COVS-2013.12.31-10Q
As filed with the Securities and Exchange Commission on February 7, 2014.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2013
OR
|
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-36088
Covisint Corporation
(Exact name of registrant as specified in its charter)
|
| | | | |
MICHIGAN (State or other jurisdiction of incorporation or organization) | | | | 26-2318591 (I.R.S. Employer Identification Number) |
One Campus Martius, Detroit, Michigan 48226-5099
(313) 227-7000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | |
Large accelerated filer o | | | | Accelerated filer o |
Non-accelerated filer x | | (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:
As of February 7, 2014, there were outstanding 37,490,500 shares of Common Stock, no par value, of the registrant.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Covisint Corporation
Detroit, Michigan
We have reviewed the accompanying condensed and consolidated balance sheet of Covisint Corporation and subsidiaries as of December 31, 2013, and the related condensed, combined and consolidated statements of comprehensive loss for the three-month and nine-month periods ended December 31, 2013 and 2012, of cash flows for the nine-month periods ended December 31, 2013 and 2012, and the related condensed and consolidated statement of shareholder’s equity for the nine months ended December 31, 2013 of Covisint Corporation and subsidiaries and the Covisint Operations of Compuware Corporation (the “Company”) . These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the interim financial statements, prior to January 1, 2013, the accompanying interim financial statements have been prepared from the separate records maintained by Compuware Corporation and may not necessarily be indicative of the financial condition or results of operations and cash flows that would have existed had the Company been operated as a stand-alone company during the periods presented.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Covisint Corporation and subsidiaries as of March 31, 2013, and the related combined and consolidated statements of comprehensive income, shareholder’s equity, and cash flows of the Company, for the year then ended (not presented herein); and in our report dated June 3, 2013, we expressed an unqualified opinion on those consolidated financial statements (which report includes an explanatory paragraph referring to the financial statements prior to January 1, 2013 being prepared from the records of Compuware Corporation). In our opinion, the information set forth in the accompanying condensed and consolidated balance sheet as of March 31, 2013 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
February 7, 2014
COVISINT CORPORATION AND THE COVISINT OPERATIONS OF COMPUWARE CORPORATION
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited) |
| | | | | | | | | |
| | | December 31, 2013 | | March 31, 2013 |
ASSETS | | | | | |
CURRENT ASSETS: | | | | | |
Cash | | |
| $54,770 |
| |
| $966 |
|
Accounts receivable, net | | | 18,990 |
| | 25,386 |
|
Deferred tax asset, net | | | 1,382 |
| | 2,011 |
|
Due from parent and affiliates | | | 2,046 |
| | — |
|
Other current assets | | | 6,267 |
| | 5,517 |
|
Total current assets | | | 83,455 |
| | 33,880 |
|
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION | | | 3,460 |
| | 2,654 |
|
CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET | | | 23,523 |
| | 24,447 |
|
OTHER: | | | | | |
Goodwill | | | 25,385 |
| | 25,385 |
|
Deferred costs | | | 7,336 |
| | 9,738 |
|
Deferred tax asset, net | | | 135 |
| | 146 |
|
Other assets | | | 858 |
| | 1,808 |
|
Total other assets | | | 33,714 |
| | 37,077 |
|
TOTAL ASSETS | | |
| $144,152 |
| |
| $98,058 |
|
LIABILITIES AND SHAREHOLDER's EQUITY | | | | | |
CURRENT LIABILITIES: | | | | | |
Accounts payable | | |
| $2,114 |
| |
| $2,440 |
|
Accrued commissions | | | 1,586 |
| | 1,982 |
|
Deferred revenue | | | 15,575 |
| | 16,989 |
|
Accrued expenses | | | 3,617 |
| | 2,921 |
|
Due to parent and affiliates | | | — |
| | 7,556 |
|
Total current liabilities | | | 22,892 |
| | 31,888 |
|
DEFERRED REVENUE | | | 13,935 |
| | 18,188 |
|
ACCRUED LIABILITIES | | | 21 |
| | 271 |
|
DEFERRED TAX LIABILITY, NET | | | 2,891 |
| | 4,817 |
|
Total liabilities | | | 39,739 |
| | 55,164 |
|
COMMITMENTS AND CONTINGENCIES | | | — |
| | — |
|
SHAREHOLDER’S EQUITY: | | | | | |
Preferred stock, no par value - authorized 5,000,000 shares; none issued and outstanding | | | — |
| | — |
|
Common stock, no par value - authorized 50,000,000 shares; issued and outstanding 37,490,500 (30,003,000 issued and outstanding as of March 31, 2013) | | | — |
| | — |
|
Additional paid-in capital | | | 133,391 |
| | 46,186 |
|
Retained deficit | | | (29,019 | ) | | (3,289 | ) |
Accumulated other comprehensive income (loss) | | | 41 |
| | (3 | ) |
Total shareholder’s equity | | | 104,413 |
| | 42,894 |
|
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY | | |
| $144,152 |
| |
| $98,058 |
|
See notes to condensed, combined and consolidated financial statements.
COVISINT CORPORATION AND THE COVISINT OPERATIONS OF COMPUWARE CORPORATION
CONDENSED, COMBINED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands, Except Per Share Data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | | 2013 | | 2012 | | 2013 | | 2012 |
REVENUE | | |
| $24,109 |
| |
| $23,801 |
| |
| $72,735 |
| |
| $65,020 |
|
COST OF REVENUE | | | 13,660 |
| | 12,173 |
| | 41,096 |
| | 34,022 |
|
GROSS PROFIT | | | 10,449 |
| | 11,628 |
| | 31,639 |
| | 30,998 |
|
OPERATING EXPENSES: | | | | | | | | | |
Research and development | | | 3,533 |
| | 480 |
| | 9,362 |
| | 898 |
|
Sales and marketing | | | 8,484 |
| | 6,510 |
| | 26,610 |
| | 18,504 |
|
General and administrative | | | 6,724 |
| | 4,787 |
| | 21,338 |
| | 13,867 |
|
Total operating expenses | | | 18,741 |
| | 11,777 |
| | 57,310 |
| | 33,269 |
|
LOSS BEFORE INCOME TAX PROVISION | | | (8,292 | ) | | (149 | ) | | (25,671 | ) | | (2,271 | ) |
INCOME TAX PROVISION | | | 22 |
| | 31 |
| | 59 |
| | 88 |
|
NET LOSS | | |
| ($8,314 | ) | |
| ($180 | ) | |
| ($25,730 | ) | |
| ($2,359 | ) |
Basic and diluted loss per share | | |
| ($0.22 | ) | |
| ($0.01 | ) | |
| ($0.79 | ) | |
| ($0.08 | ) |
OTHER COMPREHENSIVE INCOME, NET OF TAX | | | | | | | | | |
Foreign currency translation adjustments | | |
| $24 |
| |
| $— |
| |
| $44 |
| |
| $— |
|
TAX ATTRIBUTES OF ITEMS IN OTHER COMPREHENSIVE INCOME | | | | | | | | | |
Foreign currency translation adjustments | | | — |
| | — |
| | — |
| | — |
|
OTHER COMPREHENSIVE INCOME, NET OF TAX | | | 24 |
| | — |
| | 44 |
| | — |
|
COMPREHENSIVE LOSS | | |
| ($8,290 | ) | |
| ($180 | ) | |
| ($25,686 | ) | |
| ($2,359 | ) |
See notes to condensed, combined and consolidated financial statements.
COVISINT CORPORATION AND THE COVISINT OPERATIONS OF COMPUWARE CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
NINE MONTHS ENDED DECEMBER 31, 2013
(In Thousands, Except Share Data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In | | Retained | | Accumulated Other Comprehensive | | Total Shareholder’s |
| Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Equity |
BALANCE AT MARCH 31, 2013 | 30,003,000 |
| |
| $— |
| |
| $46,186 |
| |
| ($3,289 | ) | |
| ($3 | ) | |
| $42,894 |
|
Net loss | | | | | | | (25,730 | ) | | | | (25,730 | ) |
Parent contribution of stock awards and related taxes, net | | | | | (2,954 | ) | | | | | | (2,954 | ) |
Covisint stock option expense (Note 5) | | | | | 16,140 |
| | | | | | 16,140 |
|
Covisint stock option exercise | 127,500 |
| | | | 332 |
| | | | | | 332 |
|
Income taxes | | | | | 7,365 |
| | | | | | 7,365 |
|
Foreign currency translation | | | | | | | | | 44 |
| | 44 |
|
Shares sold in IPO (proceeds received net of offering costs) | 7,360,000 |
| | | | 66,322 |
| | | | | | 66,322 |
|
BALANCE AT DECEMBER 31, 2013 | 37,490,500 |
| |
| $— |
| |
| $133,391 |
| |
| ($29,019 | ) | |
| $41 |
| |
| $104,413 |
|
See notes to condensed, combined and consolidated financial statements.
COVISINT CORPORATION AND THE COVISINT OPERATIONS OF COMPUWARE CORPORATION
CONDENSED, COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended December 31, |
| 2013 | | 2012 |
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: | | | |
Net loss |
| ($25,730 | ) | |
| ($2,359 | ) |
Adjustments to reconcile net income (loss) to cash provided by (used in) operations: | | | |
Depreciation and amortization | 6,423 |
| | 4,738 |
|
Deferred income taxes | 43 |
| | (91 | ) |
Stock award compensation | 14,413 |
| | 1,105 |
|
Other | — |
| | 60 |
|
Net change in assets and liabilities: | | | |
Accounts receivable | 6,464 |
| | 677 |
|
Other assets | 1,891 |
| | 2,182 |
|
Accounts payable and accrued expenses | (376 | ) | | (323 | ) |
Deferred revenue | (5,730 | ) | | (6,004 | ) |
Net cash provided by (used in) operating activities | (2,602 | ) | | (15 | ) |
CASH FLOWS USED IN INVESTING ACTIVITIES: | | | |
Purchase of: | | | |
Property and equipment | (1,936 | ) | | (636 | ) |
Capitalized software | (4,364 | ) | | (11,848 | ) |
Net cash used in investing activities | (6,300 | ) | | (12,484 | ) |
CASH FLOWS PROVIDED BY FINANCING ACTIVITES: | | | |
Net investment from parent company | — |
| | 12,881 |
|
Cash payments from parent company | 53,208 |
| | — |
|
Cash payments to parent company | (57,942 | ) | | — |
|
Proceeds from initial public offering | 68,448 |
| | — |
|
Initial public offering costs | (1,397 | ) | | (382 | ) |
Net proceeds from exercise of stock awards | 332 |
| | — |
|
Net cash provided by financing activities | 62,649 |
| | 12,499 |
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 57 |
| | — |
|
NET CHANGE IN CASH | 53,804 |
| | — |
|
CASH AT BEGINNING OF PERIOD | 966 |
| | — |
|
CASH AT END OF PERIOD |
| $54,770 |
| |
| $— |
|
| | | |
See notes to condensed, combined and consolidated financial statements.
