Exhibit 99.2
IASTA.COM, INC.
AND
IASTA RESOURCES, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
IASTA.COM, INC.
AND
IASTA RESOURCES, INC.
TABLE OF CONTENTS
MARCH 31, 2014 AND 2013
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Consolidated Financial Statements: | | |
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Condensed Consolidated Balance Sheets | 1 | |
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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) | 2 | |
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Condensed Consolidated Statements of Stockholders’ Equity (Deficit) | | |
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Condensed Consolidated Statements of Cash Flows | 3 | |
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Notes to Condensed Consolidated Financial Statements | 4 - 12 | |
IASTA.COM, INC.
AND
IASTA RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2014 AND DECEMBER 31, 2013
| | | March 31, 2014 | | | December 31, 2013 | |
| | | (unaudited) | | | | | |
Current Assets: | | | | | | | | |
Cash | | $ | 2,016,023 | | | $ | 1,368,567 | |
Accounts receivable, net of allowancefor doubtful accounts of $64,195 and $45,529 | | | 2,198,369 | | | | 2,378,390 | |
Deferred income tax | | | 39,899 | | | | 39,899 | |
Other current assets | | | 578,864 | | | | 482,491 | |
Total current assets | | | 4,833,155 | | | | 4,269,347 | |
| | | | | | | | | |
Property and equipment, net | | | 267,506 | | | | 266,365 | |
Other Assets | | | 179,976 | | | | 143,851 | |
| Total Assets | | $ | 5,280,637 | | | $ | 4,679,563 | |
| | |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |
Current Liabilities: | | | | | | | | |
Subordinated note payable to stockholder | | $ | 308,273 | | | $ | 339,185 | |
Accounts payable | | | 514,216 | | | | 254,092 | |
Deferred revenue | | | 3,173,889 | | | | 2,710,190 | |
Accrued payroll and related liabilities | | | 491,769 | | | | 372,164 | |
Other current liabilities | | | 321,471 | | | | 306,765 | |
Income taxes payable | | | 33,761 | | | | 33,761 | |
Short-term debt (line of credit) | | | 652,568 | | | | 652,568 | |
Total current liabilities | | | 5,495,947 | | | | 4,668,725 | |
| | | | | | | | | |
Total liabilities | | | 5,495,947 | | | | 4,668,725 | |
| | | | | | | | | |
Stockholders' Equity (Deficit): | | | | | | | | |
Common stock | | | 25,870 | | | | 25,870 | |
Retained earnings | | | 770,496 | | | | 999,893 | |
Foreign currency translation adjustment | | | 30,062 | | | | 26,813 | |
| | | | | | | | | |
Less treasury stock, at cost | | | (1,041,738 | ) | | | (1,041,738 | ) |
Total stockholders' equity (deficit) | | | (215,310 | ) | | | 10,838 | |
| Total Liabilities and Stockholders' Equity (Deficit) | | $ | 5,280,637 | | | $ | 4,679,563 | |
See accompanying Notes to Consolidated Financial Statements.
IASTA.COM, INC.
AND
IASTA RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
QUARTERS ENDED MARCH 31, 2014 AND 2013
(unaudited)
| | | Three Months ended March 31, | |
| | | 2014 | | | 2013 | |
Revenues | | | | | | | | |
Recurring revenues | | $ | 2,042,586 | | | $ | 2,003,050 | |
Non-recurring revenues | | | 512,682 | | | | 1,157,345 | |
Total revenues | | | 2,555,268 | | | | 3,160,395 | |
| | | | | | | | | |
Cost of revenues: | | | | | | | | |
Cost of recurring revenues | | | 151,333 | | | | 167,999 | |
Cost of non-recurring revenues | | | 485,274 | | | | 818,054 | |
Total cost of revenues | | | 636,607 | | | | 986,053 | |
| | | | | | | | | |
Gross profit: | | | | | | | | |
Recurring gross profit | | | 1,891,252 | | | | 1,835,051 | |
Non-recurring gross profit | | | 27,409 | | | | 339,290 | |
Total gross profit | | | 1,918,661 | | | | 2,174,341 | |
| | | | | | | | | |
Operating expenses: | | | | | | | | |
General and administrative | | | 612,444 | | | | 449,016 | |
Sales and marketing | | | 923,897 | | | | 845,408 | |
Research and development | | | 597,052 | | | | 431,061 | |
Total operating expenses | | | 2,133,393 | | | | 1,725,485 | |
Income(loss)from Operations | | | (214,732 | ) | | | 448,856 | |
| | | | | | | | | |
Other income/(expense), net | | | (12,914 | ) | | | (63,018 | ) |
Income before provision for income taxes | | | (227,646 | ) | | | 385,839 | |
Provision for income taxes | | | 1,800 | | | | 2,341 | |
Net Income (Loss) | | $ | (229,446 | ) | | $ | 383,498 | |
| | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | |
Foreign currency translation adjustment | | | 3,249 | | | | (11,471 | ) |
Other comprehensive income | | | 3,249 | | | | (11,471 | ) |
Comprehensive income (loss) | | $ | (226,197 | ) | | $ | 372,027 | |
See accompanying Notes to Consolidated Financial Statements.
