SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 6 Months Ended |
Sep. 30, 2013 |
Accounting Policies [Abstract] | ' |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ' |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation—The accompanying unaudited condensed, combined and consolidated financial statements (“Financial Statements”) include the accounts of Covisint Corporation, a Michigan corporation majority-owned by Compuware Corporation (“Compuware” or the “Parent”), and the Covisint segment of Compuware (combined operations are referred to as the “Company” or “Covisint”). Effective January 1, 2013, Compuware contributed substantially all of the assets and liabilities of the Covisint segment to Covisint Corporation (“January 2013 Contribution”). The Financial Statements reflect the assets, liabilities, revenues and expenses that were directly attributable to the Company as it operated within Compuware prior to the January 2013 Contribution and have been derived from the consolidated financial statements and accounting records of Compuware using the historical results of operations and historical basis of assets and liabilities for the Covisint operations of Compuware. The historical financial results may not be indicative of the results that would have been achieved had Covisint operated as a separate, stand-alone entity. The Financial Statements do not reflect any changes that may occur in the financing and operations of the Company in the future. These Financial Statements, prior to the January 2013 Contribution, were prepared on a combined basis because the operations were under common control. |
The Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), for interim financial information and with the instructions of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based its assumptions and estimates on the facts and circumstances existing at September 30, 2013, final amounts may differ from these estimates. |
In the opinion of the Company’s management, the accompanying Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. These Financial Statements should be read in conjunction with the Company’s audited combined and consolidated financial statements and notes thereto for the year ended March 31, 2013 included in the Company's prospectus filed with the Securities and Exchange Commission. The condensed and consolidated balance sheet at March 31, 2013, has been derived from the audited financial statements at that date. |
In September 2013, the Company substantially completed its initial public offering (“IPO”) in which it issued and sold 7.4 million shares of its common stock at a public offering price of $10.00 per share. The Company will receive net proceeds of $68.4 million (recorded as “offering proceeds receivable in the condensed and consolidated balance sheet as of September 30, 2013) after deducting underwriting discounts and commissions of $5.2 million. |
The Financial Statements include an allocation of certain corporate expenses including costs for facilities, information technology, tax, internal audit, accounting, finance, human resources, legal and executive management functions provided to the Company by Compuware employees and at Compuware sites. These allocations were primarily based on headcount, revenue and space occupied as a proportion of those in all Compuware operating units. Management believes the allocations are reasonable. However, the expenses allocated to the Company for these services are not necessarily indicative of the expense that would have been incurred if the Company had been a separate, independent entity and had otherwise managed these functions. Corporate expenses charged to the Company totaled $2.9 million and $2.7 million for the three months ended September 30, 2013 and 2012, respectively, and $6.1 million and $5.4 million for the six months ended September 30, 2013 and 2012, respectively. Through December 31, 2012, such costs and expenses were deemed to have been contributed by Compuware to Covisint in the period in which the costs were recorded. Since January 1, 2013, these expenses have been included in the net amount due to parent and affiliates. |
On May 23, 2013, the Company’s board of directors approved a 30-for-1 stock split of the Company’s common shares and amended its articles of incorporation to increase the authorized shares of the Company’s common stock from 9,000,000 to 50,000,000 and to increase the authorized shares of the Company’s preferred stock from 1,000,000 to 5,000,000. The stock split was in the form of a stock dividend, where holders of common shares issued by the Company and outstanding as of the date of the stock dividend received 29 newly issued common shares of the Company for each common share of the Company held at such date. The effect of the stock split has been retroactively reflected in these Financial Statements. |
Revenue Recognition |
The Company derives revenue through contracts under which it provides customers services including access to and support of the Covisint platform (“subscription”) and services related to implementation, solution deployment and on-boarding (“services”). The arrangements do not provide customers the right to take possession of the software at any time, nor do the arrangements contain rights of return. In order for a transaction to be eligible for revenue recognition, the following revenue criteria must be met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. |
