|
|
●
|
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2013 and September 30, 2012 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2013 |
|
|
September 30, 2012 |
|
| |
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
| |
|
Fair Value Measurement
|
|
|
Fair
|
|
|
Fair Value Measurement
|
|
|
Fair
|
|
| |
|
Using Input Types
|
|
|
Value
|
|
|
Using Input Types
|
|
|
Value
|
|
| |
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$ |
2,234 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,234 |
|
|
$ |
2,234 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,234 |
|
|
Total assets at fair value
|
|
$ |
2,234 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,234 |
|
|
$ |
2,234 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,234 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liablities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$ |
900 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
900 |
|
|
$ |
900 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
900 |
|
|
Note payable
|
|
|
4,000 |
|
|
|
- |
|
|
|
- |
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
- |
|
|
|
- |
|
|
|
4,000 |
|
|
Debt discount
|
|
|
- |
|
|
|
(899 |
) |
|
|
- |
|
|
|
(899 |
) |
|
|
- |
|
|
|
(1,017 |
) |
|
|
- |
|
|
|
(1,017 |
) |
|
Total liabilities at fair value
|
|
$ |
4,900 |
|
|
$ |
(899 |
) |
|
$ |
- |
|
|
$ |
4,001 |
|
|
$ |
4,900 |
|
|
$ |
(1,017 |
) |
|
$ |
- |
|
|
$ |
3,883 |
|
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under this standard, an entity can elect to present items of net income and other comprehensive income in one continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this standard in its fiscal quarter ended December 31, 2012 by including a new separate consolidated statement of comprehensive income (loss).
In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 supersedes certain paragraphs in ASU 2011-05 which pertain to how, when and where reclassification adjustments out of accumulated other comprehensive income are presented. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance in its fiscal quarter ended December 31, 2012.
On June 14, 2013, the Company entered into a Stock Purchase Agreement under which it has agreed to acquire
Panopticon Software AB, a privately-held Swedish company specializing in the delivery of real-time data visualization solutions
(“Panopticon”). Pursuant to this agreement, the Company plans to acquire all outstanding shares of Panopticon in an
all-stock transaction. Completion of the transaction is subject to the approval of the Company’s shareholders, which is expected
to occur during its fourth fiscal quarter ending September 30, 2013.
Note 3 – Other Intangible Assets, Net
Other intangible assets, net, were comprised of the following as of June 30, 2013 and September 30, 2012:
| |
|
|
|
|
|
|
|
|
|
| |
|
Weighted
|
|
|
June 30, 2013 |
|
|
September 30, 2012 |
|
| |
|
Average
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Identified Intangible
|
|
Useful Life
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Asset
|
|
in Years
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
| |
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
|
1 |
|
|
$ |
1,468 |
|
|
$ |
1,224 |
|
|
$ |
244 |
|
|
$ |
1,190 |
|
|
$ |
1,160 |
|
|
$ |
30 |
|
|
Patents
|
|
|
20 |
|
|
|
160 |
|
|
|
71 |
|
|
|
89 |
|
|
|
160 |
|
|
|
65 |
|
|
|
95 |
|
|
Customer lists
|
|
|
10 |
|
|
|
1,790 |
|
|
|
1,320 |
|
|
|
470 |
|
|
|
1,790 |
|
|
|
1,195 |
|
|
|
595 |
|
|
Loan acquisition costs
|
|
|
4 |
|
|
|
88 |
|
|
|
39 |
|
|
|
49 |
|
|
|
88 |
|
|
|
16 |
|
|
|
72 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$ |
3,506 |
|
|
$ |
2,654 |
|
|
$ |
852 |
|
|
$ |
3,228 |
|
|
$ |
2,436 |
|
|
$ |
792 |
|
For the three months ended June 30, 2013 and 2012, amortization expense related to intangible assets was $87,000 and $52,000, respectively. For the nine months ended June 30, 2013 and 2012, amortization expense related to intangible assets was $218,000 and $167,000, respectively.
The estimated future amortization expense related to amortizing intangible assets as of June 30, 2013 is as follows (in thousands):
| |
|
|
|
|
|
Fiscal Years Ending September 30,
|
|
|
|
|
| |
|
|
|
|
Remainder of fiscal 2013
|
|
$ |
107 |
|
|
2014
|
|
|
380 |
|
|
2015
|
|
|
179 |
|
|
2016
|
|
|
110 |
|
|
2017
|
|
|
13 |
|
|
2018
|
|
|
13 |
|
|
Thereafter
|
|
|
50 |
|
| |
|
|
|
|
|
Total estimated future amortization expense
|
|
$ |
852 |
|
Note 4 – Financing Arrangements
Revolving Line of Credit
In connection with the acquisition of intellectual property disclosed in Note 1 to the Company’s condensed consolidated financial statements, on March 30, 2012, the Company entered into a $2.0 million revolving credit facility with Silicon Valley Bank (“SVB”), pursuant to a Loan and Security Agreement with SVB. On March 30, 2012, the Company borrowed $1.5 million under this revolving credit facility. The Company repaid $600,000 under the line of credit in September 2012. The revolving line of credit under the SVB facility terminates on March 29, 2014. On that date, the principal amount of all advances then outstanding under the revolving line and all unpaid interest thereon will become due and payable. The principal amount outstanding under the revolving line accrues interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor under the SVB agreement of 3.25%. The Company can borrow under the SVB revolving line of credit based on a formula percentage of its accounts receivable balance. Additionally, the SVB facility requires that the Company maintain certain net asset and net income ratios. The Company was in compliance with the covenants under its Loan and Security Agreement at June 30, 2013. The Company’s obligations under the SVB facility are secured by substantially all of the Company’s assets other than intellectual property. The principal amount outstanding under the revolving line of credit at June 30, 2013 was $900,000.
Note Payable
Also in connection with the intellectual property acquisition, on March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with Massachusetts Capital Resource Company (“MCRC”), the terms of which include a $4.0 million subordinated note and warrants for 185,000 shares of the Company’s common stock. The subordinated note issued to MCRC has a maturity date of February 28, 2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. The subordinated note also contains interest rate premiums on any optional redemption of principal payments during the first three years of the note agreement. The Company is also required under the MCRC agreement to maintain certain interest coverage and leverage ratios. The Company was in compliance with the covenants under its Note and Warrant Purchase Agreement at June 30, 2013.