IASTA.COM, INC.
AND
IASTA RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED MARCH 31, 2014 AND 2013
(unaudited)
| | | Three months ended | |
| | | March 31 2014 | | | March 31 2013 | |
| Cash Flows From Operating Activities | | | | | | | | |
Net Income (loss) | | $ | (229,446 | ) | | $ | 383,498 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | | | | | | |
Depreciation | | | 53,164 | | | | 50,880 | |
Allowance for doubtful accounts | | | 18,666 | | | | 18,215 | |
Changes in assets and liabilities | | | | | | | | |
Accounts receivable | | | 161,355 | | | | 81,986 | |
Other assets | | | (132,497 | ) | | | (11,930 | ) |
Accounts payable | | | 260,124 | | | | 45,848 | |
Unearned license revenue | | | 463,699 | | | | (54,008 | ) |
Accrued expenses and other current liabilities | | | 134,332 | | | | (29,998 | ) |
Income taxes payable | | | - | | | | (25,436 | ) |
Net cash provided by operating activities | | | 729,397 | | | | 459,055 | |
| | | | | | | | | |
Cash Flows From Investing Activities | | | | | | | | |
Capital expenditures | | | (54,278 | ) | | | (15,202 | ) |
| | | | | | | | | |
Cash Flows From Financing Activities | | | | | | | | |
Payments on subordinated note payable to stockholder | | | (30,912 | ) | | | (29,125 | ) |
Net cash used in financing activities | | | (30,912 | ) | | | (29,125 | ) |
| | | | | | | | | |
Effect of Exchange Rate Adjustment | | | 3,249 | | | | (11,490 | ) |
Net increase | | | 647,456 | | | | 403,238 | |
| | | | | | | | | |
Cash, Beginning of Period | | | 1,368,567 | | | | 1,300,570 | |
| | | | | | | | | |
Cash, End of Period | | $ | 2,016,023 | | | $ | 1,703,808 | |
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Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
Cash payments for interest | | $ | 12,837 | | | $ | 11,955 | |
Cash paid for income taxes | | $ | - | | | $ | 25,436 | |
See accompanying Notes to Consolidated Financial Statements.
1. | SIGNIFICANT ACCOUNTING POLICIES |
The accompanying consolidated financial statements include the accounts of IASTA.COM and its wholly owned subsidiaries, IASTA LIMITED and IASTA EXPORT CORPORATION (the “Company”), and IASTA RESOURCES, INC. (“IRI”), collectively referred to herein as the “Companies”. All material intercompany balances and transactions have been eliminated in consolidation.
The Company, formed in 2000 and headquartered in Carmel, Indiana, develops and sells a software application and internet-based service to its customers in support of their e-sourcing and procurement departments. In addition, the Company offers professional services and support to the customer purchased software application. IRI leases employees to the Company.
IASTA EXPORT CORPORATION was formed as a wholly owned tax-exempt subsidiary of IASTA.COM on March 17, 2011, as an Interest Charge Domestic International Sales Company. Beginning with the year ending December 31, 2011, IASTA EXPORT CORPORATION receives a 50% commission on international export net income of U.S. developed software.
The significant accounting policies followed by the Companies in the preparation of the consolidated financial statements are as follows:
Principles of Consolidation
The consolidated financial statements include all accounts of the Company and those of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Foreign Currency Exchange
The functional currency of all the Company’s U.K. subsidiaries is a local currency. The Company translates assets and liabilities of its U.K. subsidiaries into U.S. dollars using period-end exchange rates and revenues, expenses and cash flows using the average exchange rates for the reporting period. Resulting translation adjustments are included as a component of accumulated other comprehensive income in the statement of stockholders’ equity.
