sltc_10q-063011.htm


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 June 30, 2011
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from              to            
 
COMMISSION FILE NUMBER 000-29637
 

SELECTICA, INC.
(Exact Name of Registrant as Specified in Its Charter)
 

 
DELAWARE
77-0432030
(State of Incorporation)
(IRS Employer Identification No.)
 
1740 Technology Drive, Suite 460, San Jose, CA 95110-2111
(Address of Principal Executive Offices)
 
(408) 570-9700
(Registrant’s Telephone Number, Including Area Code)
 

 
Indicate by a 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  x    NO  ¨
 
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
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
¨
Accelerated filer
¨
       
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    YES  ¨    NO  x
 
The number of shares outstanding of the registrant’s common stock, par value $0.002 per share, as of August 8, 2011, was 2,831,112.
 


 
 

 
 
FORM 10-Q
 
SELECTICA, INC.
 
INDEX
 
PART I FINANCIAL INFORMATION
4
     
ITEM 1: Financial Statements
4
 
Condensed Consolidated Balance Sheets as of June 30, 2011 and March 31, 2011
4
 
Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010
5
 
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 and 2010
6
 
Notes to Condensed Consolidated Financial Statements
7
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
22
ITEM 4: Controls and Procedures
23
     
PART II OTHER INFORMATION
23
     
ITEM 1: Legal Proceedings
23
ITEM 1A: Risk Factors
23
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
23
ITEM 3: Defaults Upon Senior Securities
24
ITEM 4: Removed and Reserved
24
ITEM 5: Other Information
24
ITEM 6: Exhibits
25
Signatures
26
 
 
2

 
 
Cautionary Statement Pursuant to Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
 
The words “Selectica”, “we”, “our”, “ours”, “us”, and the “Company” refer to Selectica, Inc. In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in Item 1A to Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.  You should carefully review the risks described in other documents the Company files from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding the Company’s expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report on Form 10-Q.  The Company undertakes no obligation to release publicly any updates to the forward-looking statements included herein after the date of this document.
 
 
3

 

PART I: FINANCIAL INFORMATION
 
ITEM 1:
FINANCIAL STATEMENTS
 
SELECTICA, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
 
 
 
June 30,
2011
   
March 31,
2011
 
 
 
(unaudited)
       
Assets
 
             
Current assets:
 
             
Cash and cash equivalents
 
$
16,636
 
 
$
16,822
 
Short-term investments
 
 
199
 
   
199
 
Accounts receivable, net of allowance for doubtful accounts of $59 and $55, respectively
 
 
2,046
 
   
2,695
 
Prepaid expenses and other current assets
 
 
457
 
   
450
 
Total current assets
 
 
19,338
 
   
20,166
 
Property and equipment, net
 
 
357
 
   
423
 
Total assets
 
$
19,695
 
 
$
20,589
 
 
 
             
Liabilities and Stockholders’ Equity
 
             
Current liabilities:
 
             
Current portion of note payable to Versata
 
$
786
 
 
$
786
 
Accounts payable
 
 
744
 
   
813
 
Accrued payroll and related liabilities
 
 
685
 
   
448
 
Other accrued liabilities
 
 
124
 
   
98
 
Deferred revenues
 
 
3,389
 
   
3,746
 
Total current liabilities
 
 
5,728
 
   
5,891
 
Note payable to Versata, net of current portion
 
 
3,344
 
   
3,482
 
Other long-term liabilities
 
 
468
 
   
574
 
Total liabilities
 
 
9,540
 
   
9,947
 
Stockholders’ equity:
 
             
Common stock
 
 
4
 
   
4
 
Additional paid-in capital
 
 
266,082
 
   
265,973
 
Accumulated deficit
 
 
(255,931
)
   
(255,335
)
Total stockholders’ equity
 
 
10,155
 
   
10,642
 
 
 
             
Total liabilities and stockholders’ equity
 
$
19,695
 
 
$
20,589
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
SELECTICA, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
Revenues:
           
License
 
$
92
   
$
836
 
Services
   
3,662
     
2,897
 
                 
Total revenues
   
3,754
     
3,733
 
Cost of revenues:
               
License
   
47
     
150
 
Services
   
1,246
     
1,195
 
                 
Total cost of revenues
   
1,293
     
1,345
 
                 
Gross profit
   
2,461
     
2,388
 
Operating expenses:
               
