News Column

RENTRAK CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 6, 2014

Business Overview We are a global media measurement and information company serving the entertainment, television, video and advertising industries. Our Software as a Service ("SaaS") technology merges census-based television viewership information from over 100 million TVs and devices with consumer behavior and purchase information ("Advanced Demographics") across multiple platforms, devices and distribution channels. We also measure box office results from more than 100,000 movie screens in 36 countries throughout the world. We process and aggregate hundreds of billions of data transactions from multiple screens wherever entertainment content is viewed, whether at the box office, on a television screen, over the internet, on a smart phone or other portable device. Rentrak measures live TV, recorded TV ("DVR"), Video-On-Demand ("VOD"), and whether the content is free, purchased, rented, recorded, downloaded or streamed from multiple channels. These massive content databases provide stable and granular viewership information across every screen ("multiscreen") and are anonymously matched with third-party consumer segmentation and purchase databases using privacy compliant methodologies. By linking multiscreen viewership information with information about the products viewers consume and prefer, we provide our clients, such as content producers, distributors, advertisers and advertising agencies, with the knowledge necessary to more effectively manage their businesses, program and market their networks and more precisely target and sell their advertising inventory. The benefits to the advertising community are improvements in profitability while effectively targeting specific TV shows against the demographics of the products viewers buy, the cars they drive and how they are likely to vote in elections. The benefits to the movie industry and video (TV) content owners are they can manage their businesses in real time or near real time and also improve their profitability. Additionally, certain clients use our databases to populate programmatic buying systems. These systems automate the buying process and introduce efficiencies for both advertising agencies and their clients. Previously, we had two operating divisions within our corporate structure and we reported certain financial information by individual segment under this structure. Those two operating divisions were our Advanced Media and Information ("AMI") operating division, which included our media measurement services, and our Home Entertainment operating division, which included our distribution services as well as services that measure, aggregate and report consumer rental activity on film product from traditional "brick and mortar," online and kiosk retailers. During the fourth quarter of the fiscal year ended March 31, 2014 ("Fiscal 2014"), we initiated our plan to sell our Pay Per Transaction® ("PPT®") business, which has been a longstanding legacy business of Rentrak and a significant component of the Home Entertainment operating division. The PPT® business represented 42.5%, 48.3% and 58.4% of our total revenue for our fiscal years ended March 31, 2013, 2012 and 2011. For Fiscal 2014, it would have represented 37.4% of our total revenue if we had decided to retain the line. Our PPT® business has been in a state of decline due to the decline of physical DVD rentals from retail stores. This strategic decision to sell PPT® will enable us to focus more fully on the growth of our media measurement business and advanced consumer targeting business. Accordingly, we have restated our financial results and the PPT® business is reported as discontinued operations for all periods presented. As a result of our plan to divest our PPT® business, we will operate in a single business segment encompassing our media measurement services which are primarily delivered through scalable, SaaS products within our Entertainment Essentials™ lines of business. These syndicated big data services, offered primarily on a recurring subscription basis, provide consumer viewership information integrated with consumer segmentation and purchase behavior databases. We provide film studios, television networks and local stations, cable, satellite and telecommunications company ("telco") operators, advertisers and advertising agencies unique insights into consumer viewing and purchasing patterns through our comprehensive and expansive information on local, national, VOD and "Over the Top" television performance and worldwide box office results. Our movie measurement business is a global business measuring more than 90% of the ticket sales globally in real or near real time allowing for decisions to be made to market, promote and manage the industry for maximum profitability.



See "Forward-Looking Statements" on page 2.

Our Products and Services We provide media measurement business intelligence services across multiple screens and platforms delivered as SaaS. These services, offered primarily on a recurring subscription basis, are distributed to clients through patent pending software systems and business processes into two broad areas within the entertainment industry, which we refer to as TV Everywhere™ and Movies Everywhere™. Our systems capture total television audience information by providing the largest coverage from multiple screens and providers and merge that information with Advanced Demographics and information relating to actual consumer purchase behavior. 18



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Typical customers utilizing our services include content producers, studios, distributors, national networks, local stations, satellite and cable operators, agencies, and a wide spectrum of advertisers, ranging from traditional consumer brands to various political groups. We also provide many of our clients tailored research and analytical solutions unique to their needs and specifications.



