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, 2015, 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 visual data discovery
and self-service data preparation markets to allow organizations to access, analyze and visualize information in a more meaningful
fashion. The Datawatch Managed Analytics 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 Managed Analytics Platform solutions includes the following products:
|
·
|
Datawatch Designer
™
— Visually Design, Discover and Explore New Insights
|
Datawatch
Designer 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 Designer
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.
|
·
|
Datawatch Monarch™ — Capture and Transform Data from Virtually Any Source
|
Datawatch
Monarch is a self-service data preparation tool which lets users explore, manipulate and merge new data sources. With Datawatch
Monarch, users can bring all the data that is needed to manage the business to life, whether that information is stored in
structured sources like databases, or in less conventional places like unstructured or semi-structured EDI streams, PDF
files, reports, or text files.
|
·
|
Datawatch Server™
— Securely Share, Visualize Throughout the Organization
|
To fully
exploit the power of optimized information, organizations must ensure that all information is easily available to users of all
types. Datawatch Server is used to automate, manage, store and visualize information from any data source that can be modeled via
the Datawatch Designer or Datawatch Monarch products.
|
·
|
Datawatch Report Mining Server
™ —
Unlocking the Power of Content
|
Datawatch
Report Mining Server (“RMS”) is a web-based report analytics solution that 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 using Datawatch Designer or other productivity
tools with no user programming.
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, 2015 included
in our previously filed Form 10-K. There have been no material changes to the accounting policies for the three and six months
ended March 31, 2016.
OVERVIEW
During
the second quarter of fiscal 2016, we added 178
new customers for our Monarch data preparation solution, which was an increase of 36% over the number of new Monarch
customers added in the quarter ended December 31, 2015. Two important operational metrics are the number of
six-figure deals and the average deal size for license sales greater than $10,000. The number of six-figure deals more than
doubled from three deals for the three months ended March 31, 2015 to seven deals for three months ended March 31, 2016. The
average deal size for license sales greater than $10,000 increased approximately 39% from $31,000 for the three months ended
March 31, 2015 to $43,000 for the three months ended March 31, 2016.
Sales execution
Overall revenue decreased
by $38,000 compared to the same quarter last fiscal year; however, our deferred revenue increased by $1.8 million as of March 31,
2016 compared to the end of the same quarter last fiscal year. Of the total deferred revenue increases, deferred license revenue
increased $1.1 million, almost 300%, as a direct result of a pricing change implemented during the second half of fiscal 2015.
This pricing change requires all new or non-current maintenance customers purchasing fewer than 10 seats of Monarch, to purchase
term licenses instead of perpetual licenses. In addition, license subscription bookings increased almost 20% over the quarter ended
December 31, 2015 to an all-time high of over $0.8 million for the quarter ended March 31, 2016. We recognized more than $0.5 million
in subscription licenses revenue for the quarter ended March 31, 2016 representing a $2.0 million annual run rate, which we are
looking to further build upon during the second half of fiscal 2016.
Market awareness
During the quarter
ended March 31, 2016, we teamed with IBM Corporation (“IBM”) to provide self-service data preparation capabilities
to two key groups of IBM product users: IBM Watson Analytics and Cognos Analytics.
With Datawatch
Monarch, IBM Watson Analytics and Cognos Analytics users can now rapidly prepare data from virtually any information source, including
traditional databases and multi-structured documents, such as PDF and text reports, Web pages, JSON and log files, which had previously
been unavailable to users. Data can now be prepared for analysis in a fraction of the time that it takes using spreadsheets and
other manually-intensive measures
.
Innovation to
product platform
During the quarter
ended March 31, 2016, we released Monarch version 13.3. This new product release includes important enhancements to Data
Prep Studio such as an installer which automatically installs the appropriate 32-bit or 64-bit versions; the elimination of a separate
Citrix build, additional export capabilities to Tableau Server, new capabilities to open files from SFTP sites and password protected
Zip files, and enhancements to the File Menu.