Research and development
   
896
     
764
 
Sales and marketing
   
1,180
     
1,038
 
General and administrative
   
929
     
971
 
Shareholder litigation
   
     
1
 
                 
Total operating expenses
   
3,005
     
2,774
 
                 
Loss from operations
   
(544
)
   
(386
)
Interest and other income (expense), net
   
(52
)
   
(57
)
                 
Loss before provision for income taxes
   
(596
)
   
(443
)
Provision for income taxes
   
     
4
 
                 
Net loss
 
$
(596
)
 
$
(447
)
                 
Basic and diluted net loss per share
 
$
(0.21
)
 
$
(0.16
)
                 
Weighted-average shares of common stock used in computing basic and diluted net loss per share
   
2,831
     
2,812
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 

SELECTICA, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
 
 
Three Months Ended
June 30,
 
 
 
2011
   
2010
 
Operating activities
 
             
Net loss
 
$
(596
)
 
$
(447
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
             
Depreciation and amortization
 
 
72
 
   
79
 
Loss on disposition of property and equipment
 
 
1
     
 
Stock-based compensation
 
 
109
 
   
114
 
Changes in assets and liabilities:
 
             
Accounts receivable, net
 
 
649
 
   
1,124
 
Prepaid expenses and other current assets
 
 
(7
)
   
(133
)
Accounts payable
 
 
(69
)
   
229
 
Restructuring liability
 
 
     
(7
)
Accrued payroll and related liabilities
 
 
237
     
(21
)
Other accrued liabilities and other long-term liabilities
 
 
(18
)
   
406
 
Deferred revenues
 
 
(357
)
   
(926
)
 
 
             
Net cash provided by operating activities
 
 
21
     
418
 
 
 
             
Investing activities
 
             
Purchase of property and equipment
 
 
(7
)
   
(22
)
 
 
             
Net cash used in investing activities
 
 
(7
)
   
(22
)
 
 
             
Financing activities
 
             
Payments on note payable to Versata
 
 
(200
)
   
(200
)
Common stock issuance costs, net (See Note 6)
 
 
     
(125
)
 
 
             
Net cash used in financing activities
 
 
(200
)
   
(325
)
 
 
             
Net increase (decrease) in cash and cash equivalents
 
 
(186
)
   
71
 
Cash and cash equivalents at beginning of the period
 
 
16,822
 
   
16,957
 
 
 
             
Cash and cash equivalents at end of the period
 
$
16,636
 
 
$
17,028
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6

 

SELECTICA, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1. Basis of Presentation
 
The condensed consolidated balance sheet as of June 30, 2011, the condensed consolidated statements of operations for the three months ended June 30, 2011 and 2010, and the condensed consolidated statements of cash flows for the three months ended June 30, 2011 and 2010 have been prepared by the Company and are unaudited.  In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial position at June 30, 2011, and the results of operations and cash flows for the three months ended June 30, 2011 and 2010, respectively. Interim results are not necessarily indicative of the results for a full fiscal year. The condensed consolidated balance sheet as of March 31, 2011 has been derived from the audited consolidated financial statements at that date.
 
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying notes.  Actual results could differ materially from those estimates.
 
2. Summary of Significant Accounting Policies
 
There have been no material changes to any of the Company’s significant accounting policies and estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.
 
Customer Concentrations
 
A limited number of customers have historically accounted for a substantial portion of the Company’s revenues.
 
Customers who accounted for at least 10% of total revenues were as follows:
 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
Customer A
   
15
%
   
15
%
Customer B
   
*
     
10
%
 
   
*
Less than 10% of total revenues.
 
Customers who accounted for at least 10% of gross accounts receivable were as follows:
 
   
June 30,
2011
   
March 31,
2011
 
Customer A
   
12
%
   
10
%
Customer B
   
*
     
16
%
Customer C
   
11
%
   
*
 
 
   
*
Less than 10% of total accounts receivable.
 
