ITEM 1. BUSINESS
Covisint was incorporated in April 2008 in the State of Michigan. Our predecessor, Covisint LLC, was founded in February 2000 by a consortium of automotive manufacturers, led by General Motors Corporation (“General Motors” or “GM”), Ford Motor Company, Chrysler, Nissan, Renault and Peugeot to streamline collaboration with their global network of parts suppliers. The consortium made a significant investment in the development of a robust, highly secure cloud-based multiparty business-to-business (“B2B”) exchange. This effort resulted in a Software as a Service (“SaaS”) application called the Auto Supply Portal ("Automotive B2B Exchange") which went live in 2003.
In March 2004, Compuware Corporation (“Compuware”) purchased substantially all of the assets of Covisint LLC including its name and technology. In January 2013, Compuware contributed the Covisint business assets to Covisint (“January 2013 Contribution”) in preparation for our initial public offering, which was completed in October 2013 (“IPO”). On October 31, 2014, Compuware completed its distribution of 31,384,920 shares of Covisint common stock to Compuware shareholders (“October 2014 Distribution”). Our principal corporate offices are located in Southfield, Michigan. Our common stock is listed on the Nasdaq Global Select Market under the symbol “COVS.”
Overview
The Automotive B2B Exchange required the development and integration of three cloud-based technologies - identity management, data integration and exchange services, and portal services. This innovative solution enabled any member of the consortium to securely access the applications and information they needed, anytime, and anywhere to get their job done efficiently and effectively.
In the decade that followed the launch of the Automotive B2B Exchange, Covisint leveraged these technologies (collectively the "Covisint Cloud Platform" or "Platform") to help customers across several industries transform their businesses by enabling trusted information sharing and secure interactions between people, systems and things. Our Platform was used to build several innovative solutions, two of the most notable being General Motors' OnStar
TM
("OnStar"), the world's largest Internet of Things ("IoT") connected car solution to date, and Hyundai's Blue Link
TM
("Blue Link") connected car solution in North America.
In fiscal 2015, Covisint opened our Platform to third-party developers and customers, by:
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(a)
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exposing the capabilities within the Platform via application programming interfaces ("APIs"),
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(b)
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making the Platform infrastructure-agnostic to satisfy performance, data residency and regulatory requirements, and
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(c)
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automating the build and deploy activities to facilitate rapid deployment and upgrade of the Platform.
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Market Opportunities
We believe there is a large and rapidly growing available market for our Platform, principally in two horizontal use cases: Identity and Access Management ("IAM") and IoT.
Identity and Access Management is a well-defined and fast-growing market, with three main use cases:
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1.
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Business to Enterprise ("B2E") / Workforce,
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2.
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Business to Consumer ("B2C") / Consumer Identity and Access Management, and
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3.
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Business to Business (B2B).
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Historically, enterprises have tried to address these cases using on-premise software that is installed, configured and managed within their data center. However, with the increasing reliability and stability of the public cloud, along with the continuing deconstruction of the enterprise, many Chief Information Officers ("CIOs") and Chief Information Security Officers ("CISOs") are realizing that cloud-based Identity-as-a-Service ("IDaaS") offers superior outcomes at lower cost. The Covisint Cloud Platform
can serve all three IAM use cases, however we principally focus on the B2B use case as this is the most advanced and valuable use case for the digital enterprise, and one where we remain highly differentiated relative to our competitors.
IoT is a nascent market, but it is developing due to its significant value. Cisco Systems, Inc. ("Cisco") predicts there will be 50 billion connected things – six for every person on the planet – by 2020, and McKinsey & Co. predicts IoT will have more than $11 trillion in economic impact by 2025.
IoT has two main use cases:
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1.
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Connected Products
–
connecting manufacturers with their fielded products, and
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2.
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Connected Processes
–
connecting the assets of owner/operators together to improve process outcomes.
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The Covisint Cloud Platform offers a unique set of tightly integrated capabilities that are required to meet the needs of both IoT use cases, and includes:
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•
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Identity services
–
identity provisioning, authentication, authorization, for people, systems and things,
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•
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IoT services
–
definition, management and visualization of the IoT digital ecosystem, and
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•
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Messaging services
–
secure connectivity and complex information exchange.
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A third substantial market opportunity for Covisint is the automotive industry, as it is the midst of a significant, disruptive transformation driven by the onset of autonomous vehicles, electrification, new ownership and usage models (e.g., Mobility-as-a-Service), and ubiquitous high-bandwidth and low-latency communications. The Covisint Cloud Platform is critical to realizing these opportunities, principally in two areas:
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•
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Next Generation Connected Vehicles
. Dedicated Short Range Communication ("DSRC") and 5G will enable constant communications between vehicles and the world around them - humans, other cars, and infrastructure, both public and private. McKinsey & Co. estimates there will be more than $750 million in value created from car-data enabled services and $1.4 billion from shared mobility services by 2030. This value will be created by sharing information and enabling secure interactions with the ecosystem of stakeholders around a connected vehicle including the owner/operator, the vehicle designer, component suppliers, auto dealers - for both servicing and sales, as well as third-party service providers like insurance carriers offering usage-based insurance, or parking service providers, and vehicle-to-vehicle and vehicle-to-infrastructure offerings.
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•
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Supply-Chain Transformation
. Covisint first transformed the automotive supply chain with our B2B Exchange, and we continue to see customer demand for Supplier Collaboration solutions, particularly in China. We also continue to offer and operate our Electronic Data Interchange ("EDI") offerings, which includes GM's entire supply chain. Going forward, we see demand in our installed base for both our identity and IoT capabilities, including real-time visibility and insight into the supply chain, Factory of the Future initiatives, as well as improved visibility between Auto original equipment manufacturers ("OEMs") and their dealership networks.
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We believe the markets and use cases our Platform serves are still very dynamic and evolving. As such, we will continue to invest in sales and marketing, select technology and go-to-market partnerships, and continued innovation in our core technologies to extend our leadership position in the marketplace.
The Company operates in a single reportable segment.
Our Offering
The capabilities in our Platform are delivered via the Cloud as a Platform as a Service ("PaaS"). It has supported production-critical applications for over 14 years, and offers unparalleled levels of security, scalability and reliability. We package and market the Covisint Cloud Platform as three different offerings, aligned with our market opportunities and target buyers, namely:
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1.
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The Covisint
Identity Platform,
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2.
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The Covisint
IoT Platform
, and
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3.
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The Covisint
Connected Vehicle Platform.
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In fiscal 2018, our roadmap is focused on extending and enhancing our technology leadership including, but not limited to, the following areas:
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•
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Advanced Authentication
– More options for native integration with leading third-party Multi-Factor Authentication vendors, improved risk-based authentication algorithms, and protocol compliance updates
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Governance, Reporting & Compliance
– Integration with third-party Security Incident and Event Management and User and Entity Behavioral Analysis tools, as well as graph-based visualization of permissions management, and improved native event reporting
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Modern, Responsive & Mobile-friendly User Interfaces
– Unified IAM/IoT interfaces, policy framework & templates, and user-driven control
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Digital Ecosystem Definition and Management
– Ecosystem modeler, unified stream management & processing, asset mapping & visualization services, and advanced simulation tools
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•
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Security & Control for Connected Assets
– Improved support for x.509 certificates, token management, and endpoint security integration
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Data Integration
– Data streaming and access control, bi-directional API orchestration, prebuilt connectors to third-party systems, and real-time stream transformations to address data privacy & security requirements
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•
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Automotive Accelerators and Developer Tools
– Vehicle command mapping & protocol translation, solution templates, and service catalog integration
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Our Differentiation
The Covisint Platform offers a complete and tightly integrated set of technologies for one purpose - to enable trusted information sharing and secure interactions across people, systems and things, which is what creates economic value for our customers. We offer these capabilities via the public cloud, and exposed via APIs, to enable developers to create custom solutions to transform their businesses. The combination of our functional capabilities and delivery model is collectively what gives our large enterprise, independent software vendors ("ISVs") and systems integrators ("SIs") customers a substantial strategic advantage, enabling digital transformation faster and more cost-effectively, and ultimately enabling them to compete more effectively in connected economy.