COVISINT CORPORATION AND THE COVISINT OPERATIONS OF COMPUWARE CORPORATION
NOTES TO CONDENSED, COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation—The accompanying unaudited condensed, combined and consolidated financial statements (“Financial Statements”) include the accounts of Covisint Corporation, a Michigan corporation majority-owned by Compuware Corporation (“Compuware” or the “Parent”), and the Covisint segment of Compuware (combined operations are referred to as the “Company” or “Covisint”). Effective January 1, 2013, Compuware contributed substantially all of the assets and liabilities of the Covisint segment to Covisint Corporation (“January 2013 Contribution”). The Financial Statements reflect the assets, liabilities, revenues and expenses that were directly attributable to the Company as it operated within Compuware prior to the January 2013 Contribution, and they have been derived from the consolidated financial statements and accounting records of Compuware using the historical results of operations and historical basis of assets and liabilities for the Covisint operations of Compuware. The historical financial results may not be indicative of the results that would have been achieved had Covisint operated as a separate, stand-alone entity. The Financial Statements do not reflect any changes that may occur in the financing and operations of the Company in the future. These Financial Statements, prior to the January 2013 Contribution, were prepared on a combined basis because the operations were under common control.
The Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), for interim financial information and with the instructions of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based its assumptions and estimates on the facts and circumstances existing at December 31, 2013, final amounts may differ from these estimates.
In the opinion of the Company’s management, the accompanying Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. These Financial Statements should be read in conjunction with the Company’s audited combined and consolidated financial statements and notes thereto for the year ended March 31, 2013 included in the Company's prospectus filed with the Securities and Exchange Commission. The condensed and consolidated balance sheet at March 31, 2013, has been derived from the audited financial statements at that date.
In September 2013, the Company substantially completed its initial public offering (“IPO”) in which it issued and sold 7.4 million shares of its common stock at a public offering price of $10.00 per share. The Company received net proceeds of $68.4 million after deducting underwriting discounts and commissions of $5.2 million.
The Financial Statements include an allocation of certain corporate expenses including costs for facilities, information technology, tax, internal audit, accounting, finance, human resources, legal and executive management functions provided to the Company by Compuware. These allocations were primarily based on headcount, revenue and space occupied as a proportion of those in all Compuware operating units. Management believes the allocations are reasonable. However, the expenses allocated to the Company for these services are not necessarily indicative of the expense that would have been incurred if the Company had been a separate, independent entity and had otherwise managed these functions. Corporate expenses charged to the Company by Compuware totaled $2.4 million and $2.7 million for the three months ended December 31, 2013 and 2012, respectively, and $8.5 million and $8.1 million for the nine months ended December 31, 2013 and 2012, respectively. Through December 31, 2012, such costs and expenses were deemed to have been contributed by Compuware to Covisint in the period in which the costs were recorded. Since January 1, 2013, these expenses have been included in the net amount due to parent and affiliates.
On May 23, 2013, the Company’s board of directors approved a 30-for-1 stock split of the Company’s common shares and amended its articles of incorporation to increase the authorized shares of the Company’s common stock from 9,000,000 to 50,000,000 and to increase the authorized shares of the Company’s preferred stock from 1,000,000 to 5,000,000. The stock split was in the form of a stock dividend, where holders of common shares issued by the Company and outstanding as of the date of the stock dividend received 29 newly issued common shares of the Company for each common share of the Company held at such date. The effect of the stock split has been retroactively reflected in these Financial Statements.
Revenue Recognition
The Company derives revenue through contracts under which it provides customers services including access to and support of the Covisint platform (“subscription”) and services related to implementation, solution deployment and on-boarding (“services”). The arrangements do not provide customers the right to take possession of the software at any time, nor do the arrangements
contain rights of return. In order for a transaction to be eligible for revenue recognition, the following revenue criteria must be met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured.
Signed agreements and binding purchase orders are used as evidence of an arrangement. For customers where a purchase order is used as evidence of an arrangement, master terms and conditions exist that govern such arrangements. The Company assesses cash collectibility based on a number of factors including past collection history with the customer. If the Company determines that collectibility is not reasonably assured, the Company defers the revenue until collectibility becomes reasonably assured, generally upon receipt of cash. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Customers typically have the right to terminate their agreement if the Company fails to perform.
The Company’s contracts may include a subscription fee for ongoing platform as a service (“PaaS”) operations and project (services) fees. For arrangements that contain multiple elements, in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition,” the arrangement consideration is allocated based on relative selling price using the following hierarchy: vendor specific objective evidence (“VSOE” which represents the price when sold separately) if available; third-party evidence if VSOE is not available; or estimated selling price if neither VSOE nor third-party evidence is available. The Company is currently unable to establish VSOE or third-party evidence of selling price for its deliverables. Therefore, the Company determines its best estimate of selling price by evaluating renewal amounts included in a contract, if any, and estimated costs to deliver each element.
The subscription fees are recognized ratably over the applicable service period. Revenue recognition commences on the later of the start date specified in the subscription arrangement, the “launch date” of the customers’ access to the Company’s production environment or when all of the revenue recognition criteria have been met. The Company considers delivery to have occurred on the “launch date”, which is the point in time that a customer is provided access to use the Company’s platform.
During fiscal 2012, the Company established evidence of stand-alone value based on other vendors providing similar services for many of the services it offers. Prior to establishing evidence of stand-alone value for services, and for those projects that do not currently have stand-alone value, the revenue is deferred and recognized over the longer of the committed term of the subscription agreement (generally one to five years) or the expected period over which the customer will receive benefit (generally five years). Services that have stand-alone value are recognized as delivered generally using a proportional performance methodology based on dependable estimates of hours incurred and expected hours to complete since these services are primarily performed on a fixed fee basis. Hours or costs incurred represent a reasonable surrogate for output measures of contract performance, including the presentation of deliverables to the client; therefore, hours or costs incurred are used as the basis for revenue recognition. If it is determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent.
Deferred Costs
Deferred costs consist of the incremental direct personnel and outside contractor costs incurred in delivering implementation and solutions deployment services that do not have stand-alone value. Revenue from these services, as described above, is deferred and recognized over the longer of the committed term of the subscription agreement or the expected period over which the customer will receive benefit. Therefore, the costs are recognized over the same period as the associated revenue.
Sales commission costs that directly relate to revenue transactions that are deferred are recorded as “prepaid expenses and other current assets” or non-current “other assets” as applicable in the condensed and consolidated balance sheets and recognized as “sales and marketing” expenses in the condensed, combined and consolidated statements of comprehensive income over the revenue recognition period of the related transaction.
Deferred Revenue
Deferred revenue consists of the billed but unearned portion of existing contracts for subscription and services provided and is recognized as services are delivered or over the expected period during which the customer will receive benefit. The Company generally invoices its customers’ subscription fees in annual, quarterly or monthly installments. Contractual time periods often exceed the invoicing period and accordingly, the deferred revenue balance does not represent the total contract value of committed subscription agreements. The portion of deferred revenue that the Company anticipates will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current deferred revenue. The Company has generally received payment for the services for which the revenue has been deferred.
Collection and Remittance of Taxes
The Company records the collection of taxes from customers and the remittance of these taxes to governmental authorities on a net basis in its condensed, combined and consolidated statements of comprehensive income.
Cost of Revenue
Consists of compensation and related expenses for infrastructure and operations staff, payments to outside service providers, data center costs related to hosting the Company’s software and amortization of capitalized software.
Capitalized Software
Includes the costs of purchased and internally developed software products capitalized in accordance with ASC 350-40, “Internal Use Software” and software technology purchased through acquisitions and is stated at unamortized cost. Net purchased software included in capitalized software was $0.7 million and $0.9 million as of December 31, 2013 and March 31, 2013, respectively.
Capitalized and purchased software costs are amortized on a straight line basis over the expected useful life of the software, which is generally five years. Amortization begins when the software technology is ready for its intended use. Amortization expense was $1.7 million and $1.3 million for the three months ended December 31, 2013 and 2012, respectively, and $5.0 million and $3.5 million for the nine months ended December 31, 2013 and 2012, respectively. Amortization expenses are included in “cost of revenue” in the condensed, combined and consolidated statements of comprehensive income.
Capitalized software is reviewed for impairment when events and circumstances indicate such asset may be impaired. If estimated future undiscounted cash flows are not sufficient to recover the carrying value of the capitalized software, an impairment charge is recorded in the amount by which the present value of future cash flows is less than the carrying value of these assets. Covisint has not had any impairment charges related to capitalized software.
Research and Development
For development costs related to the Company’s PaaS offering, the Company follows the guidance set forth in ASC 350-40 which requires companies to capitalize qualifying computer software development costs, which are incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Research and development costs include primarily the cost of programming personnel and amounted to $4.5 million and $4.7 million for the three months ended December 31, 2013 and 2012, respectively, of which $1.0 million and $4.2 million, respectively, was capitalized as internally developed software technology. Research and development costs amounted to $13.7 million and $12.7 million for the nine months ended December 31, 2013 and 2012, respectively, of which $4.4 million and $11.8 million, respectively, was capitalized as internally developed software technology.
Income Taxes – The Covisint business was operated as a division of Compuware prior to the January 2013 Contribution. As a member of Compuware’s consolidated group (“Consolidated Group”), the Company’s operations have been included in the Consolidated Group since that date for tax periods or portions thereof commencing after the January 2013 Contribution.
Income taxes are presented herein on a separate return basis even though the Company’s results of operations have historically been included in the consolidated, combined, unitary or separate income tax returns of Compuware. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed, combined and consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities and net operating losses using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability. If it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which would increase the provision for income taxes. In making such determinations, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
Interest and penalties related to uncertain tax positions are included in the income tax provision.
Foreign Currency Translation
The Company’s foreign operations use their respective local currency as their functional currency. Assets and liabilities of foreign subsidiaries are minimal and are generally short term in nature. Such assets and liabilities in the condensed, combined and
consolidated balance sheets have been translated at the rate of exchange at the respective balance sheet dates, and revenues and expenses have been translated at average exchange rates prevailing during the period the transactions occurred. Translation adjustments have been excluded from the results of operations.
Stock-Based Compensation – Stock award compensation expense is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award, for awards that vest strictly based on time, and on a straight-line basis over the requisite service period of the individual tranches of the award for awards with performance conditions.
Compuware Corporation Stock Compensation Awards
Certain Covisint employees have been granted stock options to purchase Compuware common stock, and under the agreements between the Company and Compuware, Covisint records the compensation expense relating to these stock options to purchase Compuware common stock. Compuware calculates the fair value of its stock option awards using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. The expected volatility assumption is based on historical volatility of Compuware’s common stock over the most recent period commensurate with the expected life of the stock option granted. Compuware uses historical volatility because management believes such volatility is representative of prospective trends. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the stock option awarded.
