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As filed with the Securities and Exchange Commission on September 20, 2013.

Registration No. 333-188603

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5 TO

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Covisint Corporation

(Exact name of registrant as specified in its charter)

 

MICHIGAN   7372   26-2318591

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

One Campus Martius, Detroit, Michigan 48226-5099

(313) 227-7000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

David A. McGuffie

President and Chief Executive Officer

Covisint Corporation

One Campus Martius

Detroit, Michigan 48226-5099

(313) 227-7000 (telephone)

(313) 227-6435 (facsimile)

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies To:

 

Norman H. Beitner, Esq.

Honigman Miller Schwartz and Cohn LLP

2290 First National Building

660 Woodward Ave.

Detroit, Michigan 48226-3583

(313) 465-7000 (telephone)

(313) 465-7321 (facsimile)

 

William J. Schnoor Jr., Esq.

Kenneth J. Gordon, Esq.

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, Massachusetts 02109-3000

(617) 570-1000 (telephone)

(617) 523-1231 (facsimile)

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Amount to be

Registered(1)

  Proposed
Maximum Offering
Price Per Share
  Proposed
Maximum
Aggregate
Offering Price(2)
 

Amount of

Registration Fee(3)

Common Stock, no par value

  7,360,000   $11.00   $80,960,000   $11,042.94

 

 

(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes additional shares that the underwriters have the option to acquire to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

Subject to Completion, Dated September 20, 2013

6,400,000 Shares

 

LOGO

Covisint Corporation

Common Stock

 

 

We are offering 6,400,000 shares of our common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $9.00 and $11.00 per share. We have applied to list our common stock on the NASDAQ Global Market under the symbol “COVS”.

Compuware Corporation, or Compuware, currently owns 100% of our outstanding common stock, and following this offering Compuware will continue to be our controlling shareholder. Following this offering, Compuware will own 30,003,000 shares of our common stock, representing approximately 82.4% of the total outstanding shares of our common stock.

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in shares of our common stock involves risk. See “Risk Factors” beginning on page 11.

 

      

Price to

Public

    

Underwriting

Discounts and

Commissions(1)

    

Proceeds to

Covisint

Per share

     $                  $                  $            

Total

     $                  $                  $            

 

(1) We refer to “Underwriting” beginning on page 135 of this prospectus for additional information regarding total underwriter compensation.

We have granted the underwriters the right to purchase up to an additional 960,000 shares of common stock to cover over-allotments.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Delivery of the shares of common stock will be made on or about                     , 2013.

 

Credit Suisse     Pacific Crest Securities
  Evercore  

The date of this Prospectus is                     , 2013


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PROSPECTUS SUMMARY

     1   

RISK FACTORS

     11   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     39   

INDUSTRY AND MARKET DATA

     40   

USE OF PROCEEDS

     41   

DIVIDEND POLICY

     42   

CAPITALIZATION

     43   

DILUTION

     44   

SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA

     45   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     47   

BUSINESS

     79   

MANAGEMENT

     94   

EXECUTIVE COMPENSATION

     100   

DIRECTOR COMPENSATION

     112   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     113   

PRINCIPAL SHAREHOLDERS

     122   

DESCRIPTION OF CAPITAL STOCK

     123   

SHARES ELIGIBLE FOR FUTURE SALE

     129   

MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

     131   

UNDERWRITING

     135   

NOTICE TO CANADIAN RESIDENTS

     139   

LEGAL MATTERS

     141   

EXPERTS

     141   

WHERE YOU CAN FIND MORE INFORMATION

     141   

INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY

The following summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined and consolidated financial statements and related notes included elsewhere in this prospectus.

Overview

Covisint 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.

We sell our solutions through our direct sales force and increasingly through our channel partner. We have over 3,000 customers that have deployed our platform to connect to over 80,000 of their customers, business partners and suppliers. This allows more than 18 million users to access the mission-critical applications and information provided by our customers. Our customers include approximately 150 core platform customers, which represented 94%, 94%, 93% and 91% of our total revenue for the three months ended June 30, 2013 and 2012 and the years ended March 31, 2013 and 2012, respectively, including 27%, 37%, 33% and 35% of our total revenue for such periods from our largest core platform customer, General Motors. Our other core platform customers include (listed alphabetically): AT&T, Blue Cross Blue Shield Association, Blue Cross Blue Shield of North Carolina, Daimler AG, Detroit Medical Center and the Vermont Blueprint for Health. Our remaining customers include a variety of organizations that pay us a relatively nominal fee to either connect to one of our core platform customers or use one of our industry-specific solutions.

We are currently a wholly-owned subsidiary of Compuware Corporation, a publicly traded company founded in 1973. Our predecessor, Covisint LLC, was founded in February 2000 by a consortium of global automotive manufacturers to improve their ability to collaborate and transact with thousands of suppliers worldwide and reduce the cost of procuring components and materials. The consortium made a significant investment in the development of a robust, highly-secure cloud-based business-to-business network for automotive supply chains that included messaging, portal and web services technology. In March 2004, Compuware purchased substantially all of the assets of Covisint LLC including its name and messaging, portal and web services technology. For the three months ended June 30, 2013 and 2012 and the years ended March 31, 2013, 2012 and 2011, our total revenue was $24.1 million, $20.6 million, $90.7 million, $74.7 million and $54.2 million, respectively, our net income (loss) was $(4.7) million, $0.1 million, $(5.6) million, $(3.3) million and $(1.3) million, respectively, and our Adjusted EBITDA was

 

 

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$(4.0) million, $(1.7) million, $(10.9) million, $(5.4) million and $1.1 million, respectively. Adjusted EBITDA is a non-GAAP financial measure. For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure and a reconciliation of our Adjusted EBITDA to our net income (loss), see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics.”

Our Industry

Cloud computing is evolving to enable more complex business processes

The emergence of cloud computing over the past decade is leading to a fundamental transformation of organizations and their IT environments. As cloud computing has become more widely adopted, organizations have begun to appreciate the new ways in which it enables them to interact and engage with external parties. In particular, organizations in many industries are seeking to use cloud-based technologies to streamline and automate complex, information-intensive business processes and to implement external engagement models, such as health information exchanges, which involve the integration of data from disparate sources and the exchange of and access to sensitive information, such as private patient information, across business communities, organizations and systems. We believe organizations in a wide range of industries have a significant opportunity to leverage cloud computing to enable external mission-critical business processes and to improve collaboration with external parties such as customers, business partners and suppliers.

Organizations are transforming the way they interact with their external constituents

The evolution in cloud computing is accelerating a number of dramatic changes in the way that organizations interact with their customers, business partners, suppliers and other external constituents. Some of the most significant changes include:

 

   

Rapidly changing end-user behavior and expectations for cloud-based collaboration and information exchange. The increasing adoption of online tools in everyday life is fundamentally changing consumer behavior and creating expectations within organizations for similar capabilities, which are driving demand for secure cloud-based information exchange and business collaboration tools.

 

   

Increased demand for secure system and data integration across organizational boundaries. The need to improve and accelerate business performance is leading to a significant increase in the flow of sensitive digital information beyond traditional organizational boundaries, which raises new challenges for standardizing and integrating data in a secure manner across systems and organizations.

 

   

Competitive pressures for timely, innovative external engagement processes. The current business environment requires organizations to quickly capitalize on new opportunities to strengthen their relationships with their customers and improve their competitiveness, which requires technology and domain expertise that is not readily available within most organizations.

 

   

Cloud-based processes are becoming fundamental to organizations’ business models. Organizations are increasingly using cloud-based processes to streamline and automate their core, external-facing operations and, in many cases, to enable entirely new business models. These cloud-based processes require a high degree of security, reliability and scalability.

Industry-specific trends are driving additional demand

In certain industries, the need for secure information exchange and collaboration across organizations is being compounded by unique vertical-specific trends, including:

Automotive. There has been a significant shift in how automotive manufacturers connect with and reach customers. Manufacturers are seeking to provide enhanced information experiences for the new “connected consumer” through a variety of access points, including in-vehicle systems, websites and mobile devices.

 

 

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Delivering the services and features of “connected vehicles” that consumers now expect, such as location-based information services which integrate a variety of third-party data and applications and require cloud-based identification, authentication and network security, has become increasingly more important to manufacturers’ marketing and sales efforts.

Additionally, the highly-integrated, global and distributed nature of the automotive supply chain makes immediate and continuous visibility into the entire supply chain particularly critical for conducting business and managing risk. Vendors across the automotive industry, including dealers, financing sources and automakers, are utilizing the cloud to share information and streamline business processes across global supply chain boundaries.

Healthcare. One of the primary healthcare reform initiatives designed for reducing healthcare costs and improving patient care and overall population health is a new reimbursement model that is driving the shift from fee-for-service to outcomes-based care delivery. This “accountable care” model requires the primary stakeholders—physicians, hospitals and payers—to be jointly accountable for the overall cost and quality of care, share digital information and coordinate patient care in order to reduce healthcare costs. The cloud is being used for aggregating, sharing and analyzing patient information from various systems and facilities and making that information available to provide a comprehensive view of a patient’s history and condition, which can eliminate redundant testing, reduce errors in care delivery and improve overall quality of care.

Energy. The global energy industry is geographically dispersed and requires significant information sharing, communication and data protection. The energy industry includes a large number of joint ventures that require the sharing of critical geological, operational and financial information among a large distributed network of joint venture partners, who are often competitors, and outside contractors. This requires making information available to, and enabling collaboration among, these constituents with appropriate identity management and access limitations.

Other Industries. Organizations in many industries, such as financial services and the public sector, face similar challenges in connecting with external audiences. We believe a wide variety of organizations globally will benefit from using cloud-based technologies to meet their need to collaborate with customers, business partners and suppliers.

Customer requirements are extensive and challenging

The requirements for enabling cloud-based, mission-critical business processes among thousands and potentially millions of external constituents are extensive and challenging. These requirements typically include:

 

   

Security. Organizations require the ability to make sensitive information easily accessible to large populations of users through a wide range of devices.

 

   

Integration. Organizations must be able to seamlessly integrate with a variety of information systems and standardize disparate data formats.

 

   

Flexibility. To respond to rapidly-evolving business demands and opportunities, organizations seek high-quality solutions that can be quickly implemented and broadly adopted.

 

   

Reliability. Organizations require enterprise-grade reliability to bring mission-critical business initiatives to market: anything less jeopardizes an organization’s ability to remain competitive.

 

   

Compliance. Private and confidential data is subject to a growing number of regulations governing the tracking and auditing of, and access to, information.

 

 

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Our Solution

Our Platform-as-a-Service offering enables global organizations to securely connect, engage and collaborate with large, extended networks of customers, business partners, suppliers and other third parties. The key benefits of our solution for our customers include:

 

   

Secure access to critical information. Our platform provides simple, secure access to mission-critical information and applications at the moment of engagement through a common, branded interface; enabling secure, reliable communication and collaboration with key external audiences including customers, business partners and suppliers. Our cloud identity services layer enables organizations to simply and securely manage user identities across virtually any combination of customers, business partners, suppliers, external systems, cloud services and end-user groups. Our technology provides organizations with a centralized identity and access management platform for managing access to organizational information and applications for external constituents through a single, secure identity.

 

   

Comprehensive data integration. Our platform integrates with our customers’ existing enterprise systems, as well as with the systems and business processes of their customers, business partners, suppliers and other third parties, to provide a unified source of critical information.

 

   

Speed and agility. Our platform enables the rapid creation and deployment of new mission-critical business processes that can be configured to meet customer and industry-specific business requirements in order to support the development of timely new business models.

 

   

Mission-critical scalability and reliability. Our platform provides a high degree of scalability to support large transaction volumes, while maintaining the highest levels of performance and uptime required to support mission-critical processes.

 

   

Compliance. Our platform assists our customers with meeting their regulatory compliance obligations governing access to, and sharing of, private and confidential information.

Our Growth Strategies

We intend to extend our position as a leading integrated cloud engagement platform for creating and enabling external mission-critical business processes. Our key growth strategies include:

 

   

Continued innovation and enhancement of our platform. We believe our platform provides us with significant competitive advantages by addressing the unique security, identity and access management, data exchange and compliance needs of large scale external engagement models. We intend to continue investing in research and development to expand our mobility and analytics capabilities and our AppCloud® solution developer community and to develop additional industry vertical solutions that will create new entry points with customers.

 

   

Expand within our current customer base. We intend to expand the adoption of our platform within our current customer base by selling additional business solutions and expanding usage of already-deployed solutions.

 

   

Acquire new customers. We intend to expand our customer base by leveraging our established position in our existing markets, hiring additional sales and marketing personnel and developing and expanding strategic relationships with channel partners.

 

   

Penetrate new vertical markets. We intend to leverage our core external engagement platform technology along with our experience and proven customer success within our principal automotive, healthcare and energy markets to enter into new vertical markets, such as financial services and the public sector, that have similar characteristics and business challenges.

 

 

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Expand channels and strategic alliances. We intend to invest in developing and expanding strategic alliances with resellers, managed services providers, telecommunication service providers, systems integrators and independent software vendors in order to complement our direct selling efforts and extend our market reach into new vertical and geographic markets.

Risks Affecting Us

Our business is subject to numerous risks, which are highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. Some of these risks include:

 

   

We have a history of losses, we expect to continue to incur losses and we may not achieve or sustain profitability in the future.

 

   

We derive a significant percentage of our total revenue from the automotive and healthcare industries, and any downturn in these industries could harm our business.

 

   

We derive a significant percentage of our total revenue from our ten largest customers.

 

   

We derived approximately 27%, 37%, 33% and 35% of our total revenue in the three months ended June 30, 2013 and 2012 and the years ended March 31, 2013 and 2012, respectively, from our largest customer, General Motors Company.

 

   

We cannot accurately predict subscription renewal rates and the impact these rates may have on our future revenue and operating results.

 

   

We may not be able to retain and increase sales to our existing customers or to new customers, which could negatively impact our future revenue and financial results.

 

   

Competition from current competitors and new market entrants, as well as from internally developed technologies, could adversely affect our ability to sell our solutions and related services.

 

   

If our security measures are breached or unauthorized access to data is otherwise obtained, our solutions may be perceived as not being secure, customers may reduce the use of or stop using our solutions and we may incur significant liabilities.

 

   

If we fail to remediate deficiencies in our internal controls or are unable to implement and maintain effective internal controls in the future, our ability to produce accurate and timely financial statements could be impaired.

 

   

As long as Compuware controls us, your ability to influence matters requiring shareholder approval will be limited.

Corporate Information

We are a wholly-owned subsidiary of Compuware, and following this offering Compuware will continue to be our controlling shareholder.

Effective January 1, 2013, Compuware contributed to us substantially all of the assets and liabilities related to our business. Prior to the contribution, we had been operating as a division within Compuware and this prospectus has been prepared as if the contribution had occurred at the commencement of our business. In connection with the contribution, we entered into a master separation agreement with Compuware, which we refer to in this prospectus as the “master separation agreement”. At that time, we also entered into various other agreements to effect the separation and provide a framework for our relationship with Compuware after the separation, including an employee benefits agreement, a Compuware services agreement, an intellectual property agreement, a shared services agreement and a tax sharing agreement. In connection with this offering, we will also enter into a registration rights agreement with Compuware. These agreements, together with the contribution

 

 

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agreement, provide for the allocation between us and Compuware of assets, employees, liabilities and obligations (including property, employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from Compuware and govern certain relationships between us and Compuware after the separation. Additionally, the master separation agreement permits Compuware, in its discretion, to distribute its shares of our common stock to its shareholders in a transaction intended to qualify as a tax-free transaction under Section 355 of the Internal Revenue Code, or Code. In the event of such a distribution, which we refer to in this prospectus as the “Tax-Free Distribution”, these agreements will be terminated, renegotiated or will remain in effect pursuant to applicable provisions providing for continuation after such distribution. For additional information regarding the master separation agreement and our other agreements with Compuware, see “Certain Relationships and Related Party Transactions.”

Compuware announced on January 25, 2013 that it plans to distribute its shares of our common stock within one year following this offering. Compuware has submitted to the Internal Revenue Service, or IRS, a request for a private letter ruling, substantially to the effect that, among other things, the Tax-Free Distribution will qualify as a tax-free transaction for U.S. federal income tax purposes under Section 355 of the Code. If the Tax-Free Distribution fails to qualify as a tax-free transaction, in general, Compuware would be subject to tax as if it had sold our common stock in a taxable sale for its fair market value, and Compuware shareholders who receive shares of our common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares. We generally would be responsible for, among other things, certain taxes imposed under the consolidated return regulations and any taxes (including taxes that could be imposed on Compuware under Section 355(e) of the Code) resulting from the failure of the Tax-Free Distribution to qualify as a tax-free transaction to the extent such taxes are attributable to, or result from, certain actions or failures to act by us or certain transactions involving us following the Tax-Free Distribution. We also generally would be responsible for 50% of such taxes to the extent such taxes are not attributable to, or do not result from, certain actions or failures to act by either us or Compuware. We would, however, have no responsibility for taxes attributable to the failure of the Tax-Free Distribution to qualify as a tax-free transaction due to a sale or change in ownership of Compuware. Compuware has no obligation to pursue or consummate any dispositions of its ownership interest in us, including through the announced Tax-Free Distribution, by any specified date or at all. The Tax-Free Distribution will be subject to various conditions, including consent from the lenders under Compuware’s revolving credit agreement, receipt of any necessary regulatory or other approvals and the existence of satisfactory market conditions. The conditions to the Tax-Free Distribution may not be satisfied, Compuware may decide not to consummate the Tax-Free Distribution even if the conditions are satisfied or Compuware may decide to waive one or more of these conditions and consummate the Tax-Free Distribution even if all of the conditions are not satisfied. See “Risk Factors—The Tax-Free Distribution may not occur.”

Our principal executive offices are located at One Campus Martius, Detroit, Michigan 48226, and our telephone number is (313) 227-7000. Our website address is www.covisint.com. The information on, or that can be accessed through, our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus.

Unless otherwise indicated, the terms “Covisint,” “we,” “us” and “our” refer to Covisint Corporation, a Michigan corporation, together with its consolidated subsidiaries.

“Covisint” is our registered trademark in the United States, and the Covisint logo and all of our solution names are our trademarks. This prospectus contains additional trade names, trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with these other companies, or endorsement or sponsorship of us by these other companies. Other trademarks appearing in this prospectus are the property of their respective holders.

 

 

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THE OFFERING

The following is a brief summary of certain terms of this offering. For a more complete description of the terms of our common stock, see “Description of Capital Stock—Common Stock.”

 

Common stock offered by us

6,400,000 shares

 

Common stock to be outstanding after this offering

36,403,000 shares(1)

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $58.5 million ($67.5 million if the underwriters exercise in full their over-allotment option), based on the assumed initial public offering price of $10.00 per share (the midpoint of the range set forth on the cover page of this prospectus). We intend to use the net proceeds for working capital and other general corporate purposes, including to finance our growth, develop new solutions, repay short-term intercompany payables owed to Compuware, hire additional personnel and fund capital expenditures and potential acquisitions. See “Use of Proceeds.”

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of some of the factors you should consider before deciding to purchase shares of our common stock.

 

Proposed NASDAQ trading symbol

COVS

 

Except as otherwise indicated, the information in this prospectus gives effect to our amended and restated articles of incorporation and the 30-for-1 stock split of our common stock, each of which became effective on May 23, 2013.

After giving effect to this offering, 30,003,000 shares (approximately 82.4%) of our common stock will be owned by Compuware.

 

(1)   The number of shares of our common stock expected to be outstanding after this offering is based upon the 30,003,000 shares of our common stock outstanding as of June 30, 2013, and does not include:

 

   

exercise of the underwriters’ over-allotment option;

 

   

4,375,500 shares of our common stock issuable upon the exercise of stock options under our 2009 Long Term Incentive Plan outstanding as of September 10, 2013, with a weighted-average exercise price of $2.91 per share; and

 

   

124,500 shares of our common stock reserved for future issuance under our 2009 Long Term Incentive Plan, as more fully described in “Executive Compensation.”

 

 

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SUMMARY COMBINED AND CONSOLIDATED FINANCIAL DATA

The following combined and consolidated financial data should be read together with our combined and consolidated financial statements and condensed, combined and consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We have derived the following combined and consolidated statements of comprehensive income data for the years ended March 31, 2013, 2012 and 2011 from our audited combined and consolidated financial statements elsewhere in this prospectus. We have derived the following combined and consolidated statements of comprehensive income data for the three months ended June 30, 2013 and 2012 from our unaudited condensed, combined and consolidated financial statements elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that should be expected in the future.

