NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business and Basis of
Presentation
Datawatch Corporation
(the “Company” or “Datawatch”) designs, develops, markets, distributes and supports business computer software
products. The Company also provides services, including implementation and support of its software products, as well as training
on their use and administration. The Company is subject to a number of risks including dependence on key individuals, competition
from substitute products and larger companies and the need for successful ongoing development and marketing of products.
The accompanying unaudited
condensed consolidated financial statements include the accounts of Datawatch and its wholly-owned subsidiaries and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial
reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with
the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September
30, 2013 filed with the SEC. All intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of
management, the accompanying condensed consolidated financial statements have been prepared on the same basis as the audited consolidated
financial statements for the fiscal year ended September 30, 2013, and include all adjustments necessary for fair presentation
of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative
of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date
but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters
that require additional disclosure.
Summary of Significant Accounting Policies
Accounting Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and judgments, which are evaluated on an
on-going basis, that affect the amounts and disclosures reported in the Company’s condensed consolidated financial statements
and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes
are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. The most significant estimates and judgments include those related
to revenue recognition, the allowance for doubtful accounts, sales returns reserve, valuation of share-based compensation awards,
useful lives of property and equipment, and the valuation of long term assets including goodwill, intellectual property and intangibles,
capitalized software development costs and deferred tax assets. Actual results could differ from those estimates and judgments.
Revenue Recognition
Datawatch software
products are generally sold in multiple element arrangements which may include software licenses, professional services and post-contract
customer support. The Company licenses its software products directly to end-users, through value added resellers and distributors.
Sales to distributors and resellers accounted for approximately 41% and 37% of total sales for the three months ended June 30,
2014 and 2013, respectively, and approximately 46% and 32% of total sales for the nine months ended June 30, 2014 and 2013, respectively.
The Company’s software product offerings do not require customization. The Company’s software products can be installed
and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold
as a right to use the number of licenses, and the license fee revenue is recognized upon delivery of the software.
Revenue typically
consists of software licenses, post-contract support (“PCS”) and professional services. Revenue from the sale of all
software products is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance,
the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and there
are no significant obligations remaining. PCS is typically provided under a maintenance agreement which provides technical support
and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from PCS agreements
is deferred and recognized ratably over the term of the agreements, typically one year. Professional services include advanced
modeling, application design, implementation and configuration and process optimization with revenue recognized as the services
are performed. These services are generally delivered on a time and materials basis, billed on a current basis as the work is performed,
and generally do not involve modification or customization of the software or any unusual acceptance clauses or provisions.
For multiple element
arrangements, total fees are allocated to each of the undelivered elements based upon vendor specific objective evidence (“VSOE”)
of their fair values, with the residual amount recognized as revenue for the delivered elements. The residual method of revenue
recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements,
generally the software license. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value
of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed
and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as
revenue related to the delivered elements. VSOE for PCS contracts is generally based on stated renewal rates when the Company has
determined that the renewal rate is substantive and falls within the Company’s customary pricing practices. Additionally,
VSOE of fair value of the professional services is based on the amounts charged for these elements when sold separately. VSOE calculations
are routinely updated and reviewed.
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. Additionally, the Company provides its distributors with stock-balancing rights. Revenue from the sale of software
products to distributors and resellers is recognized at the time of shipment providing all other revenue recognition criteria are
met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product
resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated
for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company’s
experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things,
estimates of potential future returns are made based on the inventory levels at, and the returns history with, the various distributors
and resellers, which the Company monitors frequently.
Allowance for Doubtful Accounts
The Company maintains
allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The
Company analyzes accounts receivable and the composition of the accounts receivable aging, historical bad debts, customer creditworthiness,
current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.
Actual results could differ from the allowances recorded, and this difference could have a material effect on the Company’s
financial position and results of operations. Receivables are written off against these allowances in the period they are
determined to be uncollectible.
Sales Returns Reserve
The Company maintains
reserves for potential future product returns from distributors. The Company estimates future product returns based on its experience
and history with the Company’s various distributors and resellers as well as by monitoring inventory levels at such companies
as described above. Adjustments are recorded as increases or decreases in revenue in the period of adjustment. Actual returns have
historically been within the range estimated by management. Actual results could differ from the reserve for sales returns recorded,
and this difference could have a material effect on the Company’s financial position and results of operations.
Capitalized Software Development
Costs
The Company capitalizes
certain software development costs as well as purchased software upon achieving technological feasibility of the related products.
Costs that are incurred internally in researching and developing a computer software product are charged to expense until technological
feasibility has been established for the product. Once technological feasibility is established, software development costs are
capitalized until the product is available for general release to customers. Such capitalized costs are amortized to cost of software
licenses straight-line over the estimated life of the product, generally nine to 18 months. The Company evaluates the realizability
of the assets and the related periods of amortization on a regular basis. Judgment is required in determining when technological
feasibility of a product is established as well as its economic life. During the three months ended June 30, 2014, the Company
did not capitalize any software development costs and during the three months ended June 30, 2013, the Company capitalized approximately
$168,000 of software development costs. During the nine months ended June 30, 2014 and 2013, the Company capitalized approximately
$250,000 and $278,000 of software development costs, respectively.
