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DETERMINE, INC. 10-K 2011
selectica_10k-033111.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2011
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 0-29637

SELECTICA, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
77-0432030
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
1740 Technology Drive Suite 460, San Jose, California 94110-2111
(Address of Principal Executive Offices)
 
(408) 570-9700
(Registrant’s Telephone Number)
 
Securities registered under Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange On Which Registered
Common Stock, $0.002 par value per share
The NASDAQ Global Market
 
Securities registered under Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.     Yes  ¨    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
 
 
 

 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ¨
Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of September 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of $4.87 per share as reported by The NASDAQ Global Market on that date, was $13,737,082.
 
As of June 15, 2011, the registrant had outstanding 2,831,112 shares of common stock.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Part III of this Annual Report on Form 10-K incorporates by reference from information to be filed with the Securities and Exchange Commission in the registrant’s definitive proxy statement for its fiscal year 2012 Annual Meeting of Stockholders (the “Proxy Statement”) or in an amendment to this Annual Report on Form 10-K within 120 days of the registrant’s fiscal year ended March 31, 2011. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.
 
 
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SELECTICA, INC.
 
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
MARCH 31, 2011
 
Table of Contents
 
     
Part I
Item 1
Business
5
Item 1A
Risk Factors
9
Item 1B
Unresolved Staff Comments
15
Item 2
Properties
15
Item 3
Legal Proceedings
16
Item 4
Removed and Reserved
16
 
Part II
Item 5
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17
Item 6
Selected Financial Data
19
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
26
Item 8
Financial Statements and Supplementary Data
26
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
51
Item 9A
Controls and Procedures
51
Item 9B
Other Information
52
 
Part III
Item 10
Directors, Executive Officers and Corporate Governance
53
Item 11
Executive Compensation
53
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
53
Item 13
Certain Relationships and Related Transactions, and Director Independence
53
Item 14
Principal Accounting Fees and Services
53
 
Part IV
Item 15
Exhibits and Financial Statement Schedules
54
 
SIGNATURES
55
 
 
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Cautionary Statement Pursuant to Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
 
The words “Selectica”, “we”, “our”, “ours”, “us”, and the “Company” refer to Selectica, Inc. This Annual Report on Form 10-K (the “10-K” or Report) contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and future expectations of ours and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. These forward-looking statements include statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading “Risk Factors” in Item 1A of this Annual Report on Form 10-K and in our other Securities and Exchange Commission (the “SEC”) filings. Furthermore, such forward-looking statements speak only as of the date of this Report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
 
 
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PART I
 
Item 1.
Business
 
OVERVIEW
 
We are a business dedicated to enabling companies to close deals faster, more profitably, and with lower risk. Selectica is a team of passionate professionals committed to making our customers successful by developing and delivering innovative software solutions that improve the way they do business.
 
The Selectica Contract Lifecycle Management (“CLM” or “CM”) solution is a contract authoring, analysis, repository and process automation product designed to enhance and automate the management of the entire contract lifecycle. It helps companies take control of their contract management processes by converting from paper-based to electronic repositories and by unlocking multiple layers of critical business data, making it available for the evaluation of risk, the exposure of lost revenue, the evaluation of supplier performance, and other purposes. The solution helps to improve the customer buying experience for sales organizations, improve the control of risk and decrease time spent drafting, monitoring and managing contracts for the corporate counsel’s office and gain access to previously hidden discounts through the exposure and elimination of unfavorable agreements for procurement and sourcing organizations.
 
The Selectica Sales Configuration (“SCS”) solution consolidates configuration, pricing and quoting functions into a single application platform enabling companies to streamline the opportunity-to-order process for manufacturers, service providers, and financial services companies. Our SCS solution provides a critical link between Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) systems that helps to simplify and automate the configuration, pricing, and quoting of complex products and services. By empowering customers, internal sales staff, and/or channel partners to generate error-free sales proposals for their unique requirements, we believe our SCS solution helps companies to close sales faster, accelerate revenue generation and enhance customer relationships.
 
In addition to our software solutions, we offer professional implementation and customization. For CLM, on-demand hosting services are offered and for SCS, complex product configuration modeling services.
 
Selectica was incorporated in California in June 1996 and re-incorporated in Delaware in November 1999. The company’s principal executive offices are located at 1740 Technology Drive, Suite 460, San Jose, California, 95110 and its website is www.selectica.com.
 
SELECTICA PRODUCTS
 
Contract Management Solution
 
Our CLM solution enables customers to create, manage and analyze contracts in a single, easy to use repository and is offered both on-premise or hosted. We believe that our CLM software offers a high degree of flexibility enabling customers across many departments (e.g., sales, services, procurement, finance, IT, leasing or intellectual property) to model their specific contracting processes and to manage the lifecycle of a contract and its attendant multi-party relationship from creation through closure. We believe our CLM solutions meet the needs of many challenging and dynamic organizations:
 
 
Corporate legal organizations. The General Counsel’s office and other legal organizations can use the contract management solution to transform paper-bound contracts into a secure, centralized, searchable electronic contract repository and gain visibility and control of all corporate agreements.
 
 
Procurement organization. Procurement contract managers can use the contract management solution to expose off-contract spending.
 
 
Sales organization. Sales organizations can use the sales contract management solution to shorten the sales cycle and decrease time to revenue, while potentially protecting the company from inadvertent legal errors.
 
 
Finance organizations. Finance organizations can use the contract management solution to identify and account for non-standard terms and pricing in the revenue cycle while discovering unrealized revenue buried in sales agreements.
 
 
Contract Administration. Contract administrators can use the contract management solution to create visibility into contract obligations not captured by ERP and CRM and empower non-contract professionals to create and execute basic contracts.
 
 
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We believe our CLM product is differentiated from competitive offerings because it is:
 
 
Adaptable. Adaptable, without sacrificing scalability or speed of implementation. The CLM solution is applicable to both buy and sell-side contracts. Our vertical expertise and advanced sell-side features such as flowdown, workflow and authoring tools help differentiate our CLM solution from its competitors.
 
 
Configurable. Combines the stability of rigid contract management software solutions with the flexibility of custom solutions by allowing companies to configure and update the product without expensive services and engineering support.
 
 
Flexible. Available On-Demand (SaaS) Hosted and Enterprise (On-Site / behind-the-firewall) deployment options using the same application platform.
 
 
Industry Customizable. Customizable for a broad array of contract types including procurement, sales, governance, healthcare provider, intellectual property, IT, equipment leasing, employee, real estate, partnership, supplier and services agreements.
 
 
Rapid Deployment. Our Contract Performance Management solution is delivered in an average of 90 days or less, which we believe is shorter than the average deployment times for many competitive software solutions.
 
 
Extensive Analytics and Reporting Capabilities. Enables detailed contract analysis and performance management by combining both structured and unstructured information stored in its contract repository.
 
Sales Configuration Solution
 
Our SCS solution guides users through the buying process, offering only valid options and features at each step. As a result, limited training is required for the sales force or channel partners, and customers can easily find and configure the solutions they seek. Unlike many competitive solutions, SCS enables virtually unlimited product configuration, pricing and quoting flexibility and provides tight integration with existing applications down to the bill of materials. We believe our configuration solution helps organizations reduce sales cycles and increase productivity through faster product development, easier product updates, automated sales processes (making self-service kiosks possible even for complex products and services) and seamless integration with existing Product Lifecycle Management (PLM), Inventory Management, Manufacturing and ERP systems, thus helping to ensure order accuracy.
 
 
Our SCS products were designed to automate configuration for the largest, most complex product and services offerings. We believe that benefits of Selectica’s configuration solution include:
 
 
Increased Revenue. By enabling context-driven cross-sell and up-sell options, companies can increase revenue. Additionally, the configuration solution enables users to combine lines of business to capture higher spend on a per customer basis.
 
 
Increased Channel Sales. By equipping channel partners with our easy-to-use, web-based, graphical interface to more easily sell complex products and services, companies can boost channel revenue.
 
 
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Faster Time to Cash. By configuring complex products and services in minutes, rather than days or weeks, organizations can close deals more quickly and accelerate revenue generation.
 
 
Improved Margin. By incorporating pricing/margin during the configuration process, companies can create a configuration that meets user’s objectives at the lowest price for the company, which can improve margins.
 
 
Decreased Cost. By preventing rework and cancellations due to incorrect orders, companies can save money.
 
 
Customer Satisfaction. Our configuration solution ensures quote and order accuracy.
 
 
Flexibility. Our configuration solution can accommodate both sales configurations and manufacturing configurations, enabling our solution to be deployed to sales organizations, manufacturing organizations, or both. The configuration solution can also allow a very large number of SKU’s or offerings and a very large number of users.
 
We believe key technical differentiators of SCS from our competition include:
 
 
Declarative Constraint Engine (DCE). The DCE describes relationships among product features and components, allowing business logic to be modeled with simple declarative statements rather than complex programming. This approach also helps to simplify model processing and allows for a faster configuration process, even for highly complex products.
 
 
Efficient Modeling. Flexible modeling tools, easy-to-use wizards, automated business logic creation, and repositories of business logic help shorten the time required for development teams to deliver advanced capabilities and customize or update SCS-based applications.
 
