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DETERMINE, INC. 10-Q 2017
dtrm20161231_10q.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

 


 

 

FORM 10-Q 

  


 

 

(Mark One)

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

 

  

For the quarterly period ended December 31, 2016

 

OR

 

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

 

  

For the transition period from              to            

 

COMMISSION FILE NUMBER 000-29637

 


 

DETERMINE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 


 

DELAWARE

77-0432030

(State of Incorporation)

(IRS Employer Identification No.)

 

615 West Carmel Drive, Suite 100, Carmel, IN 46032

(Address of Principal Executive Offices)

 

(650) 532-1500

 (Registrant’s Telephone Number, Including Area Code)


  

Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of February 3, 2017, was 11,864,812.

 

 
 

 

   

FORM 10-Q

 

DETERMINE, INC.

 

INDEX

 

PART I FINANCIAL INFORMATION

 

 

 

ITEM 1: Financial Statements

 

Condensed Consolidated Balance Sheets as of December 31, 2016 and March 31, 2016

4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended December 31, 2016 and 2015

5

Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2016 and 2015

7

Notes to Condensed Consolidated Financial Statements

8

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk

26

ITEM 4: Controls and Procedures

26

 

 

 

PART II OTHER INFORMATION

26

 

 

 

ITEM 1: Legal Proceedings

26

ITEM 1A: Risk Factors

26

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

26

ITEM 3: Defaults Upon Senior Securities

26

ITEM 4: Mine Safety Disclosures

26

ITEM 5: Other Information

26

ITEM 6: Exhibits

27

Signatures

28

 

 
 

 

  

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

 

The words “Determine”, “we”, “our”, “ours”, “us”, and the “Company” refer to Determine, Inc. In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in Item 1A to Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016.  You should carefully review the risks described in other documents the Company files from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding the Company’s expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report on Form 10-Q.  The Company undertakes no obligation to release publicly any updates to the forward-looking statements included herein after the date of this document.

 

 
 

 

   

DETERMINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited) 

 

   

December 31,

   

March 31,

 
   

2016

   

2016

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 9,387     $ 9,418  

Accounts receivable, net of allowance for doubtful accounts of $196 and $407 as of December 31, 2016 and March 31, 2016, respectively

    6,759       7,031  

Restricted cash

    34       34  

Prepaid expenses and other current assets

    1,408       1,551  

Total current assets

    17,588       18,034  
                 

Property and equipment, net

    94       136  

Capitalized software development costs, net

    2,131       1,699  

Goodwill

    14,346       14,490  

Other intangibles, net

    6,346       8,011  

Other assets

    1,492       1,843  

Total assets

  $ 41,997     $ 44,213  
                 

LIABILITIES AND EQUITY

               

Current liabilities

               

Credit facility

  $ 10,861     $ 9,000  

Accounts payable

    2,435       1,973  

Accrued payroll and related liabilities

    1,802       1,655  

Other accrued liabilities

    2,020       2,396  

Deferred revenue

    10,028       10,299  

Income tax payable

    78       14  

COFACE loan

    222       407  

Accrued restructuring

    -       403  

Total current liabilities

    27,446       26,147  
                 

Long-term deferred revenue

    5       67  

Convertible note, net of debt discount

    7,374       5,420  

Other long-term liabilities

    1,055       1,382  

Deferred tax liability, non-current

    81       290  

Total liabilities

    35,961       33,306  
                 

Commitments and contingencies (Notes 11 and 12):

               
                 

Controlling stockholders' equity:

               

Common stock, $0.0001 par value: Authorized: 35,000 shares at December 31, 2016 and March 31, 2016; Issued: 11,944 and 11,387 shares at December 31, 2016 and March 31, 2016, respectively; Outstanding: 11,848 and 11,291 shares at December 31, 2016 and March 31, 2016, respectively

    5       5  

Additional paid-in capital

    316,541       313,674  

Treasury stock at cost - 96 shares at December 31, 2016 and March 31, 2016

    (472

)

    (472

)

Accumulated deficit

    (310,040

)

    (302,297

)

Accumulated other comprehensive loss

    (147

)

    (116

)

Total Determine, Inc. stockholders' equity

    5,887       10,794  

Non-controlling interest

    149       113  

Total equity

    6,036       10,907  

Total liabilities and equity

  $ 41,997     $ 44,213  

   

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

 

 
4

 

  

DETERMINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except for per share data)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2016

   

December 31,

2015

   

December 31,

2016

   

December 31,

2015

 
                                 
                                 

Revenues:

                               

Recurring revenues

  $ 5,054     $ 5,354     $ 15,267     $ 15,862  

Non-recurring revenues

    1,798       1,746       4,661       4,218  

Total revenues

    6,852       7,100       19,928       20,080  
                                 

Cost of revenues:

                               

Cost of recurring revenues

    1,777       1,816       5,085       5,003  

Cost of non-recurring revenues

    1,734       1,602       4,978       4,583  

Total cost of revenues

    3,511       3,418       10,063       9,586  
                                 

Gross profit (loss):

                               

Recurring gross profit

    3,277       3,538       10,182       10,859  

Non-recurring profit (loss)

    64       144       (317

)

    (365

)

Total gross profit

    3,341       3,682       9,865       10,494  
                                 

Operating expenses:

                               

Research and development

    1,049       1,230       3,052       2,711  

Sales and marketing

    2,273       3,310       7,843       10,191  

General and administrative

    1,761       1,934       5,432       5,561  

Acquisition related costs

    -       138       -       912  

Total operating expenses

    5,083       6,612       16,327       19,375  
                                 

Loss from operations

    (1,742

)

    (2,930

)

    (6,462

)

    (8,881

)

                                 

Other expense, net

    (462

)

    (149

)

    (1,388

)

    (549

)

Net loss before income tax

    (2,204

)

    (3,079

)

    (7,850

)

    (9,430

)

                                 

Benefit from income taxes

    35       233       143       213  

Consolidated net loss

    (2,169

)

    (2,846

)

    (7,707

)

    (9,217

)

                                 

Net loss (income) attributable to non-controlling interest

    (24

)

    1       (36 )     5  

Net loss attributable to Determine, Inc.

