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| SLTC > SEC Filings for SLTC > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
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 Part II Item 1A "Risk Factors." Actual results could differ materially. Important factors that could cause actual results to differ materially include, but are not limited to; the level of demand for Selectica's products and services; the intensity of competition; Selectica's ability to effectively manage product transitions and to continue to expand and improve internal infrastructure; risks associated with potential acquisitions; and adverse financial, customer and employee consequences that might result to us if litigation were to be resolved in an adverse manner to us. For a more detailed discussion of the risks relating to our business, readers should refer to Part II Item 1A found later in this report entitled "Risks 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 Contract Management (CM) and Sales Configuration (SCS) software solutions that allow enterprises to efficiently manage sell-side business processes. Our solutions include software, on demand hosting, professional services and expertise.
Our CM products enable customers to create, manage and analyze contracts in a single, easy to use repository and are offered as an on-premise or hosted solution. Our software enables any and all corporate departments (e.g. Sales, Services, Procurement, Finance, IT and others) to model their specific contracting processes using our application and to manage the lifecycle of the department's relationships with the counterparty from creation through closure.
Our SCS products enable customers to increase revenues and reduce costs through seamless, web-enabled automation of the "quote to contract" business processes, which reside between legacy Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) systems. These products are built using Java technology and utilize a unique business logic engine, repository, and a multi-threaded architecture. This design reduces the amount of memory used to support new user sessions and to deploy a cost-effective, robust and highly scalable, Internet-enhanced sales channel.
Quarterly Financial Overview
For the three months ended June 30, 2009, our revenues were approximately $3.2 million with license revenues representing 13% and services revenues representing 87% of total revenues. In addition, approximately 36% of our quarterly revenues came from three customers. License margins for the quarter were 88% and services margins were 50%. Net loss for the quarter was approximately $3.0 million or $(0.07) per share. For the three months ended June 30, 2008, our revenues were approximately $3.8 million with license revenues representing 20% and services revenues representing 80% of total revenues. In addition, approximately 42% of our quarterly revenues came from three customers. License margins for the quarter were 93% and services margins were 61%. Net loss for the quarter was approximately $2.2 million or $(0.08) per share.
Critical Accounting Policies and Estimates
There have been no material changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended March 31, 2009.
Factors Affecting Operating Results
A small number of customers account for a significant portion of our total
revenues. We expect that our revenues will continue to depend upon a limited
number of customers. If we were to lose a large customer, it would have a
significant impact upon future revenues. Customers who accounted for at least
10% of total revenues were as follows:
Three Months Ended
June 30,
2009 2008
Customer A 17 % 20 %
Customer B 10 % 11 %
Customer C * 11 %
Customer D 10 % *
Customer E 10 % *
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* Customer account was less than 10% of total revenues.
We have incurred significant losses since inception and, as of June 30, 2009, we had an accumulated deficit of approximately $252 million. We believe our success depends on the growth of our customer base and the development of the emerging contract management and compliance markets and the stability of our sales configuration customer base.
In view of the rapidly changing nature of our business, we believe that period-to-period comparisons of revenues and operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Our operating history has been volatile and makes it difficult to forecast future operating results.
Because our services tend to be specific to each customer and how that customer will use our products, and because each customer sets different acceptance criteria, it is difficult for us to accurately forecast the amount of revenue that will be recognized on any particular customer contract during any quarter or fiscal year. As a result, we base our revenue estimates, and our determination of associated expense levels, on our analysis of the likely revenue recognition events under each contract during a particular period. Although the value of customer contracts signed during any particular quarter or fiscal year is not an accurate indicator of revenues that will be recognized during any particular quarter or fiscal year, in general, if the value of customer contracts signed in any particular quarter or fiscal year is lower than expected, revenue recognized in future quarters and fiscal years will likely be negatively affected.
Results of Operations:
Revenues
Three Months Ended
June 30,
2009 2008 Change
(in thousands except percentages)
License $ 432 $ 756 $ (324 )
Percentage of total revenues 13 % 20 % -
Services $ 2,783 $ 3,010 $ (227 )
Percentage of total revenues 87 % 80 % -
Total revenues $ 3,215 $ 3,766 $ (551 )
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License. For the three months ending June 30, 2009, license revenues decreased on a quarterly basis by approximately $0.3 million compared to the three months ending June 30, 2008. Approximately half of our new CM customers licensed our product on a subscription basis, deferring revenue recognition over time. We also had no new licensing activities, as expected, in the SCS business reflecting our focus on growing our CM business. We expect license revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars depending on the number and size of new license contracts.
Services. Services revenues are comprised of fees from consulting, maintenance, training, subscription revenues and out-of pocket reimbursements. During the three months ending June 30, 2009, services revenues decreased $0.2 million compared to the three months ending June 30, 2008. The decrease primarily related to the lower level of professional services delivered by our SCS unit reflecting our focus on the CM business. Maintenance revenues represented 45% and 46% of total services revenues for the three months ended June 30, 2009 and June 30, 2008, respectively.
