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EX-31.2 - EXHIBIT 31.2 - LYRIS, INC.v399690_ex31-2.htm
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EX-32.1 - EXHIBIT 32.1 - LYRIS, INC.v399690_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - LYRIS, INC.v399690_ex32-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended December 31, 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 of incorporation)   (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)

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large accelerated filer ¨   Accelerated filer ¨
         
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller Reporting Company x

 

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

9,568,613 shares of $0.01 Par Value Common Stock as of January 31, 2015

 

 
 

 

LYRIS, INC. AND SUBSIDIARIES

 

Quarterly Report on Form 10-Q

 

For Quarter Ended December 31, 2014

 

Item No.   Description  

Page

Number

         
    PART I – FINANCIAL INFORMATION    
         
Item 1.   Financial Statements   1
    Unaudited Condensed Consolidated Balance Sheets as of December 31, 2014 and June 30, 2014   1
    Unaudited Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2014 and December 31, 2013   2
    Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended December 31, 2014 and December 31, 2013   3
    Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2014 and December 31, 2013   4
    Notes to Unaudited Condensed Consolidated Financial Statements   5
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   13
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   24
Item 4.   Controls and Procedures   24
         
    PART II – OTHER INFORMATION    
         
Item 1.   Legal Proceedings   25
Item 1A.   Risk Factors   25
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   25
Item 3.   Defaults Upon Senior Securities   25
Item 4.   Mine Safety Disclosures   25
Item 5.   Other Information   25
Item 6.   Exhibits   26
Signatures   27

 

 
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.    Financial Statements

 

LYRIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

 

   December 31,   June 30, 
   2014   2014  (1) 
ASSETS          
Current assets:          
Cash and cash equivalents  $1,358   $1,884 
Accounts receivable, less allowances of $331 and $396, respectively   3,466    3,456 
Prepaid expenses and other current assets   862    674 
Deferred income taxes   646    1,152 
Total current assets   6,332    7,166 
Property and equipment, net   5,912    5,160 
Intangible assets, net   4,400    4,404 
Goodwill   5,491    9,791 
Other long-term assets   298    615 
TOTAL ASSETS  $22,433   $27,136 
           
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Revolving line of credit  $2,580   $2,350 
Accounts payable and accrued expenses   2,401    3,103 
Capital lease obligations - short-term   236    459 
Income taxes payable   109    136 
Deferred revenue   3,396    3,165 
Total current liabilities   8,722    9,213 
Other long-term liabilities   395    163 
Capital lease obligations - long-term   84    450 
TOTAL LIABILITIES   9,201    9,826 
Commitments and contingencies (Note 10)          
Redeemable convertible Series A preferred stock: $0.01 par value, 2,000 shares authorized, issued and outstanding, liquidation preference $5,000   5,000    5,000 
           
Stockholders' equity:          
Preferred stock, $0.01 par value, 2,000 shares authorized; no shares issued and outstanding   -    - 
Common stock, $0.01 par value;  40,000 shares authorized; 9,568 shares issued and outstanding   1,415    1,415 
Additional paid-in capital   268,893    268,592 
Accumulated deficit   (261,931)   (257,603)
Treasury stock, at cost; 11 shares held   (56)   (56)
Accumulated other comprehensive loss   (89)   (38)
Total stockholders' equity   8,232    12,310 
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY  $22,433   $27,136 

 

(1) Derived from the consolidated audited financial statements included in our annual report on Form 10-K for the year ended June 30, 2014 filed with the Securities and Exchange Commission.

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

1
 

 

LYRIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2014   2013   2014   2013 
                 
Revenue:                    
Subscription  $5,662   $6,270   $11,109   $12,612 
Support and maintenance   896    1,030    1,811    2,028 
Professional services   508    583    1,034    1,178 
Software   188    263    372    560 
Total revenue   7,254    8,146    14,326    16,378 
Cost of revenue:                    
Subscription, support and maintenance, professional services, and software   2,482    2,457    4,960    5,095 
Amortization of developed technology   17    439    92    878 
Total cost of revenue   2,499    2,896    5,052    5,973 
Gross profit   4,755    5,250    9,274    10,405 
Operating expenses:                    
Sales and marketing   2,073    2,409    4,375    5,241 
General and administrative   1,303    1,424    2,739    3,097 
Research and development   815    837    1,599    1,874 
Impairment of goodwill   4,300    -    4,300    - 
Amortization of customer relationships and trade names   -    50    4    101 
Total operating expenses   8,491    4,720    13,017    10,313 
(Loss) income from operations   (3,736)   530    (3,743)   92 
Interest expense   (29)   (39)   (59)   (77)
Interest income   1    -    3    - 
Other income (expense), net   (9)   23    22    15 
(Loss) income from operations before income tax provision   (3,773)   514    (3,777)   30 
Income tax provision   221    36    551    45 
Net (loss) income  $(3,994)  $478   $(4,328)  $(15)
                     
Net (loss) income per share                    
Basic  $(0.42)  $0.05   $(0.45)  $(0.00)
Diluted  $(0.42)  $0.04   $(0.45)  $(0.00)
                     
Weighted average shares outstanding                    
Basic   9,568    9,568    9,568    9,568 
Diluted   9,568    11,568    9,568    9,568 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

2
 

 

LYRIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2014   2013   2014   2013 
Net (loss) income  $(3,994)  $478   $(4,328)  $(15)
Other comprehensive loss, net of tax:                    
Foreign currency translation loss   (3)   (56)   (52)   (8)
Comprehensive income (loss)  $(3,997)  $422   $(4,380)  $(23)

