Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - LYRIS, INC. | Financial_Report.xls |
| EX-32.01 - EXHIBIT 32.01 - LYRIS, INC. | v388927_ex32-01.htm |
| EX-31.02 - EXHIBIT 31.02 - LYRIS, INC. | v388927_ex31-02.htm |
| EX-23.01 - EXHIBIT 23.01 - LYRIS, INC. | v388927_ex23-01.htm |
| EX-10.03 - EXHIBIT 10.03 - LYRIS, INC. | v388927_ex10-03.htm |
| EX-21.01 - EXHIBIT 21.01 - LYRIS, INC. | v388927_ex21-01.htm |
| EX-31.01 - EXHIBIT 31.01 - LYRIS, INC. | v388927_ex31-01.htm |
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2014
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 333-82154
Lyris, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 01-0579490 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
6401 Hollis Street, Suite 125, Emeryville, CA 94608
(Address of principal executive office, including zip Code)
(800) 768-2929
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, par value $.01 per share | OTCBB |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No R
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer £ (Do not check if a smaller reporting Company) |
Smaller reporting company R |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R
Based on the last business day of the Registrant’s most recently completed second fiscal quarter, which was December 31, 2013, the aggregate market value of its shares (based on a closing price of $1.17 per share as reported on the OTC Bulletin Board held by non-affiliates was $4,597,490. As of September 18, 2014 there were 9,568,613 shares of common stock outstanding
LYRIS, INC. AND
SUBSIDIARIES
FORM 10-K—FISCAL YEAR ENDED JUNE 30, 2014
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Forward-Looking
Information
This Annual Report on Form 10-K (this ‘‘Annual Report’’ or this ‘‘Form 10-K’’), including the section titled ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ (‘‘MD&A’’), contains ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may also be included from time to time in our other public filings, press releases, our website and oral and written presentations by management. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as ‘‘may,’’ ‘‘will,’’ ‘‘expects,’’ ‘‘believes,’’ ‘‘anticipates,’’ ‘‘plans,’’ ‘‘estimates,’’ ‘‘projects,’’ ‘‘predicts,’’ ‘‘targets,’’ ‘‘seeks,’’ ‘‘could,’’ ‘‘intends,’’ ‘‘foresees’’ or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our strategies, initiatives, objectives, plans or goals are forward-looking.
These forward-looking statements are based on management’s current intent, belief, expectations, estimates and projections regarding our Company and our industry. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict. Therefore, actual results may vary materially from what is expressed in or indicated by the forward- looking statements. The risk factors set forth below under ‘‘Risk Factors,’’ and other matters discussed from time to time in subsequent filings with the Securities and Exchange Commission, including the ‘‘Risk Factors’’ sections of our Quarterly Reports on Form 10-Q, among others, could affect future results, causing these results to differ materially from those expressed in our forward-looking statements. In that event, our business, financial condition, results of operations or liquidity could be materially adversely affected and investors in our securities could lose part or all of their investments. Accordingly, our investors are cautioned not to place undue reliance on these forward-looking statements because, while we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate.
Further, the forward-looking statements included in this Form 10-K and those included from time to time in our other public filings, press releases, our website and oral and written presentations by management are only made as of the respective dates thereof. We undertake no obligation to update publicly any forward-looking statement in this Form 10-K or in other documents, our website or oral statements for any reason, even if new information becomes available or other events occur in the future. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission. Unless the context requires otherwise in this Annual Report the terms “the Company,” ‘‘we,’’ ‘‘us’’ and ‘‘our’’ refer to Lyris, Inc. and its subsidiaries.
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Our Business
We are a leading provider of digital marketing software solutions delivered on a flexible integration framework that help organizations engage with their customers across multiple interactive channels. Our solutions empower marketers to design, automate and optimize data-driven messaging campaigns that maximize revenue, accelerate time-to-market, and reduce total cost of ownership.
We were incorporated under the laws of the state of Delaware as J.L. Halsey Corporation and changed our name to Lyris, Inc. in October 2007. We have principal offices in Emeryville, California and conduct our business worldwide, with wholly owned subsidiaries in Canada, United Kingdom, and Australia, and subsidiaries in Argentina and Brazil. Our foreign subsidiaries are generally engaged in providing sales, account management and support.
We manage our operations and allocate resources as a single operating segment. Financial information regarding our operations, assets and liabilities, including our total operating revenues and net losses for the fiscal years ended June 30, 2014 and 2013 and our total assets as of June 30, 2014 and 2013 are included in our consolidated financial statements and related notes in Item 8, Financial Statements and Supplementary Data.
Lyris HQ is our cloud-based (SaaS) email and digital marketing solution It brings together enterprise-scale interactive messaging capabilities to automate customer engagement across email and other digital channels. Lyris HQ empowers marketers to quickly and easily create content, automate multiple complex campaigns simultaneously, and interact with customers and prospects more effectively using personalized and targeted messaging. Advanced reporting and tracking provide real-time insight into campaign performance, while behavior-based analytics at the individual customer level inform targeting and timeliness of messages so marketers can maximize relevancy, response, and revenue. Lyris HQ is targeted at the mid-to-large sized business market.
Lyris ListManager is our on-premises solution for advanced email marketing. It includes powerful automation features and reporting capabilities, and its flexible and configurable architecture integrates seamlessly with in-house databases so that digital marketers can leverage existing data stores to target customers and prospects more effectively. Lyris ListManager is targeted at the mid-to-large sized business market
Our solutions help companies increase customer conversions and grow revenues. Our private cloud technology stack and platform services consolidate and analyze large amounts of vital behavioral and transactional information from online activities in order to increase the relevance of every customer message. With twenty years' experience and billions of digital messages processed by our solutions, we are continuously expanding ways companies deliver value to their customers.
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Our sales and marketing activities are based in our Emeryville, California headquarters with additional direct sales personnel throughout the United States, Europe, Latin America, and Australia. We also extend our sales reach through a large network of marketing service providers who use our solutions to service their customers. Our dedicated customer success team focuses on retaining and growing existing customers. We deliver services and support that help organizations maximize the value of their digital marketing efforts driven by our solutions.
Our customers operate in many industries, including technology, retail, publishing, entertainment, and telecommunications, and include over 800 organizations such as Access Intelligence, Advanstar, Diners Club, Electrolux, ESPN, Kitbag, Morgan Stanley, Morningstar, National Public Radio, NBCUniversal Media, Nvidia, PCM, PennWell, Pumpkin Patch, Ryanair, Showtime, Smith Micro Software, Thomson Reuters, Wiley, WSI Digital Marketing, Y&R, and many others. Over 4,200 additional organizations utilize our solutions through their relationships with our marketing service provider customers.
Our Solutions
Our cross-channel marketing solutions help organizations engage with their customers and prospects in relevant and meaningful ways. We enable users to process real-time data in order to deliver targeted, relevant message flows, and are continuously expanding the ways organizations can deliver value to their customers. In the evolving digital communications market, key benefits of our solutions include:
| · | Behavioral targeting powered by tightly integrated analytics: Our platform integrates real-time analytics with email and social media messaging, which empowers marketers to engage with audiences relevantly across multiple channels using personalized information. |
| · | Automation and real-time communications: Our solutions offer sophisticated automation capabilities that integrate real-time message delivery including triggered drip campaigns, transactional email messages, and web behavioral events (such as web bounce, cart abandon, and transaction completion). |
| · | Unified, modular, scalable cloud-based architecture: Our platform brings together multiple digital marketing capabilities that may be accessed and used as needed and can scale to meet existing and new customers’ data storage, processing, and performance requirements. |
| · | Flexible and secure infrastructure: Our infrastructure is designed and developed for secure access and extensibility. Our SaaS solution enables direct data and functional integrations from external systems to our platform to extend value across the enterprise. We enable organizations to access their own systems data on their customers, or map to additional data in customer relationship management systems, call center records, transactional histories, and other silos of unique customer data. |
| · | Regulatory compliance and best practice message deliverability: We support customer delivery of messages using sophisticated monitoring and management tools, while our deliverability specialists facilitate compliance with commercial standards and industry regulations such as The CAN-SPAM Act. |
| · | Advanced next generation solutions: Lyris’ differentiated solution delivery approach allows marketers to flexibility choose, configure, and swap out application components with preferred alternatives, whether these are built by other technology vendors, themselves, or us. By extending the value of existing systems and data assets, we enable marketers to orchestrate meaningful customer experiences across every touch point without being forced into a single vendor’s “walled garden,” which may protect the value of existing investments and drive higher ROI. |
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Our Competitive Strengths
We have a deep heritage of pioneering the digital marketing industry and a proven history innovating new solutions that help marketers develop meaningful connections with their customers. We address a broad spectrum of digital marketing automation requirements, and are constantly developing new features and capabilities to help organizations execute high-impact digital campaigns.
| · | Technology: We developed the first digital marketing solution to natively integrate web analytics. All of our SaaS solutions are designed to support cross-channel marketing automation, customer data management, and real-time analytics in order to increase engagement, drive conversion, and maximize revenue. |
| · | Intellectual Property: The intellectual property we hold as a result of our investment in technology development allows us to offer a broader and more defensible suite of solutions in the competitive marketplace. |
| · | Team: We have built sales, marketing, and service capabilities, including international research and development, to quickly deliver our solutions worldwide. We have assembled an exceptional leadership team of industry veterans that have helped their prior organizations scale and succeed globally. |
| · | Experience: We have deep domain expertise and a proven ability to understand the needs of our customers. We have successfully partnered with organizations ranging from Global 1000 to upper mid-market, educational, government, and other organizations to deliver measurable value. We complement all of our software solutions with professional services to help our customers consistently realize value from their marketing initiatives. |
| · | Flexible, scalable platform: Our multi-tenant cloud-based infrastructure allows our customers to cost-effectively access sophisticated digital messaging capabilities and manage large amounts of data and transaction volumes while maintaining high availability. Our solutions are designed so customers can easily add new data sources and functionality as they expand their marketing programs. |
Our Products
Our solutions facilitate customer efficiency, scale, and reliability and offer real-time analytics, advanced segmentation, intelligent targeting, and message flow automation in order to increase the revenue impact of every customer interaction.
| · | Lyris HQ is our proven cloud-based digital marketing solution that combines enterprise-class email marketing with web analytics. Lyris HQ helps marketers manage complex email marketing campaigns and provides real-time access to revenue and conversion events to inform message targeting, relevancy, and timeliness. |
| · | Lyris ListManager is our on-premises solution for advanced email marketing. It includes powerful automation features and reporting capabilities, and its flexible and configurable architecture integrates seamlessly with in-house databases so that digital marketers can leverage existing data stores to target customers and prospects more effectively. |
All our solutions provide direct access to insightful marketing data to help marketers measure return on marketing investment. At-a-glance dashboards combined with ad hoc roll up, drill down, and drill across reporting segments offer marketers tools to provide up to the minute feedback on campaign performance and real-time conversion data.
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Individual campaign metrics as well as aggregate campaign and comparison reports expose information at multiple levels, and empowering marketers to invest in campaigns that deliver superior results. Performance data may be freely and flexibly exported for external analysis.
All Lyris products are uniquely focused on openness and extensibility as enabled by our highly flexible and modular software framework that connects data and marketing workflows across the enterprise. This allows for rapid integration with other marketing systems, empowering digital marketers to innovate with any combination of best of breed solutions.
Customer Support
Lyris provides support for our SaaS customers worldwide via phone and online portal, including 24x7 support for critical issues.
Our Services
Our professional services team provides services and support to help our customers define and accomplish their digital marketing goals and objectives and maximize the value of their investments in our product. Whether customers are trying to kick start a multi-channel digital marketing campaign, benchmark their performance against industry best practices for cross-media coordination between social and mobile messaging, troubleshoot deliverability challenges, or simply learn how to use our platform more effectively, our professional services team is available to offer guidance, expertise and solutions to help our customers achieve best-in-class data-driven digital marketing execution and results.
Our professional services include strategic services to analyze, benchmark, build and measure a results-oriented plan to increase the value of our customers’ digital marketing programs; customer success management helps define client business needs and marketing goals, and offer strategic guidance for improving digital marketing performance; campaign services plan, build, create, test, send and optimize marketing campaigns from start to finish; deliverability services examine all aspects of deliverability, from establishing authentication settings to monitoring metrics daily; online, instructor-led and private training to help our customers get the most out of our solutions; and technical services for system integration and application development.
Our Customers
Our customers operate in many industries, including technology, retail, publishing, entertainment, and telecommunications, and include over 800 organizations such as Access Intelligence, Advanstar, Diners Club, Electrolux, ESPN, Kitbag, Morgan Stanley, Morningstar, National Public Radio, NBCUniversal Media, Nvidia, PCM, PennWell, Pumpkin Patch, Ryanair, Showtime, Smith Micro Software, Thomson Reuters, Wiley, WSI Digital Marketing, Y&R, and many others. Over 4,200 additional organizations utilize our solutions through their relationships with our marketing service provider customers.
Sales and Marketing
Our sales and marketing activities are based in our Emeryville, California operating headquarters with additional personnel located throughout the United States; Latin America; Australia, and Europe. The sales team is focused on direct sales of subscription-based Lyris HQ, Lyris Real-Time Retargeting, and on-premises Lyris ListManager and special add-on capabilities. Our direct sales force targets mid-to-large enterprises, as well as marketing service providers that have been successful partners with us. Direct sales are primarily performed by phone by field sales personnel assigned to a region or country with in person follow up and demonstration. Indirect sales are referrals from marketing service provider partners who acquire and service their customers using our solutions. We also have a dedicated customer success team that focuses on retaining and growing existing customer relationships, by up-selling additional products and services and delivering support to help organizations maximize the value of our solutions.
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Our global marketing team complements our sales organization through sophisticated content marketing initiatives that serve demand generation activities. Our primary marketing programs include email, social, web, and events. We maintain an active social profile and execute against a public relations strategy to reinforce our brand and generate demand in every region.
Research and Development
Our platform development approach is to offer innovative digital marketing solutions that leverage advanced technologies. Our solutions are designed to allow marketers to improve targeting with in-depth analytics, while providing measurable improvements to marketing return on investment. We allocate a substantial portion of our operating expenses to new product development as well as product enhancement. We have established high standards and metrics for developing and testing our products. We have an automated test suite and utilize 24/7 global engineering and quality assurance operations that rapidly deliver high-quality enhancements without service interruptions. We release product enhancements on a quarterly basis As of June 30, 2014, we had 23 employees dedicated to research and development in the United States.
We incur expenditures in connection with our spend for software product investment. Certain expenditures included in cost of revenues, research and development expense, and the increase in capitalized software collectively represent our product investment.
Product investment for fiscal 2014 and fiscal 2013 was $6.5 million and $8.0 million, respectively. Product investment for fiscal 2014 consisted of research and development expense of $3.8 million, and the increase in capitalized software of $2.7 million. Product investment for fiscal 2013 consisted of research and development expense of $3.9 million, and the increase in capitalized software of $4.1 million related to our new platform development initiatives.
Our Technology
Our family of digital marketing SaaS solutions are built on our highly-scalable and flexible cloud-based architecture, which enables us to serve all of our clients from a single codebase. Because each new client is provisioned within our existing multi-tenant infrastructure, we believe we can efficiently scale our solutions as our business grows. Through cloud-enabling technologies, such as server virtualization and storage networking, new capacity can be provided as it is needed within an application partition, which allows for effective management to meet high transaction volumes.
Our applications are written in C, PHP, Java and JavaScript, and we use commercially-available hardware and a combination of proprietary and commercially-available software, including Mulesoft, Microsoft SQL, MySQL, , Microsoft Windows and Linux. We own substantially all of the hardware deployed in data centers where we locate our infrastructure. We utilize third- party hosting facilities in the United States located in California (Milpitas and Sunnyvale), and United Kingdom (Maidenhead). These facilities provide around-the-clock security personnel, video surveillance and biometric access screening, and are serviced by onsite electrical generators and fire detection and suppression systems. We continuously monitor the performance and availability of our software applications using automated robot tools that help ensure our software is operating within appropriate performance benchmarks. In addition, our system engineers proactively monitor the status and effectiveness of our applications. We offer a high-availability, scalable infrastructure that is redundant within each data center, including network teaming that includes multiple upstream internet connections. Our approach also utilizes load-balanced web server pools, redundant interconnected network switches and firewalls, intrusion detection, and fault-tolerant storage devices. Production data is backed up on a daily basis and stored in multiple locations to help ensure transactional integrity and restoration capability. We use third-party firms to perform security audits that test our applications and infrastructure security.
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Our Competition
The market for digital marketing software is highly fragmented, competitive, and rapidly evolving. Moreover, customer requirements vary considerably based on the size and profile of each organization. Barriers to entry can be low, particularly in segments focused on a single marketing channel. We compete with a wide variety of technology vendors and service providers. To a lesser extent, we compete with internally developed and maintained solutions. Our primary competitors include Bronto, Inc., ExactTarget, Inc. (a subsidiary of Salesforce.com), Experian CheetahMail, Responsys, Inc. (a subsidiary of Oracle, Inc.), Silverpop Systems Inc. (a subsidiary of IBM, Inc.), StrongView Systems, Inc., and Yesmail (a division of infoGROUP Inc). We believe the principal competitive factors in our markets include:
| · | product features, effectiveness, interoperability and reliability; |
| · | breadth and expertise of sales organization; |
| · | platform flexibility, and scalability; |
| · | ease of use; |
| · | ability to integrate across digital marketing channels; |
| · | strength of professional services organization; |
| · | pace of innovation and product roadmap; |
| · | price of products and services; |
| · | integration with third-party applications and data sources; and |
| · | size and financial stability of operations. |
Government Regulation
Email regulations
Email has been the subject of regulation by local, state, federal and foreign governments. The CAN-SPAM Act of 2003 established national standards in the U.S. for commercial email. The Federal Trade Commission (‘‘FTC’’) enforces the provisions of the CAN-SPAM Act of 2003.
The CAN-SPAM Act of 2003 defines spam as ‘‘any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service (including content on an internet website operated for a commercial purpose).’’ The CAN-SPAM Act of 2003 exempts ‘‘transactional or relationship messages.’’ The provision permits email marketers to send unsolicited commercial emails that contain, among other requirements, the following: an opt-out mechanism; a valid subject line and header (routing) information; and the legitimate physical address of the mailer.
Under the CAN-SPAM Act of 2003, if a recipient of permitted email marketing opts out, a sender has ten days to remove the address. The legislation also prohibits the sale or other transfer of an email address after an opt-out request. We believe that marketers should send email only to those who have requested or given permission for email to be sent. We do not permit any of our hosted customers to send spam, and our customer contracts require that our software purchasers and hosted customers comply with the CAN-SPAM Act of 2003.
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Canada’s anti-spam law (CASL) went into effect on July 1, 2014. While existing laws in Canada had indirectly covered email spam in some cases, CASL is the first law in Canada designed first and foremost to combat spam.
CASL sets forth the following requirements for companies engaged in sending marketing email within Canada, or to recipients in Canada:
| · | Senders must obtain express or implied consent from recipients before sending them a marketing message. |
| · | Email senders must clearly identify themselves within messages, as well as anyone else on whose behalf the message is being sent, and provide a contact method. |
| · | Messages must contain a simple, functional unsubscribe mechanism |
Privacy/data security regulations
We are subject to a number of federal, state and foreign laws and regulations regarding data governance and the privacy and protection of member data that affect companies conducting business on the internet. In the area of information security and data protection, many governments have passed laws requiring notification to users when there is a security incident that results in unauthorized disclosure of their sensitive personal data, or requiring the adoption of minimum information security standards to protect data as it is in transit. The costs of compliance with these laws are expected to increase in the future as a result of changes in interpretation and continued data incidents that lead to additional legislation and regulation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities and may result in fines to our clients and us.
Intellectual Property
Our intellectual property is an essential element of our business. We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand.
We were awarded a patent on ClickTracks technology that covers the display of statistical data overlaid on the website as well as the automatic parameter masking used to define relevant page identifying URLs. This patent expires in 2024. This technology displays metrics about website visitors directly onto the site itself, allowing easy analysis and interpretation. We plan to file a number of new patents related to our current development platform.
Lyris is our registered trademark in the United States, and the Lyris logo and all of our product names are our trademarks. Our U.S. registered trademarks include: LYRIS and CLICKTRACKS, in United States on behalf of Clicktracks. CLICKTRACKS is also registered in China. Other trademarks appearing in this Annual Report are the property of their respective holders.
We enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties in order to try to protect our trade secrets and intellectual property.
In recent years, many software companies have filed applications for patents covering their technologies. Many of these patents have yet to be litigated. Other competitors may develop technologies that are similar or superior to our technology and may receive and enforce patents on such technology. We are not aware of any issued or pending patents that may be asserted against us.
In our subscription agreements with our clients, we typically agree to indemnify our clients against any losses or costs incurred in connection with claims by a third party alleging that a client’s use of our services infringes the intellectual property rights of the third party. Companies in the software industry, including those that provide SaaS solutions, frequently face infringement threats from non-practicing organizations filing lawsuits for patent infringement.
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As part of our strategy regarding product development and intellectual property, we have faced and will likely continue to face, direct and indirect accusations of infringement from third parties. We investigate each accusation or claim carefully and respond or defend against the allegations as each situation warrants with the goal of minimizing expenses and disruptions to our business and the business of our clients.
We have in the past and may in the future license third-party intellectual property, software products, and other technology to be incorporated into some elements of our services.
Employees
As of June 30, 2014, we had 140 employees. Our employees are not represented by any labor union and we are not aware of any current activity to organize any of our employees.
Facilities
Our corporate headquarters, including our principal administrative, marketing, and technical support departments, are located in Emeryville, California, where we lease approximately 31,193 square feet under an agreement that expires March 31, 2016. During the fourth quarter of fiscal 2013, we moved our research and development department into our Emeryville office. We still maintain an office in San Jose, California where we lease approximately 9,753 square feet under an agreement that expires in December 2014. In the third quarter of fiscal 2014, we moved the operations department into an office in Santa Clara where we lease approximately 1,486 square feet under an agreement that expires in 2016. We also maintain smaller leased regional offices in Sydney, Australia; Buenos Aires, Argentina, São Paulo, Brazil; and London, United Kingdom.Our system hardware is co-located in third-party operated hosting facilities in California (Milpitas and Sunnyvale), and in the United Kingdom (Maidenhead). We do not own any real property. We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.
Insurance
We currently purchase insurance policies to cover the ongoing liability and property risks arising out of our current operations.
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An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before making a decision to invest in our common stock. Our business, operating results, financial condition or prospects could be materially and adversely affected by any of these risks and uncertainties. In that case, the trading price of our common stock could decline and you might lose all or part of your investment. In addition, the risks and uncertainties discussed below are not the only ones we face. Our business, operating results, financial performance or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. In assessing the risks and uncertainties described below, you should also refer to the other information contained in this Annual Report before making a decision to invest in our common stock.
Risks Related to Our Business and Industry
The markets in which we participate are highly competitive, and pricing pressure or other competitive dynamics, which could include customers developing their own solutions, could adversely affect our business and operating results.
The markets for digital marketing solutions are fragmented, highly competitive and rapidly changing. With the introduction of new technologies and potential new entrants into these markets, we expect competition to intensify in the future, which could harm our ability to increase sales and maintain our margins. We provide digital marketing solutions to a broad array of customers, ranging from enterprises to small businesses. We have a large number of competitors, most significantly Exact Target, Inc., Responsys, Inc., and Silverpop Systems Inc.
We also face competition from social media marketing providers, as well as from in-house solutions that our current and prospective customers may develop. We may also face competition from new companies entering our markets, which may include large established businesses, such as Adobe Systems Incorporated, Amazon.com, Inc., Google Inc., Oracle Corporation or salesforce.com, inc., each of which currently offers, or may in the future offer, digital marketing or related applications such as applications for customer relationship management, analysis of internet data and marketing automation. If these companies decide to develop, market or resell competitive digital marketing products or services, acquire one of our competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be compromised, and our operating results could be harmed. Furthermore, we believe that our industry may experience further consolidation, which could lead to increased competition and result in pricing pressure or loss of market share, either of which could have a material adverse effect on our business, limit our growth prospects or reduce our revenue.
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, may be able to devote greater resources to the development, promotion, sale and support of their products and services than we can, may have more extensive customer bases and broader customer relationships than we have and may have longer operating histories and greater name recognition than we have. In some cases, these companies may choose to offer digital marketing applications at little or no additional cost to the customer by bundling them with their existing applications. If we are unable to compete with such companies, the demand for our cross- channel, SaaS digital marketing solutions and related professional services could decline and adversely affect our business, operating results and financial condition.
We have a recent history of losses, and we may not return to or sustain profitability in the future.
We incurred net losses of $10.5 million for fiscal 2012, $0.3 million for fiscal 2013 and $5.1 million for fiscal 2014. In recent years, we have made substantial investments in research and development, infrastructure, international expansion and acquisitions to support anticipated future revenue growth. In the past, we have not been in compliance with our liquidity covenants under our credit agreements and we may not be in compliance with the liquidity covenant or other financial covenants in our credit agreements in the future. We expect to continue to make significant investments in the development and expansion of our business, which may make it difficult for us to return to profitability. We may not be able to increase revenue in future periods, and our revenue could continue to decline or grow more slowly than we expect. We may incur significant losses in the future for many reasons, including due to the risks described in this Annual Report.
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We may experience quarterly fluctuations in our operating results due to many factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Our past results may not be indicative of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide, the price of our common stock could decline.
In addition to the other risks described in this Annual Report, factors that may affect our quarterly operating results include the following:
| · | changes in spending on digital marketing technologies by our current or prospective customers; |
| · | the volume of utilization above contracted levels for a particular quarter and the amount of any associated additional revenue earned; |
| · | customer renewal rates, and the pricing and volume commitments at which agreements are renewed; |
| · | customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors; |
| · | budgeting cycles of our customers; |
| · | changes in the competitive dynamics of our industry, including consolidation among competitors or customers; |
| · | long or delayed implementation times for new customers; |
| · | the amount and timing of operating expenses, particularly research and development and sales and marketing expenses (including commissions and bonuses associated with performance), unforeseen product execution costs, employee benefit expenses and expenses related to the expansion of our business, operations and infrastructure; |
| · | changes in the levels of our capital expenditures; |
| · | seasonality; |
| · | the amount and timing of costs associated with recruiting, training and integrating new employees; and |
| · | failure to successfully manage any acquisitions or the incurrence of write-downs, impairment charges or unforeseen liabilities in connection with acquisitions. |
We may not be able to accurately forecast the amount and mix of future subscriptions, revenue and expenses and, as a result, our operating results may fall below our estimates or the expectations of public market analysts and investors.
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If we fail to effectively expand our sales and marketing capabilities and teams, we may not be able to increase our customer base and achieve broader market acceptance of our SaaS solutions.
Increasing our customer base and achieving broader market acceptance of our solutions will depend on our ability to expand our sales and marketing teams and their capabilities to obtain new customers and sell additional products and services to existing customers. We believe there is significant competition for direct sales professionals with the skills and technical knowledge that we require, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future. Our ability to achieve significant future revenue growth will depend on our success in recruiting, training and retaining sufficient numbers of direct sales professionals. New hires require significant training and time before they become fully productive, and may not become as productive as quickly as we anticipate. Our growth prospects will be harmed if our efforts to expand, train and retain our direct sales team do not generate a corresponding significant increase in revenue.
In addition to our direct sales team, we also extend our global sales distribution through relationships with marketing service providers. These providers do not have exclusive relationships with us, and we cannot be certain that these partners will prioritize or provide adequate resources for selling our solutions. Establishing and retaining qualified partners and training them in our solutions requires significant time and resources. If we are unable to devote sufficient time and resources to establish and train these partners, or if we are unable to maintain successful relationships with them, our business could be adversely affected.
We may not be able to sustain or manage any future growth effectively. If we fail to manage our growth effectively, we may be unable to execute our business plan, sell our digital marketing solutions successfully and adequately address competitive challenges. As a result, our business, financial condition, operating results and cash flows may suffer.
Our future growth prospects depend in large part on our ability to sell our SaaS solutions to the enterprise customer base, our ability to add direct sales personnel and expand our network of business partners, agencies and marketing service providers, cross-sell and up-sell new solutions and services to existing customers, and strengthen our SaaS solutions and our ability to manage our growing business effectively. Growing our business will place significant demands on our team, infrastructure and operations. Our success will depend on our ability to manage such growth effectively.
We intend to expand our overall business, customer base, number of employees, and operations, and to expand our operations internationally. Managing a large, diverse, and geographically dispersed customer base and workforce will require substantial management effort, and significant additional investment in our team, technology, and infrastructure. In order to support and sustain our growth, we will have to continue to improve our technology and our operational, financial, and management controls and reporting procedures, and all of these investments will increase our costs. Furthermore, we have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries.
If we do not address these risks successfully, or if we are unable to execute our growth strategy effectively or to manage any future growth we may experience, we may not be able to take advantage of market opportunities, execute our business plan, sell our digital marketing solutions successfully, remain competitive, maintain customer relationships or attract new customers. Our failure to effectively sustain or manage any future growth we do experience could result in a reduction in our revenue and materially and adversely affect our business, financial condition, operating results and cash flows.
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Our operating results and revenue will be adversely affected if we are not able to attract new customers, retain existing customers or sell additional functionality and services to existing customers.
To grow our business, we must attract new customers and retain and sell additional solutions and services to existing customers. Many of our subscription agreements do not automatically renew at the end of their terms. As the digital marketing industry matures and as competitors introduce lower cost or differentiated competitive products or services, our ability to effectively compete with respect to pricing, technology, functionality, services and support could be impaired. In such an event, we may be unable to attract new customers or renew our agreements with existing customers on favorable or comparable terms to prior periods. In addition, we may not be able to accurately predict new subscriptions or subscription renewal rates and the impact these rates may have on our future revenue and operating results. These events and developments could have a material adverse effect on our revenue, gross margin and other operating results.
Because our long-term growth strategy involves further expansion of our sales to customers outside the United States, our business will be susceptible to risks associated with international operations.