Our most significant lines of business, which we refer to as Entertainment Essentials™ services, are:

• TV Everywhere™, which includes TV Essentials® and StationView Essentials™;

• OnDemand Everywhere®, which includes OnDemand Essentials® and Over the Top

measurement products and related products;

• Movies Everywhere™, which includes domestic and international Box Office

Essentials®, PostTrak® and PreAct™; and

• Other Services, which includes our Studio Direct Revenue Sharing ("DRS") and

other products relating to content in the home video rental industry.

In August 2013, we acquired iTVX, a provider of branded entertainment analytics, insight and research. The financial results of iTVX, from the date of acquisition, are included within our TV Everywhere™ lines of business.

Our revenue increased $18.6 million, or 32.6%, in Fiscal 2014 compared to the fiscal year ended March 31,2013 ("Fiscal 2013"). Our current spending, investments and long-term strategic planning are heavily focused on the innovation, development, growth and expansion of our services and product lines, both domestically and internationally. As such, we continue to allocate significant resources towards innovation and the expansion of our data assets and technology as well as our research, analytics and sales groups. These strategic investments, many of which are expensed as incurred, have lowered our overall operating performance and, as a result, we had operating losses from continuing operations of $9.5 million and $26.5 million for Fiscal 2014 and Fiscal 2013, respectively. 19



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Results of Operations Our results are as follows (dollars in thousands): Year Ended March 31, (1) 2014 2013 2012 (Dollars in thousands) Dollars % of Dollars % of Dollars % of revenue revenue revenue Revenue $ 75,600 100.0 % $ 57,033 100.0 % $ 47,044 100.0 % Cost of revenue(2) 27,247 36.0 21,347 37.4 14,775 31.4 Gross margin 48,353 64.0 35,686 62.6 32,269 68.6 Operating expenses: Selling, general and administrative(2)(3) 48,799 64.5 55,998 98.2 38,245 81.3 Research, technology and innovation(2)(3) 9,014 11.9 6,215 10.9 4,662 9.9 Total operating expenses 57,813 76.5 62,213 109.1 42,907 91.2 Loss from continuing operations (9,460 ) (12.5 ) (26,527 ) (46.5 ) (10,638 ) (22.6 ) Other income: Investment income, net 125 0.2 378 0.7 477 1.0 Loss from continuing operations before income taxes (9,335 ) (12.3 ) (26,149 ) (45.8 ) (10,161 ) (21.6 ) Income tax benefit (2,183 ) (2.9 ) (980 ) (1.7 ) (982 ) (2.1 ) Loss from continuing operations, net of income taxes (7,152 ) (9.5 ) (25,169 ) (44.1 ) (9,179 ) (19.5 ) Income from discontinued operations, net of income taxes(2)(3) 2,783 3.7 2,491 4.4 2,753 5.9 Net loss (4,369 ) (5.8 ) (22,678 ) (39.8 ) (6,426 ) (13.7 ) Net loss attributable to noncontrolling interest (115 ) (0.2 ) (61 ) (0.1 ) - - Net loss attributable to Rentrak Corporation $ (4,254 ) (5.6 )% $



(22,617 ) (39.7 )% $ (6,426 ) (13.7 )%

(1) Percentages may not add due to rounding. All prior periods presented have been restated as a result of reporting our PPT® business as discontinued operations. See Note 19 of Notes to Consolidated Financial Statements.

(2) Depreciation and amortization expense is included in the line items above as follows: Cost of revenue $ 3,175$ 2,638$ 2,168 Selling, general and administrative 2,037 1,841 1,842 Research, technology and innovation 717 311 170 Net income from discontinued operations 162 161 171 $ 6,091$ 4,951$ 4,351



(3) Stock-based compensation expense is included in the line items above as follows: Selling, general and administrative(4) $ 7,361

$ 20,864$ 4,593 Research, technology and innovation 697 544 359 Net income from discontinued operation 397 384 166 $ 8,455$ 21,792$ 5,118 DISH & iTVX(4) $ 2,700$ 15,864 $ 527



(4) Stock-based compensation in the year ended March 31, 2014 includes expense related to contingent consideration associated with our acquisition of iTVX. Stock-based compensation in the years ended March 31, 2013 and 2012 includes expense related to our agreement with DISH.