Future principal payments related to the subordinated note are as follows (in thousands):
| |
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
|
| |
|
|
|
|
|
Remainder of fiscal 2013
|
|
$ |
- |
|
|
2014
|
|
|
467 |
|
|
2015
|
|
|
800 |
|
|
2016
|
|
|
800 |
|
|
2017
|
|
|
800 |
|
|
2018
|
|
|
800 |
|
|
Thereafter
|
|
|
333 |
|
| |
|
|
|
|
|
Total future principal payments
|
|
$ |
4,000 |
|
The warrants issued to MCRC are exercisable at any time prior to the later of the repayment in full of the MCRC note or February 28, 2019 at a purchase price per share of $11.54, which is equal to the average closing price of the Company’s common stock for the 45 trading days prior to the issuance of the warrants on March 30, 2012. The number of shares issuable upon exercise of the warrants is subject to adjustment in connection with stock splits and other events impacting the Company’s common stock generally, however, the warrants do not provide the holder with any anti-dilution protection.
The Company accounted for the borrowing under the Note and Warrant Purchase Agreement in accordance with the guidance prescribed in the FASB Accounting Standard Codification Topic 470-20, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“ASC 470-20”). In accordance with ASC 470-20, the value of the stock purchase warrants is considered an Original Issue Discount (“OID”) which is required to be amortized over the life of the note as interest expense with a corresponding credit to note payable. The fair value of the warrants on March 30, 2012, as determined under the Accounting Standard Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) was approximately $1.1 million which is included in Additional Paid-in Capital in the Company’s condensed consolidated balance sheets at June 30, 2013. The Company used the Black-Scholes pricing model to calculate the fair value of the warrants which included the following key assumptions: the contractual life of the warrants (7 years), stock price volatility (68.18%), risk-free interest rate (1.61%) and dividend yield (0%).
The unamortized debt discount at June 30, 2013 was $899,000 which will be amortized to interest expense over the life of the subordinated note which is seven years. Interest expense related to the warrants during the three and nine months ended June 30, 2013 was $39,000 and $117,000, respectively. Interest expense related to the warrants during the three and nine months ended June 30, 2012 was approximately $39,000 and $40,000, respectively.
Note 5 – Income Taxes
During the three months ended June 30, 2013, the Company recorded a tax benefit of $1,000 primarily related to adjustments to estimated federal alternative minimum taxes and estimated state taxes. During the nine months ended June 30, 2013, the Company recorded $2,000 in tax expense related to uncertain tax positions relative to foreign taxes net of these adjustments. During the three and nine months ended June 30, 2012, the Company recorded $9,000 and $75,000, respectively, related to estimated federal alternative minimum taxes, estimated state taxes and uncertain tax positions relative to foreign taxes.
Deferred Tax Assets
The Company’s deferred tax assets include net operating loss carry forwards and tax credits that expire at different times through and until 2031. Significant judgment is required in determining the Company’s provision for income taxes, the carrying value of deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Factors such as future reversals of deferred tax assets and liabilities, projected future taxable income, changes in enacted tax rates and the period over which the Company’s deferred tax assets will be recoverable are considered in making these determinations. Management does not believe the deferred tax
assets are more likely than not to be realized and a full valuation allowance has been provided against the deferred tax assets at June 30, 2013 and September 30, 2012.
Provision for Uncertain Tax Positions
At September 30, 2012, the Company had a cumulative tax liability of $200,000 related to foreign tax exposure that could result in cash payments, of which approximately $6,000 and $19,000, respectively, were recorded during the three and nine months ended June 30, 2012. The Company increased its tax liability by $6,000 during each of the three month periods ended December 31, 2012 and March 31, 2013. During the nine months ended June 30, 2013, the Company released a portion of its reserve for uncertain tax positions and recorded a benefit of $4,000. The Company does not expect its tax liability to change significantly during the next twelve months. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense in its consolidated statements of operations. To date, the Company has not accrued any amounts for interest and penalties associated with this liability as such amounts have been de minimis.
The Company’s unrecognized tax benefits (before consideration of any valuation allowance) represent differences between tax positions taken by the Company in its various consolidated and separate worldwide tax returns and the benefits recognized and measured for uncertain tax positions. This amount also represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The change in the unrecognized tax benefits during the nine months ended June 30, 2013 was as follows (in thousands):
| |
|
|
|
|
|
Balance at October 1, 2012
|
|
$
|
866
|
|
|
Additions for prior year tax positions
|
|
8
|
|
|
Balance at June 30, 2013
|
|
$
|
874
|
|
In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such jurisdictions as the United Kingdom, Germany, Singapore, Australia and the United States, and as a result, files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The fiscal years ended September 30, 2010 through September 30, 2012 are generally still open to examination in the jurisdictions listed above.
Note 6 – Shareholders’ Equity
Share-based compensation expense for the three months ended June 30, 2013 and 2012 was $760,000 and $227,000, respectively, and $1,922,000 and $560,000 for the nine months ended June 30, 2013 and 2012, respectively, as included in the following expense categories:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months Ended |
|
|
Nine months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
| |
|
(In thousands)
|
|
| |
|
|
|
|
Sales and marketing
|
|
$ |
523 |
|
|
$ |
118 |
|
|
$ |
1,451 |
|
|
$ |
317 |
|
|
Engineering and product development
|
|
|
21 |
|
|
|
20 |
|
|
|
64 |
|
|
|
29 |
|
|
General and administrative
|
|
|
216 |
|
|
|
89 |
|
|
|
407 |
|
|
|
214 |
|
| |
|
$ |
760 |
|
|
$ |
227 |
|
|
$ |
1,922 |
|
|
$ |
560 |
|
The Company’s stock compensation plans provide for the granting of restricted stock units and either incentive or non-qualified stock options to employees and non-employee directors. Options and restricted stock units are subject to terms and conditions determined by the Compensation and Stock Committee of the Board of Directors. Options generally vest over a three year period beginning three months from the date of grant and expire either seven or ten years from the date of grant. Restricted stock units vest annually over a three year period.