Research and development.
Research and development expenses consist primarily of salaries, benefits and bonus for employees and executives on our engineering and technical teams who are responsible for increasing the functionality and enhancing the services, as well as the development of new products. Our research and development costs are expensed as incurred.
Fair Value Measurements
We determine the fair values of our financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 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 fair value assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability.
Advertising
Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the Consolidated Statements of Income. Advertising expenses were not significant in the three months ended March 31, 2014 and 2013.
Revenue Recognition
The Company generates revenues by providing its SaaS solutions through subscription license arrangements and related professional services, and related software maintenance and professional services. The Company presents revenue net of sales taxes and any similar assessments.
Revenue recognition criteria. The Company recognizes revenue when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) fees are fixed or determinable and (4) collectability is probable. If we determine that any one of the four criteria is not met, the Company will defer recognition of revenue until all the criteria are met.
Multiple-Deliverable Arrangements. The Company enters into arrangements with multiple-deliverables that generally include subscription, support and professional services. If a deliverable has standalone value, and delivery is probable and within the Company’s control, the Company accounts for the deliverable as a separate unit of accounting. Subscription services have standalone value as such services are often sold separately, primarily through renewals. Professional services have standalone value as such services are often sold separately, and are available from other vendors.
Upon separating the multiple-deliverables into separate units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or its best estimate of selling price (“BESP”), if VSOE is not available. The Company has determined that third-party evidence of selling price (“TPE”) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
The Company has not established VSOE for its subscription services or professional services due to lack of pricing consistency, and other factors. Accordingly, the Company uses its BESP to determine the relative selling price.
The Company determined BESP by considering its price list, as well as overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, contract prices per user, the size and volume of the Company’s transactions, the customer demographic, and its market strategy.
Recurring revenues. Recurring revenues consist of subscription license sales and maintenance revenues. Recurring revenues are recognized ratably over the stated contractual period.
Non-recurring revenues. Non-recurring revenues are comprised of revenues from professional services for system implementations, enhancements, and training. For professional services arrangements billed on a time-and-materials basis, services are recognized as revenue as the services are rendered. For fixed-fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion.
In certain arrangements with non-standard acceptance criteria, the Company defers the revenue until the acceptance criteria are satisfied. Reimbursements, including those related to travel and out-of-pocket expenses are included in non-recurring revenues, and an equivalent amount of reimbursable expenses is included in non-recurring cost of revenues.
Accounts Receivable
The Companies carry accounts receivable at the amount invoiced less an allowance for doubtful accounts, if considered necessary. On a periodic basis, the Companies evaluate accounts receivable and establish an allowance for doubtful accounts based on a history of past write-offs, collections, and current credit conditions.
Concentration of Credit Risk
The Companies maintain cash in bank deposit accounts which, at times, may exceed Federally insured limits. The Companies have not experienced any losses in such accounts and do not believe they are exposed to any significant credit risk on cash. The Company did not have any customers with the balance in Accounts Receivable and Revenue that were over 10% for the three months ended March 31, 2014 and 2013.
Property, Equipment and Depreciation
Property and equipment are recorded at cost and include expenditures which substantially increase the useful lives of existing assets. Maintenance, repairs, and minor renewals are expensed as incurred. The Company follows the practice of depreciating the cost of property and equipment over their estimated useful lives using the straight-line method of depreciation for financial reporting purposes. All property and equipment is depreciated over an estimated useful life of 3 - 8 years.
Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounts requiring the use of significant estimates include allowances for uncollectible receivables, deferred tax assets, the determination of deferred revenue, reporting value and depreciable lives of property and equipment, and foreign currency transaction gains and losses.
Income Taxes
The Company has elected, under the applicable provisions of the Internal Revenue Code, to be taxed as an "S" Corporation. Under these provisions, net taxable income or loss is taxed directly to the stockholders and not the Company. Accordingly, the accompanyingconsolidated financial statements do not include any provisions for Federal or state taxes on the net income or loss of the Company. IRI is a taxable corporation and, therefore, a provision for income taxes has been included in the accompanyingconsolidated financial statements.