RESULTS OF OPERATIONS
The following table
sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. The data has been
derived from our accompanying consolidated financial statements. The operating results for any period should not be considered
indicative of the results expected for any future period.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
|
49
|
%
|
|
|
52
|
%
|
|
|
47
|
%
|
|
|
49
|
%
|
Maintenance
|
|
|
47
|
|
|
|
44
|
|
|
|
49
|
|
|
|
47
|
|
Professional services
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Total revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses
|
|
|
7
|
%
|
|
|
10
|
%
|
|
|
8
|
%
|
|
|
11
|
%
|
Cost of maintenance and services
|
|
|
8
|
|
|
|
15
|
|
|
|
8
|
|
|
|
14
|
|
Sales and marketing
|
|
|
69
|
|
|
|
91
|
|
|
|
75
|
|
|
|
103
|
|
Engineering and product development
|
|
|
28
|
|
|
|
29
|
|
|
|
27
|
|
|
|
33
|
|
General and administrative
|
|
|
35
|
|
|
|
33
|
|
|
|
34
|
|
|
|
32
|
|
Impairment of goodwill and long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
222
|
|
Total costs and expenses
|
|
|
147
|
%
|
|
|
178
|
%
|
|
|
152
|
%
|
|
|
415
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(47
|
)%
|
|
|
(78
|
)%
|
|
|
(52
|
)%
|
|
|
(315
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign currency transaction loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS BEFORE INCOME TAXES
|
|
|
(47
|
)%
|
|
|
(78
|
)%
|
|
|
(52
|
)%
|
|
|
(315
|
)%
|
Income tax expense (benefit)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(48
|
)%
|
|
|
(78
|
)%
|
|
|
(53
|
)%
|
|
|
(333
|
)%
|
Three Months Ended March 31, 2016
Compared to
Three Months Ended March 31, 2015
Total Revenues
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
(Decrease)
|
|
|
Change
|
|
Software licenses
|
|
$
|
3,645
|
|
|
$
|
3,911
|
|
|
$
|
(266
|
)
|
|
|
(7
|
)%
|
Maintenance
|
|
|
3,480
|
|
|
|
3,296
|
|
|
|
184
|
|
|
|
6
|
|
Professional services
|
|
|
299
|
|
|
|
255
|
|
|
|
44
|
|
|
|
17
|
|
Total revenue
|
|
$
|
7,424
|
|
|
$
|
7,462
|
|
|
$
|
(38
|
)
|
|
|
(1
|
)%
|
Software
license revenue.
Software license revenue decreased $0.3 million when compared with revenue for the three months
ended March 31, 2015. During the second half of fiscal 2015, we implemented a change in our pricing practice for Monarch,
which requires all new or non-current maintenance customers purchasing fewer than ten seats of Monarch to purchase term
licenses instead of perpetual licenses. The decrease in software license revenue is a direct result of this pricing change
and comprised of a decrease of perpetual software license revenue of $0.8 million, offset by an increase in subscription
license revenue of $0.5 million compared to the three months ended March 31, 2015. Since this pricing change went into
effect, we have observed the continued growth of our deferred revenue related to subscription software, which we believe will
translate into software license revenue in future quarters. Overall our deferred revenue increased by $1.8 million as of
March 31, 2016 compared to the end of the same quarter last fiscal year. Of the total deferred revenue increases, deferred
license revenue increased $1.1 million, almost 300%, as a direct result of the pricing change.
Maintenance revenue.
The increase in maintenance revenue was primarily driven by strong renewal bookings of both enterprise and desktop software
from prior quarters. We have continued to increase our maintenance customer base over the past few years. We have also recently
increased our renewal rates. Both the increase in our maintenance customer base and increased renewal rates have contributed to
the increase for both enterprise and desktop products.
Professional services.
Professional services revenue remained relatively flat compared to the same quarter last fiscal year.
Total Costs and Expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost of software licenses
|
|
$
|
499
|
|
|
$
|
721
|
|
|
$
|
(222
|
)
|
|
|
(31
|
)%
|
Cost of maintenance and services
|
|
|
610
|
|
|
|
1,084
|
|
|
|
(474
|
)
|
|
|
(44
|
)
|
Sales and marketing
|
|
|
5,100
|
|
|
|
6,802
|
|
|
|
(1,702
|
)
|
|
|
(25
|
)
|
Engineering and product development
|
|
|
2,066
|
|
|
|
2,187
|
|
|
|
(121
|
)
|
|
|
(6
|
)
|
General and administrative
|
|
|
2,626
|
|
|
|
2,434
|
|
|
|
192
|
|
|
|
8
|
|
Total costs and operating expenses
|
|
$
|
10,901
|
|
|
$
|
13,228
|
|
|
$
|
(2,327
|
)
|
|
|
(18
|
)%
|
Cost of software
licenses.
