Item 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We do not provide
forecasts of our future financial performance. However, from time to time, information we provide or statements made by our
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. We caution readers not to place
undue reliance on any such forward looking statements, which speak only as of the date they are made. We disclaim 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 our 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. Our
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 our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, and
in Item 1A of Part II of this Quarterly Report on Form 10-Q, as well as the accuracy of our internal estimates of revenue and operating
expense levels.
Introduction
We are engaged in
the design, development, marketing, distribution and support of business computer software primarily for the self-service data
preparation and visual data discovery markets to allow organizations to access, prepare, cleanse, blend and analyze information
quickly and easily. The Datawatch Monarch Platform is an enterprise solution that bridges the gap between the ease-of-use
and agility that business users demand together with the scalability, automation and governance needed by IT.
Our principal product
line of solutions includes the following products:
Datawatch Monarch™ — Access
and Prepare Data from Virtually Any Source
The Datawatch Monarch
family of products includes Datawatch Monarch Complete, Datawatch Monarch Server and Datawatch Monarch Swarm.
Datawatch Monarch
Complete (consisting of Monarch Data Prep Studio and Monarch Classic) is a self-service data preparation tool which lets users
quickly and easily explore, manipulate and blend disparate data sets and prepare them for operational processes or visual analytics.
With Datawatch Monarch Complete, users can bring to life all the data that is needed to manage the business, whether that information
is stored in structured, relational sources like databases, or in less conventional places like unstructured or semi-structured
content including PDF, XML, JSON, HTML, text, spool and ASCII files.
Datawatch Monarch
Server extends the data preparation capabilities of Monarch Complete to provide a comprehensive, enterprise-wide solution.
With Monarch Server Automation (“Automator”), models created with Monarch Complete on the desktop can be stored and
shared on a centrally managed server that runs on premise. Data preparation tasks can be fully automated and prepared data
delivered to all users and systems. Datawatch Report Mining Server (“RMS”) integrates with any existing enterprise
content management system such as Datawatch Report Manager On-Demand, IBM Content Manager On-Demand, Microsoft SharePoint, Hyland
OnBase, ASG Mobius ViewDirect and others. Datawatch RMS opens up the corporate data locked in content management systems, static
reports and business documents, enabling dynamic business-driven analysis of information.
Datawatch Monarch
Swarm is a web-based self-service data preparation platform combining data socialization, gamification, collaboration, data cataloging
and governance features with key attributes common to social media platforms. Monarch Swarm, available on premise or in a private
cloud, provides a social data community, with the ability to leverage user ratings, recommendations, discussions, comments and
popularity to make better decisions about which data to use. Data scientists, business analysts and even novice users across a
company can easily search for, share and reuse prepared, managed data to achieve true enterprise collaboration and agility, resulting
in better and faster business decisions while building an analytics community.
Datawatch Panopticon
™
—
Visually Design, Discover and Explore New Insights
Datawatch Panopticon
lets users quickly start asking questions to see hidden patterns, spot problems and identify missed opportunities without programming
or scripting. Our in-memory analytics engine enables on-the-fly aggregations and intuitive navigation and integration of data from
virtually any data source. With a simple drag-and-drop interface, users can set up hierarchies and filters in their dashboards
to make it easier to spot outliers and to see how different subsets of data correlate with each other. Datawatch Panopticon provides
a range of specialized visualizations designed specifically to make analyzing streaming data, time series data and historical data,
more impactful. Integrated data preparation capabilities and pre-built connectors make it simple to access and combine information
from any data source, including data streams from message brokers and complex event processing engines. Products in the Panopticon
family include Datawatch Panopticon Designer and Datawatch Panopticon Server.
CRITICAL ACCOUNTING POLICIES
The Securities and
Exchange Commission (“SEC”) issued disclosure guidance for “critical accounting policies.” The SEC defines
“critical accounting policies” as those that require the application of management’s most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain
and may change in subsequent periods.
Our significant accounting
policies are described in Note 1 to the consolidated financial statements for the fiscal year ended September 30, 2016 included
in our previously filed Form 10-K. There have been no material changes to the accounting policies for the three and six months
ended March 31, 2017.
OVERVIEW
During the second
quarter of fiscal 2017, we realized increases in revenue and improvement in our bottom line results compared to the second quarter
of fiscal 2016. In addition, during the second quarter of fiscal 2017, we realized an increase of $1.5 million in our cash and
short-term investments, up from $26.3 million as of the end of our first quarter of fiscal 2017, to $27.8 million as of the end
of our second quarter of fiscal 2017. During the second quarter of fiscal 2017, we added 193 new customers for our Monarch self-service
data preparation platform, which was an increase of 13% over the 171 we added during the second quarter of fiscal 2016 and a 3%
increase over the 188 new customers added during the first quarter of fiscal 2017.
