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 nine months
ended June 30, 2017.
OVERVIEW
During the third quarter
of fiscal 2017, we realized increases in revenue and improvement in our bottom line results compared to the third quarter of fiscal
2016. In addition, during the third quarter of fiscal 2017, we realized an increase of $1.6 million in our cash and short-term
investments, up from $27.8 million as of the end of the second quarter of fiscal 2017, to $29.4 million as of the end of the third
quarter of fiscal 2017. During the third quarter of fiscal 2017, we added 233 new customers for our Monarch self-service data
preparation platform, which was an increase of 21% over the 193 we added during the second quarter of fiscal 2017.
Sales execution
Overall revenue increased
by $1.7 million, or 23%, 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 $2.1
million from $8.9 million as of the end of the third quarter of fiscal 2016 to $11.0 million as of the end of the third quarter
of fiscal 2017. Of the total deferred revenue increase, deferred license revenue increased by $1.0 million, or 50%, from the end
of the second quarter of fiscal 2017. Our subscription bookings continued to increase quarter-over-quarter and year-over-year.
During the third quarter of fiscal 2017, subscription bookings increased $0.1 million, or 9%, over the second quarter of fiscal
2017 to an all-time high of $1.4 million, and increased $0.3 million, or 23%, compared to the third quarter of fiscal 2016. We
recognized $1.1 million in subscription license revenue during the third quarter of fiscal 2017, representing an 56% increase
compared to subscription license revenue of $0.7 million during the third quarter of fiscal 2016.
Market awareness
Among the key highlights
for the third quarter of fiscal 2017 were:
|
·
|
Kronos,
a leading provider of human capital management and workforce management software solutions,
selected Datawatch Monarch as the data preparation platform for its Workforce Ready Suite
to accelerate the onboarding of new customers.
|
|
·
|
Baker
Tilly Virchow Krause LLP, a full-service accounting and advisory services firm, selected
Datawatch Monarch as its standard platform for self-service data preparation to help
healthcare organizations optimize revenue cycle operations for a variety of reimbursement
methodologies, including value-based care strategies.
|
|
·
|
AstraZeneca,
a global science-led biopharmaceutical company, selected Datawatch Monarch for use by
analysts in its office of finance to streamline business processes and accelerate the
time to insight for its supply chain.
|
|
·
|
Within
days of the release of Monarch Swarm in April 2017, one of the world’s leading
integrated oil and gas companies became its first customer, leveraging the collaboration
and governance capabilities of Monarch Swarm to prepare and manage data related to oil
and natural gas exploration, field development and production for consumption through
IBM Watson Analytics.
|
Innovation to product
platform
During the third quarter
of fiscal 2017, we released an update to Monarch Complete as well as our Monarch Server products. Monarch Complete 14.2 includes
French language support, Subscription license support features, support for import and export of SAS Transport Format files along
with numerous enhancements and issues resolved. Monarch Server 14.1 continues the path to simplify the automation of data preparation
based on Datawatch Monarch Workspaces and Models. The major focus in this release is on enhancements in the general user experience,
and additional options within the Automation Edition. One specific major enhancement is in the logs produced on Visual Process
runs, where both the content and the presentation of the logs have been improved. We plan to continue adding improvements to the
Monarch product line over the coming months, including our next generation Monarch cloud platform Monarch Swarm.
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
|
|
|
Nine Months
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
|
54
|
%
|
|
|
50
|
%
|
|
|
54
|
%
|
|
|
48
|
%
|
Maintenance
|
|
|
41
|
|
|
|
45
|
|
|
|
42
|
|
|
|
48
|
|
Professional services
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses
|
|
|
3
|
%
|
|
|
12
|
%
|
|
|
6
|
%
|
|
|
9
|
%
|
Cost of maintenance and services
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
|
8
|
|
Sales and marketing
|
|
|
50
|
|
|
|
65
|
|
|
|
51
|
|
|
|
71
|
|
Engineering and product development
|
|
|
24
|
|
|
|
30
|
|
|
|
25
|
|
|
|
28
|
|
General and administrative
|
|
|
22
|
|
|
|
35
|
|
|
|
25
|
|
|
|
34
|
|
Total costs and expenses
|
|
|
106
|
%
|
|
|
149
|
%
|
|
|
114
|
%
|
|
|
150
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(6
|
)%
|
|
|
(49
|
)%
|
|
|
(14
|
)%
|
|
|
(50
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
3
|
%
|
|
|
-
|
%
|
Foreign currency transaction gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS BEFORE INCOME TAXES
|
|
|
(6
|
)%
|
|
|
(49
|
)%
|
|
|
(11
|
)%
|
|
|
(50
|
)%
|
Income tax expense
|
|
|
-
|
|
|
|
(24
|
)
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(6
|
)%
|
|
|
(73
|
)%
|
|
|
(11
|
)%
|
|
|
(57
|
)%
|
Three Months Ended June 30, 2017 Compared
to
Three Months Ended June 30, 2016
Total Revenues
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Software licenses
|
|
$
|
4,912
|
|
|
$
|
3,669
|
|
|
$
|
1,243
|
|
|
|
34
|
%
|
Maintenance
|
|
|
3,728
|
|
|
|
3,335
|
|
|
|
393
|
|
|
|
12
|
|
Professional services
|
|
|
426
|
|
|
|
372
|
|
|
|
54
|
|
|
|
15
|
|
Total revenue
|
|
$
|
9,066
|
|
|
$
|
7,376
|
|
|
$
|
1,690
|
|
|
|
23
|
%
|
Software license revenue.