Cash and Cash Equivalents
Cash and cash equivalents
include cash on hand, cash deposited with banks and highly liquid securities consisting of money market investments with original
maturities of 90 days or less.
Deferred Revenue
Deferred revenue consists
primarily of the unearned portion of customer support services provided by the Company to customers who purchased maintenance agreements
for the Company’s products. Maintenance revenues are recognized on a straight-line basis over the term of the maintenance
period, generally twelve months.
Other deferred revenue
consists of deferred professional services revenue generated from arrangements that are invoiced in accordance with the terms and
conditions of the arrangement but do not meet all the criteria for revenue recognition and are, therefore, deferred until all revenue
recognition criteria are met.
Property and Equipment
Property and equipment
consists of office equipment, furniture and fixtures, software and leasehold improvements, all of which are recorded at cost. Depreciation
and amortization are provided using the straight-line method over the lesser of the estimated useful lives of the related assets
or term of the related leases. Useful lives and lease terms range from three to seven years. Depreciation and amortization expense
related to property and equipment was approximately $39,000 and $36,000 for the three months ended June 30, 2014 and 2013, respectively,
and approximately $108,000 and $103,000 for the nine months ended June 30, 2014 and 2013, respectively.
Acquired Intellectual Property
On March 30, 2012,
the Company acquired intellectual property which consisted primarily of the source code underlying its Datawatch Modeler (formerly
Monarch Professional) and Datawatch Automator (formerly Data Pump) products pursuant to an Option Purchase Agreement dated as of
April 29, 2004 by and among the Company, Personics Corporation, Raymond J. Huger and Math Strategies, as amended (the “Option
Agreement”). Under the formula contained in the Option Agreement, the purchase price paid for the intellectual property assets
was approximately $8,541,000 which was calculated based on a multiple of the aggregate royalties paid to Math Strategies by the
Company for the four fiscal quarters preceding the exercise of the option. Additionally, the Company capitalized approximately
$75,000 in closing costs and adjustments pursuant to a Supplemental Agreement dated March 30, 2012 between the Company and Raymond
J. Huger. In fiscal 2013, the Company acquired additional intellectual property in the Panopticon Software, AB (Panopticon) transaction
(Note 2) totaling $7,900,000. The acquired intellectual property assets are being amortized to cost of software licenses using
the straight-line method over the estimated life of the asset, ranging from five to seven and a half years. Amortization expense
related to the acquired intellectual property assets was approximately $694,000 and $431,000, respectively, for the three months
ended June 30, 2014 and 2013, and was approximately $2,082,000 and $1,292,000, respectively, for the nine months ended June 30,
2014 and 2013.
The estimated future
amortization expense related to the acquired intellectual property is as follows (in thousands):
Fiscal Years Ending September 30,
|
|
|
|
|
|
|
|
Remainder of 2014
|
|
$
|
694
|
|
2015
|
|
|
2,777
|
|
2016
|
|
|
2,777
|
|
2017
|
|
|
1,905
|
|
2018
|
|
|
1,053
|
|
Thereafter
|
|
|
2,546
|
|
Total estimated future amortization expense
|
|
$
|
11,752
|
|
Other Intangible Assets
Other intangible assets
consist of internally developed software, trade names, patents and customer lists acquired through business combinations. Other
intangible assets also include loan acquisition costs. The values allocated to these intangible assets are amortized using the
straight-line method over the estimated useful life of the related asset, ranging from nine months to 20 years. The values allocated
to internally developed software are amortized using the straight-line method over the estimated useful lives of the related assets,
ranging from nine to 18 months. The values allocated to trade names are amortized using the straight-line method over the estimated
useful life of the related asset (two and one half years). The values allocated to patents are amortized using the straight-line
method over the estimated useful life of the related asset (20 years). The values allocated to customer lists are amortized using
the straight-line method over the estimated useful lives of the related assets, ranging from ten to 15 years. Loan acquisition
costs are amortized using the straight-line method over the life of the debt, ranging from two to seven years. Intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not
be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying
amount of the asset. As of June 30, 2014, the Company does not have any long-lived assets it considers to be impaired.
The intangible asset
amounts amortized to cost of software licenses totaled approximately $130,000 and $38,000 for the three months ended June 30, 2014
and 2013, respectively, and totaled approximately $478,000 and $70,000 for the nine months ended June 30, 2014 and 2013, respectively.
