The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Determine, Inc. (the “Company” or “Determine”) is a leading global provider of software-as-a-subscription (“SaaS”) source-to-pay, procure-to-pay and enterprise contract lifecycle management (“ECLM”) solutions. The Determine Cloud Platform provides procurement, sourcing, finance and legal professionals with the flexibility, agility and scalability they need to optimize spend, supplier, contract and financial performance goals. Determine empowers users across the full source-to-pay continuum, including sourcing, supplier management, contract management and procure-to-pay applications, to deliver efficiency and data insight for their operational business processes,
third
-party relationships and contractual obligations. Determine serves more than
250
global customers spanning a wide spectrum of industries including, but
not
limited to, financial services, insurance, pharmaceuticals, healthcare, retail, transportation and manufacturing. The Company’s common stock trades under the ticker symbol “DTRM” effective
October 19, 2015.
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. It also includes non-controlling interest, which is the portion of equity in a subsidiary
not
attributable to a parent. The non-controlling interest of the Company and its subsidiaries are
not
considered to be permanent equity. Non-controlling interest’s share of subsidiary earnings is reflected as net income or loss attributable to non-controlling interest in the consolidated statements of operations and comprehensive loss. Additionally, certain prior period amounts have been reclassified to conform to the current year presentation on the consolidated financial statements. The reclassification of the prior period amounts were
not
material to the previously reported consolidated financial statements.
Liquidity
The Company has incurred significant historical losses and negative cash flows from operations and has an accumulated deficit of $321.7 million at March 31, 2018. Until the Company can generate significant cash from operations, its ability to continue as a going concern is dependent upon obtaining additional financing. Management intends to raise additional funds through debt offerings and decreased expenditures until the Company has positive operating cash flows. To decrease expenditures, the Company has reduced sales and marketing programs, delayed development programs and is evaluating a reduction in employee headcount. Such actions may have a material adverse effect on the Company's financial position and results of operations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates, including, but
not
limited to, those related to the allowance for doubtful accounts, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards, best estimate of selling price and income taxes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable. The Company’s cash balances
may,
at times, exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company has
not
experienced any losses on its deposits of cash and cash equivalents to date. Accounts receivable are derived from revenue earned from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does
not
require collateral. The Company maintains reserves for potential credit losses, and historically, such losses have
not
been significant.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Fair Value of Financial Instruments
The Company’s financial instruments include cash and money market funds, trade receivables and accounts payable. Cash and cash equivalents are reported at fair value. The recorded carrying amount of trade receivables and accounts payable approximates their fair value due to their short-term nature.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of
three
months or less to be cash equivalents. The Company’s cash equivalents consist of money market funds and commercial paper, and are presented at fair value based on quoted market prices.
Restricted Cash
The Company’s restricted cash consists of certificates of deposits for credit cards utilized by employees out of the UK office.
Accounts Receivable, Net of Allowance for Doubtful Accounts
The Company evaluates the collectability of its accounts receivable based on a combination of factors. When the Company believes a collectability issue exists with respect to a specific receivable, the Company records an allowance to reduce that receivable to the amount that it believes to be collectible. In making the evaluations, the Company will consider the collection history with the customer, communications with the customer as to reasons for the delay in payment, disputes or claims filed by the customer, warranty claims, non-responsiveness of customers to collection calls and feedback from the responsible sales contact. In addition, the Company will also consider general economic conditions, the age of the receivable and the quality of the collection efforts.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives for computer software and equipment is
three
years, furniture and fixtures is
five
years, and leasehold improvements is the shorter of the lease term or estimated useful life, estimated at
five
years. Upon retirement or sale of assets, the cost and related accumulated depreciation and amortization are removed from the consolidated balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations. Maintenance and repair costs are expensed as incurred.
Capitalized Software Development Costs, Net
The Company capitalizes costs for internal use software incurred during the application development. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized software will be amortized once the product is ready for its intended use, using the straight-line method over the estimated useful lives of the assets, which is
three
years. The Company periodically reviews its capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets
may
not
be recoverable. There were
no
impairment charges during the years ended
March 31, 2018
and
2017,
respectively.
Business Combinations
The Company accounts for acquisitions using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”)
805
-
Business Combinations.
Under the acquisition method of accounting, the total purchase consideration of an acquisition is allocated to the tangible assets, identifiable intangible assets and liabilities assumed based on their fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are
not
limited to, future expected cash flows from customer relationships, acquired patents and developed technology and discount rates. Management’s estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results
may
differ from estimates.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Goodwill
Goodwill represents the excess of the purchase consideration over the net tangible and identifiable intangible assets and liabilities acquired in a business combination and is allocated to reporting units expected to benefit from the business combination. The Company tests goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets
may
be impaired. The Company has elected to
first
assess certain qualitative factors to determine whether it is more likely than
not
that the fair value of its single reporting operating unit is less than the carrying amount as a basis for determining whether it is necessary to perform the
two
-step goodwill impairment test. If the Company determines that it is more likely than
not
that the fair value is less than its carrying amount, then the
two
-step goodwill impairment test will be performed. The
first
step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the
second
step will be performed; otherwise,
no
further step is required. The
second
step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the applied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. There were
no
impairment charges recorded during years ended
March 31, 2018
and
2017.
Intangible Assets and Impairment of Long-Lived Assets
Intangible assets consist of customer relationships, trade names and acquired technology. Intangible assets are recorded at fair value at the date of the acquisition and, for those assets having finite useful lives, are amortized using the straight-line method over their estimated useful lives, which generally range from
two
to
five
years. The Company periodically reviews its intangible and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets
may
not
be recoverable. The Company then compares the carrying amounts of the assets with the future net undiscounted cash flows expected to be generated by such asset. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value determined using discounted estimates of future cash flows. There were
no
impairment charges recorded during the years ended
March 31, 2018
and
2017,
respectively.
Deferred Revenue
Deferred revenue consists of customer billings or payments received in advance of the recognition of revenue and is recognized as revenue as the revenue recognition criteria described below are met.
Revenue Recognition
The Company generates revenues by providing its software-as-a-service solutions through subscription license arrangements, and through related professional services and software maintenance. The Company presents revenue net of sales taxes and any similar assessments.
Revenue recognition criteria
. The Company recognizes revenue when (
1
) persuasive evidence of an arrangement exists, (
2
) delivery has occurred or services have been rendered, (
3
) fees are fixed or determinable and (
4
) collectability is reasonably assured. If the Company determines that any
one
of the
four
criteria is
not
met, the Company will defer recognition of revenue until all the criteria are met.
Multiple-Deliverable Arrangements.
The Company enters into arrangements with multiple-deliverables that generally include subscription, support and professional services. If a deliverable has standalone value, and delivery is probable and within the Company’s control, the Company accounts for the deliverable as a separate unit of accounting.
Upon separating the multiple-deliverables into separate units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on the vendor-specific objective evidence of the selling price (“VSOE”), if available, or its best estimate of the selling price (“BESP”), if VSOE is
not
available. The Company has determined that
third
-party evidence of selling price (“TPE”) is
not
a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant
third
-party pricing information.
For professional services and subscription services, the Company has
not
established VSOE due to lack of pricing consistency and other factors. Accordingly, the Company uses its BESP to determine the relative selling price.
The Company determined BESP by considering its price list, as well as overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, contract prices per user, the size and volume of the Company’s transactions, the customer demographic and its market strategy.
Recurring revenues.
Recurring revenues consist of subscription license sales and services, maintenance revenues from previously sold perpetual licenses and hosting revenues. Recurring revenues are recognized ratably over the stated contractual period.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Non-recurring revenues.
Non-recurring revenues are comprised of revenues from professional services for system implementations, enhancements and training. For professional services arrangements billed on a time-and-materials basis, services are recognized as revenue as they are rendered. For fixed-fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does
not
have a sufficient basis to measure progress toward completion, revenue is recognized upon completion. The Company recognizes a loss for a fixed-fee professional service if the total estimated project costs exceed project revenues.
