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SLTC > SEC Filings for SLTC > Form 10-K on 17-Jun-2013All Recent SEC Filings

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Form 10-K for SELECTICA INC


17-Jun-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

Overview

We provide cloud-based software solutions that help growing companies to close deals faster, more profitably, and with lower risk.

Selectica's Contract Lifecycle Management (CLM) cloud solution combines a single, company-wide contract repository with a flexible workflow engine capable of supporting each organization's unique contract management processes. Our cloud-based solution streamlines contract processes, from request, authoring, negotiation, and approval through ongoing obligations management, analysis, reporting, and renewals. It helps companies take control of their contract management processes by converting from paper-based to electronic repositories and by unlocking multiple layers of critical business data, making it available for the evaluation of risk, the exposure of lost revenue, the evaluation of supplier performance, and other purposes. The solution helps to improve the customer buying experience for sales organizations, improve the control of risk and decrease time spent drafting, monitoring and managing contracts, and gain access to previously hidden discounts through the exposure and elimination of unfavorable agreements for procurement and sourcing organizations.

Selectica's Guided Selling (GS) is a cloud solution that streamlines the management and dissemination of complex product information enabling companies to streamline the opportunity-to-order process for manufacturers, service providers, and financial services companies. Our Guided Selling solution can be seamlessly integrated with leading CRM systems, as well as ERP systems like Oracle and SAP, to ensure that the latest product, customer, and pricing data is always being used. This helps to simplify and automate the configuration, pricing, and quoting of complex products and services. By empowering customers, product management, marketing, sales leadership, sales operations, salespeople, and channel partners to generate error-free sales proposals for their unique requirements, we believe our cloud solution helps companies to close sales faster, accelerate revenue generation and enhance customer relationships.

Summary of Operating Results for Fiscal 2013

During the fiscal year ended March 31, 2013, our total revenues increased by 27%, or $3.8 million, to $17.6 million compared with total revenues of $13.8 million for the fiscal year ended March 31, 2012. Recurring revenues, comprised of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues, totaled $11.8 million, or 67% of total revenues, representing an increase of $2.8 million, or 32%, over fiscal 2012. Non-recurring revenues, comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training, totaled $5.8 million, or 33% of total revenues, representing an increase of $0.9 million, or 19%, over fiscal 2012. The increase in recurring revenues year over year resulted primarily from new subscription license customers reflecting the shift in business focus and strategy during the fiscal year ended March 31, 2012 to emphasize our cloud-based solutions. The increase in non-recurring revenues year over year was primarily due to an increase in consulting revenues related to new customers' purchasing implementation services.

During the fiscal year ended March 31, 2013, our net loss decreased by 24%, or $1.5 million, to $4.7 million compared to a net loss of $6.3 million for the fiscal year ended March 31, 2012. The most significant factors affecting the decrease in our net loss were (i) an increase of $1.8 million in gross margin related to recurring revenues as our shift to emphasize cloud-based solutions during fiscal 2012 yielded recurring revenues as well as new customer in fiscal 2013, and (ii) a $0.5 million reduction in payments and related expenses in connection with our Settlement Agreement with Versata (discussed more fully in Note 14 of our Notes to Consolidated Financial Statements) in fiscal 2012 which did not recur in fiscal 2013, offset by (iii) increases in operating expenses which reflect our ongoing investments in new and differentiated product offerings.


Shift in Business Model

In response to market demand, beginning in fiscal 2012, and continuing in fiscal 2013, we have shifted our primary business focus from the sale of perpetual licenses to subscription license arrangements for our cloud-based solutions. Our business and revenue model is now focused on recurring revenues. This shift could adversely affect our short-term financial results and cash flows since the financial terms of the subscription arrangements typically require smaller periodic payments over the term of the arrangement versus the larger, initial payments we have historically received under the perpetual license arrangements. However, we believe that the subscription licensing arrangements will help to increase our ability to attract new customers and improve the predictability of our revenues and cash flows by reducing our dependency on the larger, perpetual licensing arrangements. Despite the shift in our business model to focus more on our subscription licensing arrangements, which has had the corresponding effect of increasing our recurring revenue, our customers have varied preferences for how they want to deploy our solutions. As such, we will continue to offer and support the traditional software license model that some of our customers still prefer.