A key component of our growth strategy involves the further expansion of our operations and customer base internationally. In recent years, we have added direct sales personnel in Europe, Latin America, and Australia, and opened offices in London, Buenos Aires, Brazil and Sydney. As we continue to expand the sales of our solutions to customers outside the United States, our business will be increasingly susceptible to risks associated with international operations. Among the risks and challenges we believe are most likely to affect us with respect to international expansion are:
| · | difficulties and expenses associated with the continued adaptation of our solutions for international markets, including translation into foreign languages; |
| · | difficulties in staffing and managing foreign operations and the increased travel, real estate, infrastructure and legal compliance costs associated with international operations; |
| · | burdens of complying with applicable laws and regulations, including regional data privacy laws and anti-bribery laws such as the Foreign Corrupt Practices Act; |
| · | in some countries, a less-developed set of rules and infrastructure for online and mobile communications; |
| · | our ability to secure local communications and data center services and to successfully deliver communications to international ISPs and mobile carriers; |
| · | adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash; |
| · | currency exchange rate fluctuations; |
| · | difficulties in enforcing contracts; |
| · | difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; |
| · | trade restrictions; |
| · | laws and business practices favoring local competitors or general preferences for local vendors; |
| · | lesser degrees of intellectual property protection; |
| · | political instability or terrorist activities; |
| · | legal systems subject to undue influence or corruption; and |
| · | business cultures in which improper sales practices may be prevalent. |
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We have a limited operating history outside the United States, and our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business. In addition, we have limited experience in marketing, selling and supporting our cross-channel, SaaS digital marketing solutions and services abroad, which increases the risk that our future expansion efforts will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business, operating results and reputation will be adversely affected. Additionally, operating in international markets requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to establish operations in other countries will result in adequate revenue and profitability levels.
Shifts over time in the mix of sizes or types of organizations that purchase our solutions or changes in the types of solutions purchased by our customers could negatively affect our operating results.
Our strategy is to sell our cross-channel, digital marketing solutions to organizations of all sizes, but to focus on selling our SaaS solutions. Our profit margins can vary depending on numerous factors, including the number of customers using our SaaS (Lyris HQ) solutions, the number of customers using our legacy products, complexity and frequency of their use, the level of utilization, the volume of messages sent, the amount of stored data and the level of professional services and support required by a customer. For example, if we are not successful in a smooth migration of customers using our legacy products to SaaS solutions, we could lose customers or fail to maximize profits resulting from customers who continue to use our legacy products rather than our newest offering. In addition, we will have to use resources to continue to support our customers who use our legacy products. Because our professional services offerings typically have a higher cost of revenue than subscriptions to our SaaS solutions, any increase in sales of professional services may have an adverse effect on our overall gross profit margin and operating results. Enterprise organizations generally require more professional services compared to small businesses and medium-sized companies and, as a result, the overall margin for our enterprise engagements may be lower. We supplement our internal professional services team with third parties to provide professional services, and our goal is to expand these relationships over time. We also will need to increase our sales reach and add direct sales personnel to sell our SaaS solutions to new customers. If the mix of organizations that purchase our solutions changes, or the mix of solution components purchased by our customers changes, our profit margins could decrease and our operating results could be adversely affected.
As the number of enterprise customers that we serve increases, we may encounter implementation challenges, and we may have to delay revenue recognition for some complex engagements, which would harm our business and operating results.
We may face unexpected challenges with some enterprise customers or more complicated implementations of our solutions with such customers. It may be difficult or expensive to implement our solutions if a customer has unexpected data, hardware or software technology challenges, or complex or unanticipated business requirements. In addition, prospective enterprise customers may require acceptance testing related to implementation of our solutions. Implementation delays may also require us to delay revenue recognition until the technical or implementation requirements have been met. Any difficulties or delays in the initial implementation could cause customers to delay or forego future purchases of our solutions, in which case our business, operating results and financial condition would be adversely affected.
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We have been dependent on our customers’ use of email as a channel for digital marketing, and any decrease in the use of email for this purpose would harm our business, growth prospects, operating results and financial condition.
Historically, our customers have used our digital marketing solutions primarily for email-based digital marketing to consumers who have given our customers permission to send them emails. We expect that email will continue to be the primary digital marketing channel used by our customers for the foreseeable future. Should our customers lose confidence in the value or effectiveness of email marketing, or if other interactive channels are perceived to be more effective than email marketing, the demand for our solutions may decline. A number of factors could adversely affect our customers’ assessment of the value or effectiveness of email marketing, including continual growth in the number of emails consumers receive on a daily basis, the inability of internet service providers (‘‘ISPs’’) to prevent unsolicited bulk email, or ‘‘spam,’’ from overwhelming consumers’ inboxes, security concerns regarding viruses, worms or similar problems affecting internet and email utilization and increased governmental regulation or restrictive policies adopted by ISPs that make it more difficult or costly to utilize email for marketing communications.
The market for cross-channel, SaaS digital marketing solutions is relatively new and emerging. If the market develops more slowly or differently than we expect, our business, growth prospects and financial condition would be adversely affected.
The market for cross-channel, SaaS digital marketing solutions, such as ours, is relatively new and may not achieve or sustain high levels of demand and market acceptance. While email has been used successfully for digital marketing for several years, marketing through new digital marketing channels, such as mobile and social media is not as well established, and revenue from email represents a substantial majority of our total revenues. The future growth of our business depends both on the acceptance and expansion of emerging digital marketing channels, as well as the continued use and growth of existing digital marketing channels, including email. Even if digital marketing through these channels becomes widely adopted, our existing customers may choose not to use our solutions, and we may not acquire new customers. Organizations may not make significant investments in cross-channel, digital marketing solutions and may not purchase SaaS solutions to address their digital marketing needs. If cross-channel, SaaS digital marketing solutions are not widely adopted, or the market for such SaaS solutions does not develop as we expect, our business, growth prospects, and financial condition would be adversely affected.
Defects or errors in our digital marketing solutions could harm our reputation, result in significant costs to us and impair our ability to sell our solutions.
Our cross-channel, digital marketing solutions are inherently complex and may contain defects or errors, which may cause disruptions in availability or other performance problems that could include prolonged down-time. Any such errors, defects, disruptions in service or other performance problems, whether in connection with day-to-day operations, bug fixes, upgrades or otherwise, could be costly for us to remedy, damage our customers’ businesses and harm our reputation. In addition, if we have any such errors, defects, disruptions in service or other performance problems, our customers could terminate their agreements, elect not to renew their subscriptions, delay or withhold payment, or make claims against us. Any of these actions could result in lost business, increased insurance costs, difficulty in collecting our accounts receivable and costly litigation. Such errors, defects or other problems could also result in reduced sales or a loss of or delay in the market acceptance of our solutions.
Our business could be adversely affected if our customers are not satisfied with our solutions, our implementation and integration of our solutions or our professional services.
Our business depends on our ability to satisfy our customers and meet their business needs. If a customer is unsatisfied with our solutions and services, we could lose the customer, we could incur additional costs to remedy the situation, or the profitability of our relationship with that customer may be impaired. In addition, negative publicity resulting from issues related to our customer relationships, regardless of accuracy, may damage our business by adversely affecting our ability to attract new customers and maintain and expand our relationships with existing customers.
In addition, supporting enterprise customers could require us to devote significant development services and support personnel, which could strain our team and infrastructure, and reduce our profit margins. If we are unable to address the needs of these customers in a timely fashion or further develop and enhance our solutions, these customers may seek to terminate their relationships with us, not renew their subscriptions, renew their subscriptions on less favorable terms or not purchase additional features or solutions. If any of these were to occur, our revenue may decline, we may not realize future growth and our operating results may be materially and adversely affected.
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Our inability to acquire and integrate other businesses, products or technologies could harm our operating results.
Since 2009, we have acquired Robinsonscalvini Limited and Cogent Online PTY Ltd. In the future we may acquire or invest in businesses, products or technologies that we believe could complement or expand our existing solutions, expand our customer base and operations worldwide, enhance our technical capabilities or otherwise offer growth or cost-saving opportunities. We have limited experience in successfully acquiring and integrating businesses, products and technologies. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms of the acquisition, financing the acquisition or effectively integrating the acquired business, product or technology into our existing business and operations. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices, or employee or customer issues.
Additionally, in connection with any acquisitions we complete, we may not achieve the synergies or other benefits we expected to achieve, and we may incur write-downs, impairment charges or unforeseen liabilities that could negatively affect our operating results or financial position or could otherwise harm our business. In fiscal 2012, we determined that the goodwill associated with the acquisitions of Lyris Technologies on May 12, 2005 and Email Labs on October 12, 2005 exceeded their fair value. We have recorded $9.0 million in impairment of goodwill in fiscal 2012. If we finance acquisitions by issuing convertible debt or equity securities, the ownership interest of our existing stockholders may be diluted, which could adversely affect the market price of our stock. Further, contemplating or completing an acquisition and integrating an acquired business, product or technology could divert management and employee time and resources from other matters.
Widespread blocking or erasing of cookies or limitations on our ability to use cookies may impede our ability to collect information with our technology and may reduce the value of the data that we do collect.
Our technology currently uses cookies, which are small files of information placed on an internet user’s computer, to collect information about the user’s visits to the websites of our customers. Third- party software and our own technology make it easy for users to block or delete our cookies. Several software programs, sometimes marketed as ad-ware or spyware detectors, block our cookies by default or prompt users to delete or block our cookies. If a large proportion of users delete or block our cookies, this could undermine the value of the data that we collect for our customers and could negatively impact our ability to deliver accurate reports to our customers, which would harm our business.
Changes in web browsers may also encourage users to block cookies. Microsoft, for example, frequently modifies its Internet Explorer web browser. Some modifications by Microsoft could substantially impair our ability to use cookies for data collection purposes. If that happens and we are unable to adapt our technology and practices adequately in response to changes in Microsoft’s technology, then the value of our services will be substantially impaired. Furthermore, some of the unique device identifier or mobile platform providers are restricting the use of identifiers in mobile apps for the purpose of collecting user information. For example, in March 2013 Apple informed developers that starting May 1, 2013 the App Store will no longer accept new apps or app updates that access the device’s unique identifier (UDID). If we are not up to speed with these changes to collection on mobile devices, our services and products will be impaired. Additionally, other technologies could be developed that impede the operation of our services. These developments could prevent us from providing our services to our customers or reduce the value of our services.
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In addition, laws regulating the use of cookies by us and our customers could also prevent us from providing our services to our customers or require us to employ alternative technology. A European Union directive implemented by member countries requires us to tell users about cookies placed on their computers, describe how we and our customers will use the information collected and offer users the right to refuse a cookie. The requirement to obtain users’ consent has been implemented differently across the EU member states. Some countries, like the United Kingdom, permit companies to imply consent from the user’s proceeding on the website and continuing navigation, so long as the user was first clearly informed about how cookies are used without disabling them. Some other countries, like France and the Netherlands, currently require that the user’s consent must be obtained prior to the placement of cookies for targeted advertising purposes. In guidance published in April 2012, the French data protection authority interpreted the French law to require the controller of any processing that sets cookies, or a third party designated by the controller, to inform the user of the purpose of the cookie and to ask if the user accepts the storage of the cookie on his/her computer prior to any processing of user data for targeted advertising purposes, among other requirements.
We are required to obtain consent before delivering a cookie and the use or effectiveness of cookies is limited, we are required to switch to alternative technologies to collect user profile information, which may not be done on a timely basis, at a reasonable cost or at all.
The standards that private entities use to regulate the use of email have in the past interfered with, and may in the future interfere with, the effectiveness of our solutions and our ability to conduct business.
Our customers rely on email to communicate with their customers. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain ‘‘blacklists’’ of companies and individuals, and the websites, ISPs and internet protocol addresses associated with those entities or individuals, who do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company’s internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any internet domain or internet address that subscribes to the blacklisting entity’s service or purchases its blacklist.
From time to time, some of our internet protocol addresses may become listed with one or more blacklisting entities due to the messaging practices of our customers. There can be no guarantee that we will be able to successfully remove ourselves from those lists. Blacklisting of this type could interfere with our ability to market our on-demand software and services and communicate with our customers and, because we fulfill email delivery on behalf of our customers, could undermine the effectiveness of our customers’ email marketing campaigns, all of which could have a material negative impact on our business and results of operations.
Evolving domestic and international data privacy regulations may restrict our customers’ ability to solicit, collect, process, disclose and use personal information or may increase the costs of doing so, which could harm our business.
Federal, state and foreign governments and supervising authorities have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing, disclosure, or use of consumers’ personal information. Evolving regulations regarding personal data and personal information, in the European Union and elsewhere, especially relating to classification of IP addresses, machine identification, location data and other information, may limit or inhibit our ability to operate or expand our business. Such laws and regulations require or may require companies to implement privacy and security policies, permit consumers to access, correct or delete personal information stored or maintained by such companies, inform individuals of security incidents that affect their personal information, and, in some cases, obtain consent to use personal information for certain purposes. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of specific technologies, such as those that track individuals’ activities on web pages or record when individuals click on a link contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use email addresses, web browsing data and personal information, which may reduce demand for our solutions. Changing industry standards and industry self-regulation regarding the collection, use and disclosure of data may have similar effects. Existing and future privacy and data protection laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may also negatively affect the public’s perception of digital marketing, including marketing practices of our customers. If our solutions are perceived to cause, or are otherwise unfavorably associated with, invasions of privacy, whether or not illegal, we or our customers may be subject to public criticism. Public concerns regarding data collection, privacy and security may also cause some consumers to be less likely to visit our customers’ websites or otherwise interact with our customers, which could limit the demand for our solutions and inhibit the growth of our business.
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Any failure to comply with applicable privacy and data protection laws, regulations, policies and standards or any inability to adequately address privacy concerns associated with our solutions, even if unfounded, could subject us to liability, damage our reputation, impair our sales and harm our business. Furthermore, the costs to our customers of compliance with, and other burdens imposed by, such laws, regulations, policies and standards may limit adoption of and demand for our solutions.
If we fail to respond to evolving technological requirements or to introduce adequate enhancements and new features, our solutions could become obsolete or less competitive.
To remain a leading provider of cross-channel, SaaS digital marketing solutions, we must continue to invest in research and development of new solutions and enhancements to our existing solutions. The process of developing new technologies, products and services is complex and expensive. Our industry is characterized by rapidly changing technologies, standards, regulations and customer requirements and frequent product enhancements and introductions. The introduction of new solutions by our competitors, the market acceptance of competitive solutions based on new or alternative technologies or the emergence of new industry standards could render our solutions obsolete or less effective. In addition, other means of digital marketing may be developed or adopted in the future, and our solutions may not be compatible with these new marketing channels. The success of any enhancement or new solution depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance. Any new solution or feature that we develop or acquire may not be introduced in a timely or cost-effective manner, may contain defects or may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to anticipate customer requirements, successfully develop or acquire new solutions or features in a timely manner or enhance our existing solutions to meet our customers’ requirements, our business and operating results may be adversely affected.
Failures of the third-party hardware, software and infrastructure on which we rely, including third-party data center hosting facilities, could impair the delivery of our solutions and adversely affect our business.
We rely on hardware and infrastructure, which is purchased or leased, and software licensed from third parties, to offer our cross-channel, SaaS digital marketing solutions and related professional services. For example, we rely on bandwidth providers, ISPs, mobile providers and social networks to deliver messages to consumers on behalf of our customers. Any errors or defects in third-party hardware, software or infrastructure could result in errors, interruptions or a failure of our SaaS solutions. Furthermore, this hardware, software and infrastructure may not continue to be available on commercially reasonable terms, or at all. The loss of the right to use any of this hardware, software or infrastructure could limit access to our SaaS solutions.
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We currently serve our customers from third-party data center hosting facilities located in California (Milpitas and Sunnyvale) and the United Kingdom (Maidenhead), with backup data storage provided remotely by Iron Mountain. Although our network infrastructure is generally redundant in each of our data centers, our data storage and operational capabilities are not fully redundant across data centers. The owners and operators of these facilities do not guarantee that our customers’ access to our solutions will be uninterrupted, error-free or secure. We do not control the operation of these facilities, and such facilities are vulnerable to damage or interruption from a tornado, earthquake, fire, cyber-attack, terrorist attack, power loss, telecommunications failure or similar catastrophic events. They also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in the delivery of our solutions. If for any reason our arrangement with one or more of the third-party data centers we use is terminated, we could incur additional expense in arranging for new facilities and support. In addition, the failure of the data centers to meet our capacity requirements could result in interruptions in the availability of our SaaS solutions or impair the functionality of our SaaS solutions, which could adversely affect our business.
Errors, defects, disruptions or other performance problems with the delivery of our solutions may reduce our revenue, harm our reputation and brand and adversely affect our contract renewals and our ability to attract new customers. In addition, some of our customer agreements require us to issue credits for downtime in excess of certain thresholds, and in some instances give our customers the ability to terminate the agreements in the event of significant amounts of downtime. Our business, growth prospects and operating results will also be harmed if our customers and potential customers are not confident that our solutions are reliable.
As we add data centers and increase capacity in data centers to accommodate increased demand, our costs and expenses associated with these efforts may adversely affect our operating results, liquidity and financial condition.
If our security measures are compromised or unauthorized access to customer data is otherwise obtained, our solutions may be perceived as not secure, customers may curtail or cease using our solutions, our reputation may be harmed and we may incur significant liabilities.
Our operations involve the storage and transmission of customer and consumer data, and security incidents could result in unauthorized access to, loss of or unauthorized disclosure of this information, litigation, indemnity obligations and other possible liabilities, as well as negative publicity, that could damage our reputation, impair our sales and harm our business. Cyber-attacks and other malicious internet-based activity continue to increase, and platform providers of digital marketing services have been targeted. Our security measures and the contractual restraints we maintain to prevent our customers from loading sensitive health, personal and financial information into our SaaS solution may not be sufficient to prevent the storage of such information on our systems or to prevent our systems from being compromised. We do not regularly monitor or review the content that our customers upload and store and, therefore, do not control the substance of the content within our hosted environment. If customers use our cross-channel, digital marketing solutions for the transmission or storage of personally identifiable information and our security measures are compromised as a result of third- party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation and our business could be harmed and we could incur significant liability. We may be unable to anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer base and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ data. If we do not meet customers’ expectations with respect to security and confidentiality, our reputation could be seriously damaged and our ability to retain customers and attract new business could be harmed.
Many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data. In addition, some of our customers contractually require notification of any data security compromise. Security compromises experienced by our competitors, by our customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.
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There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to scale our infrastructure quickly enough to meet our customers’ growing needs and, even if we can, our operations may be disrupted or our operating results could be harmed.
As usage of our cross-channel, SaaS digital marketing solutions grows and as customers use our solutions for more advanced digital marketing programs, we will need to devote additional resources to improving our application architecture and our infrastructure to maintain our solutions’ performance. Any failure of or delays in our systems could cause service interruptions or impaired system performance. If sustained or repeated, these performance issues could reduce the attractiveness of our solutions to customers, result in decreased sales to new customers and lower renewal rates by existing customers, which could hurt our revenue growth and our reputation. We also may need to expand our hosting operations at a more rapid pace than we have in the past. This would involve spending substantial amounts to purchase or lease data center capacity and equipment, upgrade our technology and infrastructure and introduce new SaaS solutions. Similarly, our international expansion efforts could require us to use data centers located outside the United States. We may not be able to scale our existing systems in a manner that is satisfactory to our existing or prospective customers. In addition, any such expansion will require management time and support, could be expensive and complex, could result in inefficiencies, unsuccessful data transfers or operational failures, could reduce our margins and could adversely impact our financial results. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all.
Because we recognize subscription revenue from our customers over the terms of their agreements and most of the costs associated with those agreements are incurred up front, rapid increases in new customers and expanding sales to existing customers may cause an adverse impact on our short-term operating income and cash flows and may cause our operating results to be difficult to predict.
The majority of our subscription revenue in a quarter is derived from customer agreements entered into in previous quarters. Significant selling activity in a quarter may result in little incremental recognized revenue and customer cash receipts during that quarter, but results in the recognition of related commissions and sales and company bonuses due to immediate expense recognition. In addition, it takes several months to ramp up a professional services consultant to full productivity and, as a result, we generally must increase our professional services capacity ahead of the recognition of associated professional services revenue, which can result in lower margins in a period of significant hiring. The timing of revenue and expense recognition and associated cash flows may result in an adverse impact on our short-term operating income and cash flows and may also make it more difficult to accurately predict current quarter operating results. The resulting variations in our operating income, earnings per share, cash flows from operating activities and other financial metrics and non-financial metrics could harm the price of our common stock if they do not meet the expectations of the public market, securities analysts or investors.
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Our sales cycle can be unpredictable, time-consuming and expensive, which could harm our business and operating results.
Our sales efforts involve educating prospective customers and our existing customers about the use, technical capabilities and benefits of our solutions. Some customers, particularly in the enterprise market, undertake a prolonged solution-evaluation process, which frequently involves not only our solutions but also those of our competitors. As we continue to pursue enterprise customers, we may face greater costs, longer sales cycles and less predictability in completing such sales. We may spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales. It is also difficult to predict the level and timing of sales that come from our indirect sales channel of marketing service providers since these resellers do not exclusively sell our solutions. Events affecting our customers’ businesses may occur during the sales cycle that could affect the size or timing of a purchase, contributing to more unpredictability in our business and operating results.
We derive a significant portion of our revenue from customers in the technology, retail, publishing, entertainment, non-profit and telecommunications industries, and any downturn in these industries could harm our business.
A significant portion of our revenue is derived from customers in the technology, retail, publishing, entertainment, non-profit and telecommunications industries. In addition, a significant portion of our revenue is derived from agencies and marketing service providers. Any downturn in these industries may cause our customers to reduce their spending on digital marketing solutions, delay or cancel digital marketing projects or seek to terminate or renegotiate their contracts with us. Also, the increased pace of consolidation in any of these industries may result in reduced overall spending on our solutions. In particular, if our customers are acquired by entities that are not our customers, that use fewer of our solutions or that choose to discontinue, reduce or change the terms of their use of our solutions, our business and operating results could be materially and adversely affected.
Uncertain or weakened global economic conditions may adversely affect our industry, business and results of operations.
Our overall performance depends on domestic and worldwide economic conditions, which may remain challenging for the foreseeable future. Financial developments seemingly unrelated to us or to our industry may adversely affect us. The U.S. economy and other key international economies have been impacted by threatened sovereign defaults and ratings downgrades, falling demand for a variety of goods and services, restricted credit, threats to major multinational companies, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty. These conditions affect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our digital marketing solutions and services, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscriptions or affect renewal rates, any of which could adversely affect our operating results. We cannot predict the timing, strength or duration of the economic recovery or any subsequent economic slowdown worldwide, in the United States, or in our industry.
We rely on our management team and other key employees, and the loss of one or more key employees could harm our business.
Our success and future growth depend upon the continued services of our management team and other key employees, including in the areas of research and development, marketing, sales, services and general and administrative functions. From time to time, there may be changes in our management team resulting from the hiring or departure of executives, which could disrupt our business. For example, in the last two fiscal years, we have experienced significant turnover in our management team, including our Chief Executive Officer, and many of our current executive officers and key employees are new. As a result, we may face challenges in effectively managing our operations during this period of transition. If new key employees and other members of our senior management team cannot work together effectively, or if other members of our senior management team resign, our ability to effectively manage our business may be impacted. We also are dependent on the continued service of our existing development professionals because of the complexity of our solutions. We may terminate any executive officer’s employment at any time, with or without cause, and any executive officer may resign at any time, with or without cause. We do not maintain key person life insurance on any of our employees. The loss of any of our key employees could harm our business.
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Because competition for key employees is intense, we may not be able to attract and retain the highly-skilled employees we need to support our operations and future growth.
Competition for executive officers, software developers and other key employees in our industry is intense. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing software, as well as for skilled sales and operations professionals, and we may not be successful in attracting and retaining the professionals we need. Job candidates and existing employees often consider the actual and potential value of the equity awards they receive as part of their overall compensation. Thus, if the perceived value or future value of our stock declines, our ability to attract and retain highly skilled employees may be adversely affected. If we fail to attract new employees or fail to retain and motivate our current employees, our business and future growth prospects could be harmed.
Any violation of our policies or misuse of our digital marketing solutions by our customers could damage our reputation and subject us to liability.
Our customers could misuse our digital marketing solutions by, among other things, transmitting negative messages or website links to harmful applications, sending unsolicited commercial email, reproducing and distributing copyrighted material without permission, reporting inaccurate or fraudulent data and engaging in illegal activity. Any such use of our digital marketing solutions could damage our reputation and could subject us to claims for damages, copyright or trademark infringement, defamation, negligence or fraud. Moreover, our customers may use our digital marketing solutions to promote their products and services in violation of federal, state and foreign laws. We rely on contractual representations made to us by our customers that their use of our digital marketing solutions will comply with our policies and applicable law, including, without limitation, our Anti-Spam Policy. Although we retain the right to review customer lists and emails to verify that customers are abiding by our Anti-Spam Policy, our customers are ultimately responsible for compliance with our policies, and we do not audit our customers to confirm compliance with our policies.
We cannot predict whether the use of our digital marketing solutions would expose us to liability under applicable laws or subject us to other regulatory action. Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending against such claims or our reputation may be damaged. If we are found liable in connection with our customers’ activities, we could be required to pay fines or penalties, redesign our digital marketing solutions or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.
Federal, state and foreign laws regulating email and text messaging marketing practices impose certain obligations on the senders of commercial emails and text messages, which could reduce the effectiveness of our solutions or increase our operating expenses to the extent these laws subject us to financial penalties.
The Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the ‘‘CAN-SPAM Act’’) regulates commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. Among other things, the CAN-SPAM Act obligates each sender of commercial emails to allow recipients to opt-out of receiving future emails from the sender.
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In addition, some states have passed laws regulating commercial email. In some cases, these laws are significantly more punitive and difficult to comply with than the CAN-SPAM Act. For example, Utah and Michigan have enacted do-not-email registries to protect minors from receiving unsolicited commercial email marketing adult content and other products that minors are prohibited from obtaining. Whether such state laws are preempted in whole or in part by the CAN-SPAM Act is uncertain. Furthermore, some foreign jurisdictions, such as Australia, Canada and the European Union, have also enacted laws that regulate email. Some of these laws are more restrictive than U.S. laws.
As internet commerce continues to evolve and grow, increasing regulation by federal, state or foreign governments may become more likely In addition, the collection of user information from mobile devices is attracting increasing scrutiny. In January 2013, the California Attorney General issued a report that specifically focuses on privacy issues in the mobile ecosystem, which report recommended, among other things, minimizing consumer surprise by supplementing the general privacy policy with enhanced measures to alert users and give them control over data practices that are not related to an app’s basic functionality or that involve sensitive information. Other state attorneys general have expressed a similar interest in active enforcement in this area. In particular, the collection and use of certain types of information available through mobile devices, such as geo-location data, may in the future become more problematic or subject to stricter requirements. The cost to comply with such laws or regulations could be significant and would increase our operating expenses. We may be unable to pass along those costs to our customers in the form of increased subscription fees. If such restrictions require us to change one or more aspects of the way we operate our business, it could impair our ability to attract and retain customers or otherwise harm our business.
Noncompliance with any existing or future laws and regulations may subject us to significant financial penalties. If we are found to have violated these laws or regulations or if our customers are found to have violated these laws or regulations, we could be required to pay penalties, which would adversely affect our financial performance and harm our reputation and our business.
Regulation of the internet and the lack of certainty regarding the application of existing laws to the internet could substantially harm our operating results and business.
We are subject to laws and regulations applicable to doing business over the internet. It is often not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the internet, as these laws have in some cases failed to keep pace with technological change. Recently-enacted laws governing the internet could also impact our business. For instance, existing and future regulations on taxing internet use or restricting the exchange of information over the internet could result in reduced growth or a decline in the use of the internet and could diminish the viability of our services. Furthermore, it is possible that governments of one or more countries may censor, limit or block certain users’ access to websites or other social media services. Changing industry standards and industry self-regulation regarding the collection, use and disclosure of certain data may have similar effects. Any such adverse legal or regulatory developments could substantially harm our operating results and our business.
If we are unable to protect our proprietary technology and intellectual property, our business could be adversely affected.
Our success is dependent upon our ability to protect our proprietary technology and intellectual property, which may require us to incur significant costs. We rely on a combination of confidentiality obligations in contracts, patents, copyrights, trademarks, service marks, trade secret laws and other contractual restrictions to establish and protect our proprietary rights. In particular, we enter into confidentiality and invention assignment agreements with all of our employees and consultants and enter into confidentiality agreements with the parties with whom we have business relationships in which they will have access to our confidential information. No assurance can be given that these agreements or other steps we take to protect our intellectual property will be effective in controlling access to and distribution of our solutions and our confidential and proprietary information. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized uses of our intellectual property. Despite our precautions, it may be possible for third parties to copy our solutions and use information that we regard as proprietary to create products and services that compete with ours. Third parties may also independently develop technologies that are substantially equivalent or superior to our solutions. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our solutions may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our solutions and proprietary information may increase.
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In some cases, litigation may be necessary to enforce our intellectual property rights or to protect our trade secrets. Litigation could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights and exposing us to significant damages or injunctions. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting less-advanced or more-costly technologies into our solutions or harm our reputation. In addition, we may be required to license additional technology from third parties to develop and market new solutions, and we cannot assure you that we could license that technology on commercially reasonable terms or at all.
We cannot be certain that any patents will be issued with respect to our current or potential patent applications.
To date, we have no patent applications pending and one issued patent. We do not know whether any of our future patent applications will result in the issuance of patents or whether the examination process will require us to narrow the scope of our claims. To the extent any of our future applications proceed to issuance as a patent, any such future patent and our existing issued patent may be opposed, contested, circumvented, designed around by a third party or found to be invalid or unenforceable. The process of seeking patent protection can be lengthy and expensive. Some of our technology is not covered by any patent or patent application.
We may be sued by third parties for alleged infringement of their proprietary rights.
The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Companies in our industry are often required to defend against litigation claims based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able to withstand any third- party claims or rights against their use. As a result, our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, we have received threatening letters or notices or may be the subject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others, and we may be found to be infringing upon such rights.
Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our solutions or require that we comply with other unfavorable terms. Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.
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Indemnity provisions in our subscription agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
In our customer agreements, we agree to indemnify our customers against any losses or costs incurred in connection with claims by a third party alleging that a customer’s use of our services infringes the intellectual property rights of the third party. Companies in the software industry, including those that provide digital marketing solutions, frequently face infringement threats from non-practicing organizations (sometimes referred to as ‘‘patent trolls’’) filing lawsuits for patent infringement. In the past, we have been notified of claims brought against our customers for infringement by such a patent troll and have requested indemnification or indicated that they may seek redress from us under the indemnification provisions of our contracts with them. Other customers facing infringement claims who are accused of infringement may in the future seek indemnification from us under the terms of our contracts. If such claims are successful, or if we are required to indemnify or defend our customers from these or other claims, these matters could be disruptive to our business and management and have a material adverse effect on our business, operating results and financial condition.
We use open source software in our solutions, which may subject us to litigation or other actions that could adversely affect our business.
We use open source software in our solutions and may use more open source software in the future. In the past, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. If we were to use open source software subject to such licenses, we could be required to release our proprietary source code, pay damages, re-engineer our applications, discontinue sales or take other remedial action, any of which could adversely affect our business.
If we are unable to integrate our solutions with certain third-party applications, the functionality of our solutions could be adversely affected.
The functionality of our solutions depends on our ability to integrate them with third-party applications and data management systems used by our customers to obtain consumer data. In addition, we rely on access to third-party application programming interfaces (‘‘APIs’’) to provide our social media channel offerings through social media platforms. Third-party providers of marketing applications and APIs may change the features of their applications and platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications and APIs and access to those applications and platforms in a manner adverse to us. Such changes could limit our ability to integrate or could prevent us from integrating our software with these third-party applications and platforms, which could impair the functionality of our software and harm our business. Further, if we fail to integrate our software with new third-party applications and platforms that our customers use for marketing purposes, or if we fail to adapt to the data transfer requirements of such third-party applications and platforms, demand for our solutions could decrease, which would harm our business and operating results.
Qualifying and supporting our digital marketing solutions on multiple computer platforms is time consuming and expensive.
We devote time and resources to qualify and support our solutions on specific computer platforms, such as Microsoft operating systems. The pace at which existing platforms are being modified and new platforms are being adopted has increased rapidly over time. To the extent that existing platforms are modified or upgraded, or customers adopt new platforms, we could be required to expend additional engineering time and resources to qualify and support our solutions on such modified or new platforms, or we could lose customers to competitors who respond more quickly to platform changes, which could add significantly to our development expenses, decrease our revenues and adversely affect our operating results.
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The market forecasts included in this Annual Report may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you that our business will grow at similar rates, or at all.
The market forecasts included in this Annual Report, including the forecasts by Forrester Research, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. This risk also applies to forecasts of anticipated spending on digital marketing channels. Market data and forecasts relating to international spending on digital marketing are even more limited than data for the U.S. market. If the forecasts of market growth or anticipated spending prove to be inaccurate, our business and growth prospects could be adversely affected. Even if the forecasted growth occurs, our business may not grow at a similar rate, or at all. Our future growth is subject to many factors, including our ability to successfully implement our business strategy, which itself is subject to many risks and uncertainties. Accordingly, the forecasts and market data in this Annual Report should not be taken as indicative of our future growth.
We may not be able to secure sufficient additional financing on favorable terms, or at all, to meet our future capital needs.
In the future, we may require additional capital to pursue business opportunities or acquisitions or respond to challenges and unforeseen circumstances. We may also decide to engage in equity or debt financings or enter into credit facilities for other reasons. We may not be able to secure additional debt or equity financing in a timely manner, on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
We may not be able to utilize a significant portion of our net operating loss carry-forwards, which could adversely affect our operating results and cash flows.
As of June 30, 2014, we had $166.1 million of net operating loss carry-forwards. Utilization of these net operating loss carry-forwards depends on many factors, including our future income, which cannot be assured. Our loss carry-forwards begin to expire in 2019. In addition, Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carry-forwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We have undergone one or more ownership changes as a result of prior financings. Future ownership changes, or future regulatory changes may limit our ability to utilize our net operating loss carry-forwards. To the extent we are not be able to offset our future income against our net operating loss carry-forwards, this would adversely affect our operating results and cash flows.
Tax laws or regulations could be enacted or existing laws could be applied to us or our customers, which could increase the costs of our solutions and adversely impact our business.
The application of federal, state, local and international tax laws to services and products provided electronically is evolving. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services and products provided over the internet or via email, which could discourage the use of the internet and email as a means of commercial marketing, adversely affecting the viability of our solutions. These enactments could adversely affect our sales activity due to the inherent cost increase the taxes would represent and ultimately result in a negative impact on our operating results and cash flows.
In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us (possibly with retroactive effect), which could require us or our customers to pay additional tax amounts, as well as require us or our customers to pay fines or penalties and interest for past amounts. If we are unsuccessful in collecting such taxes from our customers, we could be held liable for such costs, thereby adversely impacting our operating results and cash flows.
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Our internal controls and disclosure controls may not be adequate, and control deficiencies could be significant or could even be material weaknesses that could cause us to restate our financial statements or otherwise cause errors in our public reporting.
Internal controls for financial reporting and disclosure controls for public disclosures generally are important to assure that financial and other information is reported accurately and in a timely fashion. Where control deficiencies are significant, we may be required to restate our financial statements or we may encounter errors in our public reporting. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. In the past we have experienced control deficiencies that required us to reclassify as research and development expense amounts that had previously been classified as cost of revenues expense.
Implementing new disclosure controls or internal controls requires specific compliance training of our directors, officers and employees, may entail substantial costs to modify existing accounting systems, and may take a significant period of time to complete. There can be no assurance that new disclosure controls or internal controls will be effective in maintaining the adequacy of our controls. Failure to develop or maintain effective controls, or any difficulties encountered in implementing or improving existing controls, could harm our operating results or cause us to fail to meet our reporting obligations. In the event that our disclosure controls or internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results which could cause our stock price to decline.
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.
Financial accounting standards may change or their interpretation may change. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change becomes effective. Changes to existing rules or the re-examining of current practices may adversely affect our reported financial results or the way we conduct our business. Accounting for revenue from sales of our solutions is particularly complex, is often the subject of intense scrutiny by the SEC, and will evolve as the Financial Accounting Standards Board (‘‘FASB’’) continues to consider applicable accounting standards in this area.
Catastrophic events may disrupt our business.
We rely heavily on our network infrastructure and information technology systems for our business operations. A disruption or failure of these systems in the event of a tornado, earthquake, fire, cyber-attack, terrorist attack, power loss, telecommunications failure or other similar catastrophic event could cause system interruptions, delays in the delivery of our customers’ digital marketing communications, reputational harm and loss of critical data or could prevent us from providing our digital marketing solutions to our customers. Our system hardware is co-located in three data centers operated by third parties with two in California (Milpitas and Sunnyvale) and one in the United Kingdom (Maidenhead). A catastrophic event that results in the destruction or disruption of any of these data centers, or our network infrastructure or information technology systems, could affect our ability to conduct normal business operations and adversely affect our operating results.
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Risks Related to Our Common Stock
Our stock price has been volatile or may decline regardless of our operating performance.
Our stock price has experienced high volatility, may continue to be volatile and may decline. The market price of our common stock may fluctuate significantly in response to many factors, many of which are beyond our control. In addition to the other risk factors described herein, these factors include:
| · | actual or anticipated fluctuations in our revenue and other operating results; |
| · | the financial guidance we may provide to the public, any changes in such guidance, our failure to meet any such guidance or any changes in analysts’ recommendations; |
| · | announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments; |
| · | changes in operating performance and stock market valuations of software or other technology companies, particularly companies in our industry; |
| · | the addition or loss of significant customers; |
| · | fluctuations in the trading volume of our common stock or the size of our public float; |
| · | announcements by us with regard to the effectiveness of our internal controls and our ability to accurately report our financial results; |
| · | price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; |
| · | general economic, legal, regulatory and market conditions unrelated to our performance; |
| · | lawsuits threatened or filed against us; and |
| · | other events or factors, including those resulting from war, incidents of terrorism or responses to these events. |
In addition, the stock markets have experienced extreme fluctuations in price and trading volume that have caused and will likely continue to cause the stock prices of many technology companies to fluctuate in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of declining stock prices. If we were to become involved in securities litigation, we could face substantial costs and be forced to divert resources and the attention of management from our business, which could adversely affect our business.
The transfer restrictions on our common stock may delay or prevent stockholders from obtaining more than 5% of our common stock, may delay or prevent takeover bids by third parties, and may delay or frustrate any attempt by stockholders to replace or remove members of management.
In order to protect our net operating loss carry-forwards, our common stock is subject to transfer restrictions that, unless waived by the Board, prevent any individual stockholder or group of stockholders from acquiring in excess of 5% of our outstanding common stock, within the meaning of Section 382 of the Internal Revenue Code. The transfer restrictions will make it more difficult for stockholders to obtain more than 5% of our outstanding shares of common stock. The types of acquisition transactions that we may undertake will also be limited unless our Board waives the transfer restrictions. The transfer restrictions will delay or frustrate stockholders who would like to replace current management because no single stockholder may cast votes for more than 5% of our outstanding shares of common stock, unless that stockholder already holds 5% of our common stock or our Board specifically authorizes the acquisition of more than 5% of our common stock.
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Delaware law and our amended and restated certificate of incorporation and bylaws contain provisions that could delay or discourage takeover attempts that our stockholders may consider favorable.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as they will be in effect upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
| · | Our Board is divided into three classes serving staggered three-year terms. |
| · | Our Board has the right to elect a director to fill a vacancy created by the expansion of the Board or due to the resignation or departure of an existing board member. |
| · | Our directors are not elected by cumulative voting; cumulative voting would allow less than a majority of stockholders to elect director candidates. |
| · | Advance notice of nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders meeting is required. |
| · | Our Board may issue, without stockholder approval, up to 4,000,000 shares of preferred stock with terms set by the Board, certain rights of which could be senior to those of our common stock. |
| · | Stockholders do not have the right to call a special meeting of stockholders and to take action by written consent in lieu of a meeting. |
| · | Approval of at least two thirds of the shares entitled to vote at an election of directors is required to amend or repeal, or adopt any provision inconsistent with, our amended and restated bylaws or the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors; and |
| · | Directors may be removed from office only for cause. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the ‘‘DGCL’’). In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a ‘‘business combination’’ with an ‘‘interested stockholder’’ for three years following the time that such stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A ‘‘business combination’’ includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An ‘‘interested stockholder’’ is a person who, together with affiliates and associates, owns, or did own, within three years prior to the determination of interested stockholder status, 15% or more of a corporation’s voting stock.
These provisions may prohibit large stockholders, particularly those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and the DGCL could discourage potential takeover attempts, could reduce the price that investors are willing to pay for shares of our common stock in the future and could potentially result in the market price of our common stock being lower than it otherwise would be.
Our certificate of incorporation also restricts any stock ownership that would cause a person or group of persons to be a five percent stockholder within the meaning of Section 382 of the Internal Revenue Code.
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Our directors, executive officers and principal stockholders collectively own approximately 66% of our outstanding common stock and will continue to have substantial control over the company.
Our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, beneficially own, in the aggregate, approximately 66% of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control our management and affairs. Accordingly, this concentration of ownership might harm the market price of our common stock by:
| · | delaying, deferring or preventing a change in control of the company; |
| · | impeding a merger, consolidation, takeover or other business combination involving us; or |
| · | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the company. |
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable
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Our corporate headquarters, including our principal administrative, marketing, and technical support departments, are located in Emeryville, California, where we lease approximately 31,193 square feet under an agreement that expires March 31, 2016. During the fourth quarter of fiscal 2013, we moved our research and development department into our Emeryville office. In the third quarter of fiscal 2014, we moved the operations department into an office in Santa Clara where we lease approximately 1,486 square feet under an agreement that expires in 2016. We still maintain an office in San Jose, California where we lease approximately 9,753 square feet under an agreement that expires in 2014. We also maintain smaller leased regional offices in Sydney, Australia; Buenos Aires, Argentina, São Paulo, Brazil; and London, United Kingdom.
Our system hardware is co-located in third-party operated hosting facilities in California (Milpitas, and Sunnyvale) and the United Kingdom (Maidenhead). We do not own any real property. We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.
On February 14, 2012, David R. and Janet H. Burt filed suit against Wolfgang Maasberg, our former Chief Executive Officer, one other employee, several current or former directors, and certain of our stockholders in the U.S. District Court for the District of Maryland, Baltimore Division. The plaintiffs allege various facts and make claims of federal and state securities law violations, as well as breach of fiduciary duty under Delaware law and intentional infliction of emotional distress. The plaintiffs seek unspecified damages, punitive damages, costs, and injunctive relief. The lawsuit was dismissed in April, 2013 however the Burts’ filed an amended complaint in May, 2013. As of June 30, 2014, we are awaiting a ruling from the court.
In addition, from time to time, we are a party to litigation and subject to claims incident to the ordinary course of business.
Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is currently traded on the OTC Bulletin Board under the symbol “LYRI”.
The following table sets forth the high and low bid prices of our common stock on the applicable market for the quarterly periods indicated. These prices reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.
| Quarter Ending | Low | High | ||||||
| June 30, 2014 | $ | 1.27 | $ | 2.40 | ||||
| March 31, 2014 | $ | 1.08 | $ | 2.00 | ||||
| December 31, 2013 | $ | 1.06 | $ | 1.41 | ||||
| September 30, 2013 | $ | 1.35 | $ | 1.97 | ||||
| June 30, 2013 | $ | 1.55 | $ | 2.50 | ||||
| March 31, 2013 | $ | 1.76 | $ | 2.50 | ||||
| December 31, 2012 | $ | 1.65 | $ | 3.00 | ||||
| September 30, 2012 | $ | 1.75 | $ | 3.16 | ||||
Our common stock has experienced periods, including extended periods, of limited or sporadic quotations. Under such circumstances there is no established trading market for our common stock. As of August 30, 2014, there were 476 holders of record of our common stock.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8 of this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those forward-looking statements. Our fiscal year ends on June 30, and references throughout this Annual Report to a given year are to our fiscal year ended on that date. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed above in the section entitled “Item 1A. Risk Factors.”
Overview
We are a leading provider of digital marketing software solutions that help organizations engage with their customers across multiple interactive channels. Our solutions empower marketers to design, automate and optimize data-driven campaigns that generate superior engagement, increased business value through greater customer conversions and measurable return on marketing investment. Our Lyris HQ and Lyris ListManager solutions improve marketing efficiency by providing campaign management and automated message delivery, using robust segmentation and analytics driven by real-time social, mobile and web interactions. Lyris HQ is offered as an in-the-cloud solution for enterprises while Lyris ListManager is offered as an on-premises solution primarily for the mid to large sized business market.
Lyris HQ is our proven cloud-based digital marketing solution that combines enterprise-class email marketing with web analytics. Lyris HQ helps marketers manage complex email marketing campaigns and provides real-time access to revenue and conversion events to inform message targeting, relevancy, and timeliness. Lyris HQ is targeted at mid-to-large size enterprise companies.
Lyris ListManager is our on-premises solution for advanced email marketing. It includes powerful automation features and reporting capabilities, and its flexible and configurable architecture integrates seamlessly with in-house databases so that digital marketers can leverage existing data stores to target customers and prospects more effectively. Lyris ListManager is targeted at the mid to large sized business market.
Our solutions help companies increase customer conversions and grow revenues. Real-time customer data defines and automates targeted message flows that facilitate superior customer experiences. Our private cloud technology stack is architected for “big data” to consolidate and analyze large amounts of vital behavioral and transactional information from online activities in order to increase the relevance of every customer message. With more than fifteen years' experience and billions of digital messages processed by our solutions, we are continuously expanding ways companies deliver value to their customers.
The majority of our revenues are recurring, comprised of subscription revenue and support and maintenance revenue. We derive revenue from subscriptions to our SaaS solutions (Lyris HQ), software (Lyris ListManager), support and maintenance, and related professional services.
Financial Summary
Highlights of our recent financial performance include:
| · | Recurring revenue, consisting of subscription revenue and support and maintenance revenue, represented 90% of total revenues in fiscal 2014, compared with 89% in fiscal 2013. |
| · | Lyris HQ subscription revenue decreased from $21.7 million in fiscal 2013 to $19.2 million in fiscal 2014. |
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| · | Operating expenses, excluding non-cash impairment charges, decreased $2.0 million, or 9%, to $20.0 million in fiscal 2014 from $22.0 million in fiscal 2013. |
| · | Our interest expense decreased 32% compared to fiscal 2013 as a result of a lower average outstanding debt balance. |
| · | Cost of revenue in fiscal 2014 decreased $2.4 million, or 17.3%, to $11.6 million from $14.0 million in fiscal 2013. |
| · | In the fourth quarter of fiscal 2014, we recorded an impairment charge of $4.2 million in capitalized software for Lyris One based on a decision to discontinue Lyris ONE. |
Results of Operations for Fiscal 2014 and Fiscal 2013
The following table summarizes our consolidated statements of operations data as a percentage of total revenues for the periods presented:
| Years Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Subscription revenue | 78 | % | 78 | % | ||||
| Support and maintenance revenue | 12 | % | 11 | % | ||||
| Professional services revenue | 7 | % | 7 | % | ||||
| Software revenue | 3 | % | 4 | % | ||||
| Total revenues | 100 | % | 100 | % | ||||
| Cost of revenues | 37 | % | 39 | % | ||||
| Gross profit | 63 | % | 61 | % | ||||
| Operating expenses: | ||||||||
| Sales and marketing | 32 | % | 27 | % | ||||
| General and administrative | 19 | % | 22 | % | ||||
| Research and development | 12 | % | 11 | % | ||||
| Amortization of customer relationships and trade names | 1 | % | 1 | % | ||||
| Impairment of customer relationships | 1 | % | 0 | % | ||||
| Impairment of capitalized software | 14 | % | 0 | % | ||||
| Total operating expenses | 79 | % | 61 | % | ||||
| Income (loss) from operations | (16 | )% | 0 | % | ||||
| Interest expense | 0 | % | (1 | )% | ||||
| Interest income | 0 | % | 0 | % | ||||
| Other (expense) income, net | 0 | % | 0 | % | ||||
| Loss from operations before income tax benefit | (16 | )% | (1 | )% | ||||
| Income tax benefit | 0 | % | 0 | % | ||||
| Net loss | (16 | )% | (1 | )% | ||||
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Revenue
We recognize revenue from subscriptions, support and maintenance, professional services, and licensing of our software products to our customers. Revenue for fiscal 2014 and fiscal 2013 were:
| Years Ended June 30, | Change | |||||||||||||||
| 2014 | 2013 | $ | Percent | |||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Subscription revenue | ||||||||||||||||
| Lyris HQ revenue | $ | 19,199 | $ | 21,718 | $ | (2,519 | ) | (12 | )% | |||||||
| Legacy revenue | 5,058 | 6,620 | (1,562 | ) | (24 | )% | ||||||||||
| Total subscription revenue | 24,257 | 28,338 | (4,081 | ) | (14 | )% | ||||||||||
| Support and maintenance revenue | 3,934 | 3,923 | 11 | 0 | % | |||||||||||
| Professional services revenue | 2,204 | 2,436 | (232 | ) | (10 | )% | ||||||||||
| Software revenue | 870 | 1,487 | (617 | ) | (41 | )% | ||||||||||
| Total revenues | $ | 31,265 | $ | 36,184 | $ | (4,919 | ) | (14 | )% | |||||||
Subscription revenue
Subscription revenue consists primarily of revenue from Lyris HQ, and legacy products which are in the process of reaching their end of life. Subscription revenue was $24.3 million or 78% of total revenue for fiscal 2014, compared to $28.3 million or 78% of total revenue for fiscal 2013, a decrease of $4.1 million or 14%.
Lyris HQ subscription revenue decreased $2.5 million versus the prior year, primarily as a result of customer turnover. Legacy products subscription revenue decreased $1.6 million compared to the prior year, primarily due to termination of contracts with low priced subscriptions and customer turnover.
Support and Maintenance Revenue
Support and maintenance revenue consists of customer service and support for our products. Support and maintenance revenue was $3.9 million or 12% of our revenue for fiscal 2014, compared to $3.9 million or 11% for fiscal 2013. Support and maintenance revenue remained flat as a result of our proactive effort to update existing customer support, new customers and customer upsells.
Professional Services Revenue
Professional services revenue consists of training, custom product implementation and integration, which includes web analytics and reporting, web design, email deliverability and search engine marketing. Professional services revenue was $2.2 million or 7% of our total revenue for fiscal 2014, compared to $2.4 million or 7% of our total revenue for fiscal 2013, a decrease of $0.2 million or 10%. Professional services revenue decreased due to a lower level of new customer onboarding.
Software Revenue
Software revenue consists of revenue from perpetual licensing rights of our software that we sell to our customers. Software revenue was $0.9 million or 3% of our total revenue for fiscal 2014, compared to $1.5 million or 4% for fiscal 2013, a decrease of $0.6 million or 41%. Software revenue has decreased as our customer base increasingly adopts our SaaS platform.
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Cost of revenue
Cost of revenue consists of the amortization of intangible assets related to internally developed software to support our cloud-based marketing products, amortization of our intangibles and software acquired from our strategic acquisitions, payroll-related expenses related to our engineers assigned to product and revenue-support projects, data center and depreciation costs associated with our supporting hardware, various support costs such as website development, processing fees, and allocated overhead.
| Years Ended June 30, | Change | |||||||||||||||
| 2014 | 2013 | $ | Percent | |||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Cost of revenue | $ | 11,614 | $ | 14,010 | $ | (2,396 | ) | (17 | )% | |||||||
Cost of revenue was $11.6 million or 37% of our total revenues for fiscal 2014, compared to $14.0 million or 39% of our total revenues for fiscal 2013, a decrease of $2.4 million or 17%. The decrease is largely related to a drop in compensation and benefits of $1.6 million due to a reduction in operations personnel. In addition, there was a decrease of $0.4 million in consultant expense, $0.2 million decrease in recruiting expenses, and a $0.1 million for travel and entertainment related expenses and expensed computer equipment respectively.
Gross Profit
| Years Ended June 30, | Change | |||||||||||||||
| 2014 | 2013 | $ | Percent | |||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Gross profit | $ | 19,651 | $ | 22,174 | $ | (2,523 | ) | (11 | )% | |||||||
Gross profit was $19.7 million for fiscal 2014, compared to $22.2 million for fiscal 2013, a decrease of $2.5 million or 11%. As a percentage of total revenue, gross margin increased to 63% for fiscal 2014 from 61% from fiscal 2013. Decrease in gross profit was primarily related to decrease in revenue. The increase in gross margin reflects our reduction in cost of revenue.
Operating Expenses
Operating expenses for fiscal 2014 and 2013 were:
| Years Ended June 30 | Change | |||||||||||||||
| 2014 | 2013 | $ | Percent | |||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Sales and marketing | $ | 10,065 | $ | 9,858 | $ | 207 | 2 | % | ||||||||
| General and administrative | 5,956 | 8,114 | (2,158 | ) | (27 | )% | ||||||||||
| Research and development | 3,767 | 3,845 | (78 | ) | (2 | )% | ||||||||||
| Amortization and impairment of customer relationships and trade names | 190 | 202 | (12 | ) | (6 | )% | ||||||||||
| Impairment of customer relationships | 425 | - | 425 | 100 | % | |||||||||||
| Impairment of capitalized software | 4,212 | - | 4,212 | 100 | % | |||||||||||
| Total operating expenses | $ | 24,615 | $ | 22,019 | $ | 2,596 | 12 | % | ||||||||
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Sales and Marketing
Sales and marketing expense consists of employee salaries and related costs, costs associated with advertising and other promotional programs, and allocated facilities costs.
Sales and marketing expense was $10.1 million for fiscal 2014, compared to $9.9 million for fiscal 2013, an increase of $0.2 million or 2%. As a percentage of total revenue, sales and marketing expense increased to 32% for fiscal 2014 from 27% for fiscal 2013. The variance reflects additional compensation and benefits expense of $0.9 million, partially offset by reductions in advertising expense of $0.5 million and facilities allocation expense of $0.2 million.
General and Administrative
General and administrative expense consists of salaries and related costs for administrative personnel, professional services such as consultants, legal fees and accounting, audit and tax fees, and related allocation of overhead including stock-based compensation and other corporate development costs.
General and administrative expense was $6.0 million for fiscal 2014, compared to $8.1 million for fiscal 2013, a decrease of $2.1 million or 27%. As a percentage of total revenue, general and administrative expense decreased to 19% for fiscal 2014 from 22% for fiscal 2013. The decrease in general and administrative expense was due to $1.6 million decrease in compensation and benefits related to a severance, bonus and stock-based compensation. Along with a decrease of $0.6 million in outside services related to consultants and payroll related expenses.
Research and Development
Research and development expense consists of salaries and related costs for engineering personnel, stock-based compensation and other headcount-related expenses associated with development of our next generation product line and increasing the functionality of current lines. We capitalize product development expenses incurred during the application development stage until the product is available for general release, provided we can ascertain that there is future economic value. We expense engineering costs in cost of revenue if the expense is related to supporting on-going platforms and is more related to product support activities. Management’s judgment is used to determine the allocation between these three categories, and we refer to these three categories in aggregate as ‘‘product investment’’.
Research and development expense was relatively flat in fiscal 2014 from fiscal 2013, decreasing $0.1 million or 2.0%. As a percentage of total revenue, research and development expense increased to 12% for fiscal 2014 from 11% for fiscal 2013. The decrease in research and development expense was primarily related to a $1.2 million decrease in engineering compensation and benefits as we outsourced the Quality and Assurance department, followed by a $0.1 million decrease to the allocation of facilities costs related to the reduction in headcount. This is offset by an increase of $1.2 million to outside services for consulting expenses.
Amortization of Customer Relationships and Trade Names
Amortization of customer relationships and trade names expense consists of intangibles that we obtained through the acquisition of other businesses.
Amortization of customer relationships and trade names expense was relatively flat at $0.2 million for fiscal 2014 compared to $0.2 million for fiscal 2013. As a percentage of total revenues, amortization of customer relationships and trade names expense increased to 2% for fiscal 2014 from 1% for fiscal 2013.
The increase is related to customer relationship impairment primarily due to an impairment of $0.4 million for Cogent customer relationships acquired in the Lyris APAC investment.
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Impairment of Capitalized Software
Impairment of capitalized software consists of internal-use software, which was intended to provide a major feature upgrade to Lyris HQ, which has been in the application development stage since the fourth quarter of fiscal 2011. During fiscal 2014, we analyzed our capitalized software and determined an impairment charge was required. As a result of our reassessment of the ongoing utility and value of certain capitalized software projects, and the discontinuance of Lyris ONE initiative, a $4.2 million impairment charge was recorded.
Goodwill
The following table outlines our goodwill, by acquisition:
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Lyris Technologies | $ | 9,707 | $ | 9,707 | ||||
| Cogent | 84 | 84 | ||||||
| Total | $ | 9,791 | $ | 9,791 | ||||
We performed our annual impairment testing of goodwill at June 30, 2014 and determined that the estimated fair value of our reporting unit was in excess of its carrying value; accordingly, therefore no impairment charge was recorded in fiscal 2014.
See Note 6 ‘‘Goodwill’’ of the Notes to the Consolidated Financial Statements.
Interest Expense
| Years Ended June 30, | Change | |||||||||||||||
| 2014 | 2013 | $ | Percent | |||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Interest expense | $ | (150 | ) | $ | (222 | ) | $ | 72 | (32 | )% | ||||||
Interest expense relates to our revolving line of credit with Silicon Valley Bank (“Bank”) and our short and long-term capital lease obligations in connection with acquiring computer equipment for our data center operations which is included in property and equipment.
Interest expense was $0.1 million for fiscal 2014 compared to $0.2 million for fiscal 2013, a decrease of $0.1 million or 32%. The decrease in interest expense was primarily due to a lower average balance in our revolving line of credit of $1.5 million for fiscal 2014 compared to an average balance of $4.1 million for fiscal 2013.
Income Tax Benefit
For fiscal 2014 and fiscal 2013, our effective tax rates were 2.8% and 3.7%, respectively. For additional information about income taxes, see Note 10 ‘‘Income Taxes’’ of the Notes to the Consolidated Financial Statements.
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Liquidity, Capital Resources and Financial Condition
Since our inception, we have financed our operations primarily from the issuance of our stock, cash flows from operations, and borrowings under credit facilities. As of June 30, 2014, our primary sources of liquidity to fund our operations were the collection of accounts receivable balances generated from net revenue, proceeds from our revolving line of credit, and proceeds from stock issuances. For additional operational funds requirements, we have additional borrowing capacity on our revolving line of credit with the Bank which matures on May 6, 2015, see Note 8 ‘‘Revolving Lines of Credit’’ of the Notes to the Consolidated Financial Statements for detail information.
As of June 30, 2014, our availability under this credit facility was approximately $1.4 million. As of June 30, 2014, our cash and cash equivalents totaled $1.9 million compared to $2.3 million as of June 30, 2013. As of June 30, 2014, our accounts receivable, less allowances, totaled $3.5 million compared to $4.1 million as of June 30, 2013.
| Change | ||||||||||||||||
| June 30, 2014 | June 30, 2013 | $ | Percent | |||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Accounts receivable | $ | 3,852 | $ | 4,613 | $ | (761 | ) | (16 | )% | |||||||
| Allowance for doubtful accounts | (396 | ) | (510 | ) | 114 | (22 | )% | |||||||||
| Total - Accounts receivable | $ | 3,456 | $ | 4,103 | $ | (647 | ) | (16 | )% | |||||||
During fiscal 2014, accounts receivable decreased $0.8 million, or 16%, to $3.9 million at June 30, 2014, from $4.6 million at June 30, 2013. Our allowance for doubtful accounts decreased $0.1 million, or 22%, to $0.4 million at June 30, 2014 from $0.5 million at June 30, 2013. We adjusted the allowance as appropriate based upon the collectability of the receivables in light of historical trends, adverse situations that may affect our customers’ ability to repay, and prevailing economic conditions. This evaluation was done in order to identify issues which may impact the collectability of receivables and reserve estimates. Revisions to the allowance are recorded as an adjustment to bad debt expense. After appropriate collection efforts are exhausted, specific receivables deemed to be uncollectible are charged against the allowance in the period they are deemed uncollectible. Recoveries of receivables previously written-off are recorded as credits to the allowance.