Reimbursements, including those related to travel and out-of-pocket expenses are included in non-recurring revenues, and an equivalent amount of reimbursable expenses are included in non-recurring cost of revenues.
Customer Concentrations
Historically, a limited number of customers have accounted for a substantial portion of the Company’s revenues. However, during the years ended
March 31, 2018
and
2017,
no
customer accounted for
10%
or more of the Company’s revenues or net accounts receivable, respectively.
Geographic Information
International revenues are attributable to countries based on the location of the customer. For the years ended
March 31, 2018
and
2017,
sales to international locations were derived primarily from France, the United Kingdom, Canada, Finland, Denmark, Australia, Switzerland, Bulgaria, Hong Kong, Belgium, Norway, Bermuda, the Netherlands, Italy, United Arab Emirates, Ireland, Germany and China.
|
|
For the Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
International revenue
|
|
|
33
|
%
|
|
|
30
|
%
|
Domestic revenue
|
|
|
67
|
%
|
|
|
70
|
%
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Advertising Expense
The cost of advertising is expensed as incurred. Advertising expense for the years ended
March 31, 2018
and
2017
was approximately
$0.4
million and
$0.3
million, respectively.
Foreign Currency
Non-monetary assets and liabilities are translated into U.S. dollar equivalents at the exchange rate in effect on the balance sheet date and revenues and expenses are translated into U.S. dollars using the average exchange rate over the applicable period. The Company’s United Kingdom and French subsidiaries’ functional currency is the local currency. Resulting currency translation adjustments are recorded in accumulated other comprehensive loss in the consolidated balance sheets.
Accumulated Other Comprehensive Loss
The accumulated other comprehensive loss balance consists of translation gains and losses related to our international subsidiaries with functional currencies other than the U.S. dollar, primarily the Euro, and the related deferred tax liability.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for only those awards ultimately expected to vest on a straight-line basis over the requisite service period of the award, net of an estimated forfeiture rate. The Company estimates the fair value of stock options using a Black-Scholes-Merton valuation model, which requires the input of highly subjective assumptions, including the option’s expected term and stock price volatility. In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires that deferred income taxes be provided for temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities. In addition, deferred tax assets are recorded for the future benefit from the utilization of net operating losses and research and development credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than
not
that they will be realized. The Company’s policy for accounting for uncertainty in income taxes requires the evaluation of tax positions taken or expected to be taken in the course of the preparation of tax returns to determine whether the tax positions are “more-likely-than-
not”
of being sustained by the applicable tax authority. Tax positions
not
deemed to meet the more-likely-than-
not
threshold would be recorded as a tax expense in the current year.
Treasury Stock
The Company’s equity incentive plans allow the settlement of share unit conversions through share withholding. Shares withheld are purchased back by the Company and reflected in treasury stock on the consolidated balance sheets. During the year ended
March 31, 2017,
there were
49,555
stock repurchases related to share unit conversions. There were
no
stock repurchases for the year ended
March 31, 2018.
Recent Accounting Pronouncements
In
June 2018,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
2018
-
07,
Compensation – Stock Compensation (Topic
718
): Improvements to Nonemployee Share-Based Payment Accounting
, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after
December 15, 2019,
and interim periods within those annual periods. The Company does
not
expect the adoption of ASU
2018
-
07
to have a material impact on its consolidated financial statements.
In
May 2017,
FASB issued ASU
2017
-
09,
Compensation – Stock Compensation (Topic
718
): Scope of Modification Accounting
, which clarifies what constitutes a modification of a share-based payment award. This guidance is effective for fiscal years beginning after
December 15, 2017.
The Company does
not
expect the adoption of ASU
2017
-
09
to have a material impact on its consolidated financial statements.
In
January 2017,
the FASB issued ASU
2017
-
04,
Intangibles—Goodwill and Other (Topic
350
): Simplifying the Test for Goodwill Impairment
, which simplifies the accounting for goodwill impairments by eliminating step
two
from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. ASU
2017
-
04
also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity’s testing of reporting units for goodwill impairment, and clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual reporting periods beginning after
December 31, 2019
and interim periods within those fiscal years. The Company is currently assessing the potential impact of the adoption of ASU
2017
-
04
on its consolidated financial statements.
In
January 2017,
the FASB issued ASU
2017
-
01,
Clarifying the Definition of a Business
. The new guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is
not
a business. The guidance also requires a business to include at least
one
substantive process and narrows the definition of outputs. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017.
The Company does
not
expect the adoption of ASU
2017
-
01
to have a material impact on its consolidated financial statements.
In
November 2016,
the FASB issued ASU
2016
-
18,
Statement of Cash Flows (Topic
230
): Restricted Cash
, which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The update is effective for the Company beginning
April 1, 2018.
The Company believes the adoption of ASU
2016
-
18
will
not
have a material impact on its consolidated financial statements.
In
October 2016,
the FASB issued ASU
2016
-
16,
Accounting for Income Taxes (Topic
740
): Intra-Entity Asset Transfers of Assets Other than Inventory
, which removes the prohibition in ASC
740
against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The update is effective for the Company beginning
April 1, 2018.
The adoption of this update did
not
have a material impact on the Company’s consolidated financial statements.
In
August 2016,
the FASB issued ASU
No.
2016
-
15,
Statement of Cash Flows (Topic
230
):
Classification of Certain Cash Receipts and Cash Payments (Topic
230
),
which addresses
eight
specific cash flow matters with the objective of reducing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The update is effective for fiscal years beginning after
December 15, 2017,
including interim reporting periods within that fiscal year. The adoption of this update did
not
have a material impact on the Company’s consolidated financial statements.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In
March 2016,
the FASB issued ASU
2016
-
09,
Compensation
-Stock Compensation (Topic
718
): Improvements to Employee Share-Based Payment Accounting.
The amendments in this ASU affect all entities that issue share-based payment awards to their employees. The amendments simplify the accounting in various aspects for these types of transactions: i.e. Accounting for Income Taxes, Excess tax benefits on the Statements of Cash Flows, Forfeitures, Employee taxes and Intrinsic Value. The new guidance was effective for the Company beginning on
April 1, 2017.
The adoption of this update did
not
have a material impact on the Company’s consolidated financial statements.
In
February 2016,
the FASB issued ASU
2016
-
02,
Leases,
which establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than
12
months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after
December 15, 2018,
including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently assessing the potential impact of the adoption of ASU
2016
-
02
on its consolidated financial statements.
In
May 2014,
the FASB issued ASU
2014
-
09,
Revenue from Contracts with Customers: Topic
606
and issued subsequent amendments to the initial guidance in
August 2015,
March 2016,
April 2016,
May 2016,
September 2017
and
November 2017
within ASU
2015
-
14,
ASU
2016
-
08,
ASU
2016
-
10,
ASU
2016
-
12,
ASU
2017
-
13
and ASU
2017
-
14,
respectively (ASU
2014
-
09,
ASU
2015
-
14,
ASU
2016
-
08,
ASU
2016
-
10,
ASU
2016
-
12,
ASU
2017
-
13
and ASU
2017
-
14
collectively, “Topic
606”
). Topic
606
supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of Topic
606
is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic
606
defines a
five
-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates
may
be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others. Topic
606
also provides guidance on the recognition of costs related to obtaining customer contracts. ASU
No.
2015
-
14
deferred the effective date of the new revenue standard for periods beginning after
December 15, 2016
to
December 15, 2017.
The Company has adopted the new standard under the full retrospective method and believes the adoption will
not
have a material impact on its consolidated financial statements. It will, however, require additional incremental disclosures, including information about the remaining transaction price and when the Company expects to recognize revenue. The Company continues to assess the new standard along with industry trends and additional interpretive guidance and
may
adjust its interpretation and implementation plan accordingly.
