1.   Basis of Presentation

The condensed consolidated balance sheet as of December 31, 2014, the condensed consolidated statements of operations for the three and nine months ended December 31, 2014 and 2013, and the condensed consolidated statements of cash flows for the nine months ended December 31, 2014 and 2013 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 December 31, 2014, and the results of operations and cash flows for the three and nine months ended December 31, 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 , as supplemented by the consolidated financial statements of Iasta.com, Inc. and Iasta Resources, Inc. included in the Company’s Current Report on Form 8-K/A filed with the SEC on August 7, 2014, as amended by the Company’s Current Report on Form 8-K/A filed with the SEC on August 8, 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 consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP) requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards, inventory valuations, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

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.

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.

Business Combinations

The Company accounts for acquisitions using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805 - Business Combinations. Under the acquisition method of accounting, the total purchase consideration of an acquisition is allocated to the tangible assets and identifiable intangible assets and liabilities assumed based on their relative fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets acquired and liabilities assumed 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 on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.  

Intangible Assets and Impairment of Long-Lived Assets

Intangible assets consist of customer relationships, trade names, and acquired technology. Intangible assets are recorded at fair values at the date of the acquisition and, for those assets having finite useful lives, are amortized using the straight-line method over their estimated useful lives, which generally range from two to five years. The Company periodically reviews its intangible and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. There was no impairment charge recorded during the three and nine months ended December 31, 2014.

Goodwill

Goodwill represents the excess of the purchase consideration over the net tangible and identifiable intangible assets acquired in a business combination and is allocated to reporting units expected to benefit from the business combination. The Company tests goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that the assets may be impaired. The Company has elected to first assess certain qualitative factors to determine whether it is more likely than not that the fair value of its single reporting operating unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the Company determines that it is more likely than not that the fair value is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the applied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. There was no impairment charge recorded during the three and nine months ended December 31, 2014.

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 during the three and nine months ended December 31, 2014:

At December 31, 2014, Customer A accounted for 17% of net accounts receivable. At March 31, 2014, one customer accounted for 29% of net accounts receivable.

Revenue Recognition

The Company generates revenues by providing its software as a service 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. 

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 the Company determines 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. Subscriptions to use our software solutions 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 2015. 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.

Foreign Currency

The Company’s UK subsidiary’s functional currency is the U.S. dollar. Non-monetary assets and liabilities are translated into U.S. dollar equivalents at the exchange rate in effect on the balance sheet date and revenues and expenses are translated into U.S. dollars using the average exchange rate over the period. The net gains and losses resulting from foreign exchange transactions are recorded in other income (expense), net in the condensed consolidated statement of operations.

Capitalized Software Development Costs

Software development costs incurred prior to the establishment of technological feasibility are included in research and development expenses. The Company defines achievement 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.

Capitalized software are amortized once the product is available for general release, using the straight-line method over the estimated useful lives of the asset. Capitalized software developments costs are 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 would be considered 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 Financial Accounting Standards Board (the “FASB”) issued an accounting standard which completes the joint effort by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company intends to adopt this update in the first quarter of fiscal year 2018. The standard allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative effect of initially applying this update recognized at the date of initial application. The Company is currently evaluating the impact of this authoritative guidance on its consolidated financial statements.

3.   Acquisition

Iasta, Inc.

On July 2, 2014, the Company completed its acquisition of Iasta.com, Inc. and Iasta Resources, Inc. Pursuant to the Merger Agreement, Iasta merged with and into Selectica Sourcing, with Selectica continuing as a wholly owned subsidiary of the Company. The acquisition of Iasta positions the Company to provide easier access to contract management, strategic sourcing, spend management, and configuration solutions and market coverage in more locations worldwide to its customers.

The total purchase price for Iasta included 1,000,000 shares of the Company’s common stock valued at $6.6 million, and cash of $7.0 million, adjusted for amounts related to the repayment of $0.6 million for outstanding borrowings under a line of credit, $0.3 million related to a note payable and payment of transaction costs and certain other adjustments. The total purchase price is subject to a $1.4 million cash escrow (the “Escrow”) to cover any post-closing adjustments and indemnification obligations of the former 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 acquisition date. Concurrent with the closing of the acquisition, the Company entered into employment agreements with certain key employees of Iasta. In addition, the Company granted options to certain employees of Iasta to purchase up to 700,000 shares of the Company’s common stock.