The estimates used to calculate the fair value of the Company may change from year to year based on operating results, market conditions and estimated future cash flows. While the Company believes that the assumptions and estimates used to determine the estimated fair value of the Company/or Compuware are reasonable, a change in assumptions underlying these estimates could materially affect the determination of the fair value of the Covisint business, and could therefore materially impact the estimated fair value of a share of Covisint stock.
The following is the average fair value per share of Compuware stock compensation awards estimated on the date of grant and the assumptions used for each option granted to Compuware employees, including those providing services to Covisint, during the nine months ended December 31, 2013 and 2012.
|
| | | |
| Nine Months Ended December 31, |
| 2013 | | 2012 |
Expected volatility | 39.52% | | 40.83% |
Risk-free interest rate | 1.59% | | 0.95% |
Expected lives at date of grant (in years) | 6.28 | | 6.30 |
Weighted average fair value of the options granted | $2.69 | | $4.02 |
Dividend Yield Assumption (1) | 4.42% | | 0.00% |
(1) In January 2013, the Compuware Board of Directors announced its intention to begin paying cash dividends totaling $0.50 per share annually, to be paid quarterly beginning in the first quarter of fiscal 2014. Prior to that, Compuware had never paid a dividend or announced any intentions to pay a dividend.
Covisint Corporation Stock Compensation Awards
Covisint calculates the fair value of its stock option awards using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. Covisint does not have historical stock price data, therefore, the expected volatility assumption is based on an average of the historical volatility of comparable companies (“peer group companies”). For peer group companies that have not been publicly traded long enough to have sufficient historical data, the volatility figures included in these companies’ most recent Form 10-Qs or Form 10-Ks were used. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the stock option awarded. The expected life of the stock option is based on management’s best estimates considering the terms of the options granted. Dividend yields have not been a factor in determining fair value of stock options granted as Covisint has never issued cash dividends and does not anticipate issuing cash dividends in the future.
Prior to the IPO, Covisint stock was not traded on a stock exchange and thus the exercise price of Covisint stock options at the date of grant was determined by calculating the estimated fair market value of the Company operations divided by the total shares outstanding, including outstanding stock options that had not yet vested. The estimated fair market value of the Covisint operations was measured using an equal combination of discounted cash flow and market comparable valuations and was discounted due to a lack of marketability at the grant date. Previous valuation estimates placed a greater emphasis on the discounted cash
flow model. The discounted cash flow model uses significant assumptions, including projected future cash flows, a discount rate reflecting the risk inherent in future cash flows and a terminal growth rate. The key assumptions in the market comparable value analysis are the selection of peer group companies and application of these peer group companies’ data to Covisint.
Business Segments— The Company operates in a single business segment. Sales are heavily weighted toward North American automotive companies.
Significant Customers – A single customer, in the automotive industry, comprised 25 percent and 32 percent of total revenues during the three months ended December 31, 2013 and 2012, respectively, and 26 percent and 34 percent of total revenue during the nine months ended December 31, 2013 and 2012, respectively. The same automotive customer comprised 21 percent and 30 percent of outstanding accounts receivable as of December 31, 2013 and March 31, 2013, respectively. A second customer, which is a reseller to customers in the healthcare industry, comprised 15 percent and 7 percent of total revenues during the three months ended December 31, 2013 and 2012, respectively, and 13 percent and 6 percent of total revenue during the nine months ended December 31, 2013 and 2012, respectively. The same customer comprised 15 percent and 12 percent of outstanding accounts receivable as of December 31, 2013 and March 31, 2013, respectively.
Geographical Information— Financial information regarding geographic operations is presented in the table below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenue: | | | | | | | |
United States | $ | 19,831 |
| |
| $20,647 |
| |
| $61,680 |
| |
| $55,576 |
|
International operations | 4,278 |
| | 3,154 |
| | 11,055 |
| | 9,444 |
|
Total |
| $24,109 |
| |
| $23,801 |
| |
| $72,735 |
| |
| $65,020 |
|
|
| | | | | | | |
| December 31, 2013 | | March 31, 2013 |
Long-lived assets: | | | |
United States |
| $51,150 |
| |
| $51,019 |
|
International operations | 22 |
| | — |
|
Total |
| $51,172 |
| |
| $51,019 |
|
Long-lived assets are comprised of property, plant and equipment, goodwill and capitalized software.
Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this ASU provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company plans to adopt this ASU in fiscal 2015 and does not expect it to have a significant impact on the Company’s financial statements.
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in this ASU supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. For public entities, the amendments of this ASU are effective prospectively for reporting periods beginning after December 15, 2012. The requirements of this ASU were adopted during the Company’s quarter ended March 31, 2013 and did not have a significant impact on its disclosures.
2. CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS
The components of the Company’s intangible assets are as follows (in thousands):
|
| | | | | | | | | | | |
| December 31, 2013 |
| Gross Carrying Amount |
| Accumulated Amortization |
| Net Carrying Amount |
Indefinite-lived intangible assets: |
|
|
|
|
|
Trademarks(1) |
| $358 |
| | | |
| $358 |
|
Amortizing intangible assets: | | | | | |
Capitalized software(2) |
| $47,657 |
| |
| ($25,330 | ) | |
| $22,327 |
|
Customer relationship agreements(3) | 4,715 |
| | (3,877 | ) | | 838 |
|
Trademarks(4) | 340 |
| | (340 | ) | | — |
|
Total amortizing intangible assets |
| $52,712 |
| |
| ($29,547 | ) | |
| $23,165 |
|
|
| | | | | | | | | | | |
| March 31, 2013 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Indefinite-lived intangible assets: | | | | | |
Trademarks(1) |
| $358 |
| | | |
| $358 |
|
Amortizing intangible assets: | | | | | |
Capitalized software(2) |
| $43,294 |
| |
| ($20,314 | ) | |
| $22,980 |
|
Customer relationship agreements(3) | 4,715 |
| | (3,646 | ) | | 1,069 |
|
Trademarks(4) | 340 |
| | (300 | ) | | 40 |
|
Total amortizing intangible assets |
| $48,349 |
| |
| ($24,260 | ) | |
| $24,089 |
|
_____________________________________________________
| |
(1) | The Covisint trademarks were acquired by Compuware in an acquisition in March 2004. These trademarks are deemed to have an indefinite life and therefore are not being amortized. |
| |
(2) | Amortization of capitalized software is included in “cost of revenue” in the condensed, combined and consolidated statements of comprehensive income. Capitalized software is generally amortized over five years. |
| |
(3) | Amortization of customer relationship agreements is included in “sales and marketing” in the condensed, combined and consolidated statements of comprehensive income. Customer relationship agreements were acquired as part of acquisitions and are being amortized over periods up to six years. |
| |
(4) | Amortization of trademarks is included in “administrative and general” in the condensed, combined and consolidated statements of comprehensive income. Trademarks were acquired as part of acquisitions and are being amortized over three years. |
Amortization expense of intangible assets was $1.8 million and $1.4 million for the three months ended December 31, 2013 and 2012, respectively, and $5.3 million and $3.8 million for the nine months ended December 31, 2013 and 2012, respectively. Estimated future amortization expense, based on identified intangible assets at December 31, 2013, is expected to be as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| At December 31, 2013 for the Year Ending March 31, |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
Capitalized software |
| $1,751 |
| |
| $6,613 |
| |
| $5,802 |
| |
| $4,852 |
| |
| $2,814 |
|
Customer relationships | 77 |
| | 308 |
| | 308 |
| | 144 |
| | — |
|
Total |
| $1,828 |
|
|
| $6,921 |
|
|
| $6,110 |
|
|
| $4,996 |
|
|
| $2,814 |
|
3. EARNINGS PER COMMON SHARE
Basic earnings per common share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS assumes the issuance of common stock for all potentially dilutive equivalent shares outstanding using the treasury method. Earnings per share are presented below as if Covisint Corporation and the Covisint segment of Compuware had been combined for all periods presented.
EPS data were computed as follows (in thousands, except for per share data):
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2013 | | 2012 | | 2013 | | 2012 |
Basic loss per share: | | | | | | | |
Numerator: Net loss |
| ($8,314 | ) | |
| ($180 | ) | |
| ($25,730 | ) | |
| ($2,359 | ) |
Denominator: | | | | | | | |
Weighted-average common shares outstanding | 37,363 |
| | 30,003 |
| | 32,599 |
| | 30,003 |
|
Basic loss per share |
| ($0.22 | ) | |
| ($0.01 | ) | |
| ($0.79 | ) | |
| ($0.08 | ) |
Diluted loss per share: | | | | | | | |
Numerator: Net loss |
| ($8,314 | ) | |
| ($180 | ) | |
| ($25,730 | ) | |
| ($2,359 | ) |
Denominator: | | | | | | | |
Weighted-average common shares outstanding | 37,363 |
| | 30,003 |
| | 32,599 |
| | 30,003 |
|
Dilutive effect of stock awards | — |
| | — |
| | — |
| | — |
|
Total shares | 30,403 |
| | 30,003 |
| | 30,204 |
| | 30,003 |
|
Diluted loss per share |
| ($0.22 | ) | |
| ($0.01 | ) | |
| ($0.79 | ) | |
| ($0.08 | ) |
Stock awards to purchase approximately 4,342,000 and 3,558,000 shares for the three months ended December 31, 2013 and 2012, respectively, and 4,314,000 and 3,571,000 shares for the nine months ended December 31, 2013 and 2012, respectively, were excluded from the diluted EPS calculation because they were anti-dilutive.
4. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
The Company currently occupies office space within facilities owned and leased by Compuware. The Company has not entered into commitments related to space occupied within Compuware facilities; however, the expenses allocated or charged to the Company by Compuware include costs associated with such facilities. The Company is not subject to unconditional purchase obligations with a remaining term greater than one year.
Legal Matters
The Company is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business. In accordance with U.S. GAAP, the Company makes a provision for a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company is not currently involved in any outstanding legal proceedings.
5. BENEFIT PLANS
As the Company is a majority-owned subsidiary of Compuware Corporation, certain Covisint employees have been granted Compuware stock compensation awards. In accordance with the provisions of Staff Accounting Bulletin (“SAB”) 1.B.1, “Costs Reflected in Historical Financial Statements,” the expense for these awards is included within the condensed, combined and consolidated statements of comprehensive income.
Compuware Stock-Based Compensation Plans
Compuware Employee Stock Ownership Plan and 401(k) Plan
The Company provides a matching program for the 401(k) component of the ESOP/401(k). The Company matches 33 percent of employees’ 401(k) contributions up to 2 percent of eligible earnings. Matching contributions vest 100 percent when an employee attains three years of service. During the three months ended December 31, 2013 and 2012, respectively, the Company expensed $0.2 million and $0.1 million related to this program. For the nine months ended December 31, 2013 and 2012, the Company expensed 0.5 million and $0.3 million, respectively, related to this program.