3
.
|
Goodwill and
Other
Intangible Assets
|
The following is a summary of goodwill (in thousands):
Balance at March 31, 2016
|
|
$
|
14,490
|
|
Foreign currency translation adjustment
|
|
|
(42
|
)
|
Balance at March 31, 2017
|
|
|
14,448
|
|
Foreign currency translation adjustment
|
|
|
1,010
|
|
Balance at March 31, 2018
|
|
$
|
15,458
|
|
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The following is a summary of other intangible assets (in thousands):
|
|
March
3
1
, 201
8
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Foreign Currency Translation
Adjustment
|
|
|
Net
Carrying
Value
|
|
Acquired developed technology
|
|
$
|
5,034
|
|
|
$
|
(3,486
|
)
|
|
$
|
219
|
|
|
$
|
1,767
|
|
Customer relationships
|
|
|
5,857
|
|
|
|
(3,834
|
)
|
|
|
162
|
|
|
|
2,185
|
|
|
|
$
|
10,891
|
|
|
$
|
(7,320
|
)
|
|
$
|
381
|
|
|
$
|
3,952
|
|
|
|
March
3
1
, 201
7
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Foreign Currency Translation
Adjustment
|
|
|
Net
Carrying
Value
|
|
Acquired developed technology
|
|
$
|
5,034
|
|
|
$
|
(2,347
|
)
|
|
$
|
(50
|
)
|
|
$
|
2,637
|
|
Customer relationships
|
|
|
5,857
|
|
|
|
(2,599
|
)
|
|
|
(35
|
)
|
|
|
3,223
|
|
|
|
$
|
10,891
|
|
|
$
|
(4,946
|
)
|
|
$
|
(85
|
)
|
|
$
|
5,860
|
|
Acquired developed technology and customer relationships are being amortized on a straight-line basis and have weighted-average remaining useful lives of
1.62
and
2.00
years, respectively, as of
March 31, 2018.
Amortization expense of intangible assets was
$2.2
million and
$2.1
million during the years ended
March 31, 2018
and
2017,
respectively.
As of
March 31, 2018,
approximate amortization expense for intangible assets for each of the next
five
years is as follows:
Year ended March 31:
|
|
(in thousands)
|
|
2019
|
|
$
|
2,166
|
|
2020
|
|
|
1,468
|
|
2021
|
|
|
318
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
Total
|
|
$
|
3,952
|
|
4
.
|
Property and Equipment, net
|
Property and equipment, net consist of the following:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Computers and software
|
|
$
|
356
|
|
|
$
|
360
|
|
Furniture and equipment
|
|
|
232
|
|
|
|
316
|
|
Leasehold improvements
|
|
|
43
|
|
|
|
59
|
|
|
|
|
631
|
|
|
|
735
|
|
Less: accumulated depreciation
|
|
|
(541
|
)
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
90
|
|
|
$
|
85
|
|
Depreciation expense was approximately
$0.04
million and
$0.1
million for the years ended
March 31, 2018
and
2017,
respectively.
The Company capitalizes costs for internal use software incurred during the application development stage that are included in research and development expenses. Costs related to preliminary project activities and post implementation activities are expensed as incurred. The Company capitalized
$2.4
million and
$1.8
million of research and development costs during the years ended
March 31, 2018
and
2017,
respectively.
Capitalized software is amortized once the product is ready for its intended use, using the straight-line method over the estimated useful lives of the assets, which is
three
years. Amortization expense of capitalized software is included in the product cost of revenue and was
$1.7
million and
$1.2
million during the years ended
March 31, 2018
and
2017,
respectively. The unamortized balance of capitalized software was
$3.0
million and
$2.3
million as of
March 31, 2018
and
2017,
respectively.
Management continues to evaluate the capitalized software development costs across all product lines and did
not
identify any indicators which required impairment to be recorded during the years ended
March 31, 2018
or
2017.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6
.
|
Balance Sheet Components
|
As of
March 31, 2018
and
2017,
accrued payroll and related liabilities, other accrued liabilities and deferred revenue consisted of the following:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Accrued payroll and related liabilities:
|
|
|
|
|
|
|
|
|
Accrued vacation
|
|
$
|
868
|
|
|
$
|
841
|
|
Accrued bonus
|
|
|
66
|
|
|
|
47
|
|
Accrued wages
|
|
|
233
|
|
|
|
216
|
|
Accrued benefits
|
|
|
648
|
|
|
|
440
|
|
Accrued commissions
|
|
|
171
|
|
|
|
185
|
|
Total
|
|
$
|
1,986
|
|
|
$
|
1,729
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued accounts payable
|
|
$
|
285
|
|
|
$
|
167
|
|
VAT on sales
|
|
|
661
|
|
|
|
366
|
|
Employee withhold tax for stock
|
|
|
-
|
|
|
|
190
|
|
Sales tax payable
|
|
|
980
|
|
|
|
933
|
|
Other accrued liabilities
|
|
|
313
|
|
|
|
386
|
|
Total
|
|
$
|
2,239
|
|
|
$
|
2,042
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Deferred revenue:
|
|
|
|
|
|
|
|
|
Subscription
|
|
$
|
7,393
|
|
|
$
|
7,003
|
|
Maintenance
|
|
|
1,239
|
|
|
|
2,157
|
|
Consulting
|
|
|
895
|
|
|
|
854
|
|
Hosting
|
|
|
43
|
|
|
|
55
|
|
Training
|
|
|
1
|
|
|
|
11
|
|
Total
|
|
$
|
9,571
|
|
|
$
|
10,080
|
|
7
.
|
Operating Lease Commitments
|
The Company leases office space in London, United Kingdom, Aix-en-Provence, France, Paris, France, Atlanta, Georgia, the District of Columbia and, for its headquarters, in Carmel, Indiana. The leases are non-cancelable operating leases with various expirations through
July 2021.
Rent expense, which is recognized on a straight-line basis over the lease term, was
$0.5
million and
$0.6
million during the years ended
March 31, 2018
and
2017,
respectively. The difference between the lease payments made and the lease expense recognized to date using the straight-line method is recorded as a liability and included within other accrued liabilities in the consolidated balance sheets.
In connection with the relocation of its headquarters to Carmel, Indiana, on
July 22, 2016,
the Company entered into a Second Amendment to Lease with
2121
SEC TT, LLC (formerly SKBGS I, L.L.C.) to terminate its lease obligation at the San Mateo, California location as of
July 31, 2016.
The Company paid a
one
-time early termination fee equal to
three
months’ rent which was partially offset by the security deposit refund due.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
During the year ended
March 31, 2017,
the Company began subleasing a portion of its rental space in the District of Columbia to a related party associated with the Chairman of the Board of Directors. The subleases were terminated via mutual agreement during the year ended
March 31, 2018.
Rental income from the subleases was recognized on a straight-line basis over the lease term. The Company recognized
$0.04
million and
$0.02
million in sublease income during the years ended
March 31, 2018
and
2017,
respectively.
Future minimum lease payments required under the Company’s lease agreements as of
March 31, 2018
are as follows (in thousands):
Year ending March 31,
|
|
|
|
|
2019
|
|
$
|
331
|
|
2020
|
|
|
268
|
|
2021
|
|
|
169
|
|
2022
|
|
|
28
|
|
Total
|
|
$
|
796
|
|
Minimum payments have
not
been reduced by minimum sublease rentals of
$0.01
million in the future under non-cancelable subleases.
8
.
|
Litigation and Contingencies
|
From time to time, the Company is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of its business. The Company believes that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will
not
materially affect its financial position, results of operations or liquidity.