Stock Options
The Company uses the Black-Scholes option-pricing model to calculate the fair value of options on the date of grant. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate and dividend yield. The weighted-average fair value of options granted under the stock option plans for the three and nine months ended June 30, 2013 was $7.61 per share. No options were granted under the stock option plans for the three or nine months ended June 30, 2012. The total intrinsic value of options exercised during the three months ended June 30, 2013 and 2012 was approximately $51,000 and $61,000, respectively. The total intrinsic value of options exercised during the nine months ended June 30, 2013 and 2012 was approximately $612,000 and $670,000, respectively. Total cash received from option exercises during the three and nine months ended June 30, 2013 was $9,000 and $142,000, respectively. As of June 30, 2013, there was $648,000 of total unrecognized compensation cost related to non-vested stock option arrangements, which is expected to be recognized over a weighted-average period of 2.63 years.
Many of the assumptions used in the determination of share-based compensation expense are judgmental and highly volatile. The table below indicates the key assumptions used in the option valuation calculations for options granted in the nine months ended June 30, 2013:
| |
|
|
|
| |
|
2013
|
|
|
Expected life
|
|
5 Years
|
|
|
Expected volatility
|
|
|
72.95 |
% |
|
Weighted-average volatility
|
|
|
72.95 |
% |
|
Risk-free interest rate
|
|
|
0.71 |
% |
|
Dividend yield
|
|
|
0.0 |
% |
The expected option life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company uses an expected stock-price volatility assumption that is based on historical volatilities of the underlying stock which are obtained from public data sources. The risk-free interest rate is equal to the historical U.S. Treasury zero-coupon bond rate with a remaining term equal to the expected life of the option. The Company uses a dividend yield of zero which is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture rate is higher than estimated.
The following table summarizes information about the Company’s stock option plans for the nine months ended June 30, 2013.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
| |
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
| |
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
| |
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
| |
|
Outstanding
|
|
|
Price
|
|
|
Term
|
|
|
Value $(000)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 1, 2012
|
|
|
355,334 |
|
|
$ |
3.71 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
75,000 |
|
|
|
12.92 |
|
|
|
|
|
|
|
|
Canceled
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(49,000 |
) |
|
|
2.87 |
|
|
|
|
|
|
|
|
Outstanding, June 30, 2013
|
|
|
381,334 |
|
|
$ |
5.63 |
|
|
|
4.41 |
|
|
$ |
4,732 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest, June 30, 2013
|
|
|
367,898 |
|
|
$ |
5.51 |
|
|
|
4.33 |
|
|
$ |
4,611 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2013
|
|
|
246,975 |
|
|
$ |
3.80 |
|
|
|
3.57 |
|
|
$ |
3,516 |
|
Restricted Stock Units
The Company periodically grants awards of restricted stock units (“RSU”) to each of its non-employee directors and some of its management team and employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of the Company’s common stock. The total number of RSUs unvested at June 30, 2013 was 660,630. Each RSU vests at the rate of 33.33% on each of the first through third anniversaries of the grant date with final vesting of the most recent grants scheduled to occur in May 2016. Included in the total number of RSUs unvested at June 30, 2013 are certain RSUs that are subject to a further vesting condition that the Company’s common stock must trade at a price greater than the following market prices per share on a national securities exchange for a period of twenty consecutive days on or prior to certain anniversaries of the grant date as follows:
| |
|
|
|
|
| |
|
|
Number of
|
|
| |
|
|
Unvested RSUs
|
|
| |
|
|
|
|
| $10.00 per share prior to the fifth anniversary of the grant date |
* |
|
|
103,513 |
|
| $10.00 per share prior to the fourth anniversary of the grant date |
* |
|
|
189,273 |
|
|
$17.50 per share prior to the fifth anniversary of the grant date
|
|
|
|
30,000 |
|
| $17.50 per share prior to the fourth anniversary of the grant date |
* |
|
|
112,171 |
|
|
$17.50 per share prior to the third anniversary of the grant date
|
|
|
|
166,500 |
|
|
$20.00 per share prior to the fourth anniversary of the grant date
|
|
|
|
8,500 |
|
|
$22.50 per share prior to the fourth anniversary of the grant date
|
|
|
|
19,000 |
|
|
No vesting condition
|
|
|
|
31,673 |
|
| |
|
|
|
|
|
|
Unvested RSUs, June 30, 2013
|
|
|
|
660,630 |
|
The Company’s common stock has satisfied both the $10 per share market price vesting condition and the $17.50 per share market price vesting condition for the grants denoted with an asterisk above totaling 404,957 RSUs. For all of the RSUs containing a market price vesting condition, the Company performed fair value analysis using the Monte Carlo option-pricing model. The fair value related to the RSUs was calculated based primarily on the average stock price of the Company’s common stock on the date of the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product development and general and administrative expense. The fair values of the RSUs granted in the nine months ended June 30, 2013 and 2012, respectively, were approximately $4,619,795 (or $14.77 weighted-average fair value per share) and $1,198,000 (or $6.77 weighted-average fair value per share). The Company recorded compensation expense related to RSUs of approximately $683,000 and $185,000 for the three months ended June 30, 2013 and 2012, respectively, and $1,765,000 and $431,000 for the nine months ended June 30, 2013 and 2012, respectively. These amounts are included in the total share-based compensation expense disclosed above. As of June 30, 2013, there was approximately $7.0 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 2.31 years.
The following table presents RSU information for the nine months ended June 30, 2013:
| |
|
|
|
| |
|
Number of
|
|
| |
|
RSUs
|
|
| |
|
Outstanding
|
|
| |
|
|
|
|
Outstanding, October 1, 2012
|
|
|
464,584 |
|
|
Granted
|
|
|
339,000 |
|
|
Canceled
|
|
|
(6,667 |
) |
|
Vested
|
|
|
(136,287 |
) |
| |
|
|
|
|
|
Outstanding, June 30, 2013
|
|
|
660,630 |
|
Note
7 - Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the impact, when dilutive, of the exercise of stock options and the vesting of restricted stock units using the treasury stock method. Diluted net loss per share for the nine months ended June 30, 2013 is the same as basic net loss per share as the potentially dilutive securities are all anti-dilutive.
There were no potentially dilutive common stock options for either the three or nine months ended June 30, 2013 or the three or nine months ended June 30, 2012. Potentially dilutive restricted stock units aggregating 228,336 shares and 225,743 shares for the three and nine months ended June 30, 2013, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. Potentially dilutive restricted stock units aggregating 25,599 shares and 9,560 shares for the three and nine months ended June 30, 2012, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. There were no potentially dilutive warrants for the three or nine months ended June 30, 2013. There were no potentially dilutive warrants for the three months ended June 30, 2012. Potentially dilutive warrants aggregating 62,792 shares for the nine months ended June 30, 2012 have been excluded from the computation of diluted net income per share because their inclusion would be anti-dilutive.