Our Growth Strategies
Elements of our growth strategy include:
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Upsell and cross-sell our installed base
. We have a demonstrated track record of expansion in our existing accounts. We will leverage our current footprint to identify and serve adjacent use bases in identity, IoT, and supply chain transformation.
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Penetrate new Auto OEMs.
All Auto manufacturers have similar challenges and opportunities, and we believe our demonstrated success with the Automotive B2B Exchange and connected vehicle solutions at General Motors and Hyundai will help us penetrate new accounts for next-generation connected vehicle monetization and supply chain transformation.
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Expand into Manufacturing
. IoT holds substantial value creation potential for manufacturers – first by enhancing the value of the product, and in many cases subsequently transforming the business model from a capital asset sale to services. We believe that our Platform is turnkey to the success of these initiatives.
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Grow our partner ecosystem.
We are actively developing strategic alliances with three types of partners:
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(a)
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Systems Integrators.
Recognizing the transformational potential of IoT, most leading systems integrators have developed IoT practices, which need an IoT platform upon which to build their solutions. We have a healthy and growing relationship with Tech Mahindra, and we intend to develop other such relationships with SIs where they leverage our Platform to deliver complex. high-value IoT solutions to their enterprise customers.
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(b)
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Independent Software Vendors.
Many emerging ISVs, both horizontal and vertical, recognize the need to integrate with the cloud-based identify and IoT services we provide to either extend or enrich their offerings. We intend to actively pursue these opportunities in the coming fiscal year.
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(c)
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Technology partners.
Expanding our technology partnerships and alliances in order to integrate with adjacent technologies, both existing and new, is key to customer success. We believe that our multi-protocol, technology-agnostic approach and our differentiating focus of digital ecosystems give us a strong advantage to integrate our Platform with technologies from other vendors, paving the way for lower integration costs and higher staying power with our customers, and potentially joint, revenue-enhancing offerings with such vendors.
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Developer Enablement.
Ensuring that software developers can easily use the capabilities in our Platform to rapidly prototype and demonstrate value is key to our mutual success. In fiscal year 2017, we were recognized as a winner of the Sogeti Hackathon in part for these reasons, and we will continue to invest in this area.
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Customers
Our customers include large, globally distributed organizations and mid-sized organizations with complex external business relationships, as well as the participants in their business relationships. While we have over
2,000
customers, approximately
150
of these customers represented
91%
,
90%
, and
92%
of our total revenue for the years ended
March 31, 2017
,
2016
, and
2015
, respectively. Our core Platform customers include organizations in the automotive, energy, travel, life sciences, consumer goods and national and regional insurance industries. 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
54%
,
54%
, and
45%
of our total revenue for the years ended
March 31, 2017
,
2016
, and
2015
, respectively. The healthcare industry accounted for
12%
,
19%
, and
32%
of our total revenue for the years ended
March 31, 2017
,
2016
, and
2015
, respectively. Revenue from outside of the U.S. accounted for
11%
,
9%
, and
6%
of our total revenue for the years ended
March 31, 2017
,
2016
, and
2015
, respectively. We intend to continue expanding our business into additional vertical markets and geographies and expect our revenue to diversify accordingly.
We have a significant strategic partnership with Cisco. Following entry into our Software License and Hosting Services Agreement (“Cisco Contract”) with Cisco in November 2013, we worked with Cisco to integrate our Platform with Cisco applications to build the Cisco Service Exchange Platform™ ("SXP"). We receive significant subscription revenue directly from Cisco relating to the use and development of the Platform as part of the Cisco SXP Contract. Moreover, in January and April 2015, we enabled Cisco to enter into the prime contracts (collectively, the “GM Contracts”) with various divisions of General Motors, with Cisco as prime contractor and Covisint as subcontractor, to provide most of the service that we historically provided to GM (collectively, the “Prior GM Contracts”). Under the GM Contracts, we receive annual service fees in advance. With Cisco’s involvement, we were able to extend the terms of each contract through April 2020 and eliminate GM’s ability to terminate these agreements for convenience. Notwithstanding these contractual changes, we remain actively engaged in further expanding our deep relationship with GM.
For the year ended
March 31, 2017
, Cisco accounted for
42%
of our total revenue, of which
29%
of total revenue is related to the transfer of the GM Contracts and the augmentation of the SXP platform. Our standalone business with General Motors, which is primarily services, accounted for
2%
of our total revenue in the year ended
March 31, 2017
. Losing all or a significant portion of our business with General Motors or Cisco could have a material impact on our business, liquidity and results of operations. See “Risk Factors - We derive a significant percentage of our total revenue from our largest customer, Cisco, as well as our ten largest customers” in Item 1A of this Annual Report.
Services
We provide implementation and consulting services to our customers. Recently, we moved from delivering service based solutions through our own resources to creating a network of certified service partners who are able to create and deploy solutions on our Platform. However, in certain circumstances, we continue to perform implementation services, which typically consist of user migration, content migration, solution deployment, configuration, and training 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, and expect to continue to subcontract, portions of our consulting engagements to our third-party implementation partners. We support our customers and partners as they independently implement solutions using APIs and our developer portal.
Sales and Marketing
We sell our Platform through both direct sales and our channel partners. Our direct sales team includes field sales and solution engineering personnel. We will continue to invest in attracting and retaining skilled professionals with knowledge and relationships in our target industries, use cases and technologies, in order to achieve our corporate objectives.
Our marketing and lead generation activities consist primarily of high-touch account-based sales and marketing activities, as well as participation in key industry, analyst and technology events. We principally target line of business decision makers, as well as senior business and IT executives seeking to drive digital business transformation. We are also developing specific marketing programs and campaigns targeted at developers.
Customer Support
Our customer support services are available 24x7x365 globally and include live-agent telephonic support as well as web-based and self-help options. Our customer support team is staffed by highly skilled and experienced personnel who receive extensive
training on the deployment and maintenance of our services and on the operation of our data centers. A standard deployment includes level-two support. Customers may contract for optional level-one support services to augment our standard support offering, which entitles them to single point of contact, issue resolution and escalation services and more stringent service level agreements (“SLAs”).
Technology and Operations
Covisint’s Platform is designed to support mission-critical business processes of large organizations. It is (a) highly scalable and designed to process millions of transactions, manage terabytes of data and provide access for millions of users every day, and (b) enterprise-grade, continuously available across the globe and addresses our customers’ most demanding uptime requirements.
Our Platform is written in Java and is optimized for scalability and performance. To expand the value of our Platform, we have created a software development kit, including a broad set of APIs that enable our strategic partners and customers to use our PaaS to develop custom applications and integrations. Our solutions often combine proprietary and open source technologies. Open source technology reduces the overall cost to our customers and allows us to bring innovations and enhancements to market in a more expedient and efficient manner.
For our existing customers, we operate both multi-instance and multi-tenant architectures depending on their need for dedicated applications and databases. Our new customers are onboarded on the multi-tenant public cloud instance of our PaaS.
We work with CenturyLink, Inc. and Amazon Web Services (“AWS”) for hosting. We currently utilize facilities located in Chicago, Illinois; Southfield, Michigan; Allen, Texas; Northern Virginia; Tokyo, Japan; Frankfurt, Germany; and Shanghai, China. This allows us to ensure reliability, redundancy and performance for all our customer solutions. We are increasingly utilizing AWS' Infrastructure as a Service (“IaaS”) to optimize our costs and provide flexibility and geographic coverage for our customers.