Software license revenue increased $1.2 million when compared with revenue for the three months ended June 30, 2016 driven
by a $0.9 million increase in our Panopticon data visualization revenue and a $0.3 million increase in our Monarch data preparation
revenue. During the three months ended June 30, 2017, we added 233 new customers, an increase of 18% compared to the same quarter
last fiscal year. In addition to the increase in software license revenue, our deferred revenue increased from $8.9 million at
June 30, 2016 to $11.0 million at June 30, 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 increased $0.4 million when compared with revenue for the three months ended June 30, 2016 driven by a
$0.3 million increase in renewal maintenance revenue and a $0.1 million increase in initial maintenance revenue. The increase
in renewal maintenance can be attributed to the Company having a higher percentage of customers renewing their maintenance contracts
during the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. The increase in initial maintenance
revenue correlates with the increase in software license revenue.
Professional services.
Professional services revenue increased $0.1 million when compared with revenue for the three months ended June 30, 2016.
This increase can be attributed to a $0.1 million service contract related to a large deal landed during the second quarter of
fiscal 2017 for which we delivered the professional services during the three months ended June, 30 2017.
Total Costs and Expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost of software licenses
|
|
$
|
230
|
|
|
$
|
879
|
|
|
$
|
(649
|
)
|
|
|
(74
|
)%
|
Cost of maintenance and services
|
|
|
618
|
|
|
|
499
|
|
|
|
119
|
|
|
|
24
|
|
Sales and marketing
|
|
|
4,521
|
|
|
|
4,773
|
|
|
|
(252
|
)
|
|
|
(5
|
)
|
Engineering and product development
|
|
|
2,203
|
|
|
|
2,196
|
|
|
|
7
|
|
|
|
-
|
|
General and administrative
|
|
|
2,037
|
|
|
|
2,593
|
|
|
|
(556
|
)
|
|
|
(21
|
)
|
Total costs and operating expenses
|
|
$
|
9,609
|
|
|
$
|
10,940
|
|
|
$
|
(1,331
|
)
|
|
|
(12
|
)%
|
Cost of software licenses.
The $0.6 million decrease in costs of software licenses was driven by a $0.4 million decrease in amortization expense and
a $0.2 million decrease in royalty expense during the three months ended June 30, 2017 compared to the three months ended June,
2016. The decrease in amortization was a result of certain intangible assets that became fully amortized during the first half
of fiscal 2017. The decrease in royalty expense during the three months ended June 30, 2017 is attributable to the restructuring
of a royalty contract.
Cost of maintenance
and services.
The $0.1 million increase was primarily driven by an increase in expense related to third party consulting as
a result of outsourcing services for specific customer contracts.
Sales and marketing
expenses.
The $0.3 million decrease in sales and marketing expenses was primarily driven by a decrease in marketing expense
of $0.7 million, offset by an increase in sales expense of $0.4 million. 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. The increased sales expense was primarily driven by a $0.5 million increase in commissions, which was driven by
the increases in revenue compared to the same quarter last fiscal year. In addition, there was a $0.5 million increase in share-based
compensation. The increase in share-based compensation expense was driven by lower share-based compensation for the three months
ended June 30, 2016, which was driven by the reversal of previously recorded share-based compensation related to consultants in
addition to the departure of our Chief Revenue Officer in the third quarter of fiscal 2016. There were no similar reductions for
the three months ended June 30, 2017. These increases were offset by a $0.2 decrease in severance expense driven by the departure
of our Chief Revenue Officer in the third quarter of fiscal 2016; a $0.2 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 outside consulting expenses and rent expense driven by lower third party commission payouts and lower expense lease
contracts in the third quarter of fiscal 2017, respectively.