Note
8 - Commitments and Contingencies
Prior to the acquisition of intellectual property on March 30, 2012, as disclosed in Note 1 to these condensed consolidated financial statements, the Company was obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Additionally, the Company pays royalties under arrangements with vendors related to sales of its Datawatch Report Manager on Demand and Datawatch Dashboards products. Royalty expense included in cost of software licenses was approximately $35,000 and $21,000, respectively, for the three months ended June 30, 2013 and 2012 and $102,000 and $1,116,000, respectively, for the nine months ended June 30, 2013 and 2012. The Company is not obligated to pay any minimum amounts for royalties. As a result of the acquisition of the intellectual property, the Company is no longer required to pay royalties related to its Monarch Professional and Datawatch Data Pump products.
From time to time, the Company is subject to claims and may be party to actions that arise in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company’s condensed consolidated financial condition or results of operations.
Note
9 - Segment Information
The Company has determined that it has only one reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results.
The following table presents information about the Company’s revenue by product lines:
| |
|
|
|
|
|
|
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
June 30,
|
|
|
June 30,
|
|
| |
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Information Optimization Solutions (including Monarch Professional, Datawatch Data Pump, Datawatch Enterprise Server, Datawatch Enterprise Server - Cloud, Datawatch RMS, Datawatch Report Manager on Demand, Datawatch Dashboards and iMergence)
|
|
|
97 |
% |
|
|
96 |
% |
|
|
97 |
% |
|
|
95 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Service Management Solutions (including Visual QSM and Visual HD)
|
|
|
3 |
% |
|
|
4 |
% |
|
|
3 |
% |
|
|
5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
The Company conducts operations in the U.S. and internationally. The following table presents information about the Company’s geographic operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
| |
|
Domestic
|
|
|
International
|
|
|
Eliminations
|
|
|
Total
|
|
| |
|
(In thousands) |
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2013
|
|
$ |
7,054 |
|
|
$ |
984 |
|
|
$ |
(211 |
) |
|
$ |
7,827 |
|
|
Three months ended June 30, 2012
|
|
$ |
6,491 |
|
|
$ |
869 |
|
|
$ |
(187 |
) |
|
$ |
7,173 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2013
|
|
$ |
19,130 |
|
|
$ |
2,996 |
|
|
$ |
(647 |
) |
|
$ |
21,479 |
|
|
Nine months ended June 30, 2012
|
|
$ |
17,728 |
|
|
$ |
2,881 |
|
|
$ |
(618 |
) |
|
$ |
19,991 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2013
|
|
$ |
2 |
|
|
$ |
(521 |
) |
|
$ |
- |
|
|
$ |
(519 |
) |
|
Three months ended June 30, 2012
|
|
$ |
1,030 |
|
|
$ |
(297 |
) |
|
$ |
- |
|
|
$ |
733 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2013
|
|
$ |
377 |
|
|
$ |
(1,424 |
) |
|
$ |
- |
|
|
$ |
(1,047 |
) |
|
Nine months ended June 30, 2012
|
|
$ |
2,231 |
|
|
$ |
(560 |
) |
|
$ |
- |
|
|
$ |
1,671 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2013
|
|
$ |
7,747 |
|
|
$ |
72 |
|
|
$ |
- |
|
|
$ |
7,819 |
|
|
At September 30, 2012
|
|
$ |
9,018 |
|
|
$ |
83 |
|
|
$ |
- |
|
|
$ |
9,101 |
|
GENERAL
The Company does not provide forecasts of its future financial performance. However, from time to time, information provided by the Company or statements made by its employees may contain “forward looking” information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward looking statements and are made under the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date they are made. The Company disclaims any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in the Company’s expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward looking statements. The Company’s actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, without limitation, the risks, uncertainties and other information discussed in Item 1A of the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on August 5, 2013, as well as the accuracy of the Company’s internal estimates of revenue and operating expense levels.
Datawatch is engaged in the design, development, manufacture, marketing, and support of business computer software primarily by providing information optimization products and software solutions that allow organizations to deliver an extensive variety of data into their big data and business analytic applications.
The Company’s principal product lines are Information Optimization Solutions (including Monarch Professional, Datawatch Data Pump, Datawatch Enterprise Server, Datawatch Enterprise Server – Cloud, Datawatch RMS, Datawatch Report Manager on Demand, Datawatch Dashboards, and iMergence) and Business Service Management Solutions (including Visual QSM and Visual HD). Included in the above categories are:
|
|
●
|
Monarch Professional, a desktop reporting and data analysis application that lets users extract and manipulate data from ASCII report files, PDF files or HTML files produced on any mainframe, midrange, client/server or PC system;
|
|
|
|
Datawatch Data Pump, a data replication and migration tool that offers a shortcut for populating and refreshing data marts and data warehouses, for migrating legacy data into new applications and for providing automated delivery of reports in a variety of formats, such as Excel, via email;
|
|
|
|
Datawatch Enterprise Server, an enterprise solution that provides web-enabled report storage, transformation and distribution including data analysis, visualization and MS Excel integration for easy to use and cost effective self-serve reporting and analytics;
|
|
|
|
Datawatch Enterprise Server – Cloud, a cloud-based application that provides the same functionality as Datawatch Enterprise Server and which allows faster deployment with less expense and overhead;
|
|
|
|
Datawatch RMS, a web-based report analysis solution that integrates with any existing enterprise report management or content management archiving solution;
|
|
|
|
Datawatch Report Manager on Demand, a system for high-volume document capture, archiving, and online presentation;
|
|
|
|
Datawatch Dashboards, an interactive dashboard solution that provides a visual overview of operational performance as well as the ability to monitor specific business processes and events;
|
|
|
|
iMergence, an enterprise report mining system;
|
|
|
|
Visual QSM, a fully internet-enabled IT service management solution that incorporates workflow and network management capabilities and provides web access to multiple databases via a standard browser; and
|
|
|
|
Visual Help Desk or Visual HD, a web-based help desk and call center solution operating on the IBM Lotus Domino platform.