Research and Development
Technology leadership is key to our continued success. As such, we will continue to invest in engineering, product management and technical marketing to extend our technology differentiation in IoT, identity and in support of automotive application of these technologies in the coming year. Because our Platform is cloud-based, we are able to deliver new innovation faster to market than our on-premise software competitors, and react quickly to evolving customer needs.
Our Competition
We sell our Platform in an extremely competitive environment characterized by rapid technological change, new and emerging use cases around Connected Car, IoT and Cloud Identity, shifting customer needs and continued market entrants. We believe that the key competitive factors in our market include:
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•
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Security
–
it is imperative that all aspects of security are managed from securing what can connect, to providing encryption services for the data in motion and at rest, to what systems and devices can access what data.
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•
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Scalability
–
the ability to scale to massive ecosystems, to ecosystems of ecosystems that can have millions of connected identities, to exchange millions of messages an hour, and to consume massive amounts of bandwidth and storage is significantly important for our Platform to provide.
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•
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Functional Completeness
– multi-vendor solutions are difficult, time consuming and costly to implement and support. We believe purpose-built platforms for IoT and Identity offer superior value to a technology toolkit approach.
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•
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Implementation Speed
–
speed to value is paramount, particularly with proof of concepts, in order to allow businesses to demonstrate their business ideas and secure funding.
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•
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Openness of the Platform
–
interoperability and easy integration with adjacent technologies, particularly existing enterprise systems is essential to customer value.
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•
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Privacy & Regulatory Compliance
–
governmental regulations on privacy and data handling will continue to increase, as will their customers' demands that their information be handled properly and kept private.
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•
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Infrastructure Reliability
–
providing an enterprise-class platform requires providing enterprise-grade service level agreements that are acceptable for mission critical systems.
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•
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Price
–
price competitiveness will continue to be an important factor in buying decisions particularly as computing and storage costs continue to decline with Infrastructure-as-a-Service vendors.
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We expect that the overall market for enterprise cloud platforms and solutions to remain highly competitive. We believe our competition principally follows two approaches:
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Build their own.
We continue to see end customers attempting to develop and maintain proprietary solutions, despite the significant complexity and advanced technology required for successful identity and IoT solutions. This approach typically requires substantial investment and time to develop a viable initial solution.
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•
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Buy/license and integrate.
We have seen customers attempt to create a solution by integrating solutions from multiple technology providers either themselves, or using large systems integrators. Vendors of competitive point technologies include:
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◦
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Microsoft Azure, IBM BlueMix, AWS IoT, Salesforce IoT Cloud, and PTC Thingworx for IoT, and
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◦
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Microsoft Azure ADFS, Okta Platform and SailPoint for cloud identity, and
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◦
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SiriusXM, Harman and MNOs/SIs (e.g., Verizon, Vodafone) for Connected car solution enablement.
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We believe we offer a superior alternative by offering a complete set of integrated technologies for IoT and identity solutions in the cloud. We continuously update our Platform with new and innovative technology as well as improved security which offers faster time to value and enhanced return on investment to our customers.
Intellectual Property
We protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We manage ownership of and access to our proprietary technology by requiring the execution of confidentiality and invention assignment agreements by our employees, contractors and consultants, and confidentiality agreements with third parties. We also rely on a combination of trade secret, copyright, trademark, trade dress and domain name protections to maintain our intellectual property rights, including the registration of our domain names, trademarks and service marks in the United States and in certain locations outside the United States.
We hold a patent in the U.S. on our core technology in the context of an industry-wide B2B exchange. This patent will expire in 2028.
Circumstances outside our control could pose a threat to our intellectual property rights. Effective intellectual property protection may not be available in the United States or other countries in which our solutions are distributed. In addition, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any impairment of our intellectual property rights could harm our business or our ability to compete and harm our operating results. See “
Risk Factors - We may not be able to adequately protect our intellectual property rights and efforts to protect them may be costly and may substantially harm our business”
in Item 1A of this Annual Report.
Employees
As of
March 31, 2017
, we had
297
full-time employees. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Facilities
We maintain our principal offices at 26533 Evergreen Road, Suite 500, Southfield, Michigan, which is leased under an 11-year lease of 33,786 square feet of space. We have also entered into standalone operating lease agreements for office space in Shanghai, China; Frankfurt, Germany; London, England; and San Francisco, California. Pursuant to third-party hosting agreements, we also have access to facilities in Chicago, Illinois and Tokyo, Japan.
We believe that our existing facilities and offices are adequate to meet our current requirements and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.
Backlog
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
March 31, 2017
and
2016
, our backlog balance was
$113.2 million
and
$125.4 million
, respectively, of which
$16.7 million
and
$19.5 million
, respectively, was billed and included in deferred revenue. Of the
March 31, 2017
backlog, approximately
$60.1 million
is not expected to be recognized in fiscal
2018
.
Internet Address and SEC Reports
We maintain a website with the address www.covisint.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”). We also include our corporate governance guidelines, certain policies and the charters for each of the major committees of our board of directors on our website and intend to update these documents if amended as soon as reasonably practicable. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, and the address of that site is www.sec.gov.
Executive Officers of the Registrant
The following tables set forth certain information regarding our Executive Officers as of
June 5, 2017
:
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Name
|
|
Age
|
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Position
|
Samuel M. Inman, III
|
|
66
|
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President, Chief Executive Officer, and Director
|
Enrico Digirolamo
|
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62
|
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Chief Financial Officer
|
Steven R. Asam
|
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43
|
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Senior Vice President, Delivery, Operations and Engineering
|
Samuel M. Inman, III.
Mr. Inman has served as a director of Covisint since January 2014, and as Interim President and Chief Executive Officer of Covisint since March 2014. Effective May 22, 2014, Mr. Inman became the permanent President and Chief Executive Officer of Covisint. From April 2011 to May 22, 2014, Mr. Inman served as an independent consultant providing advice to the management and boards of directors of technology companies. From April 2008 through April 2011, Mr. Inman was President and CEO of Comarco Wireless Technologies, Inc. a technology company with extensive intellectual property for power adapter products. Mr. Inman has extensive experience in the management of technology companies, including being CEO of Viking Components, Inc. and Centura Software Corporation. Mr. Inman has been a director of Comarco Wireless Technologies, Inc. (CMRO); Centura Software Corporation (CNTR); and Objectshare, Inc. (OBJS).
Enrico Digirolamo.
Mr. Digirolamo has served as Chief Financial Officer since July 2013. From 2010 until July 2013, he served as Senior Vice President - Sales & Marketing and Finance at Allstate Insurance. Mr. Digirolamo served as the Chief Financial Officer and Vice President of General Motors Europe AG from 2008 to 2010. Mr. Digirolamo also served as the Chief Financial Officer and acting Chief Executive Officer of Covisint LLC (our predecessor) at the time of its formation. He currently serves on the board of directors of Metromedia International Group LLC, a privately held owner of interests in communications and media businesses operating in the Republic of Georgia. Mr. Digirolamo has served as a member of the GM European Strategy Board, Opel Supervisory Board and the board of directors of Saab Automobile, GM Russia and Allstate New Jersey. Mr. Digirolamo has a Bachelor of Science degree in mathematics and accounting from Central Michigan University, has a Master of Business Administration from Eastern Michigan University and has completed the International Executive Program at the International Institute for Management Development in Lausanne, Switzerland.
Steven R. Asam.