Management of the Companies evaluate all significant income tax positions as required by U.S. GAAP. As of March 31, 2014, Management does not believe the Companies have taken any tax positions that would require the recording of any additional income tax liability, nor do they believe that there are any unrealized income tax benefits that would either increase or decrease within the next twelve months. The Companies’ Federal and various state income tax returns as filed remain open and subject to examination beginning with the tax year ended December 31, 2010.
Subsequent Events
Subsequent events have been evaluated through August 7, 2014, which is the date the consolidated financial statements were available for issuance.
The Company has a $1,500,000 operating line of credit facility available for short-term working capital needs. The credit facility is subject to renewal on February 28, 2016. Available borrowings are limited to the lesser of $1,500,000 or a percentage of eligible accounts as defined in the agreement. The credit agreement requires monthly payments of interest on outstanding borrowings at 1.5% over the bank’s prime rate. Borrowings are secured by substantially all assets of the Company and the loan agreement places restrictive covenants on the Company and limits advances to a borrowing base. Outstanding borrowings were $652,568 for three months ended March 31, 2014 and December 31, 2014.
In connection with the acquisition which closed on July 2, 2014, the subordinated note payable was repaid as a portion of the Merger Agreement on July 2, 2014 (Note 9). In connection with the acquisition which closed on July 2, 2014, the line of credit was fully paid to Silicon Valley Bank as a portion of the Merger Agreement on July 2, 2014 (Note 9).
Effective November 30, 2007, the Companies entered jointly into a Stock Redemption Agreement with a stockholder whereby the Companies redeemed certain shares owned by the stockholder for a cash payment of $66,738 and the issuance of a $975,000 subordinated note payable (Note 4). The shares of the stock redeemed under the terms of this agreement are recorded at a cost of $1,041,738 and are included in Treasury Stock (Note 5).
4. | SUBORDINATED NOTE PAYABLE TO STOCKHOLDER |
In connection with the Stock Redemption Agreement (Note 3), the Company issued a note payable to a stockholder for $958,369 that requires thirty-four (34) equal quarterly payments of $36,000, including interest at 6% per annum, through September 1, 2016. The note is subordinated to the line of credit (Note 2). Annual current maturities of the subordinated note payable at March 31, 2014 are 308,273.
The Company repaid the subordinated note payable prior to the Acquisition that took place on July 2, 2014 (Note 9).
The Company has 1,000 shares of voting stock authorized and 80 shares of voting common stock issued and 1,000 shares of non-voting stock authorized and 5 shares issued. IASTA RESOURCES, INC. has 1,000 shares authorized, of which 500 shares are non-voting, and has issued 405 shares of voting stock and 21 shares of non-voting stock.
As of March 31, 2014, the Companies have Treasury stock carried at cost as follows:
Company | | Shares | | | Value at Cost | |
| | | | | | | | | |
IASTA.COM | | | 20 | | | $ | 1,033,436 | |
| | | | | | | | | |
IASTA RESOURCES, INC. | | | 80 | | | | 8,302 | |
| | | | | | | $ | 1,041,738 | |
6. | COMMITMENTS AND CONTINGENCIES |
The Company leases office space and automotives requiring monthly rental payments aggregating $30,581 through December 2016. For the three months ended March 31, 2014 and 2013, lease expense related to office space and automotives was $71,028 and $42,977, respectively.
Future minimum lease payments under the terms of the existing leases are as follows:
Twelve Months Ending March 31, | | | | |
2015 | | $ | 339,484 | |
2016 | | | 202,682 | |
2017 | | | 13,237 | |
Total | | $ | 555,403 | |
Indemnifications
The Company indemnifies certain customers, distributors and suppliers for attorney fees and damages and costs awarded against such parties in certain circumstances in which the Company's products are alleged to infringe third party intellectual property rights, including patents, registered trademarks or copyrights. The terms of the Company's indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company's potential liability for indemnification relating to intellectual property infringement claims.
Pursuant to the Company's charter documents and written indemnification agreements, the Company has certain indemnification obligations to its current officers, employees and directors.
The income tax provision for the three months ended March 31, 2014, as a percentage of consolidated net loss before taxes was 7.9%.
As of March 31, 2014, there were no unrecognized tax benefits. The Companies do not anticipate a significant change to unrecognized tax benefits for uncertain income tax positions within the next twelve months.
The Companies have not recognized any interest and/or penalties related to income tax matters as part of the income tax provision.