 
Development Studio. SCS’s Development Studio’s Model Builder is a rich modeling tool that allows graphical modeling of products and services which are submitted to the Selectica Knowledge Base. A model profiler is also available for inspecting and measuring runtime execution of models.
 
 
Updates by non-technical personnel. In most organizations, business-critical information is stored in repositories, such as relational databases and other applications, and is updated very frequently. The SCS architecture allows changes in business-critical information to be automatically reflected in the application.
 
 
Flexible and Scalable Deployment. SCS is Java-based and can be deployed on a wide range of server hardware and web application servers, such as JBoss, Weblogic or Websphere. We have also introduced a laptop-based version of the configuration engine for real-time configuration at remote customer locations.
 
We also offer a Pricing Module which can integrate with SCS or third party applications to enable enterprises to efficiently manage pricing by seamlessly integrating marketing and selling pricing management processes. Efficiencies in price management can help companies realize greater profit margins and decrease SKU proliferation. We believe SCS delivers the ability to view, model, and dynamically change all aspects of an enterprise’s pricing management and execution processes.
 
Selectica Professional Services
 
We offer a range of services to ensure that the solutions meet users’ requirements. Our Professional Services team takes a best-practice, collaborative approach, applying their extensive experience with contract and configuration solutions. We provide these services using both our in-house expertise and that of third parties experienced in our solution acting under our direction. As of March 31, 2011, the Professional Services organization had 17 employees.
 
Employees
 
At March 31, 2011, we had a total of 51 employees, all located in the United States. Of the total, 10 are engaged in research and development, 17 are engaged in professional services, 14 are engaged in sales and marketing, and 10 are engaged in general & administration.  None of our employees are represented by a labor union and we consider our relations with our employees to be good.
 
 
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Sales and Marketing
 
We sell our CM products primarily through our direct sales force along with strategic and OEM partners. Our SCS products are sold primarily through partnership relationships such as an existing relationship with IBM Global Services. As of March 31, 2011, our sales team consisted of 11 employees and our marketing team consisted of 3 employees.
 
Our CM direct sales force is complemented by business partners, supported by telesales and system engineering resources. We have developed programs to attract and retain high quality, motivated sales representatives that have the necessary technical skills and consultative sales experience. We have also developed specific partner relationships to expand our solutions and domain expertise into various targeted markets. We believe that the cultivation and integration of these support networks assists in both the establishment and enhancement of customer relationships.
 
Our marketing department is engaged in revenue-centered, sales-support and awareness-building activities, such as lead generation programs, web marketing, product management, public relations, advertising, speaking programs, seminars, sales collateral creation and production, direct mail, and event hosting.
 
Research and Development
 
To date, we have invested substantial resources in research and development. At March 31, 2011, we had 10 full-time engineers and technical writing specialists that primarily work on product development, documentation, quality assurance and testing. For the fiscal years ended March 31, 2011 and 2010, we incurred approximately $3.0 million and $3.3 million, respectively on research and development.
 
Enhancements to our existing products are released periodically to add new features, improve functionality and incorporate feedback and suggestions from our customers. These updates are usually provided as part of a separate maintenance agreement sold with the product license. We expect that enhancements to our existing products will be developed internally.
 
International Operations
 
As of March 31, 2011 and 2010, we did not have any employees or operations outside the United States but we do business with a number of non-US based companies.  During the fiscal year 2011, we entered into a relationship with a third party that opened a research and operations center in Odessa, Ukraine.  This facility represents a significant investment for us as we look to execute on our global expansion strategy.
 
Competition
 
The contract management and sales configuration markets continue to be subject to rapid change. Competitors vary in size and in the scope and breadth of the products and services offered. We encounter competition primarily from (i) publicly-held and private software companies that offer integrated solutions or specific contract management and/or sales configuration solutions, (ii) information systems departments of potential or current customers that internally develop custom software, and (iii) professional services organizations.
 
We believe that the principal competitive factors affecting our market include product reputation, functionality, ease-of-use, ability to integrate with other products and technologies, quality, performance, price, customer service and support, and the vendors’ reputation. Although we believe that our products currently compete favorably with regard to such factors, we cannot assure you that we can maintain our competitive position against current and potential competitors. Increased competition may result in price reductions, less beneficial contract terms, reduced gross margins and loss of market share, any of which could materially and adversely affect our business, operating results and financial condition.
 
Intellectual Property and Other Proprietary Rights
 
We rely on a combination of trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. We currently hold six patents in the United States and one patent outside of the United States. In addition, we have various trademarks registered or pending registration in various jurisdictions. Our trademark applications might not result in the issuance of any trademarks. Our patents or any future issued patents or trademarks might be invalidated or circumvented or otherwise fail to provide us any meaningful protection. We seek to protect the source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to license agreements, which impose certain restrictions on the licensee’s ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Our failure to adequately protect our intellectual property could have a material adverse effect on our business and operating results.
 
 
8

 
 
AVAILABLE INFORMATION
 
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy these materials at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Selectica, Inc. and other companies that file materials with the SEC electronically. You may also obtain copies of reports filed with the SEC, free of charge, on our website at www.selectica.com.
 
Item 1A.
Risk Factors
 
Set forth below and elsewhere in this Annual Report on Form 10-K, and in the other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K . Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this annual report and our other public filings.
 
We have a history of losses and may incur losses in the future.
 
We incurred net losses of approximately $1.5 million and $4.6 million for the fiscal years ended March 31, 2011 and 2010, respectively. We had an accumulated deficit of approximately $255.3 million as of March 31, 2011. We may continue to incur losses in the future for a number of reasons, including uncertainty as to the level of our future revenues and the timing and impact of our cost reduction efforts. While we have made significant progress towards aligning our research and development, sales and marketing, and general and administrative expenses with revenue, given the size of our business relative to the costs associated with being a public reporting company we will need to continue to control our expenses while maintaining and increasing revenue in order to achieve profitability. If our revenue fails to grow or grows more slowly than we currently anticipate or our operating expenses exceed our expectations, our losses may continue or increase, which would harm our business and operating results.
 
We do not know the impact of current economic conditions on our customers and our business.
 
The United States and world economies currently face a number of economic challenges, including the availability of credit for businesses and consumers. The financial markets have been dramatically and adversely affected and many companies are either cutting back expenditures or delaying plans to add additional systems. If these conditions continue or worsen, the ability of our customers to pay for or obtain funding to pay for our products and services may be adversely affected, which would then have a significant adverse impact on our ability to generate revenues and cash flow and may cause us to sustain further losses.
 
Our business could be seriously harmed as a result of recent management changes or if we lose the services of our key personnel.
 
We experienced a number of recent management changes, including the appointment of Todd Spartz as our Chief Financial Officer and the promotion of Jason Stern to President and Chief Executive Officer. All members of our management team have been with us for a limited period of time. There can be no assurance that they will be effective in their roles or that they will not take some time before they achieve desired levels of performance. In addition, the loss of services of one or more members of our management team could seriously harm our business.
 
We have relied and expect to continue to rely on orders from a relatively small number of customers for a substantial portion of our revenues, and the loss of any of these customers would significantly harm our business and operating results.
 
Our revenues are dependent on orders from a relatively small number of customers. Our three largest customers accounted for approximately 28% and 33% of our revenues for the fiscal years ended March 31, 2011 and 2010, respectively. We expect that we will continue to depend upon a relatively small number of customers for a substantial portion of our revenues for the foreseeable future. As a result, if we fail to successfully sell our products and services to one or more large customers in any particular period or a large customer purchases fewer of our products or services, defers or cancels orders, or terminates its relationship with us, our business and operating results would be harmed. In addition, many of our orders are realized at the end of the quarter. As a result of this concentration and timing, our quarterly operating results, including average selling prices, may fluctuate significantly if we are unable to complete one or more substantial sales in any given quarter.
 
 
9

 
 
Our annual and quarterly revenues and operating results are inherently unpredictable and subject to fluctuations, and as a result, we may fail to meet the expectations of security analysts and investors, which could cause volatility or adversely affect the trading price of our common stock.
 
We enter into arrangements for the sale of: (1) licenses of software products and related maintenance contracts; (2) services; (3) subscription for on-demand services; and (4) bundled license, maintenance, and services. In instances where maintenance is bundled with a license of software products, the maintenance term is typically one year. For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fees are fixed or determinable, and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.
 
Our annual and quarterly revenues may fluctuate due to our inability to perform services, achieve specific milestones and obtain formal customer acceptance of specific elements of the overall completion of a project. As we provide such services and products, the timing of delivery and acceptance, changed conditions with the customers and projects could result in changes to the timing of our revenue recognition, and thus, our operating results.
 
Likewise, if our customers do not renew maintenance services or purchase additional products, our operating results could suffer. Historically, we have derived and expect to continue to derive a significant portion of our total revenue from existing customers who purchase additional products or renew maintenance agreements. Our customers may not renew such maintenance agreements or expand the use of our products. In addition, as we introduce new products, our current customers may not require or desire the features of our new products. If our customers do not renew their subscriptions or maintenance agreements with us or choose not to purchase additional products, our operating results could suffer.
 
Because we rely on a limited number of customers, the timing of customer acceptance or milestone achievement, or the amount of services we provide to a single customer can significantly affect our operating results or the failure to replace a significant customer. Because expenses are relatively fixed in the near term, any shortfall from anticipated revenues could cause our quarterly operating results to fall below anticipated levels.
 