Mr. Asam has been with Covisint since it was originally founded in 2000. Since 2012, Mr. Asam has served as Covisint’s Senior Vice President of Delivery, Operations and Engineering. In this position, he oversees all research and development of the Covisint Platform and vertical specific solutions. In addition, Mr. Asam manages our customer support, implementation, solution deployment, on-boarding and data center operations for all industry sectors. Prior to joining Covisint, Mr. Asam provided technology leadership at Ford Motor Company on several large scale business-to-business and business-to-consumer projects. Mr. Asam earned both his Bachelor of Science degree in computer engineering and a Master of Science degree in computer information systems from the University of Michigan.
ITEM 1A. RISK FACTORS
We have a history of losses and we may not achieve or sustain profitability in the future.
We have incurred losses in each fiscal year since 2011, including fiscal
2017
. These losses were mainly due to the investments we made, and continue to make in support of our growth strategy, which includes (1) expanding our installed customer base; (2) acquiring new customers in the automotive industry; (3) landing new customers via our channel partners; and (4) selling the Platform via outbound original equipment manufacturer agreements with independent software vendors and system integrators. Our ability to achieve and sustain profitability is dependent upon our ability to grow our revenue, which has not occurred at a rate we anticipated. We cannot predict our revenue growth, and you should not rely upon our revenue performance in prior fiscal years as indicative of our future performance. Accordingly, we cannot assure you that we will reach profitability in the future or at any specific time in the future or that, if and when we do become profitable, we will sustain profitability. Furthermore, as we increase our customer base, we will incur increased expenses, as costs associated with generating and supporting customer agreements are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. If we are ultimately unable to meet our financial targets to create sufficient revenue to become profitable and have sustainable positive cash flows, investors could lose all or part of their investment.
During fiscal 2015, we made strategic decisions to shift our focus away from providing services to our customers and to stop selling our Platform as a part of a set of healthcare applications, and we may not be able to replace the lost revenue.
During fiscal 2015, we made a strategic decision to stop providing certain unprofitable applications to the healthcare industry, and shift from being a services business to being an enterprise-grade Platform company. The healthcare industry accounted for
12%
,
19%
, and
32%
of our total revenue in the years ended
March 31, 2017
,
2016
, and
2015
, respectively. Our services revenue was
14%
,
17%
, and
25%
of our total revenue in the years ended
March 31, 2017
,
2016
, and
2015
, respectively. If healthcare or services revenue continues to decline and we are unable to replace it, there could be a material adverse effect on our results of operations.
We derive a significant percentage of our total revenue from a few customers, and the loss of revenue from these customers could have a material impact on our results of operations.
For the year ending
March 31, 2017
, over 90% of our total revenue was generated by under 10% of our customer base. Cisco accounted for
42%
of our total revenue, of which
29%
of total revenue is related to the transfer of the GM Contracts and the augmentation of Cisco's Service Exchange Platform
TM
.
In addition to the GM Contracts noted above, we have entered into multiple statements of work, through which Cisco has access to our Platform for the purpose of selling its functionality into its customer base. Cisco has been undergoing significant internal reorganization, and Cisco has not informed the Company of their plans for selling its Service Exchange Platform
TM
to its customer base. The loss of Cisco revenue, or a portion of it, could adversely affect our financial condition, operating results and cash flows.
While we maintain strong relationships within GM, we are no longer the prime contractor, and we may lose ability over time to influence GM's decisions regarding the extended use of the Platform. Losing all or a significant portion of our services business with General Motors could have a material impact on results of operations. Our standalone business with General Motors accounted for
2%
of our total revenue in the twelve months ended
March 31, 2017
.
We cannot accurately predict subscription rates, and negative impact to these rates may have on our future revenue and operating results.
Our customers have no obligation to renew their subscriptions for our solution after the expiration of their initial subscription period, which is typically 36 months, and some customers have elected not to renew. In addition, our customers may renew at a lower contract value or renew for shorter contract lengths. Moreover, many of our contracts are terminable for convenience with as little as 30 days’ prior written notice, and some of our customers have elected to terminate all or part of their subscription service contract for convenience. Further, the growth of our subscription revenue has been less than expected, and while we believe that we have a strong pipeline and large opportunities for the Platform, we cannot predict our subscription rates as they may decline or fluctuate as a result of a number of factors, including decreases in usage by our customers, inability to sell the Platform to new customers, competitive offerings, customer dissatisfaction with our service, customer's ability to continue their operations and spending levels, and deteriorating general economic conditions. If our customers terminate our contract for convenience, do not renew their subscriptions for our solutions or reduce the value of their subscription at the time of renewal, our revenue may grow more slowly than expected or decline, and our results of operations could be adversely affected.
If the prices we charge for our services are unacceptable to our customers, our operating results will be harmed.
As the market for our Platform matures, or as new or existing competitors introduce new products or services that compete with ours, we may experience pricing pressure and be unable to renew our agreements with existing customers or attract new customers at prices that are consistent with our pricing model and operating budget. Moreover, the market for IoT Platform services is new and developing, and there are limited standards for pricing the IoT Platform services. Accordingly, the Company's IoT Platform services pricing may not be acceptable to our customers. If our customers challenge our pricing, it is possible that we would have to change our pricing model or reduce our prices, which could harm our revenue, gross margin and operating results.
Because we recognize revenue from subscriptions over the term of the subscription, new customer subscription agreements, upsells or terminations may not be immediately reflected in our operating results.
We generally recognize subscription revenue from customers ratably over the terms of their subscription agreements, which are typically 36 months. As a result, most of the subscription revenue we report in each quarter is related to subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not be fully reflected in our subscription revenue results for that quarter and will negatively affect our subscription revenue growth rate or subscription revenue in future quarters. Our subscription model also makes it difficult for us to rapidly increase our subscription revenue through additional sales in any period, as subscription revenue from new customers must be recognized over the applicable subscription term. In addition, despite our efforts to increase our ability to have variable costs for the implementation of our Platform, we may be unable to adjust our cost structure to reflect unanticipated changes in revenue.
Our sales cycle can be long and unpredictable, particularly with respect to large enterprises. As a result, our sales are difficult to predict and may vary from quarter to quarter, which may cause our operating results to fluctuate significantly.
The timing of our sales is difficult to predict. Due to the nature, scope and complexity of the technology solution that we provide, our sales efforts require a consultative sale educating our customers about the use, technical capabilities and benefits of our Platform. It may be challenging to find the correct sales approach to foster significant adoption of our Platform. Our Platform provides solutions to business problems in a distributed environment of customers and partners. The buyers of these solutions may differ in different organizations, with IT professionals being the buyer in some cases and a consultant to the business being the buyer in others. As a result, customers often undertake a prolonged evaluation process, which frequently involves not only our solutions, but also those of our competitors. New sales opportunities, whether through direct sales or a partner, may require us to devote significant sales support to individual customers and, thus, to incur substantial costs. In addition, decisions to purchase our services are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. If sales expected from a specific customer for a particular period are not realized in that period or at all, our results could fall short of public expectations and our business, operating results and financial condition could be materially adversely affected.
In certain instances, our Platform solutions may be complex and include multiple dependencies that may cause our customers difficulty in implementing our service, which could negatively impact our future revenue and financial results.
Due to the scope and complexity of the solutions built on the Platform, the implementation cycle can be lengthy. Implementation of these solutions in certain circumstances may require integration with the customer and its partners’ existing computer systems, software programs, and databases. This process can be time-consuming for our customers and can result in delays in implementation and deployment of the solution. As a result, some of our customers have had, and may in the future have, difficulty implementing their solutions successfully or otherwise achieving their expected benefits. Additionally, while a customer may decide to purchase our Platform, the customer or its partners may require us to delay the implementation of our solutions due to their scheduling, resource or budgetary constraints.