Signed agreements and binding purchase orders are used as evidence of an arrangement. For customers where a purchase order is used as evidence of an arrangement, master terms and conditions exist that govern such arrangements. The Company assesses cash collectibility based on a number of factors including past collection history with the customer. If the Company determines that collectibility is not reasonably assured, the Company defers the revenue until collectibility becomes reasonably assured, generally upon receipt of cash. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Customers typically have the right to terminate their agreement if the Company fails to perform. |
The Company’s contracts may include a subscription fee for ongoing platform as a service (“PaaS”) operations and project (services) fees. For arrangements that contain multiple elements, in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition,” the arrangement consideration is allocated based on relative selling price using the following hierarchy: vendor specific objective evidence (“VSOE” which represents the price when sold separately) if available; third-party evidence if VSOE is not available; or estimated selling price if neither VSOE nor third-party evidence is available. The Company is currently unable to establish VSOE or third-party evidence of selling price for its deliverables. Therefore, the Company determines its best estimate of selling price by evaluating renewal amounts included in a contract, if any, and estimated costs to deliver each element. |
The subscription fees are recognized ratably over the applicable service period. Revenue recognition commences on the later of the start date specified in the subscription arrangement, the “launch date” of the customers’ access to the Company’s production environment or when all of the revenue recognition criteria have been met. The Company considers delivery to have occurred on the “launch date”, which is the point in time that a customer is provided access to use the Company’s platform. |
During fiscal 2012, the Company established evidence of stand-alone value based on other vendors providing similar services for many of the services it offers. Prior to establishing evidence of stand-alone value for services, and for those projects that do not have stand-alone value, the revenue is deferred and recognized over the longer of the committed term of the subscription agreement (generally one to five years) or the expected period over which the customer will receive benefit (generally five years). Services that have stand-alone value are recognized as delivered generally using a proportional performance methodology based on dependable estimates of hours incurred and expected hours to complete since these services are primarily performed on a fixed fee basis. Hours or costs incurred represent a reasonable surrogate for output measures of contract performance, including the presentation of deliverables to the client; therefore, hours or costs incurred are used as the basis for revenue recognition. If it is determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent. |
Deferred Costs |
Deferred costs consist of the incremental direct personnel and outside contractor costs incurred in delivering implementation and solutions deployment services that do not have stand-alone value. Revenue from these services, as described above, is deferred and recognized over the longer of the committed term of the subscription agreement or the expected period over which the customer will receive benefit. Therefore, the costs are recognized over the same period as the associated revenue. |
Sales commission costs that directly relate to revenue transactions that are deferred are recorded as “prepaid expenses and other current assets” or non-current “other assets” as applicable in the condensed and consolidated balance sheets and recognized as “sales and marketing” expenses in the condensed, combined and consolidated statements of comprehensive income over the revenue recognition period of the related transaction. |
Deferred Revenue |
Deferred revenue consists of the billed but unearned portion of existing contracts for subscription and services provided and is recognized as services are delivered or over the expected period during which the customer will receive benefit. The Company generally invoices its customers’ subscription fees in annual, quarterly or monthly installments. Contractual time periods often exceed the invoicing period and accordingly, the deferred revenue balance does not represent the total contract value of committed subscription agreements. The portion of deferred revenue that the Company anticipates will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current deferred revenue. |
Collection and Remittance of Taxes |
The Company records the collection of taxes from customers and the remittance of these taxes to governmental authorities on a net basis in its condensed, combined and consolidated statements of comprehensive income. |
Cost of Revenue |
Consists of compensation and related expenses for data center and services staff, payments to outside service providers, data center costs related to hosting the Company’s software and amortization of capitalized software. |
Capitalized Software |
Includes the costs of purchased and internally developed software products capitalized in accordance with ASC 350-40, “Internal Use Software” and software technology purchased through acquisitions and is stated at unamortized cost. Net purchased software included in capitalized software was $0.8 million and $0.9 million as of September 30, 2013 and March 31, 2013, respectively. |