Intangible asset amounts amortized to sales and marketing expense totaled approximately $161,000 and $42,000 for the three months
ended June 30, 2014 and 2013, respectively, and totaled approximately $485,000 and $125,000 for the nine months ended June 30,
2014 and 2013, respectively. Intangible asset amounts amortized to general and administrative expense totaled approximately $12,000
for the three months ended June 30, 2014 and totaled approximately $36,000 for the nine months ended June 30, 2014. There were
no intangible assets amortized to general and administrative for the three and nine months ended June 30, 2013. There were no intangible
asset amounts amortized to interest expense during the three months ended June 30, 2014. Intangible asset amounts amortized to
interest expense totaled approximately $8,000 for the three months ended June 30, 2013, and totaled approximately $122,000 and
$24,000 for the nine months ended June 30, 2014 and 2013, respectively.
The estimated future
amortization expense related to amortizing intangible assets is as follows (in thousands):
Fiscal Years Ending September 30,
|
|
|
|
|
|
|
|
Remaining 2014
|
|
$
|
304
|
|
2015
|
|
|
702
|
|
2016
|
|
|
605
|
|
2017
|
|
|
488
|
|
2018
|
|
|
488
|
|
Thereafter
|
|
|
4,807
|
|
Total estimated future amortization expense
|
|
$
|
7,394
|
|
Goodwill
The Company accounts
for goodwill in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 350
Intangibles – Goodwill and Other
. This requires that goodwill be reviewed annually, or more
frequently as a result of an event or change in circumstances, for possible impairment with impaired assets written down to fair
value. The Company conducts its annual impairment test for goodwill and indefinite-lived intangible assets during the fourth quarter
of each fiscal year.
Fair Value Measurements
The Company’s
financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and notes payable. The estimated
fair values have been determined through information obtained from market sources and management estimates. The estimated
fair value of certain financial instruments including cash equivalents, accounts receivable and account payable, approximate the
carrying value due to their short-term maturity.
The fair value of
the Company’s financial assets and liabilities are measured using inputs from the three levels of fair value hierarchy which
are as follows:
·
Level
1 — Quoted prices in active markets for identical assets or liabilities;
·
Level
2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities; and
·
Level
3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
The Company
classified its cash equivalents, which primarily include money market mutual funds, of approximately $40,260,000 and
$2,234,000 as of June 30, 2014 and September 30, 2013, respectively, within Level 2 of the fair value hierarchy because they
are valued using amortized cost.
As of June 30, 2014
and September 30, 2013, the Company’s assets that are measured on a recurring basis and whose carrying values approximate
their respective fair values include the following (in thousands):
|
|
June 30, 2014
|
|
|
September 30, 2013
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
Measurement
|
|
|
Measurement
|
|
|
|
Using Input Types
|
|
|
Using Input Types
|
|
|
|
Level
|
|
|
Level
|
|
|
Level
|
|
|
Level
|
|
|
Level
|
|
|
Level
|
|
|
|
1
|
|
|
2
|
|
|
3
|
|
|
1
|
|
|
2
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
—
|
|
|
$
|
40,260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,234
|
|
|
$
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
40,260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,234
|
|
|
$
|
—
|
|
Income Taxes
The provision for
income taxes is based on the earnings or losses reported in the consolidated financial statements. The Company recognizes deferred
tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company provides a valuation allowance against deferred tax assets if it is more likely
than not that some or all of the deferred tax assets will not be realized, with the exception of its subsidiary in Sweden. The
Company has recorded a deferred tax liability relating to the intangible assets at its Swedish subsidiary.
The Company follows
the accounting guidance for uncertain tax positions. This guidance clarifies the accounting for income taxes by prescribing the
minimum threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance
on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Net Loss Per Share
Basic net loss per
common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period.
The following table
details the derivation of weighted average shares outstanding used in the calculation of basic and diluted net loss for each period
(in thousands, except share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(5,157
|
)
|
|
$
|
(666
|
)
|
|
$
|
(17,509
|
)
|
|
$
|
(1,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding used in calculation of basic earnings per share
|
|
|
10,825,910
|
|
|
|
6,494,599
|
|
|
|
9,653,760
|
|
|
|
6,433,599
|
|
Incremental shares from the assumed exercise of dilutive stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average number of common shares outstanding used in calculating diluted earnings per share
|
|
|
10,825,910
|
|
|
|
6,494,599
|
|
|
|
9,653,760
|
|
|
|
6,433,599
|
|
As the Company was
in a net loss position for the three and nine months ended June 30, 2014 and 2013, all common stock equivalents in the respective
periods were anti-dilutive and excluded in the calculation above.
Foreign Currency Translations and
Transactions
The Company’s
foreign subsidiaries functional currency is their local currency. As a result, assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at rates in effect at each balance sheet date. Revenues, expenses and cash flows are translated into
U.S. dollars at average rates prevailing during the respective period. The related translation adjustments are reported as a separate
component of shareholders’ equity under the heading “Accumulated Other Comprehensive Loss.” Included in comprehensive
loss are the foreign currency translation adjustments. Foreign currency translation losses arising during the three months ended
June 30, 2014 were approximately $51,000. Foreign currency translation gains arising during the nine months ended June 30, 2014
were approximately $26,000. Foreign currency translation losses arising during the three and nine months ended June 30, 2013 were
approximately $29,000 and $47,000, respectively.