|
CRITICAL ACCOUNTING POLICIES
In the preparation of financial statements and other financial data, management applies certain accounting policies to transactions that, depending on choices made by management, can result in different outcomes. In order for a reader to understand the following information regarding the financial performance and condition of the Company, an understanding of those accounting policies is important. Certain of those policies are comparatively more important to the Company’s financial results and condition than others. The policies that the Company believes are most important for a reader’s understanding of the financial information provided in this report are described below.
|
|
|
Revenue Recognition, Allowance for Bad Debts and Returns Reserve
|
|
|
|
Capitalized Software Development Costs
|
|
|
|
Valuation of Intangible Assets and Other Long-Lived Assets
|
|
|
|
Accounting for Share-Based Compensation
|
During the nine months ended June 30, 2013, there were no significant changes in the Company’s critical accounting policies. See Note 1 to the Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in its Annual Report on Form 10-K for the year ended September 30, 2012 for additional information about these critical accounting policies, as well as a description of the Company’s other significant accounting policies.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. The operating results for any period should not be considered indicative of the results expected for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.
| |
|
|
|
|
|
|
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
June 30,
|
|
|
June 30,
|
|
| |
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
|
64% |
|
|
|
66% |
|
|
|
63% |
|
|
|
66% |
|
|
Maintenance
|
|
|
31% |
|
|
|
29% |
|
|
|
33% |
|
|
|
28% |
|
|
Professional services
|
|
|
5% |
|
|
|
5% |
|
|
|
4% |
|
|
|
6% |
|
|
Total revenue
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses
|
|
|
7% |
|
|
|
7% |
|
|
|
7% |
|
|
|
9% |
|
|
Cost of maintenance and services
|
|
|
8% |
|
|
|
10% |
|
|
|
8% |
|
|
|
10% |
|
|
Sales and marketing
|
|
|
56% |
|
|
|
45% |
|
|
|
58% |
|
|
|
45% |
|
|
Engineering and product development
|
|
|
10% |
|
|
|
10% |
|
|
|
11% |
|
|
|
10% |
|
|
General and administrative
|
|
|
26% |
|
|
|
18% |
|
|
|
21% |
|
|
|
18% |
|
|
Total costs and expenses
|
|
|
107% |
|
|
|
90% |
|
|
|
105% |
|
|
|
92% |
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
-7% |
|
|
|
10% |
|
|
|
-5% |
|
|
|
8% |
|
|
Interest expense and other income (expense), net
|
|
|
-2% |
|
|
|
-2% |
|
|
|
-2% |
|
|
|
-1% |
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
-9% |
|
|
|
8% |
|
|
|
-7% |
|
|
|
7% |
|
|
Provision (benefit) for income taxes
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
NET INCOME (LOSS)
|
|
|
-9% |
|
|
|
8% |
|
|
|
-7% |
|
|
|
7% |
|
Three Months Ended June 30, 2013 Compared to
Three Months Ended June 30, 2012
Total Revenues
The following table presents total revenue, revenue increase and percentage change in revenue for the three months ended June 30, 2013 and 2012:
| |
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
|
|
|
|
|
|
|
|
| |
|
June 30,
|
|
|
|
|
|
Percentage
|
|
| |
|
2013
|
|
|
2012
|
|
|
Increase
|
|
|
Change
|
|
| |
|
(In thousands) |
|
|
Software licenses
|
|
$ |
5,007 |
|
|
$ |
4,699 |
|
|
$ |
308 |
|
|
|
7 |
% |
|
Maintenance
|
|
|
2,409 |
|
|
|
2,106 |
|
|
|
303 |
|
|
|
14 |
% |
|
Professional Services
|
|
|
411 |
|
|
|
368 |
|
|
|
43 |
|
|
|
12 |
% |
|
Total revenue
|
|
$ |
7,827 |
|
|
$ |
7,173 |
|
|
$ |
654 |
|
|
|
9 |
% |
Software
license revenue for the three months ended June 30, 2013 was $5,007,000 or approximately 64% of total revenue, as compared to
$4,699,000, or approximately 66% of total revenue for the three months ended June 30, 2012. The increase in software license
revenue of $308,000 for the three months ended June 30, 2013 consists of a $317,000 increase in Information Optimization
Solutions (including Monarch Professional, Datawatch Data Pump, Datawatch Enterprise Server, Datawatch Enterprise Server
– Cloud, Datawatch RMS, Datawatch Report Manager on Demand, Datawatch Dashboards, and iMergence products) offset by a
$9,000 decrease in Business Service Management Solutions (including Visual QSM and Visual HD products). Included in software
license revenue for the three months ended June 30, 2013 was $600,000 related to a royalty payment from one customer.
Maintenance revenue for the three months ended June 30, 2013 was $2,409,000 or approximately 31% of total revenue, as compared to $2,106,000, or approximately 29% of total revenue for the three months ended June 30, 2012. The increase in maintenance revenue of $303,000 consists of a $356,000 increase in Information Optimization Solutions offset by a $53,000 decrease in Business Service Management Solutions. The Company attributes the increase in maintenance revenue to higher overall sales and higher renewal rates of Monarch Professional.
Professional services revenue for the three months ended June 30, 2013 was $411,000 or approximately 5% of total revenue, as compared to $368,000, or approximately 5% of total revenue for the three months ended June 30, 2012. The increase in professional services revenue of $43,000 consists of a $33,000 increase in Information Optimization Solutions and a $10,000 increase in Business Service Management Solutions.
Costs and Operating Expenses
The following table presents costs of sales and operating expenses, increase (decrease) in costs of sales and operating expenses and percentage changes in costs of sales and operating expenses for the three months ended June 30, 2013 and 2012:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Three Months Ended
June 30,
|
|
Increase |
|
|
Percentage |
|
| |
2013
|
|
2012
|
|
|
|
|
|
|
| |
|
|
(In thousands)
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Cost of software licenses
|
|
$ |
549 |
|
|
$ |
509 |
|
|
$ |
40 |
|
|
|
8 |
% |
|
Cost of maintenance and services
|
|
|
602 |
|
|
|
668 |
|
|
|
(66 |
) |
|
|
-10 |
% |
|
Sales and marketing
|
|
|
4,398 |
|
|
|
3,244 |
|
|
|
1,154 |
|
|
|
36 |
% |
|
Engineering and product development
|
|
|
759 |
|
|
|
730 |
|
|
|
29 |
|
|
|
4 |
% |
|
General and administrative
|
|
|
2,038 |
|
|
|
1,289 |
|
|
|
749 |
|
|
|
58 |
% |
|
Total costs and operating expenses
|
|
$ |
8,346 |
|
|
$ |
6,440 |
|
|
$ |
1,906 |
|
|
|
30 |
% |
The increase in cost of software licenses of $40,000, or approximately 8%, is primarily due to increased software amortization costs pertaining to development costs capitalized in fiscal year 2013 as well as increased royalty costs related to the Company’s Report Manager on Demand product.