 
7

 
 
SELECTICA, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Fair Value Measurements
 
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of June 30, 2011 (in thousands):
 
Description
 
Balance as of June 30, 2011
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
 
Cash equivalents:
                 
Money market fund
 
$
612
   
$
612
   
$
 
Commercial paper
   
13,998
     
13,998
         
Short-term investments:
                       
Certificates of deposit
   
199
     
     
199
 
                         
Total
 
$
14,809
   
$
14,610
   
$
199
 
 
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2011 (in thousands):
 
Description
 
Balance as of March 31, 2011
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
 
Cash equivalents:
                 
Money market fund
 
$
804
   
$
804
   
$
 
Commercial paper
   
13,799
     
13,799
         
Short-term investments:
                       
Certificates of deposit
   
199
     
     
199
 
                         
Total
 
$
14,802
   
$
14,603
   
$
199
 
 
The Company’s financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of June 30, 2011 and March 31, 2011, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3).
 
Segment Information
 
The Company operates as one business segment and therefore segment information is not presented.
 
 
8

 
 
SELECTICA, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
3. Income Taxes
 
At June 30, 2011, the Company had approximately $2.0 million of unrecognized tax benefits. As these unrecognized tax benefits relate to deferred tax assets with a full valuation allowance, there will be no effect on the Company’s effective tax rate if these amounts are recognized.

The Company’s Federal, state, and foreign tax returns may be subject to examination by the tax authorities from 1997 to 2010 due to net operating losses and tax carryforwards unutilized from such years.
 
 
9

 
 
SELECTICA, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
4. Stock-Based Compensation
 
Equity Incentive Program
 
The Company’s equity incentive program is a broad-based, retention program comprised of stock options, restricted stock units and an employee stock purchase plan designed to align stockholder and employee interests. For a description of the Company’s equity plans, see the notes to consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.
 
During the three months ended June 30, 2011 and 2010, there were 7,500 and 32,000 restricted stock units granted, respectively.
 
Valuation Assumptions
 
The Company calculated the fair value of its employee stock options at the date of grant with the following weighted average assumptions:
 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
Risk-free interest rate
   
0.88
%
   
1.04
%
Dividend yield
   
0.00
%
   
0.00
%
Expected volatility
   
82.17
%
   
83.29
%
Expected option life in years
   
3.22
     
3.09
 
Weighted average fair value at grant date
 
$
2.84
   
$
3.22
 
 
The following table summarizes activity under the equity incentive plans for the indicated periods:
 
         
Options Outstanding
 
   
Shares available
for grant
   
Number of shares
   
Weighted-average
exercise price
 
   
(in thousands except for per share amount)
       
Outstanding at March 31, 2011
   
1,434
     
161
   
$
10.54
 
Options granted
   
(47
)
   
47
     
5.20
 
Restricted stock units granted
   
(7
)
   
     
 
Options cancelled
   
7
     
(7
)
   
32.03
 
Options expired
   
     
     
 
                         
Outstanding at June 30, 2011
   
1,387
     
201
   
$
8.70
 
 
The weighted average term for exercisable options is 5.27 years. The intrinsic value is calculated as the difference between the market value as of June 30, 2011 and the exercise price of the shares. The market value of the Company’s common stock as of June 30, 2011 was $5.11 as reported by the NASDAQ Global Market. The aggregate intrinsic value of stock options outstanding at June 30, 2011 and 2010 was $0 and $2,325, respectively.
 
 
10

 
 
The options outstanding and exercisable at June 30, 2011 were in the following exercise price ranges:
 
   
Options Outstanding
   
Options Vested
 
Range of Exercise Prices per share
 
Number of Shares
   
Weighted-Average
Remaining
Contractual
Life (in years)
   
Number of Shares
   
Weighted-Average
Exercise
Price per share
 
   
(in thousands except for per share amount)
 
$5.18 — $5.18
   
15
     
2.36
     
   
$
 
$5.19 — $5.20
   
52
     
9.78
     
6
     
5.20
 
$5.21 — $5.39
   
51
     
9.11
     
     
 
$5.40 — $7.60
   
40
     
7.83
     
13
     
6.27
 
$7.61 — $42.40
   
43
     
4.58
     
39
     
21.67
 
                                 
$5.18 — $42.40
   
201
     
7.56
     
58
   
$
16.49
 
 
The effect of recording stock-based compensation expense for each of the periods presented was as follows (in thousands):
 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
Cost of revenues
 
$
7
   
$
12
 
Research and development
   
26
     
10
 
Sales and marketing
   
34
     
18
 
General and administrative
   
42
     
74
 
Impact on net loss
 
$
109
   
$
114
 
 
As of June 30, 2011, the unrecorded share-based compensation balance related to stock options outstanding excluding estimated forfeitures was $0.8 million and will be recognized over an estimated weighted average amortization period of 3.1 years.  The amortization period is based on the expected remaining vesting term of the options.
 