Gains and losses resulting
from transactions that are denominated in currencies other than the applicable unit’s functional currency are included in
the operating results of the Company and were gains of approximately $10,000 and $9,000 for the three months ended June 30, 2014
and 2013, respectively. A loss of approximately $152,000 was included in the operating results of the Company for the nine months
ended June 30, 2014. A gain of approximately $8,000 for the nine months ended June 30, 2013 was included in the operating results
of the Company.
Share-Based Compensation
The Company recognizes
the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting
period. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability
awards granted. See additional share-based compensation disclosure in Note 7.
Guarantees and Indemnifications
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. The Company has never incurred significant expense under its product or service warranties and does not expect
to do so in the future. 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, 2014 or September 30, 2013.
The Company enters
into indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify,
hold harmless, and to 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, 2014 or September 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,
2014 or September 30, 2013.
As permitted under
Delaware law, the Company has agreements with its directors whereby the Company will indemnify them for certain events or occurrences
while the director 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 limits the Company’s exposure and would enable it to recover a portion of any future amounts
paid. As a result of its insurance policy coverage for directors, the Company believes its exposure related to these indemnification
agreements is minimal. The Company has no liabilities recorded for these potential obligations as of June 30, 2014 or September
30, 2013.
Reclassifications
Certain amounts in
the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These
reclassifications had no effect on the reported net loss.
Recent Accounting Pronouncements
In May 2014, the FASB
issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606). The ASU is the result of a joint project by the FASB
and the International Accounting Standards Board (“IASB”) to clarify the principles for recognizing revenue and to
develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that would: remove
inconsistencies and weaknesses, provide a more robust framework for addressing revenue issues, improve comparability of revenue
recognition practices across entities, jurisdictions, industries, and capital markets, improve disclosure requirements and resulting
financial statements, and simplify the presentation of financial statements. The core principle of the new guidance is that an
entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is effective for annual
reporting periods beginning after December 15, 2016
.
Early application is not permitted. The
Company is currently assessing the impact of this guidance.
NOTE 2.
ACQUISITION
The Company acquired
all of the outstanding shares of Panopticon Software, AB and subsidiaries (“Panopticon”), a privately held Swedish
company specializing in the delivery of real-time visual data discovery solutions, under a stock purchase agreement dated June
14, 2013, which closed on August 28, 2013. As a result of this transaction, the Company has acquired technologies to enable it
to expand its product platform and increase its addressable market. The Company accounted for this acquisition in accordance with
ASC 805,
Business Combinations
. The purchase consideration included $175,000 in seller financing pertaining to the Company’s
direct acquisition of Panopticon’s U.S. subsidiary, Panopticon Software, Inc. and 1,866,716 Datawatch common shares, with
an additional 216,994 shares held back for a period of 15 months to secure indemnification obligations of the Panopticon sellers
under the stock purchase agreement. Also, the Company issued 86,231 restricted stock units to certain Panopticon employees, which
were fully vested as of February 28, 2014. Total fair value of the consideration issued was valued at approximately $42,644,000
($23.12 per share) at closing. The Company has allocated the cost to acquire Panopticon to its identifiable tangible and intangible
assets and liabilities, with the remaining amount classified as goodwill.
The intangible assets,
excluding goodwill and assembled workforce, are being amortized on a straight-line basis over their estimated lives as follows
(in thousands):
|
|
Fair
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Lives
|
|
Customer Relationships
|
|
$
|
7,200
|
|
|
15.0 years
|
|
Developed Technology
|
|
|
7,900
|
|
|
7.5 years
|
|
Trade Name
|
|
|
120
|
|
|
2.5 years
|
|
Total intangible assets
|
|
$
|
15,220
|
|
|
|
|
|
NOTE 3. ACCRUED EXPENSES
Accrued expenses consisted of the following
at June 30, 2014 and September 30, 2013:
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Royalties and commissions
|
|
$
|
1,056
|
|
|
$
|
1,483
|
|
Payroll and related expenses
|
|
|
743
|
|
|
|
944
|
|
Professional fees and consulting
|
|
|
512
|
|
|
|
417
|
|
Other
|
|
|
492
|
|
|
|
637
|
|
Total
|
|
$
|
2,803
|
|
|
$
|
3,481
|
|
NOTE 4. FINANCING ARRANGEMENTS
Revolving Line of Credit and Term
Note
In connection with
the acquisition of intellectual property underlying its Datawatch Modeler and Datawatch Automator products, on March 30, 2012,
the Company entered into a $2,000,000 revolving credit facility with Silicon Valley Bank (“SVB”), pursuant to a Loan
and Security Agreement with SVB. On March 30, 2012, the Company borrowed $1,500,000 under this revolving credit facility. The revolving
line of credit under the SVB facility terminated on March 29, 2014. On that date, the principal amount of all advances then outstanding
under the revolving line and all unpaid interest thereon were due and payable. The principal amount outstanding under the revolving
line accrued interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor under
the SVB agreement of 3.25%. The Company could borrow under the SVB revolving line of credit based on a formula percentage of its
accounts receivable balance. Additionally, the SVB facility required that the Company maintain certain net asset and net income
ratios. As of June 30, 2014, the Company had paid down all amounts owed under the revolving credit facility and the facility and
the SVB agreement had been terminated. The principal amount outstanding under the revolving line of credit at September 30, 2013
was $900,000.