Sales execution
Overall revenue increased
by $1.3 million, or 18%, compared to the same quarter last fiscal year. Of the overall increase in revenue, license revenue increased
$1.2 million, or 34%, compared to the same quarter last fiscal year. In addition, our deferred revenue balance increased by $1.4
million from $8.7 million as of the end of our second quarter of fiscal 2016 to $10.1 million as of the end of our second quarter
of fiscal 2017. Of the total deferred revenue increase, deferred license revenue increased by $1.0 million, or 71%, as a direct
result of our transition to a subscription pricing model for a portion of our Monarch self-service data preparation sales. Our
subscription bookings continued to increase quarter-over-quarter and year-over-year. During the second quarter of fiscal 2017,
subscription bookings increased $0.1 million, or 8%, over the first quarter of fiscal 2017 to an all-time high of $1.3 million,
and increased $0.5 million, or 58%, compared to the second quarter of fiscal 2016. We recognized $1.0 million in subscription license
revenue during the second quarter of fiscal 2017, representing an 89% increase compared to subscription license revenue of $0.5
million during the second quarter of fiscal 2016.
Market awareness
Among the key highlights
for the second quarter of fiscal 2017 were:
|
·
|
Navy Federal Credit Union, a long-time customer of Datawatch, upgraded its heritage Monarch deployment
to an enterprise-wide agreement to take advantage of the self-service data preparation and analytics capabilities of the current
Monarch platform.
|
|
·
|
Datawatch and Credit Agricole entered an agreement to roll out the Monarch data preparation and
self-service analytics platform to more than two dozen banks throughout France to transform document-based content to analytics-ready
data.
|
|
·
|
Datawatch and AquaQ, a leading provider of kdb+ analytic services to global capital markets organizations,
announced a strategic partnership to provide advanced trading analytics to banks, brokers and fund managers to meet the stringent
regulatory and compliance demands from MiFID and MiFIR.
|
Innovation to
product platform
During the second
quarter of fiscal 2017, we introduced Monarch Swarm, our next generation cloud offering that extends our self-service data preparation
and analytics platform with capabilities for data cataloguing, collaboration and gamification. The Monarch Swarm platform also
enables data socialization, which we believe is the next step in the evolution of data accessibility and self-service analytics.
With Monarch Swarm, users can search for, access, share and re-use prepared data, as well as leverage user ratings, recommendations,
discussions, comments and popularity to gain actionable insights and make better strategic business decisions. We demonstrated
the beta version of Monarch Swarm to a wide variety of customers, partners, prospects and analysts, and the reaction and feedback
were positive. We plan to more broadly introduce the powerful capabilities of this next generation Monarch cloud platform to the
market in the coming months.
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 our accompanying consolidated financial statements. The operating results for any period should not be considered
indicative of the results expected for any future period.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
|
56
|
%
|
|
|
49
|
%
|
|
|
54
|
%
|
|
|
47
|
%
|
Maintenance
|
|
|
41
|
|
|
|
47
|
|
|
|
42
|
|
|
|
49
|
|
Professional services
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
Cost of maintenance and services
|
|
|
6
|
|
|
|
8
|
|
|
|
6
|
|
|
|
8
|
|
Sales and marketing
|
|
|
47
|
|
|
|
69
|
|
|
|
52
|
|
|
|
75
|
|
Engineering and product development
|
|
|
25
|
|
|
|
28
|
|
|
|
26
|
|
|
|
27
|
|
General and administrative
|
|
|
26
|
|
|
|
35
|
|
|
|
27
|
|
|
|
34
|
|
Total costs and expenses
|
|
|
112
|
%
|
|
|
147
|
%
|
|
|
119
|
%
|
|
|
152
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(12
|
)%
|
|
|
(47
|
)%
|
|
|
(19
|
)%
|
|
|
(52
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
8
|
%
|
|
|
-
|
%
|
|
|
4
|
%
|
|
|
-
|
%
|
Foreign currency transaction loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS BEFORE INCOME TAXES
|
|
|
(4
|
)%
|
|
|
(47
|
)%
|
|
|
(16
|
)%
|
|
|
(52
|
)%
|
Income tax (expense) benefit
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(4
|
)%
|
|
|
(46
|
)%
|
|
|
(16
|
)%
|
|
|
(51
|
)%
|
Three Months Ended March 31, 2017
Compared to
Three Months Ended March 31, 2016
Total Revenues
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Software licenses
|
|
$
|
4,889
|
|
|
$
|
3,645
|
|
|
$
|
1,244
|
|
|
|
34
|
%
|
Maintenance
|
|
|
3,560
|
|
|
|
3,480
|
|
|
|
80
|
|
|
|
2
|
|
Professional services
|
|
|
311
|
|
|
|
299
|
|
|
|
12
|
|
|
|
4
|
|
Total revenue
|
|
$
|
8,760
|
|
|
$
|
7,424
|
|
|
$
|
1,336
|
|
|
|
18
|
%
|
Software license
revenue.
