Form 10-Q DETERMINE, INC. For: Dec 31

February 19, 2019 3:26 PM
 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 


 

FORM 10-Q 


 

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  

For the quarterly period ended December 31, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  

For the transition period from              to            

 

COMMISSION FILE NUMBER 000-29637 

 

 


 

DETERMINE, INC.

(Exact Name of Registrant as Specified in Its Charter) 

 

 


 

 

DELAWARE

77-0432030

(State of Incorporation)

(IRS Employer Identification No.)

 

615 West Carmel Drive, Suite 100, Carmel, IN 46032

(Address of Principal Executive Offices)

 

(650) 532-1500

 (Registrant’s Telephone Number, Including Area Code)

 


 

 

           Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ 

Smaller reporting company

   

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    YES  ☐    NO  ☒

 

The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of February 8, 2019, was 15,245,441.

 

1

 
 
 

 

FORM 10-Q

 

DETERMINE, INC.

 

INDEX

 

PART I FINANCIAL INFORMATION

 

 

 

ITEM 1: Financial Statements

 

Condensed Consolidated Balance Sheets as of December 31, 2018 and March 31, 2018

4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended December 31, 2018 and 2017

5

Condensed Consolidated Statements of Equity (Deficit) for the three and nine months ended December 31, 2018

7

Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2018 and 2017

8

Notes to Condensed Consolidated Financial Statements

9

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk

25

ITEM 4: Controls and Procedures

25

 

 

PART II OTHER INFORMATION

25

 

 

ITEM 1: Legal Proceedings

25

ITEM 1A: Risk Factors

25

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

25

ITEM 3: Defaults Upon Senior Securities

25

ITEM 4: Mine Safety Disclosures

25

ITEM 5: Other Information

25

ITEM 6: Exhibits

26

Signatures

27

 

2

 
 

 

 

Cautionary Statement Pursuant to Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995

 

The words “Determine”, “we”, “our”, “ours”, “us”, and the “Company” refer to Determine, Inc. In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in Item 1A to Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018.  You should carefully review the risks described in other documents the Company files from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding the Company’s expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report on Form 10-Q.  The Company undertakes no obligation to release publicly any updates to the forward-looking statements included herein after the date of this document.

 

3

 

 

 

DETERMINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited) 

 

   

December 31,

   

March 31,

 
   

2018

   

2018

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 8,318     $ 9,928  

Accounts receivable, net of allowance for doubtful accounts of $129 and $215 as of December 31, 2018 and March 31, 2018, respectively

    6,574       6,605  

Restricted cash

    25       28  

Prepaid expenses and other current assets

    2,104       1,542  

Total current assets

    17,021       18,103  
                 

Property and equipment, net

    105       90  

Capitalized software development costs, net

    3,375       2,994  

Goodwill

    14,931       15,458  

Other intangibles, net

    2,283       3,952  

Other assets

    1,325       1,467  

Total assets

  $ 39,040     $ 42,064  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

               

Current liabilities

               

Credit facility

  $ 14,465     $ 12,128  

Accounts payable

    2,634       2,371  

Accrued payroll and related liabilities

    1,982       1,986  

Other accrued liabilities

    2,898       2,239  

Deferred revenue

    8,935       9,487  

Income tax payable

    53       48  

Total current liabilities

    30,967       28,259  
                 

Long-term deferred revenue

    160       84  

Convertible note, net of debt discount

    8,154       7,475  

Long-term promissory notes

    2,071       -  

Other long-term liabilities

    2,837       1,306  

Total liabilities

    44,189       37,124  
                 

Commitments and contingencies (Notes 6 and 7)

               
                 

Stockholders' equity (deficit):

               

Common stock, $0.0001 par value; Authorized: 35,000 shares at December 31, 2018 and March 31, 2018; Issued: 15,382 and 15,050 shares at December 31, 2018 and March 31, 2018, respectively; Outstanding: 15,237 and 14,905 shares at December 31, 2018 and March 31, 2018, respectively

    7       7  

Additional paid-in capital

    327,096       325,942  

Treasury stock at cost - 145 shares at December 31, 2018 and March 31, 2018

    (472

)

    (472

)

Accumulated deficit

    (332,348

)

    (321,697

)

Accumulated other comprehensive income

    568       1,160  

Total stockholders’ equity (deficit)

    (5,149

)

    4,940  

Total liabilities and stockholders’ equity (deficit)

  $ 39,040     $ 42,064  

   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

 

DETERMINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except for per share data)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31, 2018

   

December 31, 2017

   

December 31, 2018

   

December 31, 2017

 
                                 

Revenues:

                               

Recurring revenues

  $ 4,891     $ 5,552     $ 15,186     $ 16,397  

Non-recurring revenues

    1,051       1,915       2,530       4,946  

Total revenues

    5,942       7,467       17,716       21,343  
                                 

Cost of revenues:

                               

Cost of recurring revenues

    1,938       1,903       5,973       5,863  

Cost of non-recurring revenues

    1,074       1,404       3,427       4,203  

Total cost of revenues

    3,012       3,307       9,400       10,066  
                                 

Gross profit:

                               

Recurring gross profit

    2,953       3,649       9,213       10,534  

Non-recurring gross profit (loss)

    (23

)

    511       (897

)

    743  

Total gross profit

    2,930       4,160       8,316       11,277  
                                 

Operating expenses:

                               

Research and development

    1,087       1,289       3,458       3,363  

Sales and marketing

    2,232       2,733       7,814       7,923  

General and administrative

    2,273       1,986       6,503       5,863  

Total operating expenses

    5,592       6,008       17,775       17,149  
                                 

Loss from operations

    (2,662

)

    (1,848

)

    (9,459

)

    (5,872

)

                                 

Other expense, net

    (318

)

    (534

)

    (1,073

)

    (1,280

)

Net loss before income tax

    (2,980

)

    (2,382

)

    (10,532

)

    (7,152

)

                                 

Provision for income taxes

    (19

)

    36       (119

)

    25  

Net loss

  $ (2,999

)

  $ (2,346

)

  $ (10,651

)

  $ (7,127

)

                                 

Basic and diluted net loss per share (Note 11)

  $ (0.20

)

  $ (0.16

)

  $ (0.70

)

  $ (0.51

)

                                 

Weighted-average shares of common stock used in computing basic and diluted net loss per share attributable to common stockholders

    15,122       14,953       15,222       14,068  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(continued)

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 
                                 

Statements of comprehensive loss:

                               

Consolidated net loss

  $ (2,999

)

  $ (2,346

)

  $ (10,651

)

  $ (7,127

)

Foreign currency translation adjustments, net

    (143

)

    257       (592

)

    1,028  

Other comprehensive loss

    -       (69

)

    -       (80

)

Comprehensive loss

  $ (3,142

)

  $ (2,158

)

  $ (11,243

)

  $ (6,179

)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

 

DETERMINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

 (In thousands, except share data) 

(Unaudited)

 

   

Three Month Period Ended December 31, 2018

 
   

Common Stock

   

Additional Paid-

In

   

Treasury Stock

   

Accumulated

   

Accumulated

Other

Comprehensive

   

Total

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Deficit

   

Income (Loss)

   

Equity (Deficit)

 

Balance at September 30, 2018

    15,194,359     $ 7     $ 327,007       (145,208

)

  $ (472

)

  $ (329,341

)

    703     $ (2,096

)

                                                                 

Net employee withholding taxes paid in connection to issuance of restricted stock

    187,331             (2

)

                            (1

)

Stock-based compensation expense

                415                               415  

Debt extinguishment with related party

                (324

)

                            (324

)

Revaluation of prior period balances

                                  (8

)

    8        

Foreign currency translation adjustment, net

                                        (143

)

    (143

)

Net loss

                                  (2,999

)

          (2,999

)

Balance at December 31, 2018

    15,381,690     $ 7     $ 327,096       (145,208

)