 

     Years Ended March 31,     Three Months Ended
June 30,
 
     2013     2012     2011     2013     2012  
     (In thousands, except per share data)        

Combined and Consolidated Statements of Comprehensive Income Data:

          

Revenue

   $ 90,732      $ 74,675      $ 54,154      $ 24,101      $ 20,613   

Cost of revenue(1)

     47,575        41,477        27,501        13,310        10,678   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     43,157        33,198        26,653        10,791        9,935   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(1)

     3,799        1,341        1,687        2,585        174   

Sales and marketing(1)

     26,593        22,544        16,571        7,339        5,512   

Administrative and general(1)

     18,315        12,583        10,288        5,534        4,116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     48,707        36,468        28,546        15,458        9,802   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (5,550     (3,270     (1,893     (4,667     133   

Other income

     0        0        750        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax provision

     (5,550     (3,270     (1,143     (4,667     133   

Income tax provision

     98        57        132        3        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (5,648   $ (3,327   $ (1,275   $ (4,670   $ 131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share(2)

   $ (0.19   $ (0.11   $ (0.04   $ (0.16   $ (0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding, basic and diluted(2)

     30,003        30,003        30,003        30,003        30,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   As of June 30, 2013, all vested stock compensation was in the form of Compuware stock awards. All outstanding Covisint stock options include a performance condition based on the occurrence of an initial public offering or change in control of the Company. Therefore, stock compensation expense incurred through June 30, 2013 has related only to Compuware stock awards provided to Covisint employees. Upon consummation of this offering or a change in control of Covisint, we will begin to recognize $25.2 million of compensation expense related to Covisint options including options granted in August 2013. Approximately 83% of the expense relates to stock options that were modified; this expense will be recognized over the requisite service period beginning December 31, 2012 (the modification date) and ending on January 1 of the third calendar year following an initial public offering, with a cumulative catch-up in the period in which such offering occurs. Approximately 13% of the expense relates to stock options issued during March 2013; this expense will be recognized over the requisite service period beginning March 2013 and ending on the second anniversary of an initial public offering, presuming such offering occurs in calendar 2013, with a cumulative catch-up in the period in which such offering occurs. These expenses will be offset by a reduction in expense associated with cancellation of certain outstanding Compuware awards due to the occurrence of an initial public offering or change in control of the Company. We expect to incur net compensation expense of $9.6 million associated with these options and awards in the quarter in which this offering occurs. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Stock Compensation—Covisint Corporation Stock Compensation”. All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. The statements above include stock compensation as follows:

 

 

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     Years Ended March 31,      Three Months Ended
June  30,
 
     2013      2012      2011      2013      2012  
     (In thousands)                

Stock compensation classified as:

              

Cost of revenue

   $ 6       $ 5       $ 111       $ 5       $ —     

Research and development

     1         1         3         47         —     

Sales and marketing

     360         9         9         47         25   

Administrative and general

     1,262         1,077         1,450         387         297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock compensation expense

   $ 1,629       $ 1,092       $ 1,573       $ 486       $ 322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)   Please see Note 5 to our audited combined and consolidated financial statements and Note 3 to our unaudited condensed, combined and consolidated financial statements for an explanation of the method used to calculate the historical net income (loss) per share attributable to common shareholders and the number of shares used in computation of the per share amounts.

The following table sets forth our summary balance sheet data as of June 30, 2013:

 

   

on an actual basis;

 

   

on an as adjusted basis to reflect the (a) issuance and sale of 6,400,000 shares of common stock in this offering by us, and the receipt of the net proceeds from our sale of these shares at an assumed initial public offering price of $10.00 per share, which represents the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us and (b) the application of a portion of the proceeds to repay short-term intercompany payables owed to Compuware.

 

     As of June 30, 2013  
     (In thousands)  
       Actual         As Adjusted    

Condensed, Combined and Consolidated Balance Sheets:

    

Cash and cash equivalents

   $ 1,388      $ 50,491   

Working capital

     (1,340     57,193   

Total assets

     96,151        144,241   

Due to parent and affiliates

     9,430        0   

Long term debt

     0        0   

Total shareholder’s equity

   $ 40,826      $ 98,346   

A $1.00 increase or decrease in the assumed initial public offering price of $10.00 per share would increase or decrease each of cash and cash equivalents, working capital, total assets and total shareholders’ equity by approximately $6.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. Similarly, each increase or decrease of one million shares in the number of shares offered by us would increase or decrease cash and cash equivalents, working capital, total assets and total shareholders’ equity (deficit) by approximately $9.3 million, assuming the initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

 

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     Years Ended March 31,     Three Months Ended
June 30,
 
     2013     2012     2011     2013     2012  
     (in thousands)              

Other Financial Data:

          

Adjusted EBITDA(1)

   $ (10,883   $ (5,425   $ 1,054      $ (4,041   $ (1,708

Adjusted gross profit(2)

     48,113        36,213        29,186        12,444        11,006   

Adjusted gross margin(2)

     53     48     54     52     53

 

(1)   Adjusted EBITDA is a non-GAAP measure and represents net income (loss) adjusted for income tax provision, depreciation, amortization of intangible assets, amounts incurred for capitalized internal software costs, stock compensation expense and other income. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for a discussion of Adjusted EBITDA and the reconciliation to U.S. GAAP.
(2)   Adjusted gross profit and adjusted gross margin are non-GAAP measures. Adjusted gross profit represents gross profit, adjusted for amortization of capitalized software associated with our research and development expense classified within cost of revenue and stock compensation. Adjusted gross margin is adjusted gross profit as a percentage of revenue. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for a discussion of adjusted gross margin and adjusted gross profit and the reconciliation to U.S. GAAP.

 

 

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RISK FACTORS

Investing in shares of our common stock involves risk. You should carefully consider the specific factors listed below, together with the cautionary statements under the caption “Special Note Regarding Forward-Looking Statements” and the other information included in this prospectus before purchasing shares of our common stock. The risks described below are not the only ones that we face. Additional risks that are not yet known to us or that we currently think are immaterial could also impair our business, operating results or financial condition. If any of the following risks actually occur, our business, financial condition or results of operations could be adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Our Industry

We have a history of losses, we expect to continue to incur losses and we may not achieve or sustain profitability in the future.

We have incurred significant losses in each fiscal year since becoming an operating division within Compuware in 2004. We experienced a combined net loss of $4.7 million, $5.6 million and $3.3 million for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively. These losses were mainly due to the substantial investments we made, and continue to make, to build our solutions and services, grow and maintain our business and acquire customers. Key elements of our growth strategy include acquiring new customers and continuing to innovate and enhance our platform. In addition, as a public company we will incur significant legal, accounting and other expenses that we did not incur as a division of a public company. Furthermore, to the extent that we are successful in increasing our customer base, we will incur increased expenses, as costs associated with generating and supporting customer agreements are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. You should not rely upon our recent revenue growth as indicative of our future performance. We cannot assure you that we will reach profitability in the future or at any specific time in the future or that, if and when we do become profitable, we will sustain profitability. If we are ultimately unable to generate sufficient revenue to meet our financial targets, become profitable and have sustainable positive cash flows, investors could lose their investment.

We derive a significant percentage of our total revenue from the automotive and healthcare industries, and any downturn in these industries could harm our business.

Approximately 53%, 56% and 57% of our revenue for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively, was generated from customers in the automotive industry. While economic conditions for the automotive sector have improved, many of our customers in the domestic automotive industry have been engaged in restructurings and other efforts to cut costs. Any new negative developments in this industry, including additional bankruptcies, could reduce the demand for our solutions and increase the collection risk of accounts receivable from these customers.

Approximately 31%, 31% and 32% of our revenue for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively, was generated from customers in the healthcare industry. Our customers in this industry may be subject to adverse changes in government regulation, the availability of government funding and reimbursement policies and practices. Any such adverse change could reduce the demand for our solutions.

A substantial downturn in either of these industries may cause our customers to reduce their spending on information technology. Customers in these industries may delay or cancel information technology projects, seek to lower their costs by renegotiating vendor contracts, or decrease their usage of our solutions. In addition, the increased pace of consolidation in these industries may result in reduced overall spending on our solutions. Any of these factors could have a material adverse effect on our results of operations.

 

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We derive a significant percentage of our total revenue from our largest customer, General Motors Company, as well as our ten largest customers.

Approximately 27%, 33% and 35% of our revenue for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively, was generated from our largest customer, General Motors Company, or General Motors. We expect revenues generated by sales to General Motors to decrease as a percentage of total revenues as we continue to expand our customer base and implement our growth strategies. General Motors has the ability to terminate the contracts we have with them prior to their expiration on short notice. It was reported in July 2012 that General Motors intends to significantly reduce its use of outsourced information technology services over the next three to five years. Losing all or a significant portion of our business with General Motors could have a material impact on our business, liquidity and results of operations.

In addition, our top ten customers, including those we sold through and invoiced to our channel partner, accounted for 68%, 65% and 63% of total revenue for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively. Many of these customers may terminate their agreements upon advance written notice to us. The loss of any of these customers would decrease our revenue and adversely affect our operating results.

Our quarterly operating results have fluctuated in the past and may fluctuate in the future, which could cause declines or volatility in the price of our common stock.

Our quarterly operating results have fluctuated in the past and may fluctuate in the future as a result of a variety of factors. For example, in fiscal 2013, our services revenue grew by $8.2 million, or 32%, compared to fiscal 2012 primarily as a result of having obtained evidence of stand-alone value for many of these services, which allowed us to recognize an increased portion of our services revenue using the proportional performance method during fiscal 2013. Other factors affecting our results may be outside our control. If our quarterly operating results or guidance fall below the expectations of research analysts or investors, the price of our common stock could decline substantially. The following factors, among others, could cause fluctuations in our quarterly operating results:

 

   

our ability to attract new customers and retain existing customers;

 

   

our ability to accurately forecast revenue and appropriately plan our expenses;

 

   

our ability to expand into new markets, introduce new solutions and integrate them with third-party software and devices;

 

   

the actions of our competitors, including consolidation within the industry, pricing changes or the introduction of new services;

 

   

our ability to effectively manage our growth;

 

   

our ability to successfully manage any future acquisitions of businesses, solutions or technologies;

 

   

the timing and cost of developing or acquiring technologies, solutions or businesses;

 

   

the timing of revenue recognition for our services;

 

   

the timing of revenue recognition for new subscriptions;

 

   

the timing, operating costs and capital expenditures related to the operation, maintenance and expansion of our business;

 

   

the annual increase in fourth quarter revenue relating to fees from our Physician Quality Reporting System offering;

 

   

service outages or security breaches and any related occurrences which could impact our reputation;

 

   

the impact of worldwide economic, industry and market conditions, including disruptions in financial markets and the deterioration of the underlying economic conditions in some countries and those conditions specific to Internet usage and online businesses;

 

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variable usage by customers with volume-based subscription contracts;

 

   

trade protection measures (such as tariffs and duties) and import or export licensing requirements;

 

   

fluctuations in currency exchange rates;

 

   

costs associated with defending intellectual property infringement and other claims; and

 

   

changes in government regulation affecting our business.

We believe that our quarterly revenue and operating results may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one quarter as an indication of future performance.

We cannot accurately predict subscription renewal rates and the impact these rates may have on our future revenue and operating results.

Our customers have no obligation to renew their subscriptions for our solution after the expiration of their initial subscription period, which is typically 36 months, and some customers have elected not to renew. In addition, our customers may renew at a lower contract value or renew for shorter contract lengths. Our renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our service, customers’ ability to continue their operations and spending levels, decreases in usage by our customers, competitive offerings and deteriorating general economic conditions. If our customers do not renew their subscriptions for our solutions or reduce the value of their subscription at the time of renewal, our revenue may grow more slowly than expected or decline, and our results of operations will be adversely affected.

We may not be able to increase sales to our existing customers or to new customers, which could negatively impact our future revenue and financial results.

A part of our growth strategy is to sell additional solutions to existing customers and to encourage these customers to extend the deployment of previously acquired solutions. If our customers are unsatisfied with, or unsuccessful at increasing the adoption of, the existing solutions they have purchased from us, or if we are unsuccessful at marketing and selling additional solutions to them, our revenue from these customers may not increase. Our growth strategy also includes selling our solutions to new customers. If we do not increase our sales to existing customers or to new customers, our revenue may grow more slowly than expected or decline, and our results of operations will be adversely affected.

Because we recognize revenue from subscriptions over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our operating results.

We generally recognize subscription revenue from customers ratably over the terms of their subscription agreements, which are typically 36 months, although terms can range from one to 60 months or longer. As a result, most of the subscription revenue we report in each quarter is related to subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not be fully reflected in our subscription revenue results for that quarter and will negatively affect our subscription revenue growth rate or subscription revenue in future quarters. Our subscription model also makes it difficult for us to rapidly increase our subscription revenue through additional sales in any period, as subscription revenue from new customers is subject to multi-month implementation and thereafter must be recognized over the applicable subscription term. In addition, we may be unable to adjust our cost structure to reflect unanticipated changes in revenue.

 

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We have had a material weakness in the past. If we fail to establish and maintain effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect investor views of us and the value of our common stock.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. A material weakness is a deficiency, or a combination of deficiencies, that creates a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the audits of our financial statements for the years ended March 31, 2010, 2011, 2012, and the quarter ended June 30, 2012, we concluded there was a material weakness in the design and operating effectiveness of our internal control over financial reporting.

The material weakness resulted from a lack of sufficient focus and control consciousness by our management on the design and documentation of control activities over the financial accounting and reporting processes necessary to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements as a stand-alone entity.

We have implemented changes in our internal control over financial reporting which we believe have allowed us to remediate the material weakness to a significant deficiency as of March 31, 2013. A significant deficiency is a deficiency, or a combination of deficiencies, that creates a reasonable possibility that a misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We continue taking steps that we believe address the significant deficiency, including the development and implementation of governance and financial policies, improved processes, documented procedures a formal, documented financial risk assessment and hiring additional personnel. At this time, we cannot assure you that the measures we have taken will be effective in mitigating or preventing significant deficiencies or material weaknesses in our internal control over financial reporting in the future. If we fail to effectively remediate deficiencies in our control environment or are unable to implement and maintain effective internal control over financial reporting to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or to report them within the timeframes required by law or exchange regulations.

We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, control deficiencies, including material weaknesses and significant deficiencies, in addition to the control deficiency discussed above, may have been identified. The SEC rules implementing Section 404 of the Sarbanes-Oxley Act do not require our management to provide an annual management report on the effectiveness of our internal control over financial reporting until the second annual report after we become a public company. As discussed above, we have in the past identified a material weakness in our internal control over financial reporting, and, although we believe we have remediated the material weakness to a significant deficiency, we cannot assure you that there will not be other material weaknesses or significant deficiencies in our internal controls in the future.

In addition, we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and as such we may elect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act until we cease to be an “emerging growth company.” At such time, which could begin as late as our annual report on Form 10-K for the year ending March 31, 2019, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. If we are unable to comply with Section 404 or

 

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otherwise are unable to produce timely and accurate financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with exchange listing requirements. Any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

Economic uncertainties or slowdowns may reduce demand for our solutions, which may have a material adverse effect on our revenue and operating results.

Our revenue and profitability depend on the overall demand for our cloud-based services. We are unable to predict the likely duration and severity of the current adverse economic conditions in the U.S. and other countries, particularly in Europe, but the longer the duration, the greater risks we face in operating our business. Economic uncertainties over the last few years have caused companies to reassess their spending for technology projects. We cannot assure you that current economic conditions, worsening economic conditions or prolonged poor economic conditions will not have a significant adverse impact on the demand for our solutions, and consequently, on our results of operations.

Our sales cycle can be long and unpredictable, particularly with respect to large enterprises. As a result, our sales are difficult to predict and may vary from quarter to quarter, which may cause our operating results to fluctuate significantly.

The timing of our sales is difficult to predict. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our platform. Customers, especially large enterprises, often undertake a prolonged evaluation process, which frequently involves not only our solutions, but also those of our competitors. As a result of these factors, new sales opportunities may require us to devote significant sales support to individual customers and, thus, to incur substantial costs. In addition, decisions to purchase our solution are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our results could fall short of public expectations and our business, operating results and financial condition could be materially adversely affected.

Our solutions are complex and may include multiple dependencies that may cause our customers difficulty in implementing our solutions successfully or prolong the implementation process, which could negatively impact our future revenue and financial results.

Due to the scope and complexity of the solutions that we provide, our implementation cycle can be lengthy and unpredictable. Implementation of our solutions for new customers requires customization and integration with the customer’s existing computer systems and software programs, and those of their partners. This process can be complex, time-consuming and expensive for our customers and can result in delays in implementation and deployment of our solutions. As a result, some of our customers have had, and may in the future have, difficulty implementing our solutions successfully or otherwise achieving the expected benefits of our solutions. Additionally, while a customer may decide to purchase our solutions and services, the customer or its partners may require us to delay the implementation of our solutions due to their scheduling, resource or budgetary constraints.

Delayed or ineffective implementation of our solutions may limit our future sales opportunities, reduce revenue and net income, cause customer dissatisfaction, harm our reputation or cause non-payment issues due to any of the following events:

 

   

The withholding of cash payments or cancellation of contracts if we fail to meet our implementation commitments, the customers have financial difficulties or change strategy, or the functionality delivered is not acceptable to the customers or their partners. We are particularly susceptible to this with respect to arrangements where payments are scheduled to occur later in the engagement;

 

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The cancellation or scaling back of one or more of our larger implementation projects which could have a material adverse impact on our reputation and future revenue; or

 

   

An inability to recognize subscription and support revenue due to delays in the launch date of the customer’s access to our production environment.

Competition from current competitors and new market entrants, as well as from internally developed technologies, could adversely affect our ability to sell our solutions and related services.

We sell our platform in an extremely competitive environment characterized by rapid technological change, shifting customer needs and frequent introductions of new products and services. We believe that the key competitive factors in our market include: security, scalability, speed of implementation, ability to enable users to maintain regulatory compliance, features and functionality, ability to meet customer service level requirements and price. If we are less successful at addressing one or more of these factors than our competitors, we may lose market share which could have a material adverse effect on our business, financial condition and operating results.

We compete with a wide range of established companies in a variety of different markets. In certain markets we compete with system integrators, such as International Business Machines, or IBM, Hewlett-Packard and Dell, cloud-based platform vendors, such as Salesforce.com and Microsoft Azure, and business-to-business integration and data exchange vendors, such as GXS and Sterling Commerce, a division of IBM, all of whom have substantially greater name recognition and resources than we do. Our competition often subscribe to or license other cloud-based platforms and third-party solutions to solve their customers’ specific business problems. Certain cloud-based platform vendors also offer development resources and consulting services that allow them to customize their platform to the customer’s requirements. We face other specialized competitors in our current vertical markets and may face new competitors as we expand into new vertical markets. These competitors may be more efficient and successful in penetrating the market for cloud-based services then we are. We also encounter competition from technologies developed by the in-house information technology departments of our customers and potential customers. If we fail to compete successfully, our operating results and financial condition will be materially adversely affected.

If we fail to penetrate new vertical markets, our business will suffer.

To date, we have concentrated our development efforts primarily in the automotive, healthcare and energy markets. While we anticipate that the substantial majority of our revenue will continue to be derived from these markets for the foreseeable future, we intend to penetrate additional vertical markets. Our success in our existing vertical markets depends on our deep understanding of these industries. In order to penetrate new vertical markets, we will need to develop a similar understanding of those new industries and the associated business challenges faced by participants in them. Developing this level of understanding may require substantial investments of time and resources and we may not be successful. If we fail to penetrate these new vertical markets, our revenue may grow at a slower rate than we anticipate and our financial condition could suffer.

If we do not effectively expand and train our sales force, we may be unable to add new customers or increase sales to our existing customers and our business will be harmed.

We continue to be substantially dependent on our sales force to obtain new customers and to sell additional solutions to our existing customers. We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and, in most cases, take significant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to

 

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do business. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in acquiring new customers or increasing sales to our existing customer base, our business will be harmed.

If we fail to manage our sales and distribution channels effectively or if our partners choose not to market and sell our solutions to their customers, our operating results could be adversely affected.

We derived approximately 5%, 3% and 1% of our revenue for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively, from sales of our solutions through our channel partner, and we anticipate that channel partners will be responsible for an increasing portion of our sales in the future, in particular for any new vertical markets we may pursue. In order to scale our channel program to support growth in our business, it is important that we help our partners enhance their ability to independently sell and deploy our solutions. We may be unable to successfully expand and improve the effectiveness of our channel sales program.

We expect that agreements with channel partners will be generally non-exclusive and that channel partners may enter into strategic relationships with our competitors or may be competitors themselves. Further, we expect that many channel partners will have multiple strategic relationships and may not regard us as significant for their businesses. Channel partners may terminate their respective relationships with us with limited or no notice and with limited or no penalty, pursue other partnerships or relationships, or attempt to develop or acquire technologies or services that compete with our solutions. Channel partners may also impair our ability to enter into other desirable strategic relationships.

If channel partners do not effectively market and sell our solutions, if they choose to place greater emphasis on technologies of their own or those offered by our competitors, or if they fail to meet the needs of our customers, our ability to grow our business and sell our solutions may be adversely affected. Similarly, the loss of a substantial number of channel partners, and our possible inability to replace them, the failure to recruit additional channel partners, any reduction or delay in their sales of our solutions, or any conflicts between channel sales and our direct sales and marketing activities could materially and adversely affect our results of operations.

We provide service level commitments to our customers, and our failure to meet the stated service levels could significantly harm our financial results and our reputation.

Our customer agreements provide that we maintain certain service level commitments to our customers relating primarily to functionality, network uptime and critical infrastructure availability. For example, our service level agreements generally require that our solutions are available up to 99.5% of the time. If we are unable to meet the stated service level commitments, we may be contractually obligated to provide customers with credits. Additionally, if we fail to meet our service level commitments a specified number of times within a given time frame or for a specified duration, our customers may terminate their agreement with us. As a result, a failure to deliver services for a relatively short duration could cause us to issue credits to a large number of affected customers or result in the loss of customers. In addition, we cannot assure you that our customers will accept these credits or termination rights in lieu of other legal remedies that may be available to them. Our failure to meet our commitments could also result in substantial customer dissatisfaction or loss. If we fail to meet our service level commitments to our customers, the resulting issuance of credits, loss of customers or other potential liabilities could significantly and adversely impact our financial results.

If our security measures are breached or unauthorized access to data is otherwise obtained, our solutions may be perceived as not being secure, customers may reduce the use of, or stop using, our solutions and we may incur significant liabilities.

Our operations enable the exchange of, and access to, sensitive information, and security breaches could result in the loss of this information, litigation, indemnity obligations and other liability. While we have security

 

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measures in place, if our security measures are breached as a result of third-party action, employee error or otherwise, our reputation could be significantly damaged, our business may suffer and we could incur substantial liability. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new customers and increase engagement by existing customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our operating results.

Because our platform is often used to collect and store personal information, privacy concerns could result in additional cost and liability to us or inhibit sales of our solutions.

Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the U.S., these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Health Information Technology for Economic and Clinical Health Act (HITECH), state breach notification laws and other state privacy and data security laws. Outside of the U.S., these privacy and data security requirements include rules and regulations promulgated under the European Union data protection directive. Virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply.

In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our solutions. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.

Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. Privacy concerns, whether valid or not valid, may inhibit market adoption of our solutions particularly in certain industries and foreign countries.

Our solutions are hosted at multiple data centers around the world. Any disruption of service at our facilities or our third-party hosting providers could interrupt or delay our customers’ access to our solutions, which could harm our operating results.

The ability of our customers to access our solutions is critical to our business. We currently serve customers from data centers located in Chicago, Tokyo, Frankfurt and Shanghai and maintain a backup data recovery center in our Detroit headquarters. We cannot assure you that the measures we have taken to eliminate single points of failure in the primary data center located in Chicago and our data recovery center located in Detroit will be effective to prevent or minimize interruptions to our operations. Our facilities are vulnerable to interruption or damage from a number of sources, many of which are beyond our control, including, without limitation:

 

   

extended power loss;

 

   

telecommunications failures from multiple telecommunication providers;

 

   

natural disaster or an act of terrorism;

 

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software and hardware errors, or failures in our own systems or in other systems;

 

   

network environment disruptions such as computer viruses, hacking and similar problems in our own systems and in other systems;

 

   

theft and vandalism of equipment; and

 

   

actions or events caused by or related to third parties.

We attempt to mitigate these risks through various business continuity efforts, including redundant infrastructure, 24x7x365 system activity monitoring, backup and recovery procedures, use of a secure off-site storage facility for backup media, separate test systems and change management and system security measures, but our precautions may not protect against all potential problems. Our data recovery center is equipped with physical space, power, storage and networking infrastructure and Internet connectivity to support the solutions we provide in the event of the interruption of services at our primary data center. Even with this data recovery center, however, our operations would be interrupted during the transition process should our primary data center experience a failure.

Disruptions at our data centers could cause disruptions in our services and data loss or corruption. This could damage our reputation, cause us to issue credits to customers, subject us to potential liability or costs related to defending against claims or cause customers to terminate or elect not to renew their agreements, any of which could negatively impact our revenue.

Savvis Inc., or Savvis, currently hosts the majority of our solutions. We cannot guarantee that we will be able to continue to receive reasonable pricing and terms from Savvis or our other hosting providers in the future. Failure to negotiate reasonable terms could result in increased costs, which would negatively impact our financial condition. If Savvis stops providing services or we fail to negotiate terms on an acceptable basis, we could be required to move our solutions to other third-party hosting providers, which would be a distraction to our business, could increase costs and could cause a disruption in our services.

We could be sued for contract claims, and such lawsuits, if successful, may have an adverse effect on our financial results.

General errors, defects, inaccuracies or other performance problems in our solutions or inaccuracies in or loss of the data we provide to our customers could result in financial or other damages to our customers, which damages could prompt them to sue us. We cannot assure you that the limitations of liability set forth in our contracts would be enforceable or would otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors and omissions, in amounts and under terms that we believe are appropriate. We cannot assure you that this coverage will continue to be available on terms acceptable to us, or at all, or in sufficient amounts to cover one or more large contract claims, or that the insurer will not deny coverage for any future claim. The successful assertion of one or more large contract claims against us that exceeds available insurance coverage, could have a material adverse effect on our business, prospects, financial condition and results of operations.

If we are unable to manage our expected growth, our performance may suffer.

Our business has grown rapidly, and if we are successful in executing our business strategy, this growth will continue as we expand our offerings and seek to penetrate new vertical markets. We will need to continue to expand our managerial, operational, financial and other systems and resources to manage our operations, continue our research and development activities and increase our sales force. It is possible that our existing management, finance and development personnel, systems and facilities may not be adequate to support this future growth. Our need to effectively manage our operations, growth and solutions requires that we continue to develop more robust business processes and improve our systems and procedures in each of these areas and to attract and retain sufficient numbers of talented employees. We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our research, development and growth goals.

 

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Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may cause our business to suffer.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. Increased enforcement of existing laws and regulations, as well as any laws, regulations, or changes that may be adopted or implemented in the future, could limit the growth of the use of public cloud applications or communications generally, result in a decline in the use of the Internet and the viability of Internet-based applications such as our cloud-based solutions and reduce the demand for our platform.

Changes in federal law or regulation could adversely impact our Physician Quality Reporting System offering.

Revenue from our Physician Quality Reporting System, or PQRS, offering represented approximately 1% and 2% of our total revenue for the years ended March 31, 2013 and 2012, respectively, and 5% and 6% of our total revenue during the quarters ended March 31, 2013 and 2012, respectively. PQRS revenue is recognized as performed at the time of the annual submission to the government during our fourth quarter ending March 31. PQRS is a voluntary federal program that incentivizes certain quality care data reporting by healthcare professionals. As a federal program, a change in federal law or regulation could alter or eliminate PQRS, which, in turn, could adversely impact our revenue.

Our platform must integrate with a variety of operating systems, software applications and hardware that are developed by others. If we are unable to devote the necessary resources to ensure that our solutions interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience reduced demand for our offerings.

Our platform must integrate with a variety of network, hardware and software platforms, and we will need to continuously modify and enhance our platform to adapt to changes in Internet-related hardware, software, communication, browser and database technologies. Any failure of our solutions to operate effectively with future platforms and technologies could reduce the demand for our platform, result in customer dissatisfaction and harm our business. If we are unable to respond to these changes in a timely, cost-effective manner, our solutions may become less marketable and less competitive or obsolete and our operating results may be negatively impacted. In addition, an increasing number of individuals in organizations are utilizing devices other than personal computers, such as mobile phones and other handheld devices, to access the Internet and corporate resources and conduct business. If we cannot effectively make our platform available on these mobile devices, we may experience difficulty attracting and retaining customers.

We rely on third-party software that may be difficult to replace or which could cause errors or failures of our service that could lead to lost customers or harm to our reputation.

We rely on software licensed from third parties to offer our solutions. This software may not continue to be available to us on commercially reasonable terms. Any loss of the right to use any of this software could result in delays in the provisioning of our service until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our solutions, which could harm our business.

The loss of certain key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse effect on our business.

Our success depends in part upon the continued service of our key senior management and technical personnel. Such personnel are employed at-will and may leave Covisint at any time. Our success also depends on our continuing ability to attract and retain highly-qualified technical, managerial and sales personnel. The market

 

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for professional services and software solutions personnel has historically been, and we expect that it will continue to be, intensely competitive. We cannot assure you that we will continue to be successful in attracting or retaining such personnel. The loss of certain key employees or our inability to attract and retain other qualified employees could have a material adverse effect on our business.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success, and our business may be harmed.

We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow, we may find it difficult to maintain these important aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.

In recent years, there has been significant litigation in the U.S. and elsewhere involving patents and other intellectual property rights. Companies providing Internet-related products and services are increasingly bringing and becoming subject to suits alleging infringement, misappropriation or other violations of patents, copyrights, trademarks, trade secrets or other intellectual property rights. These risks have been amplified by an increase in the number of third parties whose sole or primary business is to assert such claims. We could incur substantial costs in prosecuting or defending any intellectual property litigation. Additionally, the defense or prosecution of claims could be time-consuming and could divert our management’s attention away from the execution of our business plan.

We cannot be certain that our solutions and services do not infringe the intellectual property rights of third parties. Claims of alleged infringement or misappropriation could be asserted against us by third parties in the future. We cannot be sure that we would prevail against any such asserted claim. In addition to possible claims with respect to our solutions, some of our solutions contain technology developed by and licensed from third parties, and we may likewise be susceptible to infringement or misappropriation claims with respect to these third-party technologies.

Moreover, any settlement or adverse judgment resulting from a claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. We cannot assure you that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, that we would be able to develop alternative technology on a timely basis, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected solution or service. In addition, we may be required to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us. An adverse determination could also prevent us from offering our products or services to others. Infringement claims asserted with or without merit against us may have an adverse effect on our business, financial condition and results of operations.

Our contracts with customers include contractual obligations to indemnify them against claims that our solutions infringe the intellectual property rights of third parties. The results of any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may force us to do one or more of the following:

 

   

participate in or pay the costs of the defense of such litigation;

 

   

cease selling or using solutions or services that incorporate the challenged technology;

 

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make substantial payments for costs or damages;

 

   

obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or

 

   

redesign those solutions or services to avoid infringement.

If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or costs could have a material adverse effect upon our business and financial results. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our technology in any subsequent litigation in which we are a named party. Moreover, such infringement claims with or without merit may harm our relationships with our existing customers and may deter future customers from subscribing to our solutions and related services on acceptable terms, if at all.

We may not be able to adequately protect our intellectual property rights and efforts to protect them may be costly and may substantially harm our business.

Our ability to compete effectively is dependent in part upon our ability to protect our intellectual property rights. While we hold an issued patent and a pending patent application covering certain elements of our technology, this patent and patent application, and, more generally, existing patent laws, may not provide adequate protection for portions of the technology that are important to our business. In addition, our pending patent application may not result in an issued patent. We have largely relied on copyright, trade secret and trademark laws, as well as generally relying on confidentiality procedures and agreements with our employees, consultants, customers and vendors, to control access to, and distribution of, technology, software, documentation and other confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain, use or distribute our technology without authorization. If this were to occur, we could lose revenue as a result of competition from products infringing or misappropriating our technology and intellectual property and we may be required to initiate litigation to protect our proprietary rights and market position.

U.S. patent, copyright, trademark and trade secret laws offer us only limited protection and the laws of some foreign countries do not protect proprietary rights to the same extent. Accordingly, defense of our trademarks and proprietary technology may become an increasingly important issue as we continue to expand our operations and solution development into countries that provide a lower level of intellectual property protection than the U.S. Policing unauthorized use of our trademarks and technology is difficult and the steps we take may not prevent misappropriation of the trademarks or technology on which we rely. If competitors are able to use our trademarks or technology without recourse, our ability to compete would be harmed and our business would be materially and adversely affected.

We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to determine the validity and scope of the rights of others. That litigation may not be ultimately successful and could result in substantial costs to us, the reduction or loss in intellectual property protection for our technology, the diversion of our management’s attention and harm to our reputation, any of which could materially and adversely affect our business and results of operations.

Confidentiality arrangements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

We have devoted substantial resources to the development of our technology, business operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality arrangements with our employees, licensees, independent contractors, advisers and customers. These arrangements, some of which were acquired through acquisitions, may not be effective to prevent

 

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disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we would not be able to assert trade secret rights against such parties. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our solutions by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We may be subject to damages resulting from claims that our employees or contractors, or we, have wrongfully used or disclosed alleged trade secrets of their former employers or other parties.

We could in the future be subject to claims that our employees or contractors, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or other parties. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our solutions, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of these parties. In addition, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to develop, market and support potential solutions or enhancements, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management.

Our use of “open source” software could negatively affect our ability to sell our services and solutions or protect our intellectual property and subject us to possible litigation.

A portion of the technology licensed from others by us and that we use to make our solutions available currently incorporates “open source” software, and we may incorporate open source software into our solutions in the future. Such open source software is generally licensed by its authors or other third parties under various open source licenses. Terms of many source licenses have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to offer our solutions. In that event, we could be required to seek licenses from third parties in order to continue offering our services, to re-engineer our products or to discontinue sales of our affected solutions, any of which could materially adversely affect our business. In addition, if we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software or source code of our proprietary software and that we license such modifications, alterations or source code under the terms of the particular open source license. If a third party were to allege that we had not complied with the conditions of one or more of these licenses, we could be:

 

   

required to defend against such allegations;

 

   

subject to significant damages;

 

   

enjoined from the sale of our solutions that contained the open source software;

 

   

required to comply with the conditions described above; or

 

   

required to discontinue our use of such open source software or the sale of our affected solutions in the event we could not maintain compliance with such licenses.

Any of the foregoing events could disrupt the distribution and sale of some of our solutions while forcing us to incur significant legal expenses.

 

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Additionally, the use of open source software can lead to greater risks than the use of third-party commercial software, as open source software does not come with warranties or other contractual protections regarding infringement claims or the quality of the code. From time to time, parties have asserted claims against companies that use open source software in their products and services, asserting that open source software infringes their intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights with respect to what we believe to be open source software. In such event, we could be required to seek licenses from third parties in order to continue using such software or offering certain of our solutions and services or to discontinue the use of such software or the sale of our affected solutions and services in the event we could not obtain such licenses, any of which could adversely affect our business, operating results and financial condition.

Our success depends in part on our ability to develop or acquire solution enhancements and new solutions, and we may not be able to timely develop or acquire new and enhanced solutions to satisfy changes in demand.

Our success depends in part on our ability to develop and market solution enhancements and new solutions that keep pace with continuing changes in technology and customer preferences. We may not be able to develop and market new or enhanced solutions in a timely or cost-effective manner or to develop and introduce solutions that satisfy customer requirements. Our solutions also may not achieve market acceptance or correctly anticipate technological changes. While we are continually searching for acquisition opportunities, we cannot assure you that we will continue to be successful in identifying, acquiring and developing solutions and technology. If any potential acquisition opportunities are identified, we cannot assure you that we will consummate and successfully integrate any such acquisitions and we cannot assure you as to the timing or effect on our business of any such acquisitions. Our failure to develop technological improvements or to adapt our solutions to technological change may, over time, have a material adverse effect on our business.

We may expand our business by acquiring or investing in other products, services, technologies or businesses, which may divert our management’s attention, result in dilution to our shareholders and consume resources that are necessary to sustain our business.

We may in the future acquire complementary products, services, technologies or businesses. We also may enter into relationships with other businesses to expand our portfolio of solutions or our ability to provide our solutions in foreign jurisdictions. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete these transactions may often be subject to conditions or approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close.

An acquisition, investment or new business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the acquired company’s technology is not easily adapted to be compatible with ours, or we have difficulty retaining the customers of any acquired business due to changes in management or other concerns. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for the development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown liabilities, including litigation against the companies we may acquire. For one or more of those transactions, we may:

 

   

issue additional equity securities that would dilute our shareholders;

 

   

use cash that we may need in the future to operate our business;

 

   

incur debt on terms unfavorable to us or that we are unable to repay or that may place burdensome restrictions on our operations;

 

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incur significant charges or substantial liabilities; or

 

   

become subject to adverse tax consequences, or substantial depreciation, deferred compensation or other acquisition-related accounting charges.

Any of these risks could harm our business and operating results.

We may be exposed to liabilities if it is determined that we have not complied with Section 409A of the Code.

We have attempted to structure the compensation arrangements with our employees so that they either comply with, or are exempt from, Section 409A of the Code, which sets forth the rules governing deferred compensation arrangements, including by amending certain option award agreements. If it is determined that these arrangements are neither compliant with, nor exempt from, Section 409A of the Code, we may be subject to liabilities and costs, including penalties for failing to report deferred compensation arrangements under Section 409A of the Code and to withhold taxes payable by our employees, and we may be required to pay the amount of taxes we should have withheld and related interest. We have also committed to reimburse those of our employees who have made certain amendments to their compensation arrangements for certain personal negative tax implications if the amended compensation arrangements are determined to be neither compliant with, nor exempt from, Section 409A of the Code. Any amounts so payable by us could adversely impact our financial condition.

Unanticipated changes in our effective tax rate or exposure to additional income tax liabilities could have a material impact on our financial results and could increase the volatility of those results.

Due to the global nature of our business, we are subject to income taxes in both the United States and several foreign jurisdictions. In the event we generate net income in certain jurisdictions but incur net losses in other jurisdictions, we generally cannot offset the income from one jurisdiction with the loss from another, which could increase our effective tax rate. Furthermore, significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business there are many transactions and calculations for which the ultimate tax determination is uncertain. Although we believe our tax positions are reasonable, we are subject to routine corporate income tax audits in the jurisdictions in which we operate. Our provision for income taxes includes amounts intended to satisfy income tax assessments that are likely to result from the examination of our tax returns that have been filed in these jurisdictions. The amounts ultimately paid upon resolution of such examinations could be materially different from the amounts included in the provision for income taxes and could have a material impact on our financial position, results of operations or cash flows in the period or periods for which that determination is made.

We recognize reserves for uncertain tax positions through tax expense for estimated exposures related to our current and historical tax positions. We evaluate the need for reserves for uncertain tax positions on a quarterly basis and any change in the amount is recorded in our results of operations, as appropriate. It could take several years to resolve certain of these reserves for uncertain tax positions.

Additionally, one of the components that we evaluate in establishing the provision for income taxes is the realization of our deferred tax assets. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. Changes in estimates of projected future operating results or in assumptions regarding our ability to generate future taxable income could result in increases to our total valuation allowance and tax expense that would reduce net income.

We earn a portion of our income, and accumulate a portion of cash flow, in foreign jurisdictions. Any repatriation of funds currently held in foreign jurisdictions may result in a higher effective tax rate and larger incremental cash tax payments. In addition, there have been proposals to amend U.S. tax laws that would

 

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significantly impact the manner in which U.S. companies are taxed on foreign earnings. Although we cannot predict whether or in what form any legislation will pass, if enacted, such legislation could have an adverse impact on our U.S. tax expense and cash flows.

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us or Compuware, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

We are exposed to exchange rate risks on foreign currencies and to other international risks that may adversely affect our business and results of operations.

Approximately 13.6%, 14.6% and 14.2% of our total revenue for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively, was derived from foreign operations, and we expect that foreign operations will continue to generate a significant percentage of our total revenue. We currently have foreign sales denominated in the local currency of approximately fifteen foreign countries, and our solutions and services may be priced in the currency of the country in which they are sold. Changes in the exchange rates of foreign currencies or exchange controls may adversely affect our results of operations. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.

The international business environment is also subject to other risks, including the need to comply with foreign and U.S. laws and the greater difficulty of managing business operations overseas. In addition, our foreign operations are affected by general economic conditions in the international markets in which we do business. A worsening of economic conditions in these markets could cause customers to delay or forego decisions to acquire or renew subscriptions or to reduce their requirements for services.

We face many risks associated with our plans to expand our international presence, which could harm our business, financial condition and operating results.

We currently operate internationally and intend to expand into additional international markets. In some international markets, customer preferences and buying behaviors may be different, and we may use business or pricing models that are different from our traditional subscription model to provide our platform to customers in those markets or we may be unsuccessful in implementing the appropriate business model. Our revenue from new foreign markets may not exceed the costs of establishing, marketing and maintaining our offerings in those markets. In addition, the current instability in the euro zone could have many adverse consequences on our international operations, including sovereign default, liquidity and capital pressures on euro zone financial institutions, reducing the availability of credit and increasing the risk of financial sector failures and the risk of one or more euro zone member states leaving the euro, resulting in the possibility of capital and exchange controls and uncertainty about the impact of contracts and currency exchange rates.

 

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In addition, conducting our operations in a new international market may subject us to new risks. These risks include:

 

   

localization of our solutions, including the addition of the local language and adaptation to new local practices;

 

   

strong local competitors;

 

   

the cost and burden of complying with, lack of familiarity with, and unexpected changes in, local legal and regulatory requirements;

 

   

fluctuations in local currency exchange rates or restrictions on local currency;

 

   

potentially adverse tax consequences, including the complexities of transfer pricing, value-added or other tax systems, double taxation and restrictions and/or taxes on the repatriation of earnings;

 

   

hiring and training a local sales force;

 

   

development of a local marketing strategy;

 

   

dependence on third parties, including commercial partners with whom we do not have extensive experience;

 

   

increased financial accounting and reporting burdens and complexities;

 

   

political, social and economic instability, terrorist attacks and security concerns in general; and

 

   

reduced or varied protection for intellectual property rights in some countries.

Operating in new international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

Our solutions contain encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign countries, restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements could result in financial penalties or other sanctions under the U.S. export regulations, including restrictions on future export activities, which could harm our business and operating results. Regulatory restrictions could impair our access to technologies needed to improve our solutions and may also limit or reduce the demand for our solutions outside of the U.S.

Our operating results may be harmed if we are required to collect sales, services or other related taxes for our solutions in jurisdictions where we have not historically done so.

We do not believe that we are required to collect sales, use, services or other similar taxes from our customers in certain jurisdictions. However, one or more countries or states may seek to impose sales, use, services, or other tax collection obligations on us, including for past sales. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on the sale of our solutions could result in substantial tax liabilities for past sales and decrease our ability to compete for future sales. Each country and each state has different rules and regulations governing such taxes and these rules and regulations are subject to varying interpretations that may change over time. We review these rules and regulations periodically and, when we believe such taxes apply in a particular jurisdiction, we comply with their rules and regulations. We cannot assure you that we will not be subject to such taxes or related interest and penalties for past sales in jurisdictions where we presently believe such taxes are not due. We reserve estimated amounts with respect to such taxes on our financial statements but we cannot be certain that we have made sufficient reserves to cover such tax liabilities or such taxes.

Providers of goods or services are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should

 

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have, but have not, been paid with respect to our solutions, we may be liable for past taxes in addition to being required to collect sales or similar taxes in respect of our solutions going forward. Liability for past taxes may also include very substantial interest and penalty charges. Our customer contracts generally provide that our customers must pay all applicable sales and similar taxes. Nevertheless, customers may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes or we may determine that it would not be feasible to seek reimbursement. If we are required to collect and pay back taxes and the associated interest and penalties and if our customers do not reimburse us for all or a portion of these amounts, we will have incurred unplanned expenses that may be substantial. Moreover, imposition of such taxes on our solutions going forward may effectively increase the cost of such solutions to our customers.

Many states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar taxes as well as the circumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals have been introduced in the U.S. Congress that would provide states with additional authority to impose such taxes. The tax laws of foreign jurisdictions may also change. Accordingly, it is possible that either federal or state legislative changes or foreign tax law changes may require us to collect additional sales and similar taxes from our customers in the future.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our operating results.

