation was acquired by Thoma Bravo, LLC. As a result, the intended tax-free spin of Covisint became taxable to the Compuware Consolidated Group. In October, 2014, Covisint agreed to amend the tax sharing agreement with Compuware so that Covisint agreed in writing to make a joint election under §336(e) of the Internal Revenue Code with Compuware. Under §336(e) for federal income tax purposes, Covisint is treated as if it sold all of its assets at fair market value. Compuware agreed to pay all income tax Covisint would have been responsible to pay for making the §336(e) election. As a result of the §336(e) election, Covisint will receive a step up in its tax basis in its assets to fair market value on October 31, 2014, the day Covisint ceased to be a member of the Compuware Consolidated Group. Covisint will amortize its new basis to provide future tax deductions that would offset any future taxable income. Given Covisint’s historical loss position, there is a full valuation allowance preventing the recognition of any potential deferred tax asset.

The Company previously utilized professional services staff of Compuware to provide certain services to customers and to provide additional resources for research and development activities. These costs were included in “cost of revenue” and “research and development” as applicable. Effective January 31, 2014, Compuware sold substantially all of the assets related to Compuware's Professional Services business unit to Marlin Equity Partners. As such, charges from Compuware for professional services totaled $0.0 million for both the three and nine months ended December 31, 2014. Charges from Compuware for professional services were $0.3 million and $1.3 million for the three and nine months ended December 31, 2013, respectively.

Certain transactions with Compuware are settled in cash and are reflected as due to or due from parent and affiliates within the condensed consolidated balance sheet, prior to Covisint's spin-off from Compuware on October 31, 2014. At December 31, 2014, the Company had a net receivable due from parent of $0.0 as compared to a net receivable of $2.8 million at March 31, 2014. The activity in the nine months ended December 31, 2014 was primarily comprised of Compuware’s payment of the net due from amount of approximately $2.8 million as of March 31, 2014, and additional payments from Compuware of approximately $7.6 million related to Compuware’s utilization of the Company’s tax loss and other tax attributes through the date of the Company’s spin-off from Compuware.

Going forward, transactions between Compuware and Covisint are expected to be minimal and will relate primarily to cash collections for certain Covisint customers that continue to pay Compuware directly. As of December 31, 2014, a receivable of $0.7 million from Compuware was recorded as part of other current assets in the accompanying condensed consolidated balance sheet, and relates primarily to the tax sharing agreement with Compuware. On December 31, 2014, Compuware sold the building where Covisint is currently located. Accordingly, Compuware is no longer Covisint's landlord.

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

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

OVERVIEW

Covisint provides a leading cloud engagement platform for enabling organizations to securely connect, engage and collaborate with large, distributed communities of customers, business partners, and suppliers ("Platform"). Our Platform allows global organizations with complex external business relationships to create, streamline and automate external mission-critical business processes that involve the secure exchange of and access to critical information from multiple sources. Our customers deploy our Platform to deliver on current and new business initiatives, enhance competitiveness, create new revenue opportunities, increase customer retention and lower operating costs.

We believe a wide variety of organizations will benefit from using our cloud-based technologies to meet their external collaboration requirements with their customers, business partners and suppliers. We believe there is a growing available market for our technologies. We believe the use of our solutions and the development of our markets are at very early stages and that it is important that we build brand awareness, develop strategic partners and invest in our platform, vertical solutions, infrastructure and sales and marketing to maintain and extend our leadership in the cloud-based services market.

The majority of our revenue is generated through subscription and support fees paid to enable our customers to access our Platform. Subscription and support revenue accounted for $15.7 million and $17.6 million, or 72% and 73% of our total revenue, during the three months ended December 31, 2014 and 2013, respectively, and $47.9 million and $49.7 million, or 74% and 68% of our total revenue during the nine months ended December 31, 2014 and 2013, respectively. We also generate revenue from the provision of services related to implementation, solution deployment and on-boarding of new customers onto our Platform, and the performance of projects and enhancements. Services revenue accounted for $6.1 million and $6.5 million, or 28% and 27% of our total revenue, during the three months ended December 31, 2014 and 2013, respectively, and $17.2 million and $23.1 million, or 26% and 32% of our total revenue during the nine months ended December 31, 2014 and 2013, respectively.

Over the past three quarters, the Company has accelerated its transition from a services-and-software company to a true cloud-based enterprise software company. The Company increased its product management focus by accelerating its Platform product roadmap. Covisint is investing to enhance the strength and flexibility of the Platform, including (a) a broader set of standard application programming interfaces (APIs) to enable customers and partners to manage data transmitted via the Platform from an even broader set of applications; (b) enhancing the ability of our customers and service partners to develop and implement business solutions on the Platform with limited involvement of Company resources; and (c) enhancing our ability to host the Platform in different geographies with multiple hosting service providers.