We expect services revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on the number and size of new software implementations and follow-on services to our existing customers. We expect maintenance revenues to fluctuate in absolute dollars and as a percentage of services revenues with respect to the number of maintenance renewals, and number and size of new contracts. In addition, maintenance renewals are extremely dependent upon customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers. Fluctuations in services revenues are also due to timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope, and additional services.
Cost of revenues
Three Months Ended
June 30,
2009 2008 Change
(in thousands, except percentages)
Cost of license revenues $ 51 $ 51 $ -
Percentage of license revenues 12 % 7 % -
Cost of services revenues $ 1,386 $ 1,187 $ 199
Percentage of services revenues 50 % 39 % -
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Cost of License Revenues. Cost of license revenues consists of a fixed allocation of our research and development costs, the costs of the product media, duplication, packaging and delivery of our software products to our customers, which may include documentation, shipping, and other data transmission costs. We expect cost of license revenues to maintain a relatively consistent level in absolute dollars in fiscal 2010.
Cost of Services Revenues. Cost of services revenues is comprised mainly of salaries and related expenses of our services organization plus certain allocated expenses. During the three months ended June 30, 2009, these costs increased 16% compared to the same period in 2008 primarily due to an increase of approximately $0.3 million in the CM business unit due to the hiring of additional headcount and the use of outside contractors.
We expect cost of services revenues to fluctuate as a percentage of service revenues and we plan to reduce our investment in cost of services revenues in absolute dollars over the next year as necessary to balance expense levels with projected revenues.
Gross Margins
Gross margin percentages for services revenues and license revenues for the
respective periods are as follows:
Three Months Ended
June 30,
2009 2008
License 88 % 93 %
Services 50 % 61 %
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Gross Margin - Licenses. Because we have certain license costs that are fixed, margins will vary based on gross license revenue, the nature of the license agreements and product mix. Due to lower license revenues to offset the fixed license costs, we experienced lower license gross margins during the three months ended June 30, 2009 compared to the three months ending June 30, 2008.
Gross Margin - Services. During the three month period ending June 30, 2009, gross margins from services declined to 50% as compared to 61% in the three month period ending June 30, 2008. This decline was largely due to the completion of a number of legacy fixed-price contracts that required the use of outside services which have a higher cost structure than our internal resources.
We expect that our overall gross margins will continue to fluctuate due to the timing of services and license revenue recognition and will continue to be adversely affected by lower margins associated with services revenues. The impact on our gross margin will depend on the mix of services we provide, whether the services are performed by our in-house staff or third party consultants, and the overall utilization rates of our professional services organization.
Operating Expenses
Research and Development Expenses
Three Months Ended
June 30,
2009 2008 Change
(in thousands, except percentages)
Research and development $ 1,043 $ 1,147 $ (104 )
Percentage of total revenues 32 % 30 % -
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Research and development expenses consist primarily of salaries and related costs of our engineering, quality assurance, technical publications efforts and certain allocated expenses. Research and development expenses decreased slightly during the three months ending June 30, 2009 compared to the three months June 30, 2008 and were primarily attributable to staff redeployment to focus on the development of the CM product and a reduction in the use of outside services in support of our in-house development teams.
Sales and Marketing
Three Months Ended
June 30,
2009 2008 Change
(in thousands, except percentages)
Sales and marketing $ 1,199 $ 1,760 $ (561 )
Percentage of total revenues 37 % 47 % -
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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. For the three months ended June 30, 2009, sales and marketing expenses decreased $0.6 million compared to the same period in 2008. The decrease is primarily due to headcount reductions and reduced commissions in the CM segment.
General and Administrative
Three Months Ended
June 30,
2009 2008 Change
(in thousands, except percentages)
General and administrative $ 1,458 $ 1,065 $ 393
Percentage of total revenues 45 % 28 % -
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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 slightly in the three months ended June 30, 2009 compared to the same period in 2008 primarily due to increased costs in legal, accounting and other professional services.
Shareholder Litigation, Professional fees related to corporate governance review, and Restructuring
Three Months Ended
June 30,
2009 2008 Change
(in thousands, except percentages)
Shareholder litigation $ 5 $ 114 $ (109 )
Percentage of total revenues 0 % 3 % -
Professional fees related to corporate
governance review $ 347 - $ 347
Percentage of total revenues 11 % 0 % -
Restructuring $ 824 $ 380 $ 444
Percentage of total revenues 26 % 10 % -
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We are one of several defendants in lawsuits pending related to the practices of
various underwriters in the 1999-2000 timeframe. We are jointly represented as
these matters are settled largely without cost to us and our expenses are
minimal. The corporate governance review was initiated in 2009 as a result of
internal initiatives and matters that were raised during the course of our
litigation with Trilogy, Inc. In May 2009, we adopted a series of reforms to our
corporate governance policies and procedures. The details can be found in
Section 9A of our Annual Report on Form 10-K for the year ending March 31, 2009.