  $ (472

)

  $ (332,348

)

  $ 568     $ (5,149

)

 

 

 

 
   

Nine Month Period Ended December 31, 2018

 
   

Common Stock

   

Additional Paid-

In

   

Treasury Stock

   

Accumulated

   

Accumulated

Other

Comprehensive

   

Total

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Deficit

   

Income (Loss)

   

Equity (Deficit)

 

Balance at March 31, 2018

    15,049,700     $ 7     $ 325,942       (145,208

)

  $ (472

)

  $ (321,697

)

  $ 1,160     $ 4,940  
                                                                 

Issuance of stock under employee stock purchase plan

    65,350             72                               72  

Net employee withholding taxes paid in connection to issuance of restricted stock

    266,640             (9

)

                            (9

)

Stock-based compensation expense

                1,415                               1,415  

Debt extinguishment with related party

                (324

)

                            (324

)

Foreign currency translation adjustment, net

                                        (592 )     (592 )

Net loss

                                  (10,651

)

          (10,651

)

Balance at December 31, 2018

    15,381,690     $ 7     $ 327,096       (145,208

)

  $ (472

)

  $ (332,348

)

  $ 568     $ (5,149

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

 

 

 

DETERMINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited) 

 

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2018

   

2017

 

Operating activities

               

Net loss

  $ (10,651

)

  $ (7,127

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    3,219       2,910  

Stock-based compensation expense

    1,415       1,649  

Interest expense paid-in-kind as convertible note debt

    691       587  

Non-cash income tax expense (benefit)

    76       (25

)

Loss on fixed asset disposal

    -       2  

Unrealized currency translation losses (gains)

    151       (43

)

Changes in assets and liabilities:

               

Accounts receivable, net

    (742

)

    (1,989

)

Prepaid expenses and other current assets

    211       308  

Other assets

    92       691  

Accounts payable

    263       (199

)

Accrued payroll and related liabilities

    (8

)

    256  

Other accrued liabilities and other long-term liabilities

    894       365  

Deferred revenue

    (476

)

    276  

Net cash used in operating activities

    (4,865

)

    (2,339

)

                 

Investing activities

               

Purchase of property and equipment

    (58

)

    (34

)

Capitalized software development costs, net

    (1,938

)

    (1,780

)

Net cash used in investing activities

    (1,996

)

    (1,814

)

                 

Financing activities

               

Credit facility borrowing

    29,183       29,415  

Credit facility payment

    (26,856

)

    (29,455

)

Proceeds from long-term promissory notes, net of issuance costs

    2,979       -  

Proceeds from issuance of stock, net of issuance costs

    -       4,909  

Issuance of stock under employee stock purchase plan

    72       73  

Net employee withholding taxes paid in connection with issuance of restricted stock

    (9

)

    (39

)

Repayment of loan

    -       (154

)

Proceeds from exercise of stock options

    -       6  

Net cash provided by financing activities

    5,369       4,755  
                 

Effect of exchange rate changes on cash

    (121

)

    39  
                 

Net (decrease) increase in cash, cash equivalents and restricted cash

    (1,613

)

    641  

Cash, cash equivalents and restricted cash at beginning of the period

    9,956       9,463  

Cash, cash equivalents and restricted cash at end of the period

  $ 8,343     $ 10,104  
                 

Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:

               

Cash and cash equivalents

  $ 8,318     $ 10,077  

Restricted cash

    25       27  

Total cash, cash equivalents and restricted cash

  $ 8,343     $ 10,104  
                 

Supplemental disclosure of cash flow information:

               

Cash paid for interest

  $ 190     $ 116  

Cash paid for taxes

  $ 55     $ 101  

Issuance of warrant in connection with long-term promissory notes

  $ 940     $ -  

Stock issued in connection with loan guarantee extension

  $ -     $ 169  

Stock issued upon conversion of convertible note

  $ -     $ 973  

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

8

 

 

DETERMINE, INC. 

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.  Basis of Presentation

 

The condensed consolidated balance sheets as of December 31, 2018 and March 31, 2018, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2018 and 2017, the condensed consolidated statements of equity (deficit) for the three and nine months ended December 31, 2018 and the condensed consolidated statements of cash flows for the nine months ended December 31, 2018 and 2017 have been prepared by the Company and are unaudited. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial position at December 31, 2018, and the results of operations and cash flows for the three and nine months ended December 31, 2018 and 2017, respectively. Interim results are not necessarily indicative of the results for a full fiscal year. The condensed consolidated balance sheet as of March 31, 2018 has been derived from the audited consolidated financial statements at that date.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018.

 

 

2.   Summary of Significant Accounting Policies

 

There have been no significant changes to the Company’s accounting policies since it filed its audited consolidated financial statements in its Annual Report on Form 10-K for the year ended March 31, 2018, except for the changes applied due to the adoption of Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers. Refer to “Recent Accounting Pronouncements.”

 

Basis of Presentation

 

The accompanying condensed 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. Additionally, certain prior period amounts have been reclassified to conform to the current year presentation on the condensed consolidated financial statements. The reclassification of the prior period amounts was not material to the previously reported condensed consolidated financial statements.

 

Use of Estimates

 

The preparation of the condensed 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 consolidated 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, standalone selling price, the benefit period of deferred commissions and income taxes. Actual results could differ from those estimates.

 

Revenue Recognition

 

The Company generates revenues by providing its software-as-a-service solutions through subscription license arrangements and related professional services, and related software maintenance. The Company presents revenue net of sales taxes and any similar assessments.

 

Revenue recognition. In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, the Company determines revenue recognition through the following five-step framework: (1) identification of the contract, or contracts, with a customer; (2) identification of the performance obligations in a contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, the Company satisfies a performance obligation.

 

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 over the stated contractual period, satisfied over time.

 

9

 

 

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, at a point in time. For fixed-fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting, using the input method, 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.

 

Performance Obligations. The Company enters into arrangements with multiple performance obligations that generally include subscription and professional services. For these arrangements, the Company accounts for individual performance obligations separately if they are distinct. Subscription services and professional services are both distinct performance obligations that are accounted for separately. In agreements with multiple performance obligations, the transaction price is allocated to separate performance obligations on a relative standalone selling price (“SSP”) basis.

 

If the standalone selling price is not observable through past transactions, the Company determines the SSP based on overall pricing objectives, taking into consideration available information such as market conditions and internally approved pricing guidelines related to the performance obligations. This includes a review of historical data related to the size of arrangements, the cloud solutions being sold, customer demographics and the numbers and types of users within the arrangements. The Company uses a range of amounts to estimate SSP for performance obligations. There is typically more than one SSP for individual products and services due to the stratification of those products and services by information such as size and type of customer.

 

Contract Balances: The timing of revenue recognition may differ from the timing of the invoicing for contracts with customers. The Company records a receivable or contract asset when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Subscription services and certain professional services arrangements are commonly billed in advance which results in a deferred revenue balance amortized as revenue is recognized over time. However, other professional service arrangements, primarily those recognized on a time-and-materials basis, are billed in arrears following services that have been rendered. This may result in revenue recognition greater than the invoiced amounts which results in a receivable balance. Receivables represent an unconditional right to payment. Payment terms vary by contract type, however arrangements typically stipulate a requirement for the customer to pay within 60 days. As of December 31, 2018 and March 31, 2018, the balance of unbilled receivable amounts was $0.9 million and $0.8 million, respectively, and was included as a component of prepaid expenses and other current assets on the condensed consolidated balance sheets.