 
11

 
 
SELECTICA, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
The weighted average remaining contractual term of all options exercisable at June 30, 2011 is 5.3 years. Forfeitures are estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Based on the Company’s estimates of future forfeiture rates, the Company has assumed an annualized forfeiture rate of 23.83% for its options.
 
1999 Employee Stock Purchase Plan (“ESPP”)
 
The price paid for the Company’s common stock purchased under the ESPP is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each offering period. The compensation expense in connection with the ESPP for the three months ended June 30, 2011 and 2010 was $3,175 and $11,956, respectively.  During the three months ended June 30, 2011 and 2010, there were no shares issued under the ESPP.
 
The Company calculated the fair value of rights granted under its employee stock purchase plan at the date of grant using the following weighted average assumptions:
 
 
 
Three Months Ended
June 30,
 
 
 
2011
   
2010
 
Risk-free interest rate
 
 
1.04
%
   
1.53
%
Dividend yield
 
 
0.00
%
   
0.00
%
Expected volatility
 
 
90.17
%
   
69.52
%
Expected life in years
 
 
1.96
 
   
1.64
 
Weighted average fair value at grant date
 
$
4.44
 
 
$
10.60
 
 
 
12

 
 
SELECTICA, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
5. Computation of Basic and Diluted Net Loss per Share
 
Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period.
 
The Company excludes potentially dilutive securities from its diluted net loss per share computation when their effect would be antidilutive to net loss per share amounts. The following common stock equivalents were excluded from the net loss per share computation:
 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
   
(In thousands)
 
Options excluded due to the exercise price exceeding the average fair market value of the Company’s common stock during the period
   
137
     
125
 
Options excluded for which the exercise price was at or less than the average fair market value of the Company’s common stock during the period but were excluded as inclusion would decrease the Company’s net loss per share
   
27
     
7
 
                 
Total common stock equivalents excluded from diluted net loss per common share
   
164
     
132
 
 
 
13

 
 
SELECTICA, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
6. Litigation and Contingencies

The Company is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of its business. The Company believes that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect its financial position, results of operations or liquidity.
 
Rights Agreement

On December 22, 2008, the Company filed suit in the Court of Chancery of the State of Delaware against Trilogy, Inc. and certain related parties (“Trilogy”) seeking declaratory relief that the Company’s Rights Agreement as amended on November 16, 2008 was an appropriate measure to protect a valuable asset – the Company’s net operating loss carryforwards and related tax credits – from being limited as to utilization as provided under Section 382 of the Internal Revenue Code (IRC) which could in turn substantially reduce the value of that asset to all of the Company’s shareholders. The Company sued Trilogy after it amended the Rights Agreement on November 16, 2008 to reduce the ownership threshold that would trigger a rights offering under the Rights Agreement and Trilogy increased its beneficial ownership beyond the threshold.  As a result, on January 2, 2009, a special committee of the Company’s Board of Directors declared Trilogy an “Acquiring Person” under the Rights Agreement, exchanged the rights (other than those belonging to Trilogy) for new shares of common stock under the Exchange Provision in the Rights Agreement, adopted an amended Rights Agreement and declared a new dividend of rights under the amended Rights Agreement.  On January 16, 2009, the defendants in this action, Trilogy, filed an answer to the Company’s complaint and a counterclaim alleging that the Company’s Board of Directors had breached fiduciary duties in amending the Rights Agreement, in exchanging the rights, in adopting the amended Rights Agreement and in declaring a new dividend of rights.  On February 26, 2010, the Delaware Court of Chancery issued a memorandum opinion that determined, among other things (i) that the actions taken by the Company’s Board of Directors and its special committee were lawful and appropriate under the circumstances, and (ii) that Trilogy was not entitled to relief for its counterclaims.  An appeal from this decision was filed with the Delaware Supreme Court.  On October 11, 2010, the Delaware Supreme Court issued an opinion that affirmed the Court of Chancery’s ruling in the Company’s favor, confirming the validity of the actions the Board of Directors and its special committee took to preserve the Company’s net operating losses.  On November 11, 2010, the Company filed suit in the Delaware Court of Chancery against Trilogy seeking a declaratory judgment that the Company is not obligated to pay more than $1 million in fees demanded by Trilogy in connection with an alleged “investigation” into the Company’s corporate governance policies and procedures.  On January 13, 2011, Trilogy answered the Company’s complaint and asserted a counterclaim for such fees.  The Company filed a reply on February 2, 2011, and this action is ongoing.
 
