DETERMINE, INC. 10-K 2013
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number: 0-29637
(Exact Name of Registrant as Specified in Its Charter)
2121 South El Camino Real, 10th Floor, San Mateo, CA 94403
(Address of Principal Executive Offices)
(Registrant’s Telephone Number)
Securities registered under Section 12(b) of the Act:
Securities registered under Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐ No ☒
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 ☒
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 ☒ 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of September 28, 2012, 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 $5.48 per share as reported by The NASDAQ Capital Market on that date, was $8,003,258.
As of May 31, 2013, the registrant had outstanding 3,464,359 shares of common stock and 231,518 shares of Series C Convertible Preferred 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 2013 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, 2013. 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.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
MARCH 31, 2013
Table of Contents
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.
We provide cloud-based software solutions that help companies close deals faster, with less cost, and with lower risk. Selectica Contract Lifecycle Management (CLM) combines a single, company-wide contract repository with a flexible workflow engine capable of supporting each organization’s unique contract management processes. Our cloud solution streamlines contract activities, from request, authoring, negotiation, and approval through ongoing obligations management, analysis, reporting, and renewals. CLM helps companies automate their contract processes, providing a greater level of access to contracts and supporting documents while lowering risk, increasing compliance, and discovering opportunities to increase contract value.
Selectica Guided Selling streamlines the management and dissemination of complex product information, enabling companies to streamline the opportunity-to-order process. Our Guided Selling solution can be seamlessly integrated with leading CRM systems such as Salesforce.com and others, as well as ERP systems like Oracle and SAP, to ensure that the latest product, customer, and pricing data is always being used. This helps to simplify and automate the configuration, pricing, and quoting of complex products and services. By empowering customers, product management, marketing, sales leadership, sales operations, salespeople, and channel partners to generate accurate sales proposals more quickly, we believe our cloud solution helps companies to close deals faster, accelerate revenue generation and enhance customer relationships.
While we offer our customers a range of purchasing and deployment options, from subscription licenses deployed in the cloud to perpetual licenses deployed behind the firewall, beginning in fiscal 2012, we began focusing our business and revenue model on recurring revenues. This is part of our three year plan to transform our business into a software-as-a-service (“SaaS”) business.
Along with our software, we provide our customers with an array of services to assist them in implementations, customizations, system upgrades, migrations, and solution architecture.
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 2121 South El Camino Real 10th Floor, San Mateo, California, 94403 and its website is www.selectica.com.
Selectica Contract Lifecycle Management
Selectica Contract Lifecycle Management (CLM) automates the entire contract lifecycle—from initial request through contract renewal. We believe that our cloud solutions offer a high degree of flexibility, enabling customers across many departments (e.g., sales, services, procurement, finance, IT, leasing, intellectual property, and more) to model their specific contracting processes and to manage the lifecycle of a contract from creation through closure. We believe our CLM solution meets the needs of many challenging and dynamic organizations:
We believe our CLM solution provides the following key features:
• Centralized repository for contracts and attachments
• Full-text, Boolean, and fuzzy search functionality
• Ability to attach native, scanned, and faxed documents to any contract record
• Advanced filtering tools, folders, and hierarchies for document organization
• Amendment consolidation in a single auditable “effective view”
• Microsoft Word add-in for creating, authoring, editing, and checking in contracts
• Data extraction from .doc, .pdf, and faxed third-party documents
• Step-by-step contract creation wizard
Contract process management
• Conditional, parallel, and serial approval workflows
• ESignature integrations (wet or electronic)
• Composers for contracts, boilerplates, approvals, tasks, notifications, and user accounts
• Obligation tracking with alerts, post-execution workflow steps, and advanced reporting
• Alerts for contract renewal opportunities
• Contract renewal authoring based on previous contract records
• Compatibility with iPad, iPhone, Android, and Blackberry devices
• Single-click mobile approvals
• Mobile interface for approving, rejecting, commenting on, and reassigning contracts
• Notifications and tasks for expirations, renewals, obligations, and key milestones
• Custom email alerts
Reporting and analytics
• Scheduled and ad-hoc reporting capabilities
• One-click switching between contract record and report results
• Automated report emails in .pdf, .xls, or .xml format
• Integrations with external report writers, including Crystal Reports, Cognos, and Adobe
• Contract fulfillment tracking
• Personalized dashboards
• Integration with Selectica Guided Selling
• Integration with ERP and business intelligence tools
• Integration with Salesforce.com CRM
• Integration with EMC Documentum
• Strong network (128-bit SSL) and data security
• Permission-based access to data and business processes
• Security and audit reporting
• Suite of composers for managing data, templates, clauses, and more
• Cloud deployment
• Configurable, easy-to-manage interface
Selectica Guided Selling
Selectica Guided Selling (GS) combines the patented Selectica sales configuration technology with a web front-end to make it easier for companies to manage and disseminate complex product and pricing information. Its step-by-step interface guides salespeople and channel partners through the selling process, allowing only valid options and features at each step, thus making the quoting and selling process simpler, faster, and cheaper. Unlike many competitive solutions, Selectica Guided Selling enables virtually unlimited product configuration, pricing and quoting flexibility and provides tight integration with existing applications like CRM and ERP. We believe our Guided Selling cloud solution helps organizations reduce sales cycle time and increase productivity through faster product development, easier product updates, automated sales processes, and seamless integration with existing back-end systems, thus helping to ensure order accuracy. Since quotes are automatically generated, costly product configuration errors are eliminated, margin is preserved, and precious sales time is saved.