 

At any point in the contract term, transaction price may be allocated to performance obligations that are unsatisfied or partially unsatisfied. These amounts relate to remaining performance obligations on non-cancelable contracts which include both the deferred revenue balance and amounts that will be invoiced and recognized as revenue in future periods. As of December 31, 2018, approximately $20.5 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts, a majority of which is related to multi-year subscriptions. The Company expects to recognize approximately 21%, or $4.3 million, of these remaining performance obligations over the remainder of the current fiscal year, with the balance recognized thereafter. As of December 31, 2018, approximately $1.2 million of revenue is expected to be recognized from remaining performance obligations related to professional services contracts. The Company expects approximately 43%, or $0.5 million, of these remaining performance obligations within the current fiscal year, with the balance recognized thereafter.

 

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 are met. The Company generally invoices its customers annually for the forthcoming year of service. Accordingly, the Company's deferred revenue balance does not include revenue for future years of multiple-year, non-cancellable contracts that have not yet been billed. During the three and nine months ended December 31, 2018, the Company recognized revenue of $3.8 million that was included in the deferred revenue balance as of September 30, 2018 and $8.9 million that was included in the deferred revenue balance as of March 31, 2018, respectively.

 

Deferred Commissions. Commissions are earned by sales personnel upon the execution of the sales contract by the customer, and commission payments are made shortly after they are earned. Commissions earned by the Company's sales personnel are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over the life of the contract. The Company determined the period of benefit by taking into consideration its past experience with customers, industry peers and other available information.

 

The current portion of deferred commissions was $0.4 million and $0.5 million at December 31, 2018 and March 31, 2018, respectively, and is recorded as a component of prepaid expenses and other current assets on the condensed consolidated balance sheets. For both the three months ended December 31, 2018 and 2017, $0.2 million, respectively, of deferred commissions were amortized to sales and marketing expense on the condensed consolidated statements of operations and comprehensive loss, respectively. For both the nine months ended December 31, 2018 and 2017, $0.6 million, respectively, of deferred commissions were amortized to sales and marketing expense on the condensed consolidated statements of operations and comprehensive loss, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

 

10

 

 

Customer Concentrations

 

During the three and nine months ended December 31, 2018 and 2017, no customer accounted for 10% or more of the Company’s consolidated revenues or consolidated net accounts receivable, respectively.

 

Disaggregation of Revenue

 

International revenues are attributable to countries based on the location of the customer. For the three and nine months ended December 31, 2018 and 2017, sales to international locations were derived primarily from France, the United Kingdom, Ireland, Norway, Australia, Canada, Switzerland, Italy, Germany, Bermuda, the Netherlands, United Arab Emirates, Denmark, China, Hong Kong, Bulgaria, Finland, Belgium, Singapore and Portugal. 

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 
   

(in thousands)

 

International revenues

                               

Recurring revenues

  $ 1,715     $ 1,839     $ 5,236     $ 5,158  

Non-recurring revenues

    595       810       1,286       1,930  

Total international revenues

    2,310       2,649       6,522       7,088  
                                 

Domestic revenues

                               

Recurring revenues

    3,176       3,713       9,950       11,239  

Non-recurring revenues

    456       1,105       1,244       3,016  

Total domestic revenues

    3,632       4,818       11,194       14,255  

Total revenues

  $ 5,942     $ 7,467     $ 17,716     $ 21,343  

 

Fair Value Measurements

 

In December 2018, the Company entered into an amendment to its existing Junior Secured Convertible Note Purchase Agreement dated December 27, 2016 that, among other things, resulted in the issuance of warrants exercisable for up to 10,500,000 shares of the Company’s common stock, as discussed in Note 8, Credit Facility and Convertible Notes. The Company classified the warrants as a liability at the time of issuance and reevaluates such classification as of each balance sheet date.

 

The warrant liability is recorded at its estimated fair value using observable, quoted market prices, a Level 1 input, as defined by ASC 820, Fair Value Measurements, given the underlying financial instrument of the liability is the Company’s own publicly-traded stock.

 

Recent Accounting Pronouncements

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards 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, 2018, 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, the 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 adoption of this update did not have a material impact on the Company’s 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.

 

11

 

 

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 adoption of this update did not have a material impact on the Company’s 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 adoption of this update did not have a material impact on the Company’s 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and issued subsequent amendments to the initial guidance in July 2018 within ASU 2018-10 and ASU 2018-11 (ASU 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2018-20, collectively, “Topic 842”) which establish 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 Topic 842 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. On April 1, 2018, the Company adopted the new standard under the full retrospective method. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

The Company has reviewed other new accounting pronouncements that were issued as of December 31, 2018 and does not believe that these pronouncements are applicable to the Company, or that they will have a material impact on its financial position or results of operations.

     

 

3.   Goodwill and Other Intangible Assets 

 

The following is a summary of goodwill (in thousands): 

 

Balance at March 31, 2018

  $ 15,458  

Foreign currency translation adjustment

    (527

)

Balance at December 31, 2018

  $ 14,931  

 

The following is a summary of other intangible assets, net (in thousands): 

 

   

December 31, 2018

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Foreign Currency

Translation

Adjustment

   

Net

Carrying

Value

 

Acquired developed technology

  $ 5,034     $ (4,189

)

  $ 134     $ 979  

Customer relationships

    5,857       (4,608

)

    55       1,304  
    $ 10,891     $ (8,797

)

  $ 189     $ 2,283  

 

12

 

 

   

March 31, 2018

   

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    

 

Acquired developed technology and customer relationships are being amortized on a straight-line basis and have weighted-average remaining useful lives of 0.91 years and 1.32 years, respectively, as of December 31, 2018. Amortization expense of intangible assets was $0.5 million for both the three months ended December 31, 2018 and 2017, respectively, and $1.6 million for both the nine months ended December 31, 2018 and 2017, respectively.

 

 

4. Property and Equipment, net

  

Property and equipment, net consist of the following:   

 

   

December 31,

   

March 31,

 
   

2018

   

2018

 
   

(in thousands)

 

Computers and software

  $ 389     $ 356  

Furniture and equipment

    231       232  

Leasehold improvements

    69       43  
      689       631  

Less: accumulated depreciation

    (584

)

    (541

)

                 

Total property and equipment, net

  $ 105     $ 90  

 

Depreciation expense was approximately $0.01 million during both the three months ended December 31, 2018 and 2017, respectively, and $0.04 million and $0.03 million during the nine months ended December 31, 2018 and 2017, respectively.

 

 

5.  Capitalized Software Development Costs

 

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 $0.6 million of research and development costs during the both the three months ended December 31, 2018 and 2017, respectively, and $1.9 million and $1.8 million of research and development costs during the nine months ended December 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 $0.5 million during the both three months ended December 31, 2018 and 2017, respectively, and $1.6 million and $1.2 million during the nine months ended December 31, 2018 and 2017, respectively. The unamortized balance of capitalized software was $3.4 million and $3.0 million as of December 31, 2018 and March 31, 2018, 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 nine months ended December 31, 2018 or 2017.

 

 

 

6.  Operating Lease Commitments

 

The Company leases office space in London, United Kingdom, Aix-en-Provence, France, Paris, France, Atlanta, Georgia, 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 $0.1 million during both the three months ended December 31, 2018 and 2017, respectively, and $0.3 million during both the nine months ended December 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 condensed consolidated balance sheets.

 

During the third quarter of fiscal year 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 three months ended September 30, 2017. Rental income from the subleases was recognized on a straight-line basis over the lease term. The Company recognized $0.03 million in sublease income during the nine months ended December 31, 2017.

 

13

 
 

 

 

7.  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. 

 

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 the purchase price of the product or service. The Company has not provided for a warranty accrual as of December 31, 2018 or March 31, 2018.

 

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 December 31, 2018 or March 31, 2018.

 

 

8. Credit Facility and Convertible Notes

 

The Company maintains financing facilities and convertible note purchase agreements. For a description of the Company’s debt financing, see the notes to consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018 and the summaries set forth below.