The $0.2 million decrease was due to lower royalty expense, which resulted from the elimination of royalty accruals
related to prior year sales of Monarch Professional and Datawatch Data Pump products.
Cost of maintenance
and services.
Costs of maintenance and services decreased $0.5 million. During the three months ended March 31, 2015, we incurred
$0.3 million of restructuring charges due to workforce reductions, but we did not incur any such restructuring charges during the
three months ended March 31, 2016. In addition, as a result of the workforce reductions that occurred during the three months ended
March 31, 2015, employee related expenses, such as salaries, payroll taxes and benefits decreased $0.2 million, for the three months
ended March 31, 2016 when compared to the same quarter last fiscal year.
Sales and marketing
expenses.
The $1.7 million decrease in sales and marketing expenses was comprised of a decrease in sales expense of $1.7 million
and a decrease in marketing expense of $26,000. The decreased sales expense was mainly driven by the workforce reductions which
occurred during the three months ended March 31, 2015, including a decrease of $1.1 million in employee related expenses, such
as salaries, stock based compensation, payroll taxes and benefits, a $0.2 million decrease in restructuring charges and a $0.2
million decrease in travel related expenses. In addition to the decreased employee related expenses resulting from the workforce
reductions, there was also a $0.2 million decrease in spending related to outside consultants. While marketing expenses remained
relatively flat compared to the same quarter last fiscal year, the expense reductions that occurred as a result of the workforce
reductions, which took place during the three months ended March 31, 2015, were offset by increased spending related to advertising
and lead generation activities.
Engineering and
product development expenses.
The $0.1 million decrease in engineering and product development costs was mainly driven by
a $0.2 million decrease in employee related expenses such as salaries, stock based compensation, payroll taxes and benefits resulting
from a 13% decrease in headcount compared to the end of same quarter last fiscal year. The planned decreased headcount was primarily
related to resources focused on legacy products, due to the restructuring efforts that occurred during our last fiscal year. The
cost reductions related to the decrease in headcount were partially offset by a $0.1 million increase in consulting expenses related
to outside development services.
General and administrative
expenses.
The $0.2 million increase in general and administrative expenses was mainly driven by an increase in outside consulting
services related to legal activities, which was partially offset by a reduction in severance as compared to the three months ended
March 31, 2015 when the workforce reduction took place.
Other income (expense)
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase
|
|
|
Change
|
|
Other income
|
|
$
|
15
|
|
|
$
|
3
|
|
|
$
|
12
|
|
|
|
400
|
%
|
Foreign currency transaction loss
|
|
$
|
(6
|
)
|
|
$
|
(14
|
)
|
|
$
|
8
|
|
|
|
57
|
%
|
Other income (expense).
There was a minimal amount of other income for the three months ended March 31, 2016 and 2015.
Foreign currency
transactions loss.
The foreign currency losses for the three months ended March 31, 2016 and 2015 were primarily attributable
to fluctuations of the British pound sterling, Swedish krona and other foreign currencies in which we transact business relative
to the U.S. dollar.
Provision (benefit) for income taxes
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
Decrease
|
|
|
Change
|
|
Income tax expense (benefit)
|
|
$
|
(106
|
)
|
|
$
|
32
|
|
|
$
|
(138
|
)
|
|
|
(431
|
)%
|
During the three months
ended March 31, 2016, the Company recorded a tax benefit of $0.1 million, primarily related to the change in the deferred tax asset
in Sweden as a result of generating losses, estimated state taxes, and accruing interest on uncertain tax positions. During the
three months ended March 31, 2015, the Company recorded a tax expense of $32,000, primarily related to the change in the deferred
tax asset in Sweden as a result of generating losses, estimated state taxes, and accrued interest and penalties on uncertain tax
positions.