In
March 2015,
a minority stockholder of b-pack Services SA, a French subsidiary of Determine SAS, which was acquired when the Company acquired b-pack SAS, initiated litigation in the Nanterre Commercial Court against b-pack SAS and its founders claiming indemnification rights for his contribution to the business of b-pack Services SA and seeking monetary damages and other relief. In
July 2015,
the same minority stockholder also initiated litigation in the Paris Commercial Court against Determine SAS to contest the merger between b-pack SAS and Selectica France SAS and seeking monetary damages and other relief. Pursuant to an Agreement and Plan of Merger, dated
February 28, 2017,
effective
March 31, 2017,
Determine SAS acquired the additional minority interest in b-pack Services SA and the entity was dissolved. As part of the Agreement and Plan of Merger, on
April 3, 2017,
the Company paid the stockholder
$0.2
million to indemnify the transaction and settle the pending litigations. The payment is reflected in general and administrative expenses on the consolidated statements of operations and comprehensive loss for the year ended
March 31, 2017.
In
November 2015,
the Company settled outstanding litigation based upon claims the Company alleged against some of its former employees and a competitor relating to the Company’s intellectual property. In
April 2016,
such competitor paid the Company the remaining settlement amount of
$0.6
million, which is reflected in general and administrative expenses on the consolidated statements of operations and comprehensive loss for the year ended
March 31, 2017.
Warranties and Indemnifications
The Company’s products are generally warranted to perform substantially in accordance with the functional specifications set forth in the associated product documentation. In the event there is a failure of such warranties, the Company generally is obligated to correct the product to conform to the product documentation or, if the Company is unable to do so, the customer is entitled to seek a refund of a pro rata portion of the purchase price of the product or service. The Company has
not
provided for a warranty accrual as of
March 31, 2018
and
2017.
The Company generally agrees to indemnify its customers against legal claims that the Company’s software infringes certain
third
-party intellectual property rights. In the event of such a claim, the Company is obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the
third
-party claimant. In addition, in the event of the infringement, the Company agrees to modify or replace the infringing product, or, if those options are
not
reasonably possible, to refund the purchase price of the software. To date, the Company has
not
been required to make any payment resulting from infringement claims asserted against its customers. As such, the Company has
not
provided for an indemnification accrual as of
March 31, 2018
and
2017.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9
.
|
Credit Facility
and Convertible Notes
|
Credit Facility
On
July 25, 2014,
the Company and its wholly owned subsidiary, Determine Sourcing, Inc., entered into a Business Financing Agreement (the “Credit Facility”) with Western Alliance Bank, an Arizona corporation, as successor in interest to Bridge Bank, National Association (“Western Alliance Bank”). Through a series of
ten
amendments, at
March 31, 2018,
the Credit Facility provides a revolving receivables financing facility in an amount up to
$5.0
million (the “Receivables Financing Facility”) and a revolving cash secured financing facility in an amount up to
$8.0
million (the “Working Capital Facility”), for an aggregate revolving credit facility of up to
$13.0
million, and matures on
April 20, 2019.
In the event of an early termination by the Company, a penalty of
1.0%
of the total credit facility would be triggered.
All amounts borrowed under the Credit Facility are secured by a general security interest on the assets of the Company and are subject to a
2.00
Current Ratio of (i) cash and cash equivalents plus all eligible receivables in relation to (ii) the Company’s current liabilities excluding current deferred revenue. The Company’s Credit Facility with Western Alliance contains certain financial covenants that require, among other things, the maintenance of an asset coverage ratio of
not
less than
2:00
to
1:00
at the end of each month. As of
March 31, 2018,
the Company met all the requirements and was in compliance.
The Receivables Financing Facility
may
be drawn in amounts up to
$5.0
million in the aggregate, subject to a minimum borrowing base requirement equal to
80%
of the Company’s eligible accounts receivable as determined under the Credit Facility. The Working Capital Facility
may
be drawn in such amounts as requested by the Company,
not
to exceed the aggregate allowable amount.
Except as otherwise set forth in the Credit Facility, borrowings made under the Receivables Financing Facility will bear interest at a rate equal to the prime rate or
4.00%,
whichever is greater, plus
0.25%.
Borrowings made under the Working Capital Facility will bear interest at a rate equal to the financial institution’s certificate of deposit
30
-day rate plus
200
basis points, with the total minimum monthly interest to be charged being
$2,000.
The Company’s interest rates under its Receivables Financing Facility and Working Capital Facility at
March 31, 2018
were
5.00%
and
2.15%,
respectively.
As of
March 31, 2018
and
March 31, 2017,
the Company owed
$12.1
million and
$11.9
million, respectively, under the Credit Facility, and
$0.9
million and
$2.1
million were available for future borrowings, respectively.
Loan Guarantie
s
In order to satisfy certain conditions of amendments to the Credit Facility with Western Alliance Bank for additional funds, the Company’s largest shareholder or affiliates of such has entered into certain limited, non-revocable guaranties.
In
March 2015,
Lloyd I. Miller, III (as succeeded by the estate of Lloyd I. Miller III after his death (“Miller”)), the Company’s largest stockholder, and
one
of its affiliates each entered into a Limited Guaranty with Western Alliance Bank to provide a limited, non-revocable guaranty of the Company’s Credit Facility for an aggregate amount of
$2
million (the
“2015
Guaranties”). In connection with the
2015
Guaranties, the Company agreed to pay Miller and its affiliates an aggregate commitment fee of
$0.1
million and a monthly fee equal to (i)
1.0%
of the loan amount then guaranteed under the
2015
Guaranties for the
first
12
months of the term and (ii)
1.5%
of the loan amount then guaranteed under the
2015
Guaranties for the
second
12
months of the term.
In
February 2016,
Alimco Financial Corporation, a Delaware corporation formerly known as Alliance Semiconductor Corporation (“ALMC”), an affiliate of Miller, entered into a Limited Guaranty with Western Alliance Bank to provide a limited, non-revocable guaranty of the Company’s Credit Facility in an amount of
$3
million (the
“2016
Guaranties”). In connection with the
2016
Guaranties, the Company agreed to pay ALMC a commitment fee of
$0.1
million and a monthly fee equal to (i)
0.5%
of the loan amount then guaranteed under the
2016
Guaranties for the
first
12
months of the term and (ii)
0.75%
of the loan amount then guaranteed under the
2016
Guaranties for the
second
12
months of the term. Following the date that the Company draws from the Credit Facility the amount guaranteed under the
2016
Guaranties, the monthly fees shall increase to
1.0%
during the
first
12
months of the term and
1.5%
during the
second
12
months, respectively.
In
April 2016,
the
2015
Guaranties and the
2016
Guaranties, and related fee agreements, were amended to mature on the same date as the Credit Facility. The Company agreed to pay Miller and its affiliates an additional aggregate cash fee of
$0.1
million for the extension.
In
December 2016,
the fee agreements associated with both the
2015
Guaranties and the
2016
Guaranties were amended to reduce the monthly fees accrued to
0.83%
of the amounts guaranteed. Additionally, the Company issued
277,248
shares of Company common stock to the guarantors under the
2015
Guaranties and the
2016
Guaranties (the “Guarantors”), at an issue price equal to
$1.89
per share, as payment for
$524,000
of the monthly fees previously accrued under the agreements. These shares are
not
registered under the Securities Act.
In
January 2017,
the
2016
Guaranties were extended from
$3
million to
$4
million (the “Amended
2016
Guaranty”). In connection with entering into the Amended
2016
Guaranty, ALMC provided cash collateral to Western Alliance Bank in the amount of
$1
million. Western Alliance Bank, in its sole discretion,
may
reduce, but
not
increase, the additional guaranteed amount during the term. Alan Howe, a member of the Company’s board of directors, is the interim CEO of ALMC. The Company agreed to pay ALMC a commitment fee of
$50,000
and a monthly fee during the term of the
2016
Guaranties equal to
10%
of the additional guaranteed amount divided by
12.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In
June 2017,
the
2015
Guaranties and the Amended
2016
Guaranty were further amended to extend the term of the agreements (collectively, the “Amended Guaranties”) to
April 30, 2019.