Delayed or ineffective implementation of our Platform may limit our future sales opportunities, reduce revenue and net income, cause customer dissatisfaction, harm our reputation or cause non-payment issues due to any of the following events:
The withholding of cash payments or cancellation of contracts if we fail to meet our commitments;
The cancellation or scaling back of one or more of our larger projects which could have a material adverse impact on our reputation and future revenue; or
An inability to recognize subscription revenue due to delays in the launch date of the customer’s access to our production environment.
Competition from current competitors and new market entrants, as well as from internally developed technologies, could adversely affect our ability to sell our solutions and related services.
We sell our Platform in an extremely competitive environment characterized by rapid technological change, shifting customer needs and frequent introductions of new products and services. We believe that the key competitive factors in our market include: security, scalability, speed of implementation, openness of platform, ability to enable users to maintain regulatory compliance,
infrastructure reliability, features and functionality, ability to meet customer service level requirements and price. If we are less successful at addressing one or more of these factors than our competitors, we may not gain or may even lose market share which could have a material adverse effect on our business, financial condition and operating results.
We compete with a wide range of established companies in a variety of different markets. In certain markets we compete with system integrators, such as IBM, Hewlett Packard Enterprise and Dell, Inc. cloud-based platform vendors, such as Salesforce.com and Microsoft Azure, and business-to-business integration and data exchange vendors, such as Open Text Corporation and Sterling Commerce, a division of IBM, all of which have substantially greater name recognition and resources than we do. Our competition often subscribes to or licenses other cloud-based platforms and third-party solutions to solve their customers’ specific business problems. Certain cloud-based platform vendors also offer development resources and consulting services that allow them to customize their platform to the customer’s requirements. We face other specialized competitors in the automotive vertical and may face new competitors as we expand into new vertical markets. These competitors may have more resources and be more successful in penetrating the market for cloud-based services then we are. We also encounter competition from technologies developed by the in-house information technology departments of our customers and potential customers. If we fail to compete successfully, our operating results and financial condition will be materially adversely affected.
If we do not effectively hire and train our sales force, we may be unable to adequately penetrate the market and grow, and our business may be harmed.
We are dependent on our sales force to obtain new customers and to sell additional solutions to our existing customers. Our ability to achieve sustainable revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. There is significant competition for sales personnel with the skills, understanding of the digital transformation and technical knowledge that we require. When hired, it generally takes significant time before they achieve full productivity. Our hires may not become as productive as we expect, and we may need to hire new sales personnel, who would require the same training and time to become effective. Moreover, we may be unable to hire or retain sufficient numbers of qualified individuals in the automotive market where we do business or other markets in which we plan to do business. These individuals may also have difficulty implementing our go-to-market strategy on repeatable, platform-based sales. If we are unable to hire and train sufficient numbers of effective sales personnel who can effectively sell our Platform, our revenue may grow at a slower rate than we anticipate and our financial condition could suffer.
If we fail to manage our sales and distribution channels effectively or if our partners choose not to market and sell our solutions to their customers, our operating results could be adversely affected.
We derive a significant portion of our revenue from sales of our Platform to and through our strategic partners. Accordingly, our strategic partners will be responsible for a significant portion of our sales now and in the future. To scale our channel program to support growth in our business, it is important that we help our partners enhance their ability to independently sell and deploy the Platform. Accordingly, we have invested and continue to invest in enhancements to our Platform to facilitate the sale and implementation of our Platform by our partners. Moreover, we are investing significant time and resources into our strategic partners to educate them on the Platform to accelerate their ability to become productive in selling our Platform. Despite these investments and efforts, we may be unable to successfully expand and improve the effectiveness of our channel sales program.
We expect that agreements with strategic partners will be generally non-exclusive and that strategic partners may enter strategic relationships with our competitors or may be competitors themselves. Further, we expect that many strategic partners will have multiple strategic relationships and may not regard us as a significant partner for their businesses. Strategic partners may terminate their respective relationships with us with limited or no notice and with limited or no penalty, pursue other partnerships or relationships, or attempt to develop or acquire technologies or services that compete with our solutions. Strategic partners may also impair our ability to enter other desirable strategic relationships or sell additional business with our customers or other partners.
If strategic partners do not effectively market and sell our solutions, if they choose to place greater emphasis on technologies of their own or those offered by our competitors, or if they fail to meet the needs of our customers, our ability to grow our business and sell our solutions may be adversely affected. The (a) loss of Cisco or a substantial number of other strategic partners and our possible inability to replace them, (b) our failure to recruit additional strategic partners, (c) any reduction or delay in their sales of our solutions, or (d) any conflicts between channel sales and our direct sales and marketing activities, could materially and adversely affect our results of operations.
We operate in an emerging and evolving market 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 these markets will develop and how fast. Even if they do develop, it is not certain our Platform will satisfy the needs of the market to achieve and sustain high levels of demand and
acceptance. Because our Platform has a significant number of uses 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 lose the opportunity to service a market as the need matures, and thereby incur significant costs without securing our position in the marketplace.
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 could significantly affect our revenue and growth prospects.
We provide service level commitments to our customers, and our failure to meet the stated service levels could significantly harm our financial results and our reputation.
Our customer agreements require that we maintain certain service level commitments to our customers relating primarily to functionality, network uptime and critical infrastructure availability. For example, our service level agreements generally require that our solutions are available up to 99.9% of the time. If we are unable to meet the stated service level commitments, we may be contractually obligated to provide customers with financial credits. Additionally, if we fail to meet our service level commitments a specified number of times within a given time frame or for a specified duration, our customers may terminate their agreements with us. As a result, a failure to deliver services for a relatively short duration could cause us to issue financial credits to many affected customers or result in the loss of customers. In addition, we cannot assure you that our customers will accept these credits or termination rights in lieu of other legal remedies that may be available to them, and, therefore, we could be liable for other related damages incurred by our customers. Our failure to meet our commitments could also result in substantial customer dissatisfaction or loss. If we fail to meet our service level commitments to our customers, the resulting issuance of credits, loss of customers or other potential liabilities could significantly and adversely impact our financial results.
If our security measures are breached or unauthorized access to data is otherwise obtained, our solutions may be perceived as not being secure, customers may reduce the use of, or stop using, our solutions and we may incur significant liabilities.
Our operations enable the exchange of, and access to, sensitive information, and security breaches could result in the loss of this information, litigation, indemnity obligations and other liability. While we have security measures in place, if our security measures are breached because of third-party action, employee error or otherwise, our reputation could be significantly damaged, our business may suffer and we could incur substantial liability. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any of these issues could negatively impact our ability to attract new customers and increase engagement by existing customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our operating results.
Because our Platform is often used to collect and store personal information, privacy concerns could result in additional cost and liability to us or inhibit sales of our solutions.
Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the U.S., these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Health Information Technology for Economic and Clinical Health Act (HITECH), state breach notification laws and other state privacy and data security laws. Outside of the U.S., these privacy and data security requirements include rules and regulations promulgated under the European Union data protection directive. Virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply.
In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still complex, evolving and uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our solutions. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.
Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. While we
carry insurance to provide coverage for potential remediation of privacy breaches, the cost of remediation may far exceed the policy limits that we purchase. Moreover, privacy concerns, whether valid, may inhibit market adoption of our solutions particularly in certain industries and foreign countries.
Our solutions are hosted at multiple data centers around the world. Any disruption of service at our facilities or our third-party hosting providers could interrupt or delay our customers’ access to our solutions, which could harm our operating results.