Selectica Guided Selling is designed to automate product, solution, and sales configuration for companies with complex product and service offerings. We believe that our Guided Selling solution provides the following key features:
• Playbook interface for defining, maintaining, and updating product rules and behaviors
• Powerful configuration engine that sets conditions by constraints or rules with no coding required
• Easy-to-manage web-based solution
• Integrations with ERP, CRM, and CLM
• Easy spreadsheet import and export
• Role-based access controls
• Permission-based rule publishing
• HTTPS security
• Automated data migration
• Step-by-step guided selling interface
• Fully customizable smart messaging
• Searchable product catalog
• Automated quote generation
• Alerts for expirations, renewals, and upsell opportunities
• Parallel, serial, and conditional approval workflows
Product and sales configuration
• Line-item discounting
• Quote-level discounting
• Rule enforcement for discounting, pricing, promotions, bundling, and margins
• Line-item configurability
• Role-based visibility, pricing, and item availability
• Ability to create multiple quotes per opportunity
• Individual product configurability
Proposal generation (requires integration with Selectica CLM)
• Branded custom layouts for proposal documents
• Proposal generation in PDF or Microsoft Word format
• Ability to generate multiple proposals per opportunity
• Optional eSignature integration
• Ability to email proposals directly from application
Reporting and analytics
• Personalized dashboards
• Group and individual reports
• Lead-to-quote visibility
• Quote-based reporting
As of March 31, 2013, we had a total of 70 employees, all located in the United States. Of the total, 14 are engaged in research and development, 28 are engaged in professional services, 22 are engaged in sales and marketing, and 6 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.
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 lifecycle management and sales configuration solutions. We provide these services using both our in-house expertise and that of third parties experienced in our solutions acting under our direction. As of March 31, 2013, the Professional Services organization had 28 employees, as well as approximately 18 individuals contracted through our Odessa, Ukraine facility as noted below.
Sales and Marketing
We sell our CLM and GS cloud solutions primarily through our direct sales force along with strategic and OEM partners. As of March 31, 2013, our sales team consisted of 14 employees and our marketing team consisted of 8 employees.
Our CLM and GS 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. As of March 31, 2013, we had 14 full-time engineers and technical writing specialists, as well as approximately 35 engineers contracted through our Odessa, Ukraine facility as noted below. Our team primarily works on product development, enhancements, documentation, and quality assurance. For the fiscal years ended March 31, 2013 and 2012, we incurred approximately $3.7 million and $3.4 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 the product subscription or license arrangement.
As of March 31, 2013, we had two contractors performing sales services in Europe. As of March 31, 2012, we did not have any personnel or operations outside the United States but we do business with a number of non-US based companies. During fiscal 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 continue to execute on our global expansion strategy.
The market for cloud-based software solutions in general, including our CLM and Guided Selling solutions, continues to rapidly change. Competitors vary in size and in the scope and breadth of the products and services offered. We encounter competition primarily from companies such as Big Machines and Appttus, as well as (i) software companies that offer integrated solutions or specific products that compete with our CLM or GS 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 five patents in 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.
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.
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 $4.7 million and $6.3 million for the fiscal years ended March 31, 2013 and 2012, respectively. We had an accumulated deficit of approximately $266.4 million as of March 31, 2013. 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.
Our business could be seriously harmed if we lose the services of our key personnel.
Our success depends substantially on the contributions and abilities of our executive management team and other key employees. We believe that these individuals understand our operational strategies and priorities and the steps necessary to drive our long-term growth and stockholder value. The loss of services of one or more members of our management team or other key personnel could disrupt our operations and 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. 26% of our revenues were derived from our top three customers in fiscal year 2013, and 33% of our revenues were derived from our top three customers in fiscal year 2012. 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 significantly harmed.
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.
The Company generates revenue by providing its SaaS solutions through subscription license arrangements and related professional services, as well as through perpetual and term licenses and related software maintenance and professional services. The Company recognizes revenue in accordance with generally accepted accounting standards for software and service companies. The Company recognizes revenue when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) fees are fixed or determinable and (4) collectability is probable. If we determine that any one of the four criteria is not met, we will defer recognition of revenue until all the criteria are met.
Our annual and quarterly recurring and non-recurring 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 CLM customers license our software in a number of ways including subscription licenses and perpetual licenses, 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 solution, starting in fiscal 2012, and continuing in fiscal 2013, we transitioned our business model to 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 continue to 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 five patents in 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.
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 paid in full in fiscal 2012. 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.
Developments in the market for cloud-based software solutions, including our CLM and Guided Selling solutions, may harm our operating results, which could cause a decline in the price of our common stock.
The market for cloud-based software solutions, including CLM and Guided Selling 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. With the transition of our focus to 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 our solutions. Our potential customers may decide to purchase more complete solutions offered by larger competitors instead of individual applications. If the market for our 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, Open Text and SAP, as well as privately held companies such as Appttus 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:
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.