The assets acquired and liabilities assumed in connection with the acquisition of Iasta were recorded at their fair values as of the acquisition date. The total purchase price was comprised of the following:

The following table shows the fair values of assets acquired and liabilities assumed (in thousands):

The purchase price allocation includes goodwill of $8.3 million, which is primarily attributable to the synergies expected to arise after the acquisition and fair value of assembled workforce. The acquired working capital has not been finalized, and any future adjustments to the working capital may impact goodwill. The goodwill is not deductible for income tax purposes.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Iasta, which was considered a “significant” acquisition (as defined in Regulation S-X) for the purposes of unaudited pro forma financial information disclosure, as though the companies were combined as of April 1, 2013. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from the Iasta acquisition including amortization charges from acquired intangible assets and stock-based compensation charges for unvested stock option awards, as though the Company and Iasta were combined as of April 1, 2013. The related tax effect was insignificant.

The pro forma financial information, as presented below, is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition of Iasta had taken place as of the beginning of each period presented.

4.   Goodwill and Purchased Intangible Assets

The following is a summary of goodwill (in thousands):

The following is a summary of purchased intangible assets (in thousands):

Acquired developed technology, customer relationships, and trade name are being amortized on a straight-line basis and have weighted-average remaining useful lives of 4.5 years, 5.5 years, and 1.5 years, respectively, as of December 31, 2014. Amortization expense was $0.3 million and $0.7 million for the three and nine months ended December 31, 2014, respectively.

As of December 31, 2014, amortization expense for intangible assets for each of the next five years is as follows:

5.   Property and Equipment

Property and equipment consist of the following:

Depreciation expense was approximately $73,000 and $40,000 during the three months ended December 31, 2014 and 2013, respectively, and $0.2 million and $0.2 million during the nine months ended December 31, 2014 and 2013, respectively.

6.  Capitalized Software Development Costs

The Company capitalized $0.5 million and $1.5 million of research and development costs during the three months and nine months ended December 31, 2014, respectively. Amortization expense was $53,000 and $169,000 during the three months and nine months ended December 31, 2014, respectively and is included in cost of revenues on the condensed consolidated statement of operations. Prior to fiscal 2015, the Company did not capitalize significant research and development expenses due to the short time period between the achievement of technological feasibility and general availability of the software versions. As of December 31, 2014, the Company had $2.3 million of unamortized capitalized software costs.

On January 24, 2014, in connection with the closing of a 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). 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 “January 2014 Warrants”). The exercise price of the January 2014 Warrants was $7.00 per share. The January 2014 Warrants have a five-year term and became exercisable on July 24, 2014, six months following the date of issuance.

In connection with the January 2014 Financing, the Company issued to Lake Street Capital Markets, LLC (“Lake Street”), 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.

In addition, 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). In addition, the Company issued to the 2014 Second Investors warrants to purchase common stock, initially exercisable for an aggregate of 312, 223 shares of common stock (the “July 2014 Warrants”). The exercise price of the July 2014 Warrants is $7.00 per share. The July 2014 Warrants have a five-year term and became exercisable upon stockholder approval on August 27, 2014. The total proceeds raised in the 2014 Second Financing equal approximately $7.5 million.

In connection with the July 2014 Financing, the Company issued to Lake Street, who served as the placement agent in the financing, a warrant to purchase 37,467 shares of common stock.

The Company has evaluated the January 2014 Warrants and the July 2014 Warrants and has concluded that equity classification is appropriate as all such January 2014 Warrants and July 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.

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).

Because the Series E Stock was redeemable at the option of the holder (had the stockholders not approved conversion), the Company recorded the Series E Stock in temporary equity until conversion on August 27, 2014 when the redemption value of $7.5 million was reclassified to stockholders’ equity.

On August 27, 2014, following approval by the Company’s stockholders, each whole share of Series E 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 1,248,905 shares of Common Stock issued upon such conversion.

The Series D and Series E Stock were 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 value) to the transaction date value of the number of shares that the holder can convert into. The calculation resulted in a BCF of $1.3 million for Series D and $1.6 million for Series E stock. The BCF was recorded in additional paid-in capital.

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

The table below shows the allocation of proceeds from the 2014 Investors and carrying value of the Series D and Series E Stock. Series D Stock was reclassified to stockholders’ equity upon conversion to common stock on April 10, 2014 and Series E were classified to stockholder’s equity upon conversion to common stock on August 31, 2014 (in thousands, except per share amounts):

8.  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.