We may also experience seasonality in revenues. For example, our annual and quarterly results may fluctuate based upon our customers’ calendar year budgeting cycles. These seasonal variations may lead to fluctuations in our annual and quarterly revenues and operating results.
 
Our CM customers license our software in a number of ways including perpetual licenses and subscriptions, which may be hosted in our third-party hosting center or on the customer’s own facilities. Historically the bulk of our license revenues have come from perpetual licenses which, if revenue recognition requirements are met, are recognized upon execution or release of contingencies, if any. However, more recently with the increase in demand for our SaaS-based subscription CLM solutions, we have started to increase our focus on subscription sales and expect this trend to continue.  The trend towards our customers shifting to subscription licenses, which include maintenance and may include hosting, will likely affect our short-term financial results since the larger payments associated with perpetual licenses are substituted with smaller but more frequently recurring payments from our customers.

Based upon the foregoing, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of future performance. In some future period, our operating results may be below the expectations of public market analysts and investors, which could cause volatility or a decline in the price of our common stock.
 
Our future success depends on our proprietary intellectual property, and if we are unable to protect our intellectual property from potential competitors, our business may be significantly harmed.
 
We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. We currently hold six patents in the United States and one patent outside of the United States. In addition, we have various trademarks registered or pending registration in various jurisdictions. Our trademark applications might not result in the issuance of any trademarks. Our patents or any future issued trademarks might be invalidated or circumvented or otherwise fail to provide us any meaningful protection. We seek to protect the source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to license agreements, which impose certain restrictions on the licensee’s ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Regardless of the outcome, such litigation may require us to incur significant legal expenses and management time. Our failure to adequately protect our intellectual property could have a material adverse effect on our business and operating results.
 
 
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In addition, we have previously been subject to claims of third parties that our products and services infringe their intellectual property rights. For example, in October 2007 we agreed to settle a patent infringement lawsuit brought by Versata Enterprises, Inc. and a related party for a $10 million payment in October 2007 and an additional amount of not more than $7.5 million, which we have been paying in quarterly installments. It is possible that in the future, other third parties may claim that our current or potential future products infringe their intellectual property rights. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert management’s time from developing our business, cause product shipment delays, require us to enter into royalty or licensing agreements or require us to satisfy indemnification obligations to our customers. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.
 
Our lengthy sales cycle for our products makes it difficult for us to forecast revenue and exacerbates the variability of quarterly fluctuations, which could cause our stock price to decline.
 
The sales cycle of our products has historically averaged between nine to twelve months, and may sometimes be significantly longer. We are generally required to provide a significant level of education regarding the use and benefits of our products, and potential customers tend to engage in extensive internal reviews before making purchase decisions. In addition, the purchase of our products typically involves a significant commitment by our customers of capital and other resources, and is therefore subject to delays that are beyond our control, such as customers’ internal budgetary procedures and the testing and acceptance of new technologies that affect key operations. In addition, because we target large companies, our sales cycle can be lengthier due to the decision process in large organizations. As a result of our products’ long sales cycles, we face difficulty predicting the quarter in which sales to expected customers may occur. If anticipated sales from a specific customer for a particular quarter are not realized in that quarter, our operating results for that quarter could fall below the expectations of financial analysts and investors, which could cause our stock price to decline.  As we increase our focus on a subscription sales SaaS model, we expect to shorten our sales cycle and reduce the impact of delays in customer sales in any particular quarter. However, until we successfully transition our business model to a SaaS-based model, the effects of delays in any particular customer sale may cause a significant impact on our operating results.
 
Developments in the market for enterprise software, including our CM and SC solutions, may harm our operating results, which could cause a decline in the price of our common stock.
 
The market for enterprise software, including CM and SC solutions, is evolving rapidly. In view of changing market trends, including vendor consolidation, the competitive environment growth rate and potential size of the market are difficult to assess. The growth of the market is dependent upon the willingness of businesses and consumers to purchase complex goods and services over the Internet and the acceptance of the Internet as a platform for business applications. In addition, companies that have already invested substantial resources in other methods of Internet selling may be reluctant or slow to adopt a new approach or application that may replace, limit or compete with their existing systems. While we are increasing our focus on a subscription sales SaaS model which may help address certain market challenges, the rapid change in the marketplace nonetheless poses a number of concerns. Any decrease in technology infrastructure spending may reduce the size of the market for contract management and sales configuration solutions. Our potential customers may decide to purchase more complete solutions offered by larger competitors instead of individual applications. If the market for contract management and sales configuration solutions is slow to develop, or if our customers purchase more fully integrated products, our business and operating results would be significantly harmed.
 
We face intense competition, which could reduce our sales, prevent us from achieving or maintaining profitability and inhibit our future growth.
 
The market for software and services that enable electronic commerce is intensely competitive and rapidly changing. We expect competition to persist and intensify, which could result in price reductions, reduced gross margins and loss of market share. Our principal competition comes from (i) publicly held and private software companies that offer integrated solutions or specific contract management and/or sales configuration solutions and (ii) internally developed solutions. Existing and potential competitors include public companies such as Oracle Corporation, Ariba, Open Text and SAP, as well as privately held companies such as Upside Software,  Emptoris and Big Machines.
 
Our competitors may intensify their efforts in our market. In addition, other enterprise software and SaaS companies may offer competitive products in the future. Competitors vary in size, in the scope and breadth of the products and services offered. Although we believe we have advantages over our competitors including the comprehensiveness of our solution, our use of Java and mobile technology and our multi-threaded architecture, some of our competitors and potential competitors have significant advantages over us, including:
 
 
11

 
 
 
a longer operating history;
 
 
preferred vendor status with our customers;
 
 
more extensive name recognition and marketing power; and
 
 
significantly greater financial, technical, marketing and other resources, giving them the ability to respond more quickly to new or changing opportunities, technologies, and customer requirements.
 
Our competitors may also bundle their products in a manner that may discourage users from purchasing our products. Current and potential competitors may establish cooperative relationships with each other or with third parties, or adopt aggressive pricing policies to gain market share. Competitive pressures may require us to reduce the prices of our products and services. We may not be able to maintain or expand our sales if competition increases, and we are unable to respond effectively.
 
If we do not keep pace with technological change, including maintaining interoperability of our products with the software and hardware platforms predominantly used by our customers, our products may be rendered obsolete, and our business may fail.
 
Our industry is characterized by rapid technological change, changes in customer requirements, frequent new product and service introductions and enhancements and emerging industry standards. In order to achieve broad customer acceptance, our products must be compatible with major software and hardware platforms used by our customers.  In addition, our products are required to interoperate with electronic commerce applications and databases. We must continually modify and enhance our products to keep pace with changes in these operating systems, applications and databases. Our configuration, pricing and quoting products are complex, and new products and product enhancements can require long development and testing periods. If our products were to be incompatible with a popular new operating system, electronic commerce application or database, our business would be significantly harmed. In addition, the development of entirely new technologies to replace existing software could lead to new competitive products that have better performance or lower prices than our products and could render our products obsolete and unmarketable.
 
Our failure to meet customer expectations on deployment of our products could result in negative publicity and reduced sales, both of which would significantly harm our business and operating results.
 
In the past, a small number of our customers have experienced difficulties or delays in completing implementation of our products. We may experience similar difficulties or delays in the future. Deploying our products typically involves integration with our customers’ legacy systems, such as existing databases and enterprise resource planning software as well adding their data to the system. Failing to meet customer expectations on deployment of our products could result in a loss of customers and negative publicity regarding us and our products, which could adversely affect our ability to attract new customers. In addition, time-consuming deployments may also increase the amount of service personnel we must allocate to each customer, thereby increasing our costs and adversely affecting our business and operating result.
 
If we are unable to maintain our direct sales force, sales of our products and services may not meet our expectations, and our business and operating results will be significantly harmed.
 
We depend on our direct sales force for a significant portion of our current sales, and our future growth depends in part on the ability of our direct sales force to develop customer relationships and increase sales to a level that will allow us to reach and maintain profitability. If we are unable to retain qualified sales personnel or if newly hired personnel fail to develop the necessary skills or to reach productivity when anticipated, we may not be able to increase sales of our products and services, and our results of operation could be significantly harmed.
 
If we are unable to manage our professional services organization, we will be unable to provide our customers with technical support for our products, which could significantly harm our business and operating results.
 
Services revenues, which generated 83% and 79% of our total revenues during the fiscal years ended March 31, 2011 and 2010, respectively, are comprised primarily of revenues from consulting fees, maintenance contracts and training and are important to our business. Services revenues have lower gross margins than license revenues. We generally charge for our professional services on a time and materials rather than a fixed-fee basis. To the extent that customers are unwilling to utilize third-party consultants or require us to provide professional services on a fixed-fee basis, our cost of services revenues could increase and could cause us to recognize a loss on a specific contract, either of which would adversely affect our operating results. If we do not properly manage our costs of professional services, we could adversely affect our operating results. In addition, if we are unable to provide these professional services, we may lose sales or incur customer dissatisfaction, and our business and operating results could be significantly harmed.
 
 
12

 
 
If new versions and releases of our products contain errors or defects, we could suffer losses and negative publicity, which would adversely affect our business and operating results.
 