At the same time, the Company reviewed the sustainability and profitability of certain of its applications used with the Platform. Consequently, we have shifted away from developing and selling applications that require significant amounts of services to implement. A large amount of our healthcare customer base utilized these applications. Furthermore, we understand that AT&T has shifted the strategy of its healthcare business, and accordingly, AT&T is no longer reselling the Company’s Platform or application-based products. We expect that, as of the end of fiscal 2015, we will have concluded substantially all of the business under our reseller agreement with AT&T. As a result of these changes, revenue from our healthcare vertical is expected to continue

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to decline over the next six months. We remain committed to providing our core Platform in the healthcare industry where partners provide the tools to integrate and analyze healthcare data.

We continue to focus attention on growing our relationships with strategic partners, such as Cisco Systems, Inc., which provides us with extensive global sales presence to access customers we could not otherwise reach. Cisco has developed its own platform as a service offering, SXP, utilizing the Company’s core Platform. During the 3^rd quarter FY2015, we entered into our initial customer engagement with Cisco. Specifically, Cisco and General Motors entered into a 5.3 year contract for GM to procure both Covisint's supply chain platform and EDI services from Cisco, and the Company agreed to provide these services it provided directly to GM previously to GM as a subcontractor to Cisco. While the Company is no longer the prime contractor for its GM supply chain platform and EDI business, we have successfully extended the contract to provide these services to GM through April 2020. Moreover, given Cisco’s substantial presence within GM, we believe that we will be better able to expand our revenue at GM (and other customers) as a result of our strategic partnership with Cisco. We anticipate the Cisco relationship and other similar relationships will provide Covisint with additional scale and bandwidth to sell our core platform and grow our core subscription business.

The automotive industry accounted for 47% and 44% of our total revenue for the three months ended December 31, 2014 and 2013, respectively, and 45% and 48% of our total revenue in the nine months ended December 31, 2014 and 2013, respectively. The healthcare industry accounted for 28% and 33% of our total revenue for the three months ended December 31, 2014 and 2013, respectively, and 31% and 33% of our total revenue in the nine months ended December 31, 2014 and 2013, respectively. We have seen increases in revenue from our Enterprise business that services the energy, financial services, travel and other non-automotive or healthcare industries, which accounted for 25% and 19% of our total revenue for the three months ended December 31, 2014 and 2013, respectively, and 24% and 18% of our total revenue in the nine months ended December 31, 2014 and 2013, respectively. Revenue from outside of the U.S. accounted for 13% and 18% of our total revenue for the three months ended December 31, 2014 and 2013, respectively, and 15% and 15% of our total revenue in the nine months ended December 31, 2014 and 2013, respectively.

Our subscription and support revenue decreased to $15.7 million for the three months ended December 31, 2014 from $17.6 million for the three months ended December 31, 2013, representing a decrease of 11%. Our subscription and support revenue decreased to $47.9 million for the nine months ended December 31, 2014 from $49.7 million for the nine months ended December 31, 2013, representing a decrease of 4%.

Our services revenue declined to $6.1 million for the three months ended December 31, 2014 from $6.5 million for the three months ended December 31, 2013, representing a period over period decline of 6%. Our services revenue declined to $17.2 million for the nine months ended December 31, 2014 from $23.1 million for the nine months ended December 31, 2013, representing a period over period decline of 26%.

We experienced net income (losses) of ($7.0) million and ($8.3) million for the three months ended December 31, 2014 and 2013, respectively, and ($26.4) million and ($25.7) million for the nine months ended December 31, 2014 and 2013, respectively.

KEY METRICS

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we monitor a number of other metrics to evaluate our business, measure our performance, identify trends affecting our business, allocate capital and make strategic decisions.

Adjusted Gross Profit and Adjusted Gross Margin

Adjusted gross profit represents gross profit, adjusted for amortization of capitalized software associated with our research and development expense classified within cost of revenue as well as the stock based compensation associated with certain of our professional services and operations employees. Adjusted gross margin is adjusted gross profit as a percentage of revenue.