Our short-term and long-term liquidity requirements primarily arise from: (i) interest and principal payments related to our debt obligations, (ii) working capital requirements, and (iii) capital expenditures.
At June 30, 2014, our existing cash and cash equivalents, cash flow from operations, and the availability from our revolving credit facility, provides sufficient liquidity to fund our projected working capital requirements, and capital spending for at least the next 12 months at our current growth and spending rate. We anticipate that we will continue to improve our cash flow from operations through both expense reductions and stabilization of our customer base, and we intend to continue building our cash reserves. To improve our liquidity position, on May 6, 2013, we entered into a Loan and Security Agreement (“SVB Agreement”) with the Bank. The agreement provides a revolving line of credit of up to $5.0 million. Subsequently, on the same day, we fully repaid our outstanding line of credit from Comerica Bank in the amount $0.7 million and terminated our loan and security agreement with Comerica. See Note 8 ‘‘Revolving Lines of Credit’’ of the Notes to the Consolidated Financial Statements for detail information.
While fiscal 2014 had its challenges, we still expect to maintain long-term growth in our SaaS offerings; which include our existing products, Lyris HQ and List Manager. We expect to increase efficiency and aggressive management within our operating expenses to generate available cash to satisfy our capital needs and debt obligations. To the extent that existing cash and cash equivalents, and cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additionally, we may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, applications or technologies in the future, which could also require us to seek additional equity or debt financing.
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Revolving Lines of Credit
On April 18, 2012, we entered into a Ninth Amendment (“Ninth Amendment”) to the Amended and Restated Loan and Security Agreement (“Comerica Agreement”) with Comerica Bank. The Ninth Amendment revised the terms of the Comerica Agreement and increased our revolving line of credit (“Comerica Revolving Line”) from $2.5 million to $3.5 million. The Ninth Amendment also extended the maturity of the Comerica Revolving Line and our second revolving line of credit of $2.5 million (“Non-Formula Line,” and together with the Comerica Revolving Line, the “Comerica Revolving Lines”).
Repayment of the Non-Formula Line was secured by a security interest in substantially all of our assets. In addition, Mr. William T. Comfort, III, former Chairman of the Board, guaranteed our repayment of indebtedness under the Non-Formula Line by a limited guaranty (“Guaranty”). On October 17, 2012, we fully repaid and cancelled the Non-Formula Line of $2.5 million that William T. Comfort had guaranteed with our proceeds from sale of 2,000,000 shares of our Series A Preferred Stock to Lyr, Ltd., a Bermuda corporation of which Mr. Comfort is Chairman. As a result of the repayment and cancellation, the Guaranty was terminated. As of October 17, 2012, we only had the Comerica Revolving Line outstanding with Comerica Bank. See Note 8 ‘‘Revolving Lines of Credit’’ of the Notes to the Consolidated Financial Statements. The Comerica Revolving Lines matured on April 30, 2013.
On May 6, 2013, Lyris, Inc. and our wholly owned subsidiaries, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. (each a “Borrower” and collectively, the “Borrowers”), entered into the SVB Agreement. The SVB Agreement provides the Company with a revolving line of credit (“SVB Revolving Line”) of up to $5,000,000. The amount available under the SVB Revolving Line is limited by a borrowing base formula based on each Borrower’s recurring revenue and customer retention rate. The SVB Revolving Line matures on May 6, 2015. See Note 8 ‘‘Revolving Lines of Credit’’ of the Notes to the Consolidated Financial Statements.
Advances under the SVB Revolving Line will accrue interest at a per annum floating rate equal to the greater of 6.25% or the Bank’s prime rate plus 3%. Interest is due monthly, and all unpaid principal and accrued but unpaid interest is due upon maturity.
The SVB Agreement contains typical negative covenants for a credit facility of this size and type, including covenants that prevent or restrict our and our subsidiaries’ ability to take certain actions, including, without limitation, changing principal executive offices, entering into mergers and acquisitions, disposing of property or other assets, and incurring additional indebtedness. Under the SVB Agreement, we are required to comply with financial covenants to maintain a liquidity ratio of not less than 1.25 to 1.00, and to maintain a minimum EBITDA (maximum loss) for the trailing three month period according to the following schedule:
| Trailing Three Month Period Ending | Minimum EBITDA (maximum loss) | |||
| June 30, 2014, July 31, 2014 and August 31, 2014 | $ | (350,000 | ) | |
| September 30, 2014, October 31, 2014 and November 30, 2014 | $ | (200,000 | ) | |
| December 31, 2014, January 31, 2015 and February 28, 2015 | $ | (75,000 | ) | |
Payment and performance of our obligations with respect to the SVB Revolving Line is secured by a security interest in substantially all of our assets and the assets of the additional Borrowers, including our and their intellectual property.
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The SVB Agreement contains typical default provisions for a credit facility of this size and type, that include, among others, defaults in the event of non-payment or non-performance of covenants, a material adverse change, an attachment of our assets or entry of an injunction against doing business, occurrence of certain bankruptcy and insolvency events, cross-defaults to certain other material indebtedness, entry of material judgment and inaccuracy of representations and warranties. The occurrence of an event of default could result in, among other things, acceleration of all obligations under the SVB Revolving Line, Bank ceasing to advance money or extending credit under the SVB Revolving Line, and a right by Bank to exercise all remedies available to it under the SVB Agreement, including the disposition of any or all collateral.
On May 6, 2013, in connection with entering into the SVB Agreement, we paid all amounts outstanding and owed under our Amended and Restated Loan and Security Agreement with Comerica Bank, which terminated on April 30, 2013 according to its terms.
As of June 30, 2014, we were in compliance with all of the covenants of the SVB Agreement. Our outstanding borrowings totaled $2.3 million with $1.4 million in available credit remaining as of June 30, 2014.
Cash flows
In summary, our cash flows were as follows for fiscal 2014 and fiscal 2013:
| Years Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net cash provided by operating activities | $ | 3,377 | $ | 3,863 | ||||
| Net cash used in investing activities | (2,955 | ) | (4,592 | ) | ||||
| Net cash (used in) provided by financing activities | (783 | ) | 1,503 | |||||
| Effect of exchange rate changes on cash | (73 | ) | (58 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | $ | (434 | ) | $ | 716 | |||
Operating activities
Net cash flows used in operating activities were $3.4 million for fiscal 2014, as compared to net cash flows provided by operating activities of $3.9 million for fiscal 2013. Cash flows from operating activities are comprised of net losses, adjustments to reconcile the net loss to net cash provided by or used in operating activities, and the change in balance sheet accounts.
Adjustments had a $8.3 million positive effect on cash flows from operating activities in fiscal 2014, including $4.2 million in capital software impairment and $3.2 million in amortization and depreciation, $0.4 million in stock-based compensation, $0.1 of provision for bad debt, $0.4 million impairment of our customer relationships offset by an increase of $0.2 million in deferred income taxes. Changes in assets and liabilities had a $0.2 million positive effect on cash flows provided by operating activities in fiscal 2014, due largely to a $0.6 million increase in accounts receivable , offset by a $0.4 million decrease in accounts payable and accrued expenses.
Investing activities
Net cash flows used in investing activities were $3.0 million for fiscal 2014 as compared to net cash flows used in investing activities of $4.6 million for fiscal 2013, primarily reflecting capitalized software expenditures. The net cash flow used in investing activities for fiscal 2014 consisted of a $2.7 million in capitalized software expenditures, $0.2 million in purchase of property and equipment.
Financing activities
Net cash flows used in financing activities was $0.8 million for fiscal 2014 as compared to net cash flows provided by financing activities of $1.5 million for fiscal 2013. Financing cash flows for fiscal 2014 consisted primarily of $0.9 million in payments under our capital lease obligations in connection with acquiring computer equipment for our data center operations and offset by $0.1 million in additional bank financing from our line of credit with the Bank.
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Off-balance sheet arrangements
During the fourth quarter of fiscal 2013, we fully repaid the outstanding line of credit with Comerica and entered into the SVB Agreement. As such, we cancelled our letter of credit from Comerica for Legacy Partners I SJ and Hartford Insurance Company (“Hartford”). Subsequently, we entered into a new line of credit for $40 thousand issued by the Bank in favor of Legacy Partners I SJ North Second, LLC (‘‘Legacy’’).
We issued $0.1 million to Hartford as Hartford letter of credit and is held by as collateral for deductible payments that may become due under a worker’s compensation insurance policy. We classify the Hartford letter of credit as a restricted cash account of $0.1 million. Any amounts drawn on the account will be expensed during that fiscal year. See Note 7 “Other Long-term Assets” of the Notes to the Consolidated Financial Statements for detail information. As of June 30, 2014, we do not have any draw down for this account by Hartford.
The Legacy letter of credit is held by Legacy in connection with our lease dated January 31, 2008 for our offices in San Jose, California. As of June 30, 2014, we do not have any draw down for this account by Legacy.
We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance activities.
Long-term contractual obligations
Our commitments consist of obligations under operating leases for corporate office space and co-location facilities for data center capacity for research and test data centers. We entered into capital leases in connection with acquiring computer equipment for our data center operations which is included in property and equipment. We used a 5.25% interest rate to calculate the present value of the future principal payments and interest expense related to our capital leases. Additionally, in the ordinary course of business, we enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms.
The following table summarizes by period the remaining payments due for contractual obligations estimated as of June 30, 2014:
| Operating Leases | ||||||||||||||||||||||||
| Facilities (1) | Co-location Hosting Facilities (2) | Other (3) | Total Operating | Capital Leases (4) | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Fiscal Year 2015 | 1,156 | 185 | 182 | 1,523 | 484 | 2,007 | ||||||||||||||||||
| Fiscal Year 2016 | 808 | - | 17 | 825 | 137 | 962 | ||||||||||||||||||
| Fiscal Year 2017 | 216 | - | - | 216 | 33 | 249 | ||||||||||||||||||
| Total | $ | 2,180 | $ | 185 | $ | 199 | $ | 2,564 | $ | 654 | $ | 3,218 | ||||||||||||
| (1) | Represents our significant leased office facilities. |
| (2) | Represents our co-location facilities for data center capacity for research and test data centers. |
| (3) | Represents our software contracts used in our production environment. |
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| (4) | Represents our capital leases in connection with acquiring computer equipment for our data center operations which is included in property and equipment in our Consolidated Balance Sheets. Capital lease payments include interest. |
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (‘‘GAAP’’). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Our accounting estimates and assumptions bear the risk of change due to the uncertainty attached to the estimates and assumptions, or some estimates and assumptions may be difficult to measure or value. Accordingly, actual results could differ significantly from the estimates made by our management. On an ongoing basis, we evaluate these estimates, judgments and assumptions, including those related to revenue recognition, stock-based compensation, goodwill and acquired intangible assets, capitalization of software, allowances for bad debt and income taxes. We base these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our Audit Committee.
In October 2009, the Financial Accounting Standards Board (‘‘FASB’’) issued an Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (‘‘ASU No. 2009-13’’), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit and modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. The ASU significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. We adopted ASU No. 2009-13 in the first quarter of fiscal 2011 and are described in detail below.
Revenue Recognition
We recognize revenue from providing hosting and professional services and licensing our software products to our customers.
We generally recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer (for software licenses, revenue is recognized when the customer is given electronic access to the licensed software); (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of fees is probable.
Subscription and Other Services Revenue
We generate services revenue from several sources, including hosted software services bundled with technical support (maintenance) services and professional services. We recognize subscription revenue in two ways: (1) based on the subscription plan defined in the agreement with specified monthly volume, and (2) based on actual usages at rates specified in the agreement. Additionally, we invoice excess usage and recognize it as revenue when incurred.
| 43 |
We follow Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU No. 2009-13”) for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Although our professional services that are a part of multiple element arrangement have standalone value to the customer, such services could not be accounted as separate units of accounting under the previous guidance, as vendor-specific objective evidence (“VSOE”) did not exist for the undelivered element. The VSOE for subscription services could not be established based on the historical pricing trends to date, which indicate that the price of the majority of standalone sales does not yet fall within a narrow range around the median price. Since our subscription services have standalone value as such services are often sold separately, but do not have VSOE, we use estimate of selling price (“ESP”) to determine fair value for our subscription services when sold in a multiple-element arrangement and recognize revenue based on ASU No. 2009-13. Third-party evidence (“TPE”) was concluded to be an impractical alternative due to differences in features and functionality of other companies’ offerings and lack of access to the actual selling price of competitor standalone sales. If new subscription service products are acquired or developed that require significant professional services in order to deliver the subscription service and the subscription service and professional services cannot support standalone value, then such subscription services and professional services will be evaluated as one unit of accounting. We determined ESP of fair value for subscription services based on the following:
| · | We have defined processes and controls to ensure our pricing integrity. Such controls include oversight by a cross-functional team and members of executive management. Significant factors considered when establishing pricing include market conditions, underlying costs, promotions and pricing history of similar services. Based on this information and actual pricing trends, management establishes or modifies the pricing. |
| · | We identified the population of transactions to serve as the basis for establishing ESP, including subscription services and professional services pricing history in transactions with multiple element arrangements and those sold on a standalone basis. |
| · | We analyzed the population of items sold by stratifying the population by product type and level and considered several data points, such as (1) average price charged, (2) weighted average price to incorporate the frequency of each item sold at any given price, and (3) the median price charged. These three price points were then compared with the existing price list that is used as a point of reference to negotiate contracts and does not represent fair value. Additionally, we gathered and analyzed sales’ team feedback gained from interaction with customers and similar activities. This feedback included consideration of current market trends for pricing charged by companies offering similar services, competitive advantage of the products we offer and recent economic pressures that have resulted in lower spending on marketing activities. ESP for each item in the population was established based on the factors noted above and was reviewed by management. |
For transactions entered into or materially modified after July 1, 2010, we allocate consideration in multiple-element arrangements based on the relative selling prices. Revenue is then recognized as appropriate for each separate element based on its fair value. For fiscal 2014 and 2013, the impact on our revenue under the new accounting guidance as compared to the previous methodology resulted in an immaterial difference in revenue recognized as compared to that which would have previously been deferred and recognized ratably. The immaterial impact is primarily a result of the limited population of transactions subject to newly adopted guidance, as it includes only those arrangements entered into or materially modified after July 1, 2010. The accounting treatment for arrangements entered into prior to July 1, 2010 continues to follow legacy accounting rules and the revenue recognition method applied to certain types of arrangements has not changed upon adopting new guidance and does not affect the revenue recognized. The adoption of new guidance did not result in a material impact to the financial statements for the fiscal years ended 2014 and 2013 and is not anticipated to become material for fiscal 2015.
| 44 |
However, new guidance may result in a material impact in the future, due to the change in other factors affecting the revenue recognition method, as the impact on the timing and pattern of revenue will vary depending on the nature and volume of new or materially modified contracts in any given period. We expect that the new accounting guidance will facilitate our efforts to optimize the sales and marketing of our offerings due to better alignment between the economics of an arrangement and the accounting for that arrangement. Such optimization may lead us to modify our pricing practices, which could result in changes in the relative selling prices of our elements, including both VSOE and ESP, and therefore change the allocation of the sales price between multiple elements within an arrangement. However, this will not change the total revenues recognized with respect to the arrangement. We defer technical support (maintenance) revenue, including revenue that is part of a multiple element arrangement, and recognizes it ratably over the term of the agreement, which is generally one year.
For professional services sold separately from subscription services, we recognize professional service revenues as delivered. Expenses associated with delivering all professional services are recognized as incurred when the services are performed. Associated out-of-pocket travel costs and expenses related to the delivery of professional services are typically reimbursed by the customer and are accounted for as both revenue and expense in the period the cost is incurred.
For multiple element arrangements entered into prior to July 1, 2010 that include both subscription and professional services and did not meet the reparability criteria under the previous guidance, we have accounted for as a single unit of accounting. Consistent with the revenue recognition method applied prior to the adoption of ASU No. 2009-13, revenue for these arrangements continues to be recognized ratably over the term of the related subscription arrangement. If the multi-element arrangement is materially modified, the transaction is evaluated in accordance with the new accounting guidance which will most likely result in any deferred services revenue being recognized at the time of the material modification.
Software revenue
We enter into certain revenue arrangements for which we are obligated to deliver multiple products and/or services (multiple elements). For these arrangements, which generally include software products and technical support (maintenance), we allocate and defer revenue for the undelivered elements based on their VSOE. We allocate total earned revenue under the agreement among the various elements based on their relative fair value. In the event that VSOE cannot be established, we defer the entire amount until all elements of the arrangements have been delivered.
We determine VSOE based on actual prices charged for standalone sales of maintenance. To accomplish this, we track sales for the maintenance product when sold on a standalone basis for a one year term and compare to the established price list to ensure that the prices charged on the invoices align with the prices per price list.
We perform a quarterly analysis of the actual sales for standalone maintenance to establish the VSOE. We consider VSOE established if prices charged per invoice of least 75% of all standalone deals for maintenance fall within +/-20% of the prices charged per price list. If the condition is satisfied, the price list is considered to represent VSOE as prices charged per majority of the invoices agree to the established price list. Software is then recognized based on a residual method (As per ASU 985-605-25-10e) unless the price for maintenance exceeds the price for price list (which rarely happens), in which case portion of maintenance fee would be allocated to SW.
Valuation allowances and reserves
We record accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and charged to the provision for doubtful accounts.
| 45 |
We use the aged receivable and specific-identification methods of estimating our allowance for doubtful accounts. During the monthly accounts receivable analysis, we apply the aged receivable method by categorizing each customer’s balance by the number of days or months the underlying invoices have remained outstanding. Based on historical collection experience, changes in our customer payment history and a review of the current status of a customer’s trade accounts receivable, historical bad debts percentages are applied to each of these aggregate amounts, with larger percentages being applied to the older accounts. The computed total dollar amount is compared to the balance in the valuation account and an adjustment is made for the difference. On a quarterly basis, we use the specific-identification method by categorizing each customer’s balance based on all outstanding receivables greater than 90 days in the following uncollectible categories: receivables sent to collection agency; receivables under legal determination; and receivables in higher collection risk. Consequently, our quarterly allowance for doubtful accounts adjustment is determined by comparing the difference of the total of the uncollectible amounts as identified from the uncollectible categories with the pre-adjusted allowance provision.
Loss contingencies and commitment
We record an estimated loss contingency when information is available that indicates that it is probable that a material loss has been incurred or an asset has been impaired and the amount of the loss can be reasonably estimated. We disclose if the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, or if an exposure to loss exists in excess of the amount accrued. Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in which case the guarantees would be disclosed. Determining the likelihood of incurring a liability and estimating the amount of the liability involves an exercise of judgment. If the litigation results in an outcome that has greater adverse consequences to us than management currently expects, then we may have to record additional charges in the future. As of June 30, 2014, there was no probable material losses incurred that could be reasonably estimated.
Our commitments consist of obligations under operating leases for corporate office space, co-location facilities for data center capacity for research and test data centers, software contracts used in our production environment and capital leases.
Goodwill, long-lived assets and other intangible assets
We classify our intangible assets into three categories: intangible assets with definite lives subject to amortization; intangible assets with indefinite lives not subject to amortization; and goodwill.
Periodically, we evaluate our fixed assets and intangible assets with definite lives for impairment. If the carrying amount of an asset or asset group (in use or under development) is evaluated and found not to be recoverable (carrying amount exceeds the gross, undiscounted cash flows from use and disposition), then an impairment loss must be recognized. The impairment loss is measured as the excess of the carrying amount over the asset’s or asset group’s fair value. In addition, the potential impairment of finite life intangibles is assessed whenever events or a change in circumstances indicate the carrying value may not be recoverable.
We conduct a test for the impairment of goodwill on at least an annual basis. We have one reporting unit, Lyris, Inc. We adopted June 30th as the date of the annual impairment test, but will conduct the test at an earlier date if indicators of possible impairment arise that would cause a triggering event. We assessed the qualitative factors to determine whether it is necessary to perform the current two step test for goodwill impairment during each quarter ended for fiscal year 2014 and 2013.
The valuation approaches related to step one and step two considered a number of factors that included, but were not limited to, expected future cash flows, growth rates, discount rates, comparable multiples from publicly traded companies in the industry, technology lifecycles and growth rates, customer attrition, and required certain assumptions and estimates regarding industry, economic factors, and future profitability of business. The assumptions were based on reasonable market participant considerations and historical experience, which were inherently uncertain.
At June 30, 2013, we assessed our impairment and concluded that there was no impairment of goodwill or intangible assets.
| 46 |
As part of our qualitative assessment during Q4, we assessed the value of long-lived assets, including tangible and intangible assets. Due to the lack of use and termination of the Lyris APAC (Cogent Customer Relationships), the Company recognized a full write-off of these assets of $425 thousand, net of amortization, at June 30, 2014. The customer relationships asset was related to our acquisition of Cogent Online (Lyris APAC) in 2011. We reviewed the customer list and concluded the asset had no value due to the loss of CPA (Clicks Per Action) customers acquired form Cogent.
Based on our annual impairment tests conducted at June 30, 2014, we concluded that there was no impairment of goodwill or additional impairment of intangible assets for fiscal 2014.
See Note 6 ‘‘Goodwill’’ of the Notes to the Consolidated Financial Statements.
Capitalized Software Costs
Software licensing
We expense internal costs incurred in researching and developing computer software products designed for sale or licensing until technological feasibility has been established for the product. Once technological feasibility is established, applicable development software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We determined that technological feasibility is established when we have completed all necessary planning and designing and after we have resolved all high-risk development issues through coding and testing. Moreover, these activities are necessary to establish that the product can meet our design specifications including functions, features and technical performance requirements. We discontinue capitalization when the product is available for general release to customers.
SaaS software costs
We capitalize the direct costs associated with the software we develop for use in providing software-as-a-service to our customers during its application development stage, primarily consisting of employee-related costs. The types of activities performed during the application development stage create probable future economic benefits. Once the software is available for use in providing services to customers, we amortize the capitalized amount over three years with the amortization charged to cost of revenues. We expense activities performed during the preliminary project stage which are analogous to research and development activities. In addition, we expense the types of activities performed during the post-implementation / operation stage. These activities are likely to include release ready and release launch activities.
Total capitalized hosting software costs were approximately $2.7 million (before impairment) and $4.1 million during fiscal 2014 and fiscal 2013, respectively.
Stock-Based Compensation
We amortize stock-based compensation expense based on the fair value of stock-based awards on a straight-line basis over the requisite vesting period as defined in the applicable plan documents which is typically four years. We determine the fair value of each option grant using the Black-Scholes model. The Black-Scholes model utilizes the expected volatility, the term which the option is expected to be outstanding and the risk free interest rate to calculate the fair value of an option.
Accounting for income taxes
We recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets, including tax loss and credit carry forwards and liabilities using enacted tax rates expected to be applicable to taxable income in the years in which we expect those temporary differences to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.
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We establish a valuation allowance if we believe that it is more likely than not that some or all of our deferred tax assets will not be realized. We do not recognize a tax benefit unless we determine that it is more likely than not that the benefit will be sustained upon external examination, such as an audit by a taxing authority. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. See Note 10 ‘‘Income Taxes’’ of the Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 2 ‘‘Summary of Significant Accounting Policies’’ of the Notes to the Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| 49 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Lyris, Inc.:
We have audited the accompanying consolidated balance sheets of Lyris, Inc. and Subsidiaries (the ‘‘Company’’) as of June 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lyris, Inc. and Subsidiaries as of June 30, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/Burr Pilger Mayer, Inc.
San Jose, California
September 18, 2014
| 50 |
LYRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| Years Ended | ||||||||
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,884 | $ | 2,318 | ||||
| Accounts receivable, less allowances of $396 and $510, respectively | 3,456 | 4,103 | ||||||
| Prepaid expenses and other current assets | 674 | 721 | ||||||
| Deferred income taxes | 1,152 | 942 | ||||||
| Total current assets | 7,166 | 8,084 | ||||||
| Property and equipment, net | 5,160 | 9,355 | ||||||
| Intangible assets, net | 4,404 | 5,014 | ||||||
| Goodwill | 9,791 | 9,791 | ||||||
| Other long-term assets | 615 | 663 | ||||||
| TOTAL AS S ETS | $ | 27,136 | $ | 32,907 | ||||
| LIABILITIES , REDEEMABLE CONVERTIBLE PREFERRED STOCK | ||||||||
| AND S TOCKHOLDERS ' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Revolving line of credit | $ | 2,350 | $ | 2,260 | ||||
| Accounts payable and accrued expenses | 3,103 | 3,458 | ||||||
| Capital lease obligations - short-term | 459 | 827 | ||||||
| Income taxes payable | 136 | 203 | ||||||
| Deferred revenue | 3,165 | 3,220 | ||||||
| Total current liabilities | 9,213 | 9,968 | ||||||
| Capital lease obligations - long-term | 163 | 436 | ||||||
| Other long-term liabilities | 450 | 504 | ||||||
| TOTAL LIABILITIES | 9,826 | 10,908 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Redeemable convertible Series A preferred stock: $0.01 par value per share, 2,000 shares authorized, issued and outstanding, liquidation preference $5,000, as of June 30, 2014 and June 30, 2013 | 5,000 | 5,000 | ||||||
| Lyris Stockholders' equity: | ||||||||
| Preferred stock, $0.01 par value per share, 2,000 shares authorized as of June 30, 2014 and June 30, 2013; no shares issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value; 40,000 shares authorized; 9,579 shares issued and outstanding as of June 30, 2014 and June 30, 2013 | 1,415 | 1,415 | ||||||
| Additional paid-in capital | 268,592 | 268,209 | ||||||
| Accumulated deficit | (257,603 | ) | (252,608 | ) | ||||
| Treasury stock, at cost 11 shares held at June 30, 2014 and June 30, 2013 | (56 | ) | (56 | ) | ||||
| Accumulated other comprehensive (loss) income | (38 | ) | 39 | |||||
| Total equity | 12,310 | 16,999 | ||||||
| LIABILITIES , REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS ' EQUITY | $ | 27,136 | $ | 32,907 | ||||
See accompanying Notes to the Consolidated Financial Statements.
| 51 |
LYRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share data)
| Years Ended | ||||||||
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Revenue: | ||||||||
| Subscription revenue | $ | 24,257 | $ | 28,338 | ||||
| Support and maintenance revenue | 3,934 | 3,923 | ||||||
| Professional services revenue | 2,204 | 2,436 | ||||||
| Software revenue | 870 | 1,487 | ||||||
| Total revenue | 31,265 | 36,184 | ||||||
| Cost of revenue: | ||||||||
| Subscription, support and maintenance, professional services, and software | 9,890 | 12,345 | ||||||
| Amortization of developed technology | 1,724 | 1,665 | ||||||
| Total cost of revenue | 11,614 | 14,010 | ||||||
| Gross profit | 19,651 | 22,174 | ||||||
| Operating expenses: | ||||||||
| Sales and marketing | 10,065 | 9,858 | ||||||
| General and administrative | 5,956 | 8,114 | ||||||
| Research and development | 3,767 | 3,845 | ||||||
| Amortization of customer relationships and trade names | 190 | 202 | ||||||
| Impairment of customer relationships | 425 | - | ||||||
| Impairment of capitalized software | 4,212 | - | ||||||
| Total operating expenses | 24,615 | 22,019 | ||||||
| (Loss) Income from operations | (4,964 | ) | 155 | |||||
| Interest expense | (150 | ) | (222 | ) | ||||
| Interest income | 1 | 3 | ||||||
| Other expense | (31 | ) | (236 | ) | ||||
| Loss from operations before income tax benefit | (5,144 | ) | (300 | ) | ||||
| Income tax benefit | (149 | ) | (12 | ) | ||||
| Net loss | (4,995 | ) | (288 | ) | ||||
| Less: income attributable to noncontrolling interest, net of tax | - | 29 | ||||||
| Net loss attributable to Lyris, Inc. | $ | (4,995 | ) | $ | (317 | ) | ||
| Net loss per share | ||||||||
| Basic | $ | (0.52 | ) | $ | (0.03 | ) | ||
| Diluted | $ | (0.52 | ) | $ | (0.03 | ) | ||
| Weighted average shares outstanding | ||||||||
| Basic | 9,568 | 9,537 | ||||||
| Diluted | 9,568 | 9,537 | ||||||
See accompanying Notes to the Consolidated Financial Statements.
| 52 |
LYRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share data)
| Years Ended | ||||||||
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net loss | $ | (4,995 | ) | $ | (288 | ) | ||
| Other comprehensive loss, net of tax: | ||||||||
| Foreign currency translation losses | (77 | ) | (76 | ) | ||||
| Comprehensive loss | (5,072 | ) | (364 | ) | ||||
| less: Comprehensive income attributable to noncontrolling interest | - | (29 | ) | |||||
| Comprehensive loss attributable to Lyris, Inc. | $ | (5,072 | ) | $ | (393 | ) | ||
See accompanying Notes to the Consolidated Financial Statements.
| 53 |
LYRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Stockholders' | |||||||||||||||||||||||||||||||||||||||||||||||
| Reedemable Convertible | Additional | Other | Equity | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Common Stock | Paid-In | (Accumulated | Treasury Stock | Comprehensive | Controlling | Non-controlling | Stockholders' | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit) | Shares | Amount | Income (loss) | Interest | Interest | Equity | |||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2012 | - | $ | - | 9,446,831 | $ | 1,414 | $ | 267,447 | $ | (252,291 | ) | (11,333 | ) | $ | (56 | ) | $ | 115 | $ | 16,629 | $ | (178 | ) | $ | 16,451 | |||||||||||||||||||||||
| Common stock sale | - | - | 96,459 | 1 | 197 | - | - | - | - | 198 | - | 198 | ||||||||||||||||||||||||||||||||||||
| Common stock issued in settlement of RSU, | - | - | - | - | - | - | - | (49 | ) | - | (49 | ) | ||||||||||||||||||||||||||||||||||||
| net of shares withheld for employee taxes | 35,748 | (49 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Redeemable convertible Series A preferred | ||||||||||||||||||||||||||||||||||||||||||||||||
| stock issued | 2,000,000 | 5,000 | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | - | - | 159 | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Acquisition of APAC stock (100% ownership) | - | - | - | - | (165 | ) | - | - | - | - | (165 | ) | 178 | 13 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 779 | - | - | - | - | 779 | - | 779 | ||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | - | - | - | - | (76 | ) | (76 | ) | - | (76 | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (317 | ) | - | - | - | (317 | ) | - | (317 | ) | |||||||||||||||||||||||||||||||||
| Balances at June 30, 2013 | 2,000,000 | 5,000 | 9,579,197 | 1,415 | 268,209 | (252,608 | ) | (11,333 | ) | (56 | ) | 39 | 16,999 | - | 16,999 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 383 | - | - | - | - | 383 | - | 383 | ||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | - | - | - | - | (77 | ) | (77 | ) | - | (77 | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (4,995 | ) | - | - | - | (4,995 | ) | - | (4,995 | ) | |||||||||||||||||||||||||||||||||
| Balances at June 30, 2014 | 2,000,000 | $ | 5,000 | 9,579,197 | $ | 1,415 | $ | 268,592 | $ | (257,603 | ) | (11,333 | ) | $ | (56 | ) | $ | (38 | ) | $ | 12,310 | $ | - | $ | 12,310 | |||||||||||||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
| 54 |
LYRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS O F CASH FLOWS
(in thousands)
| Years Ended | ||||||||
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (4,995 | ) | $ | (288 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Stock-based compensation expense | 384 | 779 | ||||||
| Depreciation | 1,437 | 1,459 | ||||||
| Amortization of intangible assets | 190 | 249 | ||||||
| Impairment of intangible assets | 425 | - | ||||||
| Impairment of capitalized software | 4,212 | - | ||||||
| Amortization of capitalized development costs | 1,724 | 1,617 | ||||||
| Impairment of SiteWit investment | 67 | 303 | ||||||
| Provision for doubtful accounts | 92 | 328 | ||||||
| Deferred income taxes | (210 | ) | (60 | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 555 | 503 | ||||||
| Prepaid expenses and other assets | 28 | 54 | ||||||
| Accounts payable and accrued expenses | (420 | ) | (718 | ) | ||||
| Deferred revenue | (55 | ) | (373 | ) | ||||
| Income taxes payable | (57 | ) | 10 | |||||
| Net cash provided by operating activities | 3,377 | 3,863 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property and equipment, net | (225 | ) | (563 | ) | ||||
| Capitalized software expenditures | (2,730 | ) | (4,070 | ) | ||||
| Purchase of noncontrolling interest | - | (15 | ) | |||||
| Proceeds from redemption of long-term investments | - | 56 | ||||||
| Net cash used in investing activities | (2,955 | ) | (4,592 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from issuance of Redeemable Convertible Series A preferred stock | - | 5,000 | ||||||
| Proceeds from common stock issuances | - | 148 | ||||||
| Proceeds (payments) from short-term credit arrangements, net | 90 | (2,745 | ) | |||||
| Payments under capital lease obligations | (873 | ) | (800 | ) | ||||
| Increase in restricted cash | - | (100 | ) | |||||
| Net cash (used in) provided by financing activities | (783 | ) | 1,503 | |||||
| Net effect of exchange rate changes on cash and cash equivalents | (73 | ) | (58 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | (434 | ) | 716 | |||||
| Cash and cash equivalents, beginning of fiscal year | 2,318 | 1,602 | ||||||
| Cash and cash equivalents, end of fiscal year | $ | 1,884 | $ | 2,318 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 150 | $ | 184 | ||||
| Cash paid for taxes | $ | 39 | $ | 39 | ||||
| Supplemental disclosure of non-cash transactions: | ||||||||
| Equipment acquired under capital lease | $ | 232 | $ | 770 | ||||
See accompanying Notes to the Consolidated Financial Statements.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. Overview and Basis of Presentation
Overview
Lyris, Inc. ("Lyris", "we", or "us") is a leading internet marketing technology company. Our Software-as-a-Service ("SaaS") or cloud-based online marketing solutions and services provide customers the ability to build, deliver and manage, permission-based, online direct marketing programs and other communications to customers that use online and mobile channels to communicate to their respective customers and members. Our software products are offered to customers primarily on a subscription and license basis.
