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| SLTC > SEC Filings for SLTC > Form 10-Q on 16-Nov-2009 | All Recent SEC Filings |
16-Nov-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 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, 2009 (the "Form 10-K"). 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 1A to Part 1 in the Form 10-K 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 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 September 30, 2009, our revenues were approximately $3.7 million with license revenues representing 26% and services revenues representing 74% of total revenues. In addition, approximately 40% of our quarterly revenues came from three customers. License margins for the quarter were 96% and services margins were 54%. Net loss for the quarter was approximately $1.1 million or $(0.02) per share. For the three months ended September 30, 2008, our revenues were approximately $3.1 million with license revenues representing 5% and services revenues representing 95% of total revenues. In addition, approximately 49% of our quarterly revenues came from three customers. License margins for the quarter were 67% and services margins were 61%. Net loss for the quarter was approximately $3.0 million or $(0.10) 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 Six Months Ended
September 30, September 30,
2009 2008 2009 2008
Customer A 16 % 26 % 17 % 23 %
Customer B * 10 % * *
Customer C * 13 % * 11 %
Customer D 16 % * * *
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* Customer account was less than 10% of total revenues.
We have incurred significant losses since inception and, as of September 30, 2009, we had an accumulated deficit of approximately $253 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.
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 results have historically been dependent on a few significant customer transactions which make predicting future performance difficult.
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 Six Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
(in thousands, except percentages)
License $ 945 $ 156 $ 789 $ 1,377 $ 912 $ 465
Percentage of total revenues 26 % 5 % 506 % 20 % 13 % 51 %
Services $ 2,756 $ 2,979 $ (223 ) $ 5,539 $ 5,990 $ (451 )
Percentage of total revenues 74 % 95 % (7 )% 80 % 87 % (8 )%
Total revenues $ 3,701 $ 3,135 $ 566 $ 6,916 $ 6,902 $ 14
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License. For the three and six months ending September 30, 2009, license revenues increased by approximately $0.8 million and $0.5 million, respectively, compared to the three and six months ending September 30, 2008. These revenue increases were due to more license transactions in the Contract Management segment, reflecting our continued focus on the Contract Management 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, hosting, training, subscription revenues and out-of-pocket reimbursements. During the three months ended September 30, 2009, services revenues decreased $0.2 million compared to the three months ended September 30, 2008 primarily due to the lower level of consulting services delivered by our CM segment. During the six months ended September 30, 2009, services revenues decreased $0.5 million compared to the six months ended September 30, 2008 primarily due to the lower level of consulting services delivered by both our CM and SCS segments. Maintenance revenues represented 52% and 45% of total services revenues for the three months ended September 30, 2009 and September 30, 2008, respectively, and 52% and 46% of total services revenues for the six months ended September 30, 2009 and September 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 Six Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
(in thousands, except percentages)
Cost of license revenues $ 38 $ 51 $ (13 ) $ 89 $ 102 $ (13 )
Percentage of license revenues 4 % 33 % (25 )% 6 % 11 % (13 )%
Cost of services revenues $ 1,261 $ 1,159 $ 102 $ 2,646 $ 2,345 $ 301
Percentage of services revenues 46 % 39 % 8 % 48 % 39 % 13 %
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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, our data center costs, plus certain allocated expenses. During the three and six months ended September 30, 2009, these costs increased 8% and 13%, respectively, compared to the same periods in 2008 primarily due to an increase of approximately $0.2 million and $0.8 million in the CM business unit during the three and six months ended September 30, 2009 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 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 Six Months Ended
September 30, September 30,
2009 2008 2009 2008
License 96 % 67 % 94 % 89 %
Services 54 % 61 % 52 % 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 higher license revenues in our CM segment, we experienced higher license gross margins during the three and six months ended September 30, 2009 compared to the three and six months ending September 30, 2008.
Gross Margin - Services. During the three and six months ending September 30, 2009, gross margins from services declined to 54% and 52%, respectively, as compared to 61% for both the three and six months ending September 30, 2008. This decline was largely due to the ongoing shift made to our CM business, which typically has lower gross margins than our SCS business.
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 Six Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
(in thousands, except percentages)
Research and development $ 749 $ 970 $ (221 ) $ 1,792 $ 2,117 $ (325 )
Percentage of total revenues 20 % 31 % (23 )% 26 % 31 % (15 )%
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Research and development expenses consist primarily of salaries and related costs of our engineering, quality assurance, technical publication efforts and certain allocated expenses. Research and development expenses decreased $0.2 million and $0.3 million during the three and six months ending September 30, 2009 compared to the three and six months ending September 30, 2008, respectively. These decreases were primarily attributable to our reduction in force near the end of the first quarter of fiscal year 2010, and a reduction in the use of outside services in support of our in-house development teams.