We have historically capitalized a significant portion of our research and development costs and believe the amortization of capitalized software will increase in absolute dollars. Our total research and development costs incurred were $3.7 million and $4.5 million during the three months ended December 31, 2014 and 2013, respectively, and $10.9 million and $13.7 million for the nine months ended December 31, 2014 and 2013, respectively. Of our total research and development costs incurred, we capitalized 23% and 22% during the three months ended December 31, 2014 and 2013, respectively and 21% and 32% during the nine months ended December 31, 2014 and 2013, respectively. We increased capitalization of our research and development costs during the three months ended December 31, 2014, as compared to the same period in 2013, due to the timing and stage of our initiatives. In the three months ended December 31, 2014, there was an increase of projects in the implementation stage and, thus more of our project costs were capitalized as compared to the prior period when more projects were in the planning stage.

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We believe that adjusted gross margin, when viewed with our results under U.S. GAAP and the accompanying reconciliation, provides additional information that is useful for evaluating our operating performance. Additionally, we believe that adjusted gross margin provides a more meaningful comparison of our operating results against those of other companies in our industry. We believe that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which do not have comparable amortization costs related to capitalized software. However, adjusted gross margin is not a measure of financial performance under U.S. GAAP and, accordingly, should not be considered as an alternative to gross margin as an indicator of operating performance.

The table below provides reconciliations between the non-U.S. GAAP financial measures discussed above to the comparable U.S. GAAP measures of gross profit:



	Three Months Ended December 31,				Nine Months Ended December 31,
	2014		2013		2014		2013
Gross profit	$7,371		$10,449		$21,101		$31,639
Gross margin	34	%	43	%	32	%	43	%
Adjustments:
Stock compensation expense—cost of revenue	($1)		$137		$583		$735
% of total revenue	—	%	1	%	1	%	1	%
Amortization of capitalized software—cost of revenue	$1,728		$1,711		$5,103		$5,016
% of total revenue	8	%	7	%	8	%	7	%
Non-GAAP gross profit	$9,098		$12,297		$26,787		$37,390
Non-GAAP gross margin	42	%	51	%	41	%	51	%

COMPONENTS OF OUR RESULTS OF OPERATIONS

Revenue

Our revenue is primarily comprised of fees related to subscription and support and services performed. Subscription and support revenue includes fees for our customers and their users, such as automotive suppliers or healthcare organizations, to access our platform and for users, messages and end point connections such as suppliers or healthcare organizations. Our services revenue is generated from implementation, solution deployment and on-boarding. Implementation services typically consist of user migration, content migration, branding and configuration to support customer-specific workflows. Our services engagements typically occur in phases and can vary from a few weeks to several months depending on the scope and complexity of the solution. Our customers may choose to do much of this work in-house, through a third party or with Covisint. We currently subcontract portions of our consulting engagements to third-party implementation partners to supplement our staffing needs within this area of the business.

Cost of Revenue

Our cost of revenue is primarily comprised of salaries and personnel-related expenses related to our customer support, implementation, solution deployment, on-boarding and data center operations, the cost of professional services provided by third-party contractors, depreciation and amortization expenses related to capitalized research and development, acquisitions and capital expenditures, third-party hosting fees, third-party software license fees and outside services related to our call center. Where we have established third-party evidence of the stand-alone value of our services, we recognize expense with the associated revenue recognition as services are delivered. Costs associated with deferred services revenue are recognized ratably, generally over five years, beginning upon customer acceptance of the deliverable consistent with the associated revenue.

We expect our cost of revenue may fluctuate as a percentage of total revenue due to relative changes in our services revenue, changes in the percentage of services recognized using the proportional performance method, the amount and timing of depreciation and amortization, changes in the amount of services performed by subcontractors, our customers, or directly by certified partners or other vendors and the mix of subscription and support revenue relative to services revenue.

Research and Development

Research and development costs are primarily comprised of salaries and personnel-related expenses, services provided by other third-party contractors related to software development, software license and hardware fees and depreciation, amortization

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related to acquisitions and capital expenditures and costs from facilities and technology-related costs associated with our research and development functions.

We focus our research and development on new and expanded features of our platform and vertical-specific solutions. Our capitalized research and development costs are amortized as a cost of revenue ratably over 60 months upon completion of the project. We expect our fiscal 2015 research and development costs incurred, as a percentage of revenue, to decrease as compared to fiscal 2014.

Sales and Marketing

Sales and marketing costs are primarily comprised of salaries and personnel-related expenses, commissions, travel expense, marketing program fees, services provided by third-party contractors related to our marketing campaigns, amortization related to customer relationship agreements acquired as a result of various acquisitions and costs from facilities and technology-related costs associated with our sales and marketing functions. We plan to invest further in sales and marketing to create brand awareness, expand the scope and scale of our global operations, develop our sales channel and increase revenue from existing customers. Sales and marketing costs in fiscal 2015 were $5.8 million and $1.2 million for the three months ended December 31, 2014 and $20.0 million and $4.7 million for the nine months ended December 31, 2014. We expect sales and marketing costs in fiscal 2015 to decrease as compared to fiscal 2014 in absolute dollars.