We were incorporated under the laws of the state of Delaware as J.L. Halsey Corporation and changed our name to Lyris, Inc. in October 2007. We have principal offices in Emeryville, California and conduct our business worldwide, with wholly owned subsidiaries in Canada and the United Kingdom, and subsidiaries in Argentina and Australia. Our foreign subsidiaries are generally engaged in providing sales, account management and support.
On October 1, 2012, our sales office in São Paulo, Brazil was incorporated as Lyris Technologia e Software Limitada to market and promote our internet marketing technology. Lyris Technologia e Software Limitada, our wholly-owned subsidiary, was formed to provide sales, account management and customer service in response to the growing markets in Latin America.
Basis of Presentation
Unless otherwise noted, all amounts, excluding percentages, shares, and per share amounts, are in thousands of dollars.
Fiscal Periods
Our fiscal year ends on June 30. References to fiscal 2014, for example, refer to the fiscal year ended June 30, 2014.
Principles of Consolidation
The consolidated financial statements include the accounts of Lyris and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Use of Estimates and Assumptions
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP), for a fair presentation of the periods presented, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues, expenses and related disclosures during the reporting period. On an ongoing basis, management evaluates these estimates, judgments and assumptions, including those related to revenue recognition, stock-based compensation, goodwill, and acquired intangible assets, capitalization of software, allowances for bad debt and income taxes. We base these estimates on historical and anticipated results and trends and on various other assumptions we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Foreign currency translation
We record assets, liabilities and the results of our operations outside of the United States based on their functional currency. Our subsidiaries Lyris Limited, UK, Lyris APAC PTY Ltd, Australia, Hot Banana Software, Inc., Canada, 1254412 Alberta ULC, Canada, Lyris LATAM S.A., Argentina and Lyris Technologia E Software Limitada, Brazil functional currency is the Great Britain Pound, Australian Dollar, Canadian Dollar, Argentine Peso and Brazilian Real, respectively. On consolidation, we translate all assets and liabilities using the exchange rates in effect as of the balance sheet date. We translate revenues and expenses using the monthly average exchange rates that were in effect during the period. We recognize the resulting adjustments as a separate component of equity in other comprehensive loss or gain. Foreign currency transaction gains and losses are included in income as incurred for that period.
Our European, Canadian, Latin American and Australian subsidiaries represented approximately 22% of our consolidated total revenues and 1% of consolidated long-lived assets at June 30, 2014, and 19% of consolidated total revenues and 2% of consolidated long-lived assets at June 30, 2013. We will continue to manage our foreign currency exposure to mitigate, over time, a portion of the impact of exchange rate fluctuation on net income and earnings per share. The fluctuation in the exchange rates resulted in foreign currency translation (loss) reported comprehensive loss of $77 thousand and $76 thousand at June 30, 2014 and 2013, respectively.
Certain Risks and Uncertainties
We operate in a highly competitive and dynamic market. Accordingly, there are factors that could adversely impact our current and future operations or financial results including, but not limited to, the following: our ability to obtain rights to or protect intellectual property; changes in regulations; our ability to develop new products accepted in the marketplace; future impairment charges; competition including, but not limited to, product pricing, product features and services; litigation or claims against Lyris; and the hiring, training and retention of key employees.
Financial instruments that potentially subject us to a concentration of credit risk consist primarily of cash and trade receivables. We sell our products primarily to customers throughout the United States. We monitor the credit status of our customers on an ongoing basis and do not require our customers to provide collateral for purchases on credit. No sales to an individual customer accounted for more than 10% of revenue for fiscal 2014 or fiscal 2013. Moreover, there was no single customer or supplier that accounted for more than 10% of our accounts receivables as of June 30, 2014 and 2013.
Segment Reporting
We operate in one segment. See Note 15 ‘‘Segment Reporting’’ of the Notes to the Consolidated Financial Statements.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments, including cash, accounts receivable and accounts payable, and certain other accrued liabilities approximate their fair values, due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying amounts of capital lease obligations approximate their fair value. The revolving line of credit approximates fair value due to its market interest rate and short-term nature.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (‘‘exit price’’) in an orderly transaction between market participants at the measurement date. The Financial Accounting Standards Board (FASB) has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The three levels of the fair value hierarchy under the guidance for fair value measurement are described below:
Level 1: Pricing inputs are based upon quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. As of June 30, 2014 and 2013, we used Level 1 assumptions for our cash equivalents, which were $0.0 million and $0.3 million, respectively. The valuations are based on quoted prices of the underlying money market funds that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required.
Level 2: Pricing inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of June 30, 2014 and 2013, we did not have any Level 2 financial assets or liabilities.
Level 3: Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. As of June 30, 2014 and 2013, we did not have any significant Level 3 financial assets or liabilities.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents, primarily consisting of cash on deposit with banks and money market funds, are stated at cost, which approximates fair value. At certain times, we maintain cash balances with banks, including foreign banks, in excess of insured limits. We limit our credit risk by maintaining accounts with financial institutions of high credit standing.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the shorter of the estimated useful lives of the assets, generally two years to seven years, or the lease term including any lease term extensions that we have the right and intention to execute, if applicable. Repair and maintenance costs are expensed in the period incurred. See Note 4 ‘‘Property and Equipment’’ of the Notes to the Consolidated Financial Statements.
Revenue Recognition
We recognize revenue from providing hosting and professional services and licensing our software products to our customers.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
We generally recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer (for software licenses, revenue is recognized when the customer is given electronic access to the licensed software); (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of fees is probable.
| 2. | Summary of Significant Accounting Policies (Continued) |
Subscription and Other Services Revenue
We generate services revenue from several sources, including hosted software services bundled with technical support (maintenance) services and professional services. We recognize subscription revenue in two ways: (1) based on the subscription plan defined in the agreement with specified monthly volume, and (2) based on actual usages at rates specified in the agreement. Additionally, we invoice excess usage and recognize it as revenue when incurred.
We follow Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU No. 2009-13”) for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Although our professional services that are a part of multiple element arrangement have standalone value to the customer, such services could not be accounted as separate units of accounting under the previous guidance, as vendor-specific objective evidence (“VSOE”) did not exist for the undelivered element. The VSOE for subscription services could not be established based on the historical pricing trends to date, which indicate that the price of the majority of standalone sales does not yet fall within a narrow range around the median price. Since our subscription services have standalone value as such services are often sold separately, but do not have VSOE, we use estimate of selling price (“ESP”) to determine fair value for our subscription services when sold in a multiple-element arrangement and recognize revenue based on ASU No. 2009-13. Third-party evidence (“TPE”) was concluded to be an impractical alternative due to differences in features and functionality of other companies’ offerings and lack of access to the actual selling price of competitor standalone sales. If new subscription service products are acquired or developed that require significant professional services in order to deliver the subscription service and the subscription service and professional services cannot support standalone value, then such subscription services and professional services will be evaluated as one unit of accounting. We determined ESP of fair value for subscription services based on the following:
| · | We have defined processes and controls to ensure our pricing integrity. Such controls include oversight by a cross-functional team and members of executive management. Significant factors considered when establishing pricing include market conditions, underlying costs, promotions and pricing history of similar services. Based on this information and actual pricing trends, management establishes or modifies the pricing. We identified the population of transactions to serve as the basis for establishing ESP, including subscription services and professional services pricing history in transactions with multiple- element arrangements and those sold on a standalone basis. |
| · | We analyzed the population of items sold by stratifying the population by product type and level and considered several data points, such as (1) average price charged, (2) weighted average price to incorporate the frequency of each item sold at any given price, and (3) the median price charged. These three price points were then compared with the existing price list that is used as a point of reference to negotiate contracts and does not represent fair value. Additionally, we gathered and analyzed sales’ team feedback gained from interaction with customers and similar activities. This feedback included consideration of current market trends for pricing charged by companies offering similar services, competitive advantage of the products we offer and recent economic pressures that have resulted in lower spending on marketing activities. ESP for each item in the population was established based on the factors noted above and was reviewed by management. |
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Summary of Significant Accounting Policies (Continued) |
We defer technical support (maintenance) revenue, including revenue that is part of a multiple element arrangement, and recognizes it ratably over the term of the agreement, which is generally one year.
For professional services sold separately from subscription services, we recognize professional service revenues as delivered. Expenses associated with delivering all professional services are recognized as incurred when the services are performed. Associated out-of-pocket travel costs and expenses related to the delivery of professional services are typically reimbursed by the customer and are accounted for as both revenue and expense in the period the cost is incurred.
For multiple element arrangements entered into prior to July 1, 2010 that include both subscription and professional services and did not meet the reparability criteria under the previous guidance, we have accounted for as a single unit of accounting. Consistent with the revenue recognition method applied prior to the adoption of ASU No. 2009-13, revenue for these arrangements continues to be recognized ratably over the term of the related subscription arrangement. If the multi-element arrangement is materially modified, the transaction is evaluated in accordance with the new accounting guidance which will most likely result in any deferred services revenue being recognized at the time of the material modification.
Software Revenue
We enter into certain revenue arrangements for which we are obligated to deliver multiple products and/or services (multiple elements). For these arrangements, which generally include software products and technical support (maintenance), we allocate and defer revenue for the undelivered elements based on their VSOE. We allocate total earned revenue under the agreement among the various elements based on their relative fair value. In the event that VSOE cannot be established, we defer the entire amount until all elements of the arrangements have been delivered.
We determine VSOE based on actual prices charged for standalone sales of maintenance. To accomplish this, we track sales for the maintenance product when sold on a standalone basis for a one year term and compares to the established price list to ensure that the prices charged on the invoices align with the prices per price list.
We perform a quarterly analysis of the actual sales for standalone maintenance to establish the VSOE. We consider VSOE established if prices charged per invoice of least 75% of all standalone deals for maintenance fall within +/-20% of the prices charged per price list. If the condition is satisfied, the price list is considered to represent VSOE as prices charged per majority of the invoices agree to the established price list. Software is then recognized based on a residual method (As per ASU 985-605-25-10e) unless the price for maintenance exceeds the price for price list (which rarely happens), in which case portion of maintenance fee would be allocated to SW.
Deferred Revenue
Deferred revenue represents customer billings made in advance for annual support or hosting contracts, professional consulting services to be delivered in the future and bulk purchases of emails to be delivered in the future. We typically bill maintenance on a per annum basis in advance for software and recognize the revenue ratably over the maintenance period. Some hosted contracts are prepaid monthly, quarterly or annually and recognized monthly after the service has been provided. Bulk purchases are typically billed in advance, ranging from monthly to annually and we recognize revenue in the periods in which emails are delivered.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Summary of Significant Accounting Policies (Continued) |
Advertising Costs
Advertising costs are expensed as incurred or the first time the advertising takes place. Advertising costs were $0.9 million and $1.4 million for fiscal 2014 and 2013, respectively.
Allowance for Doubtful Accounts
We record accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and charged to the provision for doubtful accounts.
We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts. Our estimate is based on historical collection experience, changes in customer payment history and a review of the current status of accounts receivable. If any of these factors change, it is reasonably possible that the estimate of the allowance for doubtful accounts will change.
The following is a summary of the activity in the allowance for doubtful accounts:
| Years Ended | ||||||||
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Balance at July 1, | 510 | 686 | ||||||
| Charge to cost and expenses | 92 | 328 | ||||||
| Write-offs charge against allowance | (206 | ) | (504 | ) | ||||
| Balance at June 30, | $ | 396 | $ | 510 | ||||
Loss Contingencies and Commitments
We record estimated loss contingencies when information is available that indicates that it is probable that a material loss has been incurred or an asset has been impaired and the amount of the loss can be reasonably estimated. We disclose if the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, or if an exposure to loss exists in excess of the amount accrued. Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in which case the guarantees would be disclosed. Determining the likelihood of incurring a liability and estimating the amount of the liability involves an exercise of judgment. If the litigation results in an outcome that has greater adverse consequences than management currently expects, then we may have to record additional charges in the future. As of June 30, 2014, there were neither material changes to our commitments and obligations, nor were there any probable material losses incurred that could be reasonably estimated.
Our commitments consist of obligations under operating leases for corporate office space and co-location facilities for data center capacity for research and test data centers. We also enter into contractual purchase obligations, capital leases and other agreements that are legally binding and specify certain minimum payment terms.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Summary of Significant Accounting Policies (Continued) |
Goodwill, Long-lived Assets and Other Intangible Assets
We classify our intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill.
We evaluate our fixed assets and intangible assets with definite lives for impairment. If the carrying amount of an asset or asset group (in use or under development) is evaluated and found not to be recoverable (carrying amount exceeds the gross, undiscounted cash flows from use and disposition), then an impairment loss must be recognized. The impairment loss is measured as the excess of the carrying amount over the asset’s or asset group’s fair value. In addition, the potential impairment of finite life intangibles is assessed whenever events or a change in circumstances indicate the carrying value may not be recoverable.
We test goodwill and our intangible assets with indefinite lives not subject to amortization annually on June 30th for impairment. In addition, we consider the following significant factors that could trigger an impairment review prior to annual testing:
| a. | a significant underperformance relative to historical or expected projected future operating results; |
| b. | a significant changes in the manner of our use of the acquired assets or the strategy for our overall business; |
| c. | significant negative industry or economic trends; |
| d. | a significant decline in our stock price for a sustained period of time; |
| e. | a significant change in our market capitalization relative to net book value; and |
| f. | a significant adverse change in legal factors or in the business climate that could affect the value of the asset. |
Impairment Testing
If we determine that the carrying value of intangible assets, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, it measures any potential impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions. These assumptions include, but are not limited to, anticipated operating income growth rates, our long-term anticipated operating income growth rate and the discount rate (including a specific reporting unit risk premium). The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. In developing these assumptions, we compare the resulting estimated enterprise value to our observable market enterprise value at the time the analysis is performed. See Notes 5 and 6 ‘‘Intangible Assets’’ and ‘‘Goodwill,’’ respectively, of the Notes to the Consolidated Financial Statements.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Summary of Significant Accounting Policies (Continued) |
Capitalized Software Costs
Software licensing
We expense internal costs incurred in researching and developing computer software products designed for sale or licensing until technological feasibility has been established for the product. Once technological feasibility is established, applicable development software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We determined that technological feasibility is established when we have completed all necessary planning and designing and after it has resolved all high-risk development issues through coding and testing. Moreover, these activities are necessary to establish that the product can meet our design specifications including functions, features and technical performance requirements. We discontinue capitalization when the product is available for general release to customers.
SaaS software costs
We capitalize the direct costs associated with the software we develop for use in providing software-as-a-service to our customers during our application development stage. The types of activities performed during the application development stage create probable future economic benefits. Once the software is available for use in providing services to customers, we amortize the capitalized amount over three years with the amortization charged to cost of revenues. We expense activities performed during the preliminary project stage which are analogous to research and development activities. In addition, we expense the types of activities performed during the post-implementation / operation stage. These activities are likely to include release ready and release launch activities. See Note 4 ‘‘Property and Equipment’’ of the Notes to the Consolidated Financial Statements.
Stock-Based Compensation
We amortize stock-based compensation expense based upon the fair value of stock-based awards on a straight-line basis over the requisite vesting period as defined in the applicable plan documents. See Note 13 ‘‘Stock Compensation Plans’’ of the Notes to the Consolidated Financial Statements.
Accounting for Income Taxes
We account for income taxes in accordance with standards established by the FASB. We recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the rate enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.
In accordance with FASB standards, we establish a valuation allowance if it believes that it is more likely than not that some or all of our deferred tax assets will not be realized. We do not recognize a tax benefit unless it determines that it is more likely than not that the benefit will be sustained upon external examination, an audit by taxing authority. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. See Note 10 ‘‘Income Taxes’’ of the Notes to the Consolidated Financial Statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Summary of Significant Accounting Policies (Continued) |
Acquisition
Significant judgment is required to estimate the fair value of purchased assets and liabilities at the date of acquisition, including estimating future cash flows from the acquired business, determining appropriate discount rates, asset lives and other assumptions. Our process to determine the fair value of the non-compete agreements, customer relationships and developed technology includes the use of estimates including: the potential impact on operating results if the non-compete agreements were not in place; revenue estimates for customers acquired through the acquisition based on an assumed customer attrition rate; estimated costs to be incurred to purchase the capabilities gained through the developed technology model; and appropriate discount rates based on a particular business’ weighted average cost of capital. Our estimates of an entity’s growth and costs are based on historical data, various internal estimates and a variety of external sources and are developed as part of our planning process. See Note 3 ‘‘Acquisition’’ of the Notes to the Consolidated Financial Statements.
Net Loss per Share
Basic net income (loss) per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted net income (loss) per share is computed similarly to basic net income (loss) per share except that it includes the potential dilution that could occur if dilutive securities were exercised. See Note 11 ‘‘Net Loss per Share’’ of the Notes to Consolidated Financial Statements.
New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which will require companies to recognize revenue for a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be actioned by identifying the contracts with customers, identify the performance obligations, determining the transaction price, allocating the transaction price to the performance obligations and recognizing revenue when the performance obligation has been met. The Update will also require Lyris to provide comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. This update will be effective beginning December 15, 2016.
| 3. | Acquisition |
In April 2010, we acquired interest in an Australian reseller, Cogent Online PTY Ltd (‘‘Cogent’’) to assist us with our sales efforts and global expansion in Australia. During June 2011, we acquired other shareholders’ interest in Cogent for a total cash consideration of approximately $0.4 million and increased our ownership from 33.3 percent to 80 percent. Cogent was a privately held company, with its headquarters in Sydney, Australia. Cogent was a marketing representative and reseller for us. We accounted for the initial investment with the equity method of accounting and changed to the consolidated method of accounting with the additional shares purchased. Additionally, we recorded a non-controlling interest in the consolidated statement of operations for the non-controlling investors’ interests in the net assets and operations of Cogent. Subsequent to the acquisition, Cogent was renamed to Lyris APAC PTY Ltd.
Under the provisions of the Stock Purchase Agreement dated June 1, 2011 (“SPA”) with Cogent Lyris was entitled to purchase 16.67 shares of Cogent for each calendar quarter where Net Quarterly Revenue (as that term is defined in the SPA) is less than $0.8 million collectively from Cogent’s minority Shareholders (as that term is defined in the SPA). The Net Quarterly Revenue was lower than $0.8 million in the calendar quarters ended September 14, 2011, December 14, 2011, March 14, 2012 and June 14, 2012. We therefore, exercised our option to purchase an aggregate of 66 shares at a price of $1 per share from the Shareholders. We made a determination to purchase these shares equally from the shareholdings of Damien Saunders and Lucid Online Pty Ltd (an entity controlled by Adrian Saunders). After the exercise, Damian Saunders continued to own 66.7 shares and Lucid Online Pty Ltd, continued to own 66.7 shares. Damian Saunders transferred the remaining 66.7 shares held by him to us in exchange for the satisfaction of $15 thousand owed by Damian Saunders to us. Adrian Saunders’ employment terminated with Lyris on July 19, 2012 and Lyris purchased the remaining shares held by Lucid Online Pty Ltd for an aggregate purchase price of $67. On December 3, 2012, the transfer of Damien and Adrian Saunders’ remaining shares was completed and we obtained 100 percent ownership.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 4. | Property and Equipment |
The components of property and equipment were as follows:
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| (In thousands) | ||||||||
| Computers | $ | 4,748 | $ | 4,367 | ||||
| Furniture and fixtures | 176 | 161 | ||||||
| Leasehold improvements | 313 | 297 | ||||||
| Software | 6,548 | 10,270 | ||||||
| Other equipment | 363 | 354 | ||||||
| 12,148 | 15,449 | |||||||
| Less: accumulated depreciation and amortization | (6,988 | ) | (6,094 | ) | ||||
| Total | $ | 5,160 | $ | 9,355 | ||||
For fiscal 2014 and 2013, we acquired $0.2 million and $0.6 million, respectively, of new property and equipment. Total depreciation expense related to property and equipment for fiscal 2014 and 2013 was approximately $1.4 million and $1.5 million, respectively.
For fiscal 2014 and 2013, we entered into capital leases totaling approximately $0.2 million and $0.8 million, respectively, for computer equipment associated with our data centers. Accumulated depreciation related to property and equipment under capital leases total $0.8 million as of June 30, 2014 and $0.8 million as of June 30, 2013.
During fiscal 2014, we continued to capitalize hosting software costs for our Phase Two of our Lyris ONE, to introduce major new features that will expand the email capabilities. Total capitalized hosting software costs were approximately $0.5 million (net of impairment) and $4.1 million during fiscal 2014, respectively and 2013, respectively. Capitalized hosting software costs primarily consist of employee related costs. Total amortization related to capitalized hosting software costs in fiscal 2014 and fiscal 2013 was approximately $1.7 million and $1.6 million, respectively, in amortization expense being recorded as cost of revenue.
During the fourth quarter of fiscal 2014, we impaired $4.2 million of internal-use hosting software developed Lyris ONE because management determined at that date that it would not provide any substantive service potential to the Lyris Platform application.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 5. | Intangible Assets |
The components of intangible assets consist of the following:
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Amortizable intangibles: | ||||||||
| Customer relationships | $ | 335 | $ | 1,150 | ||||
| 335 | 1,150 | |||||||
| Less: accumulated amortization | (331 | ) | (536 | ) | ||||
| 4 | 614 | |||||||
| Non-amortizable intangibles: | ||||||||
| Trade names | 4,400 | 4,400 | ||||||
| Total intangible assets, net of amortization | $ | 4,404 | $ | 5,014 | ||||
The activity for intangible assets for fiscal 2014 and 2013, consisted of the following:
| Amount | ||||
| Ending balance at June 30, 2012 | $ | 5,266 | ||
| Amortization | (249 | ) | ||
| Foreign currency translation adjustment | (3 | ) | ||
| Ending balance at June 30, 2013 | 5,014 | |||
| Impairment | (425 | ) | ||
| Amortization | (190 | ) | ||
| Foreign currency translation adjustment | 5 | |||
| Ending balance at June 30, 2014 | $ | 4,404 | ||
For fiscal 2014 and 2013 foreign currency translation gain (loss) were $5 thousand and ($3) thousand, respectively on intangible assets. The change in net intangible assets is primarily a result of changes in the foreign currency exchange rate between the U.S. dollar and British pound.
Total intangible asset amortization and impairment expense for fiscal 2014 and 2013 were $0.1 million and $0.2 million. For fiscal 2014 and 2013, total intangible asset amortization and impairment expense of developed technology classified as cost of revenue were $50 thousand and $0.8 million, respectively. During fiscal 2014 and fiscal 2013, we eliminated approximately $0.0 million and $3.1 million, respectively, in fully amortized intangible assets from our net intangible assets.
As of June 30, 2014, there are insignificant estimated future amortization expense related to intangible assets.
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NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 6. | Goodwill |
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in connection with our business combinations accounted for using the acquisition method of accounting.
The following table outlines our goodwill, by acquisition:
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Lyris Technologies | $ | 9,707 | $ | 9,707 | ||||
| Cogent | 84 | 84 | ||||||
| Total | $ | 9,791 | $ | 9,791 | ||||
There was no change in goodwill for 2014.
ASU No. 2011-08 ‘‘Intangibles—Goodwill and Other (Topic 350) Testing Goodwill for Impairment’’ provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of our qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than our carrying amount, the quantitative two-step impairment test is required. Otherwise, no further testing is required. We operate as one reporting unit, and conduct a test for the impairment of goodwill on at least an annual basis. We adopted June 30th as the date of the annual impairment test, but will conduct the test at an earlier date if indicators of possible impairment arise.
Lyris considers various events and circumstances such as macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and our share price relative to peers to determine if an impairment has occurred.
The valuation approaches related to step one and step two considered a number of factors that included, but were not limited to, expected future cash flows, growth rates, discount rates, comparable multiples from publicly traded companies in the industry, technology lifecycles and growth rates, customer attrition, and required certain assumptions and estimates regarding industry, economic factors, and future profitability of business. The assumptions were based on reasonable market participant considerations and historical experience, which were inherently uncertain.
As part of our qualitative assessment during Q4, we assessed the value of long-lived assets, including tangible and intangible assets. Due to the lack of use and termination of the Lyris APAC (Cogent Customer Relationships), the Company recognized a full write-off of these assets of $425 thousand, net of amortization, at June 30, 2014. The customer relationships asset was related to our acquisition of Cogent Online (Lyris APAC) in 2011. We reviewed the customer list and concluded the asset had no value due to the loss of CPA (Clicks Per Action) customers acquired form Cogent.
Based on our qualitative assessment and impairment test conducted at June 30, 2014, we concluded that there was no impairment of goodwill or additional impairment of intangible assets for fiscal 2014.
| 67 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 7. | Other Long-term Assets |
The components of other long-term assets were as follows:
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Investment in SiteWit | $ | 300 | $ | 367 | ||||
| Security deposit | 215 | 196 | ||||||
| Restricted cash | 100 | 100 | ||||||
| Other long-term assets | $ | 615 | $ | 663 | ||||
During the first quarter of fiscal 2012, we changed our accounting in SiteWit from the equity method to the cost method due to the decrease in ownership that resulted from the Termination Agreement. Periodically, we assess whether this investment has been other-than-temporarily impaired by considering factors such as trends and future prospects of the investee, ability to pay dividends annually, general market conditions, and other economic factors. When a decline in fair value is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the other-than-temporary impairment is included in earnings.