In connection with the Amended Guaranties, the Company paid the Guarantors an extension fee of an aggregate of
50,000
shares of the Company’s common stock on a pro rata basis to each of the respective Guarantors. These shares are
not
registered under the Securities Act. The Amended Guaranties also provide that if the maturity date of the Credit Facility with Western Alliance is subsequently amended, the terms of the Amended Guaranties would automatically extend to a date
ten
days following the extended maturity date under such credit facility, but
no
later than
July 30, 2020.
Additionally, the Company would pay the Guarantors an additional extension fee of an aggregate of
62,500
shares of the Company’s common stock on a pro rata basis to each of the respective Guarantors.
As of
March 31, 2018,
the Company had drawn from the Credit Facility
$1
million of the guaranteed amounts under the
2015
guaranties. As of
March 31, 2017,
the Company had drawn from the Credit Facility the full
$2
million guaranteed under the
2015
Guaranties. As of
March 31, 2018
and
2017,
the Company had drawn from the Credit Facility the full
$4
million guaranteed under the
2016
Guaranties.
As of
March 31, 2018
and
2017,
the Company reflected
$1.3
million of fees associated with the loan guaranties in other long-term liabilities on the consolidated balance sheets. All commitment fees and aggregated monthly fees associated with the loan guaranties discussed above are payable in cash by the Company within
five
business days following the terminations or expirations of the agreements.
Convertible Notes
In
March 2015,
the Company entered into a Junior Secured Convertible Note Purchase Agreement with Miller and
two
of its affiliates (
“March 2015
Investors”), pursuant to which the Company issued and sold junior secured convertible promissory notes (the
“March 2015
Notes”) in the aggregate amount of
$3
million. At the option of the
March 2015
Investors, the
March 2015
Notes
may
be converted into shares of common stock at a conversion price of
$5.70.
The
March 2015
Notes are due
March 11, 2020.
Through a series of amendments, the
March 2015
Notes accrue interest at an annual rate of
10%
on the aggregate unconverted and outstanding principal amount, payable quarterly. The Company has the option to pay any amounts of interest due under the
March 2015
Notes by compounding and adding such interest amount to the unpaid principal amount of the
March 2015
Notes, based on an interest rate calculated at
10%
per year, provided that the Company is
not
then in default under any of its debt financing agreements. The Company recorded a
$0.1
million beneficial conversion feature related to the
March 2015
Notes which is reflected as a discount to the
March 2015
Notes on the consolidated balance sheets and is being amortized to interest expense over the term of the
March 2015
Notes.
In
December 2015,
the Company entered into a Junior Secured Convertible Note Purchase Agreement with Miller and
three
of its affiliates (the
“December 2015
Investors”), pursuant to which the Company issued and sold junior secured convertible promissory notes (the
“December 2015
Notes”) in the aggregate amount of
$2.5
million. At the option of the
December 2015
Investors, the
December 2015
Notes could be converted into shares of common stock at a conversion price of
$3.75.
On
December 27, 2016,
the conversion price was decreased to
$3.00.
The
December 2015
Notes are due
December 16, 2020.
Through a series of amendments, the
December 2015
Notes accrue interest at an annual rate of
10%
on the aggregate unconverted and outstanding principal amount, payable quarterly. The Company has the option to pay any amounts of interest due under the
December 2015
Notes by compounding and adding such interest amount to the unpaid principal amount of the
December 2015
Notes, based on an interest rate calculated at
10%
per year, provided that the Company is
not
then in default under any of its debt financing agreements. As a result of the amended conversion price, the Company recorded a gain on debt extinguishment of approximately
$166,000,
which consisted of the remeasurement of the debt at fair value offset by the deferred financing costs previously associated with the
December 2015
Notes. As the extinguishment was with a related party, the transaction was deemed to be a capital transaction and the gain is recorded in the Company’s stockholders’ equity as of
March 31, 2018
and
2017.
On
December 27, 2016,
the Company entered into a Junior Secured Convertible Note Purchase Agreement with MILFAM II L.P. and ALMC (the
“December 2016
Investors” and, together with the
March 2015
Investors and the
December 2015
Investors, the “Investors”), pursuant to which the Company issued and sold junior secured convertible promissory notes (the
“2016
Notes” and, together with the
March 2015
Notes and the
December 2015
Notes, the “Notes”) in the aggregate principal amount of
$2
million. At the option of the
December 2016
Investors, the
December 2016
Notes
may
be converted into shares of common stock at a conversion price of
$3.00.
The
2016
Notes are due on
December 27, 2021
and accrue interest at an annual rate of
10%
on the aggregate unconverted and outstanding principal amount, payable quarterly, beginning on
December 31, 2016.
The Company has the option to pay any amounts of interest due under the
2016
Notes by compounding and adding such interest amount to the unpaid principal amount of the
2016
Notes, based on an interest rate calculated at
12%
per year, provided that the Company is
not
then in default under any of its debt financing agreements.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Subject to applicable NASDAQ listing rule limitations (including, if applicable, approval by the Company’s stockholders), the outstanding principal and interest under the Notes
may
be converted into shares of common stock of the Company at the sole option of the Investors at any time prior to the maturity date, at the applicable conversion price for such; provided, however, that if prior to the maturity date the Company offers and sells share of its common stock in a private placement primarily intended to raise capital at a price per share of
$2.50
or less, then the conversion price for the
December 2015
Notes and the
2016
Notes will be reduced to such common stock offering price plus
$0.50
per share. However, the total number of shares of Common Stock that
may
be issued to the
December 2015
Investors and
December 2016
Investors upon conversion of the
December 2015
Notes and
2016
Notes
may
not
exceed
19.99%
of the Company’s outstanding shares of common stock as of the date such Notes were issued, respectively.
The Notes are secured by a
second
-position security interest on the Company’s assets, pursuant to the terms of the Amended and Restated Security Agreement entered into by the Company and the Investors and existing noteholders on
December 27, 2016 (
the “Security Agreement”). Upon any default under the convertible notes discussed above, the notes will bear interest at the rate of
13%
per year or, if less, the maximum rate allowable under the laws of the State of New York.
Note Conversion
On
June 21, 2017,
the
March 2015
Investors elected to convert approximately
$1.0
million of outstanding interest and principal payable under the
March 2015
Notes into an aggregate of
170,733
shares of the Company’s common stock at the conversion price of
$5.70
per share. To induce the
March 2015
Investors to convert the
March 2015
Notes, the Company entered into a subscription and investment representation agreement with the
March 2015
Investors pursuant to which the Company issued an additional
218,540
shares of common stock to the
March 2015
Investors. The shares converted and shares issued to induce the conversion together resulted in an acquisition of shares at a price approximately equivalent to the price to the investors of the shares sold in the Registered Direct Offering discussed in Note
10,
Stockholders’ Equity
, below.
The following table summarizes our outstanding debt obligations as of
March 31, 2018
and the effect those obligations are expected to have on our liquidity and cash flows in future periods:
|
|
Payments Due by Period (in thousands)
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1-3 Years
|
|
|
3-5 years
|
|
|
More than
5 Years
|
|
Loan guaranty fees due to Miller and affiliates
|
|
$
|
1,306
|
|
|
$
|
-
|
|
|
$
|
1,306
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible note
1
|
|
|
10,384
|
|
|
|
-
|
|
|
|
10,384
|
|
|
|
-
|
|
|
|
-
|
|
Credit facility
|
|
|
12,128
|
|
|
|
12,128
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
23,818
|
|
|
$
|
12,128
|
|
|
$
|
11,690
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1
Amounts shown reflect an assumption of quarterly interest paid in the form of debt, as allowable under the convertible note agreements, and are
not
reduced by debt discounts or beneficial conversion features.
10
.
|
Stockholders’
Equity
|
The Company’s equity incentive program is a broad-based, retention program comprised of stock options, restricted stock units and an employee stock purchase plan (“ESPP”) designed to align stockholder and employee interests.