Net Loss to Adjusted EBITDA Reconciliation

We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization and stock-based compensation expense and other non-operating items from our Consolidated Statements of Operations as well as certain other items specifically described below. We believe that Adjusted EBITDA is helpful as an indicator of the current financial performance of our company and our capacity to operationally fund capital expenditures and working capital requirements. Due to the nature of our internally developed software which supports our Essentials® services and use of stock-based compensation, we incur significant non-cash charges for 20



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depreciation, amortization and stock-based compensation expense that may not be indicative of our operating performance from a cash perspective. We also adjust for acquisition and non-recurring costs as we believe this provides a useful metric by which to compare performance from period to period. Adjusted EBITDA does not represent cash flows from operations as defined by GAAP, is not derived in accordance with GAAP and should not be considered as an alternative to net loss (the most comparable GAAP financial measure to Adjusted EBITDA).



The table below presents a reconciliation from net loss to Adjusted EBITDA for the years ended March 31, 2014, 2013 and 2012 (dollars in thousands):

Year Ended March



31,

2014 2013



2012

Net loss attributable to Rentrak Corporation $ (4,254 )$ (22,617 )$ (6,426 ) Adjustments: Income from discontinued operations (2,783 ) (2,491 ) (2,753 ) Income tax benefit (2,183 ) (980 ) (982 ) Investment income, net (125 ) (378 ) (477 ) Depreciation and amortization from continuing operations 5,929 4,790



4,180

Stock-based compensation from continuing operations(1) 5,358 5,544



4,425

Adjusted EBITDA $ 1,942$ (16,132 )$ (2,033 ) DISH & iTVX stock-based compensation 2,700 15,864 527 Reorganization costs 111 212 1,135 Acquisition costs 214 193 822 Adjusted EBITDA before DISH & iTVX stock-based compensation, reorganization and acquisition costs $ 4,967 $ 137



$ 451

(1) Excludes DISH and iTVX stock-based compensation.

Adjusted EBITDA before DISH and iTVX stock-based compensation, reorganization and acquisition costs increased $4.8 million from Fiscal 2013 due primarily to the growth in revenue. Revenue



Revenue increased $18.6 million, or 32.6%, to $75.6 million in Fiscal 2014, compared to $57.0 million in Fiscal 2013. Revenue increased $10.0 million, or 21.2%, to $57.0 million in Fiscal 2013, compared to $47.0 million in Fiscal 2012. These fluctuations are described in more detail below.

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Revenue information is as follows (dollars in thousands):

Year Ended March 31, Dollar 2014 2013 Change % Change



TV Everywhere™ $ 31,316$ 17,599$ 13,717 77.9% Movies Everywhere™ 26,493

23,949 2,544 10.6% OnDemand Everywhere® 12,841 11,498 1,343 11.7% Other services 4,950 3,987 963 24.2% $ 75,600$ 57,033$ 18,567 32.6% Year Ended March 31, Dollar 2013 2012 Change % Change



TV Everywhere™ $ 17,599$ 9,226$ 8,373 90.8% Movies Everywhere™ 23,949

21,046 2,903 13.8% OnDemand Everywhere® 11,498 9,979 1,519 15.2% Other services 3,987 6,793 (2,806 ) (41.3)% $ 57,033$ 47,044$ 9,989 21.2% The increase in TV Everywhere™ revenue in both periods was due primarily to the addition of new clients, sales of new service offerings, custom reports and rate increases for existing clients.



The increase in Movies Everywhere™ revenue in Fiscal 2014 compared to Fiscal 2013 was primarily due to rate increases for existing clients, sales of new services and the addition of new clients.

The increase in Movies Everywhere™ revenue in Fiscal 2013 compared to Fiscal 2012 was primarily due to rate increases for existing clients and the addition of new clients. The increase in OnDemand Everywhere® revenue in both periods was due to rate increases for existing clients and the addition of new clients. The Fiscal 2013 period also included increased custom reporting projects compared to the Fiscal 2012 period. Other services primarily includes DRS revenue. The increase in DRS revenue in Fiscal 2014 compared to Fiscal 2013 was due to an increase in transactions. The decrease in DRS revenue in Fiscal 2013 compared to Fiscal 2012 was due to fewer transactions processed as well as a decline in the number of direct retailers from which to track content performance. Cost of Revenue and Gross Margin Cost of revenue includes direct costs relating to our Entertainment Essentials™ services, and consists of costs associated with the operation of a call center for our Movies Everywhere™ services, as well as costs associated with amortizing capitalized, internally developed software used to provide the corresponding services and direct costs incurred to obtain and process data and maintain our systems. Cost of revenue increased $5.9 million, or 27.6%, in Fiscal 2014 compared to Fiscal 2013, and increased $6.6 million, or 44.5%, in Fiscal 2013 compared to Fiscal 2012. 22