During third quarter of fiscal 2013, we performed an impairment analysis of our investment in SiteWit shares. First, we compared carrying value to the estimated fair value of SiteWit. Since carrying value exceeded the estimated fair value, we noted that this was an indication of impairment. Second, we deemed the impairment is other-than-temporary based on the series of net losses in our investment and the substantial decrease in carrying value. Based on our review, we recorded an impairment and write down $0.2 million from our investment in SiteWit as of March 31, 2013
During the fourth quarter of fiscal 2014, Lyris and SiteWit entered into a contract for a repurchase of SiteWit shares held by the company, effective in fiscal 2015. Subsequently, Lyris and SiteWit amended that agreement, which is expected to close on October 15, 2014. Accordingly, Lyris recorded a charge of $0.1 million and wrote down the company’s investment to $0.3 million to reflect the fair value as of June 30, 2014.
In June 30, 2012, we had $0.1 million in irrevocable letter of credit issued by Comerica, in favor of the Hartford Insurance Company (“Hartford”) for workers’ compensation insurance obligations. The Hartford letter of credit is held by Hartford as collateral for deductible payments that may become due under a worker’s compensation insurance policy. During the fourth quarter of fiscal 2013, we fully repaid the outstanding line of credit with Comerica and entered into a Loan and Security agreement with Silicon Valley Bank. As such, we cancelled the line of credit with Comerica and issued $0.1 million to Hartford as Hartford letter of credit and is held by as collateral for deductible payments that may become due under a worker’s compensation insurance policy. We classify the Hartford letter of credit as a restricted cash account of $0.1 million. Any amounts drawn on the account will be expensed during that fiscal year.
Other assets as of June 30, 2014 included $0.3 million related to the investment in SiteWit, and $0.2 million related to security deposits for leases. Other assets as of June 30, 2013 included $0.4million related to the investment in SiteWit, $0.2 million related to security deposits for leases.
| 8. | Revolving Lines of Credit |
On April 18, 2012, we entered into a Ninth Amendment (“Ninth Amendment”) to the Amended and Restated Loan and Security Agreement (“Comerica Agreement”) with Comerica Bank. The Ninth Amendment revised the terms of the Comerica Agreement and increased our revolving line of credit (“Comerica Revolving Line”) from $2.5 million to $3.5 million. The Ninth Amendment also extended the maturity of the Comerica Revolving Line and our second revolving line of credit of $2.5 million (“Non-Formula Line,” and together with the Comerica Revolving Line, the “Comerica Revolving Lines”).
| 68 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 8. | Revolving Lines of Credit (continued) |
Repayment of the Non-Formula Line was secured by a security interest in substantially all of our assets. In addition, Mr. William T. Comfort, III, former Chairman of the Board, guaranteed our repayment of indebtedness under the Non-Formula Line by a limited guaranty (“Guaranty”). On October 17, 2012, we fully repaid and cancelled the Non-Formula Line of $2.5 million that William T. Comfort had guaranteed with our proceeds from sale of 2,000,000 shares of our Series A Preferred Stock to Lyr, Ltd., a Bermuda corporation of which Mr. Comfort is Chairman. As a result of the repayment and cancellation, the Guaranty was terminated. As of October 17, 2012, we only had the Comerica Revolving Line outstanding with Comerica Bank. The Comerica Revolving Lines matured on April 30, 2013.
On May 6, 2013 Lyris, Inc. and our wholly owned subsidiaries, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. (each a “Borrower” and collectively, the “Borrowers”), entered into a Loan and Security Agreement (“SVB Agreement”) with Silicon Valley Bank (“Bank”). The Agreement provides the Company with a revolving line of credit (“SVB Revolving Line”) of up to $5,000,000. The amount available under the SVB Revolving Line is limited by a borrowing base formula based on each Borrower’s recurring revenue and customer retention rate. The SVB Revolving Line matures on May 6, 2015.
Advances under the SVB Revolving Line will accrue interest at a per annum floating rate equal to the greater of 6.25% or the Bank’s prime rate plus 3%. Interest is due monthly, and all unpaid principal and accrued but unpaid interest is due upon maturity.
The SVB Agreement contains typical negative covenants for a credit facility of this size and type, including covenants that prevent or restrict our and our subsidiaries’ ability to take certain actions, including, without limitation, changing principal executive offices, entering into mergers and acquisitions, disposing of property or other assets, and incurring additional indebtedness. Under the SVB Agreement, we are required to comply with financial covenants to maintain a liquidity ratio of not less than 1.25 to 1.00, and to maintain a minimum EBITDA (maximum loss) for the trailing three month period according to the following schedule:
| Trailing Three Month Period | Minimum EBITDA | |||
| Ending | (maximum loss) | |||
| June 30, 2014, July 31, 2014 and August 31, 2014 | $ | (350,000 | ) | |
| September 30, 2014, October 31, 2014 and November 30, 2014 | $ | (200,000 | ) | |
| December 31, 2014, January 31, 2015 and February 28, 2015 | $ | (75,000 | ) | |
Payment and performance of our obligations with respect to the SVB Revolving Line is secured by a security interest in substantially all of our assets and the assets of the additional Borrowers, including our and their intellectual property.
The SVB Agreement contains typical default provisions for a credit facility of this size and type, that include, among others, defaults in the event of non-payment or non-performance of covenants, a material adverse change, an attachment of our assets or entry of an injunction against doing business, occurrence of certain bankruptcy and insolvency events, cross-defaults to certain other material indebtedness, entry of material judgment and inaccuracy of representations and warranties. The occurrence of an event of default could result in, among other things, acceleration of all obligations under the SVB Revolving Line, Bank ceasing to advance money or extending credit under the SVB Revolving Line, and a right by Bank to exercise all remedies available to it under the SVB Agreement, including the disposition of any or all collateral.
| 69 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
On May 6, 2013, in connection with entering into the SVB Agreement, we paid all amounts outstanding and owed under our Comerica Agreement Amended and Restated Loan and Security Agreement with Comerica Bank, which terminated on April 30, 2013 according to its terms.
As of June 30, 2014, we are in compliance with all of the covenants of the SVB Agreement for all applicable measurement periods in fiscal 2014. Our outstanding borrowings totaled $2.4 million with $1.4 million in available credit remaining as of June 30, 2014.
| 9. | Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses are summarized as follows:
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Accounts payable | $ | 712 | $ | 1,159 | ||||
| Accrued compensation and benefits | 1,222 | 1,496 | ||||||
| Other current liabilites | 1,169 | 803 | ||||||
| Total | $ | 3,103 | $ | 3,458 | ||||
Accounts payable is comprised of our accounts payable incurred during the normal course of business.
Accrued compensation and benefits are comprised of our employee salaries, commissions, bonuses, vacation, payroll taxes and related benefits.
Other current liabilities are comprised of our accrued expenses related to the operation of the normal course of business and other onetime charges.
| 10. | Income Taxes |
In accordance with FASB standards, we establish a valuation allowance if we believe that it is more likely than not that some or all of our deferred tax assets will not be realized. We do not recognize a tax benefit unless we determine that it is more likely than not that the benefit will be sustained upon external examination, an audit by taxing authority. The amount of the benefit that may be recognized is the largest amount that has greater than 50% likelihood in being realized upon ultimate settlement. The overall increase is attributable to the Australia subsidiary being taken into account on the provision calculations.
| 70 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 10. | Income Taxes (Continued) |
The components of the benefit for income taxes were as follows:
| Years Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Current: | ||||||||
| Federal | $ | (23 | ) | $ | 40 | |||
| State | (0 | ) | 80 | |||||
| Foreign | 72 | (177 | ) | |||||
| 49 | (57 | ) | ||||||
| Deferred: | ||||||||
| State | 26 | (117 | ) | |||||
| Foreign | (224 | ) | 162 | |||||
| (198 | ) | 46 | ||||||
| Total income tax provision (benefit) | (149 | ) | (12 | ) | ||||
The components of net deferred tax assets (liabilities) were as follows:
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Accruals and reserves not currently deductible for tax purposes | $ | 9,107 | $ | 6,441 | ||||
| Net operating loss and tax credit carry forwards | 65,708 | 63,408 | ||||||
| Gross deferred tax assets | 74,815 | 69,849 | ||||||
| Valuation allowance | (73,663 | ) | (68,907 | ) | ||||
| Net deferred tax assets | 1,152 | 942 | ||||||
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered, in addition to estimated amounts related to net operating loss, capital loss and tax credits carry forwards. We have recorded a valuation allowance to reflect the estimated amount of deferred tax assets which relate to federal net operating loss carry forwards, in excess of amounts carried back to prior years, and tax credit carry forwards that may not be realized.
As of June 30, 2014, we had approximately $166.1 million in U.S. federal net operating loss (‘‘NOL’’) carry forwards that will start to expire in 2019. We had approximately $5.7 million in Canadian net operating loss carry forwards that will start to expire in 2028. Also, we had approximately $14.7 million in state NOLs, which expires at various times between 5 and 20 years. These NOL’s may offset future taxable income and taxable gains.
The change in the valuation allowance was an increase of approximately $4.8 million and a decrease of $3.1 million for fiscal 2014 and 2013 respectively. The principal reason for this increase was the current year loss for income tax purposes. If we experience a change in ownership within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, it may have limitations on our ability to realize the benefit of our net operating loss and tax credit carryovers.
In addition to the net operating loss carryovers, we have alternative minimum tax credit carryovers of $4.4 million.
| 71 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
The alternative minimum tax credit may be applied to regular federal income tax once the NOLs expired or we have regular federal taxable income. There is no expiration date on alternative minimum tax credit carryovers.
| 10. | Income Taxes (Continued) |
The items accounting for the difference between expected tax (benefit) computed at the federal statutory rate of 35% and the provision of income taxes was as follows:
| Years Ended June 30, | ||||||||||||||||
| 2014 | % | 2013 | % | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Income tax benefit at the statutory rate | $ | (1,846 | ) | 35.0 | % | $ | (115 | ) | 35.0 | % | ||||||
| State income taxes, net of federal benefit | 17 | -0.3 | % | (24 | ) | 7.4 | % | |||||||||
| Foreign income tax expense at US federal stautory rate | (58 | ) | 1.1 | % | ||||||||||||
| Amortization of intangible assets | 215 | -4.1 | % | 87 | -26.6 | % | ||||||||||
| Impact of foreign operations | 103 | -2.0 | % | 66 | -20.1 | % | ||||||||||
| Difference between AMT and statutory federal income tax rates | (256 | ) | 4.9 | % | 47 | -14.5 | % | |||||||||
| Permanent differences | 7 | -0.1 | % | 25 | -7.7 | % | ||||||||||
| Temporary differences | 20 | -0.4 | % | 180 | -54.8 | % | ||||||||||
| Change in deferred tax assets | 211 | -4.0 | % | 59 | -17.8 | % | ||||||||||
| Other, net | 1,438 | -27.3 | % | 106 | -32.2 | % | ||||||||||
| $ | (149 | ) | 2.8 | % | $ | (12 | ) | 3.7 | % | |||||||
The amount of income taxes refunded during fiscal 2014 and 2013 amounted to approximately $0 thousand and $20 thousand, respectively. The amount of income tax cash payments during fiscal 2014 and 2013 were approximately $39 thousand and $39 thousand, respectively.
In accordance with FASB Interpretation No. 48, ‘‘Accounting for Uncertainly in Income Taxes, (‘‘FIN 48’’), the Company establishes a valuation allowance if it believe that it is more likely than not that some or all of our deferred tax assets will not be realized. The Company does not recognize a tax benefit unless it determines that it is more likely than not that the benefit will be sustained upon external examination, which is an audit by taxing authority. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. As of June 30, 2014, the Company had approximately $303 thousand in unrecognized tax benefits, which, if recognized would reduce tax expense and our effective tax rate.
The aggregate changes in the balance of unrecognized tax benefits were as follows:
| Years Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Balance, beginning of year | $ | 293 | $ | 379 | ||||
| Increases for tax positions related to current year | 63 | 62 | ||||||
| Reductions due to lapsed statute of limitations | (53 | ) | (147 | ) | ||||
| Balance, end of year | $ | 303 | $ | 293 | ||||
| 72 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 10. | Income Taxes (Continued) |
We recognize interest accrued and penalties related to unrecognized tax benefits in our income tax provision. As of June 30, 2014, we had accrued no penalties and an insignificant amount of interest was recorded in income tax expense.
Tax positions for Lyris and its subsidiaries are subject to income tax audits. Tax returns for all tax years since fiscal 2011 remain open to examination by the Internal Revenue Service and since 2007 for state income tax purposes. As of June 30, 2014, there are no current federal or state income tax audits in progress.
We are subject to income tax in some jurisdictions outside the United States, none of which are individually material to our financial position, cash flows, or result of operations.
| 11. | Net Loss per Share |
Accounting standards established by the FASB requires the presentation of the basic net income loss per common share and diluted net loss per common share. Basic net loss per common share excludes any dilutive effects of options and convertible securities. Dilutive net loss per common share is the same as basic net (loss) per common share since the effect of potentially dilutive securities are antidilutive.
The following table sets forth the computation and reconciliation of net loss per share:
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net loss attributable to Lyris | $ | (4,995 | ) | $ | (317 | ) | ||
| Weighted average shares outstanding: | ||||||||
| Basic and diluted | 9,568 | 9,537 | ||||||
| Net loss per share | ||||||||
| Basic and diluted | $ | (0.52 | ) | $ | (0.03 | ) | ||
Potentially anti-dilutive stock options to purchase 26 and 34 thousand shares of common stock were excluded in the dilutive loss per common share calculation for the fiscal June 30, 2014 and 2013, respectively.
| 12. | Stockholders’ Equity |
Restricted Stock Units
During the first quarter of fiscal 2011, Wolfgang Maasberg, our former President and Chief Executive Officer and member of the Board was appointed. In connection with his appointment, the Company granted Mr. Maasberg 100,000 common stock options and 300,000 restricted stock units (RSUs) under the Company’s 2005 Equity-Based Compensation Plan. Mr. Maasberg’s stock options and RSUs vest one-fourth on the first anniversary of the grant then quarterly thereafter for the following 12 quarters. During the first quarter of fiscal 2012, 75,000 RSUs of Mr. Maasberg vested. In accordance with the terms of his award agreement, 27,338 shares of RSUs that vested were net-share settled such that the Company withheld that number of shares with a value equal to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted cash in the amount equal to such withholding taxes to the appropriate taxing authorities. During the second, third and fourth quarters of fiscal 2012, and first, second and third quarter of
| 73 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 12. | Stockholders’ Equity (Continued) |
fiscal 2013, 18,750 share vested each quarter, and similarly, were net settled the same as the first quarter of fiscal 2012, for the applicable income and other employment taxes. Total shares withheld each quarter were 6,834. Fair value of the $1.5 million of the RSUs was determined based on the intrinsic value of the RSUs on the grant date using a $4.95 market price. The Company recognizes stock-based compensation on a straight-line basis over the requisite service period of the award, which is typically the RSUs vesting term of four years. Total expense for RSUs was $0.0 million and $0.2 million for the fiscal years ended June 30, 2014 and 2013, respectively.
Treasury Stock
Repurchased shares of our common stock are held as treasury shares and at cost until they are reissued. When we reissue treasury stock, if the proceeds from the sale are more than the average price we paid to acquire the shares, we record an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price we paid to acquire the shares, we record a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount.
| 13. | Stock Compensation Plans |
On May 6, 2005, we established the J.L. Halsey Corporation 2005 Equity-Based Compensation Plan, which was amended with the First Amendment, effective as of May 6, 2005 (together, the ‘‘Original Equity-Based Compensation Plan’’). Subsequently, the Board adopted the Second Amendment to the Original Equity-Based Compensation Plan (the ‘‘Second Amendment’’) and, on May 13, 2009, our stockholders ratified the Second Amendment. Subsequently, the Board adopted the Third Amendment to the Original Equity-Based Compensation Plan (the ‘‘Third Amendment’’) and the Fourth Amendment to the Original Equity-Based Compensation Plan (the ‘‘Fourth Amendment’’, together with the Original Equity-Based Compensation Plan, the ‘‘Equity-Based Compensation Plan’’). The Equity-Based Compensation Plan authorizes the granting of stock options, RSUs and stock-based awards to employees, directors and certain consultants. Stock options issued in connection with the Equity- Based Compensation
Plan participants are granted with an exercise price per share equal to the fair market value of a share of our common stock at the date of grant. Stock options generally become exercisable over a four year vesting period and expire ten years from the date of the grant. RSUs issued in connection with the Equity-Based Compensation Plan are granted with a fair value based on the intrinsic value of the RSUs as of the date of grant. RSUs vest over four years, with 25% of the total number of shares subject to the RSU vesting on the one-year anniversary of the start of employment and, the remainder vesting every three months thereafter in equal installments of 1/12th of the total number of shares subject to the RSU. The effect of the Fourth Amendment was to increase the number of shares of Common Stock that may be issued in connection with awards granted under the Equity-Based Compensation Plan from 1,800,000 shares to 2,575,000 shares, thereby increasing the number of shares available for future awards under the Equity Based Compensation Plan by 775,000 shares. On August 8, 2012 we filed a registration statement on Form S-8 to register the offer and sale of these shares.
At June 30, 2014, there were 391,000 shares available for future grant.
| 74 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 13. | Stock Compensation Plans (Continued) |
The following table summarizes stock option activity from July 1, 2011 to June 30, 2014:
| Weighted- | Weighted-Average | |||||||||||
| Number of | Average Fair | Remaining Contractual | ||||||||||
| options | Value | Life in Years | ||||||||||
| (In thousands) | ||||||||||||
| Outstanding at July 1, 2012 | 1,393 | $ | 1.93 | 9.6 | ||||||||
| Granted | 1,219 | $ | 2.28 | |||||||||
| Forfeited/expired | (949 | ) | $ | 2.03 | ||||||||
| Outstanding at June 30, 2013 | 1,663 | $ | 2.10 | 8.5 | ||||||||
| Granted | 1,211 | $ | 1.54 | |||||||||
| Forfeited/expired | (928 | ) | $ | 2.06 | ||||||||
| Outstanding at June 30, 2014 | 1,946 | $ | 1.77 | 8.8 | ||||||||
| Vested and expected to vest at June 30, 2014 | 1,431 | $ | 1.82 | 8.6 | ||||||||
| Exercisable at June 30, 2014 | 383 | $ | 2.02 | 7.3 | ||||||||
As of June 30, 2014, the calculated aggregate intrinsic value of options outstanding and options exercisable was $0. The intrinsic value represents the pre-tax intrinsic value, based on our closing stock price on June 30, 2014, which would have been received by the option holders had all option holders exercised their options as of that date. As of June 30, 2014, we had 1,430,709 options vested or expected to vest with a weighted average exercise price of $1.82 and a weighted average remaining contractual term of 8.6 years. As of June 30, 2014, unamortized compensation cost related to stock options was $1.7 million. The cost is expected to be recognized over a weighted-average period of 3.1 years.
The following table summarizes stock options outstanding and exercisable options as of June 30, 2014:
| Weighted | ||||||||||||
| Average | ||||||||||||
| Number of | Remaining | |||||||||||
| Options | Contractual | Number of Options | ||||||||||
| Exercise Prices | Outstanding | Life (Years) | Exercisable | |||||||||
| (in thousands) | (in thousands) | |||||||||||
| $1.10 - $1.68 | 1,289 | 9.0 | 167 | |||||||||
| $1.84 - $4.95 | 640 | 8.4 | 199 | |||||||||
| $7.50 - $7.50 | 18 | 6.4 | 18 | |||||||||
| Total` | 1,946 | 8.8 | 383 | |||||||||
We recognize total stock-based compensation expenses, including employee stock awards and purchases under stock purchase plans, in accordance with the standards established by FASB.
| 75 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 13. | Stock Compensation Plans (Continued) |
The following table summarizes the allocation of stock-based compensation expense:
| Years Ended | ||||||||
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Cost of revenue | $ | 27 | $ | 64 | ||||
| General and administrative | 188 | 563 | ||||||
| Research and development | 46 | 74 | ||||||
| Sales and marketing | 123 | 78 | ||||||
| Total | $ | 384 | $ | 779 | ||||
We recognize stock-based compensation expenses on a straight-line basis over the requisite service period of the award which is generally four years.
The weighted average fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the following table:
| Years Ended | ||||||||
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Weighted average fair value of options at grant date | $ | 1.12 | $ | 2.28 | ||||
| Expected volatility | 78 | % | 79 | % | ||||
| Expected term of the option | 5.7 years | 4.5 years | ||||||
| Risk-free interest rates | 1.53% - 1.93% | 0.56% - 0.93% | ||||||
| Expected dividends | - | - | ||||||
The expected term of the options is based on the period of time that options are expected to be outstanding and is derived by analyzing historical exercise behavior of employees in Lyris’s peer group as well as the options’ contractual terms. Expected volatilities are based on implied volatilities from traded options on Lyris’s peer group’s common stock, Lyris’s historical volatility, and other factors. The risk-free rates are for the period matching the expected term of the option and are based on the U.S. Treasury yield curve rates as published by the Federal Reserve in effect at the time of grant. The dividend yield is zero based on the fact we have no intention of paying dividends in the near term.
Retirement Plans
We have a defined contribution 401(k) Plan covering substantially all of our employees. Beginning September 2006, we began making matching contributions to the 401(k) Plan. During fiscal 2009, due to difficult business conditions and the economic downturn, we discontinued the 401(k) matching plan program. As such, in fiscal 2011 there was no employee-related expense associated with our 401(k) contribution match program. Effective January 1, 2012, we reinstated the 401(k) matching plan program, at the rate of 50 percent of the first 4%. During fiscal 2014 and 2013, employee-related expense associated with the 401(k) matching plan program was $0.1 million and $0.1 million, respectively.
| 76 |
LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 13. | Stock Compensation Plans (Continued) |
Annual Incentive Bonus
On August 1, 2008, the Annual Incentive Bonus plan (the ‘‘Bonus Plan’’) was approved by our Compensation Committee of the Board of Directors (the ‘‘Compensation Committee’’). Under this Bonus Plan certain key employees, including the named executive officers are eligible to receive cash bonus payments following each fiscal quarter. The objectives of the Bonus Plan include aligning the eligible participants’ performance with our business goals to reward and retain high performing key employees and to attract high quality employees to Lyris.
| 14. | Commitments and Contingencies |
Our commitments consist of obligations under operating leases for corporate office space and co-location facilities for data center capacity for research and test data centers. We have also entered into capital leases in connection with acquiring computer equipment for our data center operations which is included in property and equipment. We used a 5.25% interest rate to calculate the present value of the future principal payments and interest expense related to our capital leases. Additionally, in the ordinary course of business, we enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms.
As of June 30, 2014 we had the following commitments:
| Operating Leases | ||||||||||||||||||||||||
| Co-location | ||||||||||||||||||||||||
| Hosting | Total | Capital | ||||||||||||||||||||||
| Facilities | Facilities | Other | Operating | Leases | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Fiscal Year 2015 | $ | 1,156 | $ | 185 | $ | 182 | $ | 1,523 | $ | 484 | $ | 2,007 | ||||||||||||
| Fiscal Year 2016 | 808 | - | 17 | 825 | 137 | 962 | ||||||||||||||||||
| Fiscal Year 2017 | 216 | - | 216 | 33 | 249 | |||||||||||||||||||
| Total | $ | 2,180 | $ | 185 | $ | 199 | $ | 2,564 | 654 | $ | 3,218 | |||||||||||||
| Less: amounts representing interest | (32 | ) | ||||||||||||||||||||||
| Present value of capital lease obligations | 622 | |||||||||||||||||||||||
| Less: short-term portion | (459 | ) | ||||||||||||||||||||||
| Long-term portion | $ | 163 | ||||||||||||||||||||||
We occupy the majority of our facilities under non-cancellable operating leases with lease terms in excess of one year. Such facility leases generally provide for annual increases based upon the Consumer Price Index or fixed increments. Rent expense under operating leases totaled $1.5 million and $1.3 million during fiscal 2014 and 2013, respectively.
Legal Proceedings
On February 14, 2012, David R. and Janet H. Burt filed suit against Wolfgang Maasberg, our former Chief Executive Officer, one other employee, several current or former directors, and certain of our stockholders in the U.S. District Court for the District of Maryland, Baltimore Division. The plaintiffs alleged various facts and make claims of federal and state securities law violations, as well as breach of fiduciary duty under Delaware law and intentional infliction of emotional distress. The plaintiffs sought unspecified damages, punitive damages, costs, and injunctive relief. The lawsuit was dismissed in April, 2013; however, the plaintiffs filed an amended complaint in May, 2013. As of June 30, 2014, we are awaiting a ruling from the court.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 15. | Segment Reporting |
ASC 280 ‘‘Segment Reporting,’’ or ASC 280, establishes standards for the way public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. We concluded that there is only one reportable segment as it is a cloud-based online marketing solutions and service provider and uses an integrated approach in developing and selling our solutions and services. Our Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by ASC 280.
| 16. | Related Party Transactions |
There were no significant related party transactions in fiscal 2014. During fiscal 2013, we entered into the following related party transactions:
Issuance of common stock
On October 17, 2012, in accordance with the terms of a Conversion Agreement by and between Lyris and William T. Comfort, III, dated October 17, 2012, we issued 96,459 shares of common stock to Mr. Comfort at a conversion price of $2.05 per share. The issuance was made in satisfaction of $197,741 in interest that we owed to Mr. Comfort as of October 16, 2012 under the Reimbursement and Security Agreement dated as of August 31, 2011 by and between us and Mr. Comfort for Mr. Comfort’s guarantee of the Non-Formula Line. (See Note 8)
Issuance of redeemable convertible Series A Preferred Stock
On October 17, 2012, we filed with the Secretary of State of the state of Delaware the Certification of Designation for the designation of our redeemable convertible Series A Preferred Stock. Of the 4 million shares of Preferred Stock, par value of $0.01 authorized to be issued, 2 million shares were designated as Series A Preferred Stock.
Subsequent to filing our Certification of Designation, on October 17, 2012, Lyris sold 2,000,000 of our 2,000,000 authorized shares of redeemable convertible Series A Preferred Stock to Lyr, Ltd., a Bermuda corporation, in consideration for $5.0 million in cash. William T. Comfort, III, a director and former Chairman of our board is the Chairman of Lyr, Ltd. The sale was made pursuant to a redeemable convertible Series A Preferred Stock Purchase Agreement by and between Lyris and Lyr, Ltd. dated as of October 17, 2012. No underwriter was involved in the sale of the redeemable convertible Series A Preferred Stock. $2.5 million of the proceeds were used to fully repay the Non-Formula Line provided by Bank that Mr. Comfort had guaranteed. The remaining amount will be used for general corporate purposes.
The holders of the shares of redeemable convertible Series A Preferred Stock shall not be entitled to receive any dividends except as declared by the Corporation at the discretion of the Corporation’s Board of Directors.
Each share of the redeemable convertible Series A Preferred Stock is entitled to certain preferences as described in the Certificate of Designation for the redeemable convertible Series A Preferred Stock. In the event of our Liquidation, the holders of the redeemable convertible Series A Preferred Stock will be entitled to receive, out of the funds and assets available for distribution to stockholders, before any payment or distribution of assets to the holders of our common stock, a liquidation preference equal to the greater of (i) $2.50 per share of the redeemable convertible Series A Preferred Stock, plus declared but unpaid dividends or (ii) such amount per share as would have been payable had all shares of redeemable convertible Series A Preferred Stock been converted into our common stock A “Liquidation” includes (i) our involuntary liquidation, dissolution or winding up, (ii) our merger or consolidation, or (iii) a sale, lease transfer or other disposition of all or substantially all of our assets.
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LYRIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| 16. | Related Party Transactions (Continued) |
Each share of the redeemable convertible Series A Preferred Stock is entitled to vote on all matters and is entitled to the number of votes equal to the number of shares of our common stock into which each share of redeemable convertible Series A Preferred Stock is convertible. Except as required by law or as otherwise provided below, the holders of shares of redeemable convertible Series A Preferred Stock and our common stock will vote together as a single class and not as separate classes.
We may not, without first obtaining the approval of the holders of at least a majority of the redeemable convertible Series A Preferred Stock then outstanding: (i) alter or change the rights, powers or preferences of the redeemable convertible Series A Preferred Stock set forth in the certificate of incorporation or bylaws, as then in effect, in a way that adversely affects the redeemable convertible Series A Preferred Stock, (ii) increase or decrease the number of authorized shares of redeemable convertible Series A Preferred Stock, (iii) authorize or create (by reclassification or otherwise) any new class or series of capital stock having rights, powers or preferences that are senior to or on a parity with any series of redeemable convertible Series A Preferred Stock or authorize or create (by reclassification or otherwise) any security convertible into or exercisable for any such new class or series of capital stock, or (iv) liquidate, dissolve or wind-up our business and affairs, a Liquidation, or consent, agree or commit to any of the foregoing.
The redeemable convertible Series A Preferred Stock may be converted at any time, at the option of the holder, into shares of our common stock at a conversion price of $2.50 per share (“Conversion Price”). The Conversion Price will be adjusted for customary structural changes such as stock splits and dividends. The redeemable convertible Series A Preferred Stock will convert automatically upon the vote or written consent of the holders of at least a majority of the then outstanding shares of redeemable convertible Series A Preferred Stock.
Upon receiving a written redemption request, any time after the third anniversary of the Issuance Date, from the holders of at least a majority of the then outstanding shares of redeemable convertible Series A Preferred Stock, we shall redeem all of the then outstanding shares of redeemable convertible Series A Preferred Stock (“Redemption Right”). This Redemption Right shall not apply if Liquidation has occurred or if there was a sale by our shareholders representing at least a majority, by voting power, of our securities to one or more acquirers. The redemption price per share shall be $2.50 plus all declared but unpaid dividends thereon.
The redeemable convertible Series A Preferred Stock were issued and recorded at its original issue price of $5.0 million as there are no underwriters involved. As such, our redemption value is at 100 percent of the original issue price of $5.0 million and will adjust accordingly upon the issuance of dividends. We classified our redeemable convertible Series A Preferred Stock as a temporary equity as mezzanine due to our redemption option being contingent upon the holder’s not exercising their option to convert to our common stock.
| 17. | Subsequent Events |
SiteWit investment
Lyris entered into an agreement with SiteWit agreeing to repurchase Lyris’ shares in SiteWit, for the sum of $300,000. The closing date was July 30, 2014. SiteWit breached that agreement and Lyris and SiteWit entered into an amended agreement dated August 7, 2014, whereby SiteWit would make three separate installment payments of $100,000, for a total of $300,000, plus simple interest. The installment dates were August 15, September 15, and October 15, 2014, with the final installment date becoming the new closing date of the repurchase of shares.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934 (the ‘‘Exchange Act’’). This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Form 10-K, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As of June 30, 2014, there were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with our Audit Committee of our Board of Directors.