    (2,193

)

    (2,845

)

    (7,743

)

    (9,212

)

                                 

Redeemable preferred stock accretion

    -       -       -       1,000  

Net loss attributable to common stockholders

  $ (2,193

)

  $ (2,845

)

  $ (7,743

)

  $ (10,212

)

                                 
                                 

Basic and diluted net loss per share (Note 9)

  $ (0.18

)

  $ (0.25

)

  $ (0.67

)

  $ (0.90

)

                                 

Weighted-average shares of common stock used in computing basic and diluted net loss per share attributable to common stockholders

    11,944       11,244       11,466       10,212  

 

 
5

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(continued)

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2016

   

December 31,

2015

   

December 31,

2016

   

December 31,

2015

 
                                 

Statements of comprehensive loss:

                               

Consolidated net loss

  $ (2,169

)

  $ (2,846

)

  $ (7,707

)

  $ (9,217

)

Foreign currency translation adjustments, net

    (18

)

    (11

)

    (31

)

    (68

)

Comprehensive loss

    (2,187

)

    (2,857

)

    (7,738

)

    (9,285

)

Less: Net loss (income) attributable to non-controlling interest

    (24

)

    1       (36

)

    5  

Comprehensive loss attributable to Determine, Inc.

  $ (2,211

)

  $ (2,856

)

  $ (7,774

)

  $ (9,280

)

 

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

 

 
6

 

 

DETERMINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2016

   

2015

 
                 
                 

Operating activities

               

Net loss

  $ (7,707

)

  $ (9,217

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    2,478       1,868  

Loss on disposition of property and equipment

    -       14  

Stock-based compensation expense

    1,867       1,870  

Deferred tax liability

    (209

)

    93  

Changes in assets and liabilities:

               

Accounts receivable, net

    272       149  

Prepaid expenses and other current assets

    143       300  

Other assets

    435       (380

)

Accounts payable

    462       113  

Accrued payroll and related liabilities

    147       278  

Accrued restructuring costs

    (403

)

    -  

Other accrued liabilities and other long-term liabilities

    (356

)

    (13

)

Deferred revenue

    (333

)

    (281

)

Net cash used in operating activities

    (3,204

)

    (5,206

)

                 

Investing activities

               

Purchase of property and equipment

    (39

)

    (6

)

Capitalized software

    (1,267

)

    (1,077

)

Purchase of business acquired, net of cash

    -       (826

)

Minority stock payment

    -       (133

)

Net cash used in investing activities

    (1,306

)

    (2,042

)

                 

Financing activities

               

Proceeds from sale of common stock, preferred stock and warrants, net of issuance costs

    -       310  

Employee taxes in exchange for restricted stock awards forfeited

    78       263  

Issuance of common stock under employee stock plan

    80       87  

Credit facility borrowing

    3,000       885  

Credit facility payment

    (1,139

)

    (347

)

Repayment of a loan

    (185

)

    (25

)

Conversion of preferred stock to common stock

    -       (17

)

Issuance of debt, net of costs

    2,429       2,743  

Net cash provided by financing activities

    4,263       3,899  
                 

Effect of exchange rate changes on cash

    216       11  
                 

Net decrease in cash and cash equivalents

    (31

)

    (3,338

)

Cash and cash equivalents at beginning of the period

    9,418       13,178  

Cash and cash equivalents at end of the period

  $ 9,387     $ 9,840  
                 

Supplemental disclosure of cash flow information:

               

Cash paid for interest

  $ 161     $ 241  

Cash paid for taxes

  $ 39     $ 25  

Beneficial conversion feature for convertible redeemable preferred stock

  $ -     $ 371  

Accretion of preferred series stock to redemption value

  $ -     $ 1,000  

Conversion of redeemable preferred stock to common stock

  $ -     $ 5,895  

Issuance of shares in business combination

  $ -     $ 7,954  

Assumption of debt in connection with business combination

  $ -     $ 587  

Stock issued in connection with interest on convertible note

  $ 277     $ -  

Stock issued in connection with interest on loan guaranty

  $ 524     $ -  

Issuance of common stock for legal settlement

  $ 35     $ -  

Gain (loss) from convertible note extinguishment

  $ 166     $ -  

   

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

 

 
7

 

 

DETERMINE, INC. 

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.

Basis of Presentation

 

The condensed consolidated balance sheet as of December 31, 2016, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2016 and 2015 and the condensed consolidated statements of cash flows for the nine months ended December 31, 2016 and 2015 have been prepared by the Company and are unaudited. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial position at December 31, 2016, and the results of operations for the three and nine months ended December 31, 2016 and 2015 and cash flows for the nine months ended December 31, 2016 and 2015, respectively. Interim results are not necessarily indicative of the results for a full fiscal year. The condensed consolidated balance sheet as of March 31, 2016 has been derived from the audited consolidated financial statements at that date.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2016.

 

On October 15, 2015, the Company amended its Certificate of Incorporation and amended and restated its Bylaws to change its name from Selectica, Inc. to Determine, Inc., which became effective immediately. The Company’s common stock began trading under the ticker symbol “DTRM” on October 19, 2015.

 

2.

Summary of Significant Accounting Policies

 

There have been no significant changes to the Company’s accounting policies since it filed its audited consolidated financial statements in its Annual Report on Form 10-K for the year ended March 31, 2016.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. It also includes non-controlling interest, which is the portion of equity in a subsidiary not attributable to a parent. The non-controlling interest of the Company and its subsidiaries are not considered to be permanent equity. Non-controlling interest’s share of subsidiary earnings is reflected as net loss (income) attributable to non-controlling interest in the condensed consolidated statements of operations and comprehensive loss. Additionally, certain prior period amounts have been reclassified to conform to the current year presentation on the condensed consolidated financial statements. The reclassification of the prior period amounts were not material to the previously reported condensed consolidated financial statements.

 

Liquidity

 

The Company has incurred significant historical losses and negative cash flows from operations and has an accumulated deficit of $310 million at December 31, 2016. Until the Company can generate significant cash from operations, its ability to continue as a going concern is dependent upon obtaining additional financing. Management intends to raise additional funds through equity and/or debt offerings until the Company has positive operating cash flows. There is no assurance that the Company will be successful in generating or raising funds, if necessary, to sustain its operations for twelve months or beyond. Should the Company be unable to generate funds or obtain future financing, the Company may have to curtail operations by delaying development programs or relinquishing employees, which may have a material adverse effect on the Company's financial position and results of operations. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates, including, but not limited to, those related to the accounts receivable and allowance for doubtful accounts, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards, best estimate of selling price and income taxes. Actual results could differ from those estimates.

