NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business
Datawatch Corporation
(the “Company” or “Datawatch”) designs, develops, markets and distributes 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.
Summary of Significant Accounting
Policies
Basis of Presentation and Principles
of Consolidation
These consolidated financial
statements include the accounts of Datawatch and its wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
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 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, 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 and indirectly to end-users through value added
resellers and distributors. Sales to indirect distribution channels accounted for 36%, 35% and 40% of total sales for the years
ended September 30, 2017, 2016 and 2015, respectively. The Company’s software product offerings do not require customization
and 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. The Company has established VSOE of fair value of PCS from either contractually stated
renewal rates or using the bell-shaped curve method. Additionally, VSOE of fair value of the professional services is based on
the amounts charged for these elements when sold separately.
The Company also licenses
its enterprise software using a subscription model. At the time a customer enters into a binding agreement to purchase a subscription,
the customer is invoiced annually in advance and an account receivable and deferred revenue are recorded. Beginning on the date
the software is installed at the customer site and available for use by the customer, and provided that all other criteria for
revenue recognition are met, the deferred revenue amount is recognized ratably over the period the service is provided. The subscription
arrangement includes software, maintenance and unspecified future upgrades including major version upgrades on a when-and-if available
basis.
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.
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.
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.
For the fiscal years ended
September 30, 2017, 2016 and 2015, changes to and ending balances of the allowance for doubtful accounts were as follows:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts balance - beginning of year
|
|
$
|
28
|
|
|
$
|
106
|
|
|
$
|
53
|
|
Additions to the allowance for doubtful accounts
|
|
|
113
|
|
|
|
51
|
|
|
|
111
|
|
Deductions against the allowance for doubtful accounts
|
|
|
(81
|
)
|
|
|
(129
|
)
|
|
|
(58
|
)
|
Allowance for doubtful accounts balance - end of year
|
|
$
|
60
|
|
|
$
|
28
|
|
|
$
|
106
|
|
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.
Concentration of Credit Risks and Major
Customers
Financial instruments,
which potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts
receivable. The Company’s cash is maintained with what management believes to be a high-credit quality financial institution. At
times, deposits held at this bank may exceed the federally insured limits. Management believes that the financial institutions
that hold the Company’s deposits are financially sound and have minimal credit risk. Risks associated with cash and cash
equivalents are mitigated by the Company’s investment policy, which limits the Company’s investing of excess cash
into only money market mutual funds.
The Company licenses its products and services directly to end-users and indirectly to end-users
through U.S. and non-U.S. distributors and other software resellers, under customary credit terms. One partner accounted for 12%
of total revenue for the year ended September 30, 2017. No partner or customer constituted a significant portion (more than 10%)
of accounts receivable for the year ended September 30, 2017. No partner or customer constituted a significant portion (more than
10%) of revenues or accounts receivable for the years ended September 30, 2016 and 2015. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral.
Deferred Revenue
Deferred revenue consisted
of the following at September 30:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Maintenance
|
|
$
|
8,632
|
|
|
$
|
7,781
|
|
Software licenses
|
|
|
2,853
|
|
|
|
2,001
|
|
Professional services
|
|
|
120
|
|
|
|
85
|
|
Total
|
|
|
11,605
|
|
|
|
9,867
|
|
|
|
|
|
|
|
|
|
|
Less: Long-term portion of deferred revenue
|
|
|
(302
|
)
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$
|
11,303
|
|
|
$
|
9,630
|
|
Deferred maintenance 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 12 months. Deferred license revenue consists primarily of the unearned portion of revenue from subscription
sales and are recognized on a straight-line basis over the term of the subscription period, generally 12 months.
Deferred professional
services revenue is 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 $0.4 million for the years ended September 30, 2017 and 2016, respectively, and $0.3 million
for the year ended September 30, 2015.
Long-Lived Assets
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.
During fiscal 2015, as
a result of an interim impairment test of goodwill and long-lived assets, the Company recorded an impairment charge of $4.9 million
for the intellectual property acquired from Panopticon (now known as Datawatch AB) and $5.4 million for the customer lists acquired
from Panopticon.