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Cost of revenue information is as follows (dollars in thousands):

Year Ended March 31, Dollar 2014 2013 Change % Change Costs related to: Amortization of internally developed software $ 3,175$ 2,639$ 536 20.3% Call center operation 5,487 5,253 234 4.5% Obtaining and processing data 18,585 13,455 5,130 38.1% $ 27,247$ 21,347$ 5,900 27.6% Year Ended March 31, Dollar 2013 2012 Change % Change Costs related to: Amortization of internally developed software $ 2,639$ 2,168$ 471 21.7% Call center operation 5,253 4,793 460 9.6% Obtaining and processing data 13,455 7,814 5,641 72.2% $ 21,347$ 14,775$ 6,572 44.5% The increases in cost of revenue in the Fiscal 2014 and the Fiscal 2013 periods compared to the same periods of the prior years, resulted primarily from expanding household coverage with existing data supplier agreements, the addition of new data supplier agreements and the amendment to our data supplier agreement with DISH, which occurred in the second quarter of Fiscal 2013, and requires minimum payments relating to predefined net profit sharing provisions of portions of our TV Essentials® line of business.



Gross margin as a percentage of revenue was as follows:

Year Ended March 31, 2014 2013 2012 Gross margin 64.0% 62.6% 68.6% Our existing agreements with our data suppliers are largely fixed. This, coupled with the increases in revenue noted above, resulted in improvements in gross margin in Fiscal 2014 compared to Fiscal 2013. The decline in gross margin in Fiscal 2013 compared to Fiscal 2012 was primarily due to a shift in mix of revenue, as more revenue was generated from TV Everywhere™, which has a lower gross margin than Movies Everywhere™ or OnDemand Everywhere®. Operating Expenses Operating expenses consist primarily of compensation and benefits, information technology, development, innovation and analytics, marketing and advertising costs, legal and professional fees, communications costs, depreciation and amortization of tangible and intangible assets and software, real and personal property leases, as well as other general corporate expenses. 23



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Operating expense information is as follows (dollars in thousands):

Year Ended March 31, Dollar Operating expenses 2014 2013 Change % Change Entertainment Essentials™ $ 33,701$ 28,843$ 4,858 16.8% Research, technology and innovation 9,014 6,215 2,799 45.0% Stock-based compensation costs for iTVX & DISH 2,700 15,864 (13,164 ) nm Corporate 12,398 11,291 1,107 9.8% $ 57,813$ 62,213$ (4,400 ) (7.1)% Year Ended March 31, Dollar Operating expenses 2013 2012 Change % Change Entertainment Essentials™ $ 28,843$ 26,375$ 2,468 9.4% Research, technology and innovation 6,215 4,662 1,553 33.3% Stock-based compensation costs for DISH 15,864 527 15,337 nm Corporate 11,291 11,343 (52 ) (0.5)% $ 62,213$ 42,907$ 19,306 45.0% Entertainment Essentials™ The increase in operating expense for our Entertainment Essentials™ services groups in Fiscal 2014 compared to Fiscal 2013 was primarily due to increased headcount in our sales and client services groups, as well as operating costs relating to iTVX, which was acquired on August 16, 2013. The increase in operating expense for our Entertainment Essentials™ services groups in Fiscal 2013 compared to Fiscal 2012 was primarily due to increased headcount and other costs associated with the expansion of TV Essentials®. Our long-term strategic plan is heavily focused on the development, growth and expansion of our Entertainment Essentials™ services, both domestically and internationally, and we consider these expenses to be investments which will leverage these services. Research, Technology and Innovation We are making significant investments in our systems which support our existing service lines, as well as products which are in the planning phases. We continue to integrate various third-party segmentation databases with our data and build our analytic capabilities. The increases in these costs relate to additional headcount, as well as increased costs relating to our systems. Additionally, we are incurring costs associated with our MRC accreditation process. These expenditures will likely increase our costs over the next twelve months. We believe we will be able to leverage these investments and generate revenue and earnings streams that contribute to our overall success. Stock-based compensation costs for iTVX and DISH Our acquisition of iTVX on August 16, 2013 included contingent consideration, which, if earned, will be paid on January 29, 2016. Changes in the fair value of contingent consideration arrangements are recorded as income or expense in our Consolidated Statements of Operations. As of March 31, 2014, the fair value of the estimated contingent consideration arrangement increased by $2.7 million compared to the acquisition date fair value. The increase was a result of an increase in the value of our common stock price. The common stock portion of the contingent consideration arrangement has a fixed price of $21.795 per share, and any fluctuation in our common stock price above or below this amount will impact the fair value of the payment and our results of operations. In Fiscal 2013, we incurred costs related to the cancellation of a stock award granted to DISH that had been previously revalued at the end of each reporting period. In exchange for canceling the stock award and as compensation for past services, we paid DISH $5.8 million and issued 700,000 shares of our common stock during the second quarter of Fiscal 2013, and we recorded $15.9 million in expense related to this amendment and related stock award. 24