Non-recurring revenues are comprised of revenues from professional services for system implementations, enhancements, and training and, to a lesser extent, perpetual license sales. Professional services generated 31% and 34% of our total revenues during the fiscal years ended March 31, 2013 and 2012, respectively. Our professional services revenues have lower gross margins than license revenues and recurring revenues. We often charge for our professional services on a fixed-fee basis. If we are required to spend more hours than planned without being able to bill for customers, our cost of services revenues could exceed the fees charged to our customers on certain engagements and could cause us to recognize a loss on a contract, which would 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.
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.
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 CLM 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.
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 our stockholder rights agreement, as amended to date, may make it more difficult for or prevent a third party from acquiring control of us without approval of our directors. These provisions include:
These provisions may have the effect of entrenching our board of directors and may deprive or limit your strategic opportunities to sell your shares.
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.
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.
Risk Related to Ownership of Common Stock
Our Common Stock may be delisted from The NASDAQ Capital Market if we cannot satisfy NASDAQ’s continued listing requirements in the future.
Among the conditions required for continued listing on The NASDAQ Capital Market (“NASDAQ”), NASDAQ requires us to maintain at least $2.5 million in stockholders’ equity. Previously, due to the stockholders’ equity deficiency reported in our Form 8-K filed on February 28, 2013, NASDAQ notified us that it was reviewing our eligibility for continued listing on NASDAQ. In order to regain compliance with the stockholders’ equity requirement, on May 31, 2013, the Company issued and sold shares of common stock (the “Common Shares”), Series C Convertible Preferred Stock (the “Series C Stock”) and Series A Warrants to purchase shares of common stock (the “Series A Warrants”) to certain institutional funds and other accredited investors (the “Outside Investors”), pursuant to a Purchase Agreement dated on the same date, raising gross proceeds of approximately $5.7 million. Concurrently, the Company entered into a Subscription Agreement with certain members of the Company’s management and board of directors to sell and issue an additional $0.7 million of Common Shares and Series B Warrants to purchase shares of common (together with the “Series A Warrants, the “Warrants”), subject to stockholder approval, in a second closing anticipated to occur immediately following the Company’s next annual meeting of the stockholders. On June 6, 2013, the Company filed a Current Report on Form 8-K announcing that the Company believes it has regained compliance with the NASDAQ stockholders’ equity requirement.
There can be no assurance that our stockholders’ equity will continue to remain above NASDAQ’s $2.5 million minimum in the future. If we fail to timely comply with the applicable requirements, our stock may be delisted, which could make trading our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. Without a NASDAQ listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficult and the trading volume and liquidity of our stock could decline. Delisting from NASDAQ could also result in negative publicity and could also make it more difficult for us to raise additional capital. Further, if we are delisted, we would also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market. If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on an over-the-counter quotation system, such as the OTCQB market, where an investor may find it more difficult to sell our stock or obtain accurate quotations as to the market value of our common stock. We cannot assure you that our common stock, if delisted from NASDAQ, will be listed on another national securities exchange or quoted on an over-the counter quotation system.
The holders of our Series C Stock are entitled to receive dividends beginning on January 1, 2014.
To the extent the Series C Stock is not earlier converted into common stock by approval at the upcoming stockholders meeting, beginning on January 1, 2014, dividends will accrue on the shares of Series C Stock at a rate of 10% per annum. The dividends are payable quarterly in cash, beginning on March 31, 2014. Dividends on shares of the Series C Stock shall be cumulative, shall accrue, whether or not declared and whether or not there are any profits, surplus or other funds or assets of the Company legally available therefor.
Because of the substantial dividend to which the holders of shares of the Series C Stock are entitled, the amount of cash available to be distributed as a dividend to the holders of shares of our common stock upon declaration of any cash dividend could be substantially limited or reduced to zero.
We are responsible for having the resale of the Common Shares and the shares of common stock underlying the Series C Stock and the Series A Warrants registered with the SEC within defined time periods and will incur liquidated damages if the shares are not registered with the SEC within those defined time periods.
Pursuant to the Registration Rights Agreement, dated as of May 31, 2013 (the “Registration Rights Agreement”), entered into with certain institutional funds and the Outside Investors, we are obligated to: (i) file a registration statement covering the resale of the Common Shares and the common stock underlying the Series C Stock and issuable upon the exercise of the Series A Warrants with the SEC within 45 days following the Initial Closing Date (the “Filing Deadline”); (ii) use commercially reasonable efforts to cause the registration statement to be declared effective (A) within 90 days following the Initial Closing Date (the “Required Effectiveness Date”); provided that, if the SEC reviews and has written comments to the registration statement, then the Required Effectiveness Date will be 120 days from the Initial Closing Date, or (B) within 5 business days following the date the SEC notifies us that it will not review the registration statement or that we may request effectiveness of the registration statement and (iii) use commercially reasonable best to keep the registration statement effective until the earlier of (x) the date on which all the securities covered by such registration statement have been sold, or (y) the date all of the securities covered by such registration statement may be sold without restriction pursuant to Rule 144 of the Securities Act of 1933, as amended.
If we fail to comply with these or certain other provisions under the Registration Rights Agreement, then we will be required to pay liquidated damages equal to one and one-half percent (1.5%) of the aggregate purchase price paid by the Outside Investors for their securities for each 30-day period (or pro rata for any portion thereof) following the Filing Deadline for which no registration statement is filed. The total liquidated damages under this provision are not capped. Any such payments could materially affect our ability to fund our operations.