Complex software products such as ours often contain errors or defects, including errors relating to security, particularly when first introduced or when new versions or enhancements are released. In the past, we have discovered defects in our products and provided product updates to our customers to address such defects. Our products and other future products may contain defects or errors that could result in lost revenues, a delay in market acceptance or negative publicity, each which would significantly harm our business and operating results.
 
Demand for our products and services will decline significantly if our software cannot support and manage a substantial number of users.
 
Our strategy requires that our products be highly scalable. To date, only a limited number of our customers have deployed our products on a large scale. If our customers cannot successfully implement large-scale deployments, or if they determine that we cannot accommodate large-scale deployments, our business and operating results would be significantly harmed.
 
If we become subject to product liability litigation, it could be costly and time consuming to defend and could distract us from focusing on our business and operations.
 
Since our products are company-wide, mission-critical computer applications with a potentially strong impact on our customers’ sales, errors, defects or other performance problems could result in financial or other damages to our customers. Although our license agreements generally contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate such limitation of liability provisions. Product liability litigation, even if it were unsuccessful, would be time consuming and costly to defend.
 
Our results of operations will be reduced by charges associated with stock-based compensation, accelerated vesting associated with stock options issued to employees, charges associated with other securities issued by us, and charges related to variable accounting.
 
We have in the past and expect in the future to incur a significant amount of charges related to securities issuances, which will negatively affect our operating results. We adopted the provisions of ASC 718, Compensation-Stock Compensation (ASC 718), using a modified prospective application. We use the Black-Scholes option pricing model to determine the fair value of our share-based payments and recognize compensation cost on a straight-line basis over the vesting periods. This pronouncement from the FASB provides for certain changes to the method for valuing stock-based compensation. Among other changes, ASC 718 applies to new awards and to awards that are outstanding which are subsequently modified or cancelled. Compensation expense calculated under ASC 718 will continue to negatively impact our operating results.
 
Failure to improve and maintain relationships with systems integrators and consulting firms, which assist us with the sale and installation of our products, would impede the acceptance of our products and the growth of our revenues.
 
Our strategy has been to rely in part upon systems integrators and consulting firms to recommend our products to their customers and to install and deploy our products. To date, we have had limited success in utilizing these firms as a sales channel or as a provider of professional services. To increase our revenues and implementation capabilities, we must continue to develop and expand our relationships with these systems integrators and consulting firms. If these systems integrators and consulting firms are unwilling to install and deploy our products, we may not have the resources to provide adequate implementation services to our customers, and our business and operating results could be significantly harmed.
 
Some of our customers are hosted by a third-party provider.
 
Some of our CM customers’ licenses are hosted by a third-party data center provider under contract to us. Failure of the data center provider to maintain service levels as contracted could result in customer dissatisfaction, customer losses and potential product warranty or performance liabilities.
 
Our ongoing litigation with Trilogy, Inc. relating to our corporate governance could have a material adverse effect on our results of operations and financial condition.
 
On December 22, 2008, we filed suit in the Court of Chancery of the State of Delaware against Trilogy, Inc. and certain related parties (“Trilogy”) seeking declaratory relief that our Rights Agreement as amended on November 16, 2008 was an appropriate measure to protect a valuable asset of ours—our net operating loss carryforwards and related tax credits—from being limited as to utilization as provided under Section 382 of the Internal Revenue Code (IRC) which could in turn substantially reduce the value of that asset to all of our shareholders. We sued Trilogy after (i) we amended our Rights Agreement on November 16, 2008 to reduce the ownership threshold from 15% to 4.99%, with existing 5% or greater shareholders limited to acquiring no more than an additional 0.5% and, (ii) despite the ownership threshold, Trilogy increased its beneficial ownership by 0.51% to 6.71% as announced in its 13(d) filing with the SEC on December 22, 2008. As a result, on January 2, 2009, a special committee of our Board of Directors declared Trilogy an “Acquiring Person” under the Rights Agreement, exchanged the rights (other than those belonging to Trilogy) for new shares of common stock under the Exchange Provision in the Rights Agreement, adopted an amended Rights Agreement and declared a new dividend of rights under the amended Rights Agreement.
 
 
13

 
 
On January 16, 2009, the defendants in this action, Trilogy, filed an answer to our complaint and a counterclaim alleging that our Board of Directors had breached fiduciary duties in amending the Rights Agreement, in exchanging the rights, in adopting the amended Rights Agreement and in declaring a new dividend of rights.  We, and our Board of Directors, believe that the actions taken were lawful and appropriate under the circumstances and in the interest of all our shareholders and therefore the allegations of the counterclaim were without merit.  The counterclaim asked for various measures of equitable relief and also included a claim for punitive or exemplary damages, which are not available in Delaware.  The case was tried in the Delaware Court of Chancery in 2009.
 
On February 26, 2010, the Delaware Court of Chancery issued a memorandum opinion that determined, among other things (i) that the actions taken by our Board of Directors and its special committee were lawful and appropriate under the circumstances, and (ii) that Trilogy was not entitled to relief for its counterclaims.  An appeal from this decision was filed with the Delaware Supreme Court.  On October 11, 2010, the Delaware Supreme court issued an opinion that affirmed the Court of Chancery’s ruling in our favor, confirming the validity of the actions the Board of Directors and its special committee took to preserve our net operating losses.
 
On November 11, 2010, we filed suit in the Delaware Court of Chancery against Trilogy seeking a declaratory judgment that we are not obligated to pay more than $1 million in fees demanded by Trilogy in connection with an alleged “investigation” into our corporate governance policies and procedures.  On January 13, 2011, Trilogy answered our complaint and asserted a counterclaim for such fees.  We filed a reply on February 2, 2011, and this action is ongoing.

There can be no assurance that we will prevail in our current litigation with Trilogy. In the event that we are not successful in that litigation and Trilogy, we could incur significant costs if the Court orders us to pay the fees demanded by Trilogy. Moreover, even if we are successful, the resolution of the litigation has been expensive, time consuming and distracted management from the conduct of our business.

As the costs of this litigation and related legal work are directly related to the issuance of shares under our rights plan, the costs of the litigation have been charged as issuance costs against the additional paid in capital account on our balance sheet, less a reserve for anticipated recovery from our Director’s and Officer’s insurance policy, which is reflected in prepaid expenses and other current assets on our balance sheet.  As of March 31, 2011 and 2010, the amounts charged to additional paid in capital were approximately $0.3 million and $1.3 million, respectively, and the anticipated recovery from our insurance policy was not significant as of March 31, 2011 and $0.1 million as of March 31, 2010.
 
Anti-takeover defenses that we have in place could prevent or frustrate attempts by stockholders to change our board of directors or the direction of our company.
 
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, Delaware law and the stockholder rights agreement adopted by us on February 4, 2003, as subsequently amended and restated on January 2, 2009, may make it more difficult for or prevent a third party from acquiring control of us without approval of our directors. These provisions include:
 
 
requiring a majority vote in uncontested elections of directors;
 
 
restricting the ability of stockholders to call special meetings of stockholders;
 
 
prohibiting stockholder action by written consent;
 
 
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings;
 
 
granting our board of directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval; and
 
 
issuing shareholders rights to purchase additional shares of stock in the event that any person, together with its affiliates and associates, (i) acquires beneficial ownership of 4.99% or more of our outstanding common stock or (ii) commences a tender offer for our shares if upon consummation of the tender offer such person would beneficially own 4.99% or more of the outstanding common stock, subject, in each case, to certain exceptions.
  
These provisions may have the effect of entrenching our board of directors and may deprive or limit your strategic opportunities to sell your shares.
 
See the immediately preceding risk factor and Item 1, “Legal Proceedings,” of Part II of this report.
 
 
14

 
 
Compliance with new regulations dealing with corporate governance and public disclosure may result in additional expenses and require significant management attention.
 
The Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and The NASDAQ Global Market, have required changes in corporate governance practices of public companies. These rules are increasing our legal and financial compliance costs and causing some management and accounting activities to become more time-consuming and costly. This includes increased levels of documentation, monitoring internal controls, and increased manpower and use of consultants to comply. We have and will continue to expend significant efforts and resources to comply with these rules and regulations and have implemented a comprehensive program of compliance with these requirements and high standards of corporate governance and public disclosure.
 
These rules may also make it more difficult and more expensive for us to obtain director and officer liability insurance, and may make us accept reduced coverage or incur substantially higher costs for such coverage. The rules and regulations may also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our Audit Committee.
 
Restrictions on export of encrypted technology could cause us to incur delays in international product sales, which would adversely impact the expansion and growth of our business.
 
Our software utilizes encryption technology, the export of which is regulated by the United States government. If our export authority is revoked or modified, if our software is unlawfully exported or if the United States adopts new legislation restricting export of software and encryption technology, we may experience delay or reduction in shipment of our products internationally. Current or future export regulations could limit our ability to distribute our products outside of the United States. While we take precautions against unlawful exportation of our software, we cannot effectively control the unauthorized distribution of software across the Internet.
 
Unauthorized break-ins or other assaults on our computer systems could harm our business.
 
Our servers are vulnerable to physical or electronic break-ins and similar disruptions, which could lead to loss of data or public release of proprietary information. In addition, unauthorized persons may improperly access our data. These and other types of attacks could harm us. Actions of this sort may be very expensive to remedy and could adversely affect results of operations.
 