 

 
8

 

  

Revenue Recognition

 

The Company generates revenues by providing its software-as-a-service solutions through subscription license arrangements and related professional services, and related software maintenance. 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 reasonably assured. If the Company determines that any one of the four criteria is not met, the Company will defer recognition of revenue until all the criteria are met.

 

Multiple-Deliverable Arrangements. The Company enters into arrangements with multiple-deliverables that generally include subscription, support and professional services. If a deliverable has standalone value, and delivery is probable and within the Company’s control, the Company accounts for the deliverable as a separate unit of accounting. Subscriptions to use its software solutions have standalone value as such services are often sold separately, primarily through renewals. Professional services have standalone value as the services have value to the customer on a standalone basis 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 the vendor-specific objective evidence of the selling price (“VSOE”), if available, or its best estimate of the 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 and subscription services, the Company has not established VSOE due to lack of pricing consistency and other factors. Accordingly, the Company uses its BESP to determine the relative selling price.

 

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

 

Recurring revenues. Recurring revenues consist of subscription license sales and services, 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. For professional services arrangements billed on a time-and-materials basis, services are recognized as revenue as they 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.

 

Reimbursements, including those related to travel and out-of-pocket expenses are included in non-recurring revenues, and an equivalent amount of reimbursable expenses are included in non-recurring cost of revenues.

 

Customer Concentrations

 

Historically, a limited number of customers have accounted for a substantial portion of the Company’s revenues. However, during the three and nine months ended December 31, 2016 and 2015, no customer accounted for 10% or more of the Company’s revenues or net accounts receivable, respectively.

 

 
9

 

 

Geographic Information

 

International revenues are attributable to countries based on the location of the customer. For the three and nine months ended December 31, 2016 and 2015, sales to international locations were derived primarily from France, the United Kingdom, Ireland, Norway, Australia, Canada, Switzerland, Italy, Germany, Singapore, Bermuda, the Netherlands, United Arab Emirates, Denmark, China, Hong Kong, India, Bulgaria and New Zealand.

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2016

   

December 31,

2015

   

December 31,

2016

   

December 31,

2015

 

International revenues

    27

%

    15

%

    27

%

    18

%

Domestic revenues

    73

%

    85

%

    73

%

    82

%

Total revenues

    100

%

    100

%

    100

%

    100

%

 

 
10

 

 

 Recent Accounting Pronouncements

 

In November 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The update is effective for the Company beginning April 1, 2018 and early adoption is permitted. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory, which removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The update is effective for the Company beginning April 1, 2018 and early adoption is permitted. The Company is evaluating the impact of the adoption of the new guidance on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (Topic 230), which addresses eight specific cash flow matters with the objective of reducing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that fiscal year. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU affect all entities that issue share-based payment awards to their employees. The amendments simplify the accounting in various aspects for these types of transactions: i.e. Accounting for Income Taxes, Excess tax benefits on the Statements of Cash Flows, Forfeitures, Employee taxes and Intrinsic Value. The new guidance will be effective for the Company beginning on April 1, 2017 and earlier adoption is permitted. The Company is evaluating the impact of the adoption of the new guidance on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Intangibles−Goodwill and Other−Internal-use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, providing guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. The standard update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is applicable to the Company for fiscal years beginning after December 15, 2015. Early adoption of ASU 2015-03 is permitted. The Company adopted this guidance effective April 1, 2016. In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.   ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issuance costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement and was effective immediately. Retrospective adoption is required. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Subtopic 810) Amendments to the Consolidation Analysis to improve consolidation guidance for legal entities and affect the consolidation evaluation for reporting organizations. The standard update is effective for fiscal years beginning after December 15, 2015 and interim periods within those years and early adoption is permitted. The standard allows for adoption retrospectively or with a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606 and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016 and May 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively (ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12 collectively, “Topic 606”). Topic 606 supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others. Topic 606 also provides guidance on the recognition of costs related to obtaining customer contracts. ASU No. 2015-14 deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. The Company is evaluating the impact of the adoption of the new guidance on its consolidated financial statements.

 

 
11

 

  

The Company has reviewed other new accounting pronouncements that were issued as of December 31, 2016 and does not believe that these pronouncements are applicable to the Company, or that they will have a material impact on its financial position or results of operations.

     

3.

Goodwill and Other Intangible Assets 

 

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

 

Balance at March 31, 2016

  $ 14,490  

Goodwill acquired

    -  

Foreign currency translation adjustment

    (144

)

Balance at December 31, 2016

  $ 14,346  

 

The following is a summary of other intangible assets, net (in thousands): 

 

   

December 31, 2016

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Foreign Currency Translation

Adjustment

   

Net

Carrying

Value

 

Acquired developed technology

  $ 5,034     $ (2,091

)

  $ (78

)

  $ 2,865  

Customer relationships

    5,853       (2,316

)

    (56

)

    3,481  
    $ 10,887     $ (4,407

)

  $ (134

)

  $ 6,346  

 

   

March 31, 2016

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net

Carrying

Value

 

Acquired developed technology

  $ 5,034     $ (1,367 )   $ 3,667  

Customer relationships

    5,853       (1,509 )     4,344  
    $ 10,887     $ (2,876 )   $ 8,011  

 

Acquired developed technology and customer relationships are being amortized on a straight-line basis and have weighted-average remaining useful lives of 3.62 years and 3.54 years, respectively, as of December 31, 2016. Amortization expense was $0.5 million for both the three months ended December 31, 2016 and 2015, and $1.6 million and $1.4 million for the nine months ended December 31, 2016 and 2015, respectively.

 

4.

Property and Equipment, net

 

Property and equipment, net consist of the following:  

 

   

December 31,

   

March 31,

 
   

2016

   

2016

 
   

(in thousands)

 

Computers and software

  $ 360     $ 360  

Furniture and equipment

    298       282  

Leasehold improvements

    59       36  
      717       678  

Less: accumulated depreciation

    (623

)

    (542

)

                 

Total property and equipment, net

  $ 94     $ 136  

 

Depreciation expense was approximately $0.03 million and $0.04 million during the three months ended December 31, 2016 and 2015, respectively, and $0.08 million and $0.1 million during the nine months ended December 31, 2016 and 2015, respectively.