General and Administrative

During the nine months ended December 31, 2013, general and administrative costs were primarily comprised of the allocated costs related to the services provided by our parent Compuware for facilities, information technology, tax, internal audit, accounting, finance, human resources, legal and other services, as well as salaries and personnel-related expenses including stock and cash incentive compensation. Since August 2013, we have invested in hiring staff required to become a fully independent company. As of October 31, 2014, we have completed our general and administrative separation from Compuware.

During the nine months ended December 31, 2014, general and administrative costs are primarily comprised of salaries and personnel-related expenses for personnel in these functions including stock and cash incentive compensation and costs from facilities and technology-related costs associated with our corporate functions. We expect general and administrative costs in fiscal 2015 to decrease as compared to fiscal 2014 in absolute dollars.

Income Taxes

Provision for income taxes is comprised of federal and state taxes in the United States as well as certain foreign tax jurisdictions. Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in our financial statements and net operating loss carryforwards.

AGREEMENTS WITH COMPUWARE

We have entered into certain agreements with Compuware with respect to taxes. The lease of our Detroit office expires May, 2015, and has been assigned to 1000 Webward LLC due to the sale of 1 Campus Martius by Compuware in December, 2014.

Under the shared services agreement, Compuware provided us with certain tax, insurance, information technology and other services. In general, we were charged for shared services based on a pro rata allocation of Compuware’s costs. As the Company reduced its dependence upon Compuware for these services, the allocation was virtually eliminated. For the nine months ended December 31, 2014, this expense was immaterial, and, effective October 31, 2014, the shared services agreement was terminated.

In connection with Compuware’s distribution of all of its common stock in the Company, effective as of October 31, 2014, the Company and Compuware amended and restated their existing Master Separation Agreement and Tax Sharing Agreement and entered into a Termination of Intercompany Agreement to terminate the other intercompany agreements delivered in connection with the IPO. The amendments set forth in the Second Amended and Restated Master Separation Agreement specify the Company’s cooperation with Compuware in connection with the distribution of Covisint common stock to Compuware shareholders and to revise the parties’ respective liability for costs incurred in connection with the distribution. The amendments set forth in the Second Amended and Restated Tax Sharing Agreement address certain tax matters related to the facts and circumstances of the distribution, including, among other things, the manner, amount and timing of the tax payments related to the distribution. See Note 6, "Related Party Transactions" within the Notes of the Financial Statements.

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CRITICAL ACCOUNTING POLICIES

Our goodwill balance as of December 31, 2014 was $25.4 million. Goodwill is tested annually as of the end of our fiscal fourth quarter for impairment or more frequently if indicators of impairment exist. Given the decline in our stock price during the quarter ended December 31, 2014, the Company further evaluated whether or not it was more-likely-than-not that goodwill was impaired during the quarter ended December 31, 2014. The Company concluded there was no impairment of goodwill during the quarter ended December 31, 2014. If we experience a further sustained decline in our stock price over a continued period, there could be a material change in the estimates or assumptions that we use to evaluate goodwill for impairment and to measure any goodwill impairment loss during the fourth quarter of our fiscal 2015. An impairment of all or a significant portion of our goodwill could materially adversely affect our results of operations and would be a noncash expense in the period the goodwill is determined to be impaired.

There have been no significant changes to our Critical Accounting Policies as described in our Annual Report on Form 10-K for the year ended March 31, 2014.

STOCK-BASED COMPENSATION

Stock award compensation expense, for options that do not have performance conditions, is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award.

RESULTS OF OPERATIONS

The following table is a summary of our condensed consolidated statements of comprehensive loss data:



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

Condensed Consolidated Statements of Comprehensive Loss Data:
Subscription and support	$15,660		$17,586		$47,928		$49,682
Services	6,095		6,523		17,149		23,053
Total revenue	21,755		24,109		65,077		72,735
Cost of revenue(1)	14,384		13,660		43,976		41,096
Gross profit	7,371		10,449		21,101		31,639
Operating expenses:
Research and development(1)	2,865		3,533		8,564		9,362
Sales and marketing(1)	7,006		8,484		24,781		26,610
General and administrative(1)	4,455		6,724		14,112		21,338
Total operating expenses	14,326		18,741		47,457		57,310
OPERATING LOSS	(6,955	)	(8,292	)	(26,356	)	(25,671	)

Other Income	15		—		54		—

LOSS BEFORE INCOME TAX PROVISION	(6,940	)	(8,292	)	(26,302	)	(25,671	)
Income tax provision	21		22		79		59
Net income (loss)	($6,961)		($8,314)		($26,381)		($25,730)
Basic and diluted earnings per share(2)	($0.18)		($0.22)		($0.69)		($0.79)
Weighted-average shares outstanding, Basic and diluted(2)	38,423		37,363		37,962		32,599

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(1)	All future stock compensation is expected to be granted in the form of Covisint stock awards or restricted stock units and recorded as a non-cash expense. The statements and line items above include stock compensation as detailed in the table below.