Changes to accounting standards and financial reporting requirements or tax laws, may affect our financial results.
 
We are required to follow accounting and financial reporting standards set by governing bodies in the U.S. and other countries where we do business. From time to time, these governing bodies implement new and revised laws and regulations. These new and revised accounting standards, financial reporting and tax laws may require changes to accounting principles used in preparing our financial statements. These changes may have a material impact on our business and financial results. For example, a change in accounting rules can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change became effective. As a result, changes to existing rules or reconsideration of current practices caused by such changes may adversely affect our reported financial results or the way we conduct our business.
 
Increasing government regulation of the Internet could limit the market for our products and services, or impose greater tax burdens on us or liability for transmission of protected data.
 
As electronic commerce and the Internet continue to evolve, federal, state and foreign governments may adopt laws and regulations covering issues such as user privacy, taxation of goods and services provided over the Internet, pricing, content and quality of products and services. If enacted, these laws and regulations could limit the market for electronic commerce, and therefore the market for our products and services. Although many of these regulations may not apply directly to our business, we expect that laws regulating the solicitation, collection or processing of personal or consumer information could indirectly affect our business.
 
Item 1B.
Unresolved Staff Comments
 
Not applicable.
 
Item 2.
Properties
 
Facilities
 
Our headquarters is located in San Jose, California.  In August 2009, we amended the lease with our landlord that enabled us to relocate to a smaller commercial space of approximately 6,400 square feet under a term lease that expires on October 31, 2011.  We also leased office space in San Francisco, California, with a lease that expired in April 2010.  During the first quarter of fiscal 2011, we have consolidated our San Francisco employees into our San Jose facility.
 
 
15

 
 
Item 3.
Legal Proceedings
 
Rights Agreement
 
On December 22, 2008, we filed suit in the Court of Chancery of the State of Delaware against Trilogy, Inc. and certain related parties (“Trilogy”) seeking declaratory relief that our Rights Agreement as amended on November 16, 2008 was an appropriate measure to protect a valuable asset of ours—our net operating loss carryforwards and related tax credits—from being limited as to utilization as provided under Section 382 of the Internal Revenue Code (IRC) which could in turn substantially reduce the value of that asset to all of our shareholders. We sued Trilogy after (i) we amended our Rights Agreement on November 16, 2008 to reduce the ownership threshold from 15% to 4.99%, with existing 5% or greater shareholders limited to acquiring no more than an additional 0.5% and, (ii) despite the ownership threshold, Trilogy increased its beneficial ownership by 0.51% to 6.71% as announced in its 13(d) filing with the SEC on December 22, 2008. As a result, on January 2, 2009, a special committee of our Board of Directors declared Trilogy an “Acquiring Person” under the Rights Agreement, (exchanged the rights (other than those belonging to Trilogy) for new shares of common stock under the Exchange Provision in the Rights Agreement), adopted an amended Rights Agreement and declared a new dividend of rights under the amended Rights Agreement.
 
On January 16, 2009, the defendants in this action, Trilogy, filed an answer to our complaint and a counterclaim alleging that our Board of Directors had breached fiduciary duties in amending the Rights Agreement, in exchanging the rights, in adopting the amended Rights Agreement and in declaring a new dividend of rights.  We, and our Board of Directors, believe that the actions taken were lawful and appropriate under the circumstances and in the interest of all our shareholders and therefore the allegations of the counterclaim were without merit.  The counterclaim asked for various measures of equitable relief and also included a claim for punitive or exemplary damages, which are not available in Delaware.  The case was tried in the Delaware Court of Chancery in 2009.
 
On February 26, 2010, the Delaware Court of Chancery issued a memorandum opinion that determined, among other things (i) that the actions taken by our Board of Directors and its special committee were lawful and appropriate under the circumstances, and (ii) that Trilogy was not entitled to relief for its counterclaims.  An appeal from this decision was filed with the Delaware Supreme Court.  On October 11, 2010, the Delaware Supreme Court issued an opinion that affirmed the Court of Chancery’s ruling in our favor, confirming the validity of the actions the Board of Directors and its special committee took to preserve our net operating losses.  On November 11, 2010, we filed suit in the Delaware Court of Chancery against Trilogy seeking a declaratory judgment that we are not obligated to pay more than $1 million in fees demanded by Trilogy in connection with an alleged “investigation” into our corporate governance policies and procedures.  On January 13, 2011, Trilogy answered our complaint and asserted a counterclaim for such fees.  We filed a reply on February 2, 2011, and this action is ongoing. 

As the costs of this litigation and related legal work are directly related to the issuance of shares under our rights plan, the costs of the litigation have been charged as issuance costs against the additional paid in capital account on our balance sheet, less a reserve for anticipated recovery from our Director’s and Officer’s insurance policy, which is reflected in prepaid expenses and other current assets on our balance sheet.  As of March 31, 2011 and 2010, the amounts charged to additional paid in capital were approximately $0.3 million and $1.3 million, respectively, and the anticipated recovery from our insurance policy was minimal as of March 31, 2011 and $0.1 million as of March 31, 2010.
 
Other
 
In the future we may be subject to other lawsuits, including claims relating to intellectual property matters or securities laws. Any litigation, even if not successful against us, could result in substantial costs and divert management’s and other resources away from the operations of our business. If successful against us, we could be liable for large damage awards and, in the case of patent litigation, subject to injunctions that significantly harm our business.
 
Item 4.
Removed and Reserved.
 
 
16

 
 
PART II
 
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is traded over the counter on The NASDAQ Global Market (“NASDAQ”) under the symbol “SLTC.” Our common stock began trading in March 2000.
 
As of June 15, 2011, there were approximately 98 holders of record of our common stock. Brokers and other institutions hold many of such shares on behalf of stockholders.
 
   
High (1)
   
Low (1)
 
Fiscal 2010
           
First Quarter
  $ 10.00     $ 6.40  
Second Quarter
  $ 8.40     $ 6.60  
Third Quarter
  $ 7.40     $ 4.20  
Fourth Quarter
  $ 6.00     $ 3.80  
Fiscal 2011
               
First Quarter
  $ 6.30     $ 4.30  
Second Quarter
  $ 5.99     $ 4.50  
Third Quarter
  $ 5.66     $ 4.27  
Fourth Quarter
  $ 6.28     $ 4.19  
 
(1)
On February 9, 2010, our Board of Directors approved a one-for-twenty reverse stock split of Selectica common stock, effective February 24, 2010. The reverse stock split was intended to bring us in compliance with NASDAQ Listing Rules related to the minimum trading price of the company’s common stock. The above stock prices have been adjusted to reflect the reverse stock split.
 
The trading price of our common stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates or purchase recommendations by securities analysts and other events or factors. In addition, the stock market has experienced volatility that has affected the market prices of equity securities of many high technology companies and that often has been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock.
 
Equity Compensation Plan Information
 
The following table sets forth as of March 31, 2011, certain information regarding our equity compensation plans.
 
   
A
   
B
   
C
 
Plan category
 
Number of
securities to
be issued upon
exercise of
outstanding options
warrants and rights
   
Weighted-average
exercise price of
outstanding options
warrants and rights
   
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in Column A)
 
   
(in thousands, except for per share amounts below)
 
Equity compensation plans approved by stockholders
   
159
   
$
10.03
     
1,253
 (1)(2)
Equity compensation plans not approved by stockholders
   
3
   
$
39.73
     
182
 
Total
   
162
   
$
10.52
     
1,435
 
 
(1)
These plans permit the grant of options, stock appreciation rights, shares of restricted stock and stock units.
 
(2)
Beginning January 1, 2001, and each anniversary thereafter up to and including January 1, 2010, the number of shares reserved for issuance under our 1999 Equity Incentive Plan was automatically increased by the lesser of 5% of the then outstanding shares of common stock or 180,000 shares.  In May, 2010, the 1999 Equity Incentive Plan was amended such that the number of shares reserved for issuance are no longer automatically increased and a total of 1,551,000 shares are reserved for future issuance thereunder.  On each May 1, starting in 2001, the number of shares reserved for issuance under our 1999 Employee Stock Purchase Plan will be automatically increased by the lesser of 2% of the then outstanding shares of common stock or 100,000 shares.
 
 
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Stock Option Plans—Not Required to be Approved by Stockholders
 
2001 Supplemental Plan
 
We adopted the 2001 Supplemental Plan (the “Supplemental Plan”) on May 30, 2001; the Supplemental Plan did not require stockholder approval. A total of approximately 250,000 shares of common stock have been reserved for issuance under the Supplemental Plan. With limited restrictions, if shares awarded under the Supplemental Plan are forfeited, those shares will again become available for new awards under the Supplemental Plan. The Supplemental Plan permits the grant of non-statutory options and shares of restricted stock. Employees and consultants, who are not officers or members of the Board of Directors, are eligible to participate in the Supplemental Plan. Options are granted at an exercise price of not less than 85% of the fair market value per share on the date of grant. Options generally vest with respect to 25% of the shares one year after the options’ vesting commencement date and the remainder vest in equal monthly installments over the following 36 months. Options granted under the Supplemental Plan have a maximum term of ten years.
 