 

Amendments to Convertible Notes and Issuances of Promissory Notes

 

On November 16, 2018, the Company entered into Amendment No. 1 (the “November Amendment”) to its existing Junior Secured Note Purchase Agreement dated as of December 27, 2016 (the “2016 Notes”) with MILFAM II L.P. (“MILFAM”) and Alimco Financial Corporation, a Delaware corporation formerly known as Alliance Semiconductor Corporation (“Alimco”, and, together with MILFAM, the “Investors”), each an affiliate of the estate of Lloyd I. Miller, II (“Miller”), the Company’s largest stockholder, pursuant to which the Investors issued promissory notes (the “November Notes”) to the Company in the aggregate principal amount of $3.0 million. The November Notes are due on December 27, 2021 or upon any transaction resulting in a change of control of the Company and accrue interest at an annual rate of 10% on the aggregate outstanding principal amount, payable quarterly, beginning on December 31, 2018. The Company has the option to pay any amounts of interest due under the November Notes by compounding and adding such interest amount to the unpaid principal amount of the November 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. Pursuant to the terms of the November Amendment, the Company has agreed to pay to the Investors, conditioned on the amount of outstanding advances made by them, an amendment fee of up to $0.5 million payable upon the maturity date of the of the November Notes, as well as a supplemental fee based on certain contingencies. At December 31, 2018, the Company has drawn $0.5 million from the November Notes and has accrued $0.3 million of the amendment fee in other long-term liabilities on the condensed consolidated balance sheets.

 

On December 21, 2018, the Company entered into Amendment No. 2 (the “December Amendment”) to the 2016 Notes, pursuant to which the Investors issued promissory notes (the “December Notes”) to the Company in the aggregate outstanding principal amount of $2.5 million. The December Notes have the same maturity date and interest options as the November Notes discussed above. Pursuant to the December Amendment, no further amounts will be drawn and no further fees will be accrued under the November Amendment. In connection with the December Amendment, the Company issued warrants exercisable for up to 10,500,000 shares of the Company’s common stock at an exercise price of $0.01 per share (the “Warrants”) to the Investors. At December 31, 2018, the Company had drawn the full amount of $2.5 million from the December Notes.

 

As a result of the November and December Amendment, the Company recorded a loss on extinguishment of approximately $0.3 million, which consisted of deferred financing costs associated with the 2016 Notes, as well as the November and December Amendments. 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 December 31, 2018.

 

Amendments of Business Financing Agreement

 

On June 14, 2018, the Company 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.

 

14

 

 

On August 7, 2018, the Company and its wholly owned subsidiary, Determine Sourcing Inc. entered into Amendment Number Twelve to the Amended and Restated Business Financing Agreement (the “August Amendment”) with Western Alliance . The August Amendment, among other things, increased the Company’s available credit under the existing facility with Western Alliance (the “Credit Facility”) by $2 million (the “Additional Limit”), up to a total available credit amount of $15 million. In connection with the August Amendment, the Company agreed to pay Western Alliance cash fees of $40,000 plus a one-time facility fee equal to 0.75% of the Additional Limit on the date of the August Amendment, and the Additional Limit amount was added to the calculation of the annual facility fee payable under the Credit Facility. Additionally, the definitions of “Finance Charge Percentage” and “Prime Rate” were revised to increase the respective base percentage rates to 5.00%.

 

Amendment of Limited Guaranty

 

In connection with the Amendment, on June 14, 2018, MILFAM 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.

 

In order to satisfy certain conditions for Western Alliance Bank to lend additional funds under the Credit Facility and enter into the August Amendment, on August 7, 2018, MILFAM entered into a Fourth Amended and Restated Limited Guaranty (the “Fourth Amended Guaranty”) with Western Alliance. The Fourth Amended Guaranty increases the amount of the limited, non-revocable guaranty of the Company’s Credit Facility provided by MILFAM by $2 million, from $2 million to $4 million.

 

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 $0.2 million plus a monthly fee equal to ten percent of such commitment fee divided by twelve.

 

Guaranty Fee Agreement

 

In connection with the Fourth Amended Guaranty, on August 7, 2018, the Company entered into a Guaranty Fee Agreement with MILFAM, pursuant to which the Company agreed to pay MILFAM a commitment fee of $0.1 million and a monthly fee that shall accrue each calendar month during the term of the Fourth 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 Fourth Amended Guaranty.

 

As of December 31, 2018 and March 31, 2018, the Company owed $14.5 million and $12.1 million, respectively, under the Credit Facility, and $0.5 million and $0.9 million was available for future borrowings, respectively. 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. During the nine months ended December 31, 2018, the Company met all the requirements and was in compliance with the financial covenants.

 

 

9. Warrant Liability

 

The following table summarizes the fair value of the Warrants discussed above at the date of issuance and as of December 31, 2018 (in thousands), included in other long-term liabilities on the condensed consolidated balance sheets:

 

Balance at March 31, 2018

  $ -  

Issuance of Warrants

    940  

Change in fair value

    (113

)

Balance at December 31, 2018

  $ 827  

 

15

 

 

 

 

10.  Stockholders’ Equity (Deficit)

 

Equity Incentive Program

 

The Company’s equity incentive program is a broad-based, retention program comprised of stock options, restricted stock units and an employee stock purchase plan (“ESPP”) designed to align stockholder and employee interests. For a description of the Company’s equity plans, see the notes to consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018.

 

Valuation Assumptions

 

There were no stock options granted during the three months ended December 31, 2018. During the three months ended December 31, 2017, the Company calculated the fair value of its employee stock options at the date of grant with the following weighted average assumptions:  

 

   

Three Months Ended

 
   

December 31,

2017

 

Risk-free interest rate

    2.16

%

Dividend yield

    0

%

Expected volatility

    56.00

%

Expected term in years

    6.08  

Weighted average fair value at grant date

  $ 0.98  

 

During the nine months ended December 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:  

 

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

 

Risk-free interest rate

    2.75

%

    2.01

%

Dividend yield

    0

%

    0

%

Expected volatility

    61.35

%

    55.00

%

Expected term in years

    5.50       6.08  

Weighted average fair value at grant date

  $ 0.57     $ 1.47  

 

The following tables summarize activity under the equity incentive plans for the three months ended December 31, 2018: 

 

   

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 October 1, 2018

    4,407     $ 2.64       315     $ 1.87  

Exercised/Released

    -     $ -       (192

)

  $ 1.88  

Cancelled

    (306

)

  $ 2.25       -     $ -  

Outstanding at December 31, 2018

    4,101     $ 2.61       123     $ 1.85  
                                 

Vested and expected to vest

    4,024     $ 2.62                  

  

16

 

 

   

Shares Available for

Grant

 
   

(in thousands)

 

Balance at October 1, 2018

    232  

Options:

       

Cancelled

    255  

Shares added to the plans

    50  

Balance at December 31, 2018

    537  

 

The weighted average remaining contractual term for exercisable options is 6.84 years. The intrinsic value is calculated as the difference between the market value as of December 31, 2018 and the exercise price of the shares. The market value of the Company’s common stock as of December 31, 2018 was $0.23 as reported by the OTC Bulletin Board. The aggregate intrinsic value of stock options outstanding at December 31, 2018 and 2017 was zero and $0.4 million, respectively. The aggregate intrinsic value of restricted stock units outstanding at December 31, 2018 and 2017 was $0.03 million and $0.5 million, respectively.