We expect research and development expenditures to increase modestly in absolute dollars over the next year as we continue development in our CM products and integrate with tools provided by third parties.
Sales and Marketing
Three Months Ended Six Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
(in thousands, except percentages)
Sales and marketing $ 1,103 $ 1,353 $ (250 ) $ 2,302 $ 3,114 $ (812 )
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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 and six months ending September 30, 2009, sales and marketing expenses decreased $0.3 million and $0.8 million, respectively, compared to the same periods in 2008. These decreases are primarily due to our reduction in force near the end of the first quarter of fiscal year 2010.
We expect modest reductions in sales and marketing expenses in fiscal 2010 as a percentage of total revenues.
General and Administrative
Three Months Ended Six Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
(in thousands, except percentages)
General and administrative $ 1,457 $ 1,842 $ (385 ) $ 2,915 $ 2,907 $ 8
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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 decreased by approximately $0.4 million in the three months ended September 30, 2009 compared to the same period in 2008, primarily due to a decrease in outside services and were about the same for the six months ended September 30, 2009 and 2008.
Professional Fees Related to Corporate Governance Review and Restructuring
Three Months Ended Six Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
(in thousands, except percentages)
Professional fees related to corporate
governance review $ 91 $ - $ 91 $ 438 $ - $ 438
Percentage of total revenues 2 % - - 6 % - -
Restructuring $ 23 $ 293 $ (270 ) $ 847 $ 673 $ 174
Percentage of total revenues 1 % 9 % (92 )% 12 % 10 % 26 %
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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. During the six months ended September 30, 2009, our restructuring expenses related to employee severances and to write offs of leasehold improvements in the headquarters facility that we ceased 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, foreign currency fluctuations, and other miscellaneous expenditures. During the three months ended September 30, 2009 and 2008, interest and other income (expense), net totaled approximately $(0.1) and $(0.4) million, respectively. During the six months ended September 30, 2009 and 2008, interest and other income (expense), net totaled approximately $(0.2) and $(0.6) million, respectively. The expense reductions primarily relate to unfavorable foreign exchange rate movements against the U.S. dollar in the prior fiscal year. The foreign currency exposure no longer exists as a result of the sale of our Indian subsidiary on March 31, 2009. For more information on the sale of the Indian subsidiary, see Footnote 15 in our Annual Report on Form 10-K for the year ending March 31, 2009.
Provision for Income Taxes
During the six months ended September 30, 2009 and 2008, we recorded income tax (benefit)/provision of approximately ($179,000) and $37,000, respectively. These amounts related to taxes due in foreign jurisdictions, nominal state minimum and franchise taxes, and federal refundable R&D credit benefits.
Liquidity and Capital Resources
September 30, March 31,
2009 2009
(in thousands)
Cash, cash equivalents and short-term investments $ 18,266 $ 23,452
Working capital $ 15,610 $ 20,180
Six Months Ended
September 30,
2009 2008
(in thousands)
Net cash used in operating activities $ (3,329 ) $ (4,313 )
Net cash provided by (used in) investing activities $ (85 ) $ 6,251
Net cash used in financing activities $ (1,773 ) $ (374 )
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Our primary sources of liquidity consisted of approximately $18.3 million in cash, cash equivalents and short-term investments as of September 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 $3.3 million for the six months ended September 30, 2009, resulting primarily from our year to date net loss of $4.1 million, and a $1.2 million decrease in accounts payable, partially offset by a $2.2 million decrease in accounts receivable, net.
Net cash used in operating activities was $4.3 million for the six months ended September 30, 2008, resulting primarily from our net loss of $5.1 million and a $1.2 million increase in accounts receivable, partially offset by a $1.7 million increase in deferred revenues.
Net cash used in investing activities was $0.1 million for the six months ended September 30, 2009, resulting primarily from capital asset purchases.
Net cash provided by investing activities was $6.3 million for the six months ended September 30, 2008, which largely consisted of $6.4 million of net proceeds 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 $1.8 million for the six months ended September 30, 2009, resulting from $1.4 million in costs to defend our Rights Agreement, as well as $0.4 million of payments on our note payable to Versata.
Net cash used in financing activities was $0.4 million for the six months ended September 30, 2008, which was primarily 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 September 30, 2009 are adequate to fund our operations through at least September 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 September 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 September 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 September 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 $ 1,053 $ 880 $ 173 $ - $ -
Sublease income $ (204 ) $ (204 ) $ - $ - $ -
Net lease payments $ 849 $ 676 $ 173 $ - $ -
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