Engineering and product
development expenses.
Engineering and product development expenses for the third quarter of fiscal 2017 remained relatively
flat compared to the same quarter last fiscal year.
General and administrative
expenses.
The $0.6 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 June 30, 2016 due to the contested election of directors
at our 2016 annual shareholder meeting.
Other income (expense)
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Other income
|
|
$
|
28
|
|
|
$
|
15
|
|
|
$
|
13
|
|
|
|
87
|
%
|
Foreign currency transaction gain (loss)
|
|
$
|
24
|
|
|
$
|
(19
|
)
|
|
$
|
43
|
|
|
|
226
|
%
|
Other income (expense).
There was a minimal amount of other income for the three months ended June 30, 2017 and 2016.
Foreign currency transactions
loss.
The foreign currency gains for the three months ended June 30, 2017 and losses for the three months ended June 30, 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 for income taxes
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Decrease
|
|
|
Change
|
|
Income tax expense
|
|
$
|
(8
|
)
|
|
$
|
(1,806
|
)
|
|
$
|
1,798
|
|
|
|
(100
|
)%
|
During the three months
ended June 30, 2017, the Company recorded a tax expense of $8,000, related to estimated state taxes. During the three months ended
June 30, 2016, the Company recorded a tax expense of $1.8 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.
Nine Months Ended June 30, 2017 Compared
to
Nine Months Ended June 30, 2016
Total Revenues
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Software licenses
|
|
$
|
14,158
|
|
|
$
|
10,461
|
|
|
$
|
3,697
|
|
|
|
35
|
%
|
Maintenance
|
|
|
10,844
|
|
|
|
10,417
|
|
|
|
427
|
|
|
|
4
|
|
Professional services
|
|
|
1,057
|
|
|
|
977
|
|
|
|
80
|
|
|
|
8
|
|
Total revenue
|
|
$
|
26,059
|
|
|
$
|
21,855
|
|
|
$
|
4,204
|
|
|
|
19
|
%
|
Software license revenue.
Software license revenue increased $3.7 million compared with revenue for the nine months ended June 30, 2016 driven by a
$3.2 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 nine months ended June 30, 2017, we added 614 new Monarch self-service data preparation customers,
an increase of 24% compared to the prior fiscal year.
Maintenance revenue.
Maintenance revenue increased $0.4 million when compared with revenue for the nine months ended June 30, 2016. The increase
was primarily driven by an increase in renewal maintenance revenue. The increase in renewal maintenance can be attributed to the
Company having a higher percentage of customers renewing their maintenance contracts during the nine months ended June 30, 2017
as compared to the same period in the prior fiscal year.
Professional services.
Professional services revenue increased $0.1 million when compared with revenue for the nine months ended June 30, 2016. This
increase can be attributed to a $0.1 million service contract related to a large deal landed during the second quarter of fiscal
2017 for which we delivered the professional services during the three months ended June, 30 2017.
Total Costs and Expenses
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost of software licenses
|
|
$
|
1,666
|
|
|
$
|
2,067
|
|
|
$
|
(401
|
)
|
|
|
(19
|
)%
|
Cost of maintenance and services
|
|
|
1,694
|
|
|
|
1,707
|
|
|
|
(13
|
)
|
|
|
(1
|
)
|
Sales and marketing
|
|
|
13,393
|
|
|
|
15,621
|
|
|
|
(2,228
|
)
|
|
|
(14
|
)
|
Engineering and product development
|
|
|
6,600
|
|
|
|
6,089
|
|
|
|
511
|
|
|
|
8
|
|
General and administrative
|
|
|
6,570
|
|
|
|
7,453
|
|
|
|
(883
|
)
|
|
|
(12
|
)
|
Total costs and operating expenses
|
|
$
|
29,923
|
|
|
$
|
32,937
|
|
|
$
|
(3,014
|
)
|
|
|
(9
|
)%
|
Cost of software licenses.
The $0.4 million decrease in costs of software licenses was driven by a decrease in amortization as a result of certain intangible
assets that became fully amortized during the first half of fiscal 2017.
Cost of maintenance
and services.
Cost of maintenance and services for the nine months ended June 30, 2017 remained relatively flat compared to
the prior fiscal year.
Sales and marketing
expenses.