Global Settlement with Versata Enterprises

During the fiscal year ended March 31, 2012, we entered into a comprehensive settlement agreement with Versata Enterprises to settle all prior claims between the two companies. The agreement included a mutual cross license of patents, a mutual release of claims against the other, and a mutual covenant not to sue, restricting both parties' ability to bring future claims against the other.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are described in notes accompanying the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The preparation of the consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. Estimates are based on information available as of the date of the financial statements, and accordingly, actual results in future periods could differ from these estimates. Significant judgments and estimates used in the preparation of the consolidated financial statements apply critical accounting policies described in the notes to our consolidated financial statements.

We consider our recognition of revenue, calculation of liabilities and stock-based compensation to be the most critical judgments that are involved in the preparation of the consolidated financial statements.

Results of Operations

Revenues



                                   2013               2012         Change
                                   (in thousands, except percentages)
Recurring revenues             $     11,773       $      8,930     $ 2,843
Percentage of total revenues             67 %               65 %        32 %
Non-recurring revenues         $      5,786       $      4,857     $   929
Percentage of total revenues             33 %               35 %        19 %
Total revenues                 $     17,559       $     13,787     $ 3,772

Recurring revenues. Recurring revenues consist of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues. Our fiscal 2013 recurring revenues increased by $2.8 million from the prior year. Subscription revenue growth continued to drive the overall growth in recurring revenues as well as the growth in total revenues. Subscription and hosting revenues grew to $4.4 million for fiscal year 2013, compared to $2.4 million for fiscal year 2012, representing an 83% increase year over year. This result reflects the shift in business focus and strategy to emphasize our cloud-based solutions. Maintenance revenues grew to $7.4 million for fiscal year 2013, compared $6.5 million for fiscal year 2012, representing a 13% increase year over year. Recurring revenues continue to account for over 60% of our total revenues and we expect this trend to continue going forward.

Non-recurring revenues. Non-recurring revenues are comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training. Non-recurring revenues for fiscal year 2013 increased by $0.9 million primarily due to a $0.7 million increase in service revenues associated with new customers' implementations of our hosted software. Additionally, perpetual license revenues grew to $0.4 million for fiscal year 2013, compared to $0.1 million for fiscal year 2012, due to two new customers purchasing such licenses in fiscal year 2013.

We expect non-recurring revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on new license revenue and the number and size of new software implementations and follow-on services to our existing customers. We expect recurring revenues to fluctuate in absolute dollars and as a percentage of total revenues with respect to the number of maintenance renewals, and number and size of new subscription license contracts. In addition, maintenance renewals are extremely dependent upon economic conditions, customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers. Fluctuations in revenue are also due to timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope or renegotiated terms, and additional services.


Factors Affecting Operating Results

A small number of customers account for a significant portion of our total revenues. We expect that our revenue will continue to depend upon a limited number of customers. If we were to lose a customer, it would have a significant impact upon future revenue. Customers who accounted for at least 10% of total revenues were as follows:

2013 2012
Customer A 13 % 17 %

We do not have significant foreign activities. Sales to foreign customers accounted for only 12% of total revenue, and only 1% of revenues were denominated in foreign currency in fiscal 2013. We anticipate that any exposure to foreign currency fluctuations will not be significant in the foreseeable future.

Cost of Revenues



                                        2013        2012       Change
Cost of recurring revenues             $ 2,006     $   986     $ 1,020
Percentage of recurring revenues            17 %        11 %       103 %
Cost of non-recurring revenues         $ 5,419     $ 4,567     $   852
Percentage of non-recurring revenues        94 %        94 %        19 %
Total cost of revenues                 $ 7,425     $ 5,553     $ 1,827

Recurring cost of revenues. Recurring cost of revenues consist of costs associated with supporting our data center, a fixed allocation of our research and development costs, and salaries and related expenses of our support organization. During fiscal 2013, recurring cost of revenues increased $1.0 million or 103% compared to the prior year primarily due to a corresponding increase in recurring revenues of $2.8 million during the same period, as well as increased infrastructure spending in hosting and support costs during fiscal 2013.