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

3
 

 

LYRIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

   Six Months Ended
December 31,
 
   2014   2013 
         
Cash Flows from Operating Activities:          
Net loss  $(4,328)  $(15)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Stock-based compensation   301    156 
Depreciation   572    735 
Amortization of intangible assets   4    101 
Amortization of capitalized software costs   93    878 
Impairment of Goodwill   4,300    - 
Recovery Provision for bad debts   75    (4)
Deferred income taxes   506    (28)
Changes in assets and liabilities:          
Accounts receivable   (85)   89 
Prepaid expenses and other current assets   (171)   (103)
Accounts payable and accrued expenses   (765)   (606)
Deferred revenue   231    (7)
Income taxes payable   (19)   23 
Net cash provided by operating activities   714    1,219 
Cash Flows from Investing Activities:          
Purchases of property and equipment   (137)   (86)
Proceeds from sale of other long-term asset   300    - 
Capitalized software expenditures   (1,294)   (1,437)
Net cash used in investing activities   (1,131)   (1,523)
Cash Flows from Financing Activities:          
Proceeds from short-term credit arrangements, net   230    5 
Payments under capital lease obligations   (302)   (432)
Net cash used in financing activities   (72)   (427)
Net effect of exchange rate changes on cash and cash equivalents   (37)   (9)
Net decrease in cash and cash equivalents   (526)   (740)
           
Cash and cash equivalents, beginning of period   1,884    2,318 
Cash and cash equivalents, end of period  $1,358   $1,578 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

4
 

 

LYRIS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED December 31, 2014

 

Note 1 - Nature of Business and Basis of Presentation

 

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 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, United Kingdom, Argentina, Brazil and Australia. Our foreign subsidiaries are generally engaged in providing sales, account management and support. 

 

Fiscal Year

 

Our fiscal year ends on June 30th. References to fiscal year 2015, for example, refer to the fiscal year ending June 30, 2015.

 

Basis of Presentation and Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements and prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations; however we believe that the disclosures included are adequate.

 

These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our consolidated financial statements and notes thereto filed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, or fiscal year 2014, filed with the SEC on September 18, 2014. Interim information presented in the unaudited condensed consolidated financial statements has been prepared by management. In the opinion of management, statements include all adjustments necessary for a fair presentation and that all such adjustments are of a normal, recurring nature and necessary for the fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with GAAP. Interim results of operations for the six months ended December 31, 2014 are not necessarily indicative of results to be expected for the year ending June 30, 2015, or fiscal year 2015, or for any future period.

 

The preparation of financial statements in conformity with GAAP 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 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. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

 

The condensed consolidated financial statements include the accounts of Lyris and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

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.

 

5
 

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability 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).

 

The three levels of the fair value hierarchy under the guidance for fair value measurement are:

 

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 December 31, 2014, we used Level 1 assumptions for our cash equivalents which were nil at December 31, 2014 and nil at June 30, 2014. The valuations are based on quoted prices of the underlying security 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 December 31, 2014 we do 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 December 31, 2014, we did not have any significant Level 3 financial assets or liabilities.

 

Revenue Recognition

 

We recognize revenue from hosting, 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 Service Revenue

 

We generate service 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.

 

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·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.

 

We defer technical support (maintenance) revenue, including revenue that is part of a multiple element arrangement, and recognize 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 the services are 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.

 

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 VSOE. We consider VSOE established if prices charged per invoice of least 75% of all standalone deals for maintenance fall within 20% of the price list amounts. If that 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 revenue is then recognized based on a residual method 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.

 

Note 2 – Recent Accounting Standards

 

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 implemented by identifying the contracts with customers, identifying the performance obligations under those contracts, determining the relevant transaction price, allocating the transaction prices to the performance obligations and recognizing revenue when the performance obligation has been met. ASU 2014-09 will require Lyris to provide comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This update will be effective beginning December 15, 2016.

 

Note 3 – Other Long-term Assets

 

Included in other long-term assets as of December 31, 2013 was an investment in SiteWit held using the cost method for $0.4 million. During the fourth quarter of fiscal year 2014, Lyris and SiteWit entered into a contract for a repurchase of SiteWit shares held by Lyris, effective in fiscal year 2015. In August 2014, Lyris and SiteWit amended that agreement, and the sale was completed with the final installment payment on October 15, 2014.

 

7
 

 

During fiscal 2013 Lyris had issued a $0.1 million letter of credit to Hartford Insurance Company (“Hartford”) for workers’ compensation insurance obligations (“Hartford LOC”). This is held by Harford as collateral for deductible payments that may become due under a worker’s compensation insurance policy. We classify the Hartford LOC as a restricted cash account of $0.1 million. Any amounts drawn on the LOC account will be expensed during that fiscal year. To date, no amounts have been drawn.

 

Other long-term assets at December 31, 2014 included $0.2 million related to security deposits for leases entered in by us and $0.1 million in restricted cash.

 

Note 4 – 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
December 31, 2014
   As of
June 30, 2014
 
   (In thousands) 
Lyris Technologies  $5,407   $9,707 
Cogent   84    84 
Total  $5,491   $9,791 

 

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 its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test is required. Otherwise, no further testing is required. Lyris operates as one reporting unit, and conducts a test for the impairment of goodwill on at least an annual basis. Lyris 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.

 

We considered various events and circumstances when we evaluated whether it is more likely than not that the fair value of our reporting unit is less than our carrying value. We considered events and circumstances such as macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and our share price relative to our peers.