Software license revenue increased $1.2 million when compared with revenue for the three months ended March 31, 2016
driven by a $1.7 million increase in our Monarch data preparation revenue, offset by a $0.5 million decrease in our Panopticon
data visualization revenue. The increase in Monarch revenue was the result of our focused strategy to grow our core Monarch data
preparation business with a mixture of heritage Monarch customers as well as new customers. During the three months ended March
31, 2017, we added 193 new Monarch self-service data preparation customers, an increase of 13% compared to the same quarter last
fiscal year. In addition to the increase in software license revenue, our deferred revenue increased from $8.7 million at March
31, 2016 to $10.1 million at March 31, 2017 as a result of our transition to a subscription pricing model for a portion of our
Monarch self-service data preparation sales, which transition began at the end of fiscal 2015. Deferred license revenue accounted
for $1.0 million of the increase in total deferred revenue.
Maintenance revenue.
Maintenance revenue remained relatively flat compared to the same quarter last fiscal year.
Professional services.
Professional services revenue remained relatively flat compared to the same quarter last fiscal year.
Total Costs and Expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost of software licenses
|
|
$
|
733
|
|
|
$
|
499
|
|
|
$
|
234
|
|
|
|
47
|
%
|
Cost of maintenance and services
|
|
|
545
|
|
|
|
610
|
|
|
|
(65
|
)
|
|
|
(11
|
)
|
Sales and marketing
|
|
|
4,125
|
|
|
|
5,100
|
|
|
|
(975
|
)
|
|
|
(19
|
)
|
Engineering and product development
|
|
|
2,194
|
|
|
|
2,066
|
|
|
|
128
|
|
|
|
6
|
|
General and administrative
|
|
|
2,318
|
|
|
|
2,626
|
|
|
|
(308
|
)
|
|
|
(12
|
)
|
Total costs and operating expenses
|
|
$
|
9,915
|
|
|
$
|
10,901
|
|
|
$
|
(986
|
)
|
|
|
(9
|
)%
|
Cost of software
licenses.
The $0.2 million increase in costs of software licenses was due to lower royalty expense during the three months
ended March 31, 2016 compared to the three months ended March 31, 2017. The lower royalty expense during the three months ended
March 31, 2016 was driven by the reversal of certain royalty accruals, related to prior year sales of Monarch Professional and
Datawatch Data Pump products.
Cost of maintenance
and services.
The $0.1 million decrease was primarily driven by a reduction in employee related expenses, such as salaries,
payroll taxes and benefits, due to a decrease in headcount as compared to the same quarter last fiscal year.
Sales and marketing
expenses.
The $1.0 million decrease in sales and marketing expenses was comprised of a decrease in sales expense of $0.2 million
and a decrease in marketing expense of $0.8 million. The decreased sales expense was comprised of a $0.3 million decrease in employee
related costs such as salaries, payroll taxes and benefits due to a decrease in headcount as compared to the same quarter last
fiscal year and a $0.2 million decrease in share-based compensation, driven by the absence of expense related to several prior
grants of stock awards, which had high fair values, and became fully amortized during the fourth quarter of fiscal 2016. The decreases
in sales expenses was partially offset by an increase in commissions, which was driven by the increases in revenue compared to
the same quarter last fiscal year. The decrease in marketing expenses was comprised of a $0.6 million decrease in advertising and
lead generation costs and a $0.1 million decrease in share-based compensation. The decrease in costs related to advertising and
lead generation was driven by cost cutting measures designed to steadily reduce our quarterly expense run-rate. The reduction of
share-based compensation expenses was driven by the absence of share-based compensation expense related to several prior grants
of stock awards, which had high fair values, and became fully amortized during the fourth quarter of fiscal 2016.