As the costs of this litigation and related legal work are directly related to the issuance of shares under the Company’s Rights Agreement, these costs have historically been charged as issuance costs against the additional paid-in capital (APIC) account on the Company’s balance sheet, less a reserve for both received and anticipated recoveries from the Company’s Director’s and Officer’s insurance policy.  Anticipated recoveries are reflected in prepaid expenses and other current assets on the Company’s balance sheet.
 
The following table reflects the total charges to APIC for the periods indicated (in thousands): 
 
 
 
Quarter Ended
June 30, 2011
   
Years Ended
March 31, 2011, 2010 and 2009
   
Total
 
Gross legal and related costs incurred
 
$
 
 
$
5,409
 
 
$
5,409
 
Less: received and anticipated reimbursement
 
 
     
(1,779
)
   
(1,779
)
Net amounts charged to APIC
 
$
 
 
$
3,630
 
 
$
3,630
 
 
 
14

 
 
SELECTICA, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
7. Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04,“Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively for reporting periods beginning on or after December 15, 2011. The adoption is not expected to have a material impact to the Company’s consolidated financial statements.
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively for interim and annual periods beginning after December 15, 2011. The adoption is not expected to have a material impact to the Company’s consolidated financial statements.
 
 
15

 
 
ITEM 2:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in the “Risk Factors” in Item 1A to Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (the “Form 10-K”). They include the following: the level of demand for Selectica’s products and services; the intensity of competition; Selectica’s ability to effectively manage product transitions and to continue to expand and improve internal infrastructure; risks associated with potential acquisitions; and adverse financial, customer and employee consequences that might result to us if litigation were to be resolved in an adverse manner to us. For a more detailed discussion of the risks relating to our business, readers should refer to 1A to Part 1 in the Form 10-K entitled “Risk Factors.” Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report. We assume no obligation to update these forward-looking statements.
 
Overview
 
We provide Contract Management (CM) and Sales Configuration (SCS) software solutions that allow enterprises to efficiently manage business processes. Our solutions include software, on demand hosting, professional services and expertise.
 
Our CM products enable customers to create, manage and analyze contracts in a single, easy to use repository and are offered as an on-premise or hosted solution. Our software enables any and all corporate departments (e.g. Sales, Services, Procurement, Finance, IT and others) to model their specific contracting processes using our application and to manage the lifecycle of the department’s relationships with the counterparty from creation through closure.
 
Our SCS products enable customers to increase revenues and reduce costs through seamless, web-enabled automation of the “quote to contract” business processes, which reside between legacy Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) systems. These products are built using Java technology and utilize a unique business logic engine, repository, and a multi-threaded architecture. This design reduces the amount of memory used to support new user sessions and to deploy a cost-effective, robust and highly scalable, Internet-enhanced sales channel.
 
Quarterly Financial Overview
 
For the three months ended June 30, 2011, our revenues were approximately $3.8 million with license revenues representing 2% and services revenues representing 98% of total revenues. In addition, approximately 32% of our quarterly revenues came from three customers. License margins for the quarter were 49% and services margins were 66%. Net loss for the quarter was approximately $0.6 million or $(0.21) per share. For the three months ended June 30, 2010, our revenues were approximately $3.7 million with license revenues representing 22% and services revenues representing 78% of total revenues. In addition, approximately 33% of our quarterly revenues came from three customers. License margins for the quarter were 82% and services margins were 59%. Net loss for the quarter was approximately $0.4 million or $(0.16) per share. 
 
 
16

 
 
Critical Accounting Policies and Estimates
 
There have been no material changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended March 31, 2011.
 
Factors Affecting Operating Results
 
A small number of customers account for a significant portion of our total revenues. We expect that our revenues will continue to depend upon a limited number of customers. If we were to lose a large customer, it would have a significant impact upon future revenues. Customers who accounted for at least 10% of total revenues were as follows:
 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
Customer A
   
15
%
   
15
%
Customer B
   
*
     
10
%
 
   
*
Less than 10% of total revenues.
 