Management assessed our internal control over financial reporting as of June 30, 2014, the end of our fiscal year. Management based its assessment on criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in (COSO). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment.
Based on our assessment of our internal control over financial reporting as of June 30, 2014, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
This report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the temporary rules of the SEC that permit the Company to provide only management’s report in this Annual report.
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Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective at the ‘‘reasonable assurance’’ level. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Not Applicable.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE MANAGEMENT
Executive Officers and Directors
The following table provides information regarding our current executive officers and directors
| Name | Age | Position(s) | ||
| John Philpin | 55 | Chief Executive Officer | ||
| Deborah Eudaley | 56 | Chief Operating Officer and Chief Financial Officer | ||
| Alex Lustberg | 44 | Chief Marketing Officer | ||
| Andrew Richard Blair (1) | 81 | Director | ||
| William T. Comfort, III (2) | 48 | Director | ||
| Nicolas De Santis Cuadra | 48 | Director | ||
| Paul Hoffman (1) | 64 | Director | ||
| David Wang (1)(2) | 38 | Director |
| (1) | Member of the Audit Committee. |
| (2) | Member of the Compensation Committee. |
John Philpin was appointed our SVP Engineering in July, 2013 and our Chief Executive Officer on October 7, 2013. He also serves on our Board of Directors. Prior to joining us, Mr. Philpin was the principal of Beyond Bridges from 2005 to 2013, an organization he founded that sold services including business development, planning and strategy, change management, sales and marketing, social sales/enterprise methods and technology transformation to organizations in both the USA and Europe. From 2005 to 2007, Mr. Philpin was CEO of Group Partners, a London based strategic consulting organization. From 2004 to 2005 he was Chief Marketing Officer of Cramer, a leading provider operations support systems, that was acquired by Amdocs. From 2001 to 2003 Mr. Philpin was Chief Marketing Officer at Vitria, a provider of operational intelligence software. From 1997 to 2001, Mr. Philpin held various positions relating to marketing, sales, business development, customer support and customer experience with Flypaper, a startup that he co-founded and that developed a Flash content creation and management platform. Mr. Philpin was a Senior Vice President of Citigroup from 1994 to 1996 and held a variety of positions at Oracle from 1985 to 1994. Mr. Philpin holds a BSc in Mathematics from the University of East Anglia. We believe that Mr. Philpin should serve as a member of our Board because of his broad management experience and experience in marketing.
Deborah Eudaley was appointed our Chief Financial Officer in November, 2011 and as our Chief Operating Officer in November 2012. Prior to joining us, Ms. Eudaley served as Chief Financial Officer for Cloudmark Inc., a private messaging security software company, since June, 2010, where she managed all finance, accounting and human resources matters. From 2004 to February, 2010, she was Chief Financial Officer and Senior Vice President of Finance and Operations for GoldenGate Software Inc., a transaction data management company, which was acquired by Oracle Corporation in 2009. Ms. Eudaley also served as Vice President, Financial Planning & Analysis for Riverdeep, Inc., a publisher of educational products, from 2003 to 2004. She also served as Chief Financial Officer for Indivos Inc., a developer of biometric based authentication for the payments processing market, from 2000 to 2002, Alibris Inc., a provider of hard to find books to business partners and consumers, from 1999 to 2000, and Placeware Inc., a provider of internet conferencing services, from 1998 to 1999. Ms. Eudaley holds a B.A. from U.C. Berkeley and an M.B.A. from California State University, Hayward.
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Alex Lustberg was appointed our Vice President of Marketing in February, 2012 and our Chief Marketing Officer on November 9, 2012. Prior to joining us, Mr. Lustberg was an internal consultant at Dell Inc. from August, 2011 through February, 2012 where he was responsible for product marketing for Dell's cloud business applications offerings. He joined Dell from Overtone, Inc., a provider of SaaS customer listening and social media analytics software. While at Overtone he served as Senior Vice President of Solution Strategy and Delivery from November, 2010 through August, 2011 and as Vice President of Product Marketing from 2007 to November, 2010. Overtone was acquired by Kana Software, Inc. in 2011. Prior to that, Mr. Lustberg was the owner and managing partner of IQ Creative America, a hospitality and lifestyle marketing company, from 2002 to 2007. Mr. Lustberg was also an independent product marketing consultant from 2003 to 2007, with engagements focused on business intelligence, customer relationship management, and human resources software implementation. His prior experience includes product marketing and product management positions at i2 Technologies Inc., a software company, from 2002 to 2003 and Firepond, Inc., a software company, from 1998 to 2001 and as a consultant with Accenture, Inc., a consulting firm, from 1995 to 1997. Mr. Lustberg holds a B.A. and M.A. degrees in Organizational Studies from Stanford University.
Andrew Richard Blair has been a member of our Board since 2002. He is a founder of Freimark Blair & Company, Inc., a broker-dealer research boutique. Mr. Blair has served as President, Chief Executive Officer, Chief Financial Officer, and as a director of Freimark Blair since 1983. Mr. Blair holds a B.S. in Science and Business Administration from Wake Forest University. We believe that Mr. Blair possesses specific attributes that qualify him to serve as a member of our Board and to serve as chair of our Audit Committee, including his financial and accounting expertise and his substantial knowledge of financial markets.
William T. Comfort, III has served as a member of our Board since 2002 and as Chairman of the Board from November 2002 until November 1, 2012 and since October 7, 2013. He was a private equity investment professional with CVC Capital Partners, a leading private equity firm based in London, U.K., from 1995 until 2000. From 2001 to 2003 he served as a consultant to Citicorp Venture Capital (‘‘CVC’’). He is now principal of Conversion Capital Partners Limited, an investment fund headquartered in London. Mr. Comfort also has served as a director of numerous public and private companies as a representative of CVC Capital Partners and CVC, from all of which he has resigned. Mr. Comfort is currently a director of Kofax, Inc. Mr. Comfort received his J.D. and L.L.M. in tax law from New York University School of Law. We believe Mr. Comfort should serve as a member of our Board based on the important perspective he brings to our Board and management team from his extensive experience as an investor in numerous businesses, both public and privately held, providing guidance and counsel to a wide variety of companies, and service on the boards of directors of numerous private and publicly-held companies.
Nicolas De Santis Cuadra has been a member of our Board since 2003. Mr. De Santis Cuadra has served since 2003 as the Chief Executive Officer of London-based Twelve Stars Communications (now called Gold Mercury International), a globalization and strategy think tank and consultancy located in London, U.K., founded in 1961. From 2000 until 2003, Mr. De Santis Cuadra served as the marketing director of OPODO Ltd., the online travel portal owned by British Airways, Lufthansa, Air France and several other European-based airlines. From 1998 until 2000, Mr. De Santis Cuadra served as Chief Marketing Officer of Beenz.com, the internet currency website, sold to Carlson Marketing, the U.S.-based global marketing services company. We believe that Mr. De Santis should serve as a member of our Board because of his substantial strategic planning and marketing experience and his executive experience at several internet- related businesses.
Paul Hoffman became a member of our Board in April 2014. He is the founder and owner of Evergreen Advisory Services, a consulting firm and a director of Actian Corporation, a big data analytics platform company. From January 2005 to October 2013, he was Executive Vice President and President of Worldwide Field Operations at Informatica, a global leader global leader in data integration and data quality enterprise software and cloud (SaaS) services. Prior to Informatica, Hoffman co-founded and served as Executive Vice President of Worldwide Sales at Cassatt Corporation and was President of the Americas at SeeBeyond Technology Corporation. Earlier in his career, he was Vice President of Worldwide Sales at Documentum, and he spent 10 years at Oracle, where he ultimately assumed the role of Vice President of Worldwide Operations. Mr. Hoffman has a B. S. in Finance from Fairfield University. We believe that Mr. Hoffman should serve as a member of our Board because of his background in software sales and his senior sales leadership experience.
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David Wang became a member of our Board in June 2013. Since June 2013, Mr. Wang has been Director of Alternative Investments at The TCW Group, an investment management firm. Prior to joining TCW, Mr. Wang served as Director of Houlihan Lokey, an international investment banking firm from February 2010 to May 2013 where he was a senior member of the Capital Markets group. From 2006 through January 2010, Mr. Wang served as Managing Director, Chief Financial Officer and Advisor to Xinhua Finance Limited, a Tokyo Stock Exchange-listed provider of financial indices, ratings, news and corporate communications services. From 2000 to 2006, Mr. Wang served as Vice President with Libra Securities and U.S. Bancorp Libra, affiliated investment banking firms. During his tenure with Libra Securities, Mr. Wang also served as Chief Financial Officer and board member of Kentucky Electric Steel, LLC, from 2003 to 2006, where he was responsible for the financial management of the Company’s highly successful turnaround. Mr. Wang graduated with a B.S. in Economics from the Wharton School of the University of Pennsylvania. We believe that Mr. Wang should serve as a member of our Board because of his expertise in operations and finance, including capital markets transactions and mergers and acquisitions in addition to his board experience at several private companies.
Our executive officers are appointed by, and serve at the discretion of, our Board. There are no familial relationships among our directors and officers.
Board Composition
Our certificate of incorporation provides that the Board shall be divided into three classes, designated Class I, Class II and Class III. Directors serve for staggered terms of three years each. Messrs. Blair and De Santis Cuadra currently serve as Class I directors, whose terms expire at the 2015 Annual Meeting. Messers. Philpin and Hoffman currently serve as Class II directors whose terms expire at the 2016 Annual Meeting. Messrs. Comfort and Wang currently serve as Class III directors whose terms expire at the 2017 Annual Meeting.
The classification of our Board and provisions described above may have the effect of delaying or preventing changes in our control or management. See ‘‘Description of Capital Stock—Anti-takeover provisions—Certificate of incorporation and bylaw provisions.’’
Committees of our Board
Our Board has established an Audit Committee and a Compensation Committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignations or until otherwise determined by our Board. Our Board has adopted a charter for each of these committees, which it believes complies with the applicable requirements of current NASDAQ Capital Market and SEC rules and regulations. We intend to comply with future requirements to the extent they are applicable to us. Copies of the charters for each committee will be available without charge, upon request in writing to Lyris, Inc., 6401 Hollis Street, Suite 125, Emeryville, California 94608, Attn: Investor Relations, or on the investor relations tab at our website, www.lyris.com under Corporate Governance.
Audit Committee
Our Audit Committee is comprised of Mr. Blair who is the chair of the Audit Committee, Mr. Hoffman and Mr. Wang. Each member of our Audit Committee is financially literate as required by current NASDAQ Capital Market listing standards. In addition, our Board has determined that Mr. Blair is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act and the Board had determined that Mr. Blair is independent, as independence for audit committee members is defined in the listing standards for NASDAQ Capital Market. Our Audit Committee, among other things:
| · | selects a qualified firm to serve as the independent registered public accounting firm to audit our financial statements; |
| · | helps to ensure the independence and performance of the independent registered public accounting firm; |
| · | discusses the scope and results of the audit with the independent registered public accounting firm, and reviews, with management and the independent accountants, our interim and year-end operating results; |
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| · | develops procedures for employees to submit concerns anonymously about questionable accounting or audit matters; |
| · | reviews our policies on risk assessment and risk management; |
| · | obtains and reviews a report by the independent registered public accounting firm at least annually, that describes our internal quality-control procedures, any material issues with such procedures, and any steps taken to deal with such issues; and |
| · | approves (or, as permitted, pre-approves) all audit and all permissible non-audit services, other than de minims non-audit services, to be performed by the independent registered public accounting firm. |
Nominating Procedures
We do not currently have a nominating committee of the Board, and all director nominations are considered by the independent directors of the Board in a vote in which only the independent directors participate. Our independent directors will identify, evaluate, and select, or make recommendations to our Board regarding, nominees for election to our board of directors and its committees. The independent directors of the Board will also consider and make recommendations to our Board regarding the composition of our Board and its committees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our shares of common stock to file with the SEC initial reports of ownership and reports of changes in such ownership. SEC rules require such persons to furnish us with copies of all Section 16(a) reports that they file. Based on a review of these reports and on written representations from the reporting persons that no other reports were required, we believe that the applicable Section 16(a) reporting requirements were complied with for all of the transactions which occurred in the fiscal year ended June 30, 2013 with the following exceptions. In July, 2014, a Form 4 for Roy Camblin for an award of options was not filed on a timely basis. In August 2014, a Form 4 for Alex Lustberg for an award of options was not filed on a timely basis. In August, 2014 a Form 4 for Deborah Eudaley was not filed on a timely basis.
Code of Conduct and Ethics
We have adopted a code of conduct and ethics that applies to all of our board members, officers and employees. Our Code of Conduct and Ethics is posted on the Investor Relations section of our website located at http://lyri.irpage.net/, by clicking on “Corporate Governance.” Any amendments or waivers of our Code of Conduct and Ethics pertaining to a member of our board of directors or one of our executive officers will be disclosed on our website at the above-referenced address.
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STOCKHOLDER NOMINATION
Our Bylaws contain provisions addressing the process by which a stockholder may nominate an individual to stand for election to the Board of Directors at our Annual Meeting. Historically, we have not had a formal policy concerning stockholder recommendations for nominees. Given our size, the Board of Directors does not feel that such a formal policy is warranted at this time. The absence of such a policy, however, does not mean that a reasonable stockholder recommendation will not be considered, in light of our particular needs and the policies and procedures set forth above. Procedures for submitting such stockholder recommendations are set forth under ‘‘Stockholder Communications with the Board’’ below. The Board of Directors will reconsider this matter at such time as it believes that our circumstances, including our operations and prospects, warrant the adoption of such a policy.
Stockholder Communications with the Board
We have no formal process by which stockholders may communicate directly with directors. However stockholders may direct communications intended for the Board of Directors to the Secretary of the Company, at 6401 Hollis St., Suite 125, Emeryville, California 94608. The envelope containing such communication must contain a clear notation indicating that the enclosed letter is a ‘‘Stockholder- Board Communication’’ or ‘‘Stockholder-Director Communication’’ or similar statement that clearly and unmistakably indicates the communication is intended for the Board of Directors. All such communications must clearly indicate the author as a stockholder and state whether the intended recipients are all members of the Board of Directors or just certain specified directors. The Secretary of the Company will make copies of all such communications and circulate them to the appropriate director or directors.
ITEM 11. EXECUTIVE COMPENSATION
Compensation philosophy and objectives
Our executive compensation programs and policies focus mainly on attracting, retaining and motivating executive leadership personnel necessary to manage and grow our business. To date, we have not undertaken a formal study to determine whether compensation paid to our executives is competitive with that of our competitors. Instead, the Compensation Committee has focused on one-on-one negotiations with each executive at the time of hire for the purpose of recruiting the executive as part of a team that will develop and implement our long-term strategic goals.
Annual bonus plan
Under our annual bonus plan, originally approved by the Compensation Committee in 2008, key employees, including our named executive officers, are eligible for quarterly bonus payments if corporate or individual performance targets are achieved. The objectives of the bonus plan are to align executive compensation incentives with our business goals and to reward high performing executives.
With the annual bonus plan, participants are eligible to receive bonuses based on individual performance and Company performance. The Compensation Committee establishes individual performance objectives for executives, and determines whether such objectives have been achieved. Company performance objectives are stated in terms of net new monthly hosted revenue additions (“net new MRR’’); total revenues; and Adjusted EBITDA or any other performance criteria selected by the Compensation Committee. For each bonus plan year, the Compensation Committee will establish the percentage of the bonus determined by each of the performance criteria. If the Company exceeds performance targets, participants are eligible for additional bonus awards in the discretion of the Compensation Committee.
In fiscal 2014, no performance metrics were set under the annual bonus plan, and only individual performance targets were used for executive bonuses.
Mr. Camblin, who resigned as our Chief Executive Officer on October 7, 2013, received no bonus in fiscal 2014 because he did not achieve his individual performance targets, which were based on the overall company performance.
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Mr. Philpin was appointed our Chief Executive Officer on October 7, 2013. Under the terms of his employment agreement, Mr. Philpin’s target bonus is $100,000 per year, pro-rated to $14,688 for first fiscal quarter and $25,000 the three fiscal quarters thereafter. No specific individual performance measures were established for Mr. Philpin, and for the first two quarters of fiscal 2014. Mr. Philpin’s bonuses were awarded at the discretion of the Compensation Committee based on overall company performance against the forecasted plan.
Ms. Eudaley had a target fiscal 2014 bonus amount of $100,000, payable quarterly. She received a bonus of $25,000 for the first quarter of 2014 at the discretion of the Compensation Committee, based upon the overall company performance against the forecasted plan. For the remaining three quarters of fiscal 2014, the Compensation Committee established individual performance measures focused on liquidity management and forecasting, financial planning development of the annual business plan, financial reporting and corporate filings, and operational activities. In the second quarter of fiscal 2014 Ms. Eudaley received a bonus of $24,740 based on achievement of the established metrics. For the third and fourth quarters of fiscal 2014 no bonuses were awarded due to the overall performance of the Company.
Mr. Lustberg had a target fiscal 2014 bonus of $80,000, payable quarterly. No individual performance measures were established for the first quarter of fiscal 2014, but Mr. Lustberg was paid his $20,000 target bonus at the discretion of the Compensation Committee. The Compensation Committee established individual performance measures for the remaining quarters of fiscal 2014 prior to the start of the second quarter. Individual performance measures for Mr. Lustberg were focused on the management of his area of responsibility, developing marketing campaigns to increase demand, building brand awareness and sales support for the LATAM market. In the second quarter of fiscal 2014 Mr. Lustberg received a bonus of $15,603 based on achievement of the established metrics.
After the second quarter of fiscal 2014, the bonus arrangements for all executive officers were canceled by the Compensation Committee due to the poor overall performance of the Company.
Equity compensation
We grant stock options to executives when they are hired or promoted, as a part of their overall compensation package. The number of options and corresponding vesting schedules are based on what our Compensation Committee believes is needed to be competitive in the marketplace. However, we do not conduct any formal peer group benchmarking studies. Additional option awards may be granted based on the recommendation of the chief executive officer and approval by the Compensation Committee.
Role of executive officers in compensation decisions
The Compensation Committee makes all executive officer compensation decisions. The Compensation Committee actively considers, and has the ultimate authority of approving, recommendations made by the Chief Executive Officer regarding all equity-based awards to employees. Our Chief Executive Officer determines, in consultation with the Compensation Committee, the non-equity compensation of our employees who are not executive officers.
Employment agreements
We have entered into employment agreements with our named executive officers. The employment agreements have the following general terms.
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John Philpin We entered into an employment agreement with John Philpin, effective as of July 1, 2013, to serve as our Senior Vice President, Engineering. The agreement was amended as of October 7, 2013 when he was appointed our President and Chief Executive Officer. Pursuant to the amended agreement, Mr. Philpin receives an annual salary of $350,000 and was eligible for a target bonus of $100,000 for fiscal 2014, pro-rated for length of service. We also granted to Mr. Philpin an option to purchase 300,000 shares of our common stock at an exercise price of $1.42 per share. One quarter of the shares underlying the option vest on the first anniversary of his appointment as CEO, with the remainder vesting in equal quarterly installments of 8.3% of the total number of shares subject to the option. Mr. Philpin is eligible to participate in our benefit plans to the extent applicable generally to our other employees. The employment agreement also provides for certain severance payments to Mr. Philpin, which are described below in the section titled “Potential Payments upon Termination or Change of Control.”
Roy Camblin We entered into an employment agreement with Roy Camblin, effective as of March 11, 2013 to serve as our Chief Executive Officer. Pursuant to that agreement, Mr. Camblin received an annual salary of $350,000 and was eligible for a target annual bonus of $100,000 per year, pro-rated for length of service in the first year. We also granted to Mr. Camblin an option to purchase 315,000 shares of our common stock at an exercise price of $2.13 per share. One quarter of the shares underlying the option vested on the first anniversary of his appointment as CEO, with the remainder vesting in equal quarterly installments of 8.3% of the total number of shares subject to the option. Mr. Camblin was eligible to participate in our benefit plans to the extent applicable generally to our other employees. The employment agreement also provides for severance payments to Mr. Camblin,whch are described below in the section titled “Potential Payments upon Termination or Change of Control.” Mr. Camblin ceased to be our Chief Executive Officer in October 2013.
Deborah Eudaley We entered into an employment agreement with Deborah Eudaley, effective as of November 4, 2011, and as amended as of April 19, 2012, to serve as our Chief Financial Officer. Pursuant to that agreement, Ms. Eudaley receives an annual salary of $260,000 and is for a target annual bonus of $100,000. We also granted to Ms. Eudaley an option to purchase 96,666 shares of our common stock at an exercise price of $1.58 per share. One quarter of the shares underlying the option vested on the first anniversary of her joining the Company, with the remainder vesting in equal quarterly installments of 8.3% of the total number of shares subject to the option. Ms. Eudaley is eligible to participate in our benefit plans to the extent applicable generally to our other employees. The employment agreement also provides for severance payments to Ms. Eudaley described below in the section titled “Potential Payments upon Termination or Change of Control.”
Alex Lustberg We entered into an employment agreement with Alex Lustberg, effective as of February 28, 2012, to serve as our Vice President, Marketing and promoted him to Chief Marketing Officer in November 9, 2012. Pursuant to his agreement, Mr. Lustberg receives an annual salary of $250,000 and is eligible for a target annual bonus of $80,000 per year. In fiscal 2013, we granted Mr. Lustberg an option to purchase 30,000 shares of our common stock at an exercise price of $2.10 per share. One quarter of the shares underlying the option vested on February 28, 2012, and the remainder vest in equal quarterly installments of 8.3% of the total number of shares subject to the option. Mr. Lustberg is eligible to participate in our benefit plans to the extent applicable generally to our other employees. The employment agreement also provides for severance payments to Mr. Lustberg, which are described below in the section titled “Potential Payments upon Termination or Change of Control.”
Potential payments upon termination or change in control
John Philpin Pursuant to his employment agreement, as amended, in the event Mr. Philpin’s employment is terminated without Cause, we will pay severance to Mr. Philpin according to the following schedule in months after his promotion date:
| o | to 6 months – at will, no termination payment |
| o | 6 to 7 months – 1 month of salary |
| o | 7 to 8 months – 2 months of salary |
| o | 8 to 9 months – 3 months of salary |
| o | 9 to 10 months – 4 months of salary |
| o | 10 to 11 months – 5 months of salary |
| o | 11 to 12 months – 6 months of salary |
| o | 12 to 14 months – 7 months of salary |
| o | 14 to 16 months – 8 months of salary |
| o | 16 to 18 months – 9 months of salary |
| o | 18 to 20 months – 10 months of salary |
| o | 22 months – 11 months of salary |
| o | 22 to 24 months – 12 months of salary |
| o | After 2 years – 12 months of salary |
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If we are acquired or undergo a change of control and Mr. Philpin is terminated without Cause within two years following the change of control he will be entitled to severance payments in accordance with the above schedule and any unvested options shall immediately vest.
Roy Camblin Mr. Camblin resigned from the Company on October 7, 2013 and the Company agreed to reimburse Mr. Camblin for his COBRA health insurance premiums for a period of twelve months following his resignation. The amount of Mr. Camblin’s COBRA reimbursement for 12 months is $13,995.
Deborah Eudaley. Pursuant to her employment agreement, as amended, in the event Ms. Eudaley’s employment is terminated without cause or she resigns for good reason (as defined in the agreement), we will pay to Ms. Eudaley an amount equal to six months of her current annual base salary at the time of termination, 50% of her target bonus, payment of her COBRA health insurance premiums for a period of twelve months following termination plus any other amounts accrued but not yet paid. This provision would entitle Ms. Eudaley to $180,000. If we are acquired or undergo a change of control and Ms. Eudaley is terminated without Cause within three months prior to or two years following the change of control she will be entitled to severance payments of twelve months of her then base salary, 100% of her target bonus and payment of her COBRA health insurance premiums for a period of twelve months following termination. Ms. Eudaley’s agreement also provides that if we are acquired or undergo a change of control and her employment is terminated without Cause, any unvested options shall immediately vest.
Alex Lustberg Pursuant to his employment agreement, in the event Mr. Lustberg’s employment is terminated without Cause within two years following a Change in Control, we will pay to Mr. Lustberg an amount equal to six months of his current annual base salary at the time of termination, payment of his COBRA health insurance premiums for a period of six months following termination plus any other amounts accrued but not yet paid. Additionally, any unvested options shall immediately vest.
“Cause’’ is defined in Mr. Philpin’s, Mr. Camblin’s, Ms. Eudaley’s and Mr. Lustberg’s employment agreements to mean (a) the failure of the employee to perform his obligations and duties to the satisfaction of us, which failure is not remedied within fifteen days after receipt of written notice from us, (b) commission by the employee of an act of fraud upon, or willful misconduct towards, us or any of our affiliates, (c) a material breach by the employee of our which is not remedied within 15 days written notice from us (d) the failure of the employee to carry out, or comply with, in any material respect, any directive of our Board, which in the case of each situation above is not remedied within 15 days after receipt of written notice from us or our Board, or (e) the conviction of the employee of (or a plea of nolo contendere to) any felony or any crime involving moral turpitude.
“Change in Control” is defined in all of our named executive officers’ employment agreements to mean: (i) a sale, conveyance, exchange or transfer in which any non-current stockholder becomes the beneficial owner of more than fifty (50%) percent of the total voting power of all the then outstanding voting securities; a merger, consolidation or reorganization in which our voting securities immediately prior to such transaction do not represent or are not converted into a majority of the voting power of the surviving entity; (iii) a sale of substantially all of our assets or our liquidation or dissolution; (iv) a change in the composition of the Board occurring within a one-year period, as a result of which fewer than a majority of the directors are incumbent directors (as defined in the agreement); or (v) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
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SUMMARY COMPENSATION TABLE
The following table summarizes information relating to the compensation earned for services rendered in all capacities during fiscal 2013 and fiscal 2014, for each person who served as our principal executive officer or principal financial officer in fiscal 2014, plus certain executive officers (collectively our ‘‘named executive officers’’).
| Name | Year | Salary | Bonus | Option Grants (1) | Non-Equity Incentive Plan Compensation (2) | All Other Compensation | Total | |||||||||||||||||||
| John Philpin (3) | 2014 | $ | 319,507 | $ | 675,400 | $ | 39,688 | $ | 10,000 | $ | 1,044,595 | |||||||||||||||
| Chief Executive Officer | 2013 | - | - | - | - | - | ||||||||||||||||||||
| Roy Camblin (4) | 2014 | 102,083 | 15,878 | 117,961 | ||||||||||||||||||||||
| Former Chairman and Chief Executive Officer | 2013 | 123,397 | - | 690,087 | 33,333 | 23,794 | 870,611 | |||||||||||||||||||
| Deborah Eudaley (5) | 2014 | 260,000 | 67,200 | $ | 49,740 | 5,111 | $ | 382,051 | ||||||||||||||||||
| Chief Operating Officer and Chief Financial Officer | 2013 | 260,000 | - | 138,047 | 102,500 | 5,217 | 505,764 | |||||||||||||||||||
| Alex Lustberg (6) | 2014 | 246,943 | 42,000 | $ | 35,603 | 4,957 | $ | 329,503 | ||||||||||||||||||
| Chief Marketing Officer | 2013 | 219,167 | 107,049 | 56,375 | 5,825 | 388,416 | ||||||||||||||||||||
| (1) | Reflects the grant date fair value of the awards made in fiscal 2014 in accordance with the ASC 718. The assumptions used in the valuation of these awards are set forth in Note 13 ‘‘Stockholders’ Equity’’ of the Notes to the Consolidated Financial Statements and do not purport to reflect the value that will be recognized by the named executive officers upon the sale of the underlying securities. The vesting provisions of these options are also described in the footnotes to the 2013 Outstanding Equity Awards at Fiscal Year-End table below. |
| (2) | Payments based on individual performance metrics determined by the Compensation Committee under our annual bonus plan. |
| (3) | Mr. Philpin joined the Company in July, 2013 and was not an employee in fiscal 2013. All other compensation consists of a one- time relocation allowance. |
| (4) | Mr. Camblin resigned from the Company on October 7, 2013. All other compensation consists of the company’s reimbursement of his COBRA payments and the Company’s match of his 401 (k) reimbursement. |
(5) All other compensation consists of the Company’s match to Ms. Eudaley’s 401(k) contributions.
| (6) | All other compensation consists of the Company’s match to Mr. Lustberg’s 401(k) contributions. |
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table reflects outstanding equity awards held by our named executive officers as of June 30, 2014.