Engineering and
product development expenses.
The $0.1 million increase in engineering and product development costs was due to an increase
in employee severance costs.
General and administrative
expenses.
The $0.3 million decrease in general and administrative expenses was mainly driven by a decrease in legal and consulting
services expenses which were unusually high during the three months ended March 31, 2016 due to the contested election of directors
at our 2016 annual shareholder meeting.
Other income (expense)
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Other income
|
|
$
|
726
|
|
|
$
|
15
|
|
|
$
|
711
|
|
|
|
4,740
|
%
|
Foreign currency transaction loss
|
|
$
|
(14
|
)
|
|
$
|
(6
|
)
|
|
$
|
(8
|
)
|
|
|
133
|
%
|
Other income (expense).
During the three months ended March 31, 2017, the Company recorded the receipt of a settlement payment of $0.7 million, net
of legal expenses of $0.2 million, from a stockholder related to such stockholder’s short-swing stock trading profits.
Foreign currency
transactions loss.
The foreign currency losses for the three months ended March 31, 2017 and 2016 were attributable to fluctuations
of the British pound sterling and other foreign currencies in which we transact business relative to the U.S. Dollar.
(Provision) benefit for income taxes
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Income tax (expense) benefit
|
|
$
|
(6
|
)
|
|
$
|
106
|
|
|
$
|
(112
|
)
|
|
|
(106
|
)%
|
During the three months
ended March 31, 2017, the Company recorded a tax expense of $6,000, related to estimated state taxes. During the three months ended
March 31, 2016, the Company recorded a tax benefit of $0.1 million, primarily related to the change in the deferred tax asset in
Sweden as a result of generating losses, estimated state taxes, and accrued interest on uncertain tax positions.
Six Months Ended March 31, 2017
Compared to
Six Months Ended March 31, 2016
Total Revenues
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Software licenses
|
|
$
|
9,246
|
|
|
$
|
6,792
|
|
|
$
|
2,454
|
|
|
|
36
|
%
|
Maintenance
|
|
|
7,116
|
|
|
|
7,082
|
|
|
|
34
|
|
|
|
-
|
|
Professional services
|
|
|
631
|
|
|
|
605
|
|
|
|
26
|
|
|
|
4
|
|
Total revenue
|
|
$
|
16,993
|
|
|
$
|
14,479
|
|
|
$
|
2,514
|
|
|
|
17
|
%
|
Software license
revenue.
Software license revenue increased $2.5 million compared with revenue for the six months ended March 31, 2016 driven
by a $2.9 million increase in our Monarch data preparation revenue. The increase in Monarch data preparation revenue was the result
of our focused strategy to grow our core Monarch data preparation business with a mixture of heritage Monarch customers as well
as new customers. During the six months ended March 31, 2017, we added 379 new Monarch self-service data preparation customers,
an increase of 28% compared to the prior fiscal year.
Maintenance revenue.
Maintenance revenue remained relatively flat compared to the prior fiscal year.
Professional services.
Professional services revenue remained relatively flat compared to the prior fiscal year.
Total Costs and Expenses
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost of software licenses
|
|
$
|
1,436
|
|
|
$
|
1,188
|
|
|
$
|
248
|
|
|
|
21
|
%
|
Cost of maintenance and services
|
|
|
1,077
|
|
|
|
1,208
|
|
|
|
(131
|
)
|
|
|
(11
|
)
|
Sales and marketing
|
|
|
8,872
|
|
|
|
10,848
|
|
|
|
(1,976
|
)
|
|
|
(18
|
)
|
Engineering and product development
|
|
|
4,397
|
|
|
|
3,893
|
|
|
|
504
|
|
|
|
13
|
|
General and administrative
|
|
|
4,534
|
|
|
|
4,860
|
|
|
|
(326
|
)
|
|
|
(7
|
)
|
Total costs and operating expenses
|
|
$
|
20,316
|
|
|
$
|
21,997
|
|
|
$
|
(1,681
|
)
|
|
|
(8
|
)%
|
Cost of software
licenses.
The $0.2 million increase in costs of software licenses was due to lower royalty expense during the six months ended
March 31, 2016 compared to the six months ended March 31, 2017. The lower royalty expense during the six months ended March 31,
2016 was driven by the reversal of certain royalty accruals, related to prior year sales of Monarch Professional and Datawatch
Data Pump products.
Cost of maintenance
and services.
The $0.1 million decrease was primarily driven by a reduction in employee related expenses, such as salaries,
payroll taxes and benefits due to a decrease in headcount as compared to the prior fiscal year.
