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:
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Nine Months Ended
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June 30,
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Increase
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Percentage
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2013
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|
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2012
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|
|
(Decrease)
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Change
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(
In thousands)
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Software licenses
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$
|
13,634
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|
|
$
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13,182
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|
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$
|
452
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|
|
|
3
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%
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Maintenance
|
|
|
7,042
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|
|
|
5,683
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|
|
|
1,359
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|
|
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24
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%
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Professional Services
|
|
|
803
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|
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1,126
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(323
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)
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|
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-29
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%
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Total revenue
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|
$
|
21,479
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|
|
$
|
19,991
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|
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$
|
1,488
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|
|
|
7
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%
|
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 $74,000 decrease in Business Service Management Solutions. This decrease is due to lower consulting services primarily related to the Company’s Report Manager on Demand and Visual QSM product offerings.
Costs and Operating Expenses
The following table presents costs of sales and operating expenses, increase (decrease) in costs of sales and operating expenses and percentage changes in costs of sales and operating expenses for the nine months ended June 30, 2013 and 2012:
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Nine Months Ended
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June 30,
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|
|
Increase
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|
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Percentage
|
|
|
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2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
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(In thousands)
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Cost of software licenses
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$
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1,602
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|
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$
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1,743
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|
$
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(141
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)
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-8
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%
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Cost of maintenance and services
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1,697
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|
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2,019
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|
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(322
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)
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-16
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%
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Sales and marketing
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|
|
12,391
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|
|
|
9,041
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|
|
|
3,350
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|
|
|
37
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%
|
Engineering and product development
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|
|
2,361
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|
|
|
2,048
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|
|
|
313
|
|
|
|
15
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%
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General and administrative
|
|
|
4,475
|
|
|
|
3,469
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|
|
|
1,006
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|
|
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29
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%
|
Total costs and operating expenses
|
|
$
|
22,526
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|
|
$
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18,320
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|
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$
|
4,206
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23
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%
|
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 $327,000 for the nine months ended June 30, 2013 and 2012, respectively.
As of June 30, 2013, the Company’s contractual obligations include minimum rental commitments under non-cancelable operating leases, long-term debt obligations and other liabilities related to uncertain tax positions as follows (in thousands):
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Less than 1
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More than
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Contractual Obligations:
|
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Total
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Year
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1-3 Years
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|
|
3-5 Years
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|
|
5 Years
|
|
Operating Lease Obligations
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$
|
701
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|
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$
|
339
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|
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$
|
362
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|
|
$
|
-
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|
|
$
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-
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|
Long-term Debt Obligations
|
|
$
|
4,000
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|
|
$
|
267
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|
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$
|
1,600
|
|
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$
|
1,600
|
|
|
$
|
533
|
|
Other Liabilities
|
|
$
|
213
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|
|
$
|
-
|
|
|
$
|
-
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|
|
$
|
-
|
|
|
$
|
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.
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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).
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31.1
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
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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.
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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)
|