We have incurred significant losses since inception and, as of June 30, 2011, we had an accumulated deficit of approximately $256 million. We believe our success depends on the growth of our customer base and the development of the emerging contract management and compliance markets and the stability of our sales configuration customer base.
 
We believe that period-to-period comparisons of revenues and operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Our operating results have historically been dependent on a few significant customer transactions which make predicting future performance difficult.
 
Because our services tend to be specific to each customer and how that customer will use our products, and because each customer sets different acceptance criteria, it is difficult for us to accurately forecast the amount of revenue that will be recognized on any particular customer contract during any quarter or fiscal year. As a result, we base our revenue estimates, and our determination of associated expense levels, on our analysis of the likely revenue recognition events under each contract during a particular period. Although the value of customer contracts signed during any particular quarter or fiscal year is not an accurate indicator of revenues that will be recognized during any particular quarter or fiscal year, in general, if the value of customer contracts signed in any particular quarter or fiscal year is lower than expected, revenue recognized in future quarters and fiscal years will likely be negatively affected.
 
 
17

 
 
Results of Operations:
 
Revenues
 
 
 
Three Months Ended
June 30,
 
 
 
2011
   
2010
   
Change
 
   
(in thousands, except percentages)
 
License
 
$
92
 
 
$
836
 
 
$
(744)
 
Percentage of total revenues
 
 
2
%
   
22
%
   
(89)
%
Services
 
$
3,662
 
 
$
2,897
 
 
$
765
 
Percentage of total revenues
 
 
98
%
   
78
%
   
26
%
Total revenues
 
$
3,754
 
 
$
3,733
 
 
$
21
 
 
License. License revenues consist of revenue from licensing our software products.  For the three months ending June 30, 2011, license revenues decreased $0.7 million compared to the three months ending June 30, 2010 due to fewer license transactions in our CM product.  We expect license revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars depending on the number and size of new license contracts.
 
Services. Services revenues are comprised of fees from consulting, maintenance, hosting, training, subscription revenues and out-of-pocket reimbursements. During the three months ended June 30, 2011, services revenues increased $0.8 million compared to the three months ended June 30, 2010 primarily due to a higher level of consulting services delivered to our CM customers.  In addition, we recognized higher maintenance revenues from a larger number of CM customers.  Maintenance revenues represented 45% and 54% of total services revenues for the three months ended June 30, 2011 and 2010, respectively.
 
We expect services revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on the number and size of new software implementations and follow-on services to our existing customers. We expect maintenance revenues to fluctuate in absolute dollars and as a percentage of services revenues based on the number of maintenance renewals, and number and size of new contracts. In addition, maintenance renewals are extremely dependent upon customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers. Fluctuations in services revenues are also due to timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope, and additional services.
 
Cost of revenues
 
 
 
Three Months Ended
June 30,
 
 
 
2011
   
2010
   
Change
 
   
(in thousands, except percentages)
 
Cost of license revenues
 
$
47
 
 
$
150
 
 
$
(103
)
Percentage of license revenues
 
 
51
%
   
18
%
   
(69)
%
Cost of services revenues
 
$
1,246
 
 
$
1,195
 
 
$
51
 
Percentage of services revenues
 
 
34
%
   
41
%
   
4
%
 
Cost of License Revenues. Cost of license revenues consists primarily of a fixed allocation of our research and development costs, and costs of purchased third party licenses sold to customers as part of a bundled arrangement.  During the three months ended June 30, 2011, cost of license revenues decreased by $0.1 million compared to the three months ended June 30, 2010 primarily due to the delivery of third party licenses sold to a customer in the prior year.  We expect cost of license revenues to maintain a consistent level in absolute dollars in fiscal 2012.
 
Cost of Services Revenues. Cost of services revenues is comprised mainly of salaries and related expenses of our services organization, our data center costs, plus certain allocated expenses.  During the three months ended June 30, 2011, these costs remained flat compared to the same period in 2010.
 
We expect cost of services revenues to fluctuate as a percentage of service revenues in fiscal year 2012.
 
 
18

 
 
Gross Margins
 
Gross margin percentages for services revenues and license revenues for the respective periods are as follows:
 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
License
   
49
%
   
82
%
Services
   
66
%
   
59
%
 
Gross Margin — Licenses. Because we have certain license costs that are fixed, margins will vary based on gross license revenue, the nature of the license agreements and product mix. Gross margin decreased to 49% for the three months ended June 30, 2011 compared to 82% for the three months ended June 30, 2010.  This was primarily due to a $0.7 million decrease in license revenues year over year resulting from fewer license transactions in our CM product.