1996
Stock
Plan
The Company adopted the
1996
Stock Plan as amended and restated
March
28,
2001
(the
“1996
Plan”). Approximately
815,000
shares of common stock have been reserved under the
1996
Plan. With limited restrictions, if shares awarded under the
1996
Plan are forfeited, those shares will again become available for new awards under the
1996
Plan. The
1996
Plan permits the grant of options, stock appreciation rights, shares of restricted stock and stock units. The types of options include incentive stock options that qualify for favorable tax treatment for the optionee under Section
422
of the Internal Revenue Code of
1986,
and non-statutory stock options
not
designed to qualify for favorable tax treatment. Employees, non-employee members of the board and consultants are eligible to participate in the
1996
Plan.
Incentive stock options are granted at an exercise price of
not
less than
100%
of the fair market value per share of the common stock on the date of grant, and non-statutory stock options are granted at an exercise price of
not
less than
85%
of the fair market value per share on the date of grant. Options generally vest with respect to
25%
of the shares
one
year after the options’ vesting commencement date and the remainder vest in equal monthly installments over the following
36
months. Options granted under the
1996
Plan have a maximum term of
ten
years.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1999
Equity Incentive Plan
The Company adopted the
1999
Equity Incentive Plan (the
“1999
Plan”) on
November
18,
1999.
The
1999
Plan was amended in
May 2010,
such that the number of shares reserved for issuance was
no
longer automatically increased, and
1,551,000
shares were reserved for future issuance. On
March 10, 2015,
the
1999
Plan was terminated and the shares then reserved under the
1999
Plan were released and made awardable for grant under the
2015
Plan (as defined below).
1999
ESPP
On
November
18,
1999,
the Company’s Board of Directors approved the adoption of the
1999
Employee Stock Purchase Plan (the “Purchase Plan” or “ESPP”) and the Company’s stockholders approved the Purchase Plan. The Purchase Plan was amended and restated on
February 1, 2008
and
November 7, 2012.
A total of
100,000
shares of common stock were initially reserved for issuance under the Purchase Plan. The
November 7, 2012
amendment and restatement of the Purchase Plan provided a reserve of
553,000
shares of common stock available for issuance under the Purchase Plan.
The Compensation Committee of the Board of Directors administers the Purchase Plan and it is intended to qualify under Section
423
of the Internal Revenue Code. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which
may
not
exceed
15%
of an employee’s cash compensation, at a purchase price equal to the lower of
85%
of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each purchase period. Employees who work more than
five
months per year and more than
twenty
hours per week are eligible to participate in the Purchase Plan. Stockholders who own more than
5%
of the Company’s outstanding common stock are excluded from participating in the Purchase Plan. Each eligible employee cannot purchase more than
5,000
shares per purchase date (
10,000
shares per year) and, generally, cannot purchase more than
$25,000
of stock per calendar year. Eligible employees
may
begin participating in the Purchase Plan at the start of an offering period. Each offering period lasts
six
months beginning on
January 31
and
July 31
of each calendar year with an additional
one
-time offering period beginning on or about
November 1, 2012
and terminating on or about
January 1, 2013.
Employees
may
end their participation in the Purchase Plan at any time. Participation ends automatically upon termination of employment.
The Board of Directors
may
amend or terminate the Purchase Plan at any time. If
not
terminated earlier, the Purchase Plan has a term of
twenty
years. If the Board of Directors increases the number of shares of common stock reserved for issuance under the Purchase Plan, it must seek the approval of the Company’s stockholders.
The compensation expense in connection with the ESPP for the fiscal years ended
March 31, 2018
and
2017
was
$0.04
million and
$0.05
million, respectively. During the fiscal years ended
March 31, 2018
and
2017,
there were
116,583
and
83,540
shares issued under the ESPP.
2015
Equity Incentive Plan
The Company’s Board of Directors adopted the
2015
Equity Incentive Plan (the
“2015
Plan”) on
March 10, 2015.
The Company’s stockholders approved the
2015
Plan at the special meeting of the stockholders held on
May 5, 2015.
On
August 11, 2016,
the Company’s stockholders approved an amendment to the plan, increasing the shares authorized for issuance from
1,500,000
to
4,000,000
shares of Company common stock, subject to permitted adjustments for certain corporate transactions. Pursuant to the terms of the
2015
Plan, employees, non-employee directors and consultants of the Company, and any present or future parent or subsidiary corporation or other affiliated entity,
may
receive grants of stock options, restricted stock awards and/or restricted stock units of the Company and certain cash-based awards.
The
2015
Plan is administered by the Compensation Committee of the Company’s Board of Directors, which is comprised of independent members of the Board of Directors. The Compensation Committee has full and exclusive power to make all decisions and determinations regarding (i) the selection of participants and the granting of awards; (ii) the terms and conditions relating to each award; (iii) adopting rules, regulations and guidelines for carrying out the
2015
Plan’s purposes; and (iv) interpreting the provisions of the
2015
Plan.
With limited restrictions, if shares awarded under the
2015
Plan are forfeited, those shares will again become available for new awards under the
2015
Plan. The types of options include incentive stock options that qualify for favorable tax treatment for the optionee under Section
422
of the Internal Revenue Code of
1986
and non-statutory stock options
not
designed to qualify for favorable tax treatment. Each eligible participant is limited to being granted options or stock appreciation rights covering
no
more than
300,000
shares per fiscal year, except in the
first
year of employment where the limit is
500,000
shares. Incentive stock options and non-statutory stock options are granted at an exercise price of
not
less than
100%
of the fair market value per share of the common stock on the date of grant. Options generally vest with respect to
25%
of the shares
one
year after the options’ vesting commencement date and the remainder vest in equal monthly installments over the following
36
months. Options granted under the
2015
Plan have a maximum term of
ten
years.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
As of
March 31, 2018,
shares of common stock reserved for future issuance of stock-based grants were as follows:
Equity Incentive Plans:
|
|
|
|
|
Restricted stock unit awards outstanding
|
|
|
309,217
|
|
Options outstanding
|
|
|
4,541,816
|
|
Reserved for future grants
|
|
|
342,763
|
|
Total common stock reserved for future issuance
|
|
|
5,193,796
|
|
The following tables summarize activity under the equity incentive plans:
|
|
Options Outstanding
|
|
|
Restricted Stock Units Outstanding
|
|
|
|
Number of
shares
(in thousands)
|
|
|
Weighted-
average