Sales and marketing
expenses.
The $2.0 million decrease in sales and marketing expenses was comprised of a decrease in sales expense of $0.8 million
and a decrease in marketing expense of $1.2 million. The decreased sales expense was comprised of a $0.7 million decrease in employee
related costs such as salaries, payroll taxes and benefits due to a decrease in headcount as compared to the prior fiscal year;
a $0.5 million decrease in share-based compensation, driven by the absence of expense related to several prior grants of stock
awards, which had high fair values, and became fully amortized during the fourth quarter of fiscal 2016 as well as the absence
of expense related to the former Chief Revenue Officer whose employment terminated during the second quarter of fiscal 2016; a
$0.1 million decrease in severance and a $0.1 million decrease in amortization as a result of certain intangible assets that became
fully amortized during fiscal 2016. These decreases were offset by a $0.7 million increase in commissions driven by the increase
in sales compared to prior fiscal year. The decrease in marketing expenses was comprised of a $1.0 million decrease in advertising
and lead generation costs and a $0.3 million decrease in share-based compensation, offset by an increase of $0.1 million for severance.
The decrease in costs related to advertising and lead generation was driven by cost cutting measures designed to steadily reduce
our quarterly expense run-rate. The reduction of share-based compensation expenses was driven by the absence of share-based compensation
expense related to several prior grants of stock awards, which had high fair values, and became fully amortized during the fourth
quarter of fiscal 2016.
Engineering and
product development expenses.
The $0.5 million increase in engineering and product development costs was comprised of a $0.2
million increase in employee related costs, a $0.1 million increase in consulting expenses related to outside development services,
and a $0.1 million increase in severance. The increase in employee related costs was mainly driven by the receipt of a payroll
tax refund during the six months ended March 31, 2016, which resulted in lower payroll taxes for the first half of fiscal 2016
when compared to the first half of fiscal 2017.
General and administrative
expenses.
The $0.3 million decrease in general and administrative expenses was mainly driven by a decrease in legal and consulting
services expenses which were unusually high during the three months ended March 31, 2016 due to the contested election of directors
at our 2016 annual shareholders meeting.
Other income (expense)
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Other income
|
|
$
|
742
|
|
|
$
|
18
|
|
|
$
|
724
|
|
|
|
4,022
|
%
|
Foreign currency transaction loss
|
|
$
|
(91
|
)
|
|
$
|
(33
|
)
|
|
$
|
(58
|
)
|
|
|
176
|
%
|
Other income (expense).
During the six months ended March 31, 2017, the Company recorded the receipt of a settlement payment of $0.7 million, net of
legal expenses of $0.2 million, from a stockholder related to such stockholder’s short-swing stock trading profits.
Foreign currency
transactions loss.
The foreign currency losses for the six months ended March 31, 2017 and 2016 were attributable to fluctuations
of the British pound sterling and other foreign currencies in which we transact business relative to the U.S. Dollar.
(Provision) benefit for income taxes
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Income tax (expense) benefit
|
|
$
|
(8
|
)
|
|
$
|
207
|
|
|
$
|
(215
|
)
|
|
|
(104
|
)%
|
During the six months
ended March 31, 2017, the Company recorded a tax expense of $8,000, related to estimated state taxes. During the six months ended
March 31, 2016, the Company recorded a tax benefit of $0.2 million, primarily related to the change in the deferred tax asset in
Sweden as a result of generating losses, estimated state taxes, and accrued interest on uncertain tax positions.
OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND
CONTINGENT LIABILITIES AND COMMITMENTS
We lease various facilities
and equipment in the U.S. and overseas under non-cancelable operating leases which expire at various dates through 2022. The lease
agreements generally provide for the payment of minimum annual rentals and pro-rata share of taxes and maintenance expenses. Rental
expense for all operating leases was $0.2 million and $0.3 million for the three months ended March 31, 2017 and 2016, respectively,
and was $0.5 million and $0.6 million for the six months ended March 31, 2017 and 2016, respectively. At March 31, 2017 and September
30, 2016, deferred rent of $0.3 million and $0.4 million, respectively, is included
under
the caption “
Other long-term liabilities
” in our consolidated
balance sheets
. Certain of our facility leases include options to renew.