Long-Lived Assets: Acquired Intellectual
Property
Acquired intellectual
property consists of software source code acquired through business combinations in prior years. 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.
Acquired intellectual
property, net, were comprised of the following at September 30, 2017 and 2016:
September 30, 2017
|
Identified
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
|
|
Intangible
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
Asset
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Panopticon intellectual property
|
|
|
7.5
|
|
|
$
|
3,005
|
|
|
$
|
(2,118
|
)
|
|
$
|
887
|
|
Monarch intellectual property
|
|
|
5
|
|
|
|
8,616
|
|
|
|
(8,616
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
11,621
|
|
|
$
|
(10,734
|
)
|
|
$
|
887
|
|
September 30, 2016
|
Identified
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
|
|
Intangible
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
Asset
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Panopticon intellectual property
|
|
|
7.5
|
|
|
$
|
3,005
|
|
|
$
|
(1,859
|
)
|
|
$
|
1,146
|
|
Monarch intellectual property
|
|
|
5
|
|
|
|
8,616
|
|
|
|
(7,764
|
)
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
11,621
|
|
|
$
|
(9,623
|
)
|
|
$
|
1,998
|
|
Amortization expense related
to the acquired intellectual property assets charged to cost of software licenses for the years ended September 30, 2017, 2016
and 2015, was $1.1 million, $2.0 million and $2.2 million, respectively.
The future amortization
expense related to the acquired intellectual property is as follows (in thousands):
Fiscal Years Ending September 30,
|
|
|
|
|
|
|
|
2018
|
|
$
|
260
|
|
2019
|
|
|
259
|
|
2020
|
|
|
259
|
|
2021
|
|
|
109
|
|
Total future amortization expense
|
|
$
|
887
|
|
Long-Lived Assets: Other Intangible Assets
Other intangible assets
consist of trade names, patents and customer lists acquired through business combinations in prior years. The values allocated
to these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset.
Other intangible assets, net, were comprised
of the following at September 30, 2017 and 2016:
September 30, 2017
|
Identified
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
|
|
Intangible
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
Asset
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
20
|
|
|
$
|
160
|
|
|
$
|
(105
|
)
|
|
$
|
55
|
|
Customer lists
|
|
|
14
|
|
|
|
3,574
|
|
|
|
(2,660
|
)
|
|
|
914
|
|
Trade names
|
|
|
3
|
|
|
|
120
|
|
|
|
(120
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3,854
|
|
|
$
|
(2,885
|
)
|
|
$
|
969
|
|
September 30, 2016
|
Identified
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
|
|
Intangible
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
Asset
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
20
|
|
|
$
|
160
|
|
|
$
|
(96
|
)
|
|
$
|
64
|
|
Customer lists
|
|
|
14
|
|
|
|
3,574
|
|
|
|
(2,577
|
)
|
|
|
997
|
|
Trade names
|
|
|
3
|
|
|
|
120
|
|
|
|
(120
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3,854
|
|
|
$
|
(2,793
|
)
|
|
$
|
1,061
|
|
Amortization expense
related to other intangible assets charged to sales and marketing totaled $0.1 million, $0.2 million and $0.3 million for fiscal
2017, 2016 and 2015, respectively. There was no amortization expense related to other intangible assets charged to general and
administrative expense in fiscal 2017. Amortization expense related to other intangible assets charged to general and administrative
expense totaled $20,000 for fiscal 2016 and $48,000 for fiscal year 2015.
The future amortization
expense related to amortizing other intangible assets is as follows (in thousands):
Fiscal Years Ending September 30,
|
|
|
|
|
|
|
|
2018
|
|
$
|
92
|
|
2019
|
|
|
92
|
|
2020
|
|
|
92
|
|
2021
|
|
|
92
|
|
2022
|
|
|
92
|
|
Thereafter
|
|
|
509
|
|
Total future amortization expense
|
|
$
|
969
|
|
Goodwill and Indefinite-Lived Assets
Goodwill represents the
excess of the purchase price over the fair value of identifiable net assets of acquired businesses. Indefinite-lived intangibles
are intangible assets whose useful lives are indefinite in that their lives extend beyond the foreseeable horizon – that
is there is no foreseeable limit on the period of time over which they are expected to contribute to the cash flows of the reporting
entity. The Company accounts for these items in accordance with FASB’s ASC 350
Intangibles – Goodwill and Other
.