Capitalized and purchased software costs are amortized on a straight line basis over the expected useful life of the software, which is generally five years. Amortization begins when the software technology is ready for its intended use. Amortization expense was $1.7 million and $1.1 million for the three months ended September 30, 2013 and 2012, respectively, and $3.3 million and $2.2 million for the six months ended September 30, 2013 and 2012, respectively. Amortization expenses are included in “cost of revenue” in the condensed, combined and consolidated statements of comprehensive income. |
Capitalized software is reviewed for impairment when events and circumstances indicate such asset may be impaired. If estimated future undiscounted cash flows are not sufficient to recover the carrying value of the capitalized software, an impairment charge is recorded in the amount by which the present value of future cash flows is less than the carrying value of these assets. Covisint has not had any impairment charges related to capitalized software. |
Research and Development |
For development costs related to the Company’s PaaS offering, the Company follows the guidance set forth in ASC 350-40 which requires companies to capitalize qualifying computer software development costs, which are incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Research and development costs include primarily the cost of programming personnel and amounted to $4.6 million and $4.2 million for the three months ended September 30, 2013 and 2012, respectively, of which $1.4 million and $3.9 million, respectively, was capitalized as internally developed software technology. Research and development costs amounted to $9.2 million and $8.0 million for the six months ended September 30, 2013 and 2012, respectively, of which $3.3 million and $7.6 million, respectively, was capitalized as internally developed software technology. |
Income Taxes – The Covisint business was operated as a division of Compuware prior to the January 2013 Contribution. As a member of Compuware’s consolidated group (“Consolidated Group”), the Company’s operations have been included in the Consolidated Group since that date for tax periods or portions thereof commencing after the January 2013 Contribution. |
Income taxes are presented herein on a separate return basis even though the Company’s results of operations have historically been included in the consolidated, combined, unitary or separate income tax returns of Compuware. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed, combined and consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities and net operating losses using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. |
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability. If it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which would increase the provision for income taxes. In making such determinations, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. |
Interest and penalties related to uncertain tax positions are included in the income tax provision. |
Foreign Currency Translation |
The Company’s foreign operations use their respective local currency as their functional currency. Assets and liabilities of foreign subsidiaries are minimal and are generally short term in nature. Such assets and liabilities in the condensed, combined and consolidated balance sheets have been translated at the rate of exchange at the respective balance sheet dates, and revenues and expenses have been translated at average exchange rates prevailing during the period the transactions occurred. Translation adjustments have been excluded from the results of operations. |
Stock-Based Compensation – Stock award compensation expense is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award, for awards that vest strictly based on time, and on a straight-line basis over the requisite service period of the individual tranches of the award for awards with performance conditions. |
Compuware Corporation Stock Compensation Awards |
Certain Covisint employees have been granted stock options to purchase Compuware’s common stock. Compuware calculates the fair value of its stock option awards using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. The expected volatility assumption is based on historical volatility of Compuware’s common stock over the most recent period commensurate with the expected life of the stock option granted. Compuware uses historical volatility because management believes such volatility is representative of prospective trends. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the stock option awarded. |
The estimates used to calculate the fair value of the Company may change from year to year based on operating results, market conditions and estimated future cash flows. While the Company believes that the assumptions and estimates used to determine the estimated fair value of the Company are reasonable, a change in assumptions underlying these estimates could materially affect the determination of the fair value of the Covisint business, and could therefore materially impact the estimated fair value of a share of Covisint stock. |
The following is the average fair value per share of Compuware stock compensation awards estimated on the date of grant and the assumptions used for each option granted to Compuware employees, including those providing services to Covisint, during the six months ended September 30, 2013 and 2012. |
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| Six Months Ended September 30, | | | | | | | | | | | | |
| 2013 | | 2012 | | | | | | | | | | | | |
Expected volatility | 39.52% | | 40.81% | | | | | | | | | | | | |
Risk-free interest rate | 1.59% | | 0.95% | | | | | | | | | | | | |
Expected lives at date of grant (in years) | 6.28 | | 6.3 | | | | | | | | | | | | |
