SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended |
Mar. 31, 2014 |
Accounting Policies [Abstract] | ' |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ' |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
Business |
Covisint Corporation (the “Company”, “Covisint”, “we”, “our” and “us”) provides a leading cloud engagement platform for enabling organizations to securely connect, engage and collaborate with large, distributed communities of customers, business partners and suppliers. Our platform allows global organizations with complex external business relationships to create, streamline and automate external mission-critical business processes that involve the secure exchange of and access to critical information from multiple sources. Our customers deploy our platform to deliver on current and new business initiatives, enhance competitiveness, create new revenue opportunities, increase customer retention and lower operating costs. We have been recognized as a leader in the emerging cloud engagement market due to our market share, technical capabilities and history of successful deployments. |
Our cloud engagement platform is offered as a service, commonly referred to as Platform-as-a-Service (PaaS), and combines robust, cloud-based identity management, portal, data exchange, integration and application development capabilities. Our platform integrates with on-premise and hosted enterprise systems, as well as other cloud-based data sources, and can be deployed quickly, scaled to millions of users, and configured to address our customers’ specific organizational requirements, including workflows, content and branding. |
We deliver our platform through industry-specific solutions that address external mission-critical business processes common to companies across our target industries. To date, we have focused our solutions on the global automotive, healthcare and energy industries, in which the secure sharing of complex and distributed data is of particular importance. We are actively working to expand our platform to a wide range of industries which we believe have a significant opportunity to leverage our platform to enable external mission-critical business processes and to improve collaboration with external parties such as customers, business partners and suppliers. |
Basis of Presentation |
The accompanying 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 they 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. 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”), which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity and the disclosure of contingencies at March 31, 2014 and 2013 and the results of operations for the years ended March 31, 2014, 2013 and 2012. While management has based their assumptions and estimates on the facts and circumstances existing at March 31, 2014, final amounts may differ from estimates. |
In September 2013, the Company 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 received net proceeds of $68.4 million after deducting underwriting discounts and commissions of $5.2 million. |
|
Previously the “group equity” was shown in lieu of shareholders' equity in the combined and consolidated financial statements. All significant transactions between Compuware and the Company were included in the combined and consolidated financial statements and were deemed settled in cash. The net effect of the settlement of these intercompany transactions is reflected in the combined and consolidated statements of cash flows as a financing activity and in the “group equity” in the combined and consolidated balance sheets. From the January 2013 Contribution to the IPO, Compuware provided Covisint with short-term, non-interest bearing operating cash advances. The net effect of these intercompany transactions is reflected in the combined and consolidated statements of cash flows as financing activity and in “due to/from parent and affiliates” in the consolidated balance sheets. |
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. 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 by Compuware totaled $10.6 million, $10.8 million and $7.5 million for the years ended March 31, 2014, 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. We do not anticipate any material allocation charges from Compuware after March 31, 2014. |
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 currently 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. In the event a customer contract with deferred cost is terminated in whole, or part, the Company recognizes the remainder of the amount recorded in deferred cost attributable to the terminated component of the contract. |
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 financial statements 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. The Company has generally received payment for the services for which the revenue has been deferred. Deferred revenue also includes contracts for which we have a contractually executed agreement and have invoiced the customer under the terms of the executed agreement but have not met all the revenue recognition criteria and/or have concluded that revenue should be recognized on cash basis, as collectibility of the invoiced amounts is not reasonably assured. In the event a customer contract with deferred revenue is terminated in all, or part, the Company recognizes the remainder of the amount recorded in deferred revenue attributable to the terminated component of the contract. |
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 financial statements. |
|
Cash and Cash Equivalents |
The Company considers all investments with an original maturity of three months or less to be cash equivalents. |
Cost of Revenue |
Consists of compensation and related expenses for infrastructure and operations staff, payments to outside service providers, data center costs related to hosting the Company’s software and amortization of capitalized software. |
Allowance for Doubtful Accounts |
The Company considers historical loss experience, including the need to adjust for current conditions, the aging of outstanding accounts receivable and information available related to specific customers when estimating the allowance for doubtful accounts. The allowance is reviewed and adjusted based on the Company’s best estimates of collectibility. |
The following table summarizes the allowance for doubtful accounts and changes to the allowance during the years ended March 31, 2014, 2013 and 2012 (in thousands): |
|
|
| | | | | | | |
Allowance for Doubtful Accounts: | Balance at Beginning of Period | | Charged to Income | | Accounts Charged Against the Allowance | | Balance at End of Period |