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Corporate

The increase in Corporate expenses in Fiscal 2014 compared to Fiscal 2013 was primarily due to increases in headcount, professional services fees and higher bonus accruals. Income Taxes Our effective tax rate was 23.4% for Fiscal 2014 and was driven by a change in state law allowing research credits to be used to offset minimum tax in Oregon, as well as a benefit related to the release of valuation allowance upon the acquisition of iTVX. This benefit was offset by taxable income in some jurisdictions. The expected benefit from losses in other jurisdictions did not benefit the rate due to the recording of a valuation allowance. Primarily due to our investments in acquisitions, as well as the growth in our media measurement services and our equity compensation structure, we have cumulative operating losses over the past three fiscal years. As a result, we evaluated various factors relating to these assets and determined in Fiscal 2012 that it was not more likely than not that all of our deferred tax assets would be realized and, accordingly, we recorded a full valuation allowance. This position did not change in Fiscal 2013 or Fiscal 2014. In the future, if we generate taxable income, we would re-evaluate our ability to utilize these deferred tax assets and the need for the valuation allowance, which could reduce future tax expense. Our effective tax rate was 3.7% in Fiscal 2013. The rate was negatively affected by the recording of a $10.0 million valuation allowance to fully reserve our deferred tax assets.



Our effective tax rate was 9.7% in Fiscal 2012. The rate was negatively affected by the recording of a $4.0 million valuation allowance to fully reserve our deferred tax assets.

Income from Discontinued Operations, net of income taxes

Income from discontinued operations, net of income taxes for Fiscal 2014, 2013, and 2012 includes the results of our PPT® line of business and is as follows (dollars in thousands): Year Ended March 31, Dollar 2014 2013 Change % Change Income from discontinued operations, net of income taxes $ 2,783$ 2,491$ 292 11.7% Year Ended March 31, Dollar 2013 2012 Change % Change Income from discontinued operations, net of income taxes $ 2,491$ 2,753$ (262 ) (9.5)%



The increase in income from discontinued operations, net of income taxes in Fiscal 2014 compared to Fiscal 2013 was due to an increase in revenue as a result of the addition of Blockbuster as a major customer and Warner Bros. as a major supplier during our third quarter of Fiscal 2013. In January 2014, Blockbuster exited the market.

The decrease in income from discontinued operations, net of income taxes in Fiscal 2013 compared to Fiscal 2012 was due to declines in transaction fees and fewer customers as a result of the general state of decline of physical DVD rentals from "brick and mortar" retail stores.

Inflation

We believe that the impact of inflation was minimal on our business in Fiscal 2014, 2013 and 2012.

Liquidity and Capital Resources Our sources of liquidity include our cash and cash equivalents, marketable securities, cash expected to be generated from future operations and investments and our ability to borrow on our $15.0 million line of credit. Based on our current financial projections and projected cash needs, we believe that our available sources of liquidity will be sufficient to fund our current operations, the continued current development of our business information services and other cash requirements through at least April 1, 2015. 25



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Cash and cash equivalents and marketable securities increased $1.5 million to $22.0 million at March 31, 2014 from March 31, 2013. This increase resulted primarily from $6.3 million provided by operating activities and $3.5 million in proceeds from the issuance of our common stock, offset by $7.7 million used for the purchase of equipment and capitalized information technology costs. Portions of our cash and cash equivalents are held in our foreign subsidiaries. In the event the foreign subsidiaries repatriate these earnings, the earnings may be subject to United States federal, state and foreign income taxes. As of March 31, 2014, we had $3.2 million in foreign bank accounts, of which we plan to use $1.5 million to fund our international expansion and growth. The remaining cash is held by Sinotrak, our Chinese joint venture, and will be used to support growth for that operation. We had $16.9 million invested in a fixed-income security fund as of March 31, 2014. Fund values fluctuate in response to the financial condition of individual issues, general market and economic conditions and changes in interest rates. In general, when interest rates rise, security fund values fall and investors may lose principal value. While we currently have no plans or requirements to sell the securities in the foreseeable future, we are exposed to market risks and cannot predict what impact fluctuations in the market may have on the value of these funds.