 

The options outstanding and exercisable at December 31, 2018 were in the following exercise price ranges:

 

         

Options Outstanding

   

Options Vested

 

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

 
$0.78 $1.53       324       8.37       114     $ 1.28  
$1.64 $1.64       1,892       7.09       1,330     $ 1.64  
$1.75 $1.81       484       8.16       252     $ 1.79  
$2.00 $3.99       374       7.04       275     $ 3.27  
$4.32 $4.32       627       6.58       535     $ 4.32  
$5.18 $5.99       123       4.59       124     $ 5.68  
$6.14 $6.14       213       6.45       187     $ 6.14  
$6.30 $6.30       23       4.87       23     $ 6.30  
$6.61 $6.61       36       2.56       36     $ 6.61  
$7.20 $7.20       5       0.16       5     $ 7.20  
$0.78 $7.20       4,101       7.10       2,881     $ 2.87  

 

The effect of recording stock-based compensation expense (including expense related to the ESPP discussed below) for each of the periods presented was as follows (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 
                                 

Cost of revenues

  $ 15     $ 23     $ 73     $ 144  

Research and development

    58       61       193       225  

Sales and marketing

    58       78       244       309  

General and administrative

    284       281       905       971  

Impact on net loss

  $ 415     $ 443     $ 1,415     $ 1,649  

 

As of December 31, 2018, the unrecorded stock-based compensation balance related to stock options and restricted stock units outstanding excluding estimated forfeitures was $1.4 million and $0.2 million, respectively, and will be recognized over an estimated weighted average amortization period of 1.53 years for stock options and 1.28 years for restricted stock units. The amortization period is based on the expected remaining vesting term of the options and restricted stock units.

 

1999 Employee Stock Purchase Plan (“ESPP”)

 

The price paid for the Company’s common stock purchased under the ESPP is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each offering period. The compensation expense in connection with the ESPP for the three months ended December 31, 2018 and 2017 was $0.01 million and $0.02 million, respectively. The compensation expense in connection with the ESPP for the nine months ended December 31, 2018 and 2017 was $0.02 million and $0.06 million, respectively. During the nine months ended December 31, 2018 and 2017, there were 65,350 and 41,205 shares issued, respectively, under the ESPP.

 

17

 

 

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.

 

 

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:

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 
   

(in thousands)

   

(in thousands)

 
                                 

Options

    4,101       4,176       4,101       2,241  

Unvested restricted stock units

    120       37       96       52  

Warrants

    1,748       2,262       1,748       2,262  

Total common stock equivalents excluded from diluted net loss per common share

    5,969       6,475       5,945       4,555  

  

 

12.  Income Taxes

 

The provision for income taxes is based upon loss before income taxes as follows (in thousands):

 

   

Nine Months Ended

December 31, 2018

 

Domestic pre-tax loss

  $ (10,308

)

Foreign pre-tax loss

    (224

)

Total pre-tax loss

  $ (10,532

)

 

The components of the provision for income taxes are as follows (in thousands):

 

   

Nine Months Ended

December 31, 2018

 

US

  $ 2  

Foreign

    (121

)

Total provision for income taxes

  $ (119

)

 

The Company accounts for its income taxes in accordance with ASC 740, Income Taxes. ASC 740 clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold, measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Under ASC 740, the Company is required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The Company policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. 

 

At December 31, 2018, there was no material increase in the liability for unrecognized tax benefits nor any accrued interest and penalties related to uncertain tax positions.

 

In addition, at December 31, 2018, the Company had approximately $1.5 million of unrecognized tax benefits which were netted against deferred tax assets with a full valuation allowance. If these amounts are recognized, there will be no effect on the Company’s effective tax rate due to the full valuation allowance. 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 operation performance and the reported cumulative net losses in all prior years, the Company has provided a full valuation allowance against its U.S. federal and state net deferred tax assets

 

The Company’s Federal, state and foreign tax returns may be subject to examination by the tax authorities for fiscal years ended from 1998 to 2018 due to net operating losses and tax carryforwards unutilized from such years.  

 

18

 

 

The Tax Cuts and Jobs Act of 2017 was enacted in December 2017, which introduced the Global Low Taxed Intangible Income (“GILTI”) inclusion. Due to the losses in the foreign subsidiaries, the Company projects no GILTI income inclusion for its fiscal year ended March 31, 2019. The Company continues to evaluate its accounting policy with respect to temporary differences related to the GILTI inclusion.

 

 

13.  Related Party Transactions

 

Determine SAS rents its offices from SCI Donapierre, the company controlled by two of the Companys stockholders. During both the three months ended December 31, 2018 and 2017, Determine SAS made rental payments of approximately $0.1 million, respectively, to SCI Donapierre. During both the nine months ended December 31, 2018 and 2017, Determine SAS made rental payments of approximately $0.2 million, respectively, to SCI Donapierre.

 

The Company also maintains financing facilities and convertible note purchase agreements with related parties, as set forth in Note 8, Credit Facility and Convertible Notes, has a warrant liability associated with debt financing, as set forth in Note 9, Warrant Liability, as well as had subleases, as set forth in Note 6, Operating Lease Commitments, above. ALMC is a company for which Alan Howe, a director of the Company, serves as chief executive officer.

 

 

14. Subsequent Events

 

On February 10, 2019, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Corcentric, Inc., a Delaware corporation, and Corcentric Acquisition, L.L.C., a Delaware limited liability company (together, the “Buyer”), pursuant to which the Company has agreed to sell substantially all of its assets and the Buyer has agreed to acquire such assets and assume certain liabilities for a cash purchase price of $32.0 million, subject to certain adjustments and escrow arrangements. The transaction remains subject to customary closing conditions, including the necessary Company stockholder approval and regulatory approvals. The transaction is targeted to close in mid-2019.

 

19

 
 

 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in the “Risk Factors” in Item 1A to Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018 (the “Form 10-K”). They include the following: the level of demand for Determine’s products and services; the intensity of competition; Determine’s ability to effectively manage product transitions and to continue to expand and improve internal infrastructure; and the impact of current economic conditions on our customers and our business. For a more detailed discussion of the risks relating to our business, readers should refer to Item 1A to Part 1 in the Form 10-K entitled “Risk Factors.” Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report. We assume no obligation to update these forward-looking statements  

 

Overview

 

Determine, Inc. is a leading global provider of SaaS Source-to-Pay and Enterprise Contract Lifecycle Management (“ECLM”) solutions. We provide cloud-based software solutions that empower 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.

 

The Determine platform is an open technology infrastructure based on smart process application models. The goal of our platform is to establish awareness of relevant data, manage business documents, embed analytical tools, create a means for collaboration, and provide advanced process management tools for fully integrating business processes through an open application program interface (“API”) infrastructure. Built on a unified and highly scalable platform, we deliver deep and innovative capabilities in strategic sourcing, supplier management, ECLM, e-procurement, invoicing and other business operation areas.

 

In addition to our source to pay and enterprise contract lifecycle management solutions suite, we also provide a powerful, patented configuration engine solution, which Global 1000 companies use to increase revenue by facilitating the right combination of products, services and price.

 

During the three months ended December 31, 2018, our total revenues decreased by 20%, or $1.5 million, to $5.9 million compared with total revenues of $7.5 million during the three months ended December 31, 2017. Recurring revenues, comprised of subscription license sales and services, maintenance sales from previously sold perpetual licenses, application services management and hosting revenues, decreased $0.7 million during the three months ended December 31, 2018, compared to during the three months ended December 31, 2017. As a percent of total revenues, recurring revenues comprised 82% and 74% of total revenues during the three months ended December 31, 2018 and 2017, respectively. Non-recurring revenues, comprised of perpetual license sales and revenues from professional services for system implementations, enhancements and training, totaled $1.1 million, or 18% of total revenues, representing a decrease of $0.9 million, or 45%, over the three months ended December 31, 2017. The decrease in total revenues year over year resulted primarily from our focus on migrating customers from our legacy software platform to our cloud-based solutions. These migrations require simpler implementations, so less billable time is incurred. Additionally, the cross-sells and upsells we benefit from these migrations are of lesser dollar value than new customer subscription contracts.

 

During the three months ended December 31, 2018, our net loss from operations increased $0.8 million, or 44%, to $2.7 million, compared to $1.8 million during the three months ended December 31, 2017. The increase in net loss is primarily due to decreased gross margins. See “Results of Operations” below for further discussion on the components of our net loss.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to any of our critical accounting policies and estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018.