The decrease in cost of maintenance and services of $66,000, or approximately 10%, is primarily due to lower commissions due to decreased consulting sales and decreased other employee-related costs as compared to the same period last year.
The increase in sales and marketing expenses of $1,154,000, or approximately 36%, is due to higher wages and employee-related costs, including share-based compensation, attributable to increased headcount and increased promotional and lead generation costs as compared to the same period last year. These increases reflect the Company’s significant investment in a new sales and marketing team during the last several quarters to accelerate revenue generation. The Company does not expect increases of this magnitude to continue beyond fiscal year 2013.
The increase in engineering and product development expenses of $29,000, or approximately 4%, is primarily attributable to higher wages and other employee-related costs due to increased headcount offset by lower external consulting costs.
The increase in general and administrative expenses of $749,000, or 58%, is primarily attributable to acquisition costs incurred during the quarter in connection with the Company’s planned acquisition of a privately-held software company as well as higher external consulting costs and higher share-based compensation costs as compared to the same period last year. In June 2013, the Company announced the signing of a definitive agreement under which it has agreed to acquire Panopticon Software AB (“Panopticon”), a privately-held Swedish company specializing in the delivery of real-time data visualization solutions. Pursuant to this agreement, the Company plans to acquire all outstanding shares of Panopticon in an all-stock transaction. Completion of this transaction is subject to the approval of the Company’s shareholders, which is expected to occur during its fourth fiscal quarter of 2013. Total acquisition-related costs in the three months ended June 30, 2013 were approximately $563,000.
Interest expense and other income (expense), net for the three months ended June 30, 2013 was $148,000 which included $158,000 of interest expense related to both the Company’s $4.0 million subordinated note with a private investment company and borrowings under a $2.0 million revolving credit facility with a bank, offset by a gain on foreign currency transactions of $10,000. Both of these debt financings were issued in connection with the Company’s acquisition of the intellectual property underlying its Monarch Professional and Datawatch Data Pump product offerings. Interest expense and other income (expense), net for the three months ended June 30, 2012 was $176,000, which included $165,000 of interest expense related to the Company’s debt financings and a loss on foreign currency transactions of approximately $11,000.
Income tax benefit for the three months ended June 30, 2013 was $1,000 as compared to income tax expense of $9,000 for the three months ended June 30, 2012. The income tax benefit is primarily related to adjustments to estimated federal alternative minimum taxes offset by minimum state taxes. Income tax expense for the three months ended June 30, 2012 includes $10,000 related to estimated federal alternative minimum taxes and a $6,000 provision for uncertain tax positions relative to foreign taxes, offset by $7,000 in estimated state tax adjustments. At June 30, 2013, the Company had U.S. federal tax loss carryforwards of approximately $7.1 million which expire at various dates through and until 2031 as well as significant state and foreign net operating loss carryforwards.
Net loss for the three months ended June 30, 2013 was $666,000 as compared to net income of $548,000 for the three months ended June 30, 2012.
Nine months Ended June 30, 2013 Compared to
Nine months Ended June 30, 2012
Total Revenues
The following table presents total revenue, revenue increase (decrease) and percentage change in revenue for the nine months ended June 30, 2013 and 2012:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended
|
|
|
|
|
|
|
|
| |
|
June 30,
|
|
|
Increase |
|
|
Percentage
|
|
| |
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
| |
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$ |
13,634 |
|
|
$ |
13,182 |
|
|
$ |
452 |
|
|
|
3 |
% |
|
Maintenance
|
|
|
7,042 |
|
|
|
5,683 |
|
|
|
1,359 |
|
|
|
24 |
% |
|
Professional Services
|
|
|
803 |
|
|
|
1,126 |
|
|
|
(323 |
) |
|
|
-29 |
% |
|
Total revenue
|
|
$ |
21,479 |
|
|
$ |
19,991 |
|
|
$ |
1,488 |
|
|
|
7 |
% |
Software
license revenue for the nine months ended June 30, 2013 was $13,634,000 or approximately 63% of total revenue, as compared
to $13,182,000, or approximately 66% of total revenue for the nine months ended June 30, 2012. The increase in software
license revenue of $452,000 for the nine months ended June 30, 2013 consists of a $585,000 increase in Information
Optimization Solutions offset by a $133,000 decrease in Business Service Management Solutions. Included in software license
revenue for the nine months ended June 30, 2013 was $600,000 related to a royalty payment from one customer.
Maintenance revenue for the nine months ended June 30, 2013 was $7,042,000 or approximately 33% of total revenue, as compared to $5,683,000, or approximately 28% of total revenue for the nine months ended June 30, 2012. The increase in maintenance revenue of $1,359,000 consists of a $1,469,000 increase in Information Optimization Solutions offset by a $110,000 decrease in Business Service Management Solutions. The increase in maintenance revenue is due to higher overall sales and increased renewal rates of Monarch Professional.
Professional services revenue for the nine months ended June 30, 2013 was $803,000 or approximately 4% of total revenue, as compared to $1,126,000, or approximately 6% of total revenue for the nine months ended June 30, 2012. The decrease in professional services revenue of $323,000 consists of a $249,000 decrease in Information Optimization Solutions and a $74,000 decrease in Business Service Management Solutions. This decrease is due to lower consulting services primarily related to the Company’s Report Manager on Demand and Visual QSM product offerings.