Compuware Stock Option Activity
A summary of option activity for Covisint employees under Compuware’s stock-based compensation plans as of December 31, 2013, and changes during the nine months then ended is presented below. Shares and intrinsic value are presented in thousands.
|
| | | | | | | | | | | | |
| Nine Months Ended December 31, 2013 |
| Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
Options outstanding as of April 1, 2013 | 979 |
| |
| $9.19 |
| | | | |
Granted | — |
| | | | | | |
Exercised | (269 | ) | | 8.01 |
| | | |
| $802 |
|
Forfeited | (160 | ) | | 10.49 |
| | | | |
Cancelled/expired | (50 | ) | | 12.00 |
| | | | |
Options outstanding as of December 31, 2013 | 500 |
| |
| $9.14 |
| | 5.58 | |
| $1,070 |
|
Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2013 | 478 |
| |
| $9.10 |
| | 5.46 | |
| $1,041 |
|
Options exercisable as of December 31, 2013 | 348 |
| |
| $8.80 |
| | 4.37 | |
| $863 |
|
The vesting schedule of options has varied over the years with the following vesting terms being the most common: (1) 50 percent of shares vest on the third anniversary date and 25 percent on the fourth and fifth anniversary dates; (2) 25 percent of shares vest on each annual anniversary date over four years; or (3) 30 percent of shares vest on the first and second anniversary dates and 40 percent vest on the third anniversary date.
All options were granted with exercise prices at or above fair market value on the date of grant and expire ten years from the date of grant. Option expense is recognized on a straight-line basis over the vesting period unless the options vest more quickly than the expense would be recognized. In this case, additional expense is taken to ensure the expense is proportionate to the percent of options vested at any point in time.
During the nine months ended December 31, 2013, 86,609 Compuware option shares granted to Covisint employees vested, with an average fair value of $4.44 per share.
Compuware Restricted Stock Units and Performance-Based Stock Awards Activity
A summary of non-vested restricted stock units (“RSUs”) and performance-based stock awards (“PSAs” and collectively “Non-vested RSU”) activity for Covisint employees and directors under the Compuware LTIP as of December 31, 2013, and changes during the nine months then ended is presented below. Shares and intrinsic value are presented in thousands.
|
| | | | | | | | | | |
| Nine Months Ended December 31, 2013 |
| Shares | | Weighted Average Grant-Date Fair Value | | Aggregate Intrinsic Value |
Non-vested RSU outstanding at April 1, 2013 | 845 |
| | | | |
Granted | 104 |
| |
| $11.22 |
| | |
Released | (69 | ) | | | |
| $786 |
|
Forfeited | (702 | ) | | | | |
Dividend equivalents, net | 4 |
| |
| $11.00 |
| | |
Non-vested RSU outstanding at December 31, 2013 | 182 |
| | | | |
RSUs have various vesting terms related to the purpose of the award. The most common vesting term is 25 percent of shares vest on each annual anniversary date over four years.
The awards are settled by the issuance of one common share of Compuware stock for each unit upon vesting and vesting accelerates upon death, disability or a change in control of Compuware.
Compuware paid quarterly dividends of $0.125 per share. As a result of these dividend payments, approximately 1,000 and 18,000 dividend equivalent shares were issued to participants holding non-vested RSUs as of the dividend record date during the three and nine months ended December 31, 2013, respectively.
Covisint Stock-Based Compensation Plan
In August 2009, Covisint established a 2009 Long-Term Incentive Plan (“2009 Covisint LTIP”) allowing the Board of Directors of Covisint to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and annual cash incentive awards to employees and directors of Covisint and its affiliates. The 2009 Covisint LTIP reserves 4.5 million common shares of Covisint for issuance under this plan. On December 30, 2013, the Board of Directors of Covisint Corporation adopted the First Amendment to the 2009 Covisint LTIP, subject to shareholder approval. The Amendment increased the number of shares of Covisint’s common stock available for issuance pursuant to stock-based awards granted under the LTIP by 3 million shares (increasing the number of shares available for issuance under the LTIP from 4.5 million to 7.5 million). On January 2, 2014, Compuware approved the Amendment to increase the shares available. The increase in shares set forth in the Amendment will become effective on February 13, 2014, twenty (20) days after the date of mailing of the Company’s Schedule 14C Information Statement.
As of December 31, 2013, there were 4.2 million stock options outstanding from the 2009 Covisint LTIP.
The Covisint stock options included a performance condition requiring an IPO of the Company prior to vesting. Since the IPO, the performance condition of these options was satisfied and the Company has recognized stock compensation expense of $3.6 million and $16.1 million for the three and nine months ended December 31, 2013.
Certain individuals, who received stock options from the 2009 Covisint LTIP, were also eligible to be awarded PSAs from the Compuware 2007 LTIP. As of December 31, 2013, there were 681,000 PSAs that were cancelled upon the closing of the Covisint IPO. As a result, $2.9 million of expense associated with the PSAs was reversed during the nine months ended December 31, 2013. PSA credit totaling $0.0 million and 2.5 million was recorded to “general and administrative” during the three and nine months ended December 31, 2013, respectively. PSA expense totaling $0.2 and $0.6 million was recorded to “general and administrative” during the three months and nine months ended December 31, 2012, respectively.
Stock Option Activity
A summary of option activity under the Company’s stock-based compensation plans as of December 31, 2013, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):
|
| | | | | | | | | | | | |
| Nine Months Ended December 31, 2013 |
| Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
Options outstanding as of April 1, 2013 | 4,278 |
| |
| $2.81 |
| | | | |
Granted | 120 |
| | 7.18 |
| | | | |
Exercised | (128 | ) | | | | | | |
Forfeited | (89 | ) | | 6.77 |
| | | | |
Options outstanding as of December 31, 2013 | 4,181 |
| |
| $2.85 |
| | 3.46 | |
| $40,538 |
|
Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2013 | 4,181 |
| |
| $2.85 |
| | 3.46 | |
| $40,538 |
|
Options exercisable as of December 31, 2013* | 408 |
| |
| $5.50 |
| | 8.44 | |
| $2,875 |
|
*All remaining exercisable options subject to lock-up agreement
All options were granted at estimated fair market value and expire ten years from the date of grant.
On August 7, 2013, 120,000 options were granted to an employee. The exercise price for such options ($7.18) was determined based on the estimated fair market value of the shares including a discount for lack of marketability as of the grant date. The options vested one-quarter upon the IPO, and one-quarter will vest on each of the first, second and third anniversary dates of the
IPO. If a change in control of the Company occurs within 12 months of the employee’s hire date and his employment is terminated by the Company without cause or by him for good reason within 12 months of such change in control, one-quarter of the options will vest. If a change in control of the Company occurs more than 12 months following the employee’s hire date and his employment is terminated by the Company without cause or by him for good reason within 12 months of such change in control, all of the options will fully vest. These options expire ten years after the grant date.
On November 15, 2013, a member of the Board of Directors of Covisint Corporation resigned. This individual served on the Board of Directors, as the Chairman of the Compensation Committee and as a member of the Audit and Nominating/Governance Committees since November 30, 2012. As the result of this resignation 67,000 options were forfeited.
For the quarter ending December 31, 2013, 127,500 options were exercised by participants of the 2009 Covisint LTIP.
Stock Awards Compensation
For the three months ended December 31, 2013 and 2012, respectively, and for the nine months ended December 31, 2013 and 2012, respectively, stock awards compensation expense was recorded as follows in thousands:
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2013 | | 2012 | | 2013 | | 2012 |
Stock awards compensation classified as: | | | | | | | |
Cost of revenue |
| $137 |
| |
| $1 |
| |
| $735 |
| |
| $2 |
|
Research and development | 158 |
| | 1 |
| | 656 |
| | 1 |
|
Sales and marketing | 1,117 |
| | 52 |
| | 5,153 |
| | 120 |
|
Administrative and general | 2,495 |
| | 342 |
| | 7,869 |
| | 982 |
|
Total stock awards compensation expense before income taxes |
| $3,907 |
| |
| $396 |
| |
| $14,413 |
| |
| $1,105 |
|
Total stock awards compensation expense before income taxes of $14.4 million for the nine months ended December 31, 2013, is comprised of $12.5 million recorded for the cumulative expense of the IPO performance condition of the Company's stock options being satisfied upon completion of the IPO, the reversal of $2.9 million recorded in conjunction with the cancellation of Compuware PSAs, and $4.8 million of additional stock compensation expense that was not directly correlated with the IPO.
As of December 31, 2013, total unrecognized compensation cost of $9.7 million, net of estimated forfeitures, related to nonvested equity awards granted is expected to be recognized over a weighted-average period of approximately 1.5 years. The following table summarizes the Company’s future recognition of its unrecognized compensation cost related to stock awards as of December 31, 2013 (in thousands).
|
| | | | | | | | | | | | | | | | | | | |
| Year Ending March 31, |
Stock-Based Compensation Plan: | Total | | 2014 | | 2015 | | 2016 | | 2017 |
| | | | | | | | | |
Covisint |
| $8,762 |
| |
| $1,605 |
| |
| $5,293 |
| |
| $1,841 |
| |
| $23 |
|
Compuware | 933 |
| | 63 |
| | 430 |
| | 304 |
| | 136 |
|
Total |
| $9,695 |
| |
| $1,668 |
| |
| $5,723 |
| |
| $2,145 |
| |
| $159 |
|
6. RELATED PARTY TRANSACTIONS
The Company utilizes services staff of Compuware to provide certain services to customers and to provide additional resources for research and development activities. These costs are included in “cost of revenue” and “research and development” as applicable. Compuware provided these services substantially at cost to Covisint through March 31, 2013 and at market rates effective April 1, 2013. Many of the Compuware employees providing these services transferred to Covisint effective March 1,
2013. Charges totaled $0.3 million and $4.7 million for the three months ended December 31, 2013 and 2012, respectively, and $1.3 million and $13.2 million for the nine months ended December 31, 2013 and 2012, respectively.
Certain related party transactions are settled in cash and are reflected as due to or due from parent and affiliates within the condensed, combined and consolidated balance sheet. At December 31, 2013, the Company had a net receivable due from parent of $2.0 million as compared to a net payable of $7.6 million at March 31, 2013. The activity in the nine months ended December 31, 2013 was primarily comprised of the $10.9 million extinguishment of the September 30, 2013 balance on October 21, 2013, $4.9 million related to Compuware’s use of the Company’s tax loss and other tax related attributes, and $2.3 million due to the net change in working capital. This activity was partially offset by $8.5 million of corporate expenses allocated to Covisint.