In connection with
the first amendment to the MCRC agreement (discussed in the following section under the caption “Subordinated Note and Warrants”),
on August 15, 2013, the Company entered into an amendment to the SVB agreement which provided for an advance (“Term Loan
Advance”) of $2,000,000 which was used to reduce the outstanding obligations to MCRC. After repayment, the Term Loan Advance
cannot be re-borrowed. On August 15, 2016, the principal amount of the Term Loan Advance outstanding and all unpaid interest thereon
would have become due and payable. The principal amount outstanding under the Term Loan Advance accrued interest at a floating
per annum rate equal to two and one half percent (2.5%) above the Prime Rate (3.25%) and was payable monthly. The second amendment
to the SVB agreement also amended the financial covenants and required that Company maintain certain liquidity ratios and minimum
earnings before interest, taxes, depreciation and amortization (“EBITDA”) balances. As of June 30, 2014, the Company
had paid down all amounts owed under the term loan advance and the SVB agreement had been terminated. As of September 30, 2013,
approximately $1,945,000 remained outstanding and accrued interest on the note as of September 30, 2013 was approximately $9,000.
Subordinated Note and Warrants
Also in connection
with the intellectual property acquisition on March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with
Massachusetts Capital Resource Company (“MCRC”), the terms of which included a $4,000,000 subordinated note and warrants
for 185,000 shares of the Company’s common stock. The subordinated note issued to MCRC had a maturity date of February 28,
2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. The subordinated
note also contained interest rate premiums on any optional redemption of principal payments during the first three years of the
note agreement. Additionally, beginning on March 31, 2014 and on the last day of each month thereafter until the maturity date,
the Company would have made principal payments of $66,667 per month. The Company was also required under the MCRC agreement to
maintain certain interest coverage and leverage ratios.
On August 15, 2013,
the Company entered into the first amendment to the MCRC agreement which provided for a one-time redemption of $2,000,000 in principal
amount, together with interest, at a rate of 10% per annum, due on the amount redeemed through the date of redemption, and a premium
equal to 3% of the principal amount. In addition, this amendment allowed for a reduction in interest from 10% per annum in arrears
to 8% per annum in arrears immediately following the one-time redemption. On August 15, 2013, the Company exercised its’
one-time redemption right and made a payment of $2,000,000 to pay-down the principal, plus accrued interest in the amount of approximately
$23,000 and premium in the amount of approximately $60,000. As of June 30, 2014, the Company had paid down all amounts owed under
the subordinated note and the note and the MCRC agreement had been terminated except with respect to the outstanding warrants.
The warrants issued
to MCRC are exercisable at any time prior to February 28, 2019 at an exercise price per share of $11.54, which is equal to the
average closing price of the Company’s common stock for the 45 trading days prior to the issuance of the warrants on March
30, 2012. The number of shares issuable upon exercise of the warrants is subject to adjustment in connection with stock splits
and other events impacting the Company’s common stock generally, however, the warrants do not provide the holder with any
anti-dilution or price protection. The Company has reviewed the warrant terms and has concluded that pursuant to ASC 480,
Distinguishing
Liabilities from Equity
, the warrants should be classified as equity.
The Company accounted
for the borrowing under the Note and Warrant Purchase Agreement in accordance with the guidance prescribed in ASC 470-20,
“Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants”
. In accordance with ASC 470-20, the relative fair
value of the stock purchase warrants is considered an Original Issue Discount (“OID”) which is required to be amortized
over the life of the note as interest expense with a corresponding credit to notes payable. The relative fair value of the warrants
on March 30, 2012, as determined under the ASC 820,
“Fair Value Measurements and Disclosures”
, was approximately
$1,096,000 which is included in additional paid-in capital in the Company's accompanying condensed consolidated balance sheets
at June 30, 2014 and September 30, 2013, respectively. The Company used the Black-Scholes pricing model to calculate the fair value
of the warrants which included the following key assumptions: the expected life of the warrants (7 years), stock price volatility
(68.18%), risk-free interest rate (1.61%) and dividend yield (0%).
There was no interest
expense related to the warrants during the three months ended June 30, 2014. Interest expense related to the warrants during the
nine months ended June 30, 2014 was approximately $65,000. Interest expense related to the warrants during the three and nine months
ended June 30, 2013 was approximately $39,000 and $117,000, respectively.