The Certificate of Designation governing the Series C Stock contains various covenants and restrictions which may limit our ability to operate our business.
Under the Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock (the “Certificate of Designation”) filed by the Company with the Delaware Secretary of State with respect to the Series C Stock, we are not permitted, without the affirmative vote or written consent of the holders of at least 66% of the shares of Series C Stock, directly or indirectly, to take or agree to take any of the following actions, to the extent the Series C Stock is not earlier converted into common stock by approval at the upcoming stockholders meeting:
These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities, any of which could have a material adverse impact on our business.
The Outside Investors will have substantial voting power on matters submitted to a vote of stockholders.
Based on 3,464,359 shares of common stock outstanding as of May 31, 2013, the outstanding Common Shares and shares of Series C Stock issued to the Outside Investors represent, in the aggregate, approximately 20.7% of the voting power of our stock. Additionally, one of the Outside Investors is the Company’s largest existing stockholder. Because the Outside Investors will own a significant percentage of our voting power, they may have considerable influence in determining the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including the election of directors and approval of mergers, consolidations and the sale of all or substantially all of our assets.
In addition, the ownership by the Outside Investors of a substantial percentage of our total voting power and the terms of the Series C Stock could make it more difficult and expensive for a third party to pursue a change of control of our company, even if a change of control would generally be beneficial to our stockholders.
The Series C Stock is redeemable at the option of the holders under certain circumstances.
On or after May 31, 2014, the holders of at least a majority of the then-outstanding shares of Series C Stock may require us to redeem all or any portion of the outstanding shares of Series C Stock, to the extent funds are legally available for such redemption and to the extent the Series C Stock is not earlier converted into common stock by approval at the upcoming stockholders meeting. The redemption price per share of the Series C Stock is equal to the then current conversion price, plus any accrued and unpaid dividends up to, but not including, the redemption date. Depending on our cash resources at the time that this redemption right is exercised, we may or may not be able to fund the redemption from our available cash resources. If we were unable to fund the redemption from available cash resources we would need to find an alternative source of financing to do so. There can be no assurances that we would be able to raise such funds on favorable terms or at all if they are required.
We have agreed to give the holders of shares of the Series C Stock and Warrants the right to participate in subsequent stock issuances.
We agreed that if we issue and sell any new equity securities, subject to certain exceptions, we will give the holders of the Series C Stock and the Warrants the right to purchase a portion of those new securities so as to permit each of them to maintain their proportional ownership in our stock. The existence of this right may make it more difficult for us to obtain financing from third parties that do not wish to have holders of Series C Stock or Warrants participating in their financing.
Our stock price could decline because of the potentially dilutive effect of the Financing and any future financing, Series C Stock or Warrant anti-dilution provisions, or conversion or exercise of the Series C Stock or the Warrants.
The conversion price of the Series C Stock, and the number of shares of common stock underlying the Warrants and the Warrant exercise price, are subject to broad-based weighted-average anti-dilution adjustment in the event the Company issues securities, other than certain excepted issuances and subject to certain limitations, at a price below the then current conversion price or exercise price, respectively.
Assuming exercise in full of all Warrants plus conversion of the Series C Stock (assuming stockholder approval is obtained), approximately an additional 686,000 shares of common stock will be issued and outstanding, diluting our stockholders. Any additional equity or convertible debt financings in the future could result in further dilution to our stockholders. Existing stockholders also will suffer significant dilution in ownership interests and voting rights and our stock price could decline as a result of potential future application of anti-dilution features of our Series C Stock and our Warrants, or dividend or redemption features of our Series C Stock. Additionally, sales in the public market of the shares of common stock acquired upon conversion of shares of the Series C Stock or exercise of the Warrants, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock and impair our ability to raise funds in additional stock financings.
In July 2011, we entered into a new lease for office space in San Mateo, California, to which we relocated our headquarters on October 1, 2011. The lease is for approximately 10,287 square feet of office space for a term of 39 months.
In the future we may be subject to 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.
Our common stock is traded over the counter on The NASDAQ Capital Market (“NASDAQ”) under the symbol “SLTC.” Our common stock began trading in March 2000.
As of May 31, 2013, there were approximately 99 holders of record of our common stock. Brokers and other institutions hold many of such shares on behalf of stockholders.
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, 2013, certain information regarding our equity compensation plans.
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.
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. Beginning on January 1, 2014, the Series C Stock is entitled to 10% accruing dividends per annum, to the extent such shares are not earlier converted into common stock. Such dividends are payable quarterly in cash, beginning on March 31, 2014, out of funds legally available therefor.
Recent Sales of Unregistered Securities
Reference is made to the description of our sale and issuance of unregistered shares of common stock, shares of Series C Stock and Warrants on May 31, 2013 as disclosed in our Current Report on Form 8-K previously filed on June 3, 2013, as amended by Amendment No. 1 to our Current Report on Form 8-K/A previously filed on June 4, 2013, which are incorporated herein by reference.