The ability of our customers to access our solutions is critical to our business. We currently serve customers from data centers located in Chicago, Illinois; Southfield, Michigan; Allen, Texas: Northern Virginia; Tokyo, Japan; Frankfurt, Germany; and Shanghai, China. We cannot assure you that the measures we have taken to eliminate single points of failure in our data centers located in Chicago, Frankfurt, and Northern Virginia will be effective to prevent or minimize interruptions to our operations. Our facilities are vulnerable to interruption or damage from several sources, many of which are beyond our control, including, without limitation:
Extended power loss;
Telecommunications failures from multiple telecommunication providers;
Natural disaster or an act of terrorism;
Software and hardware errors, or failures in our own systems or in other systems;
Network environment disruptions such as computer viruses, hacking and similar problems in our own systems and in other systems;
Theft and vandalism of equipment; and
Actions or events caused by or related to third parties.
We attempt to mitigate these risks through various business continuity efforts, including redundant infrastructure, stand-by systems, failover sites, 24x7x365 system activity monitoring, backup and recovery procedures, use of a secure off-site storage facility for backup media, separate test systems and change management and system security measures, but our precautions may not protect against all potential problems. Our data recovery centers are equipped with physical space, power, storage and networking infrastructure and Internet connectivity to support the solutions we provide in the event of the interruption of services at our primary data center. Even with this data recovery center, however, our operations would be interrupted during the transition process should our primary data center experience a failure.
Disruptions at our data centers could cause disruptions in our services and data loss or corruption. This could damage our reputation, cause us to issue credits to customers, subject us to potential liability or costs related to defending against claims or cause customers to terminate or elect not to renew their agreements, any of which could negatively impact our revenue.
CenturyLink and AWS currently host most of our solutions. We cannot guarantee that we will be able to continue to receive reasonable pricing and terms from CenturyLink, AWS, or our other hosting providers in the future. Failure to negotiate reasonable terms could result in increased costs, which could negatively impact our financial condition. If our providers stop providing services or we fail to negotiate terms on an acceptable basis, we could be required to move our solutions to other third-party hosting providers, which would be a distraction to our business, could increase costs and could cause a disruption in our services.
We could be sued for contract claims, and such lawsuits, if successful, may have an adverse effect on our financial results.
Our Platform performs significant volume of transactions in mission-critical systems for our customers. General errors, defects, inaccuracies or other performance problems in our solutions or inaccuracies in or loss of the data we provide to our customers could result in financial or other damages to our customers, which damages could prompt them to make claims for damages against us. We cannot assure you that the limitations of liability set forth in our contracts would be enforceable or would otherwise protect us from liability for damages. We maintain liability insurance coverage, including coverage for errors and omissions, in amounts and under terms that we believe are appropriate. We cannot assure you that this coverage will continue to be available on terms acceptable to us, or at all, or in sufficient amounts to cover one or more large contract claims, or that the insurer will not limit or deny coverage for any future claim. The successful assertion of one or more large contract claims against us that exceeds available insurance coverage, could have a material adverse effect on our business, prospects, financial condition and results of operations.
Changes in federal law or regulation could adversely impact our Physician Quality Reporting System offering.
Revenue from our Physician Quality Reporting System (“PQRS”) offering represented approximately
3%
,
3%
, and
4%
of our total revenue for the years ended
March 31, 2017
,
2016
, and
2015
, respectively. PQRS revenue is recognized as performed
at the time of the annual submission to the government typically during our fourth quarter. PQRS is a voluntary federal program that incentivizes certain quality care data reporting by healthcare professionals. As a federal program, a change in federal law or regulation could alter or eliminate PQRS, which, in turn, could adversely impact our revenue.
Our Platform must integrate with a variety of operating systems, software applications and hardware that are developed by others. If we are unable to devote the necessary resources to ensure that our solutions interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience reduced demand for our offerings.
Our Platform must integrate with a variety of network, hardware, and software platforms, and we will need to continuously modify and enhance our Platform to adapt to changes in mobility, Internet-related hardware, software, communication, browser and database technologies. The cost to make our Platform broadly interoperable may be significant. Any failure of our solutions to operate effectively with future platforms and technologies could reduce the demand for our Platform, result in customer dissatisfaction and harm our business. If we are unable to respond to these changes in a timely, cost-effective manner, our solutions may become less marketable and less competitive or obsolete and our operating results may be negatively impacted. If we cannot effectively make our Platform available on mobile devices, we may have difficulty attracting and retaining customers.
We rely on third-party software that may be difficult to replace or which could cause errors or failures of our service that could lead to lost customers or harm to our reputation.
We rely on software licensed from third parties to offer our solutions. This software may not continue to be available to us at all or on commercially reasonable terms. Any loss of the right to use any of this software could result in delays in the provisioning of our service until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our solutions, which could harm our business.
The loss of certain key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse effect on our business.
Our success depends in part upon the continued service of our key management, technical and administrative personnel. Such personnel are employed at-will and may leave Covisint at any time. Our success also depends on our continuing ability to attract and retain highly qualified technical, managerial and sales personnel. The market for professional services and software development personnel has historically been, and we expect that it will continue to be, intensely competitive. We cannot assure you that we will continue to be successful in attracting or retaining such personnel. We have lost qualified personnel and may lose additional personnel due to the performance of the Company. Should we lose key employees, or we are unable to attract and retain other qualified employees, it could have a material adverse effect on our business.
We could incur substantial costs because of any claim of infringement of another party’s intellectual property rights.
In recent years, there has been significant litigation in the U.S. and elsewhere involving patents and other intellectual property rights. Companies providing Internet-related products and services are increasingly bringing and becoming subject to suits alleging infringement, misappropriation or other violations of patents, copyrights, trademarks, trade secrets or other intellectual property rights. These risks have been amplified by an increase in the number of third parties whose sole or primary business is to assert such claims. We could incur substantial costs in prosecuting or defending any intellectual property litigation. Additionally, the defense or prosecution of claims could be time-consuming and could divert our management’s attention away from the execution of our business plan.
We cannot be certain that our solutions and services do not infringe the intellectual property rights of third parties. Claims of alleged infringement or misappropriation could be asserted against us by third parties in the future, and if made, we cannot be certain that we would prevail. In addition to possible claims with respect to our solutions, some of our solutions contain technology developed by and licensed from third parties, and we may likewise be susceptible to infringement or misappropriation claims with respect to these third-party technologies.
Moreover, any settlement or adverse judgment resulting from a claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. We cannot assure you that we would be able to obtain a license from the third party asserting the claim at all or on commercially reasonable terms, that we would be able to develop alternative technology on a timely basis, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected solution or service. In addition, we may be required to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us. An adverse determination could also prevent us from offering our products or services to others. Infringement claims asserted with or without merit against us may have an adverse effect on our business, financial condition and results of operations.
Our contracts with customers include contractual obligations to indemnify them against claims that our solutions infringe the intellectual property rights of third parties. The results of any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may force us to do one or more of the following:
Participate in or pay the costs of the defense of such litigation;
Cease selling or using solutions or services that incorporate the challenged technology;
Make substantial payments for costs or damages;
Obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or
Redesign those solutions or services to avoid infringement.
If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or costs could have a material adverse effect upon our business and financial results. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our technology in any subsequent litigation in which we are a named party. Moreover, such infringement claims with or without merit may harm our relationships with our existing customers and may deter future customers from subscribing to our solutions and related services on acceptable terms, if at all.
We may not be able to adequately protect our intellectual property rights and efforts to protect them may be costly and may substantially harm our business.
Our ability to compete effectively is dependent in part upon our ability to protect our intellectual property rights. While we hold an issued patent and a pending patent application covering certain elements of our technology, this patent and patent application, and, more generally, existing patent laws, may not provide adequate protection for portions of the technology that are important to our business. In addition, our pending patent application may not result in an issued patent. We have largely relied on copyright, trade secret and trademark laws, as well as generally relying on confidentiality procedures and agreements with our employees, consultants, customers and vendors, to control access to, and distribution of, technology, software, documentation and other confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain, use or distribute our technology without authorization. If this were to occur, we could lose revenue as a result of competition from products infringing or misappropriating our technology and intellectual property and we may be required to initiate litigation to protect our proprietary rights and market position.