Six Months Ended March 31, 2016
Compared to
Six Months Ended March 31, 2015
Total Revenues
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
(Decrease)
|
|
|
Change
|
|
Software licenses
|
|
$
|
6,792
|
|
|
$
|
7,086
|
|
|
$
|
(294
|
)
|
|
|
(4
|
)%
|
Maintenance
|
|
|
7,082
|
|
|
|
6,705
|
|
|
|
377
|
|
|
|
6
|
|
Professional services
|
|
|
605
|
|
|
|
632
|
|
|
|
(27
|
)
|
|
|
(4
|
)
|
Total revenue
|
|
$
|
14,479
|
|
|
$
|
14,423
|
|
|
$
|
56
|
|
|
|
0
|
%
|
Software
license revenue
. Software license revenue decreased $0.3 million when compared with revenue for the six months
ended March 31, 2015. During the second half of fiscal 2015, we implemented a change in our pricing practice for Monarch,
which requires all new or non-current maintenance customers purchasing fewer than ten seats of Monarch to purchase term
licenses instead of perpetual licenses. The decrease in software license revenue is a direct result of this pricing change
and comprised of a decrease of perpetual software license revenue of $1.0 million, offset by an increase in subscription
license revenue of $0.7 million compared to the six months ended March 31, 2015. Since this pricing change went into effect,
we have observed the continued growth of our deferred revenue related to subscription software, which we believe will
translate into software license revenue in future quarters. Overall our deferred revenue increased by $1.8 million as of
March 31, 2016 compared to the end of the same quarter last fiscal year. Of the total deferred revenue increases, deferred
license revenue increased $1.1 million, almost 300%, as a direct result of the pricing change.
Maintenance revenue.
The $0.4 million increase in maintenance revenue was the result of increased renewal rates across all product lines. Renewal
rates during the six months ended March 31, 2016 increased to 74% from 70% for the six months ended March 31, 2015. In addition,
at March 31, 2016, we noted an increase in maintenance deferred revenue of 10% to $7.1 million compared to $6.5 million at for
the same period last fiscal year.
Professional services.
Professional services revenue remained largely unchanged compared to the last fiscal year.
Total Costs and Expenses
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost of software licenses
|
|
$
|
1,188
|
|
|
$
|
1,596
|
|
|
$
|
(408
|
)
|
|
|
(26
|
)%
|
Cost of maintenance and services
|
|
|
1,208
|
|
|
|
1,962
|
|
|
|
(754
|
)
|
|
|
(38
|
)
|
Sales and marketing
|
|
|
10,848
|
|
|
|
14,790
|
|
|
|
(3,942
|
)
|
|
|
(27
|
)
|
Engineering and product development
|
|
|
3,893
|
|
|
|
4,710
|
|
|
|
(817
|
)
|
|
|
(17
|
)
|
General and administrative
|
|
|
4,860
|
|
|
|
4,575
|
|
|
|
285
|
|
|
|
6
|
|
Impairment of goodwill and long-lived assets
|
|
|
-
|
|
|
|
32,009
|
|
|
|
(32,009
|
)
|
|
|
100
|
|
Total costs and operating expenses
|
|
$
|
21,997
|
|
|
$
|
59,642
|
|
|
$
|
(37,645
|
)
|
|
|
(63
|
)%
|
Cost of software
licenses.
The $0.4 million decrease was primarily due to lower royalty expense and decreased amortization expense of acquired
intangibles due to the reduction in carrying value of long-lived assets as a result of the impairment of goodwill and long-lived
assets recorded during the six months ended March 31, 2015.
Cost of maintenance
and services.
The $0.8 million decrease was mainly driven by a reduction of restructuring charges and employee related costs.
During the six months ended March 31, 2015, we incurred $0.3 million of restructuring charges due to the workforce reductions,
while the six months ended March 31, 2016 contained no restructuring charges. In addition, as a result of the workforce reductions
that occurred during the six months ended March 31, 2015, employee related expenses, such as salaries, payroll taxes and benefits,
decreased $0.4 million for the six months ended March 31, 2016 when compared to prior fiscal year.
Sales and marketing
expenses.