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. During the year ended March 31, 2013, the Company acquired a total of 85,956 shares at a total cost of $0.3 million. The following table shows the shares acquired by us during the quarter ended March 31, 2013:
ISSUER PURCHASES OF EQUITY SECURITIES
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.
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.
We provide cloud-based software solutions that help growing companies to close deals faster, more profitably, and with lower risk.
Selectica’s Contract Lifecycle Management (CLM) cloud solution combines a single, company-wide contract repository with a flexible workflow engine capable of supporting each organization’s unique contract management processes. Our cloud-based solution streamlines contract processes, from request, authoring, negotiation, and approval through ongoing obligations management, analysis, reporting, and renewals. It helps companies take control of their contract management processes by converting from paper-based to electronic repositories and by unlocking multiple layers of critical business data, making it available for the evaluation of risk, the exposure of lost revenue, the evaluation of supplier performance, and other purposes. The solution helps to improve the customer buying experience for sales organizations, improve the control of risk and decrease time spent drafting, monitoring and managing contracts, and gain access to previously hidden discounts through the exposure and elimination of unfavorable agreements for procurement and sourcing organizations.
Selectica’s Guided Selling (GS) is a cloud solution that streamlines the management and dissemination of complex product information enabling companies to streamline the opportunity-to-order process for manufacturers, service providers, and financial services companies. Our Guided Selling solution can be seamlessly integrated with leading CRM systems, as well as ERP systems like Oracle and SAP, to ensure that the latest product, customer, and pricing data is always being used. This helps to simplify and automate the configuration, pricing, and quoting of complex products and services. By empowering customers, product management, marketing, sales leadership, sales operations, salespeople, and channel partners to generate error-free sales proposals for their unique requirements, we believe our cloud solution helps companies to close sales faster, accelerate revenue generation and enhance customer relationships.
Summary of Operating Results for Fiscal 2013
During the fiscal year ended March 31, 2013, our total revenues increased by 27%, or $3.8 million, to $17.6 million compared with total revenues of $13.8 million for the fiscal year ended March 31, 2012. Recurring revenues, comprised of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues, totaled $11.8 million, or 67% of total revenues, representing an increase of $2.8 million, or 32%, over fiscal 2012. Non-recurring revenues, comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training, totaled $5.8 million, or 33% of total revenues, representing an increase of $0.9 million, or 19%, over fiscal 2012. The increase in recurring revenues year over year resulted primarily from new subscription license customers reflecting the shift in business focus and strategy during the fiscal year ended March 31, 2012 to emphasize our cloud-based solutions. The increase in non-recurring revenues year over year was primarily due to an increase in consulting revenues related to new customers’ purchasing implementation services.
During the fiscal year ended March 31, 2013, our net loss decreased by 24%, or $1.5 million, to $4.7 million compared to a net loss of $6.3 million for the fiscal year ended March 31, 2012. The most significant factors affecting the decrease in our net loss were (i) an increase of $1.8 million in gross margin related to recurring revenues as our shift to emphasize cloud-based solutions during fiscal 2012 yielded recurring revenues as well as new customer in fiscal 2013, and (ii) a $0.5 million reduction in payments and related expenses in connection with our Settlement Agreement with Versata (discussed more fully in Note 14 of our Notes to Consolidated Financial Statements) in fiscal 2012 which did not recur in fiscal 2013, offset by (iii) increases in operating expenses which reflect our ongoing investments in new and differentiated product offerings.
Shift in Business Model
In response to market demand, beginning in fiscal 2012, and continuing in fiscal 2013, we have shifted our primary business focus from the sale of perpetual licenses to subscription license arrangements for our cloud-based solutions. Our business and revenue model is now focused on recurring revenues. This shift 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 revenues and cash flows by reducing our dependency on the larger, perpetual licensing arrangements. Despite the shift in our business model to focus more on our subscription licensing arrangements, which has had the corresponding effect of increasing our recurring revenue, our customers have varied preferences for how they want to deploy our solutions. As such, we will continue to offer and support the traditional software license model that some of our customers still prefer.
Global Settlement with Versata Enterprises
During the fiscal year ended March 31, 2012, we entered into a comprehensive settlement agreement with Versata Enterprises to settle all prior claims between the two companies. The agreement included a mutual cross license of patents, a mutual release of claims against the other, and a mutual covenant not to sue, restricting both parties’ ability to bring future claims against the other.
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
Recurring revenues. Recurring revenues consist of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues. Our fiscal 2013 recurring revenues increased by $2.8 million from the prior year. Subscription revenue growth continued to drive the overall growth in recurring revenues as well as the growth in total revenues. Subscription and hosting revenues grew to $4.4 million for fiscal year 2013, compared to $2.4 million for fiscal year 2012, representing an 83% increase year over year. This result reflects the shift in business focus and strategy to emphasize our cloud-based solutions. Maintenance revenues grew to $7.4 million for fiscal year 2013, compared $6.5 million for fiscal year 2012, representing a 13% increase year over year. Recurring revenues continue to account for over 60% of our total revenues and we expect this trend to continue going forward.
Non-recurring revenues. Non-recurring revenues are comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training. Non-recurring revenues for fiscal year 2013 increased by $0.9 million primarily due to a $0.7 million increase in service revenues associated with new customers’ implementations of our hosted software. Additionally, perpetual license revenues grew to $0.4 million for fiscal year 2013, compared to $0.1 million for fiscal year 2012, due to two new customers purchasing such licenses in fiscal year 2013.