U.S. patent, copyright, trademark, and trade secret laws offer us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same extent. Accordingly, defense of our trademarks and proprietary technology may become an increasingly important issue as we continue to expand our operations and solution development into countries that provide a lower level of intellectual property protection than the United States. Policing unauthorized use of our trademarks and technology is difficult and the steps we take may not prevent misappropriation of the trademarks or technology on which we rely. If competitors are able to use our trademarks or technology without recourse, our ability to compete would be harmed and our business could be materially and adversely affected.
We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to determine the validity and scope of the rights of others. That litigation may not be ultimately successful and could result in substantial costs to us, the reduction or loss in intellectual property protection for our technology, the diversion of our management’s attention and harm to our reputation, any of which could materially and adversely affect our business and results of operations.
Confidentiality arrangements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We have devoted substantial resources to the development of our technology, business operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality arrangements with our employees, licensees, independent contractors, advisers and customers. These arrangements, some of which were acquired through acquisitions, may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our solutions by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
We may be subject to damages resulting from claims that we, our employees or contractors, have wrongfully used or disclosed alleged trade secrets of their former employers or other parties.
We could in the future be subject to claims that our employees or contractors, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or other parties. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our solutions, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of these parties. In addition, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to develop, market and support potential solutions or enhancements, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management.
Our use of “open source” software could negatively affect our ability to sell our services and solutions or protect our intellectual property and subject us to possible litigation.
A portion of the technology licensed from others by us and that we use to make our solutions available currently incorporates “open source” software, and we may incorporate open source software into our solutions in the future. Such open source software is generally licensed by its authors or other third parties under various open source licenses. Terms of many source licenses have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to offer our Platform. In that event, we could be required to seek licenses from third parties in order to continue offering our services, to re-engineer our products or to discontinue sales of our affected solutions, any of which could materially adversely affect our business. In addition, if we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software or source code of our proprietary software and that we license such modifications, alterations or source code under the terms of the particular open source license. If a third party were to allege that we had not complied with the conditions of one or more of these licenses, we could be:
Required to defend against such allegations;
Subject to significant damages;
Enjoined from the sale of our solutions that contained the open source software;
Required to comply with the conditions described above; or
Required to discontinue our use of such open source software or the sale of our affected solutions in the event we could not maintain compliance with such licenses.
Any of the foregoing events could disrupt the distribution and sale of some of our solutions while forcing us to incur significant legal expenses.
Additionally, the use of open source software can lead to greater risks than the use of third-party commercial software, as open source software does not come with warranties or other contractual protections regarding infringement claims or the quality of the code. From time to time, parties have asserted claims against companies that use open source software in their products and services, asserting that open source software infringes their intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights with respect to what we believe to be open source software. In such event, we could be required to seek licenses from third parties in order to continue using such software or offering certain of our solutions and services or to discontinue the use of such software or the sale of our affected solutions and services in the event we could not obtain such licenses, any of which could adversely affect our business, operating results and financial condition.
Our success depends in part on our ability to develop or acquire solution enhancements and new solutions, and we may not be able to timely develop or acquire new and enhanced solutions to satisfy changes in demand.
The markets for our products and services are characterized by intense competition, evolving industry standards, emerging business models, disruptive technology developments, short product and service life cycles, and frequent new product introductions. Accordingly, our success depends in part on our ability to develop and market solution enhancements and new solutions that keep pace with continuing changes in technology and customer preferences. We may not be able to develop and market new or enhanced solutions in a timely or cost-effective manner or to develop and introduce solutions that satisfy customer requirements. Our solutions also may not achieve market acceptance or correctly anticipate technological changes. If any competing products or services achieve widespread acceptance, our operating results could suffer. In addition, there has been and will continue to be significant consolidation of participants in the markets in which we compete. Further consolidation in these markets may subject to us to increased competitive pressures. Our failure to develop technological improvements or to adapt our solutions to technological or market changes may, over time, have a material adverse effect on our business.
We may expand our business by acquiring or investing in other products, services, technologies or businesses, which may divert our management’s attention, result in dilution to our shareholders and consume resources that are necessary to sustain our business.
In the future, we may acquire complementary products, services, technologies or businesses. We also may enter relationships with other businesses to expand our portfolio of solutions or our ability to provide our solutions in foreign jurisdictions. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete these transactions may often be subject to conditions or approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close.
An acquisition, investment or new business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the acquired company’s technology is not easily adapted to be compatible with ours, or we have difficulty retaining the customers of any acquired business due to changes in management or other concerns. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for the development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown liabilities, including litigation against the companies we may acquire. For one or more of those transactions, we may:
Issue additional equity securities that would dilute our shareholders;
Use cash that we may need in the future to operate our business;
Incur debt on terms unfavorable to us or that we are unable to repay or that may place burdensome restrictions on our operations;
Incur significant charges or substantial liabilities; or
Become subject to adverse tax consequences, or substantial depreciation, deferred compensation or other acquisition-related accounting charges.
Any of these risks could harm our business and operating results.
Unanticipated changes in our effective tax rate or exposure to additional income tax liabilities could have a material impact on our financial results and could increase the volatility of those results.
Due to the global nature of our business, we are subject to income taxes in both the United States and several foreign jurisdictions. In the event we generate net income in certain jurisdictions but incur net losses in other jurisdictions, we generally cannot offset the income from one jurisdiction with the loss from another, which could increase our effective tax rate. Furthermore, significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business there are many transactions and calculations for which the ultimate tax determination is uncertain. Although we believe our tax positions are reasonable, we are subject to routine corporate income tax audits in the jurisdictions in which we operate. Our provision for income taxes includes amounts intended to satisfy income tax assessments that are likely to result from the examination of our tax returns that have been filed in these jurisdictions. The amounts ultimately paid upon resolution of such examinations could be materially different from the amounts included in the provision for income taxes and could have a material impact on our financial position, results of operations or cash flows in the period or periods for which that determination is made.
We recognize reserves for uncertain tax positions through tax expense for estimated exposures related to our current and historical tax positions. We evaluate the need for reserves for uncertain tax positions on a quarterly basis and any change in the amount is recorded in our results of operations, as appropriate. It could take several years to resolve certain of these reserves for uncertain tax positions.
Additionally, one of the components that we evaluate in establishing the provision for income taxes is the realization of our deferred tax assets. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. Changes in estimates of projected future operating results or in assumptions regarding our ability to generate future taxable income could result in increases to our total valuation allowance and tax expense that would reduce net income.
We earn a portion of our income, and accumulate a portion of cash flow, in foreign jurisdictions. Any repatriation of funds currently held in foreign jurisdictions may result in a higher effective tax rate and larger incremental cash tax payments. In addition, there have been proposals to amend U.S. tax laws that would significantly impact the manner in which U.S. companies are taxed on foreign earnings. Although we cannot predict whether or in what form any legislation will pass, if enacted, such legislation could have an adverse impact on our U.S. tax expense and cash flows.
We are exposed to exchange rate risks on foreign currencies and to other international risks that may adversely affect our business and results of operations.
Approximately
11%
,
9%
and
6%
of our total revenue for each of the years ended
March 31, 2017
,
2016
, and
2015
, respectively, was derived from foreign operations. We currently have foreign sales denominated in the local currency of several foreign countries, and our solutions and services may be priced in the currency of the country in which they are sold. Changes in the exchange rates of foreign currencies or exchange controls may adversely affect our results of operations. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.