 

In the second quarter of fiscal year 2015, Lyris’ assessment of relevant events and circumstances conducted on December 31, 2014, considered the decline in Lyris’ stock price from $1.15 to $0.62. Lyris determined that it was more-likely-than-not that the fair value was less than the carrying amount. As a result, the two-step impairment test related to goodwill was performed during the quarter ended December 31, 2014.

 

In the first step of the impairment test, Lyris compared the estimated fair value of Lyris to its carrying value utilizing both an income approach and a market approach considering guideline company market multiples. Since the carrying value exceeded fair value, this was an indicator of impairment, and proceeded to step two. Step two involved assigning the estimated fair value from step one to Lyris’ identifiable net assets, with any residual fair value assigned to goodwill. Based on the results of step two, Lyris recorded a $4.3 million impairment loss in the three months ended December 31, 2014.

 

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.

 

Note 5 – Credit Facility

 

On December 9, 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 First Amendment (“Amendment”) to the Loan and Security Agreement (“SVB Agreement”) with Silicon Valley Bank. Under the amendment, the definitions of certain terms used to calculate the amount available to Lyris under the Agreement are restated. The revolving line of credit (“SVB Revolving Line”) of up to $5,000,000 remains the same under the SVB Agreement. 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 is up for renewal on May 6, 2015.

 

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Advances under the SVB Revolving Line will accrue interest at a per annum floating rate equal to the greater of 6.25% or Silicon Valley 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)
 
     
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 the assets of the Borrowers, including intellectual property assets.

 

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, Silicon Valley Bank ceasing to advance money or extending credit under the SVB Revolving Line, and a right by Silicon Valley Bank to exercise all remedies available to it under the SVB Agreement, including the disposition of any or all collateral.

 

As of December 31, 2014, we were in compliance with all of the covenants of the SVB Agreement. Our outstanding borrowings totaled approximately $2.6 million with $1.2 million in available credit remaining as of December 31, 2014.

 

Note 6 - Income Taxes

 

The following table provides a reconciliation of the income tax expense at the statutory U.S. federal rate to our actual income tax provisions for the six- month periods ended December31, 2014 and 2013:

 

   Six Months Ended December 31, 
   2014   %   2013   % 
   (In thousands) 
Income tax expense at the statutory rate  $(1,322)   35.0%  $29    35.0%
State income taxes, net of federal benefit   25    (0.7)%   17    2.1%
Utilization of NOL carryover   -    0.0%   (219)   (26.6)%
Amortization of intangible assets   1    (0.0)%   35    4.3%
Impact of Foreign Operations   1    (0.0)%   32    3.9%
Difference between AMT and statutory federal income tax rates   98    (2.6)%   29    3.5%
Change in valuation reserve   224    (5.9)%   31    3.8%
Permanent difference   1,521    (40.3)%   3    0.4%
Other, net   3    (0.1)%   88    24.7%
Income tax provision  $551    (14.6)%  $45    51.1%

 

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, 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.

 

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Note 7 – Income (Loss) Per Share

 

Accounting standards established by the FASB require the presentation of the basic net income (loss) per common share and diluted net income (loss) per common share. Basic net income (loss) per common share excludes any dilutive effects of options and convertible securities.

 

The following table sets forth the computation and reconciliation of net income (loss) per share:

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2014   2013   2014   2013 
   (In thousands)   (In thousands) 
Net (loss) income  $(3,994)  $478   $(4,328)  $(15)
                     
Weighted average shares outstanding:                    
Basic   9,568    9,568    9,568    9,568 
Effect of dilutive redeemable convertible Series A Preferred Stock   -    2,000    -    - 
Diluted   9,568    11,568    9,568    9,568 
Net income (loss) per share                    
Basic  $(0.42)  $0.05   $(0.45)  $(0.00)
Diluted  $(0.42)  $0.04   $(0.45)  $(0.00)

 

No shares were excluded in the dilutive loss per common share calculation for the six months ended December 31, 2014 and 2013

 

Note 8 - Stock-Based Compensation

 

Stock Options

 

We recognize stock-based compensation costs, including employee stock awards and purchases under stock purchase plans, at the grant date fair value of the award. Determining the fair value of stock-based awards at the grant date requires judgment. Judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be impacted.

 

The following table summarizes the allocation of stock-based compensation for the three and six months ended December 31, 2014 and 2013:

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2014   2013   2014   2013 
   (In thousands)   (In thousands) 
Cost of revenues  $13   $6   $23   $12 
General and administrative   98    (31)   180    30 
Research and development   23    50    37    63 
Sales and marketing   28    15    61    51 
Total  $162   $40   $301   $156 

 

For the three months ended December 31, 2014, total stock-based compensation was $0.2 million. For the three months ended December 31, 2013, total stock-based compensation was $40 thousand. For the six months ended December 31, 2014, total stock –based compensation was $0.3 million. For the six months ended December 31, 2013, total stock-based compensation was $0.2 million. We determine the fair value of each option grant using a Black-Scholes model. The Black-Scholes model utilizes multiple assumptions including expected volatility, expected life, expected dividends and interest rates. 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’ peer group as well as the options’ contractual terms. Expected volatilities are based on implied volatilities from traded options on Lyris’ peer group’s common stock, Lyris’ 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.

 

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We recognize stock-based compensation expense on a straight-line basis over the requisite service period of the award, which is typically the option vesting term of four years.

 

Stock-based compensation expense as part of capitalized software development costs was not significant for the quarter ended December 31, 2014.