We expect non-recurring revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on new license revenue and the number and size of new software implementations and follow-on services to our existing customers. We expect recurring revenues to fluctuate in absolute dollars and as a percentage of total revenues with respect to the number of maintenance renewals, and number and size of new subscription license contracts. In addition, maintenance renewals are extremely dependent upon economic conditions, customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers. Fluctuations in revenue are also due to timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope or renegotiated terms, and additional services.
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:
We do not have significant foreign activities. Sales to foreign customers accounted for only 12% of total revenue, and only 1% of revenues were denominated in foreign currency in fiscal 2013. We anticipate that any exposure to foreign currency fluctuations will not be significant in the foreseeable future.
Cost of Revenues
Recurring cost of revenues. Recurring cost of revenues consist of costs associated with supporting our data center, a fixed allocation of our research and development costs, and salaries and related expenses of our support organization. During fiscal 2013, recurring cost of revenues increased $1.0 million or 103% compared to the prior year primarily due to a corresponding increase in recurring revenues of $2.8 million during the same period, as well as increased infrastructure spending in hosting and support costs during fiscal 2013.
We expect recurring cost of revenues to increase in absolute dollars in fiscal 2014.
Non-recurring cost of revenues. Non-recurring cost of revenues is comprised mainly of salaries and related expenses of our services organization, fees paid to resellers, costs of purchased third party licenses sold to customers as part of a bundled arrangement, and certain allocated corporate expenses. During fiscal 2013, these costs increased by approximately $0.9 million primarily due to the corresponding $0.7 million increase in professional services revenues, as well as some additional costs incurred in certain projects that were not billable to customers. The gross margin on non-recurring revenues was 6% in both fiscal 2013 and 2012.
We expect non-recurring cost of revenues to increase in absolute dollars in fiscal 2014.
Gross Profit and Margin
Gross profit was $10.1 million, or 58% of revenues, in fiscal 2013 compared with $8.2 million, or 60% of revenues, in fiscal 2012. The decrease in gross profit percentage during fiscal year 2013 resulted from lower gross margins from our recurring revenues due to increased spending in hosting infrastructure costs during fiscal 2013.
Gross Margin—Gross margins represent gross profit as a percentage of revenue. Gross margins in fiscal 2013 and 2012 were affected by the factors discussed above under “Revenues” and “Cost of Revenues.”
We expect that our overall gross margins will continue to fluctuate primarily due to the timing of service revenue recognized and will continue to be adversely affected by lower margins associated with service revenues. The impact on our gross margin will depend on the mix of services we provide, whether the services are performed by our professional services employees or third party consultants, and the overall utilization rates of our professional services organization.
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 increase in research and development expenses of $0.3 million in fiscal 2013 compared to fiscal year 2012 was primarily due to additional expenses invested into our Ukraine research and operations center.
We expect research and development expenditures to remain relatively flat in fiscal 2014.
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 2013, sales and marketing expenses increased $0.5 million primarily due to increased marketing costs. We expect increases in sales and marketing expenses in fiscal 2014 compared to fiscal 2013 both in absolute dollars and as a percentage of total revenues.
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 $0.1 million in fiscal 2013 compared with fiscal 2012 primarily due to a $0.2 million decrease in legal costs since the settlement with Versata was negotiated in fiscal 2012 as discussed below, partially offset by a $0.1 million increase in bad debt expense in fiscal 2013. Additionally, we experienced a $0.3 million decrease in bonus expense, which was offset by a $0.3 million increase in stock-based compensation expense during fiscal 2013 compared to fiscal 2012. We expect modest increases in general and administrative expenses in fiscal 2014 compared to fiscal 2013 in absolute dollars, primarily due to stock-based compensation expense due to restricted stock grants made in fiscal 2013.
Fees Related To Comprehensive Settlement Agreement. Fees related to our Comprehensive Settlement Agreement consist of a $0.5 million charge in fiscal 2012 for consulting services as part of our settlement with Versata, as discussed further in Note 8 of the Notes to Consolidated Financial Statements.
Loss on Early Extinguishment of Note Payable
Loss on early extinguishment of note payable in fiscal 2012 relates to a $0.5 million charge resulting from the Versata note payoff, as discussed further in Note 8 of the Notes to Consolidated Financial Statements.
Provision for Income Taxes
Due to our net loss, we did not record income tax expense for fiscal 2013 or 2012. As of March 31, 2013, we had federal and state net operating loss carryforwards of approximately $186.6 million and $93.0 million, respectively. As of March 31, 2013, we also had federal and state research and development tax credit carryforwards of approximately $3.5 million and $5.0 million, respectively.
The fiscal 2013 and 2012 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 it is difficult to accurately forecast how results would 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
Our primary sources of liquidity consisted of approximately $12.1 million in cash and cash equivalents as of March 31, 2013, $6.0 million of which was received from our short-term credit facility. This compares to approximately $16.1 million in cash, cash equivalents and short-term investments as of March 31, 2012, $6.0 million of which was received from our short-term credit facility.