We expect recurring cost of revenues to increase in absolute dollars in fiscal 2014.

Non-recurring cost of revenues. Non-recurring cost of revenues is comprised mainly of salaries and related expenses of our services organization, fees paid to resellers, costs of purchased third party licenses sold to customers as part of a bundled arrangement, and certain allocated corporate expenses. During fiscal 2013, these costs increased by approximately $0.9 million primarily due to the corresponding $0.7 million increase in professional services revenues, as well as some additional costs incurred in certain projects that were not billable to customers. The gross margin on non-recurring revenues was 6% in both fiscal 2013 and 2012.

We expect non-recurring cost of revenues to increase in absolute dollars in fiscal 2014.

Gross Profit and Margin



                                       2012      2011
Gross margin, recurring revenues          83 %      89 %
Gross margin, non-recurring revenues       6 %       6 %
Gross margin, total revenues              58 %      60 %

Gross profit was $10.1 million, or 58% of revenues, in fiscal 2013 compared with $8.2 million, or 60% of revenues, in fiscal 2012. The decrease in gross profit percentage during fiscal year 2013 resulted from lower gross margins from our recurring revenues due to increased spending in hosting infrastructure costs during fiscal 2013.

Gross Margin-Gross margins represent gross profit as a percentage of revenue. Gross margins in fiscal 2013 and 2012 were affected by the factors discussed above under "Revenues" and "Cost of Revenues."

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


Operating Expenses



                                  2013        2012        Change
Total research and development   $ 3,706     $ 3,394     $    312
Percentage of total revenues          21 %        25 %          9 %

Research and Development. Research and development expenses consist mainly of salaries and related costs of our engineering, quality assurance, technical publications efforts, and certain allocated expenses. The increase in research and development expenses of $0.3 million in fiscal 2013 compared to fiscal year 2012 was primarily due to additional expenses invested into our Ukraine research and operations center.

We expect research and development expenditures to remain relatively flat in fiscal 2014.

                                2013        2012        Change
Sales and marketing            $ 6,708     $ 6,247     $    461
Percentage of total revenues        38 %        45 %          7 %

Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, trade shows, public relations, collateral sales materials, advertising and certain allocated expenses. In fiscal 2013, sales and marketing expenses increased $0.5 million primarily due to increased marketing costs. We expect increases in sales and marketing expenses in fiscal 2014 compared to fiscal 2013 both in absolute dollars and as a percentage of total revenues.

                                2013        2012       Change
General and administrative     $ 3,618     $ 3,767     $  (149 )
Percentage of total revenues        21 %        27 %         4 %

General and Administrative. General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses. General and administrative expenses decreased $0.1 million in fiscal 2013 compared with fiscal 2012 primarily due to a $0.2 million decrease in legal costs since the settlement with Versata was negotiated in fiscal 2012 as discussed below, partially offset by a $0.1 million increase in bad debt expense in fiscal 2013. Additionally, we experienced a $0.3 million decrease in bonus expense, which was offset by a $0.3 million increase in stock-based compensation expense during fiscal 2013 compared to fiscal 2012. We expect modest increases in general and administrative expenses in fiscal 2014 compared to fiscal 2013 in absolute dollars, primarily due to stock-based compensation expense due to restricted stock grants made in fiscal 2013.

Fees Related To Comprehensive Settlement Agreement. Fees related to our Comprehensive Settlement Agreement consist of a $0.5 million charge in fiscal 2012 for consulting services as part of our settlement with Versata, as discussed further in Note 8 of the Notes to Consolidated Financial Statements.

Loss on Early Extinguishment of Note Payable

Loss on early extinguishment of note payable in fiscal 2012 relates to a $0.5 million charge resulting from the Versata note payoff, as discussed further in Note 8 of the Notes to Consolidated Financial Statements.