The $2.2 million decrease in sales and marketing expenses was comprised of a decrease in marketing expense of $1.9
million and a decrease in sales expense of $0.3 million. The decrease in marketing expenses was driven by a $1.6 million decrease
in advertising and lead generation costs and a $0.3 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.
The decreased sales expense was driven by a $0.9 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 $0.3 million decrease in severance expense primarily
driven by the departure of our Chief Revenue Officer in the third quarter of fiscal 2016; a $0.1 million decrease in third party
consulting expenses driven by lower third party commission payouts; a $0.1 million decrease in rent expense driven by lower expense
lease agreements in fiscal 2017; 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 $1.2 million increase in commissions driven by the increase
in sales compared to prior fiscal year.
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 primarily driven by an increase in bonus expense as a result of the increase in revenue; a
$0.2 million increase in consulting expenses related to the development of Monarch Swarm, and a $0.1 million increase in severance
due to a headcount reduction during fiscal 2017.
General and administrative
expenses.
The $0.9 million decrease in general and administrative expenses was mainly driven by a $0.7 million decrease in
legal and consulting services expenses which were unusually high during the nine months ended June 30, 2016 due to the contested
election of directors at our 2016 annual shareholders meeting. Share-based compensation expense decreased $0.3 million and rent
expense decreased $0.1 million. The reduction of share-based compensation expenses was driven by a headcount reduction. These
decreases were offset by a $0.3 increase in bonus expenses driven by the increase in sales compared to prior fiscal year. Additionally,
severance expense increased $0.2 million.
Other income (expense)
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
Change
|
|
Other income
|
|
$
|
770
|
|
|
$
|
34
|
|
|
$
|
736
|
|
|
|
2,165
|
%
|
Foreign currency transaction loss
|
|
$
|
(68
|
)
|
|
$
|
(53
|
)
|
|
$
|
(15
|
)
|
|
|
28
|
%
|
Other income (expense).
During the nine months ended June 30, 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 nine months ended June 30, 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 for income taxes
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Decrease
|
|
|
Change
|
|
Income tax expense
|
|
$
|
(17
|
)
|
|
$
|
(1,599
|
)
|
|
$
|
1,582
|
|
|
|
(99
|
)%
|
During the nine months
ended June 30, 2017, the Company recorded a tax expense of $17,000, related to estimated state taxes. During the nine months ended
June 30, 2016, the Company recorded a tax expense of $1.6 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 June 30, 2017 and 2016, respectively,
and was $0.7 million and $1.0 million for the nine months ended June 30, 2017 and 2016, respectively. At June 30, 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 June 30, 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
|
|
$
|
3,439
|
|
|
$
|
196
|
|
|
$
|
1,359
|
|
|
$
|
1,151
|
|
|
$
|
733
|
|
Other long-term liabilities
|
|
$
|
681
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
681
|
|
Royalty expense included
in cost of software licenses was $0.1 million and $0.2 million for the three months ended June 30, 2017 and 2016, respectively.
Royalty expense included in cost of software licenses was $0.5 million for the nine months ended June 30, 2017 and 2016.
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 June 30,
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 June 30, 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 June 30, 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 June 30, 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 June 30, 2017, we had $29.4 million of cash and cash equivalents as compared $28.0 million as of September
30, 2016, an increase of $1.4 million. $1.9 million of cash and cash equivalents at June 30, 2017 was located in foreign banks.
At June 30, 2017, we
had working capital of $23.0 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
$3.2 million for the nine months ended June 30, 2017 as compared to net loss of $12.7 million for the nine months ended June 30,
2016. During the nine months ended June 30, 2017, $1.6 million of cash was provided by our operations. During the nine months
ended June 30, 2016, $5.5 million of cash was used in our operations. During the nine months ended June 30, 2017, the main source
of cash provided by operations was net loss adjusted for depreciation and amortization, share-based compensation expense, as well
as the decreases in prepaid expenses and other assets, accounts payable, accrued expenses and other liabilities, offset by the
decreases in accounts receivable and the increases in deferred revenue. During the nine months ended June 30, 2016, the main use
of cash in operations was net loss adjusted for depreciation and amortization, share-based compensation expense, deferred income
taxes, as well as the decrease in accounts receivable and the increase in deferred revenue offset by the decreases in accounts
payable, accrued expenses and other liabilities.
Net cash used in investing
activities of $0.2 million and $0.9 million for the nine months ended June 30, 2017 and 2016, respectively, was related to the
purchase of property and equipment.
There was no cash provided
by financing activities for the nine months ended June 30, 2017. Net cash provided by financing activities of $0.1 million for
the nine months ended June 30, 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.