Costs and Operating Expenses
The following table presents costs of sales and operating expenses, increase (decrease) in costs of sales and operating expenses and percentage changes in costs of sales and operating expenses for the nine months ended June 30, 2013 and 2012:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended
|
|
|
|
|
|
|
|
| |
|
June 30,
|
|
|
Increase
|
|
|
Percentage
|
|
| |
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
| |
|
(In thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses
|
|
$ |
1,602 |
|
|
$ |
1,743 |
|
|
$ |
(141 |
) |
|
|
-8 |
% |
|
Cost of maintenance and services
|
|
|
1,697 |
|
|
|
2,019 |
|
|
|
(322 |
) |
|
|
-16 |
% |
|
Sales and marketing
|
|
|
12,391 |
|
|
|
9,041 |
|
|
|
3,350 |
|
|
|
37 |
% |
|
Engineering and product development
|
|
|
2,361 |
|
|
|
2,048 |
|
|
|
313 |
|
|
|
15 |
% |
|
General and administrative
|
|
|
4,475 |
|
|
|
3,469 |
|
|
|
1,006 |
|
|
|
29 |
% |
|
Total costs and operating expenses
|
|
$ |
22,526 |
|
|
$ |
18,320 |
|
|
$ |
4,206 |
|
|
|
23 |
% |
The decrease in cost of software licenses of $141,000, or approximately 8%, is primarily due to a decrease in royalty expense attributable to the acquisition of intellectual property underlying the Company’s Monarch Professional and Datawatch Data Pump products on March 30, 2012 which was partially offset by higher software amortization costs. As a result of this acquisition, the Company is no longer incurring royalty expense related to these products to cost of software licenses but is amortizing the purchase price of the intellectual property to cost of software licenses.
The decrease in cost of maintenance and services of $322,000, or approximately 16%, is primarily due to lower commissions resulting from decreased consulting sales and lower travel expenses and other employee-related costs.
The increase in sales and marketing expenses of $3,350,000, or approximately 37%, is attributable to higher wages and employee-related costs, including share-based compensation, due to increased headcount, higher travel expenses and increased consulting, promotional and lead generation costs as compared to the same period last
year. These increases reflect the Company’s significant investment in a new sales and marketing team during the last several quarters to accelerate revenue generation. The Company does not expect increases of this magnitude to continue beyond fiscal year 2013.
The increase in engineering and product development expenses of $313,000, or approximately 15%, is primarily due to higher wages and other employee-related costs offset by lower consulting costs as compared to the same period last year.
The increase in general and administrative expenses of $1,006,000, or approximately 29%, is primarily attributable to acquisition costs incurred during the three months ended June 30, 2013 in connection with the Company’s planned acquisition of a privately-held software company as well as higher external consulting costs and higher share-based compensation costs as compared to the same period last year. In June 2013, the Company announced the signing of a definitive agreement under which it has agreed to acquire Panopticon Software AB (“Panopticon”), a privately-held Swedish company specializing in the delivery of real-time data visualization solutions. Pursuant to this agreement, the Company plans to acquire all outstanding shares of Panopticon in an all-stock transaction. Completion of this transaction is subject to the approval of the Company’s shareholders, which is expected to occur during its fourth fiscal quarter of 2013. Total acquisition-related costs in the nine months ended June 30, 2013 were approximately $563,000.
Interest expense and other income (expense), net for the nine months ended June 30, 2013 was $465,000 which includes $474,000 of interest expense related to both the Company’s $4.0 million subordinated note with a private investment company and borrowings under a $2.0 million revolving credit facility with a bank; offset by a gain on foreign currency transactions of $9,000. Both of these debt financings were issued in connection the Company’s acquisition of the intellectual property underlying its Monarch Professional and Datawatch Data Pump product offerings. Interest expense and other income (expense), net for the nine months ended June 30, 2012 was $285,000 which included $167,000 of interest expense related to the Company’s debt financings and a loss on foreign currency transactions of approximately $118,000. The foreign currency loss for the nine months ended June 30, 2012 was attributable to the settlement of intercompany account balances due to the dissolution of one of the Company’s foreign subsidiaries and the repatriation of international funds to the US required by the Company’s line of credit facility which was entered into on March 30, 2012. Additionally, the foreign currency loss for the nine months ended June 30, 2012 was partially due to the repayment of intercompany loans between the Australian and UK subsidiaries.
Income tax expense for the nine months ended June 30, 2013 was $2,000 as compared to $75,000 for the nine months ended June 30, 2012. Income tax expense for the nine months ended June 30, 2013 includes a $13,000 provision related to uncertain tax positions relative to foreign taxes offset by adjustments to estimated federal alternative minimum taxes and estimated state taxes totaling $11,000. Income tax expense for the nine months ended June 30, 2012 includes $30,000 related to estimated federal alternative minimum taxes, $26,000 related to estimated state taxes and $19,000 related to uncertain tax positions relative to foreign taxes.
Net loss for the nine months ended June 30, 2013 was $1,514,000 as compared to net income of $1,311,000 for the nine months ended June 30, 2012.
OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The Company leases various facilities and equipment in the U.S. and overseas under non-cancelable operating leases that expire through 2016. The lease agreements generally provide for the payment of minimum annual rentals, pro rata share of taxes, and maintenance expenses. Rental expense for all operating leases was approximately $128,000 and $105,000 for the three months ended June 30, 2013 and 2012, respectively, and $397,000 and $327,000 for the nine months ended June 30, 2013 and 2012, respectively.
As of June 30, 2013, the Company’s contractual obligations include minimum rental commitments under non-cancelable operating leases, long-term debt obligations and other liabilities related to uncertain tax positions as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
More than
|
|
|
Contractual Obligations:
|
|
Total
|
|
|
Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Operating Lease Obligations
|
|
$ |
701 |
|
|
$ |
339 |
|
|
$ |
362 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Long-term Debt Obligations
|
|
$ |
4,000 |
|
|
$ |
267 |
|
|
$ |
1,600 |
|
|
$ |
1,600 |
|
|
$ |
533 |
|
|
Other Liabilities
|
|
$ |
213 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
213 |
|
Prior to the acquisition of intellectual property on March 30, 2012, as disclosed in Note 1 to the condensed consolidated financial statements, the Company was obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Additionally, the Company pays royalties under arrangements with vendors related to sales of its Datawatch Report Manager on Demand and Datawatch Dashboards products. Royalty expense included in cost of software licenses was approximately $35,000 and $21,000 for the three months ended June 30, 2013 and 2012, respectively, and $102,000 and $1,116,000 for the nine months ended June 30, 2013 and 2012, respectively. The Company is not obligated to pay any minimum amounts for royalties. As a result of the acquisition of the intellectual property, the Company is no longer required to pay royalties related to its Monarch Professional and Datawatch Data Pump products.