Accounts receivable, net of allowances, increased $4.9 million to $12.5 million at March 31, 2014 from March 31, 2013, primarily due to revenue growth.

Other current assets increased $0.7 million to $2.8 million at March 31, 2014 from March 31, 2013 primarily due to a $0.6 million receivable from our landlord for a portion of the costs related to renovations made to our New York office. This amount is treated as a lease incentive, the value of which will reduce rent expense over the remaining lease term. During Fiscal 2014, we spent $7.7 million on property and equipment, including $6.7 million for the capitalization of internally developed software for our business information service offerings. We anticipate spending a total of approximately $10.5 million on property and equipment for all of Fiscal 2015, of which approximately $6.8 million is for the capitalization of internally developed software, primarily for the development of systems for our Entertainment Essentials™ lines of business. The remaining amounts include primarily purchases of computers, servers and networking equipment. Accounts payable increased $1.3 million to $2.3 million at March 31, 2014 from March 31, 2013, primarily due to the timing of payments and costs relating to our Entertainment Essentials™ lines of business.



Accrued data provider liabilities increased $0.4 million to $3.9 million at March 31, 2014 from March 31, 2013, primarily due to increased expenses incurred related to our data suppliers.

Accrued compensation, including the current and long-term portion, increased $6.2 million to $11.4 million at March 31, 2014 from March 31, 2013, primarily due to a $4.7 million accrual for contingent consideration associated with our acquisition of iTVX and $1.5 million in increases in payroll and bonus related accruals. Deferred revenue and other credits was $2.6 million at March 31, 2014 and March 31, 2013. This balance includes amounts related to quarterly and annual subscriptions for our services, as well as the current portion of our deferred rent credits. Deferred rent of $2.7 million at March 31, 2014, which includes both the current and long-term portion, represents amounts received for qualified renovations to our corporate headquarters and our offices in Portland and New York, as well as free rent for a portion of the lease terms. The deferred rent related to qualified renovations is being amortized against rent expense over the remaining lease terms, which extend through June 30, 2023, at the rate of approximately $54,000 per quarter. The deferred rent related to free rent is also being amortized against rent expense over the remaining lease term and is expected to be approximately $13,000 per quarter for Fiscal 2015. In January 2006, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock. As of March 31, 2014, 276,633 shares remained available for repurchase under this plan at a per share price not to exceed $12.75. This plan does not have an expiration date. In addition, in May 2011, our Board of Directors authorized a one-year share repurchase program for up to $5.0 million of our outstanding common stock. This program expired in May 2012. Common stock repurchases may be made from time to time in the open market at prevailing market prices or through privately negotiated transactions. The amount and timing of all repurchase transactions are contingent upon market conditions, regulatory requirements and alternative investment opportunities. During our fiscal year ending March 31, 2012, we repurchased 304,922 shares for a total price of $4.3 million pursuant to the May 2011 repurchase program. No shares have been purchased pursuant to the January 2006 authorization in the last three fiscal years. We did not repurchase any shares in Fiscal 2014. We currently have a revolving line of credit for $15.0 million that matures December 31, 2014. Interest accrues on outstanding balances under the line of credit at a rate equal to LIBOR plus 2.0% per annum, and we incur fees on the unused portion at 0.2% 26



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per annum. The credit line is secured by substantially all of our assets. At March 31, 2014, issued and outstanding letters of credit of $0.3 million were reserved against the line of credit, and we had no outstanding borrowings under this agreement. The agreement contains certain liquidity, asset and financial covenants and, as of March 31, 2014, we were in compliance with those covenants. In the first quarter of Fiscal 2012, we received a loan from the State of Oregon for $0.5 million for the purpose of facility renovations. The loan bore interest at 5% per annum and contained provisions relating to forgiveness if we met certain requirements. On April 3, 2013, the loan was forgiven in full. The balance of this loan was recorded as an offset to leasehold improvements and is being amortized as an offset to depreciation expense over the life of the related lease.