 

As of December 31, 2014, unamortized stock-based compensation expense associated with common stock options was $1.5 million which we expect to recognize over a weighted-average period of 2.75 years.

 

The following table summarizes stock option activity from July 1, 2014 to December 31, 2014:

 

   Number of
options
   Weighted-
Average
Exercise Price
   Weighted-Average
Remaining Contractual
Life in Years
   (In thousands)        
Outstanding at July 1, 2014   1,946   $1.77   8.8
Granted   -   $-    
Forfeited/expired   (101)  $1.93    
Outstanding at September 30, 2014   1,845   $1.76   8.5
Vested and expected to vest at September 30, 2014   1,423   $1.80   8.4
Exercisable at September 30, 2014   465   $2.14   7.2
Granted   172   $1.72    
Forfeited/expired   (42)  $2.01    
Outstanding at December 31, 2014   1,976   $1.75    
Vested and expected to vest at December 31, 2014   1,557   $1.79    
Exercisable at December 31, 2014   584   $1.99    

 

As December 31, 2014, the calculated aggregate intrinsic value of options outstanding and exercisable was nil. The intrinsic value represents the pre-tax intrinsic value, based on our closing stock price on December 31, 2014 which would have been received by the option holders had all option holders exercised their options as of that date.

 

Option grants of 172,000 options to purchase shares of our common stock were granted under our equity compensation plan for the six months ended December 31, 2014. The weighted-average grant date fair value of the options granted was $1.60 for the six months ended December 31, 2014 and $1.59 for the six months ended December 31, 2013, respectively.

 

Reserved Shares of Common Stock

 

On August 8, 2012, we amended our 2005 Equity-Based Compensation Plan (“Plan”) to increase the number of shares available under the Plan by 775,000 shares. As of December 31, 2014, we had 360,850 shares of common stock reserved for future equity awards.

 

Note 9 – Segment Information

 

ASC 280 “Segment Reporting,” (“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 SaaS-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.

 

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Note 10 - 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 an average of 6.78% 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.

 

   Operating Leases         
   Facilities   Other   Total
Operating
   Capital
Leases
   Total 
   (In thousands) 
Fiscal Year 2015  $562   $188   $750   $165   $915 
Fiscal Year 2016   790    140    930    137    1,067 
Fiscal Year 2017   203    35    238    34    272 
Total  $1,555   $363   $1,918    336   $2,254 
Less: amounts representing interest                  (16)     
Present value of capital lease obligations                  320      
Less: short-term portion                  (236)     
Long-term portion                 $84      

 

Legal claims

 

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 Burts filed an amended complaint in May 2013. In March, 2014 the defendants’ motion to dismiss the amended complaint was granted with prejudice, in part and partially denied. The lawsuit is now in the discovery phase.

 

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

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended June 30, 2014, or fiscal year 2014, included in our Annual Report on Form 10-K for fiscal year 2014, filed with the SEC on September 18, 2014 .

 

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements identify prospective information, particularly statements referencing our expectations regarding revenue and operating expenses, cost of revenue, tax and accounting estimates, cash, cash equivalents and cash provided by operating activities, the demand and expansion opportunities for our products, our customer base, our competitive position and the impact of the current economic environment on our business. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “would,” “might,” “will,” “should,” “expect,” “forecast,” “predict,” “potential,” “continue,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “is scheduled for,” “targeted,” and variations of such words and similar expressions. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management’s beliefs, and assumptions made by management. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth under “Risk Factors” or included elsewhere in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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.

 

Lyris' high-performance, secure and flexible digital marketing applications improve marketing efficiency by providing automated digital message delivery, robust segmentation, and real-time social, mobile, and interaction analytics. The Lyris solutions portfolio is comprised of both in-the-cloud and on-premises solutions – Lyris HQ, Lyris ListManager - combined with customer-focused services and support, and delivered on a powerful integration platform that connects data and marketing workflows across the enterprise.

 

Lyris HQ is our proven in-the-cloud 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.

 

Lyris HQ and Lyris ListManager are deployed on an open, flexible, and powerful environment for enabling multichannel digital marketing automation across the enterprise. With a foundation in email marketing, our platform architecture enables organizations to integrate and orchestrate complex digital marketing campaigns involving multiple systems. The Lyris platform seamlessly integrates with complementary systems via Lyris Enterprise Connectors that provide a visually-oriented environment for connecting data and application workflows.

 

Our solutions help companies increase customer conversions and grow revenues by allowing enterprise companies to create synergistic value across the entire ecosystem of multi-channel campaign management systems. Our in-the-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 almost 20 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 licenses (Lyris ListManager), support and maintenance, and related professional services.

 

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Critical Accounting Policies and Use of Estimates

 

Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these condensed 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. Accordingly, actual results could differ significantly from the estimates made by our management. 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 our 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 any related disclosures with our audit committee.

 

Revenue Recognition

 

We recognize revenue from 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 Service Revenue

 

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 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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We defer technical support (maintenance) revenue, including revenue that is part of a multiple element arrangement, and recognize 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 the services are 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.

 

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 at 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 a portion of maintenance fee would be allocated to software.