(2)	Please see Note 3 of our condensed consolidated financial statements and related disclosures for an explanation of the method used to calculate the historical net income (loss) per share attributable to common shareholders and the number of shares used in computation of the per share amounts.



	Three Months Ended December 31,					Nine Months Ended December 31,
	2014			2013		2014		2013
Stock awards compensation classified as:
Cost of revenue	$	(1	)	$	137	$	583	$	735
Research and development	55			158		149		656
Sales and marketing	424			1,117		1,369		5,153
General and administrative	1,221			2,495		3,470		7,869
Total stock awards compensation expense before income taxes	1,699			3,907		5,571		14,413

The following table sets forth a summary of our condensed consolidated statements of comprehensive loss as a percentage of our total revenue:



	Three Months Ended December 31,				Nine Months Ended December 31,
	2014		2013		2014		2013
Condensed Consolidated Statements of Comprehensive Loss Data:
Subscription and support	72	%	73	%	74	%	68	%
Services	28		27		26		32
Total revenue	100		100		100		100
Cost of revenue(1)	66		57		68		57
Gross profit	34		43		32		43
Operating expenses:
Research and development(1)	13		15		13		13
Sales and marketing(1)	32		35		38		37
General and administrative(1)	20		28		22		29
Total operating expenses	66		78		73		79
OPERATING LOSS	(32	)	(34	)	(40	)	(35	)

Other Income	0		0		0		0

Income (loss) from operations before for income tax provision	(32	)	(34	)	(40	)	(35	)
Income tax provision	0		0		0		0
Net income (loss)	(32	)%	(34	)%	(40	)%	(35	)%

________________________________________________


(1)	All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. Refer to the table above for the breakdown of stock compensation included in these line item percentages.

THREE MONTHS ENDED DECEMBER 31, 2014 AND 2013

Revenue

Revenue derived from our subscription and support and services is presented in the table below:

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	Three Months Ended December 31,				Period-to-Period Change
	2014		2013		$			%
	(In thousands)
Subscription and support		$15,660		$17,586		($1,926	)	(11	)%
Services	6,095		6,523		(428		)	(7	)%
Total revenue		$21,755		$24,109		($2,354	)	(10	)%

Our subscription and support revenue decreased to $15.7 million for the three months ended December 31, 2014 from $17.6 million for the three months ended December 31, 2013, representing a decrease of 11%. The $1.9 million decrease in subscription and support revenue between the three months ended December 31, 2014 and 2013 was primarily due to the decline in our healthcare subscription revenue. The decrease in healthcare subscription revenue can be attributed to our emphasis to shift away from developing and selling applications that require significant amounts of services to implement.

Our services revenue declined to $6.1 million for the three months ended December 31, 2014 from $6.5 million for the three months ended December 31, 2014, representing a period over period decline of 7%. For the three months ended December 31, 2014, the services revenue decline can be attributed to: 1) our emphasis to shift away from developing and selling applications that require significant amounts of services to implement, 2) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 3) a reduction in ad hoc services projects with major subscription customers, 4) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 5) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 6) our relatively low subscription bookings in the 2015 fiscal year. The reduction in our service revenue was offset by the recognition of $1.8 million from deferred service revenue accelerated and recognized in the third quarter, related to the decline of a healthcare subscription, and an adjustment of a large automotive subscription contract.

Cost of Revenue

Cost of revenue is presented in the table below:



	Three Months Ended December 31,						Period-to-Period Change
	2014			2013			$		%
	(In thousands)
Cost of revenue		$14,384			$13,660			$724	5	%
Gross margin	34		%	43		%

Cost of revenue increased during the three months ended December 31, 2014, as compared to the same period in 2013, by approximately $0.7 million. Cost increases primarily result from an increase of $2.3 million in variable expenses related to the use of certified partners and other subcontractors and an acceleration of deferred costs of $1.0 million due to the recognition of deferred revenue as a result of subscription cancellations. These increases were offset by a decrease in our fixed salaries and personnel-related expenses in connection with our customer support, implementation, solution deployment, on-boarding and data center operations fees of $2.4 million. Cost decreases also included a decrease of $0.1 million in stock compensation expense.