Year ended March 31, 2014 | $58 | | $108 | | $2 | | $164 |
Year ended March 31, 2013 | $97 | | $— | | $39 | | $58 |
Year ended March 31, 2012 | $155 | | $94 | | $152 | | $97 |
|
Property and Equipment |
Property and equipment is stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, which are generally estimated to be three to ten years for furniture and fixtures, computer equipment and 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 $0.6 million and $0.9 million as of March 31, 2014 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 $6.8 million, $4.9 million and $3.0 million for the years ended March 31, 2014, 2013 and 2012, respectively. Amortization expenses are included in “cost of revenue” in the financial statements. |
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 $18.1 million, $17.4 million and $9.4 million for the years ended March 31, 2014, 2013 and 2012, respectively, of which $5.7 million, $13.6 million and $8.0 million respectively, was capitalized as internally developed software technology. |
Goodwill and Other Intangible Assets |
Goodwill and intangible assets with indefinite lives are tested for impairment annually at March 31 or more frequently if management believes indicators of impairment exist. With respect to goodwill, the carrying value of the Company's single reporting unit is compared to its fair value, and when the carrying value exceeds the fair value, the carrying value of the goodwill is reduced to implied fair value. The impairment test involves a two-step process with Step 1 comparing the fair value of the reporting unit with its aggregate carrying value, including goodwill. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, the Company performs Step 2 of the goodwill impairment test to determine the amount of impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. All operations of the Company are in a single reporting unit that was evaluated in the annual impairment assessment. There were no impairments of goodwill or other intangible assets in any of the periods presented in the combined and consolidated financial statements. |
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 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 and tax credits 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. |
Certain net operating losses ("NOL") and tax credits generated by the Company have been utilized by our parent, Compuware, and are not available to reduce future taxable income of Covisint. Therefore, the deferred tax assets presented above do not include the NOL or tax credits generated by Covisint and utilized by Compuware. In as much as Compuware has paid cash for these NOL and tax credits, the Company has already realized the economic benefit. Covisint has received the economic benefit of these NOL and tax credits through a reduction of the due to parent and affiliates (for the amount of benefit realized by Compuware) which is reported as an equity contribution from Compuware to Covisint in the accompanying balance sheets. |
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 financial statements 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 common stock, and under the agreements between the Company and Compuware, Covisint records the compensation expense relating to these stock options to purchase Compuware 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 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 years ended March 31, 2014, 2013 and 2012. |
|
| | |
| | | | | | | |
| YEAR ENDED MARCH 31, | | |
| 2014 | | 2013 | | 2012 | | |
Expected volatility | 39.11% | | 40.97% | | 39.96% | | |
Risk-free interest rate | 1.67% | | 0.96% | | 1.65% | | |
Expected lives at date of grant (in years) | 6.2 | | 6.3 | | 5.8 | | |
Weighted average fair value of the options granted | $2.63 | | $4.08 | | $3.96 | | |
Dividend Yield Assumption (1) | 4.46% | | 0.00% | | 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. Following the IPO on September 26, 2013, Covisint does not have extensive 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 divided by the total shares outstanding, including outstanding stock options that had not yet vested. The estimated fair market value of the Company 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. |
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 stock options granted 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. |
Assumptions used in measuring Covisint options granted, and the weighted average fair value of options granted, in fiscal 2014, 2013 and 2012 were: |
| | |
| | | | | | | |
| YEAR ENDED MARCH 31, | | |
| 2014 | | 2013 | | 2012 | | |
Expected volatility | 49.99% | | 53.64% | | 54.85% | | |
Risk-free interest rate | 1.85% | | 1.02% | | 1.41% | | |
Expected lives at date of grant (in years) | 6.01 | | 5.6 | | 6.8 | | |
Weighted average fair value of the options granted | $5.86 | | $4.47 | | $3.40 | | |
|
Business Segments— The Company operates in a single reportable segment. Sales are heavily weighted toward North American automotive companies. |
Significant Customers – A single customer, in the automotive industry, comprised 26 percent, 33 percent and 35 percent of total revenue during the years ended March 31, 2014, 2013 and 2012, respectively. The same automotive customer comprised 18 percent and 30 percent of outstanding accounts receivable as of March 31, 2014 and March 31, 2013, respectively. A second customer, which is a reseller to customers in the healthcare industry, comprised 12 percent of total revenue during the years ended March 31, 2014 and 2013 and less than 10 percent of outstanding accounts receivables and revenue for all prior years. |
Geographical Information— Financial information regarding geographic operations is presented in the table below (in thousands): |
|
| | |
| | | | | | | |
| YEAR ENDED MARCH 31, | | |
| 2014 | | 2013 | | 2012 | | |
Revenue: | | | | | | | |
United States | $83,308 | | $77,499 | | $64,091 | | |
International operations | 13,827 | | 13,233 | | 10,584 | | |
Total | $97,135 | | $90,732 | | $74,675 | | |
|
|
| | | | | | | |
| 31-Mar-14 | | 31-Mar-13 |
Long-lived assets: | | | |
United States | | $51,552 | | | | $51,019 | |
|
International operations | 505 | | | — | |
|
Total | | $52,057 | | | | $51,019 | |
|
|
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. |
|
The Company has evaluated recent pronouncements through ASU 2014-08 and believes that none of them will have a material impact on the Company’s financial position, results of operations or cash flows. |