The following tables summarize activity under the equity incentive plans during the three months ended December 31, 2014 (in thousand): 

As of December 31, 2014, the Company had 520,000 shares of common stock available for future grants under the equity incentive program.

 Valuation Assumptions

 The Company uses the Black-Scholes pricing model to determine the fair value of stock options. The fair value of each option grant is estimated on the date of the grant. The weighted-average grant date fair value of options granted and the range of assumptions using the Black-Scholes pricing model are as follows for the periods presented: 

 The weighted average remaining contractual term for exercisable options is 7.3 years. The market value of the Company’s common stock as of December 31, 2014 was $5.18 as reported by the NASDAQ Capital Market. The aggregate intrinsic value of stock options outstanding at December 31, 2014 and 2013 was $11,100 and $100,000, respectively. The aggregate intrinsic value of restricted stock units outstanding at December 31, 2014 and 2013 was $2.3 million and $3.7 million, respectively. The intrinsic value is calculated as the difference between the market value as of December 31, 2014 and the exercise price of the shares.

The options outstanding and exercisable as of December 31, 2014 were in the following exercise price ranges:

Total share-based compensation expense (including expense related to the ESPP discussed below) for each of the periods presented is as follows (in thousands):

As of December 31, 2014, the unrecorded share-based compensation balance related to stock options and restricted stock units outstanding, excluding estimated forfeitures, was $5.3 million and will be recognized over an estimated weighted average amortization period of 3.14 years. The amortization period is based on the expected remaining vesting term of the options and restricted stock units.  

1999 Employee Stock Purchase Plan (“ESPP”)

The Company’s employee stock purchase plan (the “ESPP”) allows eligible employees to purchase shares of the Company's common stock at a discount through payroll deductions. The ESPP consists of six-month offering periods commencing on February 1^st and August 1^st each year. Under the ESPP, employees purchase shares of the Company's common stock at 85% of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower. No shares of common stock were issued under the ESPP during the three months ended December 31, 2014. During the nine months ended December 31, 2014, the Company issued 18,202 shares of common stock under the ESPP. The compensation expense related to the ESPP was $22,000 and $19,000 during the three months ended December 31, 2014 and 2013, respectively, and was $53,000 and $115,000 during the nine months ended December 31, 2014 and 2013, respectively.

9.  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:

Phantom Stock Rights

In fiscal 2015, under the 2001 Long-Term Equity Incentive Plan, the Company provided issuance of phantom stock rights to certain consultants in the Ukraine. To date, the Company has issued 11,350 shares under phantom stock rights for the exercise price of $6.76. The shares vest over one year starting from the grant date of April 1, 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 record any expenses related to this award during the three months and nine months ended December 31, 2014.

10.  Operating Lease Commitments

On May 15, 2014, Selectica, Inc. (the “Company”) entered into a lease amendment with SKBGS I, L.L.C. amending the Office Lease dated July 8, 2011, under which 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, among other things, extends the lease term to cover a 25 month period expiring on January 31, 2017.

11.  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.

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 December 31, 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 December 31, 2014.

12.  Income Taxes

The provision for income taxes is based upon income (loss) before income taxes as follows (in thousands): 

The components of the provision for income taxes/(benefit) are as follows:

The Company is required to recognize in its financial statements the impact of any tax position that is more likely than not of being sustained on audit, based on the technical merits of the position.  The Company policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2014, there was no liability for unrecognized tax benefits. 

The tax benefit of $3.0 million relates solely to release of valuation allowance to offset the deferred tax liability resulting from the Iasta acquisition and is a one-time event.

At December 31, 2014 there was no material increase in the liability for unrecognized tax benefits nor any accrued interest and penalties related to uncertain tax positions.

At December 31, 2014, the Company had approximately $2.0 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 carry forwards unutilized from such years.

13. 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 March 20, 2016, 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 $4,000.

As December 31, 2014 and March 31, 2014, the Company had approximately $7.0 million of outstanding borrowings under the Credit Facility.