     

20

 

 

Results of Operations:

 

Revenues

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 
   

(in thousands, except percentages)

   

(in thousands, except percentages)

 

Recurring revenues

  $ 4,891     $ 5,552     $ 15,186     $ 16,397  

Percentage of total revenues

    82

%

    74

%

    86

%

    77

%

Non-recurring revenues

    1,051       1,915       2,530       4,946  

Percentage of total revenues

    18

%

    26

%

    14

%

    23

%

Total revenues

  $ 5,942     $ 7,467     $ 17,716     $ 21,343  

 

Recurring revenues. Recurring revenues consist of subscription license sales and services, maintenance revenues from previously sold perpetual licenses and hosting revenues.  Recurring revenues decreased $0.7 million, or 12%, during the three months ended December 31, 2018, in comparison to the three months ended December 31, 2017, and $1.2 million, or 7%, during the nine months ended December 31, 2018, in comparison to the nine months ended December 31, 2017. Maintenance revenues continued to decrease in the current period. Subscription revenues decreased due to our focus on existing customer migrations to our cloud-based solutions, decreasing the number of new customer subscription license contracts entered into during the current period, as well as customer turnover. 

 

Subscription revenues decreased to $4.2 million during the three months ended December 31, 2018, compared to $4.6 million during the three months ended December 31, 2017, representing a 10% decrease, and $12.9 million during the nine months ended December 31, 2018, compared to $13.6 million during the nine months ended December 31, 2017, representing a 5% decrease. Maintenance revenues were $0.7 million during the three months ended December 31, 2018, compared to $0.9 million during the three months ended December 31, 2017, representing a 21% decrease, and $2.1 million during the nine months ended December 31, 2018, compared to $2.6 million during the nine months ended December 31, 2017, representing a 18% decrease.

 

Recurring revenues continue to account for the majority of our total revenues, and we expect this trend to continue going forward as we continue to emphasize our cloud-based solutions. This will depend in part on the number of maintenance renewals and the number and size of new subscription license contracts. In addition, maintenance renewals are extremely dependent upon economic conditions, customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers.

 

Non-recurring revenues. Non-recurring revenues are mainly comprised of revenues from professional services for system implementations, enhancements and training. Non-recurring revenues decreased by $0.9 million, or 45%, during the three months ended December 31, 2018, compared to the three months ended December 31, 2017, and $2.4 million, or 49%, during the nine months ended December 31, 2018, compared to the nine months ended December 31, 2017. This decrease was primarily due to decreased time spent on implementations, as our customers migrate from the legacy software platform to our cloud-based solutions, which require simpler implementations. We expect non-recurring revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on the number and size of new software implementations and follow-on services to our existing customers.

 

Fluctuations in revenue are also due to the timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope or renegotiated terms and additional services. In addition, we anticipate that as we continue to transition more of our business to our cloud-based solutions, revenue from our legacy software platforms will continue to decline.

 

Sales to foreign customers accounted for 39% and 35% of total revenues during the three months ended December 31, 2018 and 2017, respectively. The majority of these sales were denominated in US dollars. We do not anticipate that our exposure to foreign currency fluctuations will be significant in the foreseeable future.

 

Cost of Revenues  

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 

Cost of recurring revenues

  $ 1,938     $ 1,903     $ 5,973     $ 5,863  

Percentage of total cost of revenue

    64

%

    58

%

    64

%

    58

%

Cost of non-recurring revenues

    1,074       1,404       3,427       4,203  

Percentage of total cost of revenue

    36

%

    42

%

    36

%

    42

%

Total cost of revenues

  $ 3,012     $ 3,307     $ 9,400     $ 10,066  

 

Cost of recurring revenues. Cost of recurring revenues consists of costs associated with supporting our data center, a fixed allocation of our research and development costs and salaries and related expenses of our support organization. Cost of recurring revenues remained flat during the three months ended December 31, 2018, compared to the three months ended December 31, 2017, and increased $0.1 million, or 2%, during the nine months ended December 31, 2018, compared to the nine months ended December 31, 2017. These changes were the result of increased data center costs and amortization of capitalized software, offset by decreased maintenance costs.

 

21

 

 

Cost of non-recurring revenues. Cost of non-recurring revenues is comprised mainly of salaries and related expenses of our services organization, fees paid to resellers and certain allocated corporate expenses. During the three months ended December 31, 2018, cost of non-recurring revenues decreased $0.3 million, or 24%, compared to the three months ended December 31, 2017, and, during the nine months ended December 31, 2018, decreased $0.8 million, or 18%, compared to the nine months ended December 31, 2017. These decreases were primarily due to reduced labor costs associated with delivering our cloud-based solutions.

 

We expect costs of recurring and non-recurring revenues to remain relatively flat as a percentage of recurring revenues in the foreseeable future.

 

Gross Profit and Margin

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 

Gross margin, recurring revenues

    60

%

    66

%

    61

%

    64

%

Gross margin, non-recurring revenues

    (2

%)

    27

%

    (35

%)

    15

%

Gross margin, total revenues

    49

%

    56

%

    47

%

    53

%

 

Gross profit dollars decreased $1.2 million, or 30%, during the three months ended December 31, 2018, compared to the three months ended December 31, 2017, and $3.0 million, or 26%, during the nine months ended December 31, 2018, compared to the nine months ended December 31, 2017. As we emphasize our cloud-based solutions, and move away from our legacy software platforms, our gross profit will fluctuate due to the timing between costs associated with deploying our newer solutions and the related revenue recognition.

 

Gross margins represent gross profit as a percentage of revenue and were affected by the factors discussed above under “Revenues” and “Costs of Revenues.” We expect that our overall gross margins will continue to fluctuate primarily due to the timing of revenue recognition. The impact on our gross margin will depend on the mix of services we provide, whether the services are performed by our professional services employees or third-party consultants and the overall utilization rates of our professional services organization.

 

Operating Expenses

 

Research and Development Expenses

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 

Total research and development

  $ 1,087     $ 1,289     $ 3,458       3,363  

Percentage of total revenues

    18

%

    17

%

    20

%

    16

%

 

Research and development expenses consist mainly of salaries and related costs of our engineering, quality assurance, technical publication efforts and certain allocated expenses.  Research and development expenses decreased $0.2 million, or 16%, during the three months ended December 31, 2018, compared to the three months ended December 31, 2017, and increased $0.1 million, or 3%, during the nine months ended December 31, 2018, compared to the nine months ended December 31, 2017. These changes were due primarily to further development of our cloud-based solutions in line with our transition from our legacy software platforms, offset by an increase in capitalized research and development costs. We capitalized $0.6 million of research and development costs during the three months ended December 31, 2018 and 2017, respectively, and $1.9 million and $1.8 million during the nine months ended December 31, 2018 and 2017, respectively.

 

We expect research and development expenditures to decline moderately in the future quarters. As we continue to invest in enhancements to our existing products, by adding new features, improving functionality and incorporating feedback and suggestions from our customers, the expenditures will be offset by our ability to capitalize the related allowable costs.

 

Sales and Marketing Expenses

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 

Sales and marketing

  $ 2,232     $ 2,733     $ 7,814       7,923  

Percentage of total revenues

    38

%

    37

%

    44

%

    37

%

 

Sales and marketing expenses consist primarily of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, sales materials, advertising and certain allocated expenses. During the three months ended December 31, 2018, sales and marketing expenses decreased $0.5 million, or 18%, compared to the three months ended December 31, 2017, and $0.1 million, or 1%, compared to the nine months ended December 31, 2017, due primarily to management’s strategic plan to continue to build and increase our pipeline, while reducing the remaining sales and marketing expenses in the current quarter.

 

22

 

 

We expect sales and marketing expenses to remain flat in the foreseeable future as we continue to focus on building our pipeline and decreasing overall expenses.