The $3.9 million decrease in sales and marketing expenses is comprised of a decrease in sales expense of $3.2 million
and a decrease in marketing expense of $0.7 million. The decreased sales and marketing expenses were mainly driven by the workforce
reductions which occurred during the six months ended March 31, 2015, including a decrease of $2.5 million in employee related
expenses, such as salaries, stock based compensation, payroll taxes and benefits, a $0.4 million decrease in travel related expenses
and a $0.4 million decrease in restructuring charges. In addition, to the decreased expenses resulting from the workforce reductions,
we also realized a $0.7 million decrease in spending related to outside consultants and a $0.1 million reduction in amortization
expense due to the impairment of goodwill and long-lived assets which occurred during the six months ended March 31, 2015. These
decreases were partially offset by a $0.3 million increase in marketing programs such as lead generation, advertising and public
relations activities.
Engineering and
product development expenses.
The $0.8 million decrease was driven mainly by a $0.6 million decrease in employee related expenses
such as salaries, stock based compensation, payroll taxes and benefits resulting from a 13% decrease in headcount compared to the
end of same period last fiscal year and a $0.3 million decrease in restructuring charges resulting from the workforce reductions
that occurred during the prior fiscal year. The planned decreased headcount was primarily related to resources focused on legacy
products, due to the restructuring efforts that occurred during our last fiscal year. The cost reductions related to the decrease
in headcount were partially offset by a $0.2 million increase in consulting expenses related to outside development services.
General and administrative
expenses.
The $0.3 million increase was primarily attributable to a $0.4 million increase in outside consulting fees related
to legal activities, a $0.1 million increase in rent and facilities costs and a $0.1 million increase in depreciation. These increases
were partially offset by a reduction in severance of $0.2 million and employee related costs of $0.1 million resulting from the
workforce reduction, which took place during the three months ended March 31, 2015.
Impairment of
goodwill and long-lived assets.
During the six months ended March 31, 2015, we recorded goodwill and long-lived assets impairment
charges of $21.7 million and $10.3 million, respectively, as a result of performing an interim impairment review as required under
Accounting Standards Codification (“ASC”) 350
Intangibles – Goodwill and Other
. We did not record any
impairment charges during the six months ended March 31, 2016.
Other income (expense)
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
(Decrease)
|
|
|
Change
|
|
Other income
|
|
$
|
18
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
|
100
|
%
|
Foreign currency transaction loss
|
|
$
|
(33
|
)
|
|
$
|
(11
|
)
|
|
$
|
(22
|
)
|
|
|
(200
|
)%
|
Other income (expense).
There was a minimal amount of other income for the six months ended March 31, 2016 and 2015.
Foreign currency
transactions loss.
The foreign currency loss for the six months ended March 31, 2016 and 2015 were primarily attributable to
fluctuations of the British pound sterling and other foreign currencies in which we transact business related to the U.S. dollar.
Benefit for income taxes
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
Decrease
|
|
|
Change
|
|
Income tax benefit
|
|
$
|
(207
|
)
|
|
$
|
(2,536
|
)
|
|
$
|
2,329
|
|
|
|
92
|
%
|
The decrease in the
income tax benefit was mainly due to the change in the deferred tax liability in Sweden as a result of impairing non-goodwill intangibles
and amortization during the during the six months ended March 31, 2015, which resulted in recording a tax benefit of $2.5 million
for the six months ended March 31, 2015 compared to a tax benefit of $0.2 million for the six months ended March 31, 2016.
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 $0.3 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively,
and $0.6 million and $0.5 million for the six months ended March 31, 2016 and 2015, respectively. Deferred rent of $0.1 million
is
included under the caption “
Other long-term liabilities
”
in our consolidated balance sheets, at March 31, 2016
. There was no deferred rent at September 30, 2015. Certain of our
facility leases include options to renew.
On June 23, 2015,
we entered into a facility lease in Bedford, MA for a new corporate headquarters. The lease is for 20,360 square feet and has a
term of 84 months which commenced in January 2016 when we moved in. Our monthly rent expense is $42,000. In conjunction with entering
into the lease, we were required to deposit $0.2 million into a restricted cash account as collateral for a Letter of Credit, which
is
included under the caption “
Other long-term assets
”
in our consolidated balance sheets, at March 31, 2016.