 

 
12

 

  

5.

Capitalized Software Development Costs

 

The Company capitalizes costs for internal use software incurred during the application development stage that are included in research and development expenses. Costs related to preliminary project activities and post implementation activities are expensed as incurred. The Company capitalized $0.5 million and $0.3 million of research and development costs during the three months ended December 31, 2016 and 2015, respectively, and $1.3 million and $1.1 million during the nine months ended December 31, 2016 and 2015, respectively.

 

Capitalized software is amortized once the product is ready for its intended use, using the straight-line method over the estimated useful lives of the assets, which is three years. Amortization expense is included in the product cost of revenue and was $0.3 million and $0.1 million during the three months ended December 31, 2016 and 2015, respectively, and $0.8 million and $0.4 million during the nine months ended December 31, 2016 and 2015, respectively. The unamortized balance of capitalized software was $2.1 million and $1.7 million as of December 31, 2016 and March 31, 2016, respectively.

 

Management continues to evaluate the capitalized software development costs across all product lines and did not identify any indicators which required impairment to be recorded during the nine months ended December 31, 2016 or 2015.

 

 

6.

Convertible Preferred Stock

 

In February 2015, pursuant to the terms of a Purchase Agreement between the Company and certain institutional funds and other accredited investors, the Company sold and issued 118,829 shares of Series F Convertible Preferred Stock (the “Series F Stock”), as described in the notes to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended March 31, 2016.

 

In May 2015, following approval by the Company’s stockholders, each whole share of Series F Stock converted automatically into ten shares of common stock. The Company recognized accretion related to the Series F Stock through the conversion date during the three months ended June 30, 2015.

  

7.

COFACE Loan

 

In December 2009, the Company signed a stated guaranteed insurance contract with the insurance company COFACE in order to protect the Company against the financial risks of its commercial development in the United States. As part of the contract, COFACE financed part of the expenses in the United States, with the amounts to be amortized in subsequent years. As of December 31, 2016 and March 31, 2016, the amount still to be repaid was $0.2 million and $0.4 million, respectively.

 

8.

Equity

 

Equity Incentive Program

 

The Company’s equity incentive program is a broad-based, retention program comprised of stock options, restricted stock units and an employee stock purchase plan (“ESPP”) designed to align stockholder and employee interests. For a description of the Company’s equity plans, see the notes to consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2016.

 

The Company granted the following stock options and restricted units during the three and nine months ended December 31, 2016 and 2015: 

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2016

   

December 31,

2015

   

December 31,

2016

   

December 31,

2015

 
   

(in thousands)

   

(in thousands)

 

Stock options

    247       353       1,855       1,422  

Restricted stock units

    69       27       106       165  

Total granted

    316       380       1,961       1,587  

 

 
13

 

 

Valuation Assumptions 

 

For the three and nine months ended December 31, 2016 and 2015, the Company calculated the fair value of its employee stock options at the date of grant with the following weighted average assumptions: 

  

   

Period Ended

 
   

December 31, 2016

 
   

Three Months

   

Nine Months

 

Risk-free interest rate

    1.86

%

    1.28

%

Dividend yield

    0

%

    0

%

Expected volatility

    58.10

%

    52.75

%

Expected term in years

    6.08       6.08  

Weighted average fair value at grant date

  $ 1.11     $ 0.91  

  

   

Period Ended

 
   

December 31, 2015

 
   

Three Months

   

Nine Months

 

Risk-free interest rate

    1.84

%

    1.79

%

Dividend yield

    0

%

    0

%

Expected volatility

    52.83

%

    50.51

%

Expected term in years

    6.08       6.06  

Weighted average fair value at grant date

  $ 1.66     $ 2.15  

 

The following tables summarize activity under the equity incentive plans for the three months ended December 31, 2016: 

 

   

Options Outstanding

   

Restricted Stock Units

Outstanding

 
   

Number of

shares

(in thousands)

   

Weighted

average

exercise price

   

Number of

shares

(in thousands)

   

Weighted

average fair

value

 
                                 

Outstanding at October 1, 2016

    4,298     $ 3.12       181     $ 4.74  

Granted

    247     $ 2.00       69     $ 2.00  

Exercised/Released

    -     $ -       (75

)

  $ 3.11  

Cancelled

    (73

)

  $ 3.78       -     $ -  

Outstanding at December 31, 2016

    4,472     $ 3.05       175     $ 4.36  
                                 

Vested and expected to vest

    4,022     $ 3.13                  

  

   

Shares Available

for Grant

 
   

(in thousands)

 

Balance at October 1, 2016

    998  

Options:

       

Granted from approved plans

    (247

)

Cancelled and available for grant

    51  

Restricted Stock Units:

       

Granted

    (69

)

Balance at December 31, 2016

    733  

 

 
14

 

 

The weighted average remaining contractual term for exercisable options is 7.75 years. The intrinsic value is calculated as the difference between the market value as of December 31, 2016 and the exercise price of the shares. The market value of the Company’s common stock as of December 31, 2016 was $1.95 as reported by the NASDAQ Capital Market. The aggregate intrinsic value of stock options outstanding at December 31, 2016 and 2015 was $0.7 million and $0, respectively. The aggregate intrinsic value of restricted stock units outstanding at December 31, 2016 and 2015 was $0.3 million and $0.7 million, respectively.