exercise price
|
|
|
Number of
shares
(in thousands)
|
|
|
Weighted-
average fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 1, 2017
|
|
|
4,530
|
|
|
$
|
3.02
|
|
|
|
181
|
|
|
$
|
3.99
|
|
Granted
|
|
|
425
|
|
|
$
|
1.98
|
|
|
|
359
|
|
|
$
|
1.85
|
|
Exercised/Released
|
|
|
(4
|
)
|
|
$
|
1.35
|
|
|
|
(227
|
)
|
|
$
|
3.07
|
|
Cancelled
|
|
|
(409
|
)
|
|
$
|
4.08
|
|
|
|
(14
|
)
|
|
$
|
5.87
|
|
Outstanding at March 31, 2018
|
|
|
4,542
|
|
|
$
|
2.83
|
|
|
|
309
|
|
|
$
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
4,362
|
|
|
$
|
2.86
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
2,436
|
|
|
$
|
3.32
|
|
|
|
|
|
|
|
|
|
|
|
Shares Available
for Grant
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
594
|
|
Options:
|
|
|
|
|
Granted from approved plans
|
|
|
(125
|
)
|
Granted from non-approved plans
|
|
|
(300
|
)
|
Shares added to the plans
|
|
|
322
|
|
Cancelled
|
|
|
211
|
|
Restricted Stock Units:
|
|
|
|
|
Granted
|
|
|
(339
|
)
|
Granted from non-approved plans
|
|
|
(20
|
)
|
Balance at March 31, 2018
|
|
|
343
|
|
The options outstanding and exercisable at
March 31, 2018
were in the following exercise price ranges:
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices per share
|
|
|
Number of
Shares
(in thousands)
|
|
|
Weighted-
Average
Remaining
Contractual Life
(in years)
|
|
|
Number of
Shares
(in thousands)
|
|
|
Weighted-
Average
Exercise Price
per share
|
|
$1.35
|
—
|
$1.53
|
|
|
|
196
|
|
|
|
9.16
|
|
|
|
40
|
|
|
$
|
1.35
|
|
$1.64
|
—
|
$1.64
|
|
|
|
1,911
|
|
|
|
7.85
|
|
|
|
990
|
|
|
$
|
1.64
|
|
$1.75
|
—
|
$1.81
|
|
|
|
511
|
|
|
|
8.62
|
|
|
|
129
|
|
|
$
|
1.78
|
|
$2.00
|
—
|
$3.34
|
|
|
|
552
|
|
|
|
8.02
|
|
|
|
261
|
|
|
$
|
2.81
|
|
$3.44
|
—
|
$3.99
|
|
|
|
123
|
|
|
|
8.35
|
|
|
|
59
|
|
|
$
|
3.94
|
|
$4.32
|
—
|
$4.32
|
|
|
|
627
|
|
|
|
7.33
|
|
|
|
418
|
|
|
$
|
4.32
|
|
$5.18
|
—
|
$6.61
|
|
|
|
562
|
|
|
|
6.32
|
|
|
|
479
|
|
|
$
|
6.20
|
|
$6.83
|
—
|
$6.83
|
|
|
|
50
|
|
|
|
5.89
|
|
|
|
50
|
|
|
$
|
6.83
|
|
$7.20
|
—
|
$7.20
|
|
|
|
5
|
|
|
|
0.91
|
|
|
|
5
|
|
|
$
|
7.20
|
|
$11.40
|
—
|
$11.40
|
|
|
|
5
|
|
|
|
0.39
|
|
|
|
5
|
|
|
$
|
11.40
|
|
$1.35
|
—
|
$18.90
|
|
|
|
4,542
|
|
|
|
7.73
|
|
|
|
2,436
|
|
|
$
|
3.32
|
|
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The weighted-average remaining contractual term for exercisable options is 7.33 years. The intrinsic value is calculated as the difference between the market value as of March 31, 2018 and the exercise price of the shares. The market value of the Company’s common stock as of March 31, 2018 was $1.42. The aggregate intrinsic value of stock options exercisable at March 31, 2018 was zero. The aggregate intrinsic value of stock options outstanding at March 31, 2018 and 2017 was zero and $1.7 million, respectively. The aggregate intrinsic value of restricted stock units outstanding at both March 31, 2018 and 2017 was zero.
For the fiscal years ended
March 31, 2018
and
2017,
the Company calculated the fair value of its employee stock options at the date of grant with the following weighted-average assumptions:
|
|
For Years Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
2.25
|
%
|
|
|
1.40
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
56.08
|
%
|
|
|
56.30
|
%
|
Expected term in years
|
|
|
6.08
|
|
|
|
6.08
|
|
Weighted-average fair value at grant date
|
|
$
|
1.07
|
|
|
$
|
1.72
|
|
For the fiscal years ended
March 31, 2018
and
2017,
the fair value of rights granted under the employee stock purchase plan were estimated at the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted-average assumptions:
|
|
For Years Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
1.38
|
%
|
|
|
0.44
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
56.27
|
%
|
|
|
68.75
|
%
|
Expected term in years
|
|
|
0.50
|
|
|
|
0.50
|
|
Weighted-average fair value at grant date
|
|
$
|
0.60
|
|
|
$
|
0.69
|
|
The effect of recording stock-based compensation expense (including expense related to the ESPP discussed above) for each of the periods presented was as follows (in thousands):
|
|
For Years Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
167
|
|
|
$
|
308
|
|
Research and development
|
|
|
286
|
|
|
|
246
|
|
Sales and marketing
|
|
|
434
|
|
|
|
655
|
|
General and administrative
|
|
|
1,274
|
|
|
|
1,400
|
|
Impact on net loss
|
|
$
|
2,161
|
|
|
$
|
2,609
|
|
As of
March 31, 2018,
the unrecorded stock-based compensation balance related to stock options and restricted stock units outstanding, excluding estimated forfeitures, was
$2.4
million and
$0.5
million, respectively, and will be recognized over an estimated weighted-average amortization period of
2.17
years for stock options and
1.36
years for restricted stock units. The amortization period is based on the expected remaining vesting term of the options and restricted stock units.
Registered Direct Offering
On
June 26, 2017,
the Company, pursuant to a securities purchase agreement with certain investors, sold
2,184,000
shares of the Company’s common stock at a price of
$2.50
per share for aggregate proceeds of
$4.9
million, net of
$0.3
million placement agency fees and
$0.2
million other offering expenses.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11
.
|
Computation of Basic and Diluted Net Loss per Share
|
Basic and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period.
The Company excludes securities from its diluted net loss per share computation when their effect would be antidilutive to net loss per share amounts. The following common stock equivalents were excluded from the net loss per share computation:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
2,475
|
|
|
|
3,825
|
|
Unvested restricted stock units
|
|
|
47
|
|
|
|
123
|
|
Warrants
|
|
|
2,262
|
|
|
|
2,262
|
|
Total common stock equivalents excluded from diluted net loss per common share
|
|
|
4,784
|
|
|
|
6,210
|
|
The benefit from income taxes is based upon loss before income taxes as follows (in thousands):
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Domestic pre-tax loss
|
|
$
|
(9,015
|
)
|
|
$
|
(6,924
|
)
|
Foreign pre-tax loss
|
|
|
(1,488
|
)
|
|
|
(2,721
|
)
|
Total pre-tax loss
|
|
$
|
(10,503
|
)
|
|
$
|
(9,645
|
)
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal tax at statutory rate
|
|
$
|
3,307
|
|
|
$
|
3,293
|
|
Computed state tax
|
|
|
243
|
|
|
|
200
|
|
Foreign rate differential
|
|
|
(358
|
)
|
|
|
(433
|
)
|
Losses not benefited
|
|
|
8,919
|
|
|
|
(2,642
|
)
|
Change in tax reserve
|
|
|
(145
|
)
|
|
|
618
|
|
Nondeductible expenses
|
|
|
(656
|
)
|
|
|
(916
|
)
|
Research and development tax credits
|
|
|
9
|
|
|
|
109
|
|
Change in tax rate
|
|
|
(10,764
|
)
|
|
|
-
|
|
Income tax benefit
|
|
$
|
555
|
|
|
$
|
229
|
|
The components of the benefit from income taxes are as follows (in thousands):
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
US
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
(8
|
)
|
|
|
5
|
|
Foreign
|
|
|
(22
|
)
|
|
|
(66
|
)
|
|
|
|
(30
|
)
|
|
|
(61
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
84
|
|
|
|
-
|
|
State
|
|
|
12
|
|
|
|
-
|
|
Foreign
|
|
|
489
|
|
|
|
290
|
|
|
|
|
585
|
|
|
|
290
|
|
Total benefit from income taxes
|
|
$
|
555
|
|
|
$
|
229
|
|
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
ASC
740,
Income Taxes (“ASC
740”
), provides for the recognition of deferred tax assets if realization of such assets is more likely than
not.