Refer to Note 1 for discussion of allocated expenses.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report under “Part II, Other Information—Item 1A, Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
OVERVIEW
Covisint provides a leading cloud engagement platform for enabling organizations to securely connect, engage and collaborate with large, distributed communities of customers, business partners, and suppliers. Our platform allows global organizations with complex external business relationships to create, streamline and automate external mission-critical business processes that involve the secure exchange of and access to critical information from multiple sources. Our customers deploy our platform to deliver on current and new business initiatives, enhance competitiveness, create new revenue opportunities, increase customer retention and lower operating costs.
We believe a wide variety of organizations will benefit from using our cloud-based technologies to meet their external collaboration requirements with their customers, business partners and suppliers. We believe the use of our solutions and the development of our markets are at very early stages and that it is important that we build brand awareness, develop channel partners and invest in our platform, vertical solutions, infrastructure and sales and marketing to maintain and extend our leadership in the cloud-based services market.
It has been our experience that our customers are attracted to one layer of our platform, but quickly adopt other layers. Furthermore, once they have adopted our platform for one purpose, customers find additional uses for the platform within their distributed business environments. Accordingly, we believe we have yet to significantly penetrate the growing available market for our technologies and have a significant opportunity to sell additional solutions to our current customers.
Subscriptions. The majority of our revenue is generated through subscription and support fees paid to enable our customers to access our platform. Subscription and support revenue accounted for $17.6 million and $14.5 million, or 73% and 61% of our total revenue, for the three months ended December 31, 2013 and 2012, respectively, and $49.7 million and $41.2 million, or 68% and 63% of our total revenue, for the nine months ended December 31, 2013 and 2012, respectively. Our subscription contracts are typically thirty-six (36) month long, but range from one to five years. The value of our subscription contracts varies significantly for each customer agreement, depending on the number of users or volume of transactions. Typically, our customers pay us for a minimum level of platform usage. Periodically, a customer’s utilization may exceed its committed level, in which case the customer
is required to pay us additional fees, called “overages.” Subscription contract value can fluctuate period to period depending upon the size of new customers and the pace at which we sell additional solutions and services to existing customers.
Services. We also generate revenue from the provision of services related to implementation, solution deployment and on-boarding of new customers onto our platform, and the performance of projects and enhancements. Services revenue accounted for $6.5 million and $9.3 million, or 27% and 39% of our total revenue, for the three months ended December 31, 2013 and 2012, respectively, and $23.1 million and $23.8 million, or 32% and 37% of our total revenue, for the nine months ended December 31, 2013 and 2012, respectively We typically bill a portion of our services fees in advance and the remaining balance upon customer acceptance.
Services contract value varies significantly for each customer agreement. It is affected by a number of trends which make the prediction of future performance of our future services revenue difficult. These trends include, but are not necessarily limited to, a reduction in project and enhancement services performed for General Motors, improvements in our platform that make it easier for our customers to build and launch new business process innovations on the platform, and a reduction in the effort required to launch the customer. Furthermore, since the recognition of services revenue may require acceptance by the customer, the timing of the revenue recognition may shift between fiscal periods.
Our revenue generally fluctuates, and we expect it to continue to fluctuate, between periods due to inconsistent timing of sales, revenue recognition requirements (e.g., acceptance), changes in customer requirements and other factors. As a result, transactions that were expected to be recognized in one period may be recognized in a different period, which may materially affect our financial performance in a reporting period.
We consider our backlog balance to be future years of contractually committed arrangements, of which only the billed amounts are included in deferred revenue. As of December 31, 2013 and 2012, our backlog balance was approximately $100.8 million and $108.7 million, respectively. This change is primarily related to services revenue deferred from prior periods that was recognized over the last twelve months.
We sell our solutions through our direct sales force and channel partners. While we have over 3,000 customers, we have approximately 150 core platform customers, representing 93% and 95% of our total revenue for the three months ended December 31, 2013 and 2012, respectively, and 94% of our total revenue for both the nine months ended December 31, 2013 and 2012. Our remaining customers include a variety of organizations that pay us a relatively nominal fee to either connect to one of our core platform customers or use one of our industry-specific solutions.
The automotive industry accounted for 44% and 57% of our total revenue for the three months ended December 31, 2013 and 2012, respectively, and 48% and 56% of our total revenue for the nine months ended December 31, 2013 and 2012, respectively. The healthcare industry accounted for 33% and 31% of our total revenue for the three months ended December 31, 2013 and 2012, respectively, and 33% and 31% of our total revenue for the nine months ended December 31, 2013 and 2012. We have seen increases in revenue from our Enterprise business unit that services the energy, financial services, travel and other non-automotive or healthcare industries, which accounted for 19% and 15% of our total revenue for the three months ended December 31, 2013 and 2012, respectively, and 18% and 14% of our total revenue for the nine months ended December 31, 2013 and 2012, respectively.
Revenue from outside of the U.S. accounted for 18% and 13%, of our total revenue for the three months ended December 31, 2013 and 2012, respectively, and 15% of our total revenue for the nine months ended December 31, 2013 and 2012. We intend to continue expanding our business into additional vertical markets and geographies and expect our revenue to diversify accordingly. Supporting new regulatory and technology requirements as a result of our diversification initiatives may result in increased operating costs and capital expenditures. As part of our growth strategy, we expect the percentage of our revenue generated outside of the United States to increase as we invest in and enter new and emerging markets. Our financial objective is to create sustainable revenue, earnings and cash flow growth over the long term. Consistent with this objective, we expect to continue the aggressive expansion of our field sales organization and alliances to market our solutions both in the United States and internationally.
Our subscription and support revenue grew to $17.6 million for the three months ended December 31, 2013 from $14.5 million for the three months ended December 31, 2012, representing an annual growth rate of 21%. Our subscription and support revenue grew to $49.7 million for the nine months ended December 31, 2013 from $41.2 million for the nine months ended December 31, 2012, representing an annual growth rate of 20%. The increase in subscription and support revenue between the three months ended December 31, 2013 and 2012 was primarily due to $2.2 million of increased revenue with existing customers and $1.4 million from sales to new customers. The subscription revenue increase was partially offset by a decline in revenue from customers that terminated or elected not to renew their agreements of $0.6 million. The increase in subscription and support revenue between the nine months ended December 31, 2013 and 2012 was primarily due to $6.8 million of increased revenue with existing
customers and $2.8 million from sales to new customers. This was partially offset by a decline in revenue from customers that terminated or elected not to renew their agreements of $1.1 million.
Our services revenue declined to $6.5 million for the three months ended December 31, 2013 from $9.3 million for the three months ended December 31, 2012, representing a period over period decline of (30%). Our services revenue has declined to $23.1 million for the nine months ended December 31, 2013 from $23.8 million for the nine months ended December 31, 2012, representing an annual decline of (3%). Our services revenue declined in part due to customers and partners performing their own modifications and enhancements to their use of our platforms.
During the quarter, a reseller decided to change its delivery model to its customers by eliminating its plan to host separately our platform as the reseller determined it was more cost effective to utilize our hosted platform. As a result of the termination of this aspect of its existing contract with us, the reseller made a onetime payment to the Company of $1.0 million dollars, which was recorded as subscription revenue. The Company anticipates that the total revenue from the reseller will be substantially the same in fiscal 2015 as in 2014.
We experienced combined net income (losses) of ($8.3) million and ($0.2) million for the three months ended December 31, 2013 and 2012, respectively, and ($25.7) million and ($2.4) million for the nine months ended December 31, 2013 and 2012, respectively. As presented in "Note 5. Benefit Plans - Stock Awards Compensation" within the accompanying notes to the condensed, combined and consolidated financial statements, our loss was primarily due to stock compensation expense of $3.9 million and $14.4 million, respectively, in the three and nine months ended December 31, 2013, which primarily resulted from our IPO. Prior to our IPO, these losses were mainly due to the substantial investments we made, and continue to make, to build our solutions and services, grow and maintain our business and acquire customers. Our profitability was also negatively affected by decreased capitalization of our research and development costs during the three months ended December 31, 2013 and the nine months ended December 31, 2013, as compared to the same periods in 2012, due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This change increased the proportion of our research and development costs expensed relative to our research and development costs incurred.
KEY METRICS
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we monitor non-GAAP measures of non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. Each of these financial measures excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP. These non-GAAP financial measures exclude the impact of stock award compensation expense, the amortization of intangible assets and amounts incurred for capitalized internal software costs.
We monitor these non-GAAP measures to evaluate our ongoing operational performance and enhance an overall understanding of our past financial performance. We believe that these non-GAAP metrics help illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses, as well as the related tax effects, that are excluded in non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. Furthermore, we use these measures to establish budgets and operational goals for managing business and evaluating our performance. We also believe that these non-GAAP measures provide additional tools for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.
The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of the non-GAAP financial measures presented below to the most directly comparable GAAP financial measures has been provided for each respective line item. Management uses both GAAP and non-GAAP information in evaluating and operating our business internally and as such has determined that it is important to provide this information to investors.