The Compensation Committee of the Board of Directors administers the Supplemental Plan and has complete discretion to make all decisions relating to the interpretation and operation of the Supplemental Plan. The Compensation Committee has the discretion to determine which eligible persons are to receive an award, and to determine the type, number, vesting requirements and other features and conditions of each award. The exercise price of options may be paid with: cash, outstanding shares of common stock, the cashless exercise method through a designated broker, a pledge of shares to a broker or a promissory note. The purchase price for newly issued restricted shares may be paid with: cash, a promissory note or the rendering of past or future services. The Compensation Committee may reprice options and may modify, extend or assume outstanding options. The Compensation Committee may accept the cancellation of outstanding options in return for the grant of new options. The new option may have the same or a different number of shares and the same or a different exercise price. If a merger or other reorganization occurs, the agreement of merger or reorganization shall provide that outstanding options and other awards under the Supplemental Plan shall be assumed or substituted with comparable awards by the surviving corporation or its parent or subsidiary, shall be continued by the Company if it is the surviving corporation, shall have accelerated vesting and then expire early or shall be cancelled for a cash payment. If a change in control occurs, awards will become fully exercisable and fully vested if the awards do not remain outstanding, are not assumed by the surviving corporation or its parent or subsidiary and if the surviving corporation or its parent or subsidiary does not substitute its own awards that have substantially the same terms for the awards granted under the Supplemental Plan. If a change in control occurs and a plan participant is involuntarily terminated within 12 months following this change in control, then the vesting of awards held by the participant will accelerate, as if the participant provided another 12 months of service. A change in control includes: a merger or consolidation after which the then-current stockholders own less than 50% of the surviving corporation, a sale of all or substantially all of the assets, a proxy contest that results in replacement of more than one-half of the directors over a 24-month period or an acquisition of 50% or more of the outstanding stock by a person other than a person related to the Company, including a corporation owned by the stockholders. The Board of Directors may amend or terminate the Supplemental Plan at any time. The Supplemental Plan will continue in effect indefinitely unless the Board of Directors decides to terminate the plan earlier.
 
Dividend Policy
 
We have never declared or paid any cash dividends on our capital stock. Whether or not a dividend will be paid in the future will be determined by our Board of Directors.
 
Recent Sales of Unregistered Securities
 
Not applicable.
 
Use of Proceeds from Sales of Registered Securities
 
Purchases of Equity Securities by the Issuer
 
We have granted shares of restricted common stock that allow statutory tax withholding obligations incurred upon vesting of those shares to be satisfied by forfeiting a portion of those shares to us. The following table shows the shares acquired by us upon forfeiture of restricted shares during the year ended March 31, 2011.
 
 
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ISSUER PURCHASES OF EQUITY SECURITIES
 
Period
 
Total Number
of Shares
 Purchased
   
Average
Price Paid
 per Share
   
Total Number
of Shares
 Purchased as
 Part of Publicly
 Announced
 Plans or
 Programs
   
Maximum Number
(or Approximate
Dollar Value)
 of Shares That
 May Yet be
Purchased
 Under the Plans
or Program
 
April 1, 2010 – April 30, 2010
                       
May 1, 2010 – May 31, 2010
    269     $ 6.10              
June 1, 2010 – June 30, 2010
                       
July 1, 2010 – July 31, 2010
                       
August 1, 2010 – August 31, 2010
    4,447     $ 5.29              
September 1, 2010 – September 30, 2010
    685     $ 5.35              
October 1, 2010—October 31, 2010
                       
November 1, 2010—November 30, 2010
                       
December 1, 2010—December 31, 2010
    132     $ 5.11              
January 1, 2011 – January 31, 2011
    137     $ 4.95              
February 1, 2011 – February 28, 2011
                       
March 1, 2011—March 31, 2011
                       
                                 
Total
    5,670     $ 5.35              
 
Item 6.
Selected Financial Data.
 
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.
 
 
19

 
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the “Forward-Looking Statements” set forth above.
 
Overview
 
We provide contract management and sales configuration software solutions that allow enterprises to efficiently manage sell-side business processes. Our solutions include software, on demand hosting, professional services and expertise.
 
The Selectica Contract Lifecycle Management (“CLM” or “CM”) solution is a contract authoring, analysis, repository and process automation product designed to enhance and automate the management of the entire contract lifecycle. It helps companies take control of their contract management processes by converting from paper-based to electronic repositories and by unlocking multiple layers of critical business data, making it available for the evaluation of risk, the exposure of lost revenue and the evaluation of supplier performance, and other purposes. Our solution helps to improve the customer buying experience for sales organizations, improve the control of risk and decrease time spent drafting, monitoring and managing contracts for the corporate counsel’s office and gain access to previously hidden discounts through the exposure and elimination of unfavorable agreements for procurement and sourcing organizations.
 
The Selectica Sales Configuration (“SCS”) solution consolidates configuration, pricing and quoting functions into a single application platform enabling companies to streamline the opportunity-to-order process for manufacturers, service providers, and financial services companies. Our SCS solution provides a critical link between Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) systems that helps to simplify and automate the configuration, pricing, and quoting of complex products and services. By empowering customers, internal sales staff, and channel partners to generate error-free sales proposals for their unique requirements, we believe our SCS solution helps companies to close sales faster, accelerate revenue generation and enhance customer relationships.
 
Summary of Operating Results for Fiscal 2011
 
During the fiscal year ended March 31, 2011, our total revenues decreased by 4%, or $0.7 million, to $14.5 million compared with total revenues of $15.2 million for the fiscal year ended March 31, 2010.  CLM products and service revenues totaled $9.2 million or 63% of total revenues, representing a decrease of $0.3 million or 4% over fiscal 2010, whereas our SCS products and service revenues totaled $5.3 million or 37% of total revenues, representing a decrease of $0.3 million or 5% over fiscal 2010.  The CLM year over year decreases resulted primarily from a decrease in our average selling prices, and the SCS year over year decreases were primarily from lower consulting revenues.
 
During the fiscal year ended March 31, 2011, our net loss declined by 68% or $3.1 million, to $1.5 million compared to a net loss of $4.6 million for the fiscal year ended March 31, 2010. The most significant factors affecting the decline in our net loss are (i) decreases in costs for research and development, sales and marketing and general and administrative, reflecting our expense reduction actions, and (ii) a decrease in restructuring charges over the prior year.  We did not incur any restructuring charges during fiscal 2011.
 
With the increase in demand for our SaaS-based subscription CLM solutions, we have modified our licensing model to a subscription license arrangement for these solutions. This shift to subscription licensing arrangements for CLM solutions could adversely affect our short-term financial results and cash flows since the financial terms of the subscription arrangements typically require smaller periodic payments over the term of the arrangement versus the larger, initial payments we have historically received under the perpetual license arrangements. However, we believe that the subscription licensing arrangements will help to increase our ability to attract new customers and improve the predictability of our revenue and cash flows by reducing our dependency on the larger, perpetual licensing arrangements.
 
 
20

 
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are described in notes accompanying the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The preparation of the consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. Estimates are based on information available as of the date of the financial statements, and accordingly, actual results in future periods could differ from these estimates. Significant judgments and estimates used in the preparation of the consolidated financial statements apply critical accounting policies described in the notes to our consolidated financial statements.
 
We consider our recognition of revenue, calculation of liabilities and stock-based compensation to be the most critical judgments that are involved in the preparation of the consolidated financial statements.
 
Results of Operations
 
Revenues
 
   
2011
   
2010
   
Change
 
   
(in thousands, except percentages)
 
License
  $ 2,422     $ 3,182     $ (760 )
Percentage of total revenues
    17 %     21 %     (24 )%
Services
  $ 12,101     $ 11,977     $ 124  
Percentage of total revenues
    83 %     79 %     1 %
Total revenues
  $ 14,523     $ 15,159     $ (636 )
 
License.  License revenues consist of revenue from licensing our software products.  Our fiscal 2011 license revenue decreased by $0.8 million from the prior year primarily due to lower average selling prices.
 
Services.  Services revenues are comprised of fees from consulting, maintenance, training, subscription revenues and out-of pocket reimbursements. Services revenues for fiscal year 2011 increased modestly by $0.1 million, or 1%, from the prior year.  Maintenance revenues were 43% and 50% of total service revenues for the twelve months ended March 31, 2011, and 2010, respectively.
 
We expect services revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on new license revenue and the number and size of new software implementations and follow-on services to our existing customers. We expect maintenance revenue to fluctuate in absolute dollars and as a percentage of services revenues with respect to the number of maintenance renewals, and number and size of new license contracts. In addition, maintenance renewals are extremely dependent upon economic conditions, customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers. Fluctuations in revenue are also due to timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope or renegotiated terms, and additional services.
 
Factors Affecting Operating Results
 
A small number of customers account for a significant portion of our total revenues. We expect that our revenue will continue to depend upon a limited number of customers. If we were to lose a customer, it would have a significant impact upon future revenue. Customers who accounted for at least 10% of total revenues were as follows:
 
   
2011
   
2010
 
Customer A
    16 %     15 %
Customer B
    *       10 %
 
* Less than 10% of total revenues
 
We no longer have significant foreign activities and sales to foreign customers accounted for only 5% of total revenue. We anticipate that any exposure to foreign currency fluctuations will not be significant in the foreseeable future.
 