Weighted average fair value of the options granted | $2.69 | | $4.03 | | | | | | | | | | | | |
Dividend Yield Assumption | 4.42% | | 0.00% | | | | | | | | | | | | |
(1) In January 2013, the Compuware Board of Directors announced its intention to begin paying cash dividends totaling $0.50 per share annually, to be paid quarterly beginning in the first quarter of fiscal 2014. Prior to that, Compuware had never paid a dividend or announced any intentions to pay a dividend. |
Covisint Corporation Stock Compensation Awards |
Covisint calculates the fair value of its stock option awards using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. Covisint does not have historical stock price data, therefore, the expected volatility assumption is based on an average of the historical volatility of comparable companies (“peer group companies”). For peer group companies that have not been publicly traded long enough to have sufficient historical data, the volatility figures included in these companies’ most recent Form 10-Qs or Form 10-Ks were used. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the stock option awarded. The expected life of the stock option is based on management’s best estimates considering the terms of the options granted. Dividend yields have not been a factor in determining fair value of stock options granted as Covisint has never issued cash dividends and does not anticipate issuing cash dividends in the future. |
Prior to the IPO, Covisint stock was not traded on a stock exchange and thus the exercise price of Covisint stock options at the date of grant was determined by calculating the estimated fair market value of the Company operations divided by the total shares outstanding, including outstanding stock options that had not yet vested. The estimated fair market value of the Covisint operations was measured using an equal combination of discounted cash flow and market comparable valuations and was discounted due to a lack of marketability at the grant date. Previous valuation estimates placed a greater emphasis on the discounted cash flow model. The discounted cash flow model uses significant assumptions, including projected future cash flows, a discount rate reflecting the risk inherent in future cash flows and a terminal growth rate. The key assumptions in the market comparable value analysis are the selection of peer group companies and application of these peer group companies’ data to Covisint. |
Business Segments—The Company operates in a single business segment. Sales are heavily weighted toward North American automotive companies. |
Significant Customers – A single customer, in the automotive industry, comprised 26 percent and 33 percent of total revenues during the three months ended September 30, 2013 and 2012, respectively, and 26 percent and 35 percent of total revenue during the six months ended September 30, 2013 and 2012, respectively. The same automotive customer comprised 27 percent and 30 percent of outstanding accounts receivable as of September 30, 2013 and March 31, 2013, respectively. A second customer, which is a reseller to customers in the healthcare industry, comprised 14 percent and 13 percent of total revenues during the three months ended September 30, 2013 and 2012, respectively, and 12 percent and 10 percent of total revenue during the six months ended September 30, 2013 and 2012, respectively. The same customer comprised less than 10 percent and 12 percent of outstanding accounts receivable as of September 30, 2013 and March 31, 2013, respectively. A third customer, in the automotive industry, comprised 11 percent and less than 10 percent of outstanding accounts receivable as of September 30, 2013 and March 31, 2013, respectively. |
Geographical Information—Financial information regarding geographic operations is presented in the table below (in thousands): |
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| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenue: | | | | | | | |
United States | $ | 21,016 | | | | $17,367 | | | | $41,850 | | | | $34,929 | |
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International operations | 3,509 | | | 3,239 | | | 6,776 | | | 6,290 | |
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Total | | $24,525 | | | | $20,606 | | | | $48,626 | | | | $41,219 | |
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| September 30, 2013 | | September 30, 2012 | | | | | | | | |
Long-lived assets: | | | | | | | | | | | |
United States | | $51,291 | | | | $51,019 | | | | | | | | | |
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International operations | 22 | | | — | | | | | | | | | |
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Total | | $51,313 | | | | $51,019 | | | | | | | | | |
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Long-lived assets are comprised of property, plant and equipment, goodwill and capitalized software. |
Recently Issued Accounting Pronouncements |
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this ASU provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company plans to adopt this ASU in fiscal 2015 and does not expect it to have a significant impact on the Company’s financial statements. |
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in this ASU supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. For public entities, the amendments of this ASU are effective prospectively for reporting periods beginning after December 15, 2012. The requirements of this ASU were adopted during the Company’s quarter ended March 31, 2013 and did not have a significant impact on its disclosures. |