 

Results of Operations

 

Three and Six Months Ended December 31, 2014 Compared to Three and Six Months Ended December 31, 2013

 

The following tables set forth our condensed consolidated statements of operations data as a percentage of total revenue for the three and six months ended December 31, 2014 and 2013:

 

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   Three Months Ended
December 31,
   Six Months Ended     
December 31,
 
   2014   2013   2014   2013 
                 
Revenue:                    
Subscription   78%    77%    78%    77% 
Support and maintenance   12%    13%    13%    12% 
Professional services   7%    7%    7%    7% 
Software   3%    3%    3%    3% 
Total revenue   100%    100%    100%    100% 
Cost of revenue   34%    36%    35%    36% 
Gross profit   66%    64%    65%    64% 
Operating expenses:                    
Sales and marketing   29%    30%    31%    32% 
General and administrative   18%    17%    19%    19% 
Research and development   11%    10%    11%    11% 
Impairment of goodwill   59%    0%    30%    0% 
Amortization of customer relationships and trade names   0%    1%    0%    1% 
   Total operating expenses   117%    58%    91%    63% 
(Loss) income from operations   -52%    7%    -26%    1% 
Interest expense   0%    0%    0%    0% 
Interest income   0%    0%    0%    0% 
Other (expense) income, net   -1%    0%    0%    0% 
(Loss) income from operations before income tax provision   -52%    7%    -26%    0% 
Income tax provision   3%    0%    4%    0% 
Net (loss) income   -55%    7%    -30%    0% 

 

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Revenue

 

   Three Months Ended
December 31
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Subscription:                    
Lyris HQ  $4,719   $4,925   $(206)   (4)%
Legacy   943    1,345    (402)   (30)%
Total subscription   5,662    6,270    (608)   (10)%
Support and maintenance   896    1,030    (134)   (13)%
Professional services   508    583    (75)   (13)%
Software   188    263    (75)   (29)%
Total revenue  $7,254   $8,146#  $(892)   (11)%

 

   Six Months Ended
December 31,
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Subscription                    
Lyris HQ  $9,119   $9,880   $(761)   (8)%
Legacy   1,990    2,732    (742)   (27)%
Total subscription   11,109    12,612    (1,503)   (12)%
Support and maintenance   1,811    2,028    (217)   (11)%
Professional services   1,034    1,178    (144)   (12)%
Software   372    560    (188)   (34)%
Total revenue  $14,326   $16,378   $(2,052)   (13)%

 

Subscription revenue

 

Subscription revenue is primarily comprised of subscription fees from customers accessing our SaaS solutions and from customers purchasing additional offerings that are not included in the standard hosting agreement. Our subscription revenue includes revenue from our Lyris HQ product, and a variety of legacy products which are in the process of reaching their end of life. Subscription revenue was $5.7 million or 78% of our total revenue for the three months ended December 31, 2014, compared to $6.3 million or 77% of our total revenue for the same period in fiscal year 2013, a decrease of $0.6 million or 10%. Subscription revenue was $11.1 million or 77% of our total revenue for the six months ended December 31, 2014, compared to $12.6 million or 77% of our total revenue for the same period in fiscal year 2013, a decrease of $1.5 million or 12%.

 

Subscription revenue related to Lyris HQ for the three and six months ended December 31, 2014 decreased compared to the same periods in fiscal year 2014, primarily as a result of existing customer turnover and decrease in new sales. Subscription revenue related to legacy products decreased for the three and six months ended December 31, 2014 compared to the same periods in fiscal year 2013, primarily due to customer turnover.

 

Support and maintenance revenue

 

Support and maintenance revenue is primarily comprised of customer service and support for our products. Support and maintenance revenue was $0.9 million or 12% of our total revenue for the three months ended December 31, 2014 compared to $1.0 million or 13% of our total revenue for the same period in fiscal year 2014, a decrease of $0.1 million or 13%. Support and maintenance revenue was $1.8 million or 13% of our total revenue for the six months ended December 31, 2014 compared to $2.0 million or 12% of our total revenue for the same period in fiscal year 2013, a decrease of $0.2 million or 11%. The decrease for the three and six months ended in support and maintenance revenue is a result of customers not renewing support contracts.

 

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Professional services revenue

 

Professional services revenue is primarily comprised of training, campaigning services which includes web analytics and reporting, web design, email deliverability and search engine marketing. Professional services revenue was $0.5 million or 7% of our total revenue for the three months ended December 31, 2014, compared to $0.6 million or 7% of our total revenue for the same period in fiscal year 2014, a decrease of $0.1 million or 13%. Professional services revenue was $1.0 million or 7% of our total revenue for the six months ended December 31, 2014, compared to $1.2 million or 7% of our total revenue for the same period in fiscal year 2014, a decrease of $0.1 million or 12%.

 

Professional service revenue decreased for the three and six months ended December 31, 2014 compared to the same periods in fiscal year 2014 reflecting both reduced professional services in existing customer contracts and lower sales of professional services to new customers.

 

Software revenue

 

Software revenue is derived from perpetual licensing rights of our software that we sell to our customers. Software revenue was $0.2 million or 3% of our total revenue for the three months ended December 31, 2014 compared to $0.3 million or 3% of our total revenue for the same period in fiscal year 2014, a decrease of $0.1 million or 29%. Software revenue was $0.4 million or 3% of our total revenue for the six months ended December 31, 2014 compared to $0.6 million or 3% of our total revenue for the same period in fiscal year 2014, a decrease of $0.2 million or 34%.

 

Software revenue decreased for the three and six months ended December 31, 2014 as compared to the same periods in fiscal year 2014 primarily due to a decrease in new sales of our software product and decreases in software upgrades.

 

Cost of revenue

 

Cost of revenue consists primarily 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.