 
21

 
 
Cost of Revenues
 
   
2011
   
2010
   
Change
 
Cost of license revenues
 
$
434
   
$
163
   
$
271
 
Percentage of license revenues
   
18
%
   
5
%
   
166%
 
Cost of services revenues
 
$
4,470
   
$
5,291
   
$
(821
)
Percentage of services revenues
   
37
%
   
44
%
   
(16%)
 
Total cost of revenues
 
$
4,904
   
$
5,454
   
$
(550
)
 
Cost of License Revenues. Cost of license revenues consists of a fixed allocation of our research and development costs, fees paid to resellers, and costs of purchased third party licenses sold to customers as part of a bundled arrangement. During the fiscal year 2011, license costs increased $0.3 million or 166% compared to the prior year primarily due to the delivery of third party licenses sold to a customer as well as fees paid to a reseller on a new customer contract.

We expect cost of license revenues to decrease in absolute dollars in fiscal year 2012.
 
Cost of Services Revenues. Cost of services revenues is comprised mainly of salaries and related expenses of our services organization plus certain allocated corporate expenses.  During fiscal 2011, these costs decreased by approximately $0.8 million primarily due to the decrease in the use of third-party consultants in both our CM and SCS business segments.
 
We expect cost of service revenues to fluctuate as a percentage of service revenues in fiscal year 2012.
 
Gross Profit and Margin

   
2011
   
2010
 
Gross margin, license revenues
   
82
%
   
95
%
Gross margin, services revenues
   
63
%
   
56
%
Gross margin, total revenues
   
66
%
   
64
%
 
Gross profit was $9.6 million, or 66% of revenues, in fiscal 2011 compared with $9.7 million, or 64% of revenues, in fiscal 2010. The modest improvement in gross profit percentage during fiscal year 2011 resulted from a reduction in our cost of services revenues due to utilizing fewer third-party consultants in our system implementation services.  This was partially offset by the decrease in our average selling prices on new license deals.
 
Gross Margin—Gross margins represent gross profit as a percentage of revenue. Gross margins in fiscal 2011 and 2010 were affected by the factors discussed above under “Revenues” and “Cost of Revenues.”
 
We expect that our overall gross margins will continue to fluctuate due to the timing of service and license revenue recognition and will continue to be adversely affected by lower margins associated with service revenues. The impact on our gross margin will depend on the mix of services we provide, whether the services are performed by our professional services employees or third party consultants, and the overall utilization rates of our professional services organization.
 
 
22

 
 
Operating Expenses
 
   
2011
   
2010
   
Change
 
Total research and development
  $ 2,998     $ 3,274     $ (276 )
Percentage of total revenues
    21 %     22 %     (8 %)

Research and Development. Research and development expenses consist mainly of salaries and related costs of our engineering, quality assurance, technical publications efforts, and certain allocated expenses. The decrease in research and development expenses of $0.3 million in fiscal 2011 compared to fiscal year 2010 was attributable primarily to reductions in the use of outside services in support of our in-house development teams.

We expect research and development expenditures to increase modestly in absolute dollars over the next year as we continue to invest in research in development as evidenced by the Ukraine research and operations center opened during the year. This facility represents a significant investment for us as we look to execute on our global expansion strategy. 

   
2011
   
2010
   
Change
 
Sales and marketing
 
$
4,366
   
$
4,526
   
$
(160
)
Percentage of total revenues
   
30
%
   
30
%
   
(4%)
 
 
Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, trade shows, public relations, collateral sales materials, advertising and certain allocated expenses.  In fiscal 2011, sales and marketing expenses decreased $0.2 million primarily due to a reduction in headcount, which resulted in lower compensation costs compared to the prior fiscal year.  We expect increases in sales and marketing expenses in fiscal 2012 compared to fiscal 2011 both in absolute dollars and as a percentage of total revenues.
 
   
2011
   
2010
   
Change
 
General and administrative
 
$
3,560
   
$
5,368
   
$
(1,808
)
Percentage of total revenues
   
25
%
   
35
%
   
(34%)
 
 
General and Administrative. General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses. General and administrative expenses decreased $1.8 million in fiscal 2011 compared with fiscal 2010 due to significant decreases in legal and accounting expenses, as well as other outside service costs, reflecting our ongoing efforts in cost control.  We expect increases in general and administrative expenses in fiscal 2012 compared to fiscal 2011 both in absolute dollars and as a percentage of total revenues.
 
Restructuring. Restructuring expenses consist primarily of personnel reductions and excess facility charges related to our cost realignment initiatives. The restructuring accrual and the related utilization for the fiscal year ended March 31, 2011 were (in thousands):
 
    Severance and Benefits    
Excess
Facilities
   
Total
 
Balance, March 31, 2010
  $ 7     $     $ 7  
Additional accruals
                 
Amounts paid in cash
    (7 )           (7 )
Balance, March 31, 2011
  $     $     $  
 
During fiscal year 2011 we did not incur any restructuring charges.  During fiscal year 2010 we relocated the corporate headquarters to a smaller facility.  As a result of the relocation, we recorded a one-time charge of approximately $0.4 million for abandoned leasehold improvements.  In addition, we increased severance costs for reduced headcount and increased our excess facility accrual related to our corporate headquarters relocation in the amount of $0.6 million and $0.2 million, respectively.
 
Other income (expense), net
 
   
2011
   
2010
   
Change
Other income (expense), net
 
$
(224
)
 
$
(373
)
 
$
149
 
 
 
23

 
 
Other income (expense), net consists primarily of interest expense on our note payable to Versata, foreign currency fluctuations, and other miscellaneous expenditures.  In fiscal 2011, other income (expense), net decreased $0.1 million primarily due to one-time miscellaneous expenditures in fiscal 2010 relating to the sale of our Indian subsidiary on March 31, 2009.
 
Interest Income
 
   
2011
   
2010
   
Change
Interest income
 
$
51
   
$
50
   
$
1
 
 
Interest income consists primarily of interest earned on cash balances and short-term investments.  Interest income remained relatively flat during the fiscal year 2011.  We anticipate that interest income in fiscal 2012 will decline relative to fiscal 2011 as a result of lower cash balances and lower interest rates.
 
Provision for Income Taxes
 
We incurred an income tax expense of approximately $4,000 for the fiscal year 2011 and we recorded an income tax benefit of approximately ($0.3 million) for fiscal 2010.  As of March 31, 2011, we had federal and state net operating loss carryforwards of approximately $177.4 million and $99.3 million, respectively. As of March 31, 2011, we also had federal and state research and development tax credit carryforwards of approximately $3.1 million and $4.5 million, respectively.
 
The fiscal 2011 and 2010 tax provisions vary from the expected provision or benefit at the U.S. federal statutory rate due to the recording of valuation allowances against our U.S. operating loss carryforwards and the effects of different tax rates in our foreign jurisdictions. Given our history of operating losses and our inability to achieve profitable operations, it is difficult to accurately forecast how results will be affected by the realization of net operating loss carryforwards.
 
Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets. We will continue to evaluate the realizability of the deferred tax assets on a quarterly basis.
 
Liquidity and Capital Resources
 
   
2011
   
2010
 
   
(in thousands)
 
Cash, cash equivalents and short-term investments 
 
$
17,021
   
$
17,155
 
Working capital
 
$
14,275
   
$
15,494
 
Net cash provided by (used for) operating activities
 
$
1,174
   
$
(3,941
)
Net cash used for investing activities
 
$
(210
)
 
$
(212
)
Net cash used for financing activities
 
$
(1,099
)
 
$
(2,146
)
 
Our primary sources of liquidity consisted of approximately $17.0 million in cash, cash equivalents and short-term investments as of March 31, 2011 compared to approximately $17.2 million in cash, cash equivalents and short-term investments as of March 31, 2010.

Net cash provided by operating activities was $1.2 million for the twelve months ended March 31, 2011, resulting primarily from a $1.5 million decrease in accounts receivable, net due to strong cash collection efforts, an increase of $1.0 million in accounts payable and other accrued and long-term liabilities, and non-cash charges of $0.8 million for depreciation and stock-based compensation expense.  These increases were partially offset by our net loss of $1.5 million, and a $0.8 million decrease in deferred revenues.
 
 
24

 
 
Net cash used in operating activities was $3.9 million for the twelve months ended March 31, 2010, resulting primarily from our net loss of $4.6 million, adjusted for non-cash expenses totaling $1.4 million, which included depreciation and amortization, losses on disposal of property and equipment, and stock-based compensation expense.  In addition, we had changes in assets and liabilities using $0.7 million in cash, driven primarily by a $2.5 million decrease in accounts payable and a $1.3 million decrease in restructuring liability, offset by a $1.4 million decrease in accounts receivable and a $1.9 million decrease in prepaid expenses and other current assets.
 
Net cash used for investing activities was $0.2 million for the twelve months ended March 31, 2011 and 2010, resulting primarily from the purchase of capital assets.

As a result of current adverse financial market conditions, investments in some financial instruments may pose risks arising from liquidity and credit concerns. Although we believe our current investment portfolio has very little risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.
 
Net cash used in financing activities was $1.1 million for the twelve months ended March 31, 2011, resulting primarily from $0.3 million in costs to defend our Rights Agreement, as well as $0.8 million of payments on our note payable to Versata.
 
Net cash used in financing activities was $2.1 million for the twelve months ended March 31, 2010, resulting primarily from $1.3 million in costs to defend our Rights Agreement, as well as $0.8 million of payments on our note payable to Versata.
 