A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices by tax or other regulatory authorities may harm our operating results or the way we conduct our business.

If Compuware’s distribution of our common stock in the Tax-Free Distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, Compuware and its shareholders could be subject to significant tax liability and, in certain circumstances, we could be required to indemnify Compuware for material taxes pursuant to indemnification obligations under the tax sharing agreement.

Although Compuware has no obligation to complete the Tax-Free Distribution, on January 25, 2013, Compuware announced that it plans to distribute its shares of our common stock within one year following this offering. Compuware has submitted to the IRS a request for a private letter ruling, substantially to the effect that, among other things, the Tax-Free Distribution will qualify as a tax-free transaction for U.S. federal income tax purposes under Section 355 of the Code. The private letter ruling and the tax opinion that Compuware expects to receive from its counsel will rely on certain representations, assumptions and undertakings, including those relating to the past and future conduct of our business, and neither the private letter ruling nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter ruling would not address all the issues that are relevant to determining whether the distribution will qualify as a tax-free transaction. Notwithstanding the private letter ruling and opinion, the IRS could determine the distribution should be treated as a taxable transaction for U.S. federal income tax purposes if, among other reasons, it determines any of the representations, assumptions or undertakings that were included in the request for the private letter ruling are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the private letter ruling. If the Tax-Free Distribution fails to qualify as a tax-free transaction, in general, Compuware would be subject to tax as if it had sold our common stock in a taxable sale for its fair market value, and Compuware shareholders who receive shares of our common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

 

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Even if the Tax-Free Distribution would otherwise qualify as a tax-free transaction for U.S. federal income tax purposes, such distribution may be taxable to Compuware if Section 355(d) of the Code or Section 355(e) of the Code applies to the distribution. Section 355(d) of the Code may apply to the distribution if any person purchases 50% or more of Compuware’s stock, by vote or value, during the five-year period ending on the date of any distribution of our shares by Compuware to its shareholders. Section 355(e) of the Code will apply to the distribution if 50% or more of our stock or of Compuware’s stock, by vote or value, is acquired by one or more persons, other than the holders of Compuware stock who received our stock in the distribution, acting pursuant to a plan or a series of related transactions that includes the distribution. Any shares of our stock or of the stock of Compuware acquired directly or indirectly within two years before or after the Tax-Free Distribution generally are presumed to be part of such a plan unless that presumption can be rebutted.

Once Compuware accomplishes the Tax-Free Distribution, we have agreed in our tax sharing agreement with Compuware not to take certain actions, such as stock issuances, redemptions, certain stock repurchases, amending our articles of incorporation or other organizational documents to affect the voting rights of our stock, mergers or consolidations, liquidations or partial liquidations, asset sales or contributions, or other actions or transactions that could jeopardize the reorganization status of the Tax-Free Distribution within the two years following the Tax-Free Distribution without first obtaining the opinion of tax counsel or a private letter ruling to the effect that such actions will not result in the Tax-Free Distribution failing to qualify as a tax-free transaction. In addition, we generally would be responsible for, among other things, certain taxes imposed under the consolidated return regulations and any taxes (including taxes that could be imposed on Compuware under Section 355(e) of the Code) resulting from the failure of the Tax-Free Distribution to qualify as a tax-free transaction to the extent such taxes are attributable to, or result from, certain actions or failures to act by us or certain transactions involving us following the Tax-Free Distribution. We also generally would be responsible for 50% of such taxes to the extent such taxes are not attributable to, or do not result from, certain actions or failures to act by either us or Compuware. We would, however, have no responsibility for taxes attributable to the failure of the Tax-Free Distribution to qualify as a tax-free transaction due to a sale or change in ownership of Compuware. For a more detailed discussion, see “Certain Relationships and Related Party Transactions—Relationship with Compuware—Tax Sharing Agreement.”

Many of our competitors are not subject to similar restrictions and may issue their stock to complete acquisitions, expand their product offerings and speed the development of new technology. Therefore, these competitors may have a competitive advantage over us. Substantial uncertainty exists on the scope of Section 355(e) of the Code, and we may have undertaken, may contemplate undertaking or may otherwise undertake in the future transactions that may cause Section 355(e) of the Code to apply to the distribution notwithstanding our desire or intent to avoid application of Section 355(e) of the Code. Accordingly, we cannot provide you any assurance that we will not have tax-related obligations related to the application of Section 355(e) of the Code to the Tax-Free Distribution.

Acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers, which could materially and adversely affect our business, financial condition and operating results.

Natural disasters, acts of war, terrorist attacks and the escalation of military activity in response to such attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions and job losses. Such events may have an adverse effect on the economy in general. Moreover, the potential for future terrorist attacks and the national and international responses to such threats could affect the business in ways that cannot be predicted. The effect of any of these events or threats could have a material adverse effect on our business, financial condition and results of operations.

 

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Risks Related to Our Relationship with Compuware

As long as Compuware controls us, your ability to influence matters requiring shareholder approval will be limited.

After this offering, Compuware will own 30,003,000 shares of our common stock, representing approximately 82.4% of the total outstanding shares of our common stock. For so long as Compuware or its successor-in-interest beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of our outstanding common stock, Compuware or such successor will be able to elect all of the members of our board of directors. Currently, three members of our board of directors, Robert C. Paul, William O. Grabe and Ralph J. Syzgenda, are members of the Compuware board of directors, and Mr. Paul is the Chief Executive Officer of Compuware.

Our historical financial information as a business segment of Compuware may not be representative of our results as an independent public company.

The historical financial information we have included in this prospectus does not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent entity during the historical periods presented. The historical costs and expenses reflected in our financial statements include a charge for certain corporate functions historically provided by Compuware, including tax, accounting, treasury, legal and human resources services. The historical financial information is not necessarily indicative of what our results of operations, financial position, cash flows or costs and expenses will be in the future. We have not made pro forma adjustments to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our transition to becoming a public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with being a publicly traded, stand-alone company.

If Compuware experiences a change in control, our current plans and strategies could be subject to change.

On December 17, 2012, Compuware received an offer from Elliott Management Corp, or Elliott Management, an investment firm currently owning approximately 8.7% of Compuware’s outstanding stock, to acquire all of the outstanding shares of Compuware. Although the Compuware board of directors determined that Elliott Management’s proposal significantly undervalued Compuware and was not in the best interest of its shareholders, the Compuware board announced that it would carefully review and evaluate any credible offer it receives for the acquisition of Compuware shares and has agreed to provide certain non-public information to Elliott Management under the terms of a confidentiality agreement. The Compuware board also announced that it would take actions to create value for its shareholders, including its intention to distribute our common stock to Compuware shareholders. It is impossible to predict whether a credible, or unsolicited, offer to acquire Compuware will be made in the future, and whether a transaction would be consummated with respect to such an offer.

As long as Compuware controls us, it will have significant influence over our plans and strategies, including strategies relating to marketing and growth. In the event Compuware experiences a change in control, a new Compuware owner may attempt to cause us to revise or change the plans and strategies, as well as the agreements between Compuware and us, described in this prospectus. A new owner may also have different plans with respect to the contemplated distribution of our common stock to Compuware shareholders, including not effecting such a distribution.

As noted above in “Risks Relating to our Business and Our Industry—If Compuware’s distribution of our common stock in the Tax-Free Distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, Compuware and its shareholders could be subject to significant tax liability and, in certain circumstances, we could be required to indemnify Compuware for material taxes pursuant to indemnification obligations under the tax sharing agreement.”, the acquisition of either Compuware or us could result in the taxability of the Tax-Free Distribution.

 

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Our ability to operate our business effectively may suffer if we are unable to cost-effectively establish our own administrative and other support functions in order to operate as a stand-alone company after the expiration of our shared services and other intercompany agreements with Compuware.

As an operating division of Compuware, we relied on administrative and other resources of Compuware, including information technology, accounting, finance, human resources and legal, to operate our business. In connection with this offering, we have entered into various service agreements to retain the ability for specified periods to use these Compuware resources. See “Certain Relationships and Related Party Transactions.” These services may not be provided at the same level as when we were an operating division within Compuware, and we may not be able to obtain the same benefits that we received prior to this offering. These services may not be sufficient to meet our needs, and after our agreements with Compuware expire (which will generally occur no later than upon completion of the Tax-Free Distribution), we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently have with Compuware. We will need to create our own administrative and other support systems or contract with third parties to replace Compuware’s systems. In addition, we have received informal support from Compuware which may not be addressed in the agreements we have entered into with Compuware; the level of this informal support may diminish as we become a more independent company. Any failure or significant downtime in our own administrative systems or in Compuware’s administrative systems during the transitional period could result in unexpected costs, impact our results and/or prevent us from paying our suppliers or employees and performing other administrative services on a timely basis.

After this offering, we will be a smaller company relative to Compuware, which could result in increased costs because of a decrease in our purchasing power. We may also experience decreased revenue due to difficulty maintaining existing customer relationships and obtaining new customers.

Prior to this offering, we were able to take advantage of Compuware’s size and purchasing power in procuring goods, technology and services, including insurance, employee benefit support and audit and other professional services. We are a smaller company than Compuware, and we cannot assure you that we will have access to financial and other resources comparable to those available to us prior to the offering. As a stand-alone company, we may be unable to obtain office space, goods, technology and services at prices or on terms as favorable as those available to us prior to this offering, which could increase our costs and reduce our profitability. Our future success depends on our ability to maintain our current relationships with existing customers, and we may have difficulty attracting new customers.

In order to preserve the ability for Compuware to distribute its shares of our common stock on a tax-free basis, we may be prevented from pursuing opportunities to raise capital, to effectuate acquisitions or to provide equity incentives to our employees, which could hurt our ability to grow.

Beneficial ownership of at least 80% of the total voting power and 80% of each class of nonvoting capital stock is required in order for Compuware to effect the Tax-Free Distribution of Covisint or certain other tax-free transactions. We have agreed that, so long as the Tax-Free Distribution could, in the reasonable discretion of Compuware, be effectuated, we will not knowingly take or fail to take, or permit any Covisint affiliate to knowingly take or fail to take, any action that could reasonably be expected to preclude Compuware’s ability to effectuate the Tax-Free Distribution. As a result, we may be precluded from pursuing certain growth initiatives, including the creation of a class of non-voting stock, unless Compuware were to purchase at least 80% of such class of shares of any subsequent equity offering.

The Tax-Free Distribution may not occur.

Although Compuware has announced its intention to consummate a Tax-Free Distribution within one year following this offering and has submitted a private letter ruling request to the IRS in connection with such announced Tax-Free Distribution, it may abandon or change the structure of the Tax-Free Distribution if it determines, in its sole discretion, that the Tax-Free Distribution is not in the best interest of Compuware or its shareholders. Such determination may take into account, without limitation, the potential impact on the Tax-Free Distribution of a change in control of Compuware.

 

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Although we have entered into a tax sharing agreement with Compuware under which our tax liabilities effectively will be determined as if we were not part of any consolidated, combined or unitary tax group of Compuware and/or its subsidiaries, we nonetheless could be held liable for the tax liabilities of other members of these groups.

Until December 31, 2012, the Covisint business operated as a division of Compuware and, as a division, our operations were included in the tax returns filed by Compuware’s consolidated group, or Consolidated Group, for U.S. federal income tax purposes, as well as in certain consolidated, combined or unitary groups that include Compuware and/or certain of its subsidiaries, or Combined Group, for taxes other than U.S. federal income taxes. Effective January 1, 2013, Compuware made a contribution to us of substantially all of the assets and liabilities relating to our business and, as a member of the Consolidated Group, our operations have been included in the Consolidated Group since that date for tax periods or portions thereof commencing after such contribution in which Compuware owned at least 80% of the total voting power and value of our outstanding stock. Effective that date, we also entered into a tax sharing agreement with Compuware. Pursuant to the tax sharing agreement, we and Compuware generally will make payments to each other such that, with respect to tax returns for any taxable period in which we or any of our subsidiaries are included in the Consolidated Group or any Combined Group, the amount of taxes to be paid by us will be determined, subject to certain adjustments, as if we and each of our subsidiaries included in such Consolidated Group or Combined Group filed our own consolidated, combined, unitary or separate tax return. The tax sharing agreement also provides for the allocation between Compuware and Covisint of compensation-related deductions attributable to employee stock options and restricted stock granted to employees of the Covisint business. Compuware may be required to make payments to us in the event that Compuware realizes the tax benefits of such compensation-related deductions.

We intend to be included in the Consolidated Group immediately following this offering until the Tax Free Distribution. In the event that we were not included in the Consolidated Group immediately following this offering or thereafter, we would no longer join in the filing of the Consolidated Group’s federal income tax returns and would file federal income tax returns separate from the Consolidated Group following the deconsolidation. Such a deconsolidation could also negatively impact Compuware’s ability to distribute its shares of our common stock to its shareholders in a tax-free transaction. Each member of a consolidated group during any part of a consolidated return year is severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency thereon. Similarly, in some jurisdictions, each member of a consolidated, combined or unitary group for state, local or foreign tax purposes is jointly and severally liable for the state, local or foreign tax liability of each other member of the consolidated, combined or unitary group. Accordingly, for any period in which we are included in the Consolidated Group or any Combined Group, we could be liable in the event that any income or other tax liability was incurred, but not discharged, by any other member of any such group even if we are not then currently a member of such Consolidated Group or Combined Group.

Some of our directors and executive officers own Compuware common stock, restricted shares of Compuware common stock or options to acquire Compuware common stock and hold positions with Compuware, which could cause conflicts of interest that result in our not acting on opportunities we otherwise may have.

Some of our directors and executive officers own Compuware common stock, restricted shares of Compuware stock or options to purchase Compuware common stock. In addition, three members of our board of directors, Messrs. Paul, Grabe, and Syzgenda, are currently members of the Compuware board of directors. Mr. Paul is also the Chief Executive Officer of Compuware. Ownership of Compuware common stock, restricted shares of Compuware common stock and options to purchase Compuware common stock by our directors and officers after this offering and the presence of executive officers or directors of Compuware on our board of directors could create, or appear to create, conflicts of interest with respect to matters involving both us and Compuware that could have different implications for Compuware than they do for us. Provisions of our articles of incorporation address corporate opportunities that are presented to our directors or officers that are also directors or officers of Compuware. We cannot assure you that the provisions in our articles of incorporation will

 

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adequately address potential conflicts of interest or that potential conflicts of interest will be resolved in our favor or that we will be able to take advantage of corporate opportunities presented to individuals who are officers or directors of both us and Compuware. As a result, we may be precluded from pursuing certain growth initiatives.

Compuware’s ability to control our board of directors may make it difficult for us to recruit high-quality independent directors.

So long as Compuware beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of outstanding voting stock, Compuware can effectively control and direct our board of directors. Currently, three members of our board of directors are also members of the Compuware board of directors. Further, the interests of Compuware and our other shareholders may diverge. Under these circumstances, persons who might otherwise accept our invitation to join our board of directors may decline.

Our inability to resolve favorably any disputes that arise between us and Compuware with respect to our past and ongoing relationships may adversely affect our operating results.

Disputes may arise between Compuware and us in a number of areas relating to our ongoing relationships, including:

 

   

labor, tax, employee benefit, indemnification and other matters arising from our separation from Compuware;

 

   

employee retention and recruiting;

 

   

business combinations involving us;

 

   

our ability to engage in activities with certain channel, technology or other marketing partners;

 

   

sales or dispositions by Compuware of all or any portion of its ownership interest in us;

 

   

the nature, quality and pricing of services Compuware has agreed to provide us; and

 

   

business opportunities that may be attractive to both Compuware and us.

We may not be able to resolve potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.

The agreements we have entered into with Compuware may be amended upon agreement between the parties. While we are controlled by Compuware, we may not have the leverage to negotiate amendments to these agreements if required on terms as favorable to us as those we would negotiate with an unaffiliated third party.

We will be a “controlled company” within the meaning of the NASDAQ rules and, as a result, we may rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

After the completion of this offering, Compuware will own more than 50% of the total voting power of our common stock and we will be a “controlled company” under the NASDAQ corporate governance standards. As a controlled company, certain exemptions under the NASDAQ standards free us from the obligation to comply with certain NASDAQ corporate governance requirements, including the requirements:

 

   

that a majority of our board of directors consists of independent directors;

 

   

that we have a compensation committee that is comprised entirely of independent directors; and

 

   

that we have a nominating committee that is comprised entirely of independent directors.

 

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Following this offering, a majority of our board of directors, and our entire Compensation Committee and Nominating and Governance Committee, will be composed of independent directors in compliance with the requirements of NASDAQ. However, we are not required to maintain this composition of our board and its committees and, in the event we choose to rely on available “controlled company” exemptions, you will not have the same protection afforded to shareholders of companies that are subject to all of the NASDAQ corporate governance requirements.

Third parties may seek to hold us responsible for liabilities of Compuware, which could result in a decrease in our income.

Third parties may seek to hold us responsible for Compuware’s liabilities. Under our master separation agreement with Compuware, Compuware will indemnify us for claims and losses relating to Compuware’s liabilities and not related to our business. However, if those liabilities are significant and we are ultimately held liable for them, we cannot assure you that we will be able to recover the full amount of our losses from Compuware.

Risks Related to Our Common Stock

In making your investment decision, you should not rely on statements made during Compuware’s fourth quarter 2013 and first quarter 2014 earnings call. The statements should not be considered in isolation and you should make your investment decision only after reading this entire prospectus carefully.

In its May 21, 2013 earnings call with analysts covering its fourth fiscal quarter ended March 31, 2013, Compuware made certain statements about our financial results. The statements were made to stock analysts for the purpose of explaining and supplementing aspects of Compuware’s earnings and are consistent with similar statements made during this year’s earnings call with respect to Compuware’s other business units and during prior year-end earnings calls with respect to us and Compuware’s other business units.

The statements included the following:

•    statements regarding historical revenue increases from prior periods that are generally consistent with the disclosures in this prospectus, except Compuware disclosed a sequential increase in revenue for the fourth quarter of fiscal 2013 over the third quarter of fiscal 2013 of 7.8% and a year-over-year increase of 23%. The corresponding percentages determined by reference to the quarterly revenue amounts set forth in “Management Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results of Operations”, however, are 8.0% and 22%, respectively. The difference in these percentages is due to the application of year-end audit adjustments for the amounts disclosed in this prospectus, but not for the Compuware disclosures.

•    statements regarding our historical operating expense amounts and percentage increases from prior periods that reflect Compuware’s treatment of operating expenses with respect to all of its business units, rather than the determination of our expenses on a stand-alone basis as reflected in this prospectus and as is required by GAAP on a stand-alone basis. In particular, the Compuware disclosures include cost of revenues as operating expenses while we reflect it as a stand-alone expense item, and the Compuware disclosures also do not include an allocation of certain shared administrative and general services provided to us by Compuware nor certain intercompany expenses that we, when viewed as a stand-alone entity, capitalize.

•    statements regarding our “contribution margin” for the fourth quarter and fiscal 2013, including comparisons to the third quarter of fiscal 2013 and to the fourth quarter and fiscal year ended March 31, 2012. Compuware defines contribution margin as its business unit revenue less business unit expenses (i.e., operating profit), before any allocation for certain shared administrative and general services. Our

 

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management does not use this metric since we are required to pay Compuware for these shared services on a going forward basis after completion of this offering. To analyze our operating profit on a stand-alone basis, we take into account the appropriate allocation of all administrative and general services provided by our parent, including the shared services not reflected in Compuware’s determination of contribution margin. The causes for the decreased margin impact from quarter to quarter (significant increased investment in sales and marketing and a change in our product development methodology), however, are described in this prospectus. See “Management Discussion and Analysis of Financial Condition and Results of Operation—Overview”, and “—Years Ended March 31, 2013 and 2012—Sales and Marketing”.

•    the statement that “For fiscal ’14, we expect Covisint’s total revenue growth to be 20%.” Compuware had a reasonable basis for making this statement; however, it was presented as part of the overall outlook for Compuware as a whole and did not include the information included in this prospectus, including information related to the risks and uncertainties that are described in this prospectus. Therefore, you should carefully consider these risks and uncertainties, together with all other information in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. We cannot assure you that such a growth rate will be achieved for fiscal 2014 or with respect to any fiscal quarter. In that regard, any estimate or projection of future operating performance is necessarily based upon a number of underlying estimates or assumptions that may or may not prove to be accurate. In addition, these underlying estimates or assumptions are subject to significant economic, competitive and other uncertainties that are beyond our control. For these reasons, you should only rely on the information set forth in this prospectus and should only make an investment decision after carefully reviewing and evaluating all of the information in this prospectus, including the risks described in this section, in the section entitled “Special Note Regarding Forward-Looking Statements” and throughout this prospectus.

In its July 23, 2013 earnings call with analysts covering its first fiscal quarter ended June 30, 2013, Compuware made additional statements about our financial results, including the following:

•    statements regarding historical revenue increases from prior periods that are consistent with the disclosures in this prospectus. The corresponding percentages determined by reference to the quarterly total and subscription revenue amounts set forth in “Management Discussion and Analysis of Financial Condition and Results of Operations-Quarterly Results of Operations” are 17% and 22%, respectively.

•    statements regarding a “year-over-year decrease in Covisint margin due in large part to a change in the capitalization methodology” in the first quarter of fiscal 2014. The cause for the decreased margin impact during this period (decreased capitalization of our research and development costs due to a recent change to the agile delivery methodology) is described in this prospectus. See “Management Discussion and Analysis of Financial Condition and Results of Operation-Overview”, and “-Three Months Ended June 30, 2013 and 2012-Research and Development”.