 

General and Administrative Expenses

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2018

   

December 31,

2017

   

December 31,

2018

   

December 31,

2017

 

General and administrative

  $ 2,273     $ 1,986     $ 6,503       5,863  

Percentage of total revenues

    38

%

    27

%

    37

%

    27

%

 

General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses.  General and administrative expense increased $0.3 million, or 14%, during the three months ended December 31, 2018, compared to the three months ended December 31, 2017, and $0.6 million, or 11%, during the nine months ended December 31, 2018, compared to the nine months ended December 31, 2017. These increases were primarily due to increased legal and bad debt reserve activity in the current period.

 

We expect general and administrative expenses to remain flat in the foreseeable future.

 

Other Expense, net

 

Other expense, net consists primarily of interest expense on the credit facility, foreign currency transaction fluctuations and other miscellaneous expenditures. During the three and nine months ended December 31, 2018, other expenses decreased $0.2 million, when compared to the three and nine months ended December 31, 2017, due primarily to the unrealized gain on the fair value remeasurement of our warrant liability.

 

Liquidity and Capital Resources

 

   

As of

 
   

December 31, 2018

   

March 31, 2018

 
   

(in thousands)

 

Cash, cash equivalents and short-term investments

  $ 8,318     $ 9,928  

Working capital

  $ (13,946

)

  $ (10,156

)

 

   

Nine Months Ended

 
   

December 31, 2018

   

December 31, 2017

 
   

(in thousands)

 

Net cash used in operating activities

  $ (4,822

)

  $ (2,339

)

Net cash used in investing activities

  $ (1,996

)

  $ (1,814

)

Net cash provided by financing activities

  $ 5,369     $ 4,755  

  

Our primary source of liquidity consisted of approximately $8.3 million in cash and cash equivalents as of December 31, 2018, which decreased compared to March 31, 2018 primarily due to payments to pay down our short-term credit facility and the normal course of operations, partially offset by $3.0 million of proceeds received from long-term promissory notes entered into during the current quarter.    

 

Net cash used in operating activities for the nine months ended December 31, 2018 resulted primarily from our net loss of $10.7 million, offset by non-cash expense adjustments of $5.7 million. Net cash provided by operating activities during the nine months ended December 31, 2017 resulted primarily from our net loss of $7.1 million, offset by non-cash expense adjustments of $5.1 million. Non-cash expense adjustments typically include items such as depreciation and amortization, stock-based compensation, interest expense paid in kind as convertible note debt and income tax benefit or expense.

 

Net cash used in investing activities for both the nine months ended December 31, 2018 and 2017 primarily consisted of capitalized software costs, which increased $0.2 million during the current period, compared to the prior period.

 

The increase in net cash provided by financing activities during the nine months ended December 31, 2018, compared to the nine months ended December 31, 2017, was primarily due to proceeds from the issuance of long-term notes payable and decreased loan repayments in the current period, offset by $4.9 million of proceeds received from a direct registration offering, net of related costs, during the three months ended June 30, 2017.

 

We expect to incur significant operating costs for the foreseeable future. We expect to fund our operating costs, as well as our future capital expenditures and liquidity needs, from a combination of available cash balances, internally generated funds, reducing expenditures and drawing on our short-term credit facility. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues and our ability to manage costs.

 

23

 

 

While we have made significant progress in reducing our expenditures, our current cash on hand and future cash flows provided by operating activities may not be sufficient to fund our working capital and general corporate needs and the non-discretionary capital expenditures without increasing cash flows through our operating activities, reducing expenditures, borrowing additional funds under our credit facility or debt arrangements, or a combination of the foregoing. There can be no guarantee that additional financing will be available to us at this time or in the future, that any available financing will be on terms favorable to the Company and its stockholders or that additional funds will be available under our credit facility.  

 

24

 

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.

  

ITEM 4: CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the period ending December 31, 2018. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.

 

Changes in Internal Control Over Financial Reporting

     

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act that was conducted during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II: OTHER INFORMATION

 

ITEM 1: LEGAL PROCEEDINGS

 

Not applicable.

 

ITEM 1A: RISK FACTORS

 

Not applicable.

 

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

      

Not applicable.

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4: MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5: OTHER INFORMATION

 

Not applicable. 

 

25

 

 

 

ITEM 6: EXHIBITS

 

Exhibit

No.

 

Description

     
10.1     Amendment No. 1 to the Junior Secured Convertible Note Purchase Agreement dated November 16, 2018
     
10.2(1)   Amendment No. 2 to the Junior Secured Convertible Note Purchase Agreement dated December 21, 2018
     
10.3(1)   Warrant to Purchase Common Stock, issued to MILFAM II L.P.
     
10.4(1)   Junior Secured Promissory Note, issued to MILFAM II L.P.
     
10.5(1)   Warrant to Purchase Common Stock, issued to Alimco Financial Corporation.
     
10.6(1)   Junior Secured Promissory Note, issued to Alimco Financial Corporation.
     

 31.1  

  

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 31.2  

  

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 32.1  

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 32.2  

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

101.INS** XBRL Instance

 

 

101.SCH** XBRL Taxonomy Extension Schema

 

 

101.CAL** XBRL Taxonomy Extension Calculation

 

 

101.DEF** XBRL Taxonomy Extension Definition

 

 

101.LAB** XBRL Taxonomy Extension Labels

 

 

101.PRE** XBRL Taxonomy Extension Presentation

 

 

 

    (1) Previously filed in the Company’s report on Form 8-K on December 28, 2018.

  

 

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purpose of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

26

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Date: February 19, 2019

By:

/s/ JOHN NOLAN

  

  

  

John Nolan

  

  

  

Chief Financial Officer

  

 

 

27

 

 

EXHIBIT INDEX

Exhibit

No.

 

Description

     
10.1     Amendment No. 1 to the Junior Secured Convertible Note Purchase Agreement dated November 16, 2018
     
10.2(1)   Amendment No. 2 to the Junior Secured Convertible Note Purchase Agreement dated December 21, 2018
     
10.3(1)   Warrant to Purchase Common Stock, issued to MILFAM II L.P.
     
10.4(1)   Junior Secured Promissory Note, issued to MILFAM II L.P.
     
10.5(1)   Warrant to Purchase Common Stock, issued to Alimco Financial Corporation.
     
10.6(1)   Junior Secured Promissory Note, issued to Alimco Financial Corporation.
     

 31.1  

  

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 31.2  

  

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 32.1  

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 32.2  

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

101.INS** XBRL Instance

 

 

101.SCH** XBRL Taxonomy Extension Schema

 

 

101.CAL** XBRL Taxonomy Extension Calculation

 

 

101.DEF** XBRL Taxonomy Extension Definition

 

 

101.LAB** XBRL Taxonomy Extension Labels

 

 

101.PRE** XBRL Taxonomy Extension Presentation

 

 

 

    (1) Previously filed in the Company’s report on Form 8-K on December 28, 2018.

  

 

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purpose of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

28

Exhibit 10.1

 

AMENDMENT NO. 1 TO THE JUNIOR SECURED
CONVERTIBLE NOTE PURCHASE AGREEMENT

 

AMENDMENT NO. 1 TO THE JUNIOR SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT, dated as of November 16, 2018 (this “Amendment”), to the Junior Secured Convertible Note Purchase Agreement, dated as of December 27, 2016 (as amended, supplemented or otherwise modified prior to the date hereof, the “NPA”), among DETERMINE, INC., a Delaware corporation (the “Company”), Lloyd I. Miller, III (Deceased), as Lenders’ Agent (“Lenders’ Agent”), MILFAM II L.P. (“Milfam”), and Alimco Financial Corporation (“Alimco”, and together with Milfam, the “Purchasers”).