As of March 31, 2016,
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
|
|
$
|
3,921
|
|
|
$
|
187
|
|
|
$
|
624
|
|
|
$
|
1,801
|
|
|
$
|
1,309
|
|
Other long-term liabilities
|
|
$
|
396
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
396
|
|
Royalty charges included in cost
of software license for the three months ended March 31, 2016 were a benefit of $0.1 million. Royalty expense included in cost
of software licenses was $0.2 million for the three months ended March 31, 2015, and $0.1 million and $0.3 million for the six
months ended March 31, 2016 and 2015, respectively.
Our software products
are sold under warranty against certain defects in material and workmanship for a period of 30 to 90 days from the date of purchase.
If necessary, we would provide for the estimated cost of warranties based on specific warranty claims and claim history. However,
we have never incurred significant expense under our product or service warranties. As a result, we believe our exposure related
to these warranty agreements is minimal. Accordingly, we have no liabilities recorded for warranty claims as of March 31,
2016 and September 30, 2015.
We enter into indemnification
agreements in the ordinary course of business. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and
reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection
with any patent, copyright or other intellectual property infringement claim by any third party with respect to our products. The
term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments we could be required
to make under these indemnification agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related
to these indemnification agreements. As a result, we believe our exposure related to these agreements is minimal. Accordingly,
we have no liabilities recorded for these potential obligations as of March 31, 2016 and September 30, 2015.
Certain of our agreements
also provide for the performance of services at customer sites. These agreements may contain indemnification clauses, whereby we
will indemnify the customer from any and all damages, losses, judgments, costs and expenses for acts of our employees or subcontractors
resulting in bodily injury or property damage. The maximum potential amount of future payments we could be required to make under
these indemnification agreements is unlimited; however, we have general and umbrella insurance policies that would enable us to
recover a portion of any amounts paid. We have never incurred costs to defend lawsuits or settle claims related to these indemnification
agreements. As a result, we believe our exposure related to these agreements is minimal. Accordingly, we have no liabilities recorded
for these potential obligations as of March 31, 2016 and September 30, 2015.
As permitted under
Delaware law, we have agreements with our directors whereby we will indemnify them for certain events or occurrences while the
director is, or was, serving at our request in such capacity. The term of the director indemnification period is for the later
of ten years after the date that the director ceases to serve in such capacity or the final termination of proceedings against
the director as outlined in the indemnification agreement. The maximum potential amount of future payments we could be required
to make under these indemnification agreements is unlimited; however, our director and officer insurance policy would enable us
to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe our exposure related
to these indemnification agreements is minimal. Accordingly, we have no liabilities recorded for these potential obligations as
of March 31, 2016 and September 30, 2015.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our
current cash balances will be sufficient to meet our cash needs for working capital and anticipated capital expenditures for at
least the next twelve months. At March 31, 2016, we had $31.5 million of cash and cash equivalents as compared $35.2 million as
of September 30, 2015, a decrease of $3.7 million. $1.5 million of cash and cash equivalents at March 31, 2016 was located in foreign
banks.
At March 31, 2016,
we had working capital of $26.9 million as compared to $31.3 million as of September 30, 2015. 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 $7.3 million for the six months ended March 31, 2016 as compared to net loss of $42.7 million for the six months ended March
31, 2015. During the six months ended March 31, 2016 and 2015, $2.9 million and $8.7 million of cash was used in our operations,
respectively. During the six months ended March 31, 2016, the main use of cash in operations was net loss adjusted for depreciation
and amortization, share-based compensation expense, as well as the decrease in accounts receivable offset by the increases in prepaid
expenses and other assets and the decreases in accounts payable, accrued expenses and other liabilities. During the six months
ended March 31, 2015, the main use of cash in operations was net loss adjusted for depreciation and amortization, share-based compensation
expense, deferred income taxes and the impairment of goodwill and long-lived assets as well as the increases in accounts receivable
and accounts payable offset by decreases in prepaid expenses and other assets and deferred revenue.
Net cash used in investing
activities of $0.8 million and $0.4 million for the six months ended March 31, 2016 and 2015, respectively, was related to the
purchase of property and equipment.
Net cash provided
by financing activities for the six months ended March 31, 2016 and 2015 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.