Contractual Payment Obligations

A summary of our contractual commitments and obligations as of March 31, 2014 follows (dollars in thousands):

Payments Due By Fiscal Period Contractual Obligations Total 2020 and 2015 2016 and 2017 2018 and 2019 beyond Operating lease obligations $ 18,164$ 2,941 $ 4,893 $ 3,994 $ 6,336 Purchase obligations 44,430 15,598 25,815 3,017 -



Total Contractual Obligations $ 62,594$ 18,539$ 30,708 $ 7,011 $ 6,336

Critical Accounting Policies and Estimates The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Following is a discussion of our critical accounting policies and estimates.



Revenue Recognition

We generate our revenue from the delivery of subscription services and by providing analytical services and other information obtained from our systems in the form of custom reports. Our subscription contracts do not provide customers with the right to take possession of the software supporting the applications and, as a result, are accounted for as service contracts.



We recognize revenue for our services when all of the following conditions are met:

• Persuasive evidence of an arrangement exists;

• The products or services have been delivered;

• The fee is fixed or determinable; and

• Collection of the fee is reasonably assured based on our collection history.

Subscription fees are recognized ratably over the period of service as of the date that our service or data is made available to the customer. Revenue related to custom reports is recognized as value is delivered to the customer. The pattern of revenue recognition for these reports varies depending on the terms of the individual contracts and may be recognized proportionally or deferred until the end of the contract term and recognized when the information has been delivered and accepted by the customer. We also enter into arrangements with multiple-elements, generally including subscription, analytic services and custom reporting. We recognize revenue under these arrangements in accordance with current guidance which requires us to allocate consideration at the inception of the arrangement to all elements, if they represent a separate unit of accounting, based on their relative selling prices. The guidance establishes a hierarchy to determine the selling price to be used for allocating arrangement consideration to deliverables: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE") if VSOE is not available, or (iii) a best estimated selling price ("BESP") if neither VSOE nor TPE are available. VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable on a standalone basis. BESP reflects our estimate of what the selling price of a deliverable would be if it was regularly sold on a standalone basis. We have concluded that we do not have VSOE, for these types of arrangements, and TPE is generally not available because our service offerings are highly differentiated and we are unable to obtain reliable information on the pricing practices of our competitors. 27



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As such, BESP is used to allocate the total arrangement consideration at the arrangement's inception based on each element's relative selling price.

We determine BESP for our deliverables based on our overall pricing objectives, taking into consideration several internal and external factors including, but not limited to, current pricing practices, pricing concentrations (such as industry, channel, customer class or geography), internal costs and market penetration of a product or service. The total arrangement consideration is allocated to each of the elements based on the relative selling price. Once the total arrangement consideration has been allocated to each element, we commence revenue recognition for each element on a standalone basis as the data or service is delivered. In the future, as our pricing strategies and market conditions change, modifications may occur in the determination of BESP to reflect these changes. As a result, the future revenue recognized for these arrangements could differ from results in the current period.



Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit limits are established through a process of reviewing the financial history and stability of each customer. We regularly evaluate the collectibility of accounts receivable by monitoring past due balances. If it is determined that a customer may be unable to meet its financial obligations, a specific reserve is established based on the amount we expect to recover. If circumstances change related to specific customers, overall aging of accounts receivable or collection experience, our estimate of the recoverability of accounts receivable could materially change. Our allowance for doubtful accounts totaled $0.2 million and $0.3 million at March 31, 2014 and 2013, respectively. See also Schedule II, Valuation and Qualifying Accounts included in Item 8 of this Annual Report on Form 10-K.



Deferred Taxes

Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet deducted for tax purposes, from tax credits which have not been utilized, and from net operating loss carry-forwards. We calculate deferred tax assets and liabilities using enacted laws and tax rates that will be in effect when we expect the differences to reverse and be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A deferred tax asset is not recorded for net operating loss carryforwards created by excess tax benefits from the exercise of stock options. To the extent such net operating loss carryforwards are utilized, stockholders' equity will increase. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined the recoverability of the deferred tax assets is not more likely than not, we will record a valuation allowance against deferred tax assets. As of March 31, 2014 and 2013, we had a valuation allowance of $17.2 million and $14.1 million, respectively, recorded against our federal net operating and capital loss carry-forwards, as well as those net operating and capital loss carry-forwards in various state and foreign jurisdictions. As of March 31, 2014 and 2013, net deferred tax liabilities related to continuing operations totaled $0.7 million and $0.6 million, respectively.