Gross Margin — Services. During the three months ended June 30, 2011, gross margin from services increased to 66% compared to 59% for the three months ended June 30, 2010. This increase was largely due to a higher level of consulting services delivered to our CM customers.  In addition, we recognized higher maintenance revenues from a larger number of CM customers compared to the same period in 2010.
 
We expect that our overall gross margins will continue to fluctuate due to the timing of services and license revenue recognition and will continue to be adversely affected by lower margins associated with services revenues. The impact on our gross margin will depend on the mix of services we provide, whether the services are performed by our in-house staff or third party consultants, and the overall utilization rates of our professional services organization.
 
Operating Expenses
 
Research and Development Expenses
 
 
 
Three Months Ended
June 30,
 
 
 
2011
   
2010
   
Change
 
   
(in thousands, except percentages)
 
Research and development
 
$
896
 
 
$
764
 
 
$
132
 
Percentage of total revenues
 
 
24
%
   
20
%
   
17
%
 
Research and development expenses consist primarily of salaries and related costs of our engineering, quality assurance, technical publication efforts and certain allocated expenses. Research and development expenses increased $0.1 million during the three months ending June 30, 2011 compared to the same period in 2010.  These increases are primarily due to ongoing investments into our Ukraine research and operations center.
 
We expect research and development expenditures to increase modestly in absolute dollars over the next year as we continue to invest in research in development as evidenced by the Ukraine research and operations center opened in fiscal 2011. This facility represents a significant investment for us as we look to execute on our global expansion strategy. 
 
 
19

 
 
Sales and Marketing
 
 
 
Three Months Ended
June 30,
 
 
 
2011
   
2010
   
Change
 
   
(in thousands, except percentages)
 
Sales and marketing
 
$
1,180
 
 
$
1,038
 
 
$
142
 
Percentage of total revenues
 
 
31
%
   
28
%
   
14
%
 
Sales and marketing expenses consist primarily of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, trade shows, public relations, collateral sales materials, advertising and certain allocated expenses.  For the three months ended June 30, 2011, sales and marketing expenses increased $0.1 million compared to the same period in 2010.  The increase is primarily due to our 2011 annual Fusion conference, as well as headcount additions within our marketing department, resulting in higher compensation expenses.  

We expect modest increases in sales and marketing expenses in fiscal 2012 in absolute dollars and as a percentage of total revenues.
 
General and Administrative
 
 
 
Three Months Ended
June 30,
 
 
 
2011
   
2010
   
Change
 
   
(in thousands, except percentages)
 
General and administrative
 
$
929
 
 
$
971
 
 
$
(42
)
Percentage of total revenues
 
 
25
%
   
26
%
   
(4
)%
 
General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses. General and administrative expenses remained flat compared to the same period in 2010.  We expect modest increases in general and administrative expenses in fiscal 2012 in absolute dollars and as a percentage of total revenues.
 
Interest and Other Income (Expense), Net
 
Interest and other income (expense), net consists primarily of interest earned on cash balances and short-term investments, interest expense on our note payable to Versata, foreign currency fluctuations, and other miscellaneous expenditures. During the three months ended June 30, 2011 and 2010, interest and other income (expense), net remained flat totaling $52,000 and $57,000, respectively.  
 
 
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Provision for Income Taxes
 
During the three months ended June 30, 2011, we did not record an income tax provision, and during the three months ended June 30, 2010, we recorded an income tax provision of approximately $4,000.  The June 30, 2011 and June 30, 2010 amounts relate to nominal state minimum and franchise taxes.
 
Liquidity and Capital Resources
 
   
June 30,
2011
   
March 31,
2011
 
   
(in thousands)
 
Cash, cash equivalents and short-term investments
 
$
16,835
   
$
17,021
 
Working capital
 
$
13,610
   
$
14,275
 
 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
   
(in thousands)
 
Net cash provided by operating activities
 
$
21
   
$
418
 
Net cash used in investing activities
 
$
(7
)
 
$
(22
)
Net cash used in financing activities
 
$
(200
)
 
$
(325
)
 
Our primary sources of liquidity consisted of approximately $16.8 million in cash, cash equivalents and short-term investments as of June 30, 2011 compared to approximately $17.0 million in cash, cash equivalents and short-term investments as of March 31, 2011.
 