Net cash used for operating activities was $3.4 million for the twelve months ended March 31, 2013, resulting primarily from our net loss of $4.7 million, adjusted for non-cash expenses totaling $1.3 million, which included depreciation and stock-based compensation expense.
Net cash used for operating activities was $1.9 million for the fiscal year ended March 31, 2012, resulting primarily from our net loss of $6.3 million, adjusted for non-cash expenses totaling $0.9 million, which included depreciation, losses on disposal of property and equipment, and stock-based compensation expense. In addition, we had changes in assets and liabilities providing $3.5 million in cash, driven primarily by a $2.4 million increase in deferred revenues, and a $1.3 million increase in accrued payroll and related liabilities, offset by a $0.4 million decrease in accounts payable.
Net cash used for investing activities was $0.1 million for the fiscal year ended March 31, 2013, resulting primarily from the purchase of capital assets offset by proceeds from maturities of short-term investments.
Net cash used for investing activities was $0.2 million for the fiscal year ended March 31, 2012, resulting primarily from the purchase of capital assets.
Net cash used in financing activities was $0.3 million for the fiscal year ended March 31, 2013, resulting primarily from repurchases of common stock from employees.
Net cash provided by financing activities was $1.2 million for the fiscal year ended March 31, 2012, resulting primarily from $6.0 million received from our credit facility borrowings, offset by our $4.3 million payments to Versata, as well as $0.5 million in purchased treasury shares in connection with our Settlement Agreement with 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, internally generated funds, and our short-term credit facility. We have no outside debt other than our short-term credit facility, and do not have any plans to enter into any additional borrowing arrangements. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues, and our ability to manage costs.
We expect that our cash on hand and future cash flows provided by operating activities will be sufficient to fund our working capital and general corporate needs and the non-discretionary capital expenditures for the foreseeable future. In the first quarter of fiscal 2014, we closed the initial tranche of a private placement sale of common and preferred shares of stock with gross proceeds to the Company of approximately $5.7 million.
The following table summarizes our outstanding contractual obligations as of March 31, 2013 and the effect those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
Our contractual obligations and commercial commitments at March 31, 2013 were approximately $6.4 million.
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.
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.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of Selectica, Inc. (the “Company”) as of March 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the fiscal years in the two-year period ended March 31, 2013. 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 and financial statement schedule referred to above present fairly, in all material respects, the financial position of Selectica, Inc. at March 31, 2013 and March 31, 2012, and the consolidated results of their operations and their cash flows for each of the fiscal years in the two-year period ended March 31, 2013, 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 LLP
San Jose, California
June 17, 2013
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Business
Selectica, Inc. (the “Company” or “Selectica”) is a market and technology leader in cloud-based solutions that helps growing companies to close deals faster, more profitably, and with lower risk. Selectica is committed to making its customers successful by developing innovative software that the world’s most successful companies rely on to improve the effectiveness of their sales and contracting processes. Founded in 1996, the Company was originally organized to provide configuration, pricing management and quoting solutions for automating customers’ opportunity to order process. In May 2005, the Company purchased Determine Software, Inc. and entered the contract management software business. The Company's software solutions are based on patented technologies delivered through the cloud, makinsg it easy for customers in industries like high-tech, telecommunications, manufacturing, healthcare, financial services, and government contracting to overcome product and channel complexity, increase deal value, and accelerate time to revenue.
2. Summary of Significant Policies
Principles of Consolidation
The consolidated financial statements include all accounts of the Company and those of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Fair value of financial instruments
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their fair values.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, and accounts receivable. The Company places its short-term investments in high-credit quality financial institutions. The Company is exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet. The Company’s cash balances periodically exceed the FDIC insured amounts. Investments are not protected by FDIC insurance. Accounts receivable are derived from revenue earned from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral. The Company maintains reserves for potential credit losses, and historically, such losses have not been significant.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash equivalents consist of money market funds, certificates of deposits, and commercial paper. Fair values of cash equivalents approximated original cost due to the short period of time to maturity. The cost of securities sold is based on the specific identification method. The Company’s investment policy limits the amount of credit exposure to any one issuer of debt securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company monitors its investments for impairment on a quarterly basis and determines whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the issuers, the length of time an investment has been below the Company’s carrying value, and the Company’s ability and intent to hold the investment to maturity. If a decline in fair value, caused by factors other than changes in interest rates, is determined to be other-than-temporary, an adjustment is recorded and charged to operations.
Accounts Receivable and Allowance for Doubtful Accounts
The Company evaluates the collectability of its accounts receivable based on a combination of factors. When the Company believes a collectability issue exists with respect to a specific receivable, the Company records an allowance to reduce that receivable to the amount that it believes to be collectible. In making the evaluations, the Company will consider the collection history with the customer, the customer’s credit rating, communications with the customer as to reasons for the delay in payment, disputes or claims filed by the customer, warranty claims, non-responsiveness of customers to collection calls, and feedback from the responsible sales contact. In addition, the Company will also consider general economic conditions, the age of the receivable and the quality of the collection efforts.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives. The estimated useful lives for computer software and equipment is three years, furniture and fixtures is five years, and leasehold improvements is the shorter of the applicable lease term or estimated useful life.