Accounting for Unrecognized Tax Benefits

We record a benefit for uncertain tax positions only when we determine that those tax positions are more likely than not to be sustained on audit, based on the technical merits of the position. As of March 31, 2014 and 2013, the total amount of unrecognized tax benefits was $0.8 million and $1.1 million, respectively, excluding penalties and interest of $60,000 and $124,000, respectively. All unrecognized tax benefits at March 31, 2014 would affect the effective tax rate if recognized. Our policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense in our Consolidated Statements of Operations. See Note 11 of Notes to Consolidated Financial Statements.



Capitalized Software

Capitalized software, which is included in property and equipment, net, consists of costs to purchase and develop internal-use software, as well as costs to develop internal software, which is used by us to provide various services to clients. The internal and external costs to develop the internal software used to support these services are capitalized after the technological and business feasibility of the project is determined and the preliminary project stage is completed. We continue to develop our internal software systems in order to expand our service offerings. Once this software is ready for use in our products, these costs are amortized on a straight-line basis over the estimated economic life of the software, which is five years from the date of utilization. Capitalized software is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairment charges were recorded in Fiscal 2014, 2013 or 2012. Changes in technology could affect our estimate of the useful life of those assets. Capitalized software costs, net of accumulated amortization, totaled $8.6 million and $7.5 million at March 31, 2014 and 2013, respectively. We also had $4.4 million and $1.9 million as of March 31, 2014 and 2013, respectively, of capitalized costs associated with software projects which are still in the application development stage. 28



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Stock-Based Compensation

We are required to measure and recognize compensation expense for all stock-based awards granted to our employees and directors, including employee stock options, deferred stock units ("DSUs"), stock appreciation rights ("SARs"), stock-settled stock appreciation rights ("SSARs"), restricted stock units ("RSUs") and employee stock purchase plan ("ESPP") shares, based on the estimated fair value of the award on the grant date. We utilize the Black-Scholes options pricing model and Monte Carlo simulations for valuing our stock-based awards with a conversion or exercise price. The use of the Black-Scholes and Monte Carlo valuation models to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future. Compensation expense is only recognized on awards that ultimately vest and market-based awards. However, we have not reduced the stock-based compensation expense for estimated forfeitures because there is no basis for estimating future forfeitures since most unvested awards are held by members of senior management. We update for forfeitures as they occur and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures are significant, our results of operations could be materially affected.



Stock-Based Compensation Agreements with Non-Employees

We are required to recognize compensation expense for stock-based compensation agreements with non-employees based on the estimated fair value of the award on the grant date and at the end of each reporting period. We utilize the Black-Scholes valuation model to determine the end of period fair value of these awards and record the cumulative incremental change in value as compensation expense over the life of the award.



Marketable Securities

We classify our marketable securities as "available for sale" securities and, accordingly, they are marked to market on a quarterly basis, with unrealized gains and losses being excluded from earnings and reflected as a component of other comprehensive income (loss). Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.



Goodwill and Intangible Assets

In assessing the fair value of goodwill and other indefinite lived intangible assets, we first make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two-step goodwill impairment test. If, after completing our qualitative assessment, we determine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to our carrying value (including goodwill). If the estimated fair value is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value, resulting in goodwill impairment. We test goodwill for impairment during the fourth quarter every fiscal year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The qualitative analysis included assessing the impact of changes in certain factors including: (1) changes in forecasted operating results and a comparison of actual results to projections, (2) changes in the industry or our competitive environment since the acquisition date, (3) changes in the overall economy, our market share and market interest rates since the acquisition date, (4) trends in the stock price and related market capitalization and enterprise values, (5) trends in peer companies' total enterprise value metrics, and (6) additional factors such as management turnover and changes in regulations. Based on our qualitative assessment performed during the fourth quarter of Fiscal 2014, we concluded that it was more likely than not that the estimated fair values of our reporting units exceeded their carrying values as of March 31, 2014 and, therefore, determined it was not necessary to perform the two-step goodwill impairment test. We amortize intangible assets with definite lives over their estimated useful lives using the straight-line method. We evaluate the estimated remaining lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. We test these assets for impairment annually, or more frequently if events or changes in circumstances 29



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indicate that they might be impaired, based on undiscounted cash flows attributable to that asset or group of assets. There were no impairment charges related to intangible assets during the years ended March 31, 2014, 2013 and 2012. New Accounting Guidance See Note 3 of Notes to Consolidated Financial Statements for a discussion of the impact of new accounting guidance.



Off-Balance Sheet Arrangements

Other than as disclosed above under "Contractual Payment Obligations," we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.


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