 

   Three Months Ended
December 31,
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Cost of revenue  $2,499   $2,896   $(397)   (14)%

 

   Six Months Ended
December 31,
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Cost of revenue  $5,052   $5,973   $(921)   (15)%

 

Cost of revenue was $2.5 million for the three months ended December 31, 2014, compared to $2.9 million for the same period in fiscal year 2014, a decrease of $0.4 million. As a percentage of total revenue, cost of revenue decreased to 34% for the three months ended December 31, 2014 from 36% for the same period in fiscal year 2014.

 

Cost of revenue was $5.1 million for the six months ended December 31, 2014 and compared to $6.0 million for the same period in fiscal year 2014. As a percentage of total revenue, cost of revenue decreased to 35% for the six months ended December 31, 2014 from 36% for the same period in fiscal year 2014.

 

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Gross profit

 

   Three Months Ended
December 31,
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Gross profit  $4,755   $5,250   $(495)   (9)%

 

   Six Months Ended
December 31,
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Gross profit  $9,274   $10,405   $(1,131)   (11)%

 

Gross profit was $4.8 million for the three months ended December 31, 2014, compared to $5.2 million for the same period in fiscal year 2014, a decrease of $0.5 million. As a percentage of total revenue, gross profit increased to 66% for the three months ended December 31, 2014 from 64% for the same period in fiscal year 2014. Gross profit was $9.3 million for the six months ended December 31, 2014, compared to $10.4 million for the same period in fiscal year 2014.

 

Operating expenses

 

   Three Months Ended
December 31,
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Sales and marketing  $2,073   $2,409   $(336)   (14)%
General and administrative   1,303    1,424    (121)   (8)%
Research and development   815    837    (22)   (3)%
Impairment of goodwill   4,300    -    4,300    0%
                     
Amortization of customer relationships and trade names   -    50    (50)   (100)%
Total operating expenses  $8,491   $4,720   $3,771    80%

 

   Six Months Ended
December 31
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Sales and marketing  $4,375   $5,241   $(866)   (17)%
General and administrative   2,739    3,097    (358)   (12)%
Research and development   1,599    1,874    (275)   (15)%
Impairment of goodwill   4,300    -    4,300    0%
Amortization and impairment of customer relationships and trade names   4    101    (97)   (96)%
Total operating expenses  $13,017   $10,313   $2,704    26%

 

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Sales and marketing

 

Sales and marketing includes expenses primarily related to employee salaries and related costs, costs associated with advertising and other promotional programs, and allocated facilities costs.

 

Sales and marketing expense was $2.1 million for the three months ended December 31, 2014, compared to $2.4 million for the same period in fiscal year 2014, a decrease of $0.3 million or 14%. As a percentage of total revenue, sales and marketing expense decreased to 29% for the three months ended December 31, 2014 from 30% for same period in fiscal year 2014. The decrease in sales and marketing expense was primarily due to a decrease of $0.2 million in compensation and benefits related to reduction in headcount and a reduction of $0.1 million in overhead and other expenses.

 

Sales and marketing expense was $4.4 million for the six months ended December 31, 2014, compared to $5.2 million for the same period in fiscal year 2014, a decrease of $0.8 million or 17%. As a percentage of total revenue, sales and marketing expense decreased to 31% for the six months ended December 31, 2014 from 32% for same period in fiscal year 2014. The decrease in sales and marketing expense was primarily due to a $0.7 million decrease in compensation and benefits due to a reduction in headcount and a reduction of $0.1 million in overhead expenses.

 

General and administrative

 

General and administrative expense consists primarily 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 $1.3 million for the three months ended December 31, 2014, compared to $1.4 million for the same period in fiscal year 2014, a decrease of $0.1 million or 8%. As a percentage of total revenue, general and administrative expense increased to 18% for the three months ended December 31, 2014 from 17% for the same period in fiscal year 2014. The decrease was primarily due to $0.1 million decrease in executive based stock compensation.

 

General and administrative expense was $2.7 million for the six months ended December 31, 2014, compared to $3.0 million for the same period in fiscal year 2014, a decrease of $0.3 million or 12%. As a percentage of total revenue, general and administrative expense remained flat at 19% for the six months ended December 31, 2014 from 19% for the same period in fiscal year 2014. The decrease in general and administrative expense was primarily due to $0.3 million decrease in compensation and benefits due to a decrease in headcount.

 

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 $0.8 million for the three months ended December 31, 2014 compared to $0.8 million for the same period in fiscal year 2014. As a percentage of total revenue, research and development expense increased to 11% for the three months ended December 31, 2014 from 10% for the same period in fiscal year 2014. The increase was primarily related to higher depreciation and amortization.

 

Research and development expense was $1.6 million for the six months ended December 31, 2014, compared to $1.9 million for the same period in fiscal year 2014, a decrease of $0.3 million or 15%. As a percentage of total revenue, research and development expense remained flat at 11% for the six months ended December 31, 2014 and the same period in fiscal year 2014. The decrease in research and development expense for the six months ended December 31, 2014 compared to the same period in fiscal year 2014 was primarily due to a $0.3 million decrease in outside services.

 

Amortization of customer relationships and trade names

 

Amortization of customer relationships and trade names expenses consist of intangibles that we obtained through the acquisition of other businesses.

 

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Amortization of customer relationships and trade names expense was nil for the three months ended December 31, 2014 and $50 thousand for the same period in fiscal year 2014. As a percentage of total revenue, amortization of customer relationships and trade names expense remained at 0% for the three months ended December 31, 2014 and 1% for the same period in fiscal year 2014.