The international business environment is also subject to other risks, including the need to comply with foreign and U.S. laws and the greater difficulty of managing business operations overseas. In addition, our foreign operations are affected by general economic conditions in the international markets in which we do business. A worsening of economic conditions in these markets could cause customers to delay or forego decisions to acquire or renew subscriptions or to reduce their requirements for services.
We face many risks associated with our plans to expand our international presence, which could harm our business, financial condition and operating results.
We currently operate internationally and intend to expand into additional international markets. In some international markets, customer preferences and buying behaviors may be different, and we may use business or pricing models that are different from our traditional subscription model to provide our Platform to customers in those markets or we may be unsuccessful in implementing the appropriate business model. Our revenue from new foreign markets may not exceed the costs of establishing, marketing and maintaining our offerings in those markets. In addition, the current instability in the eurozone could have many adverse consequences on our international operations, including sovereign default, liquidity and capital pressures on eurozone financial institutions, reducing the availability of credit and increasing the risk of financial sector failures and the risk of one or more eurozone member states leaving the euro, resulting in the possibility of capital and exchange controls and uncertainty about the impact of contracts and currency exchange rates.
In addition, conducting our operations in a new international market may subject us to new risks. These risks include:
Localization of our solutions, including the addition of the local language and adaptation to new local practices;
Strong local competitors;
The cost and burden of complying with, lack of familiarity with, and unexpected changes in, local legal and regulatory requirements;
Fluctuations in local currency exchange rates or restrictions on local currency;
Potentially adverse tax consequences, including the complexities of transfer pricing, value-added or other tax systems, double taxation and restrictions and/or taxes on the repatriation of earnings;
Hiring and training a local sales force;
Development of a local marketing strategy;
Dependence on third parties, including commercial partners with whom we do not have extensive experience;
Increased financial accounting and reporting burdens and complexities;
Political, social and economic instability, terrorist attacks and security concerns in general; and
Reduced or varied protection for intellectual property rights in some countries.
Operating in new international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.
Our solutions contain encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign countries, restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements could result in financial penalties or other sanctions under the U.S. export regulations, including restrictions on future export activities, which could harm our business and operating results. Regulatory restrictions could impair our access to technologies needed to improve our solutions and may also limit or reduce the demand for our solutions outside of the U.S.
Our operating results may be harmed if we are required to collect sales, services or other related taxes for our solutions in jurisdictions where we have not historically done so.
We do not believe that we are required to collect sales, use, services or other similar taxes from our customers in certain jurisdictions. However, one or more countries or states may seek to impose sales, use, services, or other tax collection obligations on us, including for past sales. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on the sale of our solutions could result in substantial tax liabilities for past sales and decrease our ability to compete for future sales. Each country and each state has different rules and regulations governing such taxes and these rules and regulations are subject to varying interpretations that may change over time. We review these rules and regulations periodically and, when we believe such taxes apply in a particular jurisdiction, we comply with their rules and regulations. We cannot assure you that we will not be subject to such taxes or related interest and penalties for past sales in jurisdictions where we presently believe such taxes are not due. We reserve estimated amounts with respect to such taxes on our financial statements but we cannot be certain that we have made sufficient reserves to cover such tax liabilities or such taxes.
Providers of goods or services are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our solutions, we may be liable for past taxes in addition to being required to collect sales or similar taxes in respect of our solutions going forward. Liability for past taxes may also include very substantial interest and penalty charges. Our customer contracts generally provide that our customers must pay all applicable sales and similar taxes. Nevertheless, customers may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes or we may determine that it would not be feasible to seek reimbursement. If we are required to collect and pay back taxes and the associated interest and penalties and if our customers do not reimburse us for all or a portion of these amounts, we will have incurred unplanned expenses that may be substantial. Moreover, imposition of such taxes on our solutions going forward may effectively increase the cost of such solutions to our customers.
Many states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar taxes as well as the circumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals have been introduced in the U.S. Congress that would provide states with additional authority to impose such taxes. The tax laws of foreign jurisdictions may also change. Accordingly, it is possible that either federal or state legislative changes or foreign tax law changes may require us to collect additional sales and similar taxes from our customers in the future.
Acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers, which could materially and adversely affect our business, financial condition and operating results.
Natural disasters, acts of war, terrorist attacks and the escalation of military activity in response to such attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions and job losses. Such events may have an adverse effect on the economy in general. Moreover, the potential for future terrorist attacks and the national and international responses to such threats could affect the business in ways that cannot be predicted. The effect of any of these events or threats could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Common Stock
We are an “emerging growth company” within the meaning of the Securities Act, and as such, we will take advantage of certain modified disclosure requirements.
As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Stock Market and other applicable securities rules and regulations. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting.
However, we are an “emerging growth company” within the meaning of the rules under the Securities Act. For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an “emerging growth company” for up to five years, although we would cease to be an “emerging growth company” upon the earliest of (i) the first fiscal year following the fifth anniversary of the IPO, (ii) the first fiscal year after our annual gross revenues are $1 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, and (iv) the date on which we are deemed to be a “large accelerated filer” as defined in the Exchange
Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-JOBS Act” in Item 7 of this Annual Report.
We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock.
The share price of our common stock is likely to be volatile and could decline.
Prior to the IPO, there had been no public market for our common stock. An active public market for these shares may never develop or be sustained, which could affect your ability to sell your shares and could depress the market price of your shares. The IPO price for the shares of our common stock was determined by negotiations between us and the representatives of the underwriters and has not been indicative of prices that have since prevailed in the trading market. The market price of our common stock, has been, and could continue to be subject to wide fluctuations in response to many risk factors described in this report, and others beyond our control, including:
Actual or anticipated fluctuations in our condition and operating results;
Changes in projected operational and financial results;
Addition or loss of significant customers;
Changes in laws or regulations applicable to our business;
Actual or anticipated changes in our growth rate relative to our competitors;
Announcements of technological innovations or new offerings by us or our competitors;
Additions or departures of key personnel;
Issuance of new or updated research or reports by securities analysts;
Fluctuations in the valuation of companies perceived by investors to be comparable to us;
The expiration of contractual lock-up agreements; and
General economic, legal, regulatory and market conditions unrelated to our performance.
In addition, if the general stock market experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations.
In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
Actions of activist shareholders against us could be disruptive and costly and the possibility that activist shareholders may wage proxy contests or gain representation on or control of our Board of Directors could cause uncertainty about the strategic direction of our business.
Shareholders may from time to time engage in proxy solicitations, advance shareholder proposals or board nominations or otherwise attempt to effect changes, assert influence or acquire some level of control over us. Our Board and management team strive to maintain constructive, ongoing communications with all the Company’s shareholders, including activist shareholders, and welcome their views and opinions with the goal of enhancing value for all shareholders and the depth and breadth of our Board. Activist campaigns that contest, or conflict with, our strategic direction or seek changes in the composition of our Board could have an adverse effect on us because:
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Responding to proxy contests and other actions by activist shareholders can disrupt our operations, be costly and time-consuming, and divert the attention of our Board and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition;
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Perceived uncertainties as to our future direction as a result of changes to the composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential clients, may result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners;
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These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business; and
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If individuals are elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our shareholders.
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We do not anticipate paying any dividends on our common stock.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay cash dividends, you could receive a return on your investment in our common stock only if the market price of our common stock has increased when you sell your shares.
If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research reports about our business, our share price and trading volume could decline.
The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Our articles of incorporation and bylaws as well as certain provisions of Michigan law may have an anti-takeover effect.
Provisions of our articles of incorporation and bylaws and Michigan law could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to shareholders. The combination of these provisions inhibits a non-negotiated acquisition, merger or other business combination involving our company, which, in turn, could adversely affect the market price of our common stock.