During the nine
months ended June 30, 2014, as a result of paying down the subordinated note, the Company recorded a loss on extinguishment
of debt of approximately $795,000 which represented the unamortized debt discount on the subordinated note and was recorded
as other expense within the accompanying consolidated statement of operations.
NOTE 5.
COMMITMENTS AND CONTINGENCIES
Leases
The Company leases
various facilities and equipment in the U.S. and overseas under non-cancelable operating leases which expire at various dates through
2019. 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 $230,000 and $128,000 for the three months ended June 30, 2014
and 2013, respectively, and approximately $708,000 and $397,000 for the nine months ended June 30, 2014 and 2013, respectively.
Certain of the Company's facility leases include options to renew.
As of June 30, 2014,
future minimum rental commitments under non-cancelable operating leases are as follows (in thousands):
Years Ending September 30,
|
|
|
|
|
|
|
|
Remaining in 2014
|
|
$
|
218
|
|
2015
|
|
|
499
|
|
2016
|
|
|
269
|
|
2017
|
|
|
45
|
|
2018
|
|
|
46
|
|
Thereafter
|
|
|
39
|
|
Total future minimum lease payments
|
|
$
|
1,116
|
|
Royalties
Royalty expense included
in cost of software licenses was approximately $131,000 and $35,000 for the three months ended June 30, 2014 and 2013, respectively,
and approximately $288,000 and $102,000 for the nine months ended June 30, 2014 and 2013, respectively. Minimum royalty obligations
were insignificant for the three and nine months ended June 30, 2014 and 2013.
Contingencies
From time to time,
the Company is subject to claims and may be party to actions that arise in the normal course of business. The Company is not party
to any litigation that management believes will have a material adverse effect on the Company's consolidated financial condition
or results of operations.
NOTE 6.
INCOME TAXES
During the three and
nine months ended June 30, 2014, the Company recorded a tax provision of approximately $53,000 and a tax benefit of approximately
$270,000, respectively, primarily related to the change in the deferred tax liability in Sweden, estimated state taxes, return
to provision adjustments, change in uncertain tax positions, and accrued interest and penalties on uncertain tax positions. During
the three and nine months ended June 30, 2013, the Company recorded a tax benefit of approximately $1,000 and a tax provision of
approximately $2,000, respectively, related to adjustments to estimated federal alternative minimum taxes, estimated state taxes,
and uncertain tax positions relative to foreign taxes. During the nine months ended June 30, 2014, the Company recorded $13,000
in tax expense related to uncertain tax positions relative to state income taxes. During the nine months ended June 30, 2013, the
Company recorded $2,000 in tax expense related to uncertain tax positions relative to foreign taxes net of these adjustments.
Deferred Taxes
The Company’s
deferred tax assets include net operating loss carry forwards and tax credits that expire at different times through and until
2033. Significant judgment is required in determining the Company’s provision for income taxes, the carrying value of
deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Factors such as
future reversals of deferred tax assets and liabilities, projected future taxable income, changes in enacted tax rates and the
period over which the Company’s deferred tax assets will be recoverable are considered in making these determinations. With
the exception of Sweden, management does not believe the deferred tax assets are more likely than not to be realized and a full
valuation allowance has been provided against the deferred tax assets in the U.S, U.K., Australia, Germany, and Singapore at June
30, 2014 and September 30, 2013. The Company’s Swedish subsidiary has a $1,153,000 deferred tax liability recorded due to
acquired intangible assets.
Provision
for Uncertain Tax Positions
At September 30, 2013,
the Company had a cumulative tax liability of $353,000 related to Federal, state, and foreign tax exposure that could result in
cash payments. The Company increased the tax liability by $13,000 during the three and nine months ended June 30, 2014. The
Company does not expect its tax liability to change significantly during the next twelve months. The Company’s policy is
to recognize interest and penalties related to uncertain tax positions as a component of income tax expense in its consolidated
statements of operations. The Company accrued $4,000 and $7,000 of interest and penalties associated with this liability for the
three and nine months ended June 30, 2014, respectively. To date, the Company has accrued approximately $21,000 for interest and
penalties associated with this liability.
The Company’s
unrecognized tax benefits (before consideration of any valuation allowance) represent differences between tax positions taken by
the Company in its various consolidated and separate worldwide tax returns and the benefits recognized and measured for uncertain
tax positions. This amount also represents the amount of unrecognized tax benefits that, if recognized, would favorably affect
the effective income tax rate in any future periods. The change in the unrecognized tax benefits during the nine months ended June
30, 2014 was as follows (in thousands):
Balance at September 30, 2013
|
|
$
|
998
|
|
Additions for prior year tax positions
|
|
|
13
|
|
Balance at June 30, 2014
|
|
$
|
1,011
|
|
In the normal course
of business, the Company is subject to examination by taxing authorities throughout the world, including such jurisdictions as
the United Kingdom, Germany, Singapore, Australia and the United States, and as a result, files numerous consolidated and separate
income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The fiscal years ended September
30, 2010 through September 30, 2012 are generally still open to examination in the jurisdictions listed above. The Company is currently
under audit by the Internal Revenue Service for the fiscal year ended September 30, 2011. The Company does not believe any material
adjustments will be made as a result of this audit.