 

Amortization of customer relationships and trade names expense was $4 thousand for the six months ended December 31, 2014 and $101 thousand for the same period in fiscal year 2014. As a percentage of total revenue, amortization of customer relationships and trade names expense remained at 0% for the six months ended December 31, 2014 and 1% for the same period in fiscal year 2014.

 

Impairment of Goodwill

 

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.

 

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.

 

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 its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.

 

We adopted ASU No. 2011-08 in the first quarter of fiscal year 2012 and considered various events and circumstances when we evaluated whether it is more likely than not that the fair value of our reporting unit is less than our carrying value. We considered events and circumstances such as macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and our share price relative to our peers. In the second quarter of fiscal year 2015, Lyris’ assessment of relevant events and circumstances conducted on December 31, 2014, considered the decline in Lyris’ stock price from $1.15 to $0.62. Lyris determined that it was more-likely-than-not that the fair value was less than the carrying amount. As a result, the two-step impairment test related to goodwill was performed during the quarter ended December 31, 2014. As a result of this process, Lyris determined a goodwill impairment of $4.3 million as of December 31, 2014.

 

Interest expense

 

   Three Months Ended
December 31,
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Interest expense  $(29)  $(39)  $(10)   (26)%

 

   Six Months Ended
December 31,
   Change 
   2014   2013   $   Percent 
   (In thousands, except percentages) 
Interest expense  $(59)  $(77)  $(18)   (23)%

 

Interest expense relates to our revolving line of credit with Silicon Valley 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 $29 thousand for the three months ended December 31, 2014, compared to $39 thousand for the same period in fiscal year 2014, a decrease of $10 thousand or 26%. The decrease was primarily due to less interest expense paid for capital lease equipment.

 

Interest expense was $59 thousand for the six months ended December 31, 2014, compared to $77 thousand for the same period in fiscal year 2014, a decrease of $18 thousand or 23%. The decrease in interest expense for the six months ended December 31, 2014 compared to the same period in fiscal year 2014 was primarily due to a decrease in our short and long term capital lease obligations.

 

21
 

 

Income Tax Provision

 

Our effective tax rates for the six months ended December 31, 2014 and 2013 were 14.6% and 150.0%, respectively. For additional information about income taxes, refer to Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements.

 

Liquidity, Capital Resources and Financial Condition

 

Our primary sources of liquidity to fund our operations as of December 31, 2014 were the collection of accounts receivable balances generated from net sales and proceeds from our revolving line of credit.

 

For additional operational funds requirements, we have available a revolving line of credit with Silicon Valley Bank which is up for renewal on May 6, 2015. Please refer to Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements. As of December 31, 2014, our availability under this credit facility was approximately $1.2 million. As of December 31, 2014, our cash and cash equivalents totaled $1.4 million compared to $1.9 million at December 31, 2014. As of December 31, 2014, our accounts receivable, less allowances, totaled $3.5 million compared to $3.5 million at June 30, 2014.

 

           Change 
   December 31, 2014   June 30, 2014   $   Percent 
   (In thousands, except percentages) 
Accounts receivable  $3,796   $3,852   $(56)   (1)%
Allowance for doubtful accounts   (331)   (396)   65    (16)%
Total - Accounts receivable  $3,466   $3,456   $10    0%

 

Accounts receivables decreased $0.1 million or 1% for the six months ended December 31, 2014 due to decreased sales in our subscription, professional service and software. Allowance for doubtful accounts (“Allowance”) was relatively flat for the six months ended December 31, 2014 as a result of our routine evaluation of customer balances. 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, including periodic acquisitions.

 

As of December 31, 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. See Notes 5 “Credit Facility” of the Notes to Unaudited Condensed Consolidated Financial Statements.

 

Our ability to service any indebtedness we incur under our revolving credit facility will depend on our ability to generate cash in the future. We may not have significant cash available to meet any large unanticipated liquidity requirements, other than from available borrowings, if any, under our revolving credit facility. As a result, we may not retain a sufficient amount of cash to finance growth opportunities, including acquisitions, or unanticipated capital expenditures or to fund our operations. If we do not have sufficient cash for these purposes, our financial condition and our business could suffer.

 

While the first half of fiscal year 2015 had its challenges, we still expect to obtain long-term growth in our hosted revenue offerings through the marketing of our products, Lyris HQ and Lyris ListManager, as well as future product releases. Additionally, we continue to increase efficiency through aggressive management of our operating expenses in order to generate available cash to satisfy our capital needs and debt obligations. To the extent that existing cash, 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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Our cash flows were as follows for the three months ended December 31, 2014 and the three months ended December 31, 2013 (in thousands):

 

   Six Months Ended
December 31,
 
   2014   2013 
   (In thousands) 
Net cash provided by  operating activities  $714   $1,219 
Net cash used in investing activities   (1,131)   (1,523)
Net cash used in by in financing activities   (72)   (427)
Effect of exchange rate changes on cash   (37)   (9)
Net decrease in cash and cash equivalents  $(526)  $(740)

 

Cash Flows for the Six Months Ended December 31, 2014 Compared to the Six Months Ended December 31, 2013

 

Operating Activities

 

Net cash flows provided by operating activities was $0.7 million for the six months ended December 31, 2014 compared to net cash flows provided by operating activities of $1.2 million in the same period in fiscal year 2014.