The Companies are required to file U.S. Federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Companies may be subject to examination by the Internal Revenue Service (“IRS”) for calendar years 2010 and forward. The only significant state tax jurisdiction is Indiana, and generally, the Companies are subject to routine examination for years 2010 and forward in this jurisdiction. Generally, the Companies are subject to routine examination for years 2009 and forward in various immaterial foreign tax jurisdictions in which they operates.
Deferred tax assets and liabilities result primarily from temporary differences between book and tax bases of assets and liabilities. Iasta Resources, Inc. (“IRI”) had net current deferred tax assets of $39,899 as of March 31, 2014. IRI must regularly assess the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of these deferred tax assets. IRI currently believes that future taxable income levels will be sufficient to realize the tax benefits of these deferred tax assets and has not established a valuation allowance.
The Companies adopted a Simple IRA Plan. The plan covers substantially all employees who meet the plan’s eligibility requirements and provides for employee elective contributions and a matching amount contributed by the Companies up to three percent (3%) of the employee’s salary. A participant’s contribution may not exceed the maximum amount allowed as determined by the Internal Revenue Code. The Companies contributed $29,799 and $29,352 to the plan for the quarters ended March 31, 2014 and 2013, respectively.
On June 2, 2014, the Company entered into the Merger Agreement with Selectica Inc and the Shareholders pursuant to which the Company was acquired by Selectica. Subject to the terms and conditions of the Merger Agreement, to effect the Acquisition, the Company will be merged with and into Selectica Inc with Selectica Sourcing (‘Iasta’, ‘the Company’) continuing as a wholly owned subsidiary of the Company.
The aggregate purchase price for the Acquisition will be the Acquisition Shares and $7.0 million in cash (together with the Acquisition Shares, the “Purchase Price”), including amounts related to the repayment of indebtedness and payment of transaction costs. The Acquisition is not conditioned upon receipt of financing by the acquire Company, Selectica, Inc. The Purchase Price will be subject to certain adjustments and to a $1.4 million cash escrow (the “Escrow”) to cover any post-closing adjustments to the Purchase Price and indemnification obligations of the Shareholders. The Escrow will be deposited with Wells Fargo Bank, National Association, as escrow agent, pursuant to an Escrow Agreement to be entered into by the parties at the closing of the Acquisition. A portion of the Escrow will be released on the 12-month anniversary of the closing of the Acquisition, and the remainder of the Escrow will be released on the 18-month anniversary of the closing of the Acquisition, in each case after deducting any claims or adjustments.
The Merger Agreement contains customary representations and warranties as well as covenants by each of the parties, including non-competition covenants made by the principal Shareholders for the benefit of the Company. Subject to certain limitations, the Company will be indemnified for damages resulting from breaches or inaccuracies by Selectica, Inc or the Shareholders of their respective representations, warranties and covenants in the Merger Agreement as well as other specified matters. The Shareholders will be indemnified by the Acquire Company for damages resulting from breaches or inaccuracies by the Company of its representations, warranties and covenants in the Merger Agreement.
The Acquisition Shares to be issued to the Shareholders at the closing of the Acquisition have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. At the closing of the Acquisition, the Company and the Shareholders will enter into a Registration Rights Agreement with respect to registration of the resale of the Acquisition Shares.
The Merger Agreement contains a “no shop” provision that, in general, prohibits the Company from soliciting third-party acquisition proposals, provide information to or engage in discussions or negotiations with third parties that have made or might make an acquisition proposal. The Merger Agreement also contains certain termination rights by the parties.
The Acquisition closed on July 2, 2014. Following the closing of the Acquisition, Selectica, Inc issued options to certain Iasta employees to purchase up to an aggregate of 700,000 shares of Common Stock of the Acquire Company, which awards will be employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4).
The Company has a $1,500,000 operating line of credit facility available for short-term working capital needs. The credit facility is subject to renewal on February 28, 2016. Outstanding borrowings were $652,568 for three months ended March 31, 2014 and December 31, 2014. In connection with the acquisition which closed on July 2, 2014, the subordinated note payable was repaid as a portion of the Merger Agreement on July 2, 2014.
In connection with the Stock Redemption Agreement, the Company issued a note payable to a stockholder for $958,369 that requires thirty-four (34) equal quarterly payments of $36,000, including interest at 6% per annum, through September 1, 2016. Annual current maturities of the subordinated note payable at March 31, 2014 are 308,273. The Company repaid the subordinated note payable prior to the Acquisition that took place on July 2, 2014.
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