| Name | Number of Securities Underlying Unexercised Options Unexercisable | Number of Securities Underlying Unexercised Options Exercisable | Option Exercise Price | Option Expiration Date | ||||||||||
| John Philpin | 80,000 | (1) | $ | 2.00 | 7/1/2023 | |||||||||
| Chief Executive Officer | 53,000 | (2) | 1.68 | 7/24/2023 | ||||||||||
| 300,000 | (3) | 1.42 | 10/7/2023 | |||||||||||
| Roy Camblin (4) | ||||||||||||||
| Former Chief Executive Officer | ||||||||||||||
| Deborah Eudaley | 36,250 | (5) | 60,416 | 1.58 | 11/4/2021 | |||||||||
| Chief Operating Officer and Chief | 16,265 | (6) | 27,108 | 1.58 | 11/23/2021 | |||||||||
| Financial Officer | 19,694 | (7) | 15,316 | 2.56 | 8/1/2022 | |||||||||
| 34,375 | (8) | 15,625 | 2.17 | 1/1/2023 | ||||||||||
| 40,000 | (9) | 1.68 | 8/8/2023 | |||||||||||
| Alex Lustberg | 13,125 | (10) | 16,875 | 2.10 | 2/28/2022 | |||||||||
| Chief Marketing Officer | 5,000 | (11) | 5,000 | 2.08 | 4/1/2022 | |||||||||
| 16,546 | (12) | 12,869 | 2.56 | 8/1/2022 | ||||||||||
| 8,791 | (13) | 5,274 | 2.17 | 11/1/2012 | ||||||||||
| 18,750 | (14) | 6,250 | 1.99 | 5/31/2023 | ||||||||||
| 25,000 | (15) | 1.68 | 8/8/2023 | |||||||||||
| (1) | The Compensation Committee granted 80,000 options to Mr. Philpin on July 1, 2013 at an exercise price of $2.00 per share. The awards will vest over four years, with 25% of the total number of shares vesting on July 1, 2014 and the remainder vesting in equal quarterly installments thereafter. |
| (2) | The Compensation Committee granted 53,000 options to Mr. Philpin on August 8, 2013 at an exercise price of $1.68 per share. The awards will vest over four years, with 25% of the total number of shares vesting on August 8, 2014 and the remainder vesting in equal quarterly installments thereafter. |
| (3) | The Compensation Committee granted 300,000 options to Mr. Philpin on October 7, 2013 at an exercise price of $1.42 per share. The awards will vest over four years, with 25% of the total number of shares vesting on October 7, 2014 and the remainder vesting in equal quarterly installments thereafter. |
| (4) | Mr. Camblin resigned from the company and from our board effective October 7, 2013. His options expired unexercised. |
| (5) | The Compensation Committee granted 96,666 shares to Ms. Eudaley on November 4, 2011 at an exercise price of $1.58 per share. The awards will vest over four years, with 25% of the total number of shares vesting on November 4, 2012 and the remainder vesting in equal quarterly installments thereafter. |
| (6) | The Compensation Committee granted 43,373 shares to Ms. Eudaley on November 23, 2011 at an exercise price of $1.58 per share. The awards will vest over four years, with 25% of the total number of shares vesting on November 23, 2012 and the remainder vesting in equal quarterly installments thereafter. |
| (7) | The Compensation Committee granted 35,010 shares to Ms. Eudaley on August 1, 2012 at an exercise price of $2.56 per share. The awards will vest over four years, with 25% of the total number of shares vesting on August 1, 2013 and the remainder vesting in equal quarterly installments thereafter. |
| (8) | The Compensation Committee granted 50,000 shares to Ms. Eudaley on January 1, 2013 at an exercise price of $2.17 per share. The awards will vest over four years, with 25% of the total number of shares vesting on January 1, 2014 and the remainder vesting in equal quarterly installments thereafter. |
| (9) | The Compensation Committee granted 40,000 shares to Ms. Eudaley on August 8, 2013 at an exercise price of $1.68 per share. The awards will vest over four years, with 25% of the total number of shares vesting on August 8, 2014 and the remainder vesting in equal quarterly installments thereafter. |
| (10) | The Compensation Committee granted 30,000 shares to Mr. Lustberg on February 28, 2012 at an exercise price of $2.10 per share. The awards will vest over four years, with 25% of the total number of shares vesting on February 28, 2013 and the remainder vesting in equal quarterly installments thereafter. |
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| (11) | The Compensation Committee granted 10,000 shares to Mr. Lustberg on April 1, 2012 at an exercise price of $2.08 per share. The awards will vest over four years, with 25% of the total number of shares vesting on April 1, 2013 and the remainder vesting in equal quarterly installments thereafter. |
| (12) | The Compensation Committee granted 29,415 shares to Mr. Lustberg on August 1, 2012 at an exercise price of $2.56 per share. The awards will vest over four years, with 25% of the total number of shares vesting on August 1, 2013 and the remainder vesting in equal quarterly installments thereafter. |
| (13) | The Compensation Committee granted 14,065 shares to Mr. Lustberg on November 1, 2012 at an exercise price of $2.17 per share. The awards will vest over four years, with 25% of the total number of shares vesting on November 1, 2013 and the remainder vesting in equal quarterly installments thereafter. |
| (14) | The Compensation Committee granted 25,000 shares to Mr. Lustberg on May 31, 2013 at an exercise price of $1.99 per share. The awards will vest over four years, with 25% of the total number of shares vesting on May 31, 2014 and the remainder vesting in equal quarterly installments thereafter. |
| (15) | The Compensation Committee granted 25,000 shares to Mr. Lustberg on August 8, 2013 at an exercise price of $1.68 per share. The awards will vest over four years, with 25% of the total number of shares vesting on August 8, 2014 and the remainder vesting in equal quarterly installments thereafter. |
Director compensation
Each non-employee member of the Board is entitled to an annual cash retainer of $25,000 and meeting fees of $1,000 per in-person Board meeting attended, $1,000 for each in-person committee meeting attended that is not scheduled in conjunction with a Board meeting, and $500 for each other committee meeting attended. Directors are also reimbursed for their out-of pocket expenses associated with the Board and committee meetings. Our executive officers do not receive additional compensation for serving on the Board. Mr. Comfort, our Chairman of the Board, has waived all retainers and fees for his services.
In February 2012, Roy Camblin was appointed a member of the Board to fill a vacancy. In lieu of an annual cash retainer, Mr. Camblin received an option to purchase 9,333 shares of our common stock at an exercise price of $1.95 per share, which the Board determined to be equal to the fair market value of our common stock on his appointment date. Each option vests over four years, with 25% of the total number of shares subject to each option vesting on the first anniversary of the appointment date and the remainder vesting in equal installments quarterly thereafter. Additionally, Mr. Camblin received an option to purchase 1,000 shares of our common stock at an exercise price of $1.95 per share, which option was fully vested on the appointment date and exercisable immediately.
Mr. Camblin was appointed our non-executive Chairman in October, 2012 and was awarded a ten year option to purchase 125,000 shares of our common stock at an exercise price of $2.17 per share. This option vests over four years, with 25% of the total number of shares subject to the option vesting on the first anniversary of his appointment date as Chairman and the remainder vesting in equal installments quarterly thereafter. Mr. Camblin was appointed our CEO on March 12, 2013 and the options that he received previously for his time of service as a non-employee board member continued to vest. All such options were granted under our 2005 Equity-Based Compensation Plan, for a term of ten years, with vesting contingent upon continued service and exercisability expiring 90 days after termination of service. Mr. Camblin resigned from the Company and from our board on October 7, 2013 and his options were terminated thereafter unexercised.
In April 2014, Paul Hoffman was appointed as a member of the Board to fill a vacancy. In lieu of an annual cash retainer, he received a stock option to purchase 75,000 shares of our common stock at an exercise price of $1.57 per share, which the Board determined to be equal to the fair market value of our common stock on his appointment date. The option will vest over four years in equal quarterly installments. All such options were granted under our 2005 Equity-Based Compensation Plan, for a term of ten years, with vesting contingent upon continued service and exercisability expiring 90 days after termination of service. Mr. Hoffman is also entitled to meeting fees of $1,000 per in-person meeting attended, $1,000 for each in-person committee meeting attended that is not scheduled in conjunction with a Board meeting, and a fee of $500 for all other committee meetings attended.
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Director compensation table
The table below summarizes the compensation paid to non-employee members of the Board for fiscal 2014.
| Name | Fees Earned or Paid in Cash | Stock Compensation | Total | |||||||||
| Andrew Richard Blair | $ | 27,000 | (1) | $ | — | $ | 27,000 | |||||
| Roy Camblin (1) | — | — | — | |||||||||
| William T. Comfort III (2) | — | — | — | |||||||||
| Nicolas De Santis Cuadra | 25,000 | (1) | — | 25,000 | ||||||||
| Paul Hoffman(3) | — | $ | 2,638 | |||||||||
| David Wang | 29,500 | (1) | — | 29,500 | ||||||||
| (1) | Mr. Camblin resigned from the Company and from our board on October 17, 2013. |
| (2) | Mr. Comfort waived all retainers and fees in fiscal 2014. |
| (3) | Mr. Hoffman was appointed to our Board effective April 7, 2014. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information with respect to the beneficial ownership of the Common Stock as of August 31, 2014 by:
each stockholder known by us to beneficially own more than five percent of the Common Stock;
each of our directors;
each of our named executive officers; and
all directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the SEC, and thus it represents sole or shared voting or investment power with respect to our securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares that they beneficially owned, subject to community property laws where applicable. We have deemed shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of August 31, 2014 to be outstanding and to be beneficially owned by the person holding the option for the purpose of computing the percentage ownership of that person but have not treated them as outstanding for the purpose of computing the percentage ownership of any other person.
August 31, 2014, there were 9,568,613 shares of our common stock outstanding, not including 2,000,000 shares issuable upon conversion of Series A Preferred shares into shares of our common stock.
We have determined beneficial ownership in accordance with the rules of the SEC. Unless otherwise indicated, the persons included in this table have sole voting and investment power with respect to all the shares of Common Stock beneficially owned by them, subject to applicable community property laws.
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| Name of Beneficial Owner (a) | Amount and Nature of Beneficial Ownership | Percentage of Outstanding Shares | ||||||
| William T. Comfort, III (b) | 7,498,849 | 64.8 | % | |||||
| LDN Stuyvie Partnership (c) | 2,830,208 | 24.5 | % | |||||
| Lyr, Ltd. (d) | 2,000,000 | 17.3 | % | |||||
| 65 BR Trust (e) | 1,497,436 | 12.9 | % | |||||
| James A. Urry (f) | 670,707 | 5.8 | % | |||||
| Deborah Eudaley (g) | 213,560 | 1.8 | % | |||||
| John Philpin (h) | 116,562 | 1.0 | % | |||||
| Andrew Richard Blair (i) | 66,817 | * | ||||||
| Alex Lustberg (j) | 61,484 | * | ||||||
| Paul Hoffman (k) | 9,375 | * | ||||||
| Nicolas De Santis Cuadra | 8,064 | * | ||||||
| Roy Camblin | ||||||||
| David Wang | - | |||||||
| All current directors and executive officers as a group (8 persons)(l) | 7,974,711 | 67.0 | % | |||||
| * | Represents beneficial ownership of less than 1%. |
| (a) | Inclusion of information concerning shares held by or for their spouses or children or by entities in which a person has an interest does not constitute an admission of beneficial ownership by such person. Unless otherwise indicated, the address of each director and officer is 6401 Hollis St., Suite 125, Emeryville, CA 94608. |
| (b) | Includes shares held by LDN Stuyvie Partnership, of which Mr. Comfort is sole general partner, shares held by 65 BR Trust of which Mr. Comfort is the investment advisor and shares held by Lyr, Ltd. of which Mr. Comfort is Chairman. Mr. Comfort disclaims beneficial ownership of all shares held by 65 BR Trust and Lyr, Ltd. |
| (c) | LDN Stuyvie Partnership is a limited partnership, the sole general partner of which is William T. Comfort III, our Chairman of the Board. The address of LDN Stuyvie Partnership is 127-131 Sloane St., 4th Floor, Liscartan House, SWIX 9AS, London, UK. |
| (d) | Represents shares issuable upon conversion of Series A preferred shares held by Lyr, Ltd. a Bermuda corporation of which Mr. Comfort is Chairman with voting and dispositive power over the shares held by Lyr, Ltd. Mr. Comfort disclaims beneficial ownership of all shares held by Lyr, Ltd. |
| (e) | 65 BR Trust is a US trust of which Mr. Comfort is an investment advisor with voting and dispositive power over the shares held by the trust. The address of 65 BR Trust is PO Box 503, 115 S. Beach Road, Hobe Sound, Florida 33475. Mr. Comfort disclaims beneficial ownership of all 1,497,436 shares held by the trust. |
| (f) | The shares reported do not include the 2,830,208 shares beneficially owned by LDN Stuyvie Partnership, of which Mr. Urry’s spouse is a partner. Mr. Urry’s spouse has no dispositive or voting authority with respect to the shares beneficially owned by LDN Stuyvie Partnership, and Mr. Urry disclaims beneficial ownership of such shares. |
| (g) | Includes 148,156 shares issuable upon exercise of stock options. Also includes 43,467 shares held by Ms. Eudaley’s spouse. Ms. Eudaley disclaims beneficial ownership of all shares held by her spouse. |
| (h) | Consists of 116,562 shares issuable upon exercise of stock options. |
| (i) | Includes 55,000 shares owned by Mr. Blair and his wife, 4,000 owned by the Freimark, Blair & Co. pension fund and 7,813 owned by the Blair Family Trust. Mr. Blair disclaims beneficial ownership of 1,840 of the shares owned by the Freimark, Blair & Co. pension fund and the entire 7,813 shares are owned by the Blair Family Trust. |
| (j) | Consists of 61,484 shares issuable upon exercise of stock options. |
| (k) | Consists of 9,375 shares issuable upon exercise of stock options. |
| (l) | Includes 335,577 shares issuable upon exercise of stock options. |
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Equity Compensation Plan Information
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under compensation plans (excluding securities related in (a)) (c) | |||||||||
| Equity compensation plans approved by security holders. | 1,945,805 | $ | 2.03 | 390,785 | ||||||||
| Equity compensation plans not approved by security holders. | ||||||||||||
| Total | 1,945,805 | $ | 2.03 | 390,785 | ||||||||
We established the 2005 Equity-Based Compensation Plan (“2005 Plan”) on May 6, 2005. The 2005 Plan provides for grants of stock options and stock-based to our employees, directors and consultants. Stock options issued in connection with the 2005 Plan are granted with an exercise price per share equal to the fair market value of a share of our Common Stock at the date of grant. All stock options have ten-year maximum terms and vest, either quarterly or annually and all within four years of grant date. RSUs issued in connection with the Equity-Based Compensation Plan are granted with a fair value based on the intrinsic value of the RSUs as of the date of grant RSUs vest over four years, with 25% of the total number of shares subject to the RSU vesting on the one-year anniversary of the start of employment and, the remainder vesting every three months thereafter in equal installments of 1/12th of the total number of shares subject to the RSU. The total number of shares of common stock issuable under the Equity Based Compensation Plan is 2,575,000. At June 30, 2014, there were 390,785 shares available for grant under the 2005 Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Issuance of Preferred Stock
On October 17, 2012, we sold 2,000,000 of our 4,000,000 authorized shares of our Series A Preferred Stock to Lyr, Ltd., a Bermuda corporation in consideration for $5.0 million in cash. William T. Comfort, III, a director and former Chairman of our board is the Chairman of Lyr, Ltd. The sale was made pursuant to a Series A Stock Preferred Stock Purchase Agreement by and between us and Lyr, Ltd. dated as of October 17, 2012. No underwriter was involved in the sale of the Series A Preferred Stock. $2,500,000 of the proceeds were used to fully repay the Non-Formula Line provided by Bank that William T. Comfort, III had guaranteed. The remaining amount will be used for general corporate purposes.
Each share of the Series A Preferred Stock is entitled to certain preferences as described in the Certificate of Designation for the Series A Preferred Stock filed with the Secretary of State of the State of Delaware on October 17, 2012. In the event of our Liquidation, the holders of the Series A Preferred Stock will be entitled to receive, out of the funds and assets available for distribution to stockholders, before any payment or distribution of assets to the holders of our common stock, a liquidation preference equal to the greater of (i) $2.50 per share of the Series A Preferred Stock, plus declared but unpaid dividends or (ii) such amount per share as would have been payable had all shares of Series A Preferred Stock been converted into our common stock A “Liquidation” includes (i) our involuntary liquidation, dissolution or winding up, (ii) our merger or consolidation, or (iii) a sale, lease transfer or other disposition of all or substantially all of our assets.
Each share of the Series A Preferred Stock is entitled to vote on all matters and is entitled to the number of votes equal to the number of shares of the our common stock into which each share of Series A Preferred Stock is convertible. Except as required by law or as otherwise provided below, the holders of shares of Series A Preferred Stock and our common stock will vote together as a single class and not as separate classes.
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We may not, without first obtaining the approval of the holders of at least a majority of the Series A Preferred Stock then outstanding: (i) alter or change the rights, powers or preferences of the Series A Preferred Stock set forth in the certificate of incorporation or bylaws, as then in effect, in a way that adversely affects the Series A Preferred Stock, (ii) increase or decrease the number of authorized shares of Series A Preferred Stock, (iii) authorize or create (by reclassification or otherwise) any new class or series of capital stock having rights, powers or preferences that are senior to or on a parity with any series of Series A Preferred Stock or authorize or create (by reclassification or otherwise) any security convertible into or exercisable for any such new class or series of capital stock, or (iv) liquidate, dissolve or wind-up our business and affairs, a Liquidation, or consent, agree or commit to any of the foregoing.
The Series A Preferred Stock may be converted at any time, at the option of the holder, into shares of our common stock at a conversion price of $2.50 per share (“Conversion Price”). The Conversion Price will be adjusted for customary structural changes such as stock splits and dividends. The Series A Preferred Stock will convert automatically upon the vote or written consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock.
Upon receiving a written redemption request, any time after the third anniversary of the Issuance Date, from the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, we shall redeem all of the then outstanding shares of Series A Preferred Stock (“Redemption Right”). This Redemption Right shall not apply if Liquidation has occurred or if there was a sale by our stockholders representing at least a majority, by voting power, of our securities to one or more acquirers. The redemption price per share shall be $2.50 plus all declared but unpaid dividends thereon.
Issuance of Common Stock
On October 17, 2012, in accordance with the terms of a Conversion Agreement by and between us and Mr. Comfort, dated October 17, 2012, we issued 96,459 shares of common stock to Mr. Comfort at a conversion price of $2.05 per share. The issuance was made in satisfaction of $197,741 in interest that we owed to Mr. Comfort as of October 16, 2012 under the Reimbursement and Security Agreement dated as of August 31, 2011 by and between us and Mr. Comfort for Mr. Comfort’s guarantee of the Non-Formula Line.
Employment and separation agreements
Employment and separation agreements with our named executive officers are described under ‘‘Executive Compensation’’ above.
Indemnification agreements
We have entered into indemnification agreements with all of our directors, and our Chief Executive Officer, and our Chief Financial Officer. Under these agreements, we are obligated to indemnify the directors to the fullest extent permitted under the Delaware General Corporation Law for expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by them in any action or proceeding arising out of their services as a director and officer. We believe that these indemnification agreements are helpful in attracting and retaining qualified directors and officers.
Policies and procedures
Under SEC rules, we must disclose ‘‘related-person transactions’’ between us or our subsidiaries and related persons. A related person is any director, officer, nominee for director, or 5% stockholder of our capital stock since the beginning of the last fiscal year, and the immediate family members of these persons. A transaction, or series of transactions, may constitute a ‘‘related-person transaction’’ if the amount involved exceeds $120,000, and a related person has a direct or indirect material interest. To date we have not adopted a formal written policy with respect to such related-party transactions. However, an informal, unwritten policy has been in place whereby all such related-party transactions are reported to, and approved by, the full Board (other than any interested director). Factors considered by the Board when deliberating such transactions include:
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whether the terms of such transaction are fair to us; and
whether the transaction is consistent with, and contributes to, our growth strategy.
All the related-party transactions listed above were approved by the full Board (other than those directors with interests in the transactions).
Director independence
We have adopted, and are in compliance with, the listing rules of the NASDAQ Stock Market, which require that a majority of the members of our Board be independent. Based upon information requested from and provided by each director concerning his background, employment and affiliations, our Board has determined that none of our non-employee directors has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is ‘‘independent’’ as that term is defined under the rules of the NASDAQ Stock Market. In making this determination, our Board considered the relationships that each non-employee director has with our company and all other facts and circumstances our Board deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the fees billed for professional audit services rendered to us by an independent accountant, Burr Pilger Mayer, Inc., during fiscal 2014 and 2013:
| Fiscal Year | ||||||||
| Ended June | ||||||||
| 30, | ||||||||
| 2014 | 2013 | |||||||
| (In thousands) | ||||||||
| Audit fees (1) | $ | 271 | $ | 168 | ||||
| Audit-related fees (2) | 16 | 18 | ||||||
| Total | $ | 287 | $ | 186 | ||||
| (1) | Represents fees for professional services rendered in connection with the audit of our annual financial statements and review of our quarterly financial statements. |
| (2) | Represents fees for professional services rendered in connection with the audit of our 401(k) benefit plan. |
The Audit Committee of the Board of Directors has adopted a policy to pre-approve all audit, audit-related, tax and other services proposed to be provided by our independent auditor prior to engaging the auditor for that purpose. Consideration and approval of such services generally will occur at the Audit Committee’s regularly scheduled quarterly meetings. In situations where it is impractical to wait until the regularly scheduled quarterly meeting, the Audit Committee may delegate authority to approve the audit, audit-related, tax and other services to a member of the committee up to a certain pre-determined level as approved by the Audit Committee. During fiscal 2014 and 2013 all of our audit-related fees were pre-approved by the Audit Committee.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| a) | The financial statements filed as part of this Annual Report at Item 8 are listed in the Financial Statements and Supplementary Data on page 50 of this Annual Report. All other consolidated financial schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or the notes thereto. |
| b) | The following documents are filed or incorporated by reference as exhibits to this Report: |
| Incorporated by Reference | ||||||||||
|
Exhibit |
Description |
Form |
Date
of |
Exhibit |
Filed | |||||
| 3.01 | Certificate of Incorporation of the Registrant. | 10-K | 9/26/07 | 3(a)(i) | ||||||
| 3.02 | Certificate of Amendment to Certificate of Incorporation of the Registrant. | 10-K | 9/26/07 | 3(a)(ii) | ||||||
| 3.03 | Certificate of Amendment to Certificate of Incorporation of the Registrant. | 8-K | 3/5/12 | 3.1 | ||||||
| 3.04 | Certificate of Ownership and Merger, merging NAHC, Inc. with and into J. L. Halsey Corporation. | 10-K | 9/26/07 | 3(a)(iii) | ||||||
| 3.07 | First Amended and Restated Bylaws of the Registrant, as amended as of February 14, 2007. | 8-K | 2/21/07 | 3.2 | ||||||
| 4.1 | Certificate of Designation of the Series A Preferred Stock | 8-K | 10/18/12 | 4.1 | ||||||
| 10.01† | Form of Indemnification Agreement. | 8-K | 3/30/09 | 10.1 | ||||||
| 10.02† | 2005 Equity-Based Compensation Plan, as amended, including forms of equity award agreements. | S-1 | 5/24/12 | 10.01 | ||||||
|
10.03†
|
Offer Letter between the Registrant and Roy Camblin, dated March 8, 2013 | 8-K | 3/12/13 | 99.2 | X | |||||
| 10.04† | Executive Employment Agreement effective February 15, 2012 between the Registrant and Alex Lustberg. | |||||||||
| 10.05† | Executive Employment Agreement effective August 18, 2010, between the Registrant and Wolfgang Maasberg, as amended. | S-1 | 5/24/12 | 10.11 | ||||||
| 10.06† | Executive Employment Agreement effective November 4, 2011, between the Registrant and Deborah Eudaley, as amended. | S-1 | 5/24/12 | 10.12 | ||||||
| 10.07† | Executive Transition and Separation Agreement dated March 8, 2013, between the Registrant and Wolfgang Maasberg | 8-K | 3/12/13 | 99.3 | ||||||
| 10.08 | Offer Letter, June 24, 2013, between the Registrant and John Philpin | 8-K | 10/20/13 | 99.1 | ||||||
| 10.09 | Promotion Letter, dated October 7, 2013 | 8-K | 10/20/13 | 99.2 | ||||||
| 10.10 | Subscription Agreement effective April 12, 2010 by and between the Registrant and Meudon Investments. | 8-K | 4/13/10 | 10.1 | ||||||
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| Incorporated by Reference | ||||||||||
|
Exhibit |
Description |
Form |
Date
of |
Exhibit |
Filed | |||||
| 10.11 | Subscription Agreement effective April 12, 2010 by and between the Registrant and William Ty Comfort, III. | 8-K | 4/13/10 | 10.2 | ||||||
| 10.12 | Loan and Security Agreement effective May 6, 2013 by and among Silicon Valley Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 5/8/13 | 99.1 | ||||||
| 10.13 | First Amendment to the Loan and Security Agreement effective December 9, 2013 by and among Silicon Valley Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 12/9/13 | 99.1 | ||||||
| 10.14 | Amended and Restated Loan and Security Agreement effective as of March 6, 2008, by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 3/11/08 | 10.1 | ||||||
| 10.15 | First Amendment to Amended and Restated Loan and Security Agreement effective as of July 30, 2008, by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 8/4/08 | 10.1 | ||||||
| 10.16 | Second Amendment to Amended and Restated Loan and Security Agreement effective as of December 31, 2008, by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 1/6/09 | 10.1 | ||||||
| 10.17 | Third Amendment to Amended and Restated Loan and Security Agreement effective as of June 19, 2009, by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 6/22/09 | 10.1 | ||||||
| 10.18 | Fourth Amendment to Amended and Restated Loan and Security Agreement effective as of October 23, 2009, by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 10/27/09 | 10.1 | ||||||
| 10.19 | Fifth Amendment to Amended and Restated Loan and Security Agreement effective as of May 6, 2010, by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 5/7/10 | 10.1 | ||||||
| 10.20 | Sixth Amendment to Amended and Restated Loan and Security Agreement effective as of September 15, 2010, by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 9/16/10 | 10.1 | ||||||
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|
Incorporated by Reference | ||||||||||
|
Exhibit |
Description |
Form |
Date
of |
Exhibit |
Filed | |||||
| 10.21 | Seventh Amendment to Amended and Restated Loan and Security Agreement effective as of August 31, 2011, by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 9/6/11 | 99.1 | ||||||
| 10.22 | Eighth Amendment to Amended and Restated Loan and Security Agreement dated as of November 28, 2011, by and among Comerica Bank, the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 12/1/11 | 10.1 | ||||||
| 10.23 | Ninth Amendment to Amended and Restated Loan and Security Agreement by and among Comerica Bank, the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc., dated as of April 18, 2012. | 8-K | 4/4/12 | 99.1 | ||||||
| 10.24 | Limited Guaranty by William T. Comfort, III, dated as of August 31, 2011. | 8-K | 9/6/11 | 99.2 | ||||||
| 10.25 | Amendment to and Affirmation of Secured Guaranty Documents by and between Comerica Bank and William T. Comfort, III, dated as of April 18, 2012. | 8-K | 4/24/12 | 99.2 | ||||||
| 10.26 | Pledge and Security Agreement entered into as of August 31, 2011 by and among Comerica Bank and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. | 8-K | 9/6/11 | 99.3 | ||||||
| 10.27 | Subordination Agreement entered into as of August 31, 2011, by and among William T. Comfort III and Comerica Bank. | 8-K | 9/6/11 | 99.5 | ||||||
| 10.28 | Affirmation of Subordination Agreement by William T. Comfort, III and Comerica Bank. | 8-K | 4/24/12 | 99.2 | ||||||
| 10.29 |
Reimbursement and Security Agreement entered into as of August 31, 2011, by and among William T. Comfort III and the Registrant, Lyris Technologies, Inc. and Commodore Resources (Nevada), Inc. |
8-K | 9/6/11 | 99.4 | ||||||
| 21.01 | Subsidiaries of the Company. | X | ||||||||
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|
Incorporated by Reference | ||||||||||
|
Exhibit |
Description |
Form |
Date
of |
Exhibit |
Filed | |||||
| 23.01 | Consent of Burr Pilger Mayer, Inc., Independent | X | ||||||||
| Registered Public Accounting Firm | ||||||||||
| 31.1 | Certification of Chief Executive Officer pursuant | X | ||||||||
| to Rule 13a-14(a)/15d-14(a) | ||||||||||
| 31.2 | Certification of Chief Financial Officer pursuant to | X | ||||||||
| Rule 13a-14(a)/15d-14(a) | ||||||||||
| 32.01 | Section 1350 Certification | X | ||||||||
| 101* | The following financial statements of Lyris, Inc. | X | ||||||||
| formatted in XBRL (eXtensible Business | ||||||||||
| Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2014 and 2013, | ||||||||||
| (ii) Consolidated Statements of Operations for the years ended June 20, 2014 and 2013, | ||||||||||
| (iii) Consolidated Statements of Stockholders’ Equity and Comprehensive Loss at June 30, 2012, June 30 2013 and at June 30, 2014, | ||||||||||
| (iv) Consolidated Statements of Cash Flows for the years ended June 20, 2013 and 2014, (v) and the Notes to the Consolidated Financial Statements. | ||||||||||
| * | These exhibits are furnished with this Annual Report on Form 10-K, and are not deemed to be filed or part of this Annual Report on Form 10-K for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections. |
| † | Indicates management contracts or compensatory plans, contracts or arrangements in which any director or named executive officer participates. |
Copies of the exhibits filed with this Annual Report on Form 10-K or incorporated by reference herein do not accompany copies hereof for distribution to our stockholders. We will furnish a copy of any of such exhibits to any stockholder requesting the same.
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Pursuant to the requirements of Section 13 or 15(d) 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.
| Dated: September 18, 2014 | LYRIS, INC. | |
| By: | /s/ JOHN PHILPIN | |
| John Philpin | ||
| Chief Executive Officer, President | ||
| and Chairman of the Board of Directors | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
|
/s/ JOHN PHILPIN |
Chief Executive Officer, President, | September 18, 2014 | ||
| (JOHN PHILPIN) | Chairman of the Board and Director(Principal Executive Officer) | |||
|
/s/ DEBORAH EUDALEY |
Chief Financial Officer (Principal | September 18, 2014 | ||
| (DEBORAH EUDALEY) | Financial and Accounting Officer) | |||
|
/s/ ANDREW RICHARD BLAIR |
Director | September 18, 2014 | ||
| (ANDREW RICHARD BLAIR) | ||||
|
/s/ WILLIAM T. COMFORT, III |
Director | September 18, 2014 | ||
| (WILLIAM T. COMFORT, III) | ||||
|
/s/ PAUL HOFFMAN |
Director | September 18, 2014 | ||
| (PAUL HOFFMAN) | ||||
|
/s/ NICOLAS DE SANTIS CUADRA |
Director | September 18, 2014 | ||
| (NICOLAS DE SANTIS CUADRA) | ||||
|
/s/ DAVID WANG |
Director | September 18, 2014 | ||
|
(DAVID WANG) |
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