We have, from time to time, realigned or restructured our costs to better fit the sales and customer model in place at the time. In the period ending June 30, 2009, our restructuring expenses related to employee severances and to write offs of leasehold improvements in the headquarters facility that we will cease to occupy on August 17, 2009. In the comparable period in the previous fiscal year, the restructuring expenses related primarily to severance arrangements with certain former officers of the Company.
Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily of interest earned on cash balances and short-term investments, interest expense on our note payable to Versata, and other miscellaneous expenditures. During the three months ended June 30, 2009 and June 30, 2008, interest and other income (expense), net totaled approximately $0.1 and $0.2 million, respectively.
Provision for Income Taxes
During the three months ended June 30, 2009 and 2008, we recorded income tax (benefit)/provision of approximately ($179,000) and $17,000, respectively. These amounts related to taxes due in foreign jurisdictions and nominal tax amounts for federal and state taxes in the U.S.
Liquidity and Capital Resources
June 30, March 31,
2009 2009
(in thousands)
Cash, cash equivalents and short-term investments $ 20,025 $ 23,452
Working capital $ 16,509 $ 20,180
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Three Months Ended
June 30,
2009 2008
(in thousands)
Net cash used in operating activities $ (2,034 ) $ (1,762 )
Net cash (used in) provided by investing activities $ (36 ) $ 4,391
Net cash used in financing activities $ (1,358 ) $ (200 )
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Our primary sources of liquidity consisted of approximately $20.0 million in cash, cash equivalents and short-term investments as of June 30, 2009 compared to approximately $23.5 million in cash, cash equivalents and short-term investments as of March 31, 2009.
Net cash used in operating activities was $2.0 million for the three months ended June 30, 2009, resulting primarily from our net loss of $3.0 million, and a $0.9 million decrease in accounts payable. These decreases in cash flows from operating activities were partially offset by a $1.8 million decrease in accounts receivable, net.
Net cash used in operating activities was $1.8 million for the three months ended June 30, 2008, resulting primarily from our net loss of approximately $2.2 million, and a $0.7 million increase in accounts receivable, net. These decreases in cash flows from operating activities were partially offset by a $0.7 million increase in deferred revenues, and a $0.5 million increase in accrued payroll and related liabilities.
Net cash used in investing activities was immaterial for the three months ended June 30, 2009.
Net cash provided by investing activities was $4.4 million for the three months ended June 30, 2008, which was primarily due to net proceeds from the maturity of short-term investments.
As a result of current adverse financial market conditions, investments in some financial instruments may pose risks arising from liquidity and credit concerns. Although we believe our current investment portfolio has very little risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.
Net cash used in financing activities was $1.4 million for the three months ended June 30, 2009, resulting from $1.2 million in costs to defend our Rights Agreement, as well as $0.2 million of payments on our note payable to Versata.
Net cash used in financing activities was $0.2 million for the three months ended June 30, 2008, which was due to payments on our note payable to Versata.
We expect to incur significant operating costs for the foreseeable future. We expect to fund our operating costs, as well as our future capital expenditures and liquidity needs, from a combination of available cash balances and internally generated funds. We have no outside debt, and do not have any plans to enter into borrowing arrangements. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues, our ability to manage costs and ongoing legal proceedings.
We believe our cash, cash equivalents, and short-term investment balances as of June 30, 2009 are adequate to fund our operations through at least June 30, 2010. 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
We had no significant commitments for capital expenditures as of June 30, 2009. We expect to fund our future capital expenditures, liquidity and strategic operating programs from a combination of available cash balances and internally generated funds. We have no outside debt and do not have any plans to enter into borrowing arrangements. We believe our cash, cash equivalents, and short-term investment balances as of June 30, 2009 are adequate to fund our operations through at least the next 12 months.
We do not anticipate any significant capital expenditures, payments due on long-term obligations, or other contractual obligations. However, management is continuing to review our cost structure to minimize expenses and use of cash as we implement our planned business model changes. This activity may result in additional restructuring charges or severance and other benefits.
Our contractual obligations and commercial commitments at June 30, 2009, are summarized as follows:
Payments Due By Period
Less Than 1-3 4-5 After 5
Contractual Obligations: Total 1 Year Years Years Years
(in thousands)
Operating leases $ 1,566 $ 1,304 $ 262 $ - $ -
Sublease income $ (339 ) $ (339 ) $ - $ - $ -
Net lease payments $ 1,227 $ 965 $ 262 $ - $ -
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