 

The options outstanding and exercisable at December 31, 2016 were in the following exercise price ranges:

 

         

Options Outstanding

   

Options Vested

 

Range of Exercise

Prices per share

   

Number of Shares

(in thousands)

   

Weighted-

Average

Remaining

Contractual Life

(in years)

   

Number of

Shares

(in thousands)

   

Weighted-Average

Exercise Price per

Share

 
$1.35 $1.35       106       9.45       -     $ -  
$1.64 $1.64       2,000       9.15       -     $ -  
$1.80 $2.00       578       9.61       22     $ 1.83  
$3.24 $3.99       318       8.70       128     $ 3.46  
$4.32 $4.32       655       8.57       233     $ 4.32  
$5.18 $6.61       754       7.53       468     $ 6.25  
$6.83 $6.83       50       7.14       50     $ 6.83  
$7.20 $7.20       5       2.16       5       7.20  
$11.40 $11.40       5       1.64       5     $ 11.40  
$18.90 $18.90       1       0.87       1     $ 18.90  
$1.35 $18.90       4,472       8.79       912     $ 5.33  

 

The effect of recording stock-based compensation expense (including expense related to the ESPP discussed below) for each of the periods presented was as follows (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2016

   

December 31,

2015

   

December 31,

2016

   

December 31,

2015

 
                                 

Cost of revenues

  $ 111     $ 104     $ 236     $ 279  

Research and development

    66       70       181       198  

Sales and marketing

    160       264       512       770  

General and administrative

    294       221       938       621  

Impact on net loss

  $ 630     $ 659     $ 1,867     $ 1,868  

 

 Upon the departure of our CEO in June 2015, a nominal amount of previously recognized stock-based compensation expense was reversed due to the forfeiture of stock option grants. As of December 31, 2016, the unrecorded stock-based compensation balance related to stock options and restricted stock units outstanding excluding estimated forfeitures was $3.8 million and $0.8 million, respectively, and will be recognized over an estimated weighted average amortization period of 2.88 years for stock options and 1.54 years for restricted stock units. The amortization period is based on the expected remaining vesting term of the options and restricted stock units.

 

1999 Employee Stock Purchase Plan (“ESPP”)

 

The price paid for the Company’s common stock purchased under the ESPP is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each offering period. The compensation expense in connection with the ESPP for the three months ended December 31, 2016 and 2015 was $21,000 and $21,300, respectively, and approximately $70,000 and $55,000 for the nine months ended December 31, 2016 and 2015, respectively. During the nine months ended December 31, 2016 and 2015, there were 46,604 and 24,115 shares issued under the ESPP, respectively.

 

 
15

 

 

9.

Computation of Basic and Diluted Net Loss per Share

 

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

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2016

   

December 31,

2015

   

December 31,

2016

   

December 31,

2015

 
   

(in thousands)

   

(in thousands)

 
                                 

Options

    4,380       2,075       4,224       1,612  

Unvested restricted stock units

    108       234       135       190  

Warrants

    2,262       2,262       2,262       2,262  

Total common stock equivalents excluded from diluted net loss per common share

    6,750       4,571       6,621       4,064  

  

10.

Restructuring

 

The following is a summary of restructuring accrual (in thousands):

 

Balance at March 31, 2016

    403  

Payment of costs

    (403

)

Balance at December 31, 2016

  $ -  

 

Restructuring expenses consisted of employee severance costs and other contract termination costs incurred to improve the Company’s cost structure prospectively. As part of the process of consolidating companies and moving forward with its unified platform strategy, the Company evaluated its operations for duplication of efforts and work not in full alignment with its strategy which resulted in the elimination of eleven positions.  These positions were primarily executives and included a direct report to the CEO.  The Company incurred these expenses in the fiscal year ended March 31, 2016, and all payments were made during the three months ended June 30, 2016.

 

 
16

 

 

11.

Operating Lease Commitments

 

In connection with the acquisition of Iasta, we assumed a lease for an office in Carmel, Indiana, which expired May 31, 2016. On April 7, 2016, the Company entered into a Lease Agreement with Atapco Carmel, Inc. for approximately 8,795 square feet of office space in a building located at 615 West Carmel Drive, Suite 100 in Carmel, Indiana. The term of the lease runs for approximately 51 months and provides for monthly rent payments of $11,727 per month for the first year of the term of the lease (with three of the months of the first-year term provided rent free), subject to annual adjustment thereafter.

 

In connection with the relocation of its headquarters to Carmel, Indiana, on July 22, 2016, the Company entered into a Second Amendment to Lease with 2121 SEC TT, LLC (formerly SKBGS I, L.L.C.) to terminate its lease obligation at the San Mateo, California location as of July 31, 2016. The Company paid a one-time early termination fee equal to three months’ rent which was partially offset by the security deposit refund due.

 

Rental expenses for office space were approximately $0.1 million and $0.2 million for the three months ended December 31, 2016 and 2015, respectively, and approximately $0.5 million and $0.6 million for the nine months ended December 31, 2016 and 2015, respectively.

 

12.

Litigation and Contingencies

 

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

 

In March 2015, a minority stockholder of b-pack Services SA, a French subsidiary of Determine SAS, which was acquired when the Company acquired b-pack SAS, initiated litigation in the Nanterre Commercial Court against b-pack SAS and its founders claiming indemnification rights for his contribution to the business of b-pack Services SA and seeking monetary damages and other relief. The Nanterre Commercial Court declined jurisdiction and sent the matter to the Tribunal de Grande Instance of Nanterre, where it is currently pending. In July 2015, the same minority shareholder also initiated litigation in the Paris Commercial Court against Determine SAS to contest the merger between b-pack SAS and Selectica France SAS, which is also pending, and seeking monetary damages and other relief.  The Company believes the lawsuits are without merit and intends to defend against them vigorously. The Company did not record any provision as of December 31, 2016.

 

In November 2015, the Company settled outstanding litigation based upon claims the Company alleged against some of its former employees and a competitor relating to the Company’s intellectual property. In April 2016, such competitor paid the Company the remaining settlement amount of $0.6 million which is reflected in general and administrative expenses on the condensed consolidated statements of operations and comprehensive loss for the nine months ended December 31, 2016.

 

Warranties and Indemnifications

 

The Company’s products are generally warranted to perform substantially in accordance with the functional specifications set forth in the associated product documentation for a period of at least 90 days. In the event there is a failure of such warranties, the Company generally is obligated to correct the product to conform to the product documentation or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company has not provided for a warranty accrual as of December 31, 2016 or March 31, 2016. To date, the Company has not refunded any amounts in relation to the warranty.

 

The Company generally agrees to indemnify its customers against legal claims that the Company’s software infringes certain third-party intellectual property rights. In the event of such a claim, the Company is obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of the infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably possible, to refund the purchase price of the software. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers. As such, the Company has not provided for an indemnification accrual as of December 31, 2016 or March 31, 2016.

 

 
17

 

 

13.