Based on the weight of available evidence, which includes the Company's historical operational performance and the reported cumulative net losses in all prior years, the Company has provided a full valuation allowance against its net deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
15,615
|
|
|
$
|
22,378
|
|
Intangible assets
|
|
|
7,183
|
|
|
|
9,289
|
|
Tax credit carryforwards
|
|
|
3,267
|
|
|
|
2,824
|
|
Reserves and accruals
|
|
|
398
|
|
|
|
391
|
|
Stock compensation
|
|
|
687
|
|
|
|
676
|
|
Fixed assets
|
|
|
7
|
|
|
|
32
|
|
Deferred revenue
|
|
|
10
|
|
|
|
83
|
|
|
|
|
27,167
|
|
|
|
35,673
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liability
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(264
|
)
|
|
|
(549
|
)
|
Cumulative translation adjustment
|
|
|
(84
|
)
|
|
|
-
|
|
|
|
|
(348
|
)
|
|
|
(549
|
)
|
|
|
|
|
|
|
|
|
|
Gross Deferred Tax Assets
|
|
|
26,819
|
|
|
|
35,124
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(26,330
|
)
|
|
|
(35,124
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities
|
|
$
|
489
|
|
|
$
|
-
|
|
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance that decreased by
$8.7
million and increased by
$3.0
million during the years ended
March 31, 2018
and
2017,
respectively.
The Tax Cuts and Jobs Act of
2017
was enacted in
December 2017,
lowering the U.S. federal corporate tax rate to
21%.
Given the tax rate reduction, the Company remeasured its U.S. federal and state deferred tax assets which resulted in decreasing the Company’s deferred tax assets by approximately
$10.8
million. The Company has a full valuation allowance in the U.S. Accordingly, the Company’s valuation allowance also decreased by
$10.8
million, resulting in
no
net tax expense.
As of
March 31, 2018,
the Company had federal and state net operating loss carryforwards of approximately
$56.9
million and
$46.4
million, respectively. As of
March 31, 2018,
the Company also had federal and state research credit carryforwards of
$0.2
million and
$3.9
million, respectively. The federal net operating loss and credit carryforwards expire in various amounts between fiscal years ending
March 31, 2020
through
2037,
if
not
utilized. The state net operating loss carryforwards expire in various amounts between fiscal years ending
March 31, 2019
through various dates, if
not
utilized. The state research and development tax credits have
no
expiration date.
The Internal Revenue Code Section
382
limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event the Company has had a change in ownership, utilization of the carryforwards could be restricted.
Based on its most recently performed study, the Company has concluded it had an ownership change on
July 2, 2014
as defined by Section
382
of the Internal Revenue Code (IRC), which is limiting the future realization of its net operating loss carryforwards since
June 1999.
Based on this recent study, the Company believes that the application of Section
382
will result in the forfeiture of
$172
million net operating loss carryforward for federal income tax purposes and
$30
million of net operating loss carryforward for California income tax purposes.
In addition, based on this recent study, the Company concluded that
$3.6
million of the federal and
none
of the California research tax credit carryforwards, respectively, would be subject to forfeiture due to Section
382
ownership changes under IRC Section
383
and/or possible credit amount reduction upon audit. As noted above, this is subject to review by the applicable taxing authority. Please note the research and development tax credit carryforwards above take into account this reduction.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company accounts for uncertainty in income taxes in accordance with ASC
740.
Tax positions are evaluated in a
two
-step process, whereby the Company
first
determines whether it is more likely than
not
that a tax position will be sustained upon examination by the tax authority, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-
not
recognition threshold it is then measured to determine the amount of benefit to be recognized in the financial statements. The Company’s policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. At
March 31, 2018,
there was
no
liability for unrecognized tax benefits.
A reconciliation of the beginning and ending unrecognized tax benefit amounts for the year ended
March 31, 2018
are as follows (in thousands):
Balance at April 1, 2017
|
|
$
|
1,410
|
|
Increases related to current year tax positions
|
|
|
3
|
|
Increase related to prior year tax positions
|
|
|
75
|
|
Balance at March 31, 2018
|
|
$
|
1,488
|
|
The Company’s federal, state, and foreign tax returns are subject to examination by the tax authorities from inception due to net operating losses and tax carryforwards unutilized from such years.
13
.
|
401
(k) Benefit Plan
|
The Company offers a tax-deferred savings plan under Section
401
(k) of the Internal Revenue Code (“the
401
(k) Plan”), for the benefit of qualified employees. The
401
(k) Plan is designed to provide employees with an accumulation of funds at retirement. Qualified employees
may
elect to make contributions to the
401
(k) Plan on a monthly basis. Starting in fiscal
2012,
the
401
(k) Plan requires the Company to match the
first
1%
of all employee contributions. For both the fiscal years ended
March 31, 2018
and
2017,
the Company contributed
$0.2
million to the
401
(k) Plan. Administrative expenses relating to the
401
(k) Plan are insignificant.
The Company operates as
one
business segment and therefore segment information is
not
presented.
Determine SAS rents its offices from SCI Donapierre, the company controlled by
two
of the Company’s stockholders. For the years ended
March 31, 2018
and
2017,
Determine SAS made rental payments of approximately
$0.3
million and
$0.1
million, respectively, to SCI Donapierre.
The Company also maintains financing facilities and convertible note purchase agreements with related parties, as set forth in Note
9,
Credit Facility and Convertible Notes
, as well as received sublease payments, as set forth in Note
7,
Operating Lease Commitments
, above.
Amendment of Business Financing Agreement
On
June 14, 2018,
Determine and its wholly owned subsidiary, Determine Sourcing, Inc., entered into Amendment Number Eleven to the Amended and Restated Business Financing Agreement (the “Amendment”) with Western Alliance Bank, an Arizona corporation, as successor in interest to Bridge Bank, National Association (“Western Alliance”). The Amendment extended the maturity date of the underlying credit facility to
July 31, 2019,
revised the definition of “Prime Rate” to be
4.75%
and revised certain of the financial and compliance reporting obligations.
DETERMINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amendment of Limited Guarant
y
In connection with the Amendment, on
June 14, 2018,
MILFAM II, L.P. (“MILFAM”), an affiliate of the estate of Lloyd I. Miller, III (“Mr. Miller”), the Company’s largest stockholder, entered into a Third Amended and Restated Limited Guaranty (the “Amended Guaranty”) with Western Alliance. The Amended Guaranty (i) extends the term of the Second Amended and Restated Limited Guaranty entered into by MILFAM with Western Alliance on
June 1, 2017
to
August 10, 2019,
and (ii) terminates the Second Amended and Restated Limited Guaranty entered into by the estate of Mr. Miller with Western Alliance on
June 1, 2017.
The Amended Guaranty also provides that if the maturity date of the Credit Facility is subsequently amended, the term of the Amended Guaranty would automatically extend to a date
ten
(
10
) days following the extended maturity date under the Credit Facility, but
no
later than
July 30, 2020.
In connection with the Amended Guaranty, on
June 14, 2018,
the Company entered into a Guaranty Fee Agreement (the “Fee Agreement”) with MILFAM, pursuant to which the Company agreed to pay MILFAM a commitment fee of
$108,000
and a monthly fee that shall accrue each calendar month during the term of the Amended Guaranty equal to
ten
percent of the commitment fee divided by twelve. The commitment fee and the accrued monthly fee shall be payable in cash by the Company upon the termination or expiration of the Amended Guaranty.
Amendment to Guaranty Fee Agreement
Additionally, in connection with the Amended Guaranty, on
June 14, 2018,
the Company entered into an Amendment to Guaranty Fee Agreement (the “Fee Agreement Amendment”) with MILFAM, Mr. Miller’s estate and Alimco Financial Corporation, an affiliate of Mr. Miller’s estate (collectively, the “Guarantors”). The Fee Agreement Amendment, among other things, amends the Guaranty Fee Agreement, dated as of
June 1, 2017 (
the
“June 2017
Fee Agreement”), among the Company and the Guarantors, to eliminate the payment of certain shares of Company common stock in connection with any extension of the guarantees provided by the Guarantors under the
June 2017
Fee Agreement and replace such payment with a cash commitment fee of
$168,750
plus a monthly fee equal to
ten
percent of such commitment fee divided by twelve.