Our gross margin decreased during the three months ended December 31, 2014 as compared with the same period in 2013 as our cost of revenue did not decline in line with the decrease in revenue.

Research and Development

Research and development costs incurred, expensed and capitalized are presented in the table below:

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	Three Months Ended December 31,							Period-to-Period Change
	2014			2013				$			%
	(In thousands)
Research and development costs incurred		$3,734			$4,549				($815	)	(18	)%
Capitalized internal software costs	(869		)	(1,016		)		147			(14	)%
Research and development costs expensed		$2,865			$3,533				($668	)	(19	)%
Percentage of total revenue:							t
Research and development costs incurred	17		%	19		%
Research and development costs expensed	13		%	15		%

Research and development costs incurred decreased to $3.7 million for the three months ended December 31, 2014, as compared to $4.5 million for the three months ended December 31, 2013 primarily due to a $1.1 million decrease in salaries and personnel-related expenses. This was partially offset by an increase of $0.1 million in costs related to third-party subcontractors for software development activities and $0.2 million increase in facility expenses. We expect our facility expenses to decline substantially beginning in June 2015.

Sales and Marketing

Sales and marketing costs are presented in the table below:



	Three Months Ended December 31,						Period-to-Period Change
	2014			2013			$			%
	(In thousands)
Sales and marketing		$7,006			$8,484			($1,478	)	(17	)%
Percentage of total revenue	32		%	35		%

Sales and marketing costs decreased to $7.0 for the three months ended December 31, 2014, as compared to $8.5 million for the three months ended December 31, 2013, primarily due to a $0.8 million decrease in in salaries and personnel-related expenses and a $0.7 million decrease in stock compensation expense. Marketing costs also decreased $0.2 million as a result of a more target concentrated marketing strategy aimed to build rapport with large strategic customers.

General and Administrative

General and administrative costs are presented in the table below:



	Three Months Ended December 31,						Period-to-Period Change
	2014			2013			$			%
	(In thousands)
General and administrative		$4,455			$6,724			($2,269	)	(34	)%
Percentage of total revenue	20		%	28		%

General and administrative costs decreased to $4.5 million for the three months ended December 31, 2014, as compared to $6.7 million for the three months ended December 31, 2013, primarily due to a $1.3 million decrease in stock compensation expense. In addition, there was a decline in costs as a result of successfully building out our own independent administration team including legal, finance and human resources which was completed as of April 1, 2014. Prior to April 1, 2014, general and administrative costs included allocated expenses from Compuware while the current fiscal year reflects general and administrative expenses incurred as a stand-alone company.

NINE MONTHS ENDED DECEMBER 31, 2014 AND 2013

Revenue

Revenue derived from our subscription and support and services is presented in the table below:

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	Nine Months Ended December 31,				Period-to-Period Change
	2014		2013		$			%
	(In thousands)
Subscription and support		$47,928		$49,682		($1,754	)	(4	)%
Services	17,149		23,053		(5,904		)	(26	)%
Total revenue		$65,077		$72,735		($7,658	)	(11	)%

Our subscription and support revenue decreased to $47.9 million for the nine months ended December 31, 2014 from $49.7 million for the nine months ended December 31, 2013, representing a decrease of 4% which can be attributed to our emphasis to shift away from developing and selling applications that require significant amounts of services to implement. The decrease in subscription and support revenue between the three months ended December 31, 2014 and 2013 was primarily due to a $3.9 million decline in our healthcare subscription revenue. These decreases were partially offset by increases from new subscriptions with a strategic channel partner which resulted in additional revenue of $2.6 million.

Our services revenue declined to $17.1 million for the nine months ended December 31, 2014 from $23.1 million for the nine months ended December 31, 2013, representing a period over period decline of 26%. For the nine months ended December 31, 2014, the services revenue decline can be attributed to: 1) our emphasis to shift away from developing and selling applications that require significant amounts of services to implement, 2) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 3) a reduction in ad hoc services projects with major subscription customers, 4) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 5) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 6) our relatively low subscription bookings in the 2015 fiscal year.