Non-GAAP Condensed, Combined and Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
REVENUE | | $24,109 | | $23,801 | | $72,735 | | $65,020 |
COST OF REVENUE | | 11,812 | | 10,897 | | 35,345 | | 30,530 |
GROSS PROFIT | | 12,297 | | 12,904 | | 37,390 | | 34,490 |
| | 51 | % | | 54 | % | | 51 | % | | 53 | % |
OPERATING EXPENSES: | | | | | | | | |
Research and development | | 4,391 | | 4,726 | | 13,070 | | 12,745 |
Sales and marketing | | 7,290 | | 6,368 | | 21,224 | | 18,112 |
General and administrative | | 4,229 | | 4,423 | | 13,429 | | 12,820 |
Total operating expenses | | 15,910 | | 15,517 | | 47,723 | | 43,677 |
| | | | | | | | |
INCOME (LOSS) BEFORE INCOME TAX PROVISION | | (3,613) | | (2,613) | | (10,333) | | (9,187) |
| | | | | | | | |
INCOME TAX PROVISION | | 22 | | 31 | | 59 | | 88 |
| | | | | | | | |
NET INCOME (LOSS) | | ($3,635) | | ($2,644) | | ($10,392) | | ($9,275) |
| | | | | | | | |
DILUTED EPS COMPUTATION | | | | | | | | |
Numerator: Net income | | ($3,634) | | ($2,644) | | ($10,392) | | ($9,275) |
Denominator: | | | | | | | | |
Weighted-average common shares outstanding | | 37,363 | | 30,003 | | 32,599 | | 30,003 |
Dilutive effect of stock awards | | — |
| | — |
| | — |
| | — |
|
Total shares | | 37,363 | | 30,003 | | 32,599 | | 30,003 |
Diluted EPS | | ($0.10) | | ($0.09) | | ($0.32) | | ($0.31) |
Reconciliations of GAAP to Non-GAAP
(In Thousands, Except Per Share Data)
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Gross profit | | $10,449 | | $11,628 | | $31,639 | | $30,998 |
Gross margin | | 43 | % | | 49 | % | | 43 | % | | 48 | % |
Adjustments: | | | | | | | | |
Stock compensation expense—cost of revenue | | $137 | | $1 | | $735 | | $2 |
% of total revenue | | 1 | % | | — | % | | 1 | % | | — | % |
Amortization of capitalized software—cost of revenue | | $1,711 | | $1,275 | | $5,016 | | $3,490 |
% of total revenue | | 7 | % | | 5 | % | | 7 | % | | 5 | % |
Non-GAAP gross profit | | $12,297 | | $12,904 | | $37,390 | | $34,490 |
Non-GAAP gross margin | | 51 | % | | 54 | % | | 51 | % | | 53 | % |
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Cost of revenue | | $13,660 | | $12,173 | | $41,096 | | $34,022 |
Adjustments: | | | | | | | | |
Stock compensation expense | | 137 |
| | 1 |
| | 735 |
| | 2 |
|
Cost of revenue - amortization of capitalized software | | 1,711 |
| | 1,275 |
| | 5,016 |
| | 3,490 |
|
| | | | | | | | |
Cost of revenue, non-GAAP | | $11,812 | | $10,897 | | $35,345 | | $30,530 |
| | | | | | | | |
| | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Research and development | | $3,533 | | $480 | | $9,362 | | $898 |
Adjustments: | | | | | | | | |
Capitalized internal software costs | | (1,016) | | (4,247) | | (4,364) | | (11,848) |
Stock compensation expense | | 158 | | 1 | | 656 | | 1 |
| | | | | | | | |
Research and development, non-GAAP | | $4,391 | | $4,726 | | $13,070 | | $12,745 |
| | | | | | | | |
| | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Sales and marketing | | $8,484 | | $6,510 | | $26,610 | | $18,504 |
Adjustments: | | | | | | | | |
Stock compensation expense | | 1,117 | | 52 | | 5,153 | | 120 |
Amortization of customer relationship agreements | | 77 | | 90 | | 233 | | 272 |
| | | | | | | | |
Sales and marketing, non-GAAP | | $7,290 | | $6,368 | | $21,224 | | $18,112 |
| | | | | | | | |
| | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
General and administrative | | $6,724 | | $4,787 | | $21,338 | | $13,867 |
Adjustments: | | | | | | | | |
Stock compensation expense | | 2,495 | | 342 | | 7,869 | | 982 |
Amortization of trademarks | | 0 | | 22 | | 40 | | 65 |
| | | | | | | | |
General and administrative, non-GAAP | | $4,229 | | $4,423 | | $13,429 | | $12,820 |
|
| | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Net income (loss) | | ($8,314) | | ($180) | | ($25,730) | | ($2,359) |
Adjustments: | | | | | | | | |
Capitalized internal software costs | | (1,016) | | (4,247) | | (4,364) | | (11,848) |
Stock compensation expense | | 3,907 | | 396 | | 14,413 | | 1,105 |
Amortization of intangibles | | 1,788 | | 1,387 | | 5,289 | | 3,827 |
Net income (loss), non-GAAP | | ($3,635) | | ($2,644) | | ($10,392) | | ($9,275) |
| | | | | | | | |
| | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Diluted EPS | | ($0.22) | | ($0.01) | | ($0.79) | | ($0.08) |
Adjustments: | | | | | | | | |
Capitalized internal software costs | | (0.03) | | (0.14) | | (0.13) | | (0.39) |
Stock compensation expense | | 0.10 | | 0.01 | | 0.44 | | 0.04 |
Amortization of intangibles | | 0.05 | | 0.05 | | 0.16 | | 0.12 |
Diluted EPS, non-GAAP | | ($0.10) | | ($0.09) | | ($0.32) | | ($0.31) |
COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenue
Our revenue is primarily comprised of fees related to subscription and support and services performed. Subscription and support revenue includes fees for our customers and their users, such as suppliers or healthcare organizations, to access our platform and for users, messages and end point connections such as suppliers or healthcare organizations. Our services revenue is generated from implementation, solution deployment and on-boarding. Implementation services typically consist of user migration, content migration, branding and configuration to support customer-specific workflows. Our services engagements typically occur in phases and can vary from a few weeks to several months depending on the scope and complexity of the solution. Our customers may choose to do much of this work in-house, through a third party or with Covisint. We currently subcontract portions of our consulting engagements to third-party implementation partners, including Compuware, to supplement our staffing needs within this area of the business.
Cost of Revenue
Our cost of revenue is primarily comprised of salaries and personnel-related expenses related to our customer support, implementation, solution deployment, on-boarding and data center operations, the cost of professional services provided by the Company, Compuware and other third-party contractors, depreciation and amortization expenses related to capitalized research and development, acquisitions and capital expenditures, third-party hosting fees, third-party software license fees and outside services related to our call center. Where we have established third-party evidence of the stand-alone value of our services, we recognize expense with the associated revenue recognition as services are delivered. Costs associated with deferred services revenue are recognized ratably, generally over five years, beginning upon customer acceptance of the deliverable consistent with the associated revenue.
We expect that our cost of revenue in absolute dollars may increase in the future as we continue to support the implementation, configuration, hosting and support of new and existing customers. We expect our cost of revenue may fluctuate as a percentage of total revenue due to relative changes in our services revenue, changes in the percentage of services recognized using the proportional performance method, the amount and timing of depreciation and amortization, changes in the amount of services performed by our customers or other vendors and the mix of subscription and support revenue relative to services revenue.
Research and Development
Research and development costs are primarily comprised of salaries and personnel-related expenses, services provided by Compuware and other third-party contractors related to software development, software license and hardware fees and depreciation and amortization related to acquisitions and capital expenditures. As part of our separation from our parent, most Compuware
personnel providing such services to us transitioned to Covisint during the three months ended March 31, 2013 or were replaced with additions to our research and development staff.
We focus our research and development on new and expanded features of our platform and vertical-specific solutions. Since February 2010, when we implemented additional tracking related to the time spent on approved research and development projects, we have capitalized an increasing portion of our research and development costs. In the three and nine months ended December 31, 2013, as compared with the same periods in 2012, we capitalized a smaller portion of our research and development costs as a result of a recent change to the agile delivery methodology for our platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. Our capitalized research and development costs are amortized as a cost of revenue ratably over 60 months upon completion of the project. We expect our fiscal 2014 research and development costs incurred, as a percentage of revenue, to remain consistent with such costs incurred during fiscal 2013. We expect research and development costs expensed to increase in the future in both absolute dollars and as a percentage of revenue.
Sales and Marketing
Sales and marketing costs are primarily comprised of salaries and personnel-related expenses, commissions, travel expense, marketing program fees, services provided by Compuware and other third-party contractors related to our marketing campaigns and amortization related to customer relationship agreements acquired as a result of various acquisitions. We plan to invest further in sales and marketing to create brand awareness, expand the scope and scale of our global operations, develop our sales channel and increase revenue from existing customers. We expect sales and marketing costs to increase in the future in absolute dollars.
General and Administrative
General and administrative costs are primarily comprised of the allocated costs related to the services provided by our parent Compuware for facilities, information technology, tax, internal audit, accounting, finance, human resources, legal and other services, as well as salaries and personnel-related expenses including stock and cash incentive compensation.
Income Taxes
Provision for income taxes is comprised of federal and state taxes in the United States as well as certain foreign tax jurisdictions. Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in our financial statements and net operating loss carryforwards.
AGREEMENTS WITH COMPUWARE
We have entered into certain agreements with Compuware with respect to employee benefits, intellectual property, registration rights, shared services, professional services and taxes. These agreements do not require any specified minimum payments to Compuware, but do include payment obligations and other financial commitments.
Under the shared services agreement, Compuware provides us with certain administrative, financial, legal, tax, insurance, facility, information technology and other services. In general, we are charged for shared services based on a pro rata allocation of Compuware’s costs. As the Company reduces its dependence upon Compuware for these services, the allocation is reduced.
Pursuant to the Compuware services agreement, Compuware and its affiliates will provide professional services in support of our solutions, to the extent that we request them. We will compensate Compuware for these professional services on a case-by-case basis in accordance with rates to be mutually agreed upon.
CRITICAL ACCOUNTING POLICIES
Basis of Presentation
The financial statements included in Item 1 of this Report do not reflect any changes that may occur in our future financing and operations. Our financial statements have been prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, group equity and the disclosure of contingencies at the applicable balance sheet date and the results of operations for all periods presented. While we have based our assumptions and estimates on the facts and circumstances existing at December 31, 2013, final amounts may differ from estimates.
There have been no significant changes to our Critical Accounting Policies as described in our final Prospectus filed with the Securities and Exchange Commission on September 26, 2013.
STOCK-BASED COMPENSATION
Stock award compensation expense is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award.
Compuware Corporation Stock Compensation
Under the agreements between the Company and Compuware, Covisint records compensation expense for the Compuware stock compensation granted Covisint employees, including the stock options in Compuware’s common stock. Compuware calculates the fair value of its stock option awards using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. The expected volatility assumption is based on historical volatility of Compuware’s common stock over the most recent period commensurate with the expected life of the stock option granted. Compuware uses historical volatility because management believes such volatility is representative of prospective trends. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the stock option awarded.
The following is the average fair value per share of Compuware stock compensation awards estimated on the date of grant and the assumptions used for each option granted to Compuware employees, including those providing services to Covisint, during the nine months ended December 31, 2013 and 2012:
|
| | | |
| Nine Months Ended December 31, |
| 2013 | | 2012 |
Expected volatility | 39.52% | | 40.83% |
Risk-free interest rate | 1.59% | | 0.95% |
Expected lives at date of grant (in years) | 6.28 | | 6.30 |
Weighted average fair value of the options granted | $2.69 | | $4.02 |
Dividend Yield Assumption | 4.42% | | 0.00% |
(1) In January 2013, the Compuware Board of Directors announced its intention to begin paying cash dividends totaling $0.50 per share annually, to be paid quarterly beginning in the first quarter of fiscal 2014. Prior to that, Compuware had never paid a dividend or announced any intentions to pay a dividend.
Covisint Corporation Stock Compensation
We calculate the fair value of our stock option awards using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. Because we do not have historical stock price data, the expected volatility assumption is based on an average of the historical volatility of comparable companies, or peer group companies. For peer group companies that have not been publicly traded long enough to have sufficient historical data, the volatility figures included in these companies’ most recent Form 10-Qs or Form 10-Ks were used. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the stock option awarded. The expected life of the stock option is based on management’s best estimates considering the terms of the options granted. Dividend yields have not been a factor in determining fair value of stock options granted, as we have never issued cash dividends and do not anticipate issuing cash dividends in the future.