NOTE 7.
SHARE-BASED COMPENSATION
The Company provides
its employees, officers, consultants and directors with stock options, restricted stock units and other stock rights for common
stock of the Company on a discretionary basis. All option and restricted stock unit grants are subject to the terms and conditions
determined by the Compensation and Stock Committee of the Board of Directors, and generally vest over a three-year period beginning
three months from the date of grant and expire either seven or ten years from the date of grant depending on the plan. Generally,
options and other stock rights are granted at exercise prices not less than the fair market value at the date of grant. Share-based
compensation expense for all share-based payment awards is measured based on the grant-date fair value of the award.
The following table
presents share-based employee compensation expenses included in our unaudited condensed consolidated statements of operations (in
thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
1,204
|
|
|
$
|
523
|
|
|
$
|
3,731
|
|
|
$
|
1,451
|
|
Engineering and product development
|
|
|
136
|
|
|
|
21
|
|
|
|
1,493
|
|
|
|
64
|
|
Professional Services
|
|
|
25
|
|
|
|
—
|
|
|
|
91
|
|
|
|
—
|
|
General and administrative
|
|
|
321
|
|
|
|
216
|
|
|
|
1,190
|
|
|
|
407
|
|
Total
|
|
$
|
1,686
|
|
|
$
|
760
|
|
|
$
|
6,505
|
|
|
$
|
1,922
|
|
Stock Option Plans
The Company estimates
the fair value of each share-based award (except restricted stock units, which are discussed below) using the Black-Scholes option
valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life
of options, a risk-free interest rate and dividend yield. The Company recognizes share-based compensation expense related to stock
options on a straight-line basis over the requisite service period of the award. All of the Company’s stock compensation
awards are accounted for as equity instruments and there have been no liability awards granted. No options were granted under
the stock option plans for the three or nine month periods ended June 30, 2014 and 2013. The total intrinsic value of options exercised
during the three months ended June 30, 2014 and 2013 was approximately $46,000 and $51,000, respectively. The total intrinsic value
of options exercised during the nine months ended June 30, 2014 and 2013 was approximately $570,000 and $612,000, respectively.
Total cash received from option exercises during the three and nine months ended June 30, 2014 was approximately $23,000 and $88,000,
respectively. There was no tax benefit realized from stock options exercised during the three and nine months ended June 30, 2014
and 2013. As of June 30, 2014, there was approximately $310,000 of total unrecognized compensation cost related to non-vested stock
option arrangements, which is expected to be recognized over a weighted-average period of 1.82 years. Many of the assumptions
used in the determination of share-based compensation expense are judgmental and highly volatile.
The expected option
life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise
behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate
pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company determined
the volatility for options granted using the historical volatility of the Company’s common stock. The risk-free interest
rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. Dividend yield of
zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based
on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating
the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of
prior expense will be recorded if the actual forfeiture is higher than estimated.
On April 22, 2014,
the stockholders of the Company approved the adoption of the Company’s Second Amended and Restated 2011 Equity Compensation
and Incentive Plan (the “Amended 2011 Plan”), which amends the previous Amended and Restated 2011 Equity Compensation
and Incentive Plan to increase the shares authorized for issuance under such plan by 700,000 shares to 2,275,392 shares. At June
30, 2014, 632,223 shares were available for future issuance under the 2011 Plan.