As of March 31, 2017,
our contractual obligations include minimum rental commitments under non-cancelable operating leases and other long-term liabilities
related to uncertain tax positions as follows (in thousands):
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations:
|
|
Total
|
|
|
1 Year
|
|
|
1 – 2 Years
|
|
|
3 – 5 Years
|
|
|
5 Years
|
|
Operating lease obligations
|
|
$
|
3,655
|
|
|
$
|
425
|
|
|
$
|
1,346
|
|
|
$
|
1,151
|
|
|
$
|
733
|
|
Royalty expense included
in cost of software licenses was $0.2 million for the three months ended March 31, 2017. There was a Royalty benefit of $0.1 million
included in cost of software licenses for the three months ended March 31, 2016. Royalty expense included in cost of software licenses
was $0.4 million and $0.1 million for the six months ended March 31, 2017 and 2016, respectively.
Our software products
are sold under warranty against certain defects in material and workmanship for a period of 30 to 90 days from the date of purchase.
If necessary, we would provide for the estimated cost of warranties based on specific warranty claims and claim history. However,
we have never incurred significant expense under our product or service warranties. As a result, we believe our exposure related
to these warranty agreements is minimal. Accordingly, we have no liabilities recorded for warranty claims as of March 31,
2017 and September 30, 2016.
We enter into indemnification
agreements in the ordinary course of business. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and
reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection
with any patent, copyright or other intellectual property infringement claim by any third party with respect to our products. The
term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments we could be required
to make under these indemnification agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related
to these indemnification agreements. As a result, we believe our exposure related to these agreements is minimal. Accordingly,
we have no liabilities recorded for these potential obligations as of March 31, 2017 and September 30, 2016.
Certain of our agreements
also provide for the performance of services at customer sites. These agreements may contain indemnification clauses, whereby we
will indemnify the customer from any and all damages, losses, judgments, costs and expenses for acts of our employees or subcontractors
resulting in bodily injury or property damage. The maximum potential amount of future payments we could be required to make under
these indemnification agreements is unlimited; however, we have general and umbrella insurance policies that would enable us to
recover a portion of any amounts paid. We have never incurred costs to defend lawsuits or settle claims related to these indemnification
agreements. As a result, we believe our exposure related to these agreements is minimal. Accordingly, we have no liabilities recorded
for these potential obligations as of March 31, 2017 and September 30, 2016.
As permitted under
Delaware law, we have agreements with our directors whereby we will indemnify them for certain events or occurrences while the
director is, or was, serving at our 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 we could be required
to make under these indemnification agreements is unlimited; however, our director and officer insurance policy would enable us
to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe our exposure related
to these indemnification agreements is minimal. Accordingly, we have no liabilities recorded for these potential obligations as
of March 31, 2017 and September 30, 2016.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our
current cash balances will be sufficient to meet our cash needs for working capital and anticipated capital expenditures for at
least the next twelve months. At March 31, 2017, we had $27.8 million of cash and cash equivalents as compared $28.0 million as
of September 30, 2016, a decrease of $0.2 million. $1.4 million of cash and cash equivalents at March 31, 2017 was located in foreign
banks.
At March 31, 2017,
we had working capital of $22.7 million as compared to $23.5 million as of September 30, 2016. We do 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, we may seek additional financing by issuing equity or obtaining credit facilities
to fund such requirements. There can be no assurance that we will be able to issue additional equity or obtain a new or expanded
credit facility at attractive prices or rates, or at all.
We had a net loss
of $2.7 million for the six months ended March 31, 2017 as compared to net loss of $7.3 million for the six months ended March
31, 2016. During the six months ended March 31, 2017 and 2016, $0.1 million and $2.9 million of cash was used in our operations,
respectively. During the six months ended March 31, 2017, the main use of cash in operations was net loss adjusted for depreciation
and amortization, share-based compensation expense, as well as the increases in prepaid expenses and other assets and the decreases
in accounts payable, accrued expenses and other liabilities, offset by the decreases in accounts receivable and the increases in
deferred revenue. During the six months ended March 31, 2016, the main use of cash in operations was net loss adjusted for depreciation
and amortization, share-based compensation expense, as well as the decrease in accounts receivable offset by the increases in prepaid
expenses and other assets and the decreases in accounts payable, accrued expenses and other liabilities.
Net cash used in investing
activities of $0.2 million and $0.8 million for the six months ended March 31, 2017 and 2016, respectively, was related to the
purchase of property and equipment.
There was no cash
provided by financing activities for the six months ended March 31, 2017. Net cash provided by financing activities of $0.1 million
for the six months ended March 31, 2016 was related to the proceeds from the issuance of common stock upon the exercise of outstanding
stock option awards.
We believe that our
current operations have not been materially impacted by the effects of inflation.