Prior to the IPO, our stock was not traded on a stock exchange, and thus the exercise price for Covisint stock options at the date of grant was determined by calculating the estimated fair market value of our operations divided by the total shares outstanding, including outstanding stock options that had not yet vested. The estimated fair market value of our operations was measured using an equal combination of discounted cash flow and market comparable valuations and was discounted due to a lack of marketability at the grant date. Previous valuation estimates placed a greater emphasis on the discounted cash flow model. The discounted cash flow model uses significant assumptions, including projected future cash flows, a discount rate reflecting the risk inherent in future cash flows and a terminal growth rate. The key assumptions in the market comparable value analysis are the selection of peer group companies and application of these peer group companies’ data to Covisint.
RESULTS OF OPERATIONS
The following table is a summary of our condensed, combined and consolidated statements of income (loss) data:
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | |
Condensed, Combined and Consolidated Statements of Comprehensive Income Data: | | | | | | | | |
Subscription and support | | $17,586 | | $14,500 | | $49,682 | | $41,237 |
Services | | 6,523 |
| | 9,301 |
| | 23,053 |
| | 23,783 |
|
Total revenue | | 24,109 |
| | 23,801 |
| | 72,735 |
| | 65,020 |
|
Cost of revenue(1) | | 13,660 |
| | 12,173 |
| | 41,096 |
| | 34,022 |
|
Gross profit | | 10,449 |
| | 11,628 |
| | 31,639 |
| | 30,998 |
|
Operating expenses: | | | | | | | | |
Research and development(1) | | 3,533 |
| | 480 |
| | 9,362 |
| | 898 |
|
Sales and marketing(1) | | 8,484 |
| | 6,510 |
| | 26,610 |
| | 18,504 |
|
General and administrative(1) | | 6,724 |
| | 4,787 |
| | 21,338 |
| | 13,867 |
|
Total operating expenses | | 18,741 |
| | 11,777 |
| | 57,310 |
| | 33,269 |
|
Income (loss) from operations before income tax provision | | (8,292 | ) | | (149 | ) | | (25,671 | ) | | (2,271 | ) |
Income tax provision | | 22 |
| | 31 |
| | 59 |
| | 88 |
|
Net income (loss) | | ($8,314) | | ($180) | | ($25,730) | | ($2,359) |
Basic and diluted earnings per share(2) | | ($0.22) | | ($0.01) | | ($0.79) | | ($0.08) |
Weighted-average shares outstanding, Basic and diluted(2) | | 37,363 |
| | 30,003 |
| | 32,599 |
| | 30,003 |
|
| |
(1) | All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. The statements and line items above include stock compensation as detailed in the table below. |
| |
(2) | Please see Note 3 of our condensed, combined and consolidated financial statements and related disclosures for an explanation of the method used to calculate the historical net income (loss) per share attributable to common shareholders and the number of shares used in computation of the per share amounts. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Stock awards compensation classified as: | | | | | |
Cost of revenue | | $ | 137 |
| | $ | 1 |
| | $ | 735 |
| | $ | 2 |
|
Research and development | | 158 |
| | 1 |
| | 656 |
| | 1 |
|
Sales and marketing | | 1,117 |
| | 52 |
| | 5,153 |
| | 120 |
|
General and administrative | | 2,495 |
| | 342 |
| | 7,869 |
| | 982 |
|
Total stock awards compensation expense before income taxes | | 3,907 |
| | 396 |
| | 14,413 |
| | 1,105 |
|
The following table sets forth a summary of our condensed, combined and consolidated statements of comprehensive income as a percentage of our total revenue:
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Condensed, Combined and Consolidated Statements of Comprehensive Income Data: | | | | | | | | |
Subscription and support | | 73 | % | | 61 | % | | 68 | % | | 63 | % |
Services | | 27 |
| | 39 |
| | 32 |
| | 37 |
|
Total revenue | | 100 |
| | 100 |
| | 100 |
| | 100 |
|
Cost of revenue(1) | | 57 |
| | 51 |
| | 57 |
| | 52 |
|
Gross profit | | 43 |
| | 49 |
| | 43 |
| | 48 |
|
Operating expenses: | | | | | | | | |
Research and development(1) | | 15 |
| | 2 |
| | 13 |
| | 1 |
|
Sales and marketing(1) | | 35 |
| | 27 |
| | 37 |
| | 28 |
|
General and administrative(1) | | 28 |
| | 20 |
| | 29 |
| | 21 |
|
Total operating expenses | | 78 |
| | 49 |
| | 79 |
| | 50 |
|
Income (loss) from operations before for income tax provision | | (34 | ) | | (1 | ) | | (35 | ) | | (3 | ) |
Income tax provision | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Net income (loss) | | (34 | )% | | (1 | )% | | (35 | )% | | (3 | )% |
________________________________________________
| |
(1) | All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. Refer to the table above for the breakdown of stock compensation included in these line item percentages. |
THREE AND NINE MONTHS ENDED DECEMBER 31, 2013 AND 2012
Revenue
Revenue derived from our subscription and support and services is presented in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Period-to-Period Change | | Nine Months Ended December 31, | | Period-to-Period Change |
| 2013 | | 2012 | | $ | | % | | 2013 | | 2012 | | $ | | % |
| (In thousands) | | | | (In thousands) | | |
Subscription and support |
| $17,586 |
| |
| $14,500 |
| |
| $3,086 |
| | 21 | % | |
| $49,682 |
| |
| $41,237 |
| |
| $8,445 |
| | 20 | % |
Services | 6,523 |
| | 9,301 |
| | (2,778 | ) | | (30 | )% | | 23,053 |
| | 23,783 |
| | (730 | ) | | (3 | )% |
Total revenue |
| $24,109 |
| |
| $23,801 |
| |
| $308 |
| | 1 | % | |
| $72,735 |
| |
| $65,020 |
| |
| $7,715 |
| | 12 | % |
In the three months ended December 31, 2013, as compared with the same period in 2012, our total revenue increased due to increases in our subscription and support revenue, which was offset by a decline in our services revenue. Our increase in subscription and support revenue was primarily due to continued growth within our non-automotive verticals. The increase in subscription and support revenue between the three months ended December 31, 2013 and 2012 was due to approximately $2.2 million of increased revenue with existing customers and $1.4 million from sales to new customers. This was partially offset by a decline in revenue from customers that terminated or elected not to renew their agreements of $0.6 million. These increases were partially offset by the decrease in services revenue between the three months ended December 31, 2013 and 2012, in part due to customers and partners performing their own modifications and enhancements to their use of our platforms.
During the quarter, a reseller decided to change its delivery model to its customers by eliminating its plan to host separately our platform as the reseller determined it was more cost effective to utilize our hosted platform. As a result of the termination of this aspect of its existing contract with us, the reseller made a onetime payment to the Company of $1.0 million dollars, which was recorded as subscription revenue. The Company anticipates that the total revenue from the reseller will be substantially the same in fiscal 2015 as in 2014.
In the nine months ended December 31, 2013, as compared with the same period in 2012, our total revenue increased due to increases in our subscription and support revenue. Our increase in subscription and support revenue was primarily due to continued growth within our non-automotive verticals. The increase in subscription and support revenue between the nine months ended December 31, 2013 and 2012 was primarily due to $6.8 million of increased revenue with existing customers and $2.8 million from sales to new customers. This was partially offset by a decline in revenue from customers that terminated or elected not to renew their agreements of $1.1 million.
Cost of Revenue
Cost of revenue is presented in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Period-to-Period Change | | Nine Months Ended December 31, | | Period-to-Period Change |
| 2013 | | 2012 | | $ | | % | | 2013 | | 2012 | | $ | | % |
| (In thousands) | | | | (In thousands) | | |
Cost of revenue |
| $13,660 |
| |
| $12,173 |
| |
| $1,487 |
| | 12 | % | |
| $41,096 |
| |
| $34,022 |
| |
| $7,074 |
| | 21 | % |
Gross margin | 43 | % | | 49 | % | | | | | | 43 | % | | 48 | % | | | | |
Cost of revenue increased during the three months ended December 31, 2013, as compared to the same period in 2012, primarily due to an increase in revenue. Cost increases included an increase of $3.4 million in salaries and personnel-related expenses in connection with our customer support, implementation, solution deployment, on-boarding and data center operations fees. This increase was offset by a decrease of $2.4 million in Compuware and other third-party contractors primarily as a result of the transition of most Compuware personnel to Covisint during the three months ended March 31, 2013. Cost increases also included an increase of $0.1 million in stock compensation expense.
Our gross margin decreased during the three months ended December 31, 2013 as compared with the same period in 2012 due to an increase of $0.4 million related to the amortization of capitalized research and development costs and purchased software. We have historically capitalized a significant portion of our research and development costs. As a result, amortization of capitalized research and development costs and purchased software accounted for $1.7 million and $1.3 million of the cost of revenue during the three months ended December 31, 2013 and 2012, respectively.
Cost of revenue increased during the nine months ended December 31, 2013, as compared to the same period in 2012, primarily due to an increase in revenue. Cost increases included an increase of $10.7 million in salaries and personnel-related expenses in connection with our customer support, implementation, solution deployment, on-boarding and data center operations fees. This increase was offset by a decrease of $6.2 million in Compuware and other third-party contractors primarily as a result of the transition of most Compuware personnel to Covisint during the three months ended March 31, 2013. Cost increases also include an increase of $0.7 million in stock compensation expense.
Our gross margin decreased during the nine months ended December 31, 2013, as compared with the same period in 2012, due to an increase of $1.5 million related to the amortization of capitalized research and development costs and purchased software. We have historically capitalized a significant portion of our research and development costs. As a result, amortization of capitalized research and development costs and purchased software accounted for $5.0 million and $3.5 million of the cost of revenue during the nine months ended December 31, 2013 and 2012, respectively.
Research and Development
Research and development costs incurred, expensed and capitalized are presented in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Period-to-Period Change | | Nine Months Ended December 31, | | Period-to-Period Change |
| 2013 | | 2012 | | $ | | % | | 2013 | | 2012 | | $ | | % |
| (In thousands) | | | | (In thousands) | | |
Research and development costs incurred |
| $4,549 |
| |
| $4,727 |
| |
| ($178 | ) | | (4 | )% | |
| $13,726 |
| |
| $12,746 |
| |
| $980 |
| | 8 | % |
Capitalized internal software costs | (1,016 | ) | | (4,247 | ) | | 3,231 |
| | (76 | )% | | (4,364 | ) | | (11,848 | ) | | 7,484 |
| | (63 | )% |
Research and development costs expensed |
| $3,533 |
| |
| $480 |
| |
| $3,053 |
| | 636 | % | |
| $9,362 |
| |
| $898 |
| |
| $8,464 |
| | 943 | % |
Percentage of total revenue: | | | | | | | | | | | | | | | |
Research and development costs incurred | 19 | % | | 20 | % | | | | | | 19 | % | | 20 | % | | | | |
Research and development costs expensed | 15 | % | | 2 | % | | | | | | 13 | % | | 1 | % | | | | |
Research and development costs incurred decreased during the three months ended December 31, 2013, as compared to the same period in 2012, primarily due to a $1.7 million decrease in fees paid to Compuware and other third-party contractors for software development activities offset by $1.1 million increase in salaries and personnel-related expenses. The decline in fees paid to Compuware and other third-party contractors and increase in salaries and personnel-related expenses was primarily the result of the transition of most Compuware personnel to Covisint during the three months ended March 31, 2013. Cost increases also include an increase of $0.2 million in stock compensation expense.