The following table is a summary
of combined activity for all of the Company’s stock option plans:
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Value
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Life (years)
|
|
|
(thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2013
|
|
|
363,209
|
|
|
$
|
5.76
|
|
|
|
4.33
|
|
|
$
|
8,042
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Canceled/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
22,375
|
|
|
|
3.94
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding, June 30, 2014
|
|
|
340,834
|
|
|
$
|
5.88
|
|
|
|
3.78
|
|
|
$
|
3,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest, June 30, 2014
|
|
|
45,003
|
|
|
$
|
12.92
|
|
|
|
5.82
|
|
|
$
|
92
|
|
Exercisable, June 30, 2014
|
|
|
290,830
|
|
|
$
|
4.67
|
|
|
|
3.43
|
|
|
$
|
2,994
|
|
Restricted Stock Units
The Company periodically
grants awards of restricted stock units (“RSUs”) to each of its non-employee directors and some of its management team
and employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the
end of each vesting period, a specified number of shares of the Company’s common stock. The total number of RSUs unvested
at June 30, 2014 was 920,010. Most RSUs vest at the rate of 33.33% on each of the first through third anniversaries of the grant
date. Included in the total number of RSUs unvested at June 30, 2014 are certain RSUs that are subject to a further vesting condition
that the Company’s common stock must trade at a price greater than the following market prices per share on a national securities
exchange for a period of twenty consecutive days on or prior to certain anniversaries of the grant date as follows:
|
|
Number of
|
|
|
|
Unvested RSUs
|
|
|
|
|
|
$10.00 per share prior to five years of the grant date
|
|
*
|
27,839
|
|
$10.00 per share prior to four years of the grant date
|
|
*
|
110,645
|
|
$17.50 per share prior to five years of the grant date
|
|
*
|
30,000
|
|
$17.50 per share prior to four years of the grant date
|
|
*
|
64,176
|
|
$17.50 per share prior to three years of the grant date
|
|
*
|
106,002
|
|
$20.00 per share prior to four years of the grant date
|
|
*
|
4,334
|
|
$22.50 per share prior to four years of the grant date
|
|
*
|
7,667
|
|
$22.50 per share prior to three years of the grant date
|
|
*
|
184,834
|
|
$22.50 per share prior to two and one-half years of the grant date
|
|
*
|
64,674
|
|
No further trading vesting condition
|
|
|
319,839
|
|
Unvested RSUs, June 30, 2014
|
|
|
920,010
|
|
The Company’s
common stock has satisfied the per share market price vesting conditions for the grants denoted with an asterisk above totaling
600,171 RSUs. For such RSUs, the Company performed fair value analysis using the Monte Carlo option-pricing model. The fair value
related to the RSUs was calculated based primarily on the average stock price of the Company’s common stock on the date of
the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product
development, professional services and general and administrative expense. The fair values of the RSUs granted in the nine months
ended June 30, 2014 and 2013 were approximately $5,764,000 (or $20.33 weighted average fair value per share) and approximately
$4,620,000 (or $14.77 weighted average fair value per share), respectively. The Company recorded compensation expense related to
RSUs of approximately $1,679,000 and $683,000 for the three months ended June 30, 2014 and 2013, respectively, and approximately
$6,280,000 and $1,765,000 for the nine months ended June 30, 2014 and 2013, respectively. These amounts are included in the total
share-based compensation expense disclosed above. As of June 30, 2014, there was approximately $12,456,000 of total unrecognized
compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 1.96 years.
The following table
presents nonvested RSU information for the nine months ended June 30, 2014:
|
|
Number of
|
|
|
|
RSUs
|
|
|
|
Outstanding
|
|
|
|
|
|
Nonvested, September 30, 2013
|
|
|
1,056,696
|
|
Granted
|
|
|
283,500
|
|
Canceled/Forfeited
|
|
|
(69,834
|
)
|
Vested
|
|
|
(350,352
|
)
|
Nonvested, June 30, 2014
|
|
|
920,010
|
|
Note 8. ISSUANCE OF COMMON STOCK
On February 19, 2014, the Company completed
a public offering of 2,018,250 shares of common stock at a price to the public of $28.50 per share. The number of shares the Company
sold includes the underwriters’ full exercise of their over-allotment option of 263,250 shares. Net proceeds to the Company
from the offering, after underwriting discounts but before expenses, were approximately $54,069,000.
Note 9. SEGMENT INFORMATION
The Company has determined
that it has only one reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, does
not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on
the Company’s consolidated operations and operating results.
The Company conducts
operations in the U.S. and internationally. The following table presents information about the Company’s geographic operations
(in thousands):
|
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Eliminations
|
|
|
Total
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2014
|
|
$
|
7,680
|
|
|
$
|
2,507
|
|
|
$
|
(959
|
)
|
|
$
|
9,228
|
|
Three months ended June 30, 2013
|
|
$
|
7,054
|
|
|
$
|
984
|
|
|
$
|
(211
|
)
|
|
$
|
7,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2014
|
|
$
|
22,342
|
|
|
$
|
5,912
|
|
|
$
|
(2,217
|
)
|
|
$
|
26,037
|
|
Nine months ended June 30, 2013
|
|
$
|
19,130
|
|
|
$
|
2,996
|
|
|
$
|
(647
|
)
|
|
$
|
21,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2014
|
|
$
|
(4,422
|
)
|
|
$
|
(684
|
)
|
|
$
|
(12
|
)
|
|
$
|
(5,118
|
)
|
Three months ended June 30, 2013
|
|
$
|
2
|
|
|
$
|
(521
|
)
|
|
$
|
—
|
|
|
$
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2014
|
|
$
|
(12,577
|
)
|
|
$
|
(3,873
|
)
|
|
$
|
(16
|
)
|
|
$
|
(16,466
|
)
|
Nine months ended June 30, 2013
|
|
$
|
377
|
|
|
$
|
(1,424
|
)
|
|
$
|
—
|
|
|
$
|
(1,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2014
|
|
$
|
48,235
|
|
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
48,362
|
|
At September 30, 2013
|
|
$
|
51,301
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
51,403
|
|
Note 10. SUBSEQUENT EVENTS
The Company has evaluated
all events and transactions that occurred after the balance sheet date and through the date that the condensed consolidated financial
statements were available to be issued noting none.