The statements made in the May 21, 2013 and July 23, 2013 earnings calls did not contain the more complete information, including discussion of various risks and uncertainties, described in this prospectus. The statements should not be considered in isolation and you should make your investment decision only after reading this entire prospectus carefully.

We are an “emerging growth company” within the meaning of the Securities Act of 1933, and as such, we will take advantage of certain modified disclosure requirements.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of The NASDAQ Stock Market and other applicable securities rules and regulations. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting.

 

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However, we are an “emerging growth company” within the meaning of the rules under the Securities Act of 1933, as amended, or the Securities Act. For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an “emerging growth company” for up to five years, although we would cease to be an “emerging growth company” upon the earliest of (i) the first fiscal year following the fifth anniversary of this offering, (ii) the first fiscal year after our annual gross revenues are $1 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, and (iv) the date on which we are deemed to be a “large accelerated filer” as defined in the Exchange Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—JOBS Act.”

We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock.

The share price of our common stock is likely to be volatile and could decline following this offering, and you may be unable to sell your shares at or above the offering price, if at all.

Prior to this offering, there has not been a public market for our common stock. An active public market for these shares may never develop or be sustained, which could affect your ability to sell your shares and could depress the market price of your shares. The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of our common stock could be subject to wide fluctuations in response to many risk factors described in this prospectus, and others beyond our control, including:

 

   

actual or anticipated fluctuations in our condition and operating results;

 

   

changes in projected operational and financial results;

 

   

addition or loss of significant customers;

 

   

changes in laws or regulations applicable to our business;

 

   

actual or anticipated changes in our growth rate relative to our competitors;

 

   

announcements of technological innovations or new offerings by us or our competitors;

 

   

additions or departures of key personnel;

 

   

issuance of new or updated research or reports by securities analysts;

 

   

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

   

the expiration of contractual lock-up agreements; and

 

   

general economic, legal, regulatory and market conditions unrelated to our performance.

In addition, if the general stock market experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations.

 

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If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

We do not anticipate paying any dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay cash dividends, you could receive a return on your investment in our common stock only if the market price of our common stock has increased when you sell your shares.

If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research reports about our business, our share price and trading volume could decline.

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We have broad discretion to determine how to use the funds raised in this offering, and we may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. As of the date of this prospectus, we have no specific plans with respect to the allocation of the net proceeds of this offering. The net proceeds may be used for corporate purposes (including the planned repayment of short-term intercompany payables owed to our parent Compuware, subsequent to its contribution of assets and liabilities to us as of January 1, 2013) that do not increase our operating results or market value. We may also use a portion of the net proceeds to acquire, invest in, or obtain rights to complementary technologies, solutions or businesses. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value. If we do not invest or apply the proceeds of this offering in ways that enhance shareholder value, we may fail to achieve expected financial results, which could cause our common stock price to decline.

Substantial future sales of our common stock in the public market could cause our stock price to fall.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline and impede our ability to raise capital through the issuance of additional equity securities. Upon completion of this offering, Compuware will own 30,003,000 shares of our common stock, representing approximately 82.4% of the outstanding shares of our common stock. All shares sold in this offering will be freely transferable, subject, in the case of affiliates, to applicable volume and other restrictions under Rule 144 under the Securities Act, and subject to the lock-up arrangements described in “Underwriting” and “Shares Eligible for Future Sale.” Compuware has no contractual obligation to retain these shares, other than the lock-up arrangement, and has announced its intention to distribute such shares in the Tax-Free Distribution, within twelve months after this offering. In addition, Compuware has the right to cause us to register the sale of its shares of our common stock under the Securities Act. Registration of these shares under the Securities Act would result in these shares, other than

 

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shares purchased by our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration statement.

Following this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of our common stock reserved for future issuance under our 2009 Long Term Incentive Plan, including the shares issuable under outstanding options and restricted stock unit awards which will be outstanding after this offering. This registration statement will automatically become effective upon filing. Shares registered under this registration statement will be available for sale in the open market, subject to the lock-up arrangements described above, as well as any stock option vesting requirements and the lapsing of restrictions on restricted stock, although sales of shares held by our affiliates will be limited by the volume limitations of Rule 144 of the Securities Act. Sales of substantial amounts of these securities could cause our stock price to fall.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution, as the initial public offering price of our common stock will be substantially greater than the net tangible book value per share of our common stock. Based on the assumed initial offering price of $10.00 per share, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $8.67 per share. If the underwriters exercise their over-allotment option, or if outstanding options to purchase our common stock are exercised, you will experience additional dilution. For a further description of the dilution that you will experience immediately after this offering, see the section entitled “Dilution.”

Our articles of incorporation and bylaws as well as certain provisions of Michigan law may have an anti-takeover effect.

Provisions of our articles of incorporation and bylaws and Michigan law could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to shareholders. The combination of these provisions inhibits a non-negotiated acquisition, merger or other business combination involving our company, which, in turn, could adversely affect the market price of our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this prospectus until after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

 

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INDUSTRY AND MARKET DATA

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties, including Forrester Research, Inc., International Data Corporation (IDC) and Secured by Design Ltd. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable. We believe and act as if the third-party data contained in this prospectus, and the underlying economic assumptions relied upon in such data, are generally reliable.

We do not necessarily know what assumptions regarding general economic growth were used in preparing the forecasts and projections we cite. Statements as to our market position are based on recently available data. While we are not aware of any misstatements regarding industry data presented in this prospectus, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors” in this prospectus.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $58.5 million, at an assumed initial public offering price of $10.00 per share (the midpoint of the range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and offering expenses that we must pay. If the underwriters’ over-allotment option in this offering is exercised in full, we estimate that our net proceeds will be approximately $67.5 million. A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per share would increase (decrease) the net proceeds to us from this offering by $6.0 million, assuming the underwriters do not exercise their over-allotment option and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and offering expenses payable by us.

The principal reasons for this offering are to increase our capitalization, financial flexibility and visibility in the marketplace. We currently intend to use the net proceeds for working capital and other general corporate purposes, including to finance our growth, develop new solutions, hire additional personnel and fund capital expenditures and potential acquisitions. We may pursue the acquisition of companies or businesses with complementary products and technologies that we believe will enhance our suite of offerings, however we do not have agreements or commitments for any specific acquisitions at this time. Although we have no current specific plans with respect to the allocation of the net proceeds of this offering, for the next year, assuming we engage in no acquisitions, we intend to use approximately $20 million to $30 million of our net proceeds, together with the cash generated from operations, to fund our current operations, repay short-term intercompany payables owed to our parent, Compuware, subsequent to its contribution of assets and liabilities to us as of January 1, 2013 in the amount of $9.4 million as of June 30, 2013, implement our growth strategies and fund capital expenditures.

We cannot specify with certainty all of the particular uses of the net proceeds that we receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Furthermore, the amount and timing of our actual expenditures will depend on numerous factors, including the cash used in or generated by our operations, the status of our development activities, the level of our sales and marketing activities, our technology investments and any potential acquisitions. Our management also has discretion over many of these factors. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We currently do not anticipate declaring any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors. See “Description of Capital Stock—Common Stock—Dividend Rights.”

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of June 30, 2013 on a historical basis, and adjusted

 

   

to give effect to the issuance and sale of 6,400,000 shares of our common stock in this offering based on the assumed initial public offering price of $10.00 per share after deducting estimated underwriting discounts and commissions and offering expenses payable by us; and

   

to give effect to the application of a portion of the proceeds to repay short-term intercompany payables owed to Compuware.

The information below is not necessarily indicative of what our cash and capitalization would have been had the separation, distribution and related transactions been completed as of June 30, 2013. In addition, it is not indicative of our future cash and capitalization. This table is derived from our historical unaudited condensed, combined and consolidated financial statements and the accompanying notes included elsewhere in this prospectus, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our unaudited condensed, combined and consolidated financial statements and notes to our unaudited condensed, combined and consolidated financial statements included elsewhere in this prospectus.

 

     As of  
     June 30, 2013  
     (In thousands)  
     Actual     As
Adjusted
 

Cash

   $ 1,388      $ 50,491   
  

 

 

   

 

 

 

Due to parent and affiliates

   $ 9,430      $ 0   

Long term debt

   $ 0      $ 0   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock, no par value (50,000,000 shares authorized, 30,003,000 shares
issued and outstanding actual; 50,000,000 shares authorized, 36,403,000 shares
issued and outstanding, as adjusted)

   $ 0      $ 0   

Preferred stock, no par value (5,000,000 shares authorized; none issued and outstanding)

     0        0   

Additional paid-in capital

     48,789        106,309   

Retained deficit

     (7,959     (7,959

Accumulated other comprehensive income (loss)

     (4     (4
  

 

 

   

 

 

 

Total shareholders’ equity

     40,826        98,346   
  

 

 

   

 

 

 

Total capitalization

   $ 40,826      $ 98,346   
  

 

 

   

 

 

 

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after the completion of this offering.

Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of common shares then outstanding. Our net tangible deficit as of June 30, 2013 was approximately $9.2 million for a net tangible deficit per common share of $0.31. After giving effect to our sale of shares of our common stock in this offering at an assumed initial public offering price of $10.00 per share (the midpoint of the range set forth on the cover page of this prospectus) and deducting estimated underwriting discounts and offering expenses, our net tangible book value would have been $48.3 million, or $1.33 per common share (assuming no exercise of the underwriters’ over-allotment option). This represents an immediate increase in the net tangible book value of $1.64 per share and an immediate and substantial dilution of $8.67 per share to new investors purchasing shares of our common stock in this offering. The following table illustrates this dilution per share:

 

Assumed midpoint of offering per share

   $ 10.00   

Net tangible deficit per share as of June 30, 2013

   $ (0.31

Increase in net tangible book value per share attributable to this offering

   $ 1.64   

Net tangible book value per share after giving effect to this offering

   $ 1.33   

Dilution per share to new investors.

   $ 8.67   

A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per share would increase (decrease) the net tangible book value attributable to this offering, as well as the net tangible book value after giving effect to this offering, by $0.16 per share and the dilution to new investors in this offering by $0.84 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and offering expenses payable by us.

The following table summarizes, as of June 30, 2013, the number of shares of our common stock we issued and sold, the total consideration we received and the average price per share paid to us by Compuware, our sole shareholder prior to this offering, and by new investors purchasing shares of common stock in this offering. The table assumes an initial public offering price of $10.00 per share (the midpoint of the price range set forth on the cover page of this prospectus).

 

     Shares Purchased     Total Consideration  
     Number      Percentage     Amount     Percentage     Avg. Price per
Share
 
     (in thousands)            ($ in millions)              

Compuware

     30,003         82.4   $ 44.7 (1)      41.1   $ 1.49   

New Investors

     6,400         17.6   $ 64.0        58.9   $ 10.00   

Total

     36,403         100.0   $ 108.7        100.0   $ 2.99   

 

(1)  

Represents the net book value of the assets and liabilities of the business as of January 1, 2013 which were contributed to us by Compuware as of that date.

A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per share would increase (decrease) the total consideration paid by new investors by $6.4 million, or increase (decrease) the percent of total consideration paid by new investors by approximately 10%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

If the underwriters’ over-allotment option is exercised in full, the following will occur:

 

   

the percentage of shares of our common stock held by Compuware will decrease to approximately 80.3% of the total number of shares of our common stock outstanding; and

 

   

the number of shares of our common stock held by new investors in this offering will be increased to approximately 7,360,000 shares, or approximately 19.7% of the total number of shares of our common stock outstanding.

 

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SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA

The following combined and consolidated financial data should be read together with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We have derived the following combined and consolidated statements of comprehensive income data for the years ended March 31, 2013, 2012 and 2011 from our audited combined and consolidated financial statements elsewhere in this prospectus. We have derived the following combined and consolidated statements of comprehensive income data for the three months ended June 30, 2013 and 2012 from our unaudited condensed, combined and consolidated financial statements elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that should be expected in the future.

 

    Years Ended March 31,     Three Months Ended
June 30,
 
    2013     2012     2011     2013     2012  
    (In thousands, except per share data)        

Combined and Consolidated Statements of Comprehensive Income Data:

         

Revenue

  $ 90,732      $ 74,675      $ 54,154      $ 24,101      $ 20,613   

Cost of revenue(1)

    47,575        41,477        27,501        13,310        10,678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    43,157        33,198        26,653        10,791        9,935   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development(1)

    3,799        1,341        1,687        2,585        174   

Sales and marketing(1)

    26,593        22,544        16,571        7,339        5,512   

Administrative and general(1)

    18,315        12,583        10,288        5,534        4,116   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    48,707        36,468        28,546        15,458        9,802   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (5,550     (3,270     (1,893     (4,667     133   

Other income

    0        0        750        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax provision

    (5,550     (3,270     (1,143     (4,667     133   

Income tax provision

    98        57        132        3        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (5,648   $ (3,327   $ (1,275   $ (4,670   $ 131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share(2)

  $ (0.19   $ (0.11   $ (0.04   $ (0.16   $ 0.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding, basic and diluted(2)

    30,003        30,003        30,003        30,003        30,003   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   As of June 30, 2013, all vested stock compensation was in the form of Compuware stock awards. All outstanding Covisint stock options include a performance condition based on the occurrence of an initial public offering or change in control of the Company. Therefore, stock compensation expense incurred through June 30, 2013 has related only to Compuware stock awards provided to Covisint employees. Upon consummation of this offering or a change in control of Covisint, we will begin to recognize $25.2 million of compensation expense related to Covisint options including options granted in August 2013. Approximately 83% of the expense relates to stock options that were modified; this expense will be recognized over the requisite service period beginning December 31, 2012 (the modification date) and ending on January 1 of the third calendar year following an initial public offering, with a cumulative catch-up in the period in which such offering occurs. Approximately 13% of the expense relates to stock options issued during March 2013; this expense will be recognized over the requisite service period beginning March 2013 and ending on the second anniversary of an initial public offering, presuming such offering occurs in calendar 2013, with a cumulative catch-up in the period in which such offering occurs. These expenses will be offset by a reduction in expense associated with cancellation of certain outstanding Compuware awards due to the occurrence of an initial public offering or change in control of the Company. We expect to incur net compensation expense of $9.6 million associated with these options and awards in the quarter in which this offering occurs. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Stock Compensation—Covisint Corporation Stock Compensation”. All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. The statements above include stock compensation as follows:

 

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     Years Ended March 31,      Three Months Ended
June  30,
 
     2013      2012      2011      2013      2012  
     (In thousands)                

Stock compensation classified as:

              

Cost of revenue

   $ 6       $ 5       $ 111       $ 5       $ —     

Research and development

     1         1         3         47         —     

Sales and marketing

     360         9         9         47         25   

Administrative and general

     1,262         1,077         1,450         387         297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock compensation expense

   $ 1,629       $ 1,092       $ 1,573       $ 486       $ 322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)   Please see Note 5 to our audited combined and consolidated financial statements and Note 3 to our unaudited condensed, combined and consolidated financial statements for an explanation of the method used to calculate the historical net income (loss) per share attributable to common shareholders and the number of shares used in computation of the per share amounts.

 

     As of March 31,      As of
June 30,
 
     2013      2012      2013  
     (In thousands)  

Combined and Consolidated Balance Sheet Data:

        

Cash

   $ 966       $ 0       $ 1,388   

Working capital

     1,992         3,830         (1,340

Total assets

     98,058         86,148         96,151   

Due to parent and affiliates

     7,556         0         9,430   

Long term debt

     0         0         0   

Total shareholders’ equity

     42,894         33,065         40,826   

 

     Years Ended March 31,     Three Months Ended
June 30,
 
     2013     2012     2011     2013     2012  
     (in thousands)              

Other Financial Data:

          

Adjusted EBITDA(1)

   $ (10,883   $ (5,425   $ 1,054      $ (4,041   $ (1,708

Adjusted gross profit(2)

     48,113        36,213        29,186        12,444        11,006   

Adjusted gross margin(2)

     53     48     54     52     53

 

(1)   Adjusted EBITDA is a non-GAAP measure and represents net income (loss) adjusted for income tax provision, depreciation, amortization of intangible assets, amounts incurred for capitalized internal software costs, stock compensation expense and other income. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for a discussion of Adjusted EBITDA and the reconciliation to U.S. GAAP.
(2)   Adjusted gross profit and adjusted gross margin are non-GAAP measures. Adjusted gross profit represents gross profit, adjusted for amortization of capitalized software associated with our research and development expense classified within cost of revenue and stock compensation. Adjusted gross margin is adjusted gross profit as a percentage of revenue. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for a discussion of adjusted gross margin and adjusted gross profit and the reconciliation to U.S. GAAP.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following management’s discussion and analysis of financial condition and results of operations in association with our financial statements and the notes thereto contained elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors” and included in other portions of this prospectus.

Overview

Covisint 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 platform currently supports customers in the automotive, healthcare, energy, financial services and travel industries. We believe a wide variety of organizations will benefit from using our cloud-based technologies to meet their external collaboration requirements with their customers, business partners and suppliers. We believe we have yet to significantly penetrate the growing available market for our technologies and have a significant opportunity to sell additional solutions to our current customers. We believe the use of our solutions and the development of our markets are at very early stages and that it is important that we build brand awareness, develop channel partners and invest in our platform, vertical solutions, infrastructure and sales and marketing to maintain and extend our leadership in the cloud-based services market.

We generate the majority of our revenue through subscription fees that enable our customers to access our platform. Subscription and support revenue accounted for $15.9 million and $13.1 million, or 66% and 64% of our total revenue, during the three months ended June 30, 2013 and 2012, respectively, and $57.0 million, $49.2 million and $45.0 million, or 63%, 66% and 83% of our total revenue, during the years ended March 31, 2013, 2012 and 2011, respectively. We typically bill subscription fees in advance. Our subscription contract lengths primarily range from one to five years and are typically 36 months. The value of our subscription contracts varies significantly for each customer agreement and is typically related to the number of users or volume of transactions associated with the deployment. Our customers pay us for a minimum level of platform usage. Periodically, a customer’s utilization may exceed its committed minimum level, in which case the customer is required to pay us additional fees, called overages.

We also generate revenue from the provision of services related to implementation, solution deployment and on-boarding of new customers onto our platform. Services revenue accounted for $8.2 million and $7.5 million, or 34% and 36% of our total revenue, during the three months ended June 30, 2013 and 2012, respectively, and $33.8 million, $25.5 million and $9.2 million, or 37%, 34% and 17% of our total revenue, during the years ended March 31, 2013, 2012 and 2011, respectively. We typically bill a portion of our services fees in advance and the remaining balance upon customer acceptance. Services contract value varies significantly for each customer agreement and is typically related to the complexity of the deployment.

We sell our solutions through our direct sales force and through our channel partner. We target certain vertical markets and sell to large organizations as well as the interconnected smaller organizations that act as

 

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suppliers or business partners. We have over 3,000 customers that have deployed our platform to connect to over 80,000 of their customers, business partners and suppliers. This allows more than 18 million users to access the mission-critical applications and information provided by our customers. Our customers include approximately 150 core platform customers, which represented 94%, 94%, 93% and 91% of our total revenue for the three months ended June 30, 2013 and 2012 and the years ended March 31, 2013 and 2012, respectively. Our remaining customers include a variety of organizations that pay us a relatively nominal fee to either connect to one of our core platform customers or use one of our industry-specific solutions.

The automotive industry accounted for 53%, 59%, 56% and 57% of our total revenue in the three months ended June 30, 2013 and 2012 and the years ended March 31, 2013 and 2012, respectively, of which approximately 27%, 37%, 33% and 35% of our total revenue for such periods was derived from General Motors. We have successfully expanded our customer base from the automotive to the healthcare industry, which accounted for 31%, 28%, 31% and 32% of our total revenue in the three months ended June 30, 2013 and 2012 and the years ended March 31, 2013 and 2012, and to the energy, financial services, and travel industries. Revenue from outside of the U.S. accounted for 14%, 15%, 15% and 14% of our total revenue in the three months ended June 30, 2013 and 2012 and the years ended March 31, 2013 and 2012, respectively. We intend to continue expanding our business into additional vertical markets and geographies and expect our revenue to diversify accordingly. Supporting new regulatory and technology requirements as a result of our diversification initiatives may result in increased operating costs and capital expenditures.

Our subscription and support revenue has grown to $15.9 million in the three months ended June 30, 2013 from $13.1 million in the three months ended June 30, 2012, representing an annual growth rate of 22%. Historically, we have experienced significant revenue growth from existing customers as they renew and purchase additional subscriptions. Of the increase in subscription and support revenue between the three months ended June 30, 2013 and 2012, approximately $1.2 million was due to increased revenue from existing customers. Additionally, there was approximately $1.9 million from sales to new customers, offset by a decline in revenue from customers that terminated or elected not to renew their agreements aggregating approximately $0.3 million, between the three months ended June 30, 2013 and 2012. Of the increases in subscription and support revenue during fiscal 2013 and 2012, approximately $8.6 million and $6.3 million, respectively, were due to increased revenue from existing customers. In addition, there was approximately $1.2 million and $3.1 million from sales to new customers during fiscal 2013 and 2012, respectively. These increases were offset by a decline in revenue from customers that terminated or elected not to renew their agreements aggregating approximately $1.9 million during fiscal 2013 and approximately $3.7 million during fiscal 2012, as well as a $1.5 million reduction in fiscal 2012 PQRS revenue due to a decline in submissions, which we attribute to a change in the incentive rate of the program. In the year ended March 31, 2012, the growth of subscription revenue slowed due to lower-than-expected implementation of state-sponsored Health Information Exchanges, or HIEs, the terminated agreement of a significant healthcare customer as a result of its dissolution and, to a lesser extent, the impact of the economic downturn on the automotive industry.

Our services revenue has grown to $8.2 million in the three months ended June 30, 2013 from $7.5 million in the three months ended June 30, 2012, representing an annual growth rate of 9%. As discussed below under “—Components of Our Results of Operations—Cost of Revenue,” we recognized a larger percentage of our services revenue as delivered during the years ended March 31, 2013 and 2012, as compared to the year ended March 31, 2011, as a result of having obtained evidence of stand-alone value for many of these services, which allowed us to recognize revenue using the proportional performance method.