Research and development costs incurred increased during the nine months ended December 31, 2013, as compared to the same period in 2012, primarily due to a $3.7 million increase in salaries and personnel-related expenses offset by a $3.9 million decrease in fees paid to Compuware and other third-party contractors for software development activities. The decline in fees paid to Compuware and other third-party contractors and increase in salaries and personnel-related expenses was primarily the result of the transition of most Compuware personnel to Covisint during the three months ended March 31, 2013. Cost increases also include an increase of $0.7 million in stock compensation expense. We capitalized $4.4 million and $11.8 million of research and development costs during the nine months ended December 31, 2013 and 2012, respectively.
We decreased capitalization of our research and development costs during the three and nine months ended December 31, 2013 as compared to the same periods in 2012 due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This change increased the proportion of our research and development costs expensed relative to our research and development costs incurred.
Sales and Marketing
Sales and marketing costs are presented in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Period-to-Period Change | | Nine Months Ended December 31, | | Period-to-Period Change |
| 2013 | | 2012 | | $ | | % | | 2013 | | 2012 | | $ | | % |
| (In thousands) | | | | (In thousands) | | |
Sales and marketing |
| $8,484 |
| |
| $6,510 |
| |
| $1,974 |
| | 30 | % | |
| $26,610 |
| |
| $18,504 |
| |
| $8,106 |
| | 44 | % |
Percentage of total revenue | 35 | % | | 27 | % | | | | | | 37 | % | | 28 | % | | | | |
Sales and marketing costs increased during the three months ended December 31, 2013, as compared to the same period in 2012, primarily due to a $1.1 million increase in stock compensation expense and a $0.6 million increase in salaries and personnel-related expenses.
Sales and marketing costs increased during the nine months ended December 31, 2013, as compared to the same period in 2012, primarily due to a $5.0 million increase in stock compensation expense and a $2.5 million increase in salaries and personnel-related expenses.
General and Administrative
General and administrative costs are presented in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Period-to-Period Change | | Nine Months Ended December 31, | | Period-to-Period Change |
| 2013 | | 2012 | | $ | | % | | 2013 | | 2012 | | $ | | % |
| (In thousands) | | | | (In thousands) | | |
General and administrative |
| $6,724 |
| |
| $4,787 |
| |
| $1,937 |
| | 40 | % | |
| $21,338 |
| |
| $13,867 |
| |
| $7,471 |
| | 54 | % |
Percentage of total revenue | 28 | % | | 20 | % | | | | | | 29 | % | | 21 | % | | | | |
General and administrative costs increased during the three months ended December 31, 2013, as compared to the same period in 2012, primarily due to a $2.2 million increase in stock compensation expense offset by a $0.6 million decrease in legal and audit fees related to the separation from our parent in preparation for our initial public offering.
General and administrative costs increased during the nine months ended December 31, 2013, as compared to the same period in 2012, primarily due to a $6.9 million increase in stock compensation expense and an increase of $0.4 million of costs related to the services provided by our parent Compuware and a $0.4 million increase in salaries and personnel expenses associated with the establishment of Covisint as an independent entity. We expect to utilize certain services to continue incurring the cost associated with the services provided by Compuware until Compuware completes its spin-off of the Company in future periods.
LIQUIDITY AND CAPITAL RESCOURCES
In summary, our cash flows were:
|
| | | | | | | | |
| | Nine Months Ended December 31, |
| | 2013 | | 2012 |
| | | | |
Combined and Consolidated Statement of Cash Flows Data: | | | | |
Net cash provided by (used in) operating activities | |
| ($2,602 | ) | |
| ($15 | ) |
Net cash used in investing activities | | (6,300 | ) | | (12,484 | ) |
Net cash provided by financing activities | | 62,649 |
| | 12,499 |
|
Effect of exchange rate | | 57 |
| | 0 |
|
Net change in cash | |
| $53,804 |
| |
| $0 |
|
Cash Flows from Operating Activities
Cash provided by operating activities decreased for the nine months ended December 31, 2013, as compared to the same period in 2012, primarily as a result of a $8.5 million increase in research and development expense due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This impact was partially offset by our cash from working capital which increased by $5.7 million primarily as a result of collections of accounts receivable.
Cash Flows from Investing Activities
Cash used in investing activities typically consists of the purchase of property and equipment associated with our infrastructure and the capitalization of research and development costs related to expanding our cloud-based platform. Cash used in investing activities decreased for the nine months ended December 31, 2013, as compared with the same period in 2012, primarily due to
a $7.5 million decrease in cash paid for capitalized research and development, partially offset by an increase in property and equipment purchases of $1.3 million.
Cash Flows from Financing Activities
Prior to January 1, 2013, as an operating unit within Compuware, we did not maintain separate cash accounts. All cash receipts and payments were reported on a net basis as “Net investment from parent company" presented within financing activities. Since the January 1, 2013 contribution of the business, all significant transactions between Compuware and us were included in the condensed, combined and consolidated financial statements and were or are expected to be settled in cash. The gross activity of these cash transactions with our parent is reflected in the condensed, combined and consolidated statements of cash flows as a financing activity presented as "Cash payments from/to parent company."
Cash provided by financing activities increased to $62.6 million for the nine months ended December 31, 2013, from $12.5 million for the nine months ended December 31, 2012, primarily due to the cash received from the IPO of 68.4 million. This cash inflow was partially offset by the related party cash transactions with our parent and $1.0 increase in cash paid for IPO costs.
RECENTLY ISSUED ACCOUNTING PRONOUCEMENTS
New accounting guidance that we have recently adopted, as well as accounting guidance that has been recently issued, but not yet adopted by us, will not significantly affect our results. The related accounting pronouncements are included in Note 1 of the notes to the condensed, combined and consolidated financial statements appearing elsewhere in this Report.
CONTRACTUAL OBLIGATIONS
We currently occupy office space within facilities owned and leased by Compuware. We have not entered into commitments related to space occupied within Compuware facilities; however, the expenses allocated or charged to us include costs associated with such facilities. We are not subject to unconditional purchase obligations with a remaining term greater than one year.
OFF-BALANCE SHEET ARRANGEMENTS
We currently do not have any off balance sheet or non-consolidated special purpose entity arrangements as defined by the applicable SEC rules.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to market risks associated with foreign currency exchange rates. We do not use derivative financial instruments or forward foreign exchange contracts for investment, speculative or trading purposes. We believe our foreign currency risk is minimal as 85% of our revenue was based in U.S. dollars for the nine months ended December 31, 2013 and 2012, respectively. In addition, we have no long-term assets or liabilities in foreign currencies. We do not have a material exposure to market risk with respect to investments.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2013, our disclosure controls and procedures are effective, at the reasonable assurance level, to cause information required to be disclosed in the reports that we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required financial disclosure.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not party to any material legal proceedings at this time. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Report, you should carefully consider the risks under the heading "Risk Factors" in our final Prospectus filed with the Securities and Exchange Commission on September 26, 2013, which risks could materially affect our business, financial condition or future results. There has been no material change in our risk factors from those described in the Prospectus. Set forth below, however, is an additional "risk factor relating to our business and our industry." These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
We operate in an emerging and evolving market, with both direct customers and channel partners, which may lead to period to period variability in our revenue and make it difficult to evaluate our future prospects.
We believe our platform is unique in the marketplace as it flexibly provides the framework to improve business processes involving a user's extended enterprise ranging from customers, suppliers and other stakeholders. However, the markets for our platform are in an early stage of development, and it is uncertain how rapidly these markets will develop. Even if they do develop, it is not certain the subscription software and solutions provided by our platform will achieve and sustain high levels of demand and acceptance. Because our platform has significant number of applications across many industries, our ability to grow revenue will be dependent upon our ability to determine which industries are most likely to be ready to utilize our technologies to solve their business issues. If we do not select wisely, we may incur costs and lose the opportunities to formalize our position in the marketplace.
In order to expand our sales force and reduce market risks, we have established, and continue to focus upon creating, relationships with channel partners and resellers of our platform. We anticipate that our channel partnerships and reseller agreements will produce new subscription and services revenue. However, since the reseller / channel market is evolving, we cannot predict how these partners will attempt to sell our platform within their customer base, or how effective their go to market strategy will be. Further, we cannot predict whether these reseller / channel partners will continue to sell our platform in the event that their business is not profitable. Changes in the reseller / channel partner’s sales strategy, their methodology of delivering our platform to their customers, or a loss of a reseller / channel partner could significantly affect our revenue on a period to period basis and our overall revenue growth.
If companies do not perceive or value the benefits of our solutions, or if companies are unwilling to accept our platform as an alternative to the traditional approach to solving business process problems in their extended enterprise, the market for our platform might not continue to develop or might develop more slowly than we expect, either of which would significantly affect our revenue and growth prospects.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 25, 2013, our registration statement on Form S-1 (File No. 333-188603) was declared effective by the Securities and Exchange Commission for our initial public offering. Pursuant to the offering, we sold an aggregate of 7,360,000 shares of our common stock (which includes the underwriters’ full exercise of their over-allotment option of 960,000 shares) at a price to the public of $10.00 per share. The sale of all of such shares was consummated on October 1, 2013 and resulted in net proceeds to us of $66.3 million after deducting underwriting discounts, commissions and other offering expenses. Through December 31, 2013, $10.9 million of such net proceeds were used to repay short-term intercompany payables owed to our parent, Compuware Corporation. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates. There has been no material change in the planned use of proceeds from our initial public offering as described in our final Prospectus filed with the Securities and Exchange Commission on September 26, 2013.
ITEM 6. EXHIBITS
The following exhibits are filed herewith.
|
| | |
Exhibit Number | | Description of Document |
10.15 | | Director Compensation Summary |
10.16 | | First Amendment to the Covisint Corporation 2009 Long-Term Incentive Plan ** |
15 | | Independent Registered Public Accounting Firm's Awareness Letter |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act |
32.1 | | Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
** (incorporated by reference to Current Report on Form 8-K filed on January 6, 2014)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | COVISINT CORPORATION |
| | |
Date: | February 7, 2014 | By: /s/ David A. McGuffie |
| | David A. McGuffie |
| | Chief Executive Officer |
| | Principal Executive Officer |
| | |
Date: | February 7, 2014 | By: /s/ Enrico Digirolamo |
| | Enrico Digirolamo |
| | Chief Financial Officer |
| | Principal Accounting Officer |
| | |