Cost of Revenue

Cost of revenue is presented in the table below:



	Nine Months Ended December 31,						Period-to-Period Change
	2014			2013			$		%
	(In thousands)
Cost of revenue		$43,976			$41,096			$2,880	7	%
Gross margin	32		%	43		%

Cost of revenue increased to $44.0 million for the nine months ended December 31, 2014, as compared to $41.1 million for the nine months ended December 31, 2013, representing a period over period increase of 7%. The increases included $4.1 million in additional expenses related to the use of subcontractors mainly as a result of the Company's decision to transfer certain employees to certified partners in the current fiscal year. In addition, there was an increase in the amortization of deferred services costs of $1.2 million related to the acceleration of deferred revenue due to customer contract cancellations. These costs were partially offset by a decrease of $2.3 million in salaries and personnel-related expenses.

Our gross margin decreased during the nine months ended December 31, 2014 as compared with the same period in 2013. Cost of revenue did not decline in line with the decrease in revenue.

Research and Development

Research and development costs incurred, expensed and capitalized are presented in the table below:

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	Nine Months Ended December 31,						Period-to-Period Change
	2014			2013			$			%
	(In thousands)
Research and development costs incurred		$10,862			$13,726			($2,864	)	(21	)%
Capitalized internal software costs	(2,298		)	(4,364		)	2,066			(47	)%
Research and development costs expensed		$8,564			$9,362			($798	)	(9	)%
Percentage of total revenue:
Research and development costs incurred	17		%	19		%
Research and development costs expensed	13		%	13		%

Research and development costs incurred decreased to $10.9 million during the nine months ended December 31, 2014, as compared to $13.7 million for the nine months ended December 31, 2013 primarily due to a $3.1 million decrease in salaries and personnel-related expenses. This was offset by a $0.3 million increase in technology related costs.

Sales and Marketing

Sales and marketing costs are presented in the table below:



	Nine Months Ended December 31,						Period-to-Period Change
	2014			2013			$			%
	(In thousands)
Sales and marketing		$24,781			$26,610			($1,829	)	(7	)%
Percentage of total revenue	38		%	37		%

Sales and marketing costs decreased to $24.8 million during the nine months ended December 31, 2014, as compared to $26.6 million for the nine months ended December 31, 2013, primarily due to a $3.8 million decrease in stock compensation expense and a $0.6 million decrease in salaries and personnel related costs. These declines were offset by a $0.8 million increase in marketing expense, a $1.3 million increase in technology and a $0.3 million increase in depreciation and amortization expense.

General and Administrative

General and administrative costs are presented in the table below:



	Nine Months Ended December 31,						Period-to-Period Change
	2014			2013			$			%
	(In thousands)
General and administrative		$14,112			$21,338			($7,226	)	(34	)%
Percentage of total revenue	22		%	29		%

General and administrative costs decreased to $14.1 million for the nine months ended December 31, 2014, as compared to $21.3 million for the nine months ended December 31, 2013, primarily due to a $4.4 million decrease in stock compensation expense. In addition, there was a decline in costs as a result of successfully building out our own independent administration team including legal, finance and human resources which was completed as of April 1, 2014. Prior to April 1, 2014, general and administrative costs included allocated expenses from Compuware while the current fiscal year reflects general and administrative expenses incurred as a stand-alone company.

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LIQUIDITY AND CAPITAL RESCOURCES

In summary, our cash flows were:



	Nine Months Ended December 31,
	2014			2013

Condensed and Consolidated Statement of Cash Flows Data:
Net cash provided by (used in) operating activities		($14,417	)		($2,602	)
Net cash used in investing activities	(4,273		)	(6,300		)
Net cash provided by financing activities	12,524			62,649
Effect of exchange rate	(45		)	57
Net change in cash		($6,211	)		$53,804

Cash Flows from Operating Activities

The condensed consolidated statements of cash flows compute net cash used in operating activities using the indirect cash flow method. Therefore non-cash adjustments including depreciation and amortization and stock compensation expense, as well as net changes in assets and liabilities are adjusted from net income to derive net cash from operating activities.

Cash provided by operating activities decreased $11.8 million for the nine months ended December 31, 2014, as compared to the same period in 2013, primarily as a result of a $7.7 million decrease in revenues primarily from our decline in services revenue. In addition, cost of revenues increased $2.9 million primarily due to the increased utilization of our certified partners and other subcontractors.

Cash Flows from Investing Activities

Cash used in investing activities typically consists of the purchase of property and equipment associated with our infrastructure and the capitalization of research and development costs related to expanding our cloud-based platform. Cash used in investing activities decreased by $2.0 million for the nine months ended December 31, 2014, as compared with the same period in 2013, primarily due to a $2.0 million decrease in cash paid for capitalized research and development.