14. Subsequent Events

On February 6, 2015, the “Company entered into a Purchase Agreement (the “Purchase Agreement”) with certain institutional funds and other accredited investors, including certain entities affiliated with the Company’s largest stockholder (collectively, the “Outside Investors”), and entered into a Subscription Agreement with certain members of the Company’s management and board of directors (the “Management and Director Investors” and, together with the Outside Investors, the “Investors”), pursuant to which the Company (i) sold and issued 118,829.1 shares of its newly created Series F Convertible Preferred Stock, par value $0.0001 per share (the “Series F Stock”), to the Outside Investors at a purchase price of $47.00 per whole Preferred share (or $4.70 per one-tenth (1/10) of a Preferred Share, which would convert into one share of the Company’s common stock as described below) in an initial closing that occurred on February 6, 2015 for a total of approximately $5.6 million and, (ii) subject to stockholder approval, will sell and issue 65,955 shares of its common stock, par value $0.0001 per share, to the Management and Director Investors at a purchase price of $4.70 per share immediately after such stockholder approval is obtained for a total of approximately $310,000 for an aggregate amount raised of approximately $5.9 million.  After stockholder approval, each whole share of Series F Stock will be converted automatically into ten shares of the Company’s common stock at an initial conversion price of $4.70 per share of Common Stock, subject to broad-based weighted-average anti-dilution adjustment provisions 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. 

On February 9, 2015, the Company entered into a binding term sheet with its largest stockholder and two of his affiliates: MILFAM II L.P. and Lloyd I. Miller Trust A-4, (the “Purchasers”), pursuant to which the Company agreed to issue and the Purchasers agreed to purchase, junior secured convertible promissory notes (the “Convertible Notes”) in the aggregate principal amount of $3 million, subject to the negotiation and execution of definitive agreements (the “Debt Financing”).  Pursuant to the term sheet, the Convertible Notes will be due five years from the date of issuance (the “Maturity Date”) and accrue interest at an annual rate of 8% on the aggregate unconverted and outstanding principal amount, payable quarterly. The Company also has the option to pay any amounts of interest with a payment-in-kind (“PIK”) based upon an interest rate amount calculated at 10% per year, provided that the Company provides prior written notice thereof to the Purchaser at least 30 days in advance of the applicable interest payment date.  The Convertible Notes may be converted into shares of Common Stock at the sole option of the Purchasers at any time and from time to time prior to the Maturity Date, subject to applicable NASDAQ listing rule limitations, at a conversion price of $5.70 (as may be adjusted for stock splits, recapitalizations or other similar events). Following the issuance of the Convertible Note, the Company will file a registration statement with the Securities and Exchange Commission with respect to the common stock issued pursuant to conversion of the Convertible Notes.  The Convertible Notes may not be prepaid or called by the Company prior to the Maturity Date. The Convertible Notes will be secured by a junior security interest on the Company’s assets, subordinate only to the senior security interest of the Company’s institutional lender, Bridge Bank, N.A.

On February 9, 2015, the Company entered into a $2 million binding term sheet with its largest stockholder and MILFAM II L.P., an affiliate of the Company’s largest stockholder (the “Guarantors”) to provide a limited guarantee under the Company’s existing credit facility (the “Credit Facility”) with Bridge Bank, N.A. (the “Lender”), in order to satisfy certain conditions for the Lender to lend additional funds to the Company. Subject to Lender approval and the execution of a definitive guarantee agreement, the Guarantors will guarantee the performance of the Company’s obligations under the Credit Facility in an amount of $2 million, or such lesser amount as may be agreed to by the Lender from time to time (the “Guaranteed Loan Amount”), for a period of 24 months, or sooner if terminated by the Company (the “Guarantee”).  Upon execution of the definitive guarantee agreement, the Company will pay the Guarantors an aggregate commitment fee of either $100,000 in cash or a PIK in an amount equal to the greater of (i) 8% of the initial Guaranteed Loan Amount and (ii) $100,000. Thereafter, subject to the earlier termination of the Guarantee, the Company will pay the Guarantors an aggregate monthly fee equal to (a) 1% of the Guaranteed Loan Amount for months (including partial months) 1 through 12 following the date of execution of the definitive guarantee agreement and (b) 1.5% of the Guaranteed Loan Amount for months (including partial months) 13 through 24 following the date of execution of the definitive guarantee agreement (the “Monthly Fee”). At the Company’s option, the Monthly Fee may be paid in cash or PIK, subject to certain conditions.  The Guarantors will be granted a right of subrogation as to the Guaranteed Loan Amount under the Credit Facility.