Provision for Income Taxes

Due to our net loss, we did not record income tax expense for fiscal 2013 or 2012. As of March 31, 2013, we had federal and state net operating loss carryforwards of approximately $186.6 million and $93.0 million, respectively. As of March 31, 2013, we also had federal and state research and development tax credit carryforwards of approximately $3.5 million and $5.0 million, respectively.

The fiscal 2013 and 2012 tax provisions vary from the expected provision or benefit at the U.S. federal statutory rate due to the recording of valuation allowances against our U.S. operating loss carryforwards and the effects of different tax rates in our foreign jurisdictions. Given our history of operating losses it is difficult to accurately forecast how results would be affected by the realization of net operating loss carryforwards.

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


Liquidity and Capital Resources

                                                         2013         2012
                                                          (in thousands)
Cash, cash equivalents and short-term investments      $ 12,098     $ 16,076
Working capital                                        $  1,866     $  5,405
Net cash used for operating activities                 $ (3,421 )   $ (1,929 )
Net cash used for investing activities                 $    (60 )   $   (213 )
Net cash (used for) provided by financing activities   $   (298 )   $  1,197

Our primary sources of liquidity consisted of approximately $12.1 million in cash and cash equivalents as of March 31, 2013, $6.0 million of which was received from our short-term credit facility. This compares to approximately $16.1 million in cash, cash equivalents and short-term investments as of March 31, 2012, $6.0 million of which was received from our short-term credit facility.

Net cash used for operating activities was $3.4 million for the twelve months ended March 31, 2013, resulting primarily from our net loss of $4.7 million, adjusted for non-cash expenses totaling $1.3 million, which included depreciation and stock-based compensation expense.

Net cash used for operating activities was $1.9 million for the fiscal year ended March 31, 2012, resulting primarily from our net loss of $6.3 million, adjusted for non-cash expenses totaling $0.9 million, which included depreciation, losses on disposal of property and equipment, and stock-based compensation expense. In addition, we had changes in assets and liabilities providing $3.5 million in cash, driven primarily by a $2.4 million increase in deferred revenues, and a $1.3 million increase in accrued payroll and related liabilities, offset by a $0.4 million decrease in accounts payable.

Net cash used for investing activities was $0.1 million for the fiscal year ended March 31, 2013, resulting primarily from the purchase of capital assets offset by proceeds from maturities of short-term investments.

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

Net cash used in financing activities was $0.3 million for the fiscal year ended March 31, 2013, resulting primarily from repurchases of common stock from employees.

Net cash provided by financing activities was $1.2 million for the fiscal year ended March 31, 2012, resulting primarily from $6.0 million received from our credit facility borrowings, offset by our $4.3 million payments to Versata, as well as $0.5 million in purchased treasury shares in connection with our Settlement Agreement with Versata.

We expect to incur significant operating costs for the foreseeable future. We expect to fund our operating costs, as well as our future capital expenditures and liquidity needs, from a combination of available cash balances, internally generated funds, and our short-term credit facility. We have no outside debt other than our short-term credit facility, and do not have any plans to enter into any additional borrowing arrangements. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues, and our ability to manage costs.

We expect that our cash on hand and future cash flows provided by operating activities will be sufficient to fund our working capital and general corporate needs and the non-discretionary capital expenditures for the foreseeable future. In the first quarter of fiscal 2014, we closed the initial tranche of a private placement sale of common and preferred shares of stock with gross proceeds to the Company of approximately $5.7 million.


Contractual Obligations



The following table summarizes our outstanding contractual obligations as of
March 31, 2013 and the effect those obligations are expected to have on our
liquidity and cash flows in future periods (in thousands):



                                                    Payments Due by Period
                                          Less than                                    More than
Contractual Obligations        Total       1 Year        1-3 Years      3-5 years       5 Years
Operating lease-real estate   $   448    $       252    $       196    $         -    $         -
Credit facility                 6,000          6,000              -              -              -
Total                         $ 6,448    $     6,252    $       196    $         -    $         -

Our contractual obligations and commercial commitments at March 31, 2013 were approximately $6.4 million.

Off-balance sheet arrangements

We have no off-balance sheet arrangements or transactions with unconsolidated limited purpose entities, nor do we have any undisclosed material transactions or commitments involving related persons or entities.

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