The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. If necessary, the Company would provide for the estimated cost of warranties based on specific warranty claims and claim history. However, the Company has never incurred significant expense under its product or service warranties. As a result, the Company believes its exposure related to these warranty agreements is minimal. Accordingly, there are no liabilities recorded for warranty claims as of June 30, 2013.
The Company enters into indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company generally agrees to indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally its customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes its exposure related to these agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of June 30, 2013.
Certain of the Company’s agreements also provide for the performance of services at customer sites. These agreements may contain indemnification clauses, whereby the Company will indemnify the customer from any and all damages, losses, judgments, costs and expenses for acts of its employees or subcontractors resulting in bodily injury or property damage. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrella insurance policies that would enable it to recover a portion of any amounts paid. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes its exposure related to these agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of June 30, 2013.
As permitted under Delaware law, the Company has agreements with its directors and certain officers whereby the Company will indemnify them for certain events or occurrences while the director or officer is, or was, serving at the Company’s request in such capacity. The term of the director indemnification period is for the later of ten years after the date that the director ceases to serve in such capacity or the final termination of proceedings against the director as outlined in the indemnification agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited;
however, the Company’s director and officer insurance policy would enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes its exposure related to these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of June 30, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that its current cash balances and cash generated from operations will be sufficient to meet the Company’s cash needs for working capital and anticipated capital expenditures for at least the next twelve months. At June 30, 2013, the Company had $10,424,000 of cash and equivalents, an increase of $1,702,000 from September 30, 2012.
At June 30, 2013, the Company had working capital of approximately $5,627,000 as compared to $4,041,000 at September 30, 2012. The Company expects cash flows from operations to remain positive as it anticipates profitability in the future. However, if the Company’s cash flow from operations were to decline significantly, it may need to consider reductions to its operating expenses. The Company does not anticipate additional cash requirements to fund growth or the acquisition of additional complementary technology or businesses. However, if in the future, such expenditures are anticipated or required, the Company may seek additional financing by issuing equity or obtaining credit facilities to fund such requirements. There can be no assurance that the Company will be able to issue additional equity or obtain a new or expanded credit facility at attractive prices or rates, or at all.
The Company had a net loss of approximately $1,514,000 for the nine months ended June 30, 2013 as compared to net income of approximately $1,311,000 for the nine months ended June 30, 2012. During the nine months ended June 30, 2013 and 2012, approximately $2,053,000 and $2,492,000, respectively, of cash was provided by the Company’s operations. During the nine months ended June 30, 2013, the main source of cash from operations was net loss adjusted for share-based compensation expense and depreciation and amortization expense.
Net cash used in investing activities for the nine months ended June 30, 2013 of $392,000 is primarily related to capitalized software development costs and the purchase of property and equipment.
Net cash provided by financing activities for the nine months ended June 30, 2013 of $142,000 is related to proceeds from the exercise of stock options.
On March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with a private investment company. The terms of the Note and Warrant Purchase Agreement include a $4.0 million subordinated note and warrants for 185,000 shares of the Company’s common stock. The subordinated note has a maturity date of February 28, 2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. Additionally, beginning on March 31, 2014 and on the last day of each month thereafter until the maturity date, the Company will make principal payments totaling $66,667. The Company is required under this agreement to maintain certain interest coverage and leverage ratios. As of June 30, 2013, the Company was in compliance with the covenants under the Note and Warrant Purchase Agreement.
On March 30, 2012, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with a bank which established a $2.0 million revolving line of credit facility and borrowed $1.5 million under the Loan Agreement on that date. The Company repaid $600,000 under the line of credit in September 2012. The Loan Agreement terminates on March 29, 2014. On that date, the principal amount of all advances under the revolving line and all unpaid interest thereon will become due and payable. The principal amount outstanding under the revolving line accrues interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor of 3.25%. The Company can borrow under the revolving line of credit based on a formula percentage of its accounts receivable balance. Additionally, the Loan Agreement requires that the Company maintain certain net asset and net income ratios. The Company’s obligations under the line of credit facility are secured by substantially all of the Company’s assets other than intellectual property. As of June 30, 2013, the Company was in compliance with the covenants under the Loan Agreement.
Management believes that the Company’s current operations have not been materially impacted by the effects of inflation.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments
At June 30, 2013, the Company did not participate in or hold any derivative financial instruments or commodity instruments. The Company holds no investment securities that possess significant market risk.
Primary Market Risk Exposures
The Company’s primary market risk exposure is foreign currency exchange rate risk. The Company’s exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of its international subsidiaries are almost exclusively conducted in their respective local currencies, and dollar advances to the Company’s international subsidiaries, if any, are usually considered to be of a long-term investment nature. Accordingly, the majority of currency movements are reflected in the Company’s other comprehensive income (loss). There are, however, certain situations where the Company will invoice customers in currencies other than its own. Such gains or losses from operating activity, whether realized or unrealized, are reflected in interest expense and other income (expense), net in the condensed consolidated statements of operations. Currently, the Company does not engage in foreign currency hedging activities.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The principal executive officer and principal financial officer, with the participation of the Company’s management, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a−15(e) and 15d−15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in the Company’s periodic SEC filings within the required time period.
(b) Changes in Internal Controls.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
The Company is occasionally involved in legal proceedings and other claims arising out of its operations in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows.
In addition to the other information set forth in this report, the reader should carefully consider the factors discussed in Part I, Item 1A under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012, which could materially affect its business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known or that it currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
| |
|
|
|
|
| |
|
|
2.1
|
Stock Purchase Agreement by and among Datawatch Corporation, the shareholders of Panopticon Software AB, certain optionholders of Panopticon Software AB, Panopticon Software AB and Willem De Geer, dated June 14, 2013 (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K previously filed on June 20, 2013 with the Commission (File No. 000-19960) and incorporated herein by reference).
|
| |
|
|
31.1
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| |
|
|
31.2
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| |
|
|
32.1
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| |
|
|
32.2
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 14, 2013.
| |
|
|
| |
DATAWATCH CORPORATION
|
| |
|
| |
/s/ Michael A. Morrison
|
| |
Michael A. Morrison
|
| |
President, Chief Executive Officer, and
|
| |
Director (Principal Executive Officer)
|
| |
|
| |
/s/ James L. Eliason
|
|
| |
James L. Eliason
|
| |
Chief Financial Officer
|
| |
(Principal Financial Officer)
|