Credit Facility and Convertible Notes

  

The Company maintains financing facilities and convertible note purchase agreements. For a description of the Company’s debt financing, see the notes to consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2016 and the summaries set forth below.

 

On April 20, 2016, the Company and its wholly owned subsidiary, Determine Sourcing, Inc., entered into Amendment Number Seven to the Amended and Restated Business Financing Agreement with Western Alliance Bank, an Arizona corporation, as successor in interest to Bridge Bank, National Association. The Amendment extended the maturity date of the underlying credit facility to April 20, 2018.

 

In order to satisfy certain conditions for Western Alliance Bank to enter into the Amendment, on April 22, 2016, Lloyd I. Miller, III, the Company’s largest stockholder, and his affiliates MILFAM II, L.P. and Alliance Semiconductor Corporation (“ALSC”, now known as Alimco Financial Corporation), a Delaware corporation, each entered into an Amended and Restated Limited Guaranty with Western Alliance. The Amended Guaranties extended the term of the limited guaranties entered into by Mr. Miller and MILFAM with Western Alliance on March 11, 2015, and the limited guaranty entered into by ALSC with Western Alliance on February 3, 2016, to April 20, 2018 (Mr. Miller, MILFAM and ALSC, collectively the “Guarantors”).

 

On April 22, 2016, the Company and the Guarantors entered into a Second Amendment to 2015 Guaranty Fee Agreement and Amendment to 2016 Guaranty Fee Agreement, which (i) further amended the Guaranty Fee Agreement, dated March 11, 2015, entered into by the Company, Mr. Miller and MILFAM and (ii) amended the Guaranty Fee Agreement, dated February 3, 2016, entered into by the Company and ALSC. Pursuant to this amendment, the term of the 2015 Fee Agreement and the 2016 Fee Agreement were extended to April 20, 2018. As a condition for extending the term of the Amended Guaranties as described above, the Company agreed to pay an additional cash fee of $76,000 to Mr. Miller and MILFAM, payable by the Company within five business days following the termination or expiration of the Amended Guaranties, and also agreed to pay certain fees and expenses of the Guarantors related to the Amended Guaranties.

 

On December 27, 2016, the Company entered into a Junior Secured Convertible Note Purchase Agreement with MILFAM II L.P. and Alimco Financial Corporation, formerly ALSC, pursuant to which the Company issued and sold junior secured convertible promissory notes (the “2016 Notes”) in the aggregate principal amount of $2 million. The 2016 Notes are due on December 27, 2021 and accrue interest at an annual rate of 10% on the aggregate unconverted and outstanding principal amount, payable quarterly, beginning on December 31, 2016. The Company has the option to pay any amounts of interest due under the 2016 Notes by compounding and adding such interest amount to the unpaid principal amount of the 2016 Notes, based on an interest rate calculated at 12% per year, provided that the Company is not then in default under any of its debt financing agreements. Upon any default, the 2016 Notes will bear interest at the rate of 13% per year or, if less, the maximum rate allowable under the laws of the State of New York. The 2016 Notes are secured by a second-position security interest on the Company’s assets, pursuant to the terms of the Amended and Restated Security Agreement entered into by the Company and the Investors and existing noteholders on December 27, 2016 (the “Security Agreement”).

 

Subject to applicable NASDAQ listing rule limitations (including, if applicable, approval by the Company’s stockholders), the outstanding principal and interest under the 2016 Notes may be converted into shares of common stock of the Company at the sole option of the Investors at any time prior to the Maturity Date, at a conversion price of $3.00 per share (as may be adjusted for any subdivision by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or similar event occurring prior to such record date); provided, however, that if prior to the Maturity Date the Company offers and sells share of its common stock in a private placement primarily intended to raise capital at a price per share of $2.50 or less, then the conversion price for the Notes will be reduced to such common stock offering price plus $0.50 per share. However, the total number of shares of Common Stock that may be issued to the Investors upon conversion of the 2016 Notes may not exceed 19.99% of the Company’s outstanding shares of common stock as of December 27, 2016.

 

Additionally, under the terms of an Amendment to Junior Secured Convertible Promissory Notes, entered into as of December 27, 2016 (the “Prior Note Amendment”), between the Company and Mr. Miller as Lenders’ Agent, the Junior Secured Convertible Promissory Notes issued by the Company on March 11, 2015 in the aggregate principal amount of $3 million and on December 16, 2015 in the aggregate principal amount of $2.5 million (collectively, the “Prior Notes”), were amended to terminate the Company’s option to pay quarterly accrued interest by conversion into shares of common stock of the Company and to provide, instead, the same compounding interest options as described for the 2016 Notes above.

 

 
18

 

 

Further, the Prior Notes issued by the Company on December 16, 2015 (the “December 2015 Notes”) were amended to reduce the conversion price to $3.00 per share; provided, however, that if prior to the maturity date as of the December 2015 Notes, the Company offers and sells shares of its common stock in a private placement primarily intended to raise capital at a price per share of $2.50 or less, then the conversion price for the December 2015 Notes will be reduced to such common stock offering price plus $0.50 per share. As a result of the Prior Notes Amendment on the December 2015 Notes, the Company recorded a gain on debt extinguishment of approximately $166,000, which consisted of the remeasurement of the debt at fair value offset by the deferred financing costs previously associated with the December 2015 Notes. As the extinguishment was with a related party, the transaction was deemed to be a capital transaction and the gain is recorded in the Company’s stockholders’ equity as of December 31, 2016.

 

Also on December 27, 2016, the Company and the Guarantors amended the 2015 and 2016 Guaranty Fee Agreements to reduce the amount of the monthly fees accrued to the ratable monthly amount of an aggregate annual fee equal to 10% of the amounts guaranteed under the guaranties entered into by the Guarantors with Bank on March 11, 2015 and February 3, 2016. Additionally, the Company issued 277,248 shares of Company common stock to the Guarantors, at an issue price equal to approximately $1.89 per share, as payment for $524,000 of the monthly fees previously accrued under the agreements. These shares are not registered under the Securities Act.

 

As of December 31, 2016 and March 31, 2016, the Company owed $10.9 million and $9.0 million, respectively, under the Credit Facility, and $1.1 million and $3.0 million was available for future borrowings, respectively. The Company’s Credit Facility with Western Alliance contains certain financial covenants that require, among other things, the maintenance of an asset coverage ratio of not less than 2:00 to 1:00 at the end of each month. As of December 31, 2016, the Company met all the requirements and was in compliance.