 

Adjustments had a $5.8 million positive effect on cash flows from operating activities for the six months ended December 31, 2014 including $4.3 million for the impairment of goodwill, $0.6 million of depreciation and amortization, $0.5 million in deferred income tax, $0.3 million stock-based compensation, and $0.1 in provision for bad debt. Changes in assets and liabilities had a $0.8 million negative effect on cash flows provided by operating activities for the six months ended December 31, 2014 due to a decrease of $0.7 million in accounts payable, $0.2 million in prepaid expenses, and $0.1 million to accounts receivable offset by an increase of $0.2 million in deferred revenue and $0.2 million in accounts receivable.

 

Investing Activities

 

Net cash flows used in investing activities was $1.1 million for the six months ended December 31, 2014 compared to net cash flow used in investing activities of $1.5 million in the same period in fiscal year 2014. Net cash flows used in investing activities primarily reflects capitalized software expenditures. The net cash flow used in investing activities for the six months ended December 31, 2014 consisted of $1.3 million in capitalized software expenditures and $0.1 million used in purchasing property and equipment, offset by $0.3 million provided by the sale of the SiteWit investment.

 

Financing Activities

 

Net cash flows used in financing activities was $0.1 million for the six months ended December 31, 2014, compared to net cash flows provided by financing activities of $0.4 million in the same period in fiscal year 2014. Financing cash flows for the six months ended December 31, 2014 consisted primarily of $0.3 million payments under our capital lease obligations in connection with acquiring computer equipment for our data center operations offset by an increase in LOC borrowings of $0.2 million.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2014, we have a $40 thousand irrevocable letter of credit (“LOC”) issued by Silicon Valley Bank in favor of Legacy Partners I SJ North Second, LLC (“Legacy”), for obligations under our San Jose, California office lease.

 

We issued $0.1 million to The Hartford for a letter of credit (“Hartford LOC”) which is held by as collateral for deductible payments that may become due under a worker’s compensation insurance policy. We classify Hartford LOC as a restricted cash account of $0.1 million. Any amounts drawn on the account will be expensed during that fiscal year. As of December 31, 2014 no amount was drawn under the account.

 

We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance activities.

 

Revolving Line of Credit

 

For summary description of our revolving credit facility with Silicon Valley Bank, please refer to Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.     CONTROLS AND PROCEDURES

 

(a) Disclosure Controls and Procedures

 

As of December 31, 2014, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 ( “Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded at that time that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the second quarter of fiscal year 2015, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

24
 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Lyris is involved in litigation as discussed under the caption “Legal claims” in Note 10 of the Notes to Unaudited Condensed Consolidated Financial Statements disclosed in this Quarterly Report on Form 10-Q and incorporated herein by reference.

 

In addition, from time to time, we are subject to legal proceedings and claims with respect to such matters as patents, intellectual property rights, and contractual disputes with customers, marketing service providers, and others, arising out of the normal course of business. Litigating claims of these types, whether or not ultimately determined in our favor or settled by us, is costly and diverts the efforts of management and other personnel from normal business operations. The results of legal proceedings cannot be predicted with certainty. We do not believe the final disposition of these matters will have a material effect on our financial statements and future cash flows.

 

ITEM 1A. RISK FACTORS

 

Careful consideration should be given to the risk factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014. This Quarterly Report on Form 10-Q is qualified in its entirety by these risks. This Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described in the Form 10-K and elsewhere in this Form 10-Q. The market price of our common stock could decline due to any of these risks and uncertainties, or for other reasons, and a stockholder may lose part or all of its investment.

 

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for fiscal year ended June 30, 2014.

 

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

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

ITEM 5. OTHER INFORMATION

 

None

 

25
 

 

ITEM 6. EXHIBITS

 

            Incorporated by Reference    
Exhibit
No.
  Description   Form   Date of First
Filing
  Exhibit Number   Filed
Herewith
                     
3.1   Certificate of Incorporation of the Company.   10-K   9/26/07   3(a)(i)    
                     
3.2   Certificate of Amendment to Certificate of Incorporation of the Company.   10-K   9/26/07   3(a)(ii)    
                     
3.3   Certificate of Amendment to Certificate of Incorporation of the Company.   8-K   3/5/12   3.1    
                     
3.4   Certificate of Ownership and Merger, merging NAHC, Inc. with and into J.L. Halsey Corporation.   10-K   9/26/07   3(a)(iii)    
                     
3.5   Certificate of Ownership and Merger, merging Lyris, Inc., with and into J.L. Halsey Corporation.   8-K   10/31/07   3.2    
                     
3.6   First Amended and Restated Bylaws of the Company   8-K   2/21/07   3.3    
                     
3.7   Amendment to First Amended and Restated Bylaws of the Company   8-K   2/21/07   3.1    
                     
3.8   Amendment No.2 to First Amended and Restated Bylaws of the Company   8-K   9/17/13   3.1    
                     
4.1   Certificate of Designation, as filed with the Delaware Secretary of State on October 17, 2012.   8-K   10/18/12   4.1    
                     
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)               X
                     
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)               X

 

26
 

 

32.1   Section 1350 Certification of Chief Executive Officer               X
                     
32.2   Section 1350 Certification of Chief Financial Officer               X
                     
101.INS   XBRL Instance Document               X
                     
101.SCH   XBRL Taxonomy Extension Schema               X
                     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase               X
                     
101.DEF   XBRL Taxonomy Extension Definition Linkbase               X
                     
101.LAB   XBRL Taxonomy Extension Label Linkbase               X
                     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase               X

 

SIGNATURE

 

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: February 17, 2015    
  By: /s/ John Philpin
    John Philpin
    Chief Executive Officer and President
     
  By: /s/ Deborah Eudaley
    Debor
    Chief Financial Officer and Chief Operating Officer

 

 

27