Net cash provided by operating activities was not significant for the three months ended June 30, 2011.  Net cash provided by operating activities was $0.4 million for the three months ended June 30, 2010, resulting primarily from improved operating results, a $1.1 million decrease in accounts receivable, net resulting from strong cash collection efforts during the quarter, and a $0.2 million increase in accounts payable.  These increases were partially offset by a $0.9 million decrease in deferred revenues.
 
Net cash used in investing activities was not significant for the three months ended June 30, 2011 and 2010, respectively.
 
As a result of current adverse financial market conditions, investments in some financial instruments may pose risks arising from liquidity and credit concerns. Although we believe our current investment portfolio has very little risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.
 
Net cash used in financing activities was $0.2 million for the three months ended June 30, 2011, resulting from our $0.2 million payment on our note payable to Versata.
 
Net cash used in financing activities was $0.3 million for the three months ended June 30, 2010, resulting from $0.1 million in costs to defend our Rights Agreement, as well as our $0.2 million payment on our note payable to Versata.
 
We expect to incur significant operating costs for the foreseeable future. We expect to fund our operating costs, as well as our future capital expenditures and liquidity needs, from a combination of available cash balances and internally generated funds. We have no outside debt other than our note payable to Versata, and do not have any plans to enter into borrowing arrangements. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues, our ability to manage costs and ongoing legal proceedings.
 
We believe our cash, cash equivalents, and short-term investment balances as of June 30, 2011 are adequate to fund our operations through at least June 30, 2012. However, given the significant changes in our business and results of operations in the last 12 months, the fluctuation in cash and investment balances may be greater than presently anticipated. After the next 12 months, we may find it necessary to obtain additional funds. In the event additional funds are required, we may not be able to obtain additional financing on favorable terms or at all.
 
Contractual Obligations
 
We had no significant commitments for capital expenditures as of June 30, 2011.
 
We do not anticipate any significant capital expenditures, payments due on long-term obligations other than our note payable to Versata, or other contractual obligations. However, management is continuing to review our cost structure to minimize expenses and use of cash as we implement our planned business model changes. This activity may result in additional restructuring charges or severance and other benefits.
 
 
21

 
 
Our contractual obligations and commercial commitments at June 30, 2011, are summarized as follows:
 
    Payments Due By Period      
Contractual Obligations:
 
Total
   
Less Than
1 Year
   
1-3
Years
   
4-5
Years
   
After 5
Years
 
 
(in thousands)
 
Operating leases
 
$
805
   
$
174
   
$
501
   
$
130
   
$
 
Versata note
   
4,130
     
786
     
2,078
     
1,266
     
 
Total
 
$
4,935
   
$
960
   
$
2,579
   
$
1,396
   
$
 
 
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.
 
 
22

 
 
ITEM 4:
CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including the President and Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the period ending June 30, 2011. Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2011.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act that was conducted during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II: OTHER INFORMATION
 
ITEM 1:
LEGAL PROCEEDINGS
 
Not applicable.
 
ITEM 1A:
RISK FACTORS
 
Not applicable.
 
ITEM 2:
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Not applicable.
 
 
23

 
 
ITEM 3:
DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.
 
ITEM 4:
REMOVED AND RESERVED.
 
ITEM 5:
OTHER INFORMATION
 
Not applicable.
 
 
24

 
 
ITEM 6:
EXHIBITS
 
Exhibit
No.
  
Description
   
31.1  
  
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2  
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1  
  
Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2  
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T:  (i) Condensed Consolidated Balance Sheets as of June 30, 2011 and March 31, 2011; (ii) Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010; (iii) Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 and 2010; and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.  Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.
 
 
25

 
 
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.
 
       
Date: August 12, 2011
By:
/s/ TODD SPARTZ  
    Todd Spartz  
    Chief Financial Officer  
       
 
 
26

 
 
EXHIBIT INDEX
 
Exhibit
No.
  
Description
   
31.1  
  
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2  
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1  
  
Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2  
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T:  (i) Condensed Consolidated Balance Sheets as of June 30, 2011 and March 31, 2011; (ii) Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010; (iii) Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 and 2010; and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.  Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.
 
27