The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the "Forward-Looking Statements" set forth above.

Overview

We provide cloud-based software solutions that help growing companies to close deals faster, more profitably, 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-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 Guided Selling (GS) 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-based solution helps companies to close sales faster, accelerate revenue generation and enhance customer relationships.

Summary of Operating Results for Fiscal 2012

During the fiscal year ended March 31, 2012, our total revenues decreased by 5%, or $0.7 million, to $13.8 million compared with total revenues of $14.5 million for the fiscal year ended March 31, 2011. Recurring revenues, comprised of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues, totaled $8.9 million, or 65% of total revenues, representing an increase of $1.0 million, or 13%, over fiscal 2011. Non-recurring revenues, comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training, totaled $4.9 million, or 35% of total revenues, representing a decrease of $1.7 million, or 26%, over fiscal 2011. The increase in recurring revenues year over year resulted primarily from new subscription license customers reflecting the shift in business focus and strategy to emphasize our cloud-based solutions. The decrease in non-recurring revenues year over year was primarily due to significantly lower license revenues resulting from our shift to a cloud-based business model. These decreases were partially offset by an increase in consulting revenues.

During the fiscal year ended March 31, 2012, our net loss increased by 322%, or $4.8 million, to $6.3 million compared to a net loss of $1.5 million for the fiscal year ended March 31, 2011. The most significant factors affecting the increase in our net loss were (i) increases in research and development, which reflect our ongoing investments in new and differentiated product offerings,
(ii) increases in marketing costs as we continue to transform Selectica into a cloud-based SaaS business, (iii) higher compensation costs, (iv) an increase in the use of outside contractors, and (v) payments and related expenses in connection with our Settlement Agreement with Versata (discussed more fully in Note 13 of our Notes to Consolidated Financial Statements).

Shift in Business Model

In response to market demand, beginning in 2012, 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 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

Revenues

                                          2012               2011          Change
                                           (in thousands, except percentages)
       Recurring revenues             $      8,930       $      7,937     $    993
       Percentage of total revenues             65 %               55 %         13 %
       Non-recurring revenues         $      4,857       $      6,586     $ (1,729 )
       Percentage of total revenues             35 %               45 %        (26 )%
       Total revenues                 $     13,787       $     14,523     $   (736 )

Recurring revenues. Recurring revenues consist of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues. Our fiscal 2012 recurring revenues increased by $1.0 million from the prior year primarily due to new subscription license customers.

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 2012 decreased by $1.7 million due to lower perpetual license revenues. This was due to our ongoing shift to a cloud-based SaaS business model which typically produces subscription license revenue recognized ratably over the term of the contract. These decreases were partially offset by an increase in consulting revenues.

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:

2012 2011
Customer A 17 % 16 %

We do not have significant foreign activities and sales to foreign customers accounted for only 6% of total revenue. We anticipate that any exposure to foreign currency fluctuations will not be significant in the foreseeable future.

Cost of Revenues

                                                 2012        2011        Change
         Recurring cost of revenues             $   986     $   823     $    163
         Percentage of recurring revenues            11 %        10 %         20 %
         Non-recurring cost of revenues         $ 4,567     $ 4,081     $    486
         Percentage of non-recurring revenues        94 %        62 %         12 %
         Total cost of revenues                 $ 5,553     $ 4,904     $    649

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 2012, recurring cost of revenues increased $0.2 million or 20% compared to the prior year primarily due to an increase in license and support costs in our data center, higher compensation expenses in our support organization, and a higher allocation of R&D costs.

We expect recurring cost of revenues to increase in absolute dollars in fiscal 2013.

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 2012, these costs increased by approximately $0.5 million primarily due to the increase in the use of third-party consultants used for our system implementations.

We expect non-recurring cost of revenues to increase in absolute dollars in fiscal 2013.

Gross Profit and Margin

                                                       2012      2011
                Gross margin, recurring revenues          89 %      90 %
                Gross margin, non-recurring revenues       6 %      38 %
                Gross margin, total revenues              60 %      66 %

Gross profit was $8.2 million, or 60% of revenues, in fiscal 2012 compared with $9.6 million, or 66% of revenues, in fiscal 2011. The decrease in gross profit percentage during fiscal year 2012 resulted from lower revenues due to our ongoing shift to a cloud-based SaaS business model and an increase in the use of third-party consultants used for our system implementations.

Gross Margin-Gross margins represent gross profit as a percentage of revenue. Gross margins in fiscal 2012 and 2011 were affected by the factors discussed above under "Revenues" and "Cost of Revenues."

We expect that our overall gross margins will continue to fluctuate due to the timing of service and license revenue recognized from perpetual licenses 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.

Operating Expenses

                                  2012        2011        Change
Total research and development   $ 3,394     $ 2,998     $    396
Percentage of total revenues          25 %        21 %         13 %

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 $0.4 million in fiscal 2012 compared to fiscal year 2011 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 2013.

                                2012        2011       Change
Sales and marketing            $ 6,247     $ 4,366     $ 1,881
Percentage of total revenues        45 %        30 %        43 %

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 2012, sales and marketing expenses increased $1.9 million primarily due to increased marketing headcount, our recently updated website and new logo, our 2011 annual Fusion user conference as well as other trade show expenses. We expect increases in sales and marketing expenses in fiscal 2013 compared to fiscal 2012 both in absolute dollars and as a percentage of total revenues.