 

WITNESSETH:

 

WHEREAS, pursuant to the NPA, the Purchasers have purchased, and the Company has issued certain promissory Notes (as defined in the NPA) to the Company;

 

WHEREAS, the Company has requested that the Purchasers purchase additional notes of the Borrower in an amount up to $3,000,000 and that certain other amendments be made to the NPA as set forth in Section 4 of this Amendment (the “Amendments”) (the NPA, after giving effect to the Amendments, the “Amended NPA”);

 

WHEREAS, the Company, Lenders’ Agent and the Purchasers are willing to agree to this Amendment and the Amended NPA on the terms set forth herein.

 

NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth, the parties hereto agree as follows:

 

SECTION 1.     Definitions. Unless otherwise defined herein, terms defined in the NPA and used herein shall have the meanings given to them in the NPA.

 

SECTION 2.     Amendment Effective Date. This Amendment shall become effective as of the date (the “Amendment Effective Date”) on which the following conditions have been satisfied (or waived pursuant to Section 7(e) of the NPA):

 

(a)     Lenders’ Agent shall have received counterparts to this Amendment, duly executed by the Company and the Purchasers;

 

(b)     (i) all of the representations and warranties made by the Company in the NPA shall be true and correct in all material respects on and as of the Amendment Effective Date to the same extent as though made on and as of such date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date; and (ii) no Event of Default shall have occurred and be continuing at the time of, or after giving effect to, this Amendment on the Amendment Effective Date; and

 

(c)     the Lenders’ Agent shall have received a duly executed officer’s certificate from the Company certifying as to the satisfaction of the matters set forth in condition (b) above.

 

SECTION 3.     Amendment Fees. In consideration of the Amendment, the Company shall pay to the Purchasers, ratably in accordance with their pro rata shares set forth opposite their names on Schedule I of the Amended NPA:

 

 

 

 

(a)     On the date that the Purchasers make the first Advance (as defined in the Amended NPA) (the “First Fee Date”), a fee of $270,000 in the aggregate (“Amendment Fee No. 1”), payable in cash on the “Maturity Date” (as defined in each Additional Note) ratably between the Purchasers in accordance with the outstanding Advances made by them, provided that Amendment Fee No. 1 shall be fully earned and accrue, without interest, on the First Fee Date; and

 

(b)     On the date that the Purchasers make an Advance resulting in the aggregate outstanding principal amount of the Additional Notes exceeding $1,500,000 (the “Second Fee Date”), a fee of $270,000 in the aggregate (“Amendment Fee No. 2”), payable in cash upon the “Maturity Date” (as defined in each Additional Note) ratably between the Purchasers in accordance with the outstanding Advances made by them, provided that Amendment Fee No. 2 shall be fully earned and accrue, without interest, on the Second Fee Date.

 

(c) If the Supplemental Fee Trigger Event (as defined in Annex A hereto) occurs, the Company shall also pay to the Purchasers, ratably in accordance with the outstanding Advances made by them, the Supplemental Amendment Fee (as defined in Annex A hereto). The Supplemental Amendment Fee shall be fully earned, accrue, without interest, and payable immediately following the effectiveness of the deregistration of the Company’s Common Stock under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

SECTION 4.     Representations and Warranties. The Company represents and warrants to each of the Purchasers and Lenders’ Agent that as of the Amendment Effective Date this Amendment has been duly authorized, executed and delivered by it and this Amendment and the NPA, as amended hereby, constitutes its valid and binding obligation, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

 

SECTION 5.     Amendment to NPA. Effective as of the Amendment Effective Date the NPA is hereby amended to delete the stricken text (indicated textually in the same manner as the following example: stricken text) and to add the double-underlined text (indicated textually in the same manner as the following example: double-underlined text) as set forth in the pages of the Amended NPA attached as Annex I hereto.

 

SECTION 6.     Effect of Amendment; Reaffirmation.

 

6.1.      Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of the Purchasers or Lenders’ Agent under the NPA or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the NPA or any other provision of the NPA or of any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. The Company reaffirms its Obligations under the Loan Documents to which it is a party and acknowledges and agrees that all of the Liens and security interests created and arising under any Loan Document remain in full force and effect and continue to secure its Obligations, in each case, unimpaired, uninterrupted and undischarged, regardless of the effectiveness of this Amendment. Nothing herein shall be deemed to entitle the Company to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the NPA or any other Loan Document in similar or different circumstances. Nothing in this Amendment shall be deemed to be a novation of any Obligations under the NPA or any other Loan Document.

 

2

 

 

6.2.      On and after the Amendment Effective Date, each reference in the NPA to “this Agreement”, “hereunder”, “hereof”, “herein”, or words of like import, and each reference to the NPA in any other Loan Document shall be deemed a reference to the NPA as amended hereby. This Amendment shall constitute a “Loan Document” for all purposes of the Amended NPA and the other Loan Documents (as defined in the Amended NPA).

 

SECTION 7.     General.

 

7.1.      GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

 

7.2.      Costs and Expenses. The Company agrees to reimburse the Lenders’ Agent for its reasonable and documented out-of-pocket expenses in connection with this Amendment, including the reasonable fees, charges and disbursements of counsel for the Lenders’ Agent within a reasonable time following the execution hereof.

 

7.3.      Counterparts. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by email or facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

 

7.4.      Headings. The headings of this Amendment are used for convenience of reference only, are not part of this Amendment and shall not affect the construction of, or be taken into consideration in interpreting, this Amendment.

 

[remainder of page intentionally left blank]

 

3

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective duly authorized officers as of the day and year first above written.

 

DETERMINE, INC.

 
 

By:

/s/ John Nolan

  Name:   John Nolan
  Title:     CFO

 

 

MILFAM II L.P., a Delaware limited partnership

 

By: MILFAM LLC

Its: General Partner

 

 

By:      /s/ Neil S. Subin                                

Name: Neil S. Subin

Title: Manager

 

 

 

ALIMCO FINANCIAL CORPORATION

 

 

By:      /s/ Alan B. Howe                                

Name: Alan B. Howe

Title: CEO

 

 

LENDERS’ AGENT

 

Lloyd I. Miller, III (Deceased)

 

 

By:     /s/ Neil S. Subin                                  

Name: Neil S. Subin

Title: Executor of the Estate of Lloyd I. Miller, III

 

[Signature Page to Amendment]

 

 

ANNEX A

 

Supplemental Fee Trigger Event” shall mean the occurrence of a Change of Control (as defined in each Additional Note) pursuant to which all of the issued and outstanding shares of the Company’s common stock are purchased at a price per share in excess of $0.55 (such price, the “Sale Price”).

 

Supplemental Amendment Fee” shall mean an additional fee in the amount equal to (i) One Million (1,000,000) multiplied by (ii) the difference between (x) the Sale Price and (y) $0.55.

 

 

 

EXHIBIT 31.1

 

DETERMINE, INC.

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

 

I, Patrick Stakenas, certify that:

 

1)

I have reviewed this quarterly report on Form 10-Q of Determine, Inc.;

 

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4)

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5)

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 19, 2019

 

/s/ PATRICK STAKENAS

 

Patrick Stakenas

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 

EXHIBIT 31.2

 

DETERMINE, INC.

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

 

I, John Nolan, certify that:

 

1)

I have reviewed this quarterly report on Form 10-Q of Determine, Inc.;

 

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4)

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5)

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 19, 2019

 

/s/ JOHN NOLAN

 

John Nolan

 

Chief Financial Officer

(Principal Financial Officer)

 

 

EXHIBIT 32.1

 

DETERMINE, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report of Determine, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick Stakenas, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

This Certificate has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

 

 

 

Date: February 19, 2019

 

/s/ PATRICK STAKENAS

 

Patrick Stakenas

 

Chief Executive Officer

 

 

 

 

 

 

 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be returned to the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

 

DETERMINE, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report of Determine, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Nolan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

This Certificate has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

 

 

 

Date: February 19, 2019

 

/s/ John Nolan

 

John Nolan

 

Chief Financial Officer

 

 

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be returned to the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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