Cash Flows from Financing Activities

Cash provided by financing activities decreased $50.1 million to $12.5 million for the nine months ended December 31, 2014, from $62.6 million for the nine months ended December 31, 2013, primarily due to the net proceeds received from the IPO.

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RECENTLY ISSUED ACCOUNTING PRONOUCEMENTS

New accounting guidance that we have recently adopted, as well as accounting guidance that has been recently issued, but not yet adopted by us, are included in Note 1 of the notes to the condensed consolidated financial statements appearing elsewhere in this Report.

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CONTRACTUAL OBLIGATIONS

The Company entered into standalone operating lease agreements for its Shanghai and Detroit locations in the first quarter of our fiscal year 2015. The Shanghai lease expires on April 30, 2017 and does not contain any purchase obligations associated with the lease. The total future minimum lease obligation of the Shanghai lease is approximately $1.3 million. The lease agreement for our Detroit location has been extended two months and now expires as of May, 2015.

On December 18, 2014, the Company entered into a new lease for its headquarters. The building lease between the Company and Southfield HS Development LLC and Southfield HS RK LLC, as tenants-in-common, is for 33,786 square feet of office space at 26533 Evergreen Road, Southfield, Michigan. The initial term of the lease commences in May, 2015.

OFF-BALANCE SHEET ARRANGEMENTS

We currently do not have any off-balance sheet or non-consolidated special purpose entity arrangements as defined by the applicable SEC rules.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed primarily to market risks associated with foreign currency exchange rates. We do not use derivative financial instruments or forward foreign exchange contracts for investment, speculative or trading purposes. We believe our foreign currency risk is minimal as 85% and 85% of our revenue was based in U.S. dollars for the nine months ended December 31, 2014 and 2013, respectively. In addition, we have no long-term assets or liabilities in foreign currencies. We do not have a material exposure to market risk with respect to investments.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2014, our disclosure controls and procedures are effective, at the reasonable assurance level, to cause information required to be disclosed in the reports that we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required financial disclosure.

Changes in Internal Control over Financial Reporting

We began configuration of NetSuite as our ERP System in Fiscal Year 2014. On April 1, 2014, we went live with the initial phase of the NetSuite implementation, (i.e., custodial accounting) which upgrades our information system capabilities and improves our business processes and financial reporting system. On September 1, 2014, we went live with the implementation of time reporting for service employees. The implementation of the contract management module remains ongoing. This software implementation project will result in changes in our business processes and related internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Management will continue to monitor, evaluate and update the related processes and internal controls as necessary during the post implementation period to ensure adequate internal control over financial reporting.

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Other than the change described above, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Beginning on May 30, 2014, two putative class actions were filed in the U.S. District Court for the Southern District of New York against the Company, directors and certain officers at the time of the Company's initial public offering ("IPO") alleging violation of securities laws in connection with the Company's IPO and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to vigorously defend them. The Company currently has no other outstanding material litigation.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Report, you should carefully consider the risks under the heading "Risk Factors" in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 20, 2014, which risks could materially affect our business, financial condition or future results. There has been no material changes in our risk factors from those described in the 2014 Annual Report on Form 10-K. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

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

On September 25, 2013, our registration statement on Form S-1 (File No. 333-188603) was declared effective by the Securities and Exchange Commission for our initial public offering. Pursuant to the offering, we sold an aggregate of 7,360,000 shares of our common stock (which includes the underwriters’ full exercise of their over-allotment option of 960,000 shares) at a price to the public of $10.00 per share. The sale of all of such shares was consummated on October 1, 2013 and resulted in net proceeds to us of $66.3 million after deducting underwriting discounts, commissions and other offering expenses. We used, and intend to continue to use, net proceeds, together with the cash generated from operations, to fund our current operations, repay short-term intercompany payables owed to our parent, Compuware, implement our growth strategies and fund capital expenditures.

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ITEM 6. EXHIBITS

The following exhibits are filed herewith.



Exhibit Number		Description of Document
10.1		Covisint Corporation Director Compensation Plan
10.2		Restricted Stock Unit Award Agreement
10.3		Lease Agreement Travelers Tower II
15		Independent Registered Public Accounting Firm's Awareness Letter
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act
32.1		Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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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.



		COVISINT CORPORATION

Date:	February 12, 2015	By: /s/ Samuel M. Inman, III
		Samuel M. Inman, III
		Chief Executive Officer
		Principal Executive Officer

Date:	February 12, 2015	By: /s/ Enrico Digirolamo
		Enrico Digirolamo
		Chief Financial Officer
		Principal Accounting Officer

Covisint Corp - FORM 10-Q - February 12, 2015

Attached files

Covisint Corp Reports