We expect to incur significant operating costs for the foreseeable future. We expect to fund our operating costs, as well as our future capital expenditures and liquidity needs, from a combination of available cash balances and internally generated funds. We have no outside debt other than our note payable to Versata, and do not have any plans to enter into borrowing arrangements. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues, our ability to manage costs and ongoing legal proceedings.
 
We believe our cash, cash equivalents, and short-term investment balances as of March 31, 2011 should be adequate to fund our operations through at least March 31, 2012. However, given the significant changes in our business and results of operations in the last 12 months, the fluctuation in cash and investment balances may be greater than presently anticipated.  After the next 12 months, we may find it necessary to obtain additional funds. In the event additional funds are required, we may not be able to obtain additional financing on favorable terms or at all.
 
Contractual Obligations
 
The following table summarizes our outstanding contractual obligations as of March 31, 2011 and the effect those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
 
   
Payments Due by Period
 
Contractual Obligations
 
Total
   
Less than
1 Year
   
1-3 Years
   
3-5 years
   
More than
5 Years
 
Operating lease—real estate
 
$
88
   
$
88
   
$
0
   
$
0
   
$
0
 
Versata note
   
4,268
     
786
     
2,057
     
1,371
     
54
 
Other
   
5
     
3
     
2
     
0
     
0
 
Total
 
$
4,361
   
$
877
   
$
2,059
   
$
1,371
   
$
54
 
 
Our contractual obligations and commercial commitments at March 31, 2011 were approximately $4.4 million. We had no significant commitments for capital expenditures as of March 31, 2011.
 
We do not anticipate any significant capital expenditures, un-planned payments due on long-term obligations, or other contractual obligations. However, management is continuing to review the Company’s cost structure to minimize expenses and use of cash as it implements its planned business model changes. This activity may result in additional restructuring charges for severance and other benefits.
 
 
25

 
 
Off-balance sheet arrangements
 
We have no off-balance sheet arrangements or transactions with unconsolidated limited purpose entities, nor do we have any undisclosed material transactions or commitments involving related persons or entities.
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
 
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K. 
 
Item 8.
Financial Statements and Supplementary Data.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Report of Independent Registered Public Accounting Firm
27
Consolidated Balance Sheets as of March 31, 2011 and 2010
28
Consolidated Statements of Operations—Years ended March 31, 2011 and 2010
29
Consolidated Statements of Stockholders’ Equity—Years ended March 31, 2011 and 2010
30
Consolidated Statements of Cash Flows—Years ended March 31, 2011 and 2010
31
Notes to Consolidated Financial Statements
32
 
 
26

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders
Selectica, Inc.
 
We have audited the accompanying consolidated balance sheets of Selectica, Inc. (the “Company”) as of March 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended March 31, 2011.  In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in Item 15b. These consolidated financial statements and related financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal controls over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Selectica, Inc. at March 31, 2011 and March 31, 2010, and the consolidated results of their operations and their cash flows for each of the two years in the period ended March 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material aspects, the information set forth therein.

/s/ ARMANINO MCKENNA LLP
San Jose, California
June 29, 2011
 
 
27

 
 
SELECTICA, INC.
CONSOLIDATED BALANCE SHEETS
 
   
March 31,
 
   
2011
   
2010
 
   
(in thousands, except par value)
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 16,822     $ 16,957  
Short-term investments
    199       198  
Accounts receivable, net of allowance for doubtful accounts of
               
$55 and $301, as of March 31, 2011 and 2010, respectively
    2,695       4,242  
Prepaid expenses and other current assets
    450       538  
Total current assets
    20,166       21,935  
                 
Property and equipment, net
    423       536  
Other assets
          24  
                 
Total assets
  $ 20,589     $ 22,495  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Current portion of note payable to Versata
  $ 786     $ 786  
Accounts payable
    813       609  
Restructuring liability
          7  
Accrued payroll and related liabilities
    448       483  
Other accrued liabilities
    98       56  
Deferred revenues
    3,746       4,500  
                 
Total current liabilities
    5,891       6,441  
                 
Note payable to Versata, net of current portion
    3,482       4,036  
Other long-term liabilities
    574       27  
                 
Total liabilities
    9,947       10,504  
                 
Commitments and contingencies (See Notes 7 and 8)
               
Stockholders’ equity:
               
Preferred stock, $0.0001 par value:
               
Authorized: 1,000 shares at March 31, 2011 and 25,000 shares at March 31, 2010; None issued and outstanding
           
Common stock, $0.002 par value:
               
     Authorized: 15,000 shares at March 31, 2011 and 150,000 shares at March 31, 2010,
     respectively
               
     Issued and Outstanding: 2,831 and 2,811 shares at March 31, 2011 and 2010,
     respectively
    4       4  
Additional paid-in capital
    265,973       265,836  
Accumulated deficit
    (255,335 )     (253,849 )
                 
Total stockholders’ equity
    10,642       11,991  
                 
Total liabilities and stockholders’ equity
  $ 20,589     $ 22,495  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
28

 
 
SELECTICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Fiscal Years Ended March 31,
 
   
2011
   
2010
 
   
(in thousands, except per share amounts)
 
Revenues:
           
License
  $ 2,422     $ 3,182  
Services
    12,101       11,977  
                 
Total revenues
    14,523       15,159  
Cost of revenues:
               
License
    434       163  
Services
    4,470       5,291  
                 
Total cost of revenues
    4,904       5,454  
                 
Gross profit
    9,619       9,705  
                 
Operating expenses:
               
Research and development
    2,998       3,274  
Sales and marketing
    4,366       4,526  
General and administrative
    3,560       5,368  
Restructuring
          1,245  
Professional fees related to corporate governance review
          438  
Reversal of payroll charges related to stock options
          (541 )
Shareholder litigation
    4       34  
                 
Total operating expenses
    10,928       14,344  
                 
Loss from operations
    (1,309 )     (4,639 )
Other income (expense), net
    (224 )     (373 )
Interest income
    51       50  
                 
Loss before provision for income taxes
    (1,482 )     (4,962 )
Provision for (benefit from) income taxes
    4       (318 )
                 
Net loss
  $ (1,486 )   $ (4,644 )
                 
Basic and diluted net loss per share
  $ (0.53 )   $ (1.66 )
                 
Weighted-average shares of common stock used in computing basic and diluted net loss per share
    2,821       2,794  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
29

 
 
SELECTICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
 
                                           
                                           
                                       
Total
 
   
Common Stock
   
Additional
Paid-In
   
Accum-
ulated
   
Treasury Stock
   
Stock-
holders’
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
Shares
   
Amount
   
Equity
 
Balance at March 31, 2009
    3,345     $ 4     $ 299,383     $ (249,205 )     (568 )   $ (32,906 )   $ 17,276  
Stock-based compensation expense
                705                         705  
Proceeds from sales of shares through employee stock purchase plan
    4             19                         19  
Issuance of additional common shares under Rights Agreement (see Note 8) 
    2                                      
Issuance of restricted stock, net of repurchase
    36                         (8 )     (44 )     (44 )
Retirement of treasury stock
    (576 )           (32,950 )           576       32,950        
Common stock issuance costs, net (see Note 8)
                (1,321 )                       (1,321 )
Net loss
                      (4,644 )                 (4,644 )
Balance at March 31, 2010
    2,811     $ 4     $ 265,836     $ (253,849 )         $     $ 11,991  
                                                         
Stock-based compensation expense
                435                         435  
Proceeds from sales of shares through employee stock purchase plan
    1             6                         6  
Issuance of restricted stock, net of repurchase
    19             (29 )                       (29 )
Common stock issuance costs, net (see Note 8)
                (275 )                       (275 )
Net loss
                      (1,486 )                 (1,486 )
Balance at March 31, 2011
    2,831     $ 4     $ 265,973     $ (255,335 )         $     $ 10,642  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
30

 
 
SELECTICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Fiscal Years Ended March 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Operating activities:
           
Net loss
  $ (1,486 )   $ (4,644 )
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
               
Depreciation
    321       380  
Amortization
          7  
Loss on disposition of property and equipment
    2       354  
Stock-based compensation expense
    435       705  
Changes in assets and liabilities:
               
Accounts receivable, net
    1,547       1,356  
Prepaid expenses and other current assets
    88       1,947  
Other assets
    24       641  
Accounts payable
    204       (2,524 )
Restructuring liability
    (7 )     (1,258 )
Accrued payroll and related liabilities
    (35 )     (237 )
Other accrued and long-term liabilities
    835       (1,237 )
Deferred revenues
    (754 )     569  
                 
Net cash provided by (used for) operating activities
    1,174       (3,941 )
                 
Investing activities:
               
Purchase of capital assets
    (209 )     (213 )
Proceeds from disposition of property and equipment
          3  
Purchase of short-term investments
    (4,351 )     (2 )
Proceeds from maturities of short-term investments
    4,350        
                 
Net cash used for investing activities
    (210 )     (212 )
                 
Financing activities:
               
Payments on note payable to Versata
    (800 )     (800 )
Common stock issuance costs, net (See Note 8)
    (275 )     (1,321 )
Repurchases of common stock, net of proceeds for common stock issuance
    (24     (25 )
                 
Net cash used for financing activities
    (1,099 )     (2,146 )