We expect our revenue to grow 20% in the year ended March 31, 2014 from the year ended March 31, 2013. Because we cannot assure you that such a growth rate will be achieved for fiscal 2014 or with respect to any fiscal quarter, you should not attribute undue certainty to this expectation. Our expectation is based primarily on our management’s experience, our past revenue growth and the increase in our annualized subscription revenue from fiscal 2012 to fiscal 2013. It is also based on the assumption that we will retain substantially all of our

 

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customers and their associated revenues and that there is continued demand for our solutions and services. These assumptions may not prove to be accurate. Key factors that will determine our revenue growth include the size and timing of new bookings from both new and existing customers and the speed at which we are able to deploy our services and recognize the corresponding revenue. Changes to the competitive environment as well as the general market conditions of our customers will also impact our ability to achieve our expected growth. Many of these factors are largely outside of our control. We have no current plans to update or revise our revenue projection as the result of new information, future events or otherwise. Our expectations regarding revenue growth should not be considered in isolation and you should make your investment decision only after reading this entire prospectus carefully.

We believe our business will benefit from current technology trends such as the increasing adoption of cloud computing, as well as industry-specific trends in our vertical markets. We anticipate demand in the automotive industry will increase as automakers invest in connected vehicle and connected consumer technologies. In healthcare we expect the formation of privately-sponsored HIEs to increase as hospitals, payers, physicians and the United States government move to reimbursement models that require the secure storing and sharing of patient information. Finally, we believe there is an unmet need in the energy industry to connect large global organizations with external partners, including contractors and joint venture partners, to provide secure access to critical information.

To support our growth strategies and capitalize on current technology trends, we are actively investing in our business and do not expect to be profitable before or during fiscal 2014. We experienced combined net profit (losses) of $(4.7) million, $0.1 million, $(5.6) million, $(3.3) million and $(1.3) million for the three months ended June 30, 2013 and 2012 and the years ended March 31, 2013, 2012 and 2011, respectively. These losses were mainly due to the substantial investments we made, and continue to make, to build our solutions and services, grow and maintain our business and acquire customers. Our profitability was negatively affected by decreased capitalization of our research and development costs during the three months ended June 30, 2013, as compared to the same period in 2012, due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This change increased the proportion of our research and development costs expensed relative to our research and development costs incurred. We expect our fiscal 2014 research and development costs incurred, as a percentage of revenue, to remain consistent with such costs incurred during fiscal 2013. As a result of the decreased capitalization of our research and development costs, we expect research and development costs expensed, as a percentage of revenue, to increase and negatively impact our profitability. In addition, we are actively investing in our sales and marketing organization to create brand awareness, expand the scope and scale of our global operations, develop our sales channels and promote new solutions with existing customers. Although we believe these investments will drive future revenue growth and profitability, our profitability may be negatively affected in fiscal 2014.

Our administrative and general costs increased in fiscal 2013 due to the growth of our business and the additional expense associated with our separation from Compuware and preparing to become a publicly traded company. In the three months ended June 30, 2013, administrative and general costs increased $1.4 million from the three months ended June 30, 2012, primarily due to a $0.5 million increase in costs related to services provided by our parent Compuware as well as a $0.5 million increase in legal and audit fees associated with our establishment as an independent entity. In fiscal 2013, administrative and general costs increased $5.7 million from fiscal 2012, primarily due to a $3.3 million increase in costs related to services provided by our parent Compuware as well as a $2.2 million increase in legal and audit fees associated with our establishment as an independent entity. We may incur additional expenses in future quarters as we assume many of the services provided by our parent, to the extent our costs to provide those services are higher than what we have historically paid Compuware. As a result, our administrative and general costs may increase as a percentage of total revenue and negatively impact our profitability.

 

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We acquired DocSite during the year ended March 31, 2011 for $15.9 million to complement our existing cloud-based services with the reporting and analytic capabilities required by healthcare reform regulations. As a result, we provide web-based solutions that allow physicians and healthcare organizations to manage, analyze and report healthcare performance and quality in an accurate and timely manner.

Our predecessor, Covisint LLC, was founded in February 2000 by a consortium of global automotive manufacturers to improve collaboration between manufacturers and suppliers. Compuware purchased substantially all of the assets of Covisint LLC in March 2004 and currently provides us with certain corporate functions including facilities, information technology, tax, internal audit, accounting, finance, human resources and legal functions. The cost allocations associated with these services are based on estimates of the level of effort incurred or resources deployed on our behalf. The financial statements included in this prospectus may differ from those previously reported in Compuware’s consolidated financial statements and may not reflect our results of operations, financial position and cash flows as if we had operated as a stand-alone company during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance.

Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards. Therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

On May 23, 2013, our board of directors approved and effected a 30-for-1 stock split. All share and per share information in this prospectus has been adjusted for all periods presented to reflect the effects of the stock split.

Key Metrics

In addition to generally accepted accounting principles in the United States of America, or U.S. GAAP, metrics such as total revenue, gross margin and cash flows from operations, we regularly review a number of other metrics to evaluate our business, measure our performance, identify trends affecting our business, allocate capital and make strategic decisions.

Adjusted EBITDA

“Adjusted EBITDA” represents net income (loss) adjusted for income tax provision, depreciation, amortization of intangible assets, amounts incurred for capitalized internal software costs, stock compensation expense and other (income) expenses.

We believe that Adjusted EBITDA, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provides additional information that is useful for evaluating our operating performance. Additionally, we believe that Adjusted EBITDA provides a more meaningful comparison of our operating results against those of other companies in our industry, as well as on a period-to-period basis, because it excludes certain non-cash charges, such as depreciation, amortization of intangible assets, amounts incurred for capitalized internal software costs, stock compensation and other income, as these items may not directly correlate to the underlying performance of our business operations. However, Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and, accordingly, should not be considered as an alternative to net income (loss) as an indicator of operating performance.

 

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The table below provides reconciliations between the non-U.S. GAAP financial measures discussed above to the comparable U.S. GAAP measures of operating profit:

 

     Years Ended March 31,     Three Months Ended
June  30,
 
     2013     2012     2011     2013     2012  
     (In thousands)              

Net income (loss)

   $ (5,648   $ (3,327   $ (1,275   $ (4,670   $ 131   

Depreciation

     1,226        1,327        1,304        345        307   

Amortization of intangible assets

     5,391        3,462        2,981        1,747        1,184   

Income tax provision

     98        57        132        3        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     1,067        1,519        3,142        (2,575     1,624   

Capitalized internal software costs

     (13,579     (8,036     (2,911     (1,952     (3,654

Stock compensation

     1,629        1,092        1,573        486        322   

Less other income

     0        0        750        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (10,883   $ (5,425   $ 1,054      $ (4,041   $ (1,708
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We have historically capitalized a significant portion of our research and development costs and believe the amortization of capitalized software will increase in absolute dollars. Our total research and development costs incurred were $4.5 million and $3.8 million during the three months ended June 30, 2013 and 2012, respectively, and $17.4 million, $9.4 million and $4.6 million during the years ended March 31, 2013, 2012 and 2011, respectively. Of our total research and development costs incurred, we capitalized 43% and 95% during the three months ended June 30, 2013 and 2012, respectively, and 78%, 86% and 63% during the years ended March 31, 2013, 2012 and 2011. We decreased capitalization of our research and development costs during the three months ended June 30, 2013, as compared to the same period in 2012, due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This change increased the proportion of our research and development costs expensed relative to our research and development costs incurred.

Our amortization of intangible assets includes the amortization of capitalized software associated with our research and development costs, which has increased in absolute dollars and as a percentage of revenue. We expect this trend to continue in fiscal 2014 and have a negative impact on our gross profit and margin as reported under U.S. GAAP. In the future, we expect to capitalize a smaller portion of our research and development costs due to a recent change to the agile delivery methodology for platform enhancements.

As of June 30, 2013, unrecognized compensation cost related to Covisint stock options totaled approximately $24.6 million. This expense will become recognizable upon consummation of this offering or a change in control of Covisint. Approximately 84% of the expense relates to stock options that were modified; this expense will be recognized over the requisite service period beginning December 31, 2012 (the modification date) and ending on January 1 of the third calendar year following an initial public offering, with a cumulative catch-up in the period in which such offering occurs. Approximately 14% of the expense relates to stock options issued during March 2013; this expense will be recognized over the requisite service period beginning March 2013 and ending on the second anniversary of an initial public offering, presuming such offering occurs in calendar 2013, with a cumulative catch-up in the period in which such offering occurs. These expenses will be offset by a reduction in expense associated with cancellation of certain outstanding Compuware awards due to the occurrence of an initial public offering or change in control of the Company. We expect to incur net compensation expense of $9.3 million associated with these options and awards in the quarter in which this offering occurs. Please see Note 5 to our unaudited condensed, combined and consolidated financial statements included elsewhere in this prospectus for more information related to these options. All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense.

 

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Our other income pertains to a contingent consideration component included in our acquisition of DocSite that would have increased the DocSite purchase price up to an additional $1.0 million if pre-determined revenue targets for a specific product line were achieved by March 31, 2011. The fair value of the contingent consideration arrangement at the time of acquisition was $0.8 million. In fiscal 2011, the revenue target required for payment was not achieved and the $0.8 million liability was reversed and was reflected in “other income” within the combined and consolidated statements of comprehensive income.

Adjusted Gross Profit and Adjusted Gross Margin

Adjusted gross profit represents gross profit, adjusted for amortization of capitalized software associated with our research and development expense classified within cost of revenue as well as the stock based compensation associated with certain of our professional services and operations employees. Adjusted gross margin is adjusted gross profit as a percentage of revenue.

Capitalized software includes the costs of internally developed software technology and software technology purchased through acquisitions. We have historically capitalized a significant portion of our research and development costs and believe the amortization of capitalized software will increase in absolute dollars. Our total research and development costs incurred were $4.5 million and $3.8 million during the three months ended June 30, 2013 and 2012, respectively, and $17.4 million, $9.4 million and $4.6 million during the years ended March 31, 2013, 2012 and 2011, respectively. Of our total research and development costs incurred, we capitalized 43% and 95% during the three months ended June 30, 2013 and 2012, respectively, and 78%, 86% and 63% during the years ended March 31, 2013, 2012 and 2011, respectively. We decreased capitalization of our research and development costs during the three months ended June 30, 2013, as compared to the same period in 2012, due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This change increased the proportion of our research and development costs expensed relative to our research and development costs incurred. We expect this trend to continue in fiscal 2014 and to have a negative impact on our gross profit and margin as reported under U.S. GAAP. In the future, we expect to capitalize a smaller portion of our research and development costs due to a recent change to the agile delivery methodology for platform enhancements.

We believe that adjusted gross margin, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provides additional information that is useful for evaluating our operating performance. Additionally, we believe that adjusted gross margin provides a more meaningful comparison of our operating results against those of other companies in our industry. We believe that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which do not have comparable amortization costs related to capitalized software. However, adjusted gross margin is not a measure of financial performance under U.S. GAAP and, accordingly, should not be considered as an alternative to gross margin as an indicator of operating performance.

 

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The table below provides reconciliations between the non-U.S. GAAP financial measures discussed above to the comparable U.S. GAAP measures of gross profit:

 

     Years Ended March 31,     Three Months Ended
June 30,
 
     2013     2012     2011     2013     2012  
     (In thousands)              

Gross profit

   $ 43,157      $ 33,198      $ 26,653      $ 10,791      $ 9,935   

Gross margin

     48     44     49     45     48

Adjustments:

          

Stock compensation expense—cost of revenue

     6        5        111        5        —     

% of total revenue

     —       —       —       —       —  

Cost of revenue—amortization of capitalized software

     4,950        3,010        2,422        1,648        1,071   

% of total revenue

     5     4     4     7     5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross profit

     48,113        36,213        29,186        12,444        11,006   

Adjusted gross margin

     53     48     54     52     53

New Annualized Subscription Revenue

Due to the nature of the subscription-based revenue model, a significant portion of the revenue we report in each quarter is generated from customer agreements entered into during previous periods. Therefore, since changes in business momentum are not immediately reflected in our results of operations, we look towards additional metrics such as new annualized subscription revenue that include recently added or expanded customer relationships to gauge progress within our business. We disclose this metric annually.

We define new annualized subscription revenue as the annualized value of new or incremental committed subscription revenue for new or renewed contracts signed within a given period. We calculate new annualized subscription revenue for each new contract signed within a given period by dividing the total committed subscription revenue by the number of months under contract and multiplying that figure by the lesser of twelve or the number of months included in the agreement. We then adjust this amount for any increase or decrease in committed subscription revenue under existing contracts renewed during that period.

In fiscal 2013, our new annualized subscription revenue increased 209% from fiscal 2012. We believe this increase, if it can be maintained and extended going forward, will contribute favorably to the amount and growth rate of subscription and support revenue in subsequent periods.

New annualized subscription revenue is presented in the table below:

 

     Years Ended March 31,  
     2013      2012      2011  
     (In thousands)  

New annualized subscription revenue

   $ 15,011       $ 4,861       $ 5,680   

Components of Our Results of Operations

Revenue

Our revenue is primarily comprised of fees related to subscription and support and services performed. Subscription and support revenue includes fees for access to our platform and for users, messages and end point connections such as suppliers or healthcare organizations. We recognized $1.3 million, $1.3 million and $2.8 million of subscription and support revenue in the years ended March 31, 2013, 2012 and 2011, respectively, related to a U.S. federal government program called the Physician Quality Reporting System (PQRS), an

 

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incentive program designed to encourage reporting of healthcare quality measures by eligible professionals. PQRS revenue began in the year ended March 31, 2011, when we acquired DocSite, and has fluctuated from year to year due to changes in the incentive rate of the program. PQRS revenue is recognized as performed at the time of the annual submission to the government during our fourth quarter ending March 31.

Our services revenue is generated from implementation, solution deployment and on-boarding. Implementation services typically consist of user migration, content migration, branding and configuration to support customer-specific workflows. Our services engagements typically occur in phases and can vary from a few weeks to several months depending on the scope and complexity of the solution. Our customers may choose to do much of this work in-house, through a third party or with Covisint. We currently subcontract portions of our consulting engagements to third-party implementation partners, including Compuware, to supplement our staffing needs within this area of the business.

Services revenue in any quarter includes: revenue attributable to projects actively underway that have stand-alone value, as well as deferred revenue attributable to projects completed in past periods or the current quarter:

 

   

Revenue attributable without deferral to projects actively underway is derived from implementation services, on-boarding services and services for which we have obtained evidence of stand-alone value. This includes revenue attributable to our operations in China that support implementation and data exchange services.

 

   

Deferred revenue results from implementation and solution deployment services for which we have not obtained evidence of stand-alone value. Prior to fiscal 2012, we had not obtained evidence of stand-alone value for the majority of our implementation and solution deployment services. Revenue from these services was 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). During fiscal 2012, we obtained evidence of stand-alone value for a significant portion of our implementation and solution deployment services, thereby reducing the proportion of revenue deferred. In the three months ended June 30, 2013 and the year ended March 31, 2013, we deferred approximately $1.1 million and $3.5 million of services revenue, respectively, and recognized approximately $2.7 million and $10.7 million, respectively, from deferred revenue.

We believe that the transition of our implementation and solution deployment services fees from predominantly deferred to predominantly recognized within the period delivered, which began in the year ended March 31, 2012, was essentially completed by March 31, 2013. As a result, the deferred services revenue balance, which was approximately $31 million on March 31, 2012, decreased to $22.1 million on June 30, 2013 and will decrease further as the deferred revenue from services projects which were previously deferred is amortized. The effect of this amortization in any period is to cause the services revenue recognized for each period to be greater than the value of services actually delivered during that period. We currently estimate that all of the deferred revenue related to services projects that occurred prior to establishing stand-alone value will be amortized by March 2017. After amortization is complete, the excess of services revenue recognized in a period over the value of services actually delivered in that period will diminish, affecting the percentage of services revenue to total revenue. The average of services revenue recognized to total revenue recognized for the three years ended March 31, 2013 is 31%.

Cost of Revenue

Our cost of revenue is primarily comprised of salaries and personnel-related expenses related to our customer support, implementation, solution deployment, on-boarding and data center operations, the cost of professional services provided by Compuware and other third-party contractors, depreciation and amortization expenses related to capitalized research and development, acquisitions and capital expenditures, third-party hosting fees, third-party software license fees and outside services related to our call center. Where we have established third-party evidence of the stand-alone value of our services, we recognize expense with the associated revenue recognition as services are delivered. Costs associated with deferred services revenue are

 

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recognized ratably, generally over five years, beginning upon customer acceptance of the deliverable consistent with the associated revenue.

We expect that our cost of revenue in absolute dollars may increase in the future as we continue to support the implementation, configuration, hosting and support of new customers. We expect our cost of revenue may fluctuate as a percentage of total revenue due to growth of our services revenue, changes in the percentage of services recognized using the proportional performance method, the amount and timing of depreciation and amortization, changes in the amount of services performed by our customers or other vendors and the mix of subscription and support revenue relative to services revenue.

Research and Development

Research and development costs are primarily comprised of salaries and personnel-related expenses, services provided by Compuware and other third-party contractors related to software development, software license and hardware fees and depreciation and amortization related to acquisitions and capital expenditures. As part of our separation from our parent, most Compuware personnel providing such services to us transitioned to Covisint during the three months ended March 31, 2013 or were replaced with additions to our research and development staff. Compuware personnel represented approximately 20% and 30% of our research and development costs incurred during fiscal 2012 and 2013, respectively.

We focus our research and development on new and expanded features of our platform and vertical-specific solutions. Since February 2010, when we implemented additional tracking related to the time spent on approved research and development projects, we have capitalized an increasing portion of our research and development costs. In the three months ended June 30, 2013, as compared with the same period in 2012, we capitalized a smaller portion of our research and development costs as a result of a recent change to the agile delivery methodology for our platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. Our capitalized research and development costs are amortized as a cost of revenue ratably over 60 months upon completion of the project. We expect our fiscal 2014 research and development costs incurred, as a percentage of revenue, to remain consistent with such costs incurred during fiscal 2013. We expect research and development costs expensed to increase in the future in both absolute dollars and as a percentage of revenue.

Sales and Marketing

Sales and marketing costs are primarily comprised of salaries and personnel-related expenses, commissions, travel expense, marketing program fees, services provided by Compuware and other third-party contractors related to our marketing campaigns and amortization related to customer relationship agreements acquired as a result of various acquisitions. We plan to invest further in sales and marketing to create brand awareness, expand the scope and scale of our global operations, develop our sales channel and increase revenue from existing customers. We expect sales and marketing costs to increase in the future in absolute dollars.

Administrative and General

Administrative and general costs are primarily comprised of the allocated costs related to the services provided by our parent Compuware for facilities, information technology, tax, internal audit, accounting, finance, human resources, legal and other services, as well as salaries and personnel-related expenses including stock and cash incentive compensation. We expect administrative and general costs to increase in the future in absolute dollars to support the expected growth of the business and due to the additional expense associated with being a publicly traded company.

Income Taxes

Provision for income taxes is comprised of federal and state taxes in the United States as well as certain foreign tax jurisdictions. Income taxes are accounted for using the asset and liability approach. Deferred income

 

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taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in our financial statements and net operating loss carryforwards.

Agreements with Compuware

We have entered into certain agreements with Compuware relating to this offering and our relationship with Compuware after this offering, including with respect to employee benefits, intellectual property, registration rights, shared services, professional services and taxes. These agreements will not require any specified minimum payments to Compuware, but do include payment obligations and other financial commitments. See “Certain Relationships and Related Party Transactions—Relationship with Compuware—Agreements between Compuware and Us.”

Under the shared services agreement, Compuware will provide us with certain administrative, financial, legal, tax, insurance, facility, information technology and other services. In general, we will be charged for shared services based on a pro rata allocation of Compuware’s costs.

Pursuant to the Compuware services agreement, Compuware and its affiliates will provide professional services in support of our solutions, to the extent that we request them. We will compensate Compuware for these professional services on a case-by-case basis in accordance with rates to be mutually agreed upon. We do not expect a material change in the cost model related to this agreement.

Critical Accounting Policies

Basis of Presentation

The financial statements included in this prospectus do not reflect any changes that may occur in our future financing and operations. Our financial statements have been prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, group equity and the disclosure of contingencies at the applicable balance sheet date and the results of operations for all periods presented. While we have based our assumptions and estimates on the facts and circumstances existing at June 30, 2013 and March 31, 2013, 2012 and 2011, final amounts may differ from estimates.

Effective January 1, 2013, Compuware contributed substantially all of the assets and liabilities related to the Covisint business to us. Prior to the contribution, we operated as a division within Compuware. Our financial statements reflect the assets, liabilities, revenue and expenses that were directly attributable to us as we operated within Compuware prior to the January 1, 2013 contribution of assets and liabilities 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 and as if the contribution had occurred at the commencement of Covisint operations. The historical financial results may not be indicative of the results that would have been achieved had we operated as a separate, stand-alone entity.

Prior to January 1, 2013, “group equity” was shown in lieu of shareholder’s equity in our audited financial statements. All significant transactions between Compuware and the Company were included in our 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. Since the January 1, 2013 contribution of the Covisint business to us, Compuware is providing Covisint with short-term, non-interest bearing operating cash advances until such time as Covisint has secured outside financing including an initial public offering or ceases to be a majority owned subsidiary of Compuware. The net effect of these intercompany transactions is reflected in the statements of cash flows as financing activity and in “due to parent and affiliates” in the balance sheets.