 

14.

Income Taxes

 

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

 

   

Three Months Ended

December 31, 2016

   

Nine Months Ended

December 31, 2016

 

Domestic pre-tax loss

  $ (1,461

)

  $ (5,590

)

Foreign pre-tax loss

    (743

)

    (2,260

)

Total pre-tax loss

  $ (2,204

)

  $ (7,850

)

 

The components of the benefit from (provision for) income taxes are as follows (in thousands):

  

   

Three Months Ended

December 31, 2016

   

Nine Months Ended

December 31, 2016

 

US

  $ (2

)

  $ (5

)

Foreign

    37       148  

Total benefit from provision for income taxes

  $ 35     $ 143  

 

The Company accounts for its income taxes in accordance with ASC 740, Income Taxes. ASC 740 clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold, measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Under ASC 740, the Company is required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The Company policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. 

 

At December 31, 2016, there was no material increase in the liability for unrecognized tax benefits nor any accrued interest and penalties related to uncertain tax positions.

 

In addition, at December 31, 2016, the Company had approximately $1.4 million of unrecognized tax benefits which was netted against deferred tax assets with a full valuation allowance. If these amounts are recognized, there will be no effect on the Company’s effective tax rate due to the full valuation allowance.

 

The Company’s Federal, state and foreign tax returns may be subject to examination by the tax authorities for fiscal year ended from 1998 to 2015 due to net operating losses and tax carryforwards unutilized from such years.  

 

15.

Related Party Transactions

 

Determine SAS and b-pack Services rent their offices from SCI Donapierre, the company controlled by two of the Companys stockholders. During the three and nine months ended December 31, 2016, Determine SAS made rental payments of approximately $28,000 and $82,000, respectively, to SCI Donapierre.

 

The Company also maintains financing facilities and convertible note purchase agreements with related parties. For a description of the Company’s debt financing, see the notes to consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2016 and the summaries set forth in Note 13, Credit Facility and Convertible Notes, above.

 

 
19

 

 

16.

Subsequent Events

 

On January 23, 2017, the Company and its wholly owned subsidiary, Determine Sourcing Inc., entered into Amendment Number Nine to the Amended and Restated Business Financing Agreement with Western Alliance Bank, as successor in interest to Bridge Bank, N.A. (“Western Alliance Bank”). The Amendment, among other things, increased the Company’s maximum borrowing capacity under the existing credit facility with Western Alliance Bank to $13 million.

 

In order to satisfy certain conditions for Western Alliance Bank to lend additional funds under the Credit Facility and enter into the Amendment, on January 23, 2017, Alimco Financial Corporation, a Delaware corporation formerly known as Alliance Semiconductor Corporation (“ALMC”) and an affiliate of Lloyd I. Miller, III, the Company’s largest stockholder, entered into a Second Amended and Restated Limited Guaranty (collectively, the “Amended Guaranty”) with Western Alliance Bank to increase the amount of the limited, non-revocable guaranty of the Company’s Credit Facility provided by ALMC, from $3 million to $4 million. In connection with entering into the Amended Guaranty, ALMC provided cash collateral to Western Alliance Bank in the amount of $1 million. The term of the Amended Guaranty is two years. Western Alliance Bank, in its sole discretion, may reduce, but not increase, the additional guaranteed amount during the term. Alan Howe, a member of the Company’s board of directors, is the interim CEO of ALMC.

 

In connection with the Amended Guaranty, the Company entered into a Guaranty Fee Agreement with ALMC, pursuant to which the Company agrees to pay ALMC a commitment fee of $50,000 and a monthly fee during the term of the Guaranty equal to 10% of the additional guaranteed amount divided by 12. Such commitment fee and the aggregate amount of the monthly fees are payable in cash by the Company within five business days following the termination or expiration of the Amended Guaranty. 

 

 
20

 

 

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

 

In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in the “Risk Factors” in Item 1A to Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 (the “Form 10-K”). They include the following: the level of demand for Determine’s products and services; the intensity of competition; Determine’s ability to effectively manage product transitions and to continue to expand and improve internal infrastructure; and the impact of current economic conditions on our customers and our business. For a more detailed discussion of the risks relating to our business, readers should refer to Item 1A to Part 1 in the Form 10-K entitled “Risk Factors.” Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report. We assume no obligation to update these forward-looking statements  

 

Overview

 

We provide cloud-based software solutions that help enable growing companies transform their operational data and processes into unique insights to make informed decisions that drive value and mitigate risk.

 

The Determine platform is an open technology infrastructure based on smart process application models. The goal of our platform is to establish awareness of relevant data, manage business documents, embed analytical tools, create a means for collaboration and provide advanced process management tools for fully integrating business processes through an open application program interface (“API”) infrastructure. Built on a unified and highly scalable platform, we deliver deep and innovative capabilities in strategic sourcing, supplier management, enterprise contract lifecycle management, e-procurement, invoicing and other business operation areas.

 

In addition to our source to pay and enterprise contract lifecycle management solutions suite, we also provide a powerful, patented configuration engine solution, which Global 1000 companies use to increase revenue by facilitating the right combination of products, services and price.

 

Quarterly Financial Overview

  

During the three months ended December 31, 2016, our total revenues decreased by 4%, or $0.2 million, to $6.9 million compared with total revenues of $7.1 million for the three months ended December 31, 2015. Recurring revenues, comprised of subscription license sales and services, maintenance sales from previously sold perpetual licenses, application services management and hosting revenues, decreased to $5.1 million during the three months ended December 31, 2016, compared to $5.4 million during the three months ended December 31, 2015. As a percent of total revenues, recurring revenues comprised 74% and 75% of total revenues during the three months ended December 31, 2016 and 2015, respectively. Non-recurring revenues, comprised of perpetual license sales and revenues from professional services for system implementations, enhancements and training, totaled $1.8 million, or 26% of total revenues, representing an increase of $0.1 million, or 3%, over the three months ended December 31, 2015. The decrease in total revenues year over year resulted primarily from decreased maintenance revenues, partially offset by increased revenues from professional services for system implementations.