The Company generates revenues by providing its SaaS solutions through subscription license arrangements and related professional services, as well as through perpetual licenses and related software maintenance and professional services. The Company presents revenue net of sales taxes and any similar assessments.
Revenue recognition criteria. The Company recognizes revenue when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) fees are fixed or determinable and (4) collectability is probable. If we determine that any one of the four criteria is not met, the Company will defer recognition of revenue until all the criteria are met.
Multiple-Deliverable Arrangements. The Company enters into arrangements with multiple-deliverables that generally include subscription, support and professional services. If a deliverable has standalone value, and delivery is probable and within the Company’s control, the Company accounts for the deliverable as a separate unit of accounting. Subscription services have standalone value as such services are often sold separately, primarily through renewals. Professional services have standalone value as such services are often sold separately, and are available from other vendors.
Upon separating the multiple-deliverables into separate units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or its best estimate of selling price (“BESP”), if VSOE is not available. The Company has determined that third-party evidence of selling price (“TPE”) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
For professional services, the Company has established VSOE as a consistent number of standalone sales of this deliverable have been priced within a reasonably narrow range. The Company has not established VSOE for its subscription services due to lack of pricing consistency, and other factors. Accordingly, the Company uses its BESP to determine the relative selling price.
The Company determined BESP by considering its price list, as well as overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, contract prices per user, the size and volume of the Company’s transactions, the customer demographic, and its market strategy.
The Company also enters into arrangements consisting of perpetual licenses and related maintenance and support. Revenues for such arrangements are recognized based upon the residual method. Under the residual method, the fair value of the undelivered elements is calculated based upon vendor-specific objective evidence of fair value and recognized as the services are delivered, and the remaining portion of the arrangement fee is recognized as license revenue upon delivery.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Recurring revenues. Recurring revenues consist of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues. Recurring revenues are recognized ratably over the stated contractual period.
Non-recurring revenues. Non-recurring revenues are comprised of revenues from professional services for system implementations, enhancements, and training, and perpetual license sales prior to fiscal 2013. For professional services arrangements billed on a time-and-materials basis, services are recognized as revenue as the services are rendered. For fixed-fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion. The Company recognizes a loss for a fixed-fee professional service if the total estimated project costs exceed project revenues. Perpetual license sales are recognized upon delivery of the product, assuming all the other conditions for revenue recognition have been met.
In certain arrangements with non-standard acceptance criteria, the Company defers the revenue until the acceptance criteria are satisfied. Reimbursements, including those related to travel and out-of-pocket expenses are included in non-recurring revenues, and an equivalent amount of reimbursable expenses is included in non-recurring cost of revenues.
Non-recurring revenues in fiscal year 2013 were comprised of $5.4 million in professional services revenues and $0.4 in perpetual license revenues. Non-recurring revenues in fiscal year 2012 were comprised of $4.7 million in professional services revenues and $0.1 in perpetual license revenues.
A limited number of customers have historically accounted for a substantial portion of the Company’s revenues. The following table presents customers that accounted for more than 10% of revenue for the last two fiscal years:
Customers who accounted for at least 10% of gross accounts receivable were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The cost of advertising is expensed as incurred. Advertising expense for the years ended March 31, 2013 and 2012 was approximately $118,000 and $14,000, respectively. The increase in fiscal year 2013 relates to increased spending on lead generation.
Software Development Costs
Software development costs incurred prior to the establishment of technological feasibility are included in research and development expenses. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the products are capitalized, if material, after consideration of various factors, including net realizable value. To date, software development costs that are eligible for capitalization have not been material and have been expensed as incurred.
The Company recognizes stock-based compensation expense for only those awards ultimately expected to vest on a straight-line basis over the requisite service period of the award, net of an estimated forfeiture rate. The Company estimates the fair value of stock options using a Black-Scholes valuation model, which requires the input of highly subjective assumptions, including the option’s expected term and stock price volatility. In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future.
The effect of recording stock-based compensation expense for each of the periods presented was as follows:
As of March 31, 2013, the unrecorded share-based compensation balance related to stock options outstanding excluding estimated forfeitures was $0.3 million and will be recognized over an estimated weighted average amortization period of 1.7 years. As of March 31, 2013, the unrecorded share-based compensation balance related to stock awards outstanding excluding estimated forfeitures was $3.6 million and will be recognized over an estimated weighted average amortization period of 2.1 years. The amortization period is based on the expected remaining vesting term of the options or awards.
1999 Employee Stock Purchase Plan (“ESPP”)
The Company suspended the ESPP in fiscal year 2013 until January 2013. As such, no purchase period occurred during fiscal year 2013. In fiscal year 2012, the price paid for the Company’s common stock purchased under the ESPP was equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each offering period. The compensation expense in connection with the ESPP for the fiscal year ended March 31, 2012 was $4,600. During the fiscal year ended March 31, 2012 there were 1,000 shares issued under the ESPP at a weighted average purchase price of $4.00 per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
International revenues are attributable to countries based on the location of the customers. For the fiscal years ended March 31, 2013 and 2012, sales to international locations were derived primarily from Canada, India, New Zealand, Switzerland and the United Kingdom.
For the years ended March 31, 2013 and 2012, the Company held long-lived assets outside of the United States with a net book value of approximately $126,000 and $98,000, respectively. These assets were located in Odessa, Ukraine.