Our 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

 

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management functions provided by Compuware. These allocations were primarily based on headcount, revenue and space occupied as a proportion of those in all Compuware operating units. We believe the allocations are reasonable. However, the expenses allocated to us for these services are not necessarily indicative of the expense that would have been incurred if we had been a separate, independent entity and had otherwise managed these functions. Corporate expenses charged to the Company totaled $3.2 million and $2.7 million for the three months ended June 30, 2013 and 2012, respectively, and $10.8 million, $7.5 million and $6.2 million for the years ended March 31, 2013, 2012 and 2011, respectively. Corporate expenses charged to the Company are included in the “administrative and general” line item in the statements of comprehensive income. The increase in cost from prior years is primarily due to costs associated with establishing Covisint as an independent entity. All such costs and expenses have, prior to the January 1, 2013 contribution of the Covisint business to us, been deemed to have been contributed by Compuware to us in the period in which the costs were recorded. Prior to January 1, 2013, allocations of current income taxes are deemed to have been remitted, in cash, to Compuware in the period the related income taxes were recorded. In connection with the contribution, Compuware and the Company have entered into a tax sharing agreement. Pursuant to this agreement the amount of taxes to be paid by us will be determined, subject to certain adjustments, as if we and each of our subsidiaries included in such Consolidated Group or Combined Group filed our own consolidated, combined, unitary or separate tax return. Amounts due to or from Compuware have been treated as capital transactions within group equity. We will reimburse Compuware, or be reimbursed by Compuware, for intercompany transactions subsequent to the January 1, 2013 contribution of assets and liabilities. These costs and expenses have been deemed advances and have been recorded within the due to parent and affiliates balance within the balance sheets.

JOBS Act

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act.

Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and our audited financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we no longer meet the requirements of being an “emerging growth company,” upon the earlier of (i) the first fiscal year after our annual gross revenues are $1 billion or more, (ii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, and (iii) the date on which we are deemed to be a “large accelerated filer” as defined in the Exchange Act.

Revenue Recognition

We derive revenue through contracts under which we provide customers services including access to and support of our platform and services related to implementation, solution deployment and on-boarding. The

 

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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 and determinable, and collectability 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. We assess likelihood of cash collectability based on a number of factors including past collection history with the customer. If we determine that collectability is not reasonably assured, we defer the revenue until collectability becomes reasonably assured, generally upon receipt of cash. We assess whether the fee is fixed and 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 we fail to perform.

Our contracts may include subscription fees for ongoing PaaS operations and a project (services) fee. For arrangements that contain multiple elements, in accordance with Accounting Standards Update (ASU) 605 “Revenue Recognition,” the arrangement consideration is allocated based on relative selling price using the following hierarchy: vendor specific objective evidence, or VSOE, which represents the price when sold separately, if available; third-party evidence if VSOE is not available; or best estimated selling price if neither VSOE nor third-party evidence is available. We are currently unable to establish VSOE or third-party evidence of selling price for our deliverables. Therefore, we determine our best estimate of selling price by evaluating renewal amounts included in a contract, if any, and estimated costs to deliver each element.

Our subscription and support 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 customer’s access to our production environment or when all of the revenue recognition criteria have been met. We consider delivery to have occurred on the launch date, which is the point in time that a customer is provided access to use our platform.

During the year ended March 31, 2012, we established evidence of stand-alone value (based on other vendors providing similar services) for many of the services we perform. 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 fees 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. Revenue increased approximately $13 million and $11 million in fiscal 2013 and 2012, respectively, related to services which were recognized as delivered due to the establishment of stand-alone value for these services.

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 balance sheets and

 

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recognized as “sales and marketing” expenses in the 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 to be provided and is recognized as services are delivered or over the expected period during which the customer will receive benefit. We generally invoice our customers for subscription services 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 we anticipate will be recognized during the succeeding twelve-month period is recorded as current deferred revenue, and the remaining portion is recorded as non-current deferred revenue.

Cost of Revenue

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 our software and amortization of capitalized software.

Allowance for Doubtful Accounts

We consider 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 our best estimates of collectability.

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, $0.9 million and $1.5 million as of June 30, 2013, March 31, 2013 and 2012, respectively. In the future, we expect to capitalize a smaller portion of our research and development costs as a result of a recent change to the agile delivery methodology for our platform enhancements, which is expected to result in significantly shorter development cycles thereby reducing our capitalized costs.

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 totaled $1.6 million and $1.1 million during the three months ended June 30, 2013 and 2012, respectively and $4.9 million, $3.0 million and $2.4 million during the years ended March 31, 2013, 2012 and 2011, respectively, and is included in “cost of revenue” in the 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. We have not had any impairment charges related to capitalized software.

Research and Development

For development costs related to our PaaS offering, we follow the guidance set forth in Accounting Standards Codification (ASC) 350-40 which requires companies to capitalize qualifying computer software costs,

 

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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 $4.5 million and $3.8 million for the three months ended June 30, 2013 and 2012, respectively, of which $2.0 million and $3.7 million, respectively, was capitalized for internally developed software technology. Research and development costs amounted to $17.4 million, $9.4 million and $4.6 million for the years ended March 31, 2013, 2012, and 2011, respectively, of which $13.6 million, $8.0 million, and $2.9 million, respectively, was capitalized for internally developed software technology.

Goodwill and Other Intangible Assets

We are required to assess goodwill and other intangible assets with indefinite lives for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may exceed the fair value.

The performance test involves a two-step process. Step 1 of the impairment test involves comparing the fair value of the reporting unit with its aggregate carrying value, including goodwill. Application of the goodwill and other intangibles impairment test requires judgment, including the determination of the fair value of the reporting unit. The fair value of the reporting unit is estimated using a discounted cash flow model in combination with a market approach. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, estimation of market interest rates, determination of our weighted-average cost of capital and selection and application of peer groups. The key assumption in the market comparable value analysis is peer group selection. If the carrying amount of the reporting unit exceeds its fair value, the Company performs Step 2 of the goodwill and other intangibles 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. Under such evaluation, if the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, the impairment loss is recognized as an operating expense in an amount equal to that excess. There is a high degree of judgment regarding management’s forecast as market developments for both customers and competitors can affect actual results. There can also be uncertainty regarding management’s selection of peer companies as an exact match of peers is unlikely to exist.

The estimates used to calculate the fair value of the reporting unit change from year to year based on operating results, market conditions and estimated future cash flows. While we believe that the assumptions and estimates used to determine the estimated fair values of our reporting unit are reasonable, a change in assumptions underlying these estimates could materially affect the determination of fair value and goodwill impairment.

At March 31, 2013, the date of our last annual impairment test, we were not at risk of failing Step 1 of our goodwill and other intangibles impairment analysis since the estimated fair value of our single reporting unit was substantially in excess of its carrying value.

Income Taxes

Income taxes are presented on a separate return basis. Prior to January 1, 2013, the Covisint results of operations have been included in the consolidated, combined, unitary or separate income tax returns of Compuware. Income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available

 

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positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying business. Changes in estimates of projected future operating results or in assumptions regarding our ability to generate future taxable income during the periods in which temporary differences are deductible could result in significant changes to these tax liabilities and, therefore, to our net income.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a variety of jurisdictions across our global operations.

We recognize tax benefits from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

We recognize tax liabilities in accordance with ASC 740 “Income Taxes” and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of such tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

For additional information regarding these matters, see Note 6 of the audited combined and consolidated financial statements appearing elsewhere in this prospectus.

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.

Compuware Corporation Stock Compensation

Certain employees have been granted stock options in 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. Historically, Compuware has used the simplified method to determine the expected life of stock options granted as described in Staff Accounting Bulletin “SAB” Topic 14, “Share-Based Payment,” and during fiscal 2013, it was determined that the exercise history of Compuware’s stock option participants was comparable to the expected life estimated using the simplified method. Historically, dividend yields have not been a factor in determining the fair value of Compuware stock options granted, as Compuware had never issued a cash dividend. However, 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 fiscal 2014. For Compuware options granted after January 2013, a dividend assumption has been included in the fair value calculation to consider the future dividend payments.

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

 

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providing services to Covisint, during the years ended March 31, 2013, 2012 and 2011 and the three months ended June 30, 2013 and 2012:

 

     Years Ended March 31,     Three Months Ended
June 30,
 
     2013 (1)     2012     2011     2013 (2)     2012  

Expected volatility

     40.97     39.96     42.08     39.24     41.27

Risk-free interest rate

     0.96     1.65     2.43     1.54     1.01

Expected lives at date of grant (in years)

     6.3        5.8        6.1        7.5        6.1   

Weighted-average fair value of the options granted

   $ 4.08      $ 3.96      $ 4.16      $ 2.82      $ 3.58   

Dividend yield assumption

     0.00     0.00     0.00     4.41     0.00

 

(1)   Although a dividend assumption was included for options granted subsequent to January 2013, the average dividend assumption had a minimal impact on the weighted average fair value, as the majority of options were granted prior to the announcement of the intended dividend
(2)   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

We calculate the fair value of our 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. Because we do not have historical stock price data, the expected volatility assumption is based on an average of the historical volatility of comparable companies, or 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 we have never issued cash dividends and do not anticipate issuing cash dividends in the future.

As our stock is not currently traded on a stock exchange, the exercise price at the date of grant is determined by calculating the estimated fair market value of our operations divided by the total shares outstanding, including outstanding stock options that have not yet vested. The estimated fair market value of our operations is measured using an equal combination of the discounted cash flow and market comparable valuations and is discounted due to 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 selection of peer group companies and application of these peer group companies’ data to our operations. These objective and subjective factors included, but were not limited to:

 

   

our financial position and historical operating and financial performance as well as progress to date against planned budgets;

 

   

our financial projections and future prospects;

 

   

business conditions at the time;

 

   

the fact that option grants involved illiquid securities of a private company; and

 

   

the stock price performance of selected publicly held companies identified as being comparable to us.

The estimates used to calculate the fair value of our operations may change from year to year based on operating results, market conditions and estimated future cash flows. While we believe that the assumptions and estimates used to determine the estimated fair value of our operations are reasonable, a change in assumptions

 

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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.

All Covisint options include performance criteria which defer vesting until an initial public offering or change in control transaction occurs. Because there is expected to be a market for options at the time of vesting, fair value is not reduced for the present lack of marketability when determining the fair value of the options. The following is the average fair value per share of Covisint stock compensation awards estimated on the date of grant and the assumptions used for each Covisint option granted during the years ended March 31, 2013, 2012 and 2011:

 

     Years Ended March 31,  
     2013     2012     2011  

Expected volatility

     53.64     54.85     58.85

Risk-free interest rate

     1.02     1.41     3.13

Expected lives at date of grant (in years)

     5.6        6.8        7.6   

Weighted-average fair value of the options granted

   $ 4.47      $ 3.40      $ 1.50   

No options were granted during the quarters ended June 30, 2013 and 2012. See Note 5 to the unaudited condensed, combined and consolidated financial statements for a further discussion on stock-based compensation including the impact on net income during the reported periods.

On August 7, 2013, the Covisint Board approved a grant of stock options under the Covisint LTIP to Mr. Digirolamo, our new Chief Financial Officer, to purchase 120,000 shares of Covisint common stock. Fair value of the underlying shares ($8.87) was determined by our board of directors, by utilizing both a discounted cash flow method and a market comparable method. The valuation requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, estimation of market interest rates, determination of our weighted average cost of capital and selection and application of peer groups. Both methods were equally weighted in the estimation of fair value. The exercise price for such options ($7.18 per share) was determined based on the estimated fair market value of the shares including a 20% discount for lack of marketability as of the grant date. If an initial public offering occurs in 2013, the options will vest one-quarter upon the initial public offering, and one-quarter will vest on each of the first, second and third anniversary dates of the initial public offering. If an initial public offering occurs in 2014, one-half of the options will vest upon the initial public offering and one-quarter will vest on each of the first and second anniversary dates of the initial public offering. If an initial public offering occurs after January 1, 2015 and before August 25, 2015, three-quarters of the options will vest upon the initial public offering and the one-quarter will vest on the first anniversary of the initial public offering. If a change in control of Covisint occurs within 12 months of the employee’s hire date and his employment is terminated by Covisint without cause or by him for good reason within 12 months of such change in control, one-quarter of the options will vest. If a change in control of Covisint occurs more than 12 months following the employee’s hire date and his employment is terminated by Covisint without cause or by him for good reason within 12 months of such change in control, all of the options will fully vest. These options expire 10 years after the grant date. The fair value per option was measured as $4.77 based on the following assumptions:

 

Expected volatility

     51.42

Risk-free interest rate

     1.63

Expected life at date of grant (in years)

     5.6   

The measurement of the fair value per option includes the impact of the variance between the exercise price and the estimated fair value of the underlying shares in accordance with ASC 718, and results in total compensation expense of $0.6 million associated with this grant, which will be recognized over the requisite service period beginning August 2013 and ending on the third anniversary of the initial public offering, presuming such offering occurs in calendar 2013, with a cumulative catch-up in the period such offering occurs.

 

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On March 4, 2013, 810,000 options were granted to certain employees and non-employee directors of our company. These options utilized the fair value calculations as of December 31, 2012, since there had not been a significant change in expected future cash flows or in the market during the two months subsequent to the date of the valuation. The exercise price for such options ($6.77 per share) was determined based on the estimated fair market value of the shares ($8.26 per share) as adjusted by a 20% discount for lack of marketability as of the grant date. If an initial public offering occurs in 2013, the options will vest one-third upon the initial public offering, and one-third will vest on each of the first and second anniversary dates of the initial public offering. If an initial public offering occurs in 2014, two-thirds of the options will vest upon the initial public offering and one-third will vest on the first anniversary of the initial public offering. If an initial public offering occurs after January 1, 2015, all options will vest upon the initial public offering. All options become fully vested upon a change in control of Covisint. The non-employee director options expire 10 years after the grant date. The remaining options were granted to our employees and expire on August 26, 2015, if no offering or change in control has occurred prior to that date. The average fair value per option was $4.47 based on the following assumptions:

 

Expected volatility

     53.64

Risk-free interest rate

     1.02

Expected lives at date of grant (in years)

     5.6   

The average fair value per share includes the impact of the variance between the exercise price and the estimated fair value of the underlying shares in accordance with ASC 718 and totals $3.5 million, which will be recognized over the requisite service period beginning March 2013 and ending on the second anniversary of the initial public offering, presuming such offering occurs in calendar 2013, with a cumulative catch-up in the period such offering occurs.

One stock option award was made on February 13, 2012 in the amount of 52,500 shares and with an exercise price of $6.21 per share. The exercise price was based on estimated fair market value and determined by our board of directors by utilizing a discounted cash flow model and an estimate based on market multiples.

As of June 30, 2013, 4,255,500 options were outstanding. These options will vest only if, prior to August 26, 2015, we complete an initial public offering or if there is a change in control of our company. We have determined that options granted prior to December 2012 may not satisfy certain requirements of Section 409A of the Code and, therefore, offered recipients of these options an amendment which provides for fixed exercise dates for options that are amended. We intend that this amendment will cure any failure of the options to comply with Section 409A of the Code without incurring penalties thereunder. In December 2012, 3,303,000 of the 3,558,000 then outstanding options, including the options granted February 13, 2012, were amended. The compensation cost associated with the amendments is based on the fair value of the modified award. Fair value of the underlying shares ($8.25) was determined by our board of directors, by utilizing both a discounted cash flow method and a market comparable method. The valuation requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, estimation of market interest rates, determination of our weighted average cost of capital and selection and application of peer groups. Both methods were equally weighted in the estimation of fair value. The fixed exercise dates are during the three calendar years following an initial public offering and extend the requisite service period for options which were so amended through January 1 of the third calendar year following an initial public offering. In connection with the modification of the options, we have also agreed to reimburse the option holders who have accepted the amendment for certain negative personal tax implications incurred as a result of any violation of Section 409A of the Code that may later be found to have occurred. Any such reimbursement would also include a tax gross-up, resulting in the net reimbursement equaling any penalties incurred based on Section 409A of the

 

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Code. Following is the average fair value per share estimated on the modification date and the assumptions used for the modification as of December 31, 2012:

 

     Original Grant Date  
     Aug.-Dec. 2009     Apr. 2010     Jan. 2011     Feb. 2012  

Exercise price

   $ 1.73      $ 2.11      $ 3.50      $ 6.21   

Expected volatility

     40     40     40     40

Risk-free interest rate

     0.36     0.36     0.36     0.36

Expected lives at date of modification (in years)

     2.9        2.9        2.9        2.9   

Weighted-average fair value of the modified options

   $ 6.55      $ 6.19      $ 4.96      $ 3.13   

The fair value of the Company has increased since the original grant dates primarily as a result of increased revenues since the original option grants were made as well as changes in market valuations. Revenues have increased approximately 125 percent since fiscal 2010, when the first options were granted and we expect revenues to continue to grow. Previous valuation estimates were more heavily weighted toward a discounted cash flow method, since a market transaction was not anticipated in the short term. The previous valuations used risk-adjusted discount rates ranging from 14.3% to 17.5%, which varied based on several factors including the Company’s size premium and fluctuations in the market. The Company’s most recent valuations, as of December 31, 2012 and June 30, 2013, both used a risk-adjusted discount rate of 16%. The Company has applied a non-marketability discount of 20% in each of its previous valuations, for purposes of establishing the exercise price of the options granted.

Certain individuals, who received stock options from the 2009 Covisint Long-Term Incentive Plan, were also awarded performance-based share awards, or PSAs, from Compuware. As of June 30, 2013, there were approximately 631,000 PSAs outstanding that were granted to our employees and directors. These PSAs will vest only if we do not complete an initial public offering or a change in control transaction by August 25, 2015 and we meet a pre-defined revenue target for any four consecutive calendar quarters ending prior to August 26, 2015.

All Covisint options include performance criteria based on an offering or change in control of our company. Consummation of an offering is not deemed probable until it has been completed; therefore, no expense is currently being recognized for these options. If an initial public offering or change in control occurs prior to August 26, 2015, the PSAs granted to employees with Covisint stock options will be cancelled. As a result, expense will be recognized for the Covisint stock options over the requisite service period; however, all prior expense taken for the PSAs for employees with Covisint stock options (expected to be approximately $3.1 million through September 30, 2013) will be reversed. Presuming this offering becomes effective before September 30, 2013, compensation expense related to Covisint options, including those granted in August 2013, would be $9.6 million (net of a reversal of expense associated with the Compuware PSAs) for the quarter ended September 30, 2013, $5.5 million for the remainder of fiscal 2014, $5.3 million in fiscal 2015 and $1.7 million in fiscal 2016. The expense decreases as each tranche vests and becomes fully expensed.

Assuming the sale of common stock contemplated by this offering is consummated at $10.00 per share, which is the midpoint of the range of the initial public offering prices listed on the cover page of this prospectus, the aggregate intrinsic values of options to purchase shares of our common stock outstanding as of the offering date would be $31.0 million. Although it is possible that the completion of this offering will add value to the shares of our common stock because they will have increased liquidity and marketability, the amount of any additional value cannot be measured with precision or certainty.

Please see Note 5 to the unaudited condensed, combined and consolidated financial statements included elsewhere in this prospectus for more information related to these options. All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense.

 

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Results of Operations

The following table is a summary of our combined and consolidated statements of comprehensive income data:

 

     Years Ended March 31,     Three Months Ended
June  30,
 
     2013     2012     2011     2013     2012  
     (In thousands)              

Combined and Consolidated Statements of Comprehensive Income Data:

          

Subscription and support

   $ 56,978      $ 49,153      $ 44,970      $ 15,943      $ 13,120   

Services

     33,754        25,522        9,184        8,158        7,493   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     90,732        74,675        54,154        24,101        20,613   

Cost of revenue(1)

     47,575        41,477        27,501        13,310        10,678   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     43,157        33,198        26,653        10,791        9,935   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(1)

     3,799        1,341        1,687        2,585        174   

Sales and marketing(1)

     26,593        22,544        16,571        7,339        5,512   

Administrative and general(1)

     18,315        12,583        10,288        5,534        4,116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     48,707        36,468        28,546        15,458        9,802   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (5,550     (3,270     (1,893     (4,667     133   

Other income

     0        0        750        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax provision

     (5,550     (3,270     (1,143     (4,667     133   

Income tax provision

     98        57        132        3        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (5,648   $ (3,327   $ (1,275   $ (4,670   $ 131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share(2)

   $ (0.19   $ (0.11   $ (0.04   $ (0.16   $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding, Basic and diluted(2)

     30,003        30,003        30,003        30,003        30,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

As of June 30, 2013, all vested stock compensation was in the form of Compuware stock awards. All outstanding Covisint stock options include a performance condition based on the occurrence of an initial public offering or change in control of the Company. Therefore, stock compensation expense incurred through June 30, 2013 has related only to Compuware stock awards provided to Covisint employees. Upon consummation of this offering or a change in control of Covisint, we will begin to recognize $25.2 million of compensation expense related to Covisint options including options granted in August 2013. Approximately 83% of the expense relates to stock options that were modified; this expense will be recognized over the requisite service period beginning December 31, 2012 (the modification date) and ending on January 1 of the third calendar year following an initial public offering, with a cumulative catch-up in the period in which such offering occurs. Approximately 13% of the expense relates to stock options issued during March 2013; this expense will be recognized over the requisite service period beginning March 2013 and ending on the second anniversary of an initial public offering, presuming such offering occurs in calendar 2013, with a cumulative catch-up in the period in which such offering occurs. These expenses will be offset by a reduction in expense associated with cancellation of certain outstanding Compuware awards due to the occurrence of an initial public offering or change in control of the Company. We expect to incur net compensation expense of $9.6 million associated with these options and awards in the quarter in which this offering occurs. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Stock Compensation—Covisint

 

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Corporation Stock Compensation”. All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. The statements above include stock compensation as follows:

 

     Years Ended March 31,      Three Months Ended
June  30,
 
     2013      2012      2011      2013      2012  
     (In thousands)                

Stock compensation classified as:

              

Cost of revenue

   $ 6       $ 5       $ 111       $ 5       $ —     

Research and development

     1         1         3         47         —     

Sales and marketing

     360         9         9         47         25   

Administrative and general

     1,262         1,077         1,450         387         297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock compensation expense

   $ 1,629       $ 1,092       $ 1,573       $ 486       $ 322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)   Please see Note 5 to our audited combined and consolidated financial statements and Note 3 of to our unaudited condensed, combined and consolidated financial statements for an explanation of the method used to calculate the historical net income (loss) per share attributable to common shareholders and the number of shares used in computation of the per share amounts.