 

During the three months ended December 31, 2016, our net loss from operations decreased $1.2 million, or 41%, to $1.7 million, compared to $2.9 million during the three months ended December 31, 2015. The decrease in net loss relates primarily to decreased labor costs, legal activity and rent expense during the three months ended December 30, 2016. The decrease in rent expense resulted from the closure of our San Mateo office during the first quarter of fiscal 2017. See “Results of Operations” below for further discussion on the components of our net loss.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to any of our critical accounting policies and estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2016.

 

 
21

 

 

Results of Operations:

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2016

   

December 31,

2015

   

December 31,

2016

   

December 31,

2015

 
   

(in thousands, except percentages)

   

(in thousands, except percentages)

 

Recurring revenues

  $ 5,054     $ 5,354     $ 15,267     $ 15,862  

Percentage of total revenues

    74

%

    75

%

    77

%

    79

%

Non-recurring revenues

    1,798       1,746       4,661       4,218  

Percentage of total revenues

    26

%

    25

%

    23

%

    21

%

Total revenues

  $ 6,852     $ 7,100     $ 19,928     $ 20,080  

 

Recurring revenues.  Recurring revenues consist of subscription license sales and services, maintenance revenues from previously sold perpetual licenses and hosting revenues.  The overall decrease in recurring revenues was driven by decreased maintenance revenues, offset by subscription revenue growth. Maintenance revenues were impacted by decreased renewals of previously sold perpetual licenses, while subscription revenues increased due to the acquisition of b-pack during the second quarter of 2015 and new customers we entered into contract with during the current periods.

 

Maintenance revenues were $0.9 million during the three months ended December 31, 2016, compared to $1.2 million during the three months ended December 31, 2015, a 28% decrease. Subscription revenues remained flat at $4.1 million during the three months ended December 31, 2016, compared to the three months ended December 31, 2015. Maintenance revenues were $2.7 million during the nine months ended December 31, 2016, compared to $4.2 million during the nine months ended December 31, 2015, a 35% decrease. Subscription revenues grew to $12.3 million during the nine months ended December 31, 2016, compared to $11.5 million for the nine months ended December 31, 2015, representing a 7% increase.

 

Recurring revenues continue to account for approximately 75% of our total revenues, and we expect this trend to continue going forward as we continue to emphasize our cloud-based solutions. This will depend in part on the number of maintenance renewals, and the number and size of new subscription license contracts. In addition, maintenance renewals are extremely dependent upon economic conditions, customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers.

 

 Non-recurring revenues. Non-recurring revenues are comprised of revenues from professional services for system implementations, enhancements and training. Non-recurring revenues increased by $0.1 million, or 3%, during the three months ended December 31, 2016, compared to the three months ended December 31, 2015, and increased by $0.4 million, or 11%, during the nine months ended December 31, 2016, compared to the nine months ended December 31, 2015. This increase was primarily due to the acquisition of b-pack. We expect non-recurring revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on the number and size of new software implementations and follow-on services to our existing customers.

 

Fluctuations in revenue are also due to the timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope or renegotiated terms and additional services. In addition, we anticipate that as we continue to transition more of our business to our cloud-based solutions, revenue from our legacy software platforms will continue to decline.

 

Sales to foreign customers accounted for 27% of total revenues during both the three and nine months ended December 31, 2016, compared to 15% and 18% of total revenues during the three and nine months ended December 31, 2015, respectively. The majority of these sales were denominated in US dollars. We do not anticipate that our exposure to foreign currency fluctuations will be significant in the foreseeable future.

   

 Cost of revenues  

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31, 2016

   

December 31, 2015

   

December 31, 2016

   

December 31, 2015

 

Cost of recurring revenues

  $ 1,777     $ 1,816     $ 5,085     $ 5,003  

Percentage of total cost of revenue

    51

%

    53

%

    51

%

    52

%

Cost of non-recurring revenues

    1,734       1,602       4,978       4,583  

Percentage of total cost of revenue

    49

%

    47

%

    49

%

    48

%

Total cost of revenues

  $ 3,511     $ 3,418     $ 10,063     $ 9,586  

 

Cost of recurring revenues. Cost of recurring revenues consists 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 the three months ended December 31, 2016, cost of recurring revenues remained flat compared to the three months ended December 31, 2015. During the nine months ended December 31, 2016, cost of recurring revenues increased $0.1 million, compared to the nine months ended December 31, 2015, driven by the amortization of capitalized software, offset by a decrease in costs related to maintenance revenues.

  

 
22

 

 

Cost of non-recurring revenues. Cost of non-recurring revenues is comprised mainly of salaries and related expenses of our services organization, fees paid to resellers and certain allocated corporate expenses. During the three months ended December 31, 2016, cost of non-recurring revenues increased $0.1 million, compared to the three months ended December 31, 2015. During the nine months ended December 31, 2016, cost of non-recurring revenues increased $0.4 million, compared to nine months ended December 31, 2015, primarily due to labor costs associated with delivering our cloud-based solutions.

 

We expect cost of recurring and non-recurring revenues to remain relatively flat as a percentage of recurring revenues throughout the remainder of fiscal 2017.

 

Gross Profit Dollars and Margin

  

   

Three Months Ended

   

Nine Months Ended

 
   

December 31, 2016

   

December 31, 2015

   

December 31, 2016

   

December 31, 2015

 

Gross margin, recurring revenues

    65

%

    66

%

    67

%

    68

%

Gross margin, non-recurring revenues

    4

%

    8

%

    (7

%)

    (9

%)

Gross margin, total revenues

    49

%

    52

%

    50

%

    52

%

 

Gross profit dollars decreased $0.3 million, or 9%, during the three months ended December 31, 2016, compared to the three months ended December 31, 2015, and decreased $0.6 million, or 6%, during the nine months ended December 31, 2016, compared to the nine months ended December 31, 2015. As we emphasize our cloud-based solutions, and move away from our legacy software platforms, our gross profit will fluctuate due to the timing between costs associated with deploying our new solutions and the related revenue recognition. Gross margins represent gross profit as a percentage of revenue and were affected by the factors discussed above under “Revenues” and “Costs of Revenues.”

 

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

 

Operating Expenses

 

Research and Development Expenses

  

   

Three Months Ended

   

Nine Months Ended