                                2012        2011        Change
General and administrative     $ 3,767     $ 3,564     $    203
Percentage of total revenues        27 %        25 %          6 %

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 increased $0.2 million in fiscal 2012 compared with fiscal 2011 primarily due to increases in legal, accounting, and bad debt expenses, partially offset by reductions in the use of outside contractors. We expect modest increases in general and administrative expenses in fiscal 2013 compared to fiscal 2012 in absolute dollars.

Fees Related To Comprehensive Settlement Agreement. Fees related to our Comprehensive Settlement Agreement consist of a $0.5 million charge for consulting services as part of our settlement with Versata, as discussed further in Note 7 of the Notes to Consolidated Financial Statements.

Loss on Early Extinguishment of Note Payable

Loss on early extinguishment of note payable relates to a $0.5 million charge
resulting from the Versata note payoff, as discussed further in Note 7 of the
Notes to Consolidated Financial Statements.

Other Income (Expense), Net

                               2012       2011       Change
Other income (expense), net   $ (143 )   $ (224 )   $   81

Other income (expense), net consists primarily of interest expense on our note payable to Versata, foreign currency fluctuations, and other miscellaneous expenditures. In fiscal 2012, other income (expense), net decreased $0.1 million primarily due to the Versata note payoff, as discussed further in Note 7 of the Notes to Consolidated Financial Statements.

Interest Income

                  2012      2011       Change
Interest income   $  20     $  51     $  (31 )

Interest income consists primarily of interest earned on cash balances and short-term investments. Interest income decreased during fiscal year 2012 compared to fiscal year 2011, and was immaterial for both years. We anticipate that interest income in fiscal 2013 will decline relative to fiscal 2012 as a result of lower cash balances and lower interest rates.

Provision for Income Taxes

We did not record an income tax expense for fiscal 2012 and we recorded an income tax expense of approximately $4,000 for fiscal 2011. As of March 31, 2012, we had federal and state net operating loss carryforwards of approximately $183.1 million and $86.5 million, respectively. As of March 31, 2012, we also had federal and state research and development tax credit carryforwards of approximately $3.3 million and $4.8 million, respectively.

The fiscal 2012 and 2011 tax provisions vary from the expected provision or benefit at the U.S. federal statutory rate due to the recording of valuation allowances against our U.S. operating loss carryforwards and the effects of different tax rates in our foreign jurisdictions. Given our history of operating losses and our inability to achieve profitable operations, it is difficult to accurately forecast how results will be affected by the realization of net operating loss carryforwards.

Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets. We will continue to evaluate the realizability of the deferred tax assets on a quarterly basis.

Liquidity and Capital Resources

                                                         2012         2011
                                                          (in thousands)
Cash, cash equivalents and short-term investments      $ 16,076     $ 17,021
Working capital                                        $  5,405     $ 14,275
Net cash (used for) provided by operating activities   $ (1,929 )   $  1,174
Net cash used for investing activities                 $   (213 )   $   (210 )
Net cash provided by (used for) financing activities   $  1,197     $ (1,099 )

Our primary sources of liquidity consisted of 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. This compares to approximately $17.0 million in cash, cash equivalents and short-term investments as of March 31, 2011.

Net cash used for operating activities was $1.9 million for the twelve months 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 provided by operating activities was $1.2 million for the twelve months ended March 31, 2011, resulting primarily from a $1.5 million decrease in accounts receivable, net due to strong cash collection efforts, an increase of $1.0 million in accounts payable and other accrued and long-term liabilities, and non-cash charges of $0.8 million for depreciation and stock-based compensation expense. These increases were partially offset by our net loss of $1.5 million, and a $0.8 million decrease in deferred revenues.

Net cash used for investing activities was $0.2 million for the twelve months ended March 31, 2012 and 2011, resulting primarily from the purchase of capital assets.

As a result of current adverse financial market conditions, investments in some financial instruments may pose risks arising from liquidity and credit concerns. Although we believe our current investment portfolio has very little risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.

Net cash provided by financing activities was $1.2 million for the twelve months 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.

Net cash used in financing activities was $1.1 million for the twelve months ended March 31, 2011, resulting primarily from $0.3 million in costs to defend our Rights Agreement, as well as $0.8 million of payments on our note payable to Versata.

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 believe our cash, cash equivalents, and short-term investment balances as of March 31, 2012 should be adequate to fund our operations through at least March 31, 2013. However, given the significant changes in our business and results of operations in the last 12 months, the fluctuation in cash and investment balances may be greater than presently anticipated. After the next 12 months, we may find it necessary to obtain additional funds. In the event additional funds are required, we may not be able to obtain additional financing on favorable terms or at all.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of
March 31, 2012 and the effect those obligations are expected to have on our
liquidity and cash flows in future periods (in thousands):

                                                       Payments Due by Period
Contractual                             Less than                                                More than
Obligations               Total           1 Year          1-3 Years          3-5 years            5 Years
Operating lease-real
estate                 $       687     $        243     $         444     $             -     $             -
Versata consulting
services                       500              500                 -                   -                   -
Credit facility              6,000            6,000                 -                   -                   -
Other                            8                3                 4                   1                   -
Total                  $     7,195     $      6,746     $         448     $             1     $             -

Our contractual obligations and commercial commitments at March 31, 2012 were approximately $7.2 million. We had no significant commitments for capital expenditures as of March 31, 2012.

We do not anticipate any significant capital expenditures, un-planned payments due on long-term obligations, or other contractual obligations. However, management is continuing to review the Company's cost structure to minimize expenses and use of cash as it implements its planned business model changes. This activity may result in additional restructuring charges for severance and other benefits.

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.