The following table sets forth a summary of our combined and consolidated statement of comprehensive income as a percentage of our total revenue:

 

     Years Ended March 31,     Three Months Ended
June  30,
 
     2013     2012     2011     2013     2012  

Combined and Consolidated Statements of Comprehensive Income Data:

          

Subscription and support

     63     66     83     66     64

Services

     37        34        17        34        36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100        100        100        100        100   

Cost of revenue(1)

     52        56        51        55        52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     48        44        49        45        48   

Operating expenses:

          

Research and development(1)

     4        2        3        11        1   

Sales and marketing(1)

     30        30        31        30        26   

Administrative and general(1)

     20        17        19        23        20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     54        49        53        64        47   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (6     (5     (4     (19     1   

Other income

     0        0        1        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before for income tax provision

     (6     (5     (3     (19     1   

Income tax provision

     0        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (6 )%      (5 )%      (3 )%      (19 )%      1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

As of June 30, 2013, all vested stock compensation was in the form of Compuware stock awards. All outstanding Covisint stock options include a performance condition based on the occurrence of an initial public offering or change in control of the Company. Therefore, stock compensation expense incurred through June 30, 2013 has related only to Compuware stock awards provided to Covisint employees. Upon consummation of this offering or a change in control of Covisint, we will begin to recognize $25.2 million of compensation expense related to Covisint options including options granted in August 2013. Approximately 83% of the expense relates to stock options that were modified; this expense will be recognized over the requisite service period beginning December 31, 2012 (the modification date) and ending on January 1 of the third calendar year following an initial public offering, with a cumulative catch-up in the period in which such offering occurs. Approximately 13% of the expense relates to stock options issued during March 2013; this expense will be recognized over the requisite service period beginning March 2013 and ending on the second anniversary of an initial public offering, presuming such offering occurs in calendar 2013, with a cumulative catch-up in the period in which such offering occurs. These expenses will be offset by a reduction in expense associated with cancellation of certain outstanding Compuware awards due to

 

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the occurrence of an initial public offering or change in control of the Company. We expect to incur net compensation expense of $9.6 million associated with these options and awards in the quarter in which this offering occurs. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Stock Compensation—Covisint Corporation Stock Compensation”. All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense.

Three Months Ended June 30, 2013 and 2012

Revenue

Revenue derived from our subscription and support and services is presented in the table below:

 

     Three Months Ended June 30,      Period-to-Period
Change
 
         2013              2012              $              %      
     (In thousands)         

Subscription and support

   $ 15,943       $ 13,120       $ 2,823         22

Services

     8,158         7,493         665         9
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 24,101       $ 20,613       $ 3,488         17
  

 

 

    

 

 

    

 

 

    

Our total revenue increased due to increases in both our subscription and support revenue and our services revenue. Our increase in subscription and support revenue was primarily due to continued growth within our non-automotive verticals. Our increase in services revenue was primarily due to a large deployment with a new automotive customer. Of the increase in subscription and support revenue, there was approximately $1.9 million from sales to new customers and approximately $1.2 million was due to increased revenue from existing customers. These increases were offset by a decline in revenue from customers that terminated or elected not to renew their agreements aggregating approximately $0.3 million.

Cost of Revenue

Cost of revenue is presented in the table below:

 

     Three Months Ended June 30,     Period-to-Period
Change
 
         2013             2012             $              %      
     (In thousands)         

Cost of revenue

   $ 13,310      $ 10,678      $ 2,632         25

Gross margin

     45     48     

Cost of revenue increased during the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to an increase in revenue. Cost increases include $3.5 million in salaries and personnel-related expenses in connection with our customer support, implementation, solution deployment, on-boarding and data center operations fees. This increase was offset by a decrease of $1.6 million in Compuware and other third-party contractors primarily as a result of the transition of most Compuware personnel to Covisint during the three months ended March 31, 2013.

Our gross margin decreased during the three months ended June 30, 2013, as compared with the same period in 2012, due to an increase of $0.6 million related to the amortization of capitalized research and development costs and purchased software. We have historically capitalized a significant portion of our research and development costs. As a result, amortization of capitalized research and development costs and purchased software accounted for $1.6 million and $1.1 million of the cost of revenue during the three months ended June 30, 2013 and 2012, respectively.

 

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Research and Development

Research and development costs incurred, expensed and capitalized are presented in the table below:

 

     Three Months Ended June 30,     Period-to-Period
Change
 
         2013             2012             $             %      
     (In thousands)        

Research and development costs incurred

   $ 4,537      $ 3,828      $ 709        19

Capitalized internal software costs

     (1,952     (3,654     (1,702     47
  

 

 

   

 

 

   

 

 

   

Research and development costs expensed

   $ 2,585      $ 174      $ 2,411        1386
  

 

 

   

 

 

   

 

 

   

Percentage of total revenue:

        

Research and development costs incurred

     19     19    

Research and development costs expensed

     11     1    

Research and development costs incurred and expensed increased during the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to a $1.5 million increase in salaries and personnel-related expenses offset by a $0.9 million decrease in fees paid to Compuware and other third-party contractors for software development activities. The decline in fees paid to Compuware and other third-party contractors and increase in salaries and personnel-related expenses was primarily the result of the transition of most Compuware personnel to Covisint during the three months ended March 31, 2013. We capitalized $2.0 million and $3.7 million of research and development costs during the three months ended June 30, 2013 and 2012, respectively.

We decreased capitalization of our research and development costs during the three months ended June 30, 2013 as compared to the same period in 2012 due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This change increased the proportion of our research and development costs expensed relative to our research and development costs incurred.

Sales and Marketing

Sales and marketing costs are presented in the table below:

 

     Three Months Ended June 30,     Period-to-Period
Change
 
         2013             2012             $              %      
     (In thousands)         

Sales and marketing

   $ 7,339      $ 5,512      $ 1,827         33

Percentage of total revenue

     30     26     

Sales and marketing costs increased during the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to a $1.3 million increase in salaries and personnel-related expenses resulting from an increase in the number of sales and marketing personnel, $0.3 million in travel costs, and a $0.2 million increase in marketing program fees.

Administrative and General

Administrative and general costs are presented in the table below:

 

     Three Months Ended June 30,     Period-to-Period
Change
 
         2013             2012             $              %      
     (In thousands)         

Administrative and general

   $ 5,534      $ 4,116      $ 1,418         34

Percentage of total revenue

     23     20     

 

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Administrative and general costs increased during the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to an increase of $0.5 million of costs related to the services provided by our parent Compuware and the costs associated with the establishment of Covisint as an independent entity. We expect to continue incurring the cost associated with the services provided by Compuware in future periods. In addition, there was a $0.5 million increase in legal and audit fees related to the separation from our parent in preparation for this offering.

Years Ended March 31, 2013 and 2012

Revenue

Revenue derived from our subscription and support and services is presented in the table below:

 

     Year Ended March 31,      Period-to-Period
Change
 
         2013              2012              $              %      
     (In thousands)         

Subscription and support

   $ 56,978       $ 49,153       $ 7,825         16

Services

     33,754         25,522         8,232         32
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 90,732       $ 74,675       $ 16,057         22
  

 

 

    

 

 

    

 

 

    

Our total revenue increased due to increases in both our subscription and support revenue and our services revenue. Our increase in subscription and support revenue was primarily due to continued expansion with our automotive customers and growth in sales to new industry verticals. Of the increase in subscription and support revenue, approximately $8.6 million was due to increased revenue from existing customers. Additionally, there was approximately $1.2 million from sales to new customers. These increases were offset by a decline in revenue from customers that terminated or elected not to renew their agreements aggregating approximately $1.9 million, primarily as a result of the dissolution of a significant healthcare customer.

Our increase in services revenue was primarily due to establishing stand-alone value for an increasing proportion of the services we perform during the year ended March 31, 2013, which allowed us to recognize the related revenue as the services were delivered rather than over the expected customer life. Approximately $16.9 million and $11.8 million of services revenue in the years ended March 31, 2013 and 2012, respectively, was recognized as delivered due to establishing stand-alone value that would have historically been recognized ratably.

Cost of Revenue

Cost of revenue is presented in the table below:

 

     Year Ended March 31,     Period-to-Period
Change
 
         2013             2012             $              %      
     (In thousands)         

Cost of revenue

   $ 47,575      $ 41,477      $ 6,098         15

Gross margin

     48     44     

Cost of revenue increased during the year ended March 31, 2013, as compared to the year ended March 31, 2012, primarily due to an increase in revenue including a greater percentage of services revenue. Our gross margin increased during the year ended March 31, 2013, as compared with the same period in 2012, due to our use of less costly resources to deliver our services as well as economies of scale gained on our infrastructure and hosting costs. We also capitalize a significant portion of our research and development costs. As a result, amortization of capitalized research and development costs and purchased software accounted for $4.9 million and $3.0 million of the cost of revenue during the years ended March 31, 2013 and 2012, respectively.

 

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Research and Development

Research and development costs incurred, expensed and capitalized are presented in the table below:

 

     Year Ended March 31,     Period-to-Period
Change
 
         2013             2012             $             %      
     (In thousands)        

Research and development costs incurred

   $ 17,378      $ 9,377      $ 8,001        85

Capitalized internal software costs

     (13,579     (8,036     (5,543     (69 )% 
  

 

 

   

 

 

   

 

 

   

Research and development costs expensed

   $ 3,799      $ 1,341      $ 2,458        183
  

 

 

   

 

 

   

 

 

   

Percentage of total revenue:

        

Research and development costs incurred

     19     13    

Research and development costs expensed

     4     2    

Research and development costs incurred and expensed increased during the year ended March 31, 2013, as compared to the year ended March 31, 2012, primarily due to a $4.2 million increase in fees paid to Compuware and other third-party contractors for software development activities and a $3.7 million increase in salaries and personnel-related expenses. We capitalized $13.6 million and $8.0 million of research and development costs during fiscal 2013 and 2012, respectively.

Sales and Marketing

Sales and marketing costs are presented in the table below:

 

     Year Ended March 31,     Period-to-Period
Change
 
         2013             2012             $              %      
     (In thousands)         

Sales and marketing

   $ 26,593      $ 22,544      $ 4,049         18

Percentage of total revenue

     30     30     

Sales and marketing costs increased during the year ended March 31, 2013, as compared to the year ended March 31, 2012, primarily due to a $1.6 million increase in salaries and personnel-related expenses resulting from an increase in the number of sales and marketing personnel, and a $0.9 million increase in marketing program fees.

Administrative and General

Administrative and general costs are presented in the table below:

 

     Year Ended March 31,     Period-to-Period
Change
 
         2013             2012             $              %      
     (In thousands)         

Administrative and general

   $ 18,315      $ 12,583      $ 5,732         46

Percentage of total revenue

     20     17     

Administrative and general costs increased during the year ended March 31, 2013, as compared to the year ended March 31, 2012, primarily due to an increase of $3.3 million of allocated costs related to the services provided by our parent Compuware and the costs associated with the establishment of Covisint as an independent entity. We expect to continue incurring the cost associated with the services provided by Compuware in future periods. In addition, there was a $2.2 million increase in legal and audit fees related to the separation from our parent in preparation for this offering.

 

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Years Ended March 31, 2012 and 2011

Revenue

Revenue derived from our subscription and support and services is presented in the table below:

 

     Year Ended March 31,      Period-to-Period
Change
 
         2012              2011              $              %      
     (In thousands)         

Subscription and support

   $ 49,153       $ 44,970       $ 4,183         9

Services

     25,522         9,184         16,338         178
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 74,675       $ 54,154       $ 20,521         38
  

 

 

    

 

 

    

 

 

    

Our total revenue increased due to increases in both our subscription and support revenue and our services revenue. Subscription and support revenue increased primarily due to growth in sales of our solutions to automotive customers and new industry verticals. Of the increase in subscription and support revenue, approximately $6.3 million was due to increased revenue from existing customers and $3.1 million was due to new customers. These increases were offset by a decline in revenue from customers that terminated or elected not to renew their agreements during the last two fiscal years aggregating approximately $3.7 million and a $1.5 million reduction in PQRS revenue due to a decline in submissions, which we attribute to a change in the incentive rate of the program. We recognized subscription and support revenue related to our PQRS solution in the amount of $1.3 million and $2.8 million in the years ended March 31, 2012 and 2011, respectively.

Our services revenue increased during the year ended March 31, 2012, as compared to the year ended March 31, 2011, primarily due to establishing stand-alone value for certain services, which allowed us to recognize the related revenue as the services were delivered rather than over the expected customer life. During fiscal 2012, approximately $11.8 million of services revenue that historically would have been recognized ratably was recognized as delivered due to establishing stand-alone value. In addition, our services revenue increased due to several large services engagements with both new and existing customers during fiscal 2012.

Cost of Revenue

Cost of revenue is presented in the table below:

 

     Year Ended March 31,     Period-to-Period
Change
 
         2012             2011             $              %      
     (In thousands)         

Cost of revenue

   $ 41,477      $ 27,501      $ 13,976         51

Gross margin

     44     49     

Cost of revenue increased during the year ended March 31, 2012, as compared to the year ended March 31, 2011, primarily related to the increase in revenue from our automotive customers. Cost increases include $9.3 million in fees paid to Compuware and other third-party contractors, $2.0 million in recognition of deferred costs related to deferred services revenue, $0.8 million in hosting and technology-related costs and $0.7 million in amortization of capitalized software and purchased software. These increases were offset by a decrease of $1.2 million in salaries and personnel-related expenses in connection with our customer support, implementation, solution deployment, on-boarding and data center operations. We also capitalize a significant portion of our research and development costs. As a result, amortization of capitalized software costs and purchased software accounted for $3.0 million and $2.4 million of cost of revenue during fiscal 2012 and 2011, respectively.

Our gross margin was negatively impacted by the recognition of increased services revenues and the related expenses, as services fees typically have a lower margin than our subscription and support fees, as well as the $1.5 million decrease in PQRS revenue between fiscal 2011 and 2012.

 

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Research and Development

Research and development costs incurred, expensed and capitalized are presented in the table below:

 

     Year Ended March 31,     Period-to-Period
Change
 
         2012             2011             $             %      
     (In thousands)        

Research and development costs incurred

   $ 9,377      $ 4,598      $ 4,779        104

Capitalized internal software costs

     (8,036     (2,911     (5,125     (176 )% 
  

 

 

   

 

 

   

 

 

   

Research and development costs expensed

   $ 1,341      $ 1,687      $ (346     (21 )% 
  

 

 

   

 

 

   

 

 

   

Percentage of total revenue:

        

Research and development costs incurred

     13     8    

Research and development costs expensed

     2     3    

Research and development costs incurred increased during the year ended March 31, 2012, as compared to the year ended March 31, 2011, primarily due to a $3.7 million increase in fees paid to Compuware and other third-party contractors and a $1.1 million increase in salaries and personnel-related expenses during fiscal 2012, as a result of increased software development to support regulatory changes in the healthcare industry and entry into the energy industry.

Research and development costs expensed decreased during the year ended March 31, 2012, as compared to the year ended March 31, 2011, primarily due to increased capitalization as a result of additional tracking of time spent on approved research and development projects. We capitalized $8.0 million and $2.9 million of research and development costs during fiscal 2012 and 2011, respectively.

Sales and Marketing

Sales and marketing costs are presented in the table below:

 

     Year Ended March 31,     Period-to-Period
Change
 
         2012             2011             $              %      
     (In thousands)         

Sales and marketing

   $ 22,544      $ 16,571      $ 5,973         36

Percentage of total revenue

     30     31     

Sales and marketing costs increased during the year ended March 31, 2012, as compared to the year ended March 31, 2011, primarily due to increased investment in sales personnel as we expanded in the healthcare market and into new vertical markets. With respect to our sales and marketing activities, we experienced an increase of $4.6 million in salaries and personnel-related expenses, $0.4 million in fees paid to Compuware and other third-party contractors, $0.4 million in travel costs, and $0.4 million in marketing costs.

Administrative and General

Administrative and general costs are presented in the table below:

 

     Year Ended March 31,     Period-to-Period
Change
 
         2012             2011             $              %      
     (In thousands)         

Administrative and general

   $ 12,583      $ 10,288      $ 2,295         22

Percentage of total revenue

     17     19     

 

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Administrative and general costs increased during the year ended March 31, 2012, as compared to the year ended March 31, 2011, primarily due to a $1.3 million increase of allocated costs related to services provided by Compuware, a $0.4 million increase in salaries and personnel-related expenses and $0.3 million increase in legal and audit fees related to the separation from our parent.

Stock and cash incentive compensation included a $1.2 million charge during the quarter ended March 31, 2011 for the accumulation of stock compensation expense associated with performance-based stock awards for which the performance target became probable of being met during the quarter.

Quarterly Results of Operations

The following table presents our unaudited quarterly condensed, combined and consolidated statements of comprehensive income data for the eight quarters commencing with the quarter ended September 30, 2011 and ending with the quarter ended June 30, 2013. We have prepared the quarterly data on a consistent basis with the financial statements included in this prospectus. The quarterly information should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. Our quarterly results have varied in the past, and we believe that comparisons of our quarterly results of operations are not indicative of our future performance.

 

     Three Months Ended  
     Jun 30,
2013
    Mar 31,
2013
    Dec 31,
2012
    Sep 30,
2012
    Jun 30,
2012
     Mar 31,
2012
    Dec 31,
2011
    Sep 30,
2011
 
     (in thousands)  

Combined and Consolidated Statements of Comprehensive Income:

                 

Subscription and support

   $ 15,943      $ 15,741      $ 14,499      $ 13,618      $ 13,120       $ 13,881      $ 12,118      $ 11,096   

Professional services

     8,158        9,971        9,302        6,988        7,493         7,552        6,582        6,141   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

     24,101        25,712        23,801        20,606        20,613         21,433        18,700        17,237   

Cost of revenue(1)

     13,310        13,553        12,173        11,171        10,678         9,403        10,685        11,497   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     10,791        12,159        11,628        9,435        9,935         12,030        8,015        5,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

                 

Research and development(1)

     2,585        2,901        480        244        174         186        229        664   

Sales and marketing(1)

     7,339        8,089        6,510        6,482        5,512         5,853        5,592        5,991   

Administrative and general(1)

     5,534        4,448        4,787        4,964        4,116         3,365        3,072        3,071   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     15,458        15,438        11,777        11,690        9,802         9,404        8,893        9,726   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax provision

     (4,667     (3,279     (149     (2,255     133         2,626        (878     (3,986

Income tax provision (benefit)

     3        10        31        55        2         (190     29        322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (4,670   $ (3,289   $ (180   $ (2,310   $ 131       $ 2,816      $ (907   $ (4,308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)  

As of June 30, 2013, all vested stock compensation was in the form of Compuware stock awards. All outstanding Covisint stock options include a performance condition based on the occurrence of an initial public offering or change in control of the Company. Therefore, stock compensation expense incurred through June 30, 2013 has related only to Compuware stock awards provided to Covisint employees. Upon consummation of this offering or a change in control of Covisint, we will begin to recognize $25.2 million of compensation expense related to Covisint options including options granted in August 2013. Approximately 83% of the expense relates

 

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to stock options that were modified; this expense will be recognized over the requisite service period beginning December 31, 2012 (the modification date) and ending on January 1 of the third calendar year following an initial public offering, with a cumulative catch-up in the period in which the such offering occurs. Approximately 13% of the expense relates to stock options issued during March 2013; this expense will be recognized over the requisite service period beginning March 2013 and ending on the second anniversary of an initial public offering, presuming such offering occurs in calendar 2013, with a cumulative catch-up in the period in which such offering occurs. These expenses will be offset by a reduction in expense associated with cancellation of certain outstanding Compuware awards due to the occurrence of an initial public offering or change in control of the Company. We expect to incur net compensation expense of $9.6 million associated with these options and awards in the quarter in which this offering occurs. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Stock Compensation—Covisint Corporation Stock Compensation”. All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. The statements above include stock compensation as follows:

 

            Three Months Ended  
     Jun 30,
2013
     Mar 31,
2013
     Dec 31,
2012
     Sep 30,
2012
     Jun 30,
2012
     Mar 31,
2012
     Dec 31,
2011
     Sep 30,
2011
 
            (In thousands)  

Stock awards compensation classified as:

                       

Cost of revenue

   $ 5       $ 4       $ 1       $ 1       $ —        $ 1       $ 2       $ 1   

Research and development

     47         —          1         —          —          (1      1         1   

Sales and marketing

     47         240         52         43         25         4         5         1   

Administrative and general

     387         280         342         343         297         290         113         380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock awards compensation expense before income taxes

   $ 486       $ 524       $ 396       $ 387       $ 322       $ 294       $ 121       $ 383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth a summary of our quarterly combined and consolidated statement of comprehensive income data as a percentage of our total revenue:

 

     Three Months Ended  
     Jun 30,
2013
    Mar 31,
2013
    Dec 31,
2012
    Sep 30,
2012
    Jun 30,
2012
    Mar 31,
2012
    Dec 31,
2011
    Sep 30,
2011
 

Combined and Consolidated Statements of Comprehensive Income:

                

Subscription and support

     66     61     61     66     64     65     65     64

Professional services

     34        39        39        34        36        35        35        36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100