This requires that goodwill and intangible assets having indefinite lives are not amortized but instead are 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. Goodwill and assembled workforce are considered indefinite-lived intangibles. The Company conducts its annual impairment
test for goodwill and indefinite-lived intangible assets during the fourth quarter of each fiscal year. In 2017 and 2016, the
Company conducted its annual goodwill impairment test on July 31 and concluded that no impairment was indicated.
Fair Value Measurements
The Company’s financial
instruments consist of cash and cash equivalents, accounts receivable and accounts 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 $16.5 million and $18.8 million as of September 30,
2017 and 2016, respectively, within Level 2 of the fair value hierarchy.
As of September 30, 2017
and 2016, the Company’s assets that are measured on a recurring basis include the following (in thousands):
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Fair Value Measurement
|
|
|
Fair Value Measurement
|
|
|
|
Using Input Types
|
|
|
Using Input Types
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
-
|
|
|
$
|
16,470
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,771
|
|
|
$
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
16,470
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,771
|
|
|
$
|
-
|
|
Non-financial assets
such as goodwill and long-lived assets are also subject to fair value
measurements. Goodwill is subject to recurring fair value measurements to determine whether impairment exists. Long-lived assets
are subject to non-recurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial
assets depend on the type of asset and are accounted for in accordance with the
Financial Accounting Standards Board (“FASB”)
guidance on fair value measurement.
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.
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):
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,993
|
)
|
|
$
|
(14,632
|
)
|
|
$
|
(49,787
|
)
|
Weighted-average number of common shares outstanding
|
|
|
12,073
|
|
|
|
11,758
|
|
|
|
11,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.33
|
)
|
|
$
|
(1.24
|
)
|
|
$
|
(4.38
|
)
|
As the Company was in
a net loss position in fiscal 2017, 2016 and 2015, all common stock equivalents (vested stock options and unvested RSUs) in the
respective periods were anti-dilutive. As a result of being anti-dilutive, 220,729 shares, 384,312 shares and 259,424 shares for
the years ended September 30, 2017, 2016 and 2015, respectively, were 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 loss in fiscal 2017 and 2015 were $34,000
and $0.4 million, respectively. Foreign currency translation gains in fiscal year 2016 was $0.1 million.
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. There was a loss of $49,000, $0.1 million and $0.1 million for the years ended September
30, 2017, 2016 and 2015, respectively.
Advertising and Promotional Materials
Advertising and promotional
costs are expensed as incurred and amounted to $0.1 million, $0.6 million and $0.1 million in fiscal years 2017, 2016 and 2015,
respectively.
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 5.
Segment Information and Revenue by Geographic
Location
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. See Note 9 for information about the
Company’s revenue by geographic operations.
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 September 30, 2017 or 2016.
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 September 30, 2017 or 2016.
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 September
30, 2017 or 2016.
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 September 30, 2017 or 2016.
Research and Development Costs
Research and development
costs are expensed as incurred to the extent the costs do not meet the capitalization requirements.
Recent Accounting Pronouncements
In May 2017, the FASB
issued Accounting Standard Update (“ASU”) 2017-09,
Compensation-Stock Compensation (Topic 718) Scope of Modification
Accounting
to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance in Topic
718 to a change to the terms and conditions of a stock-based payment award. ASU 2017-09 also provides guidance about the types
of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in
accordance with Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017,
with early adoption permitted. The Company is currently evaluating the effect this standard will have on the Company’s consolidated
financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill And Other (Topic
350): Simplifying The Test For Goodwill Impairment
, in an effort to simplify the subsequent measurement of goodwill and the
associated procedures to determine fair value. The guidance eliminates Step 2 from the goodwill impairment test. Instead, an entity
should perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying
amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value, not to exceed the total amount of goodwill allocated to the reporting unit. This guidance is effective for fiscal years
beginning after December 15, 2019, including interim periods within that reporting period. The adoption of this guidance
is not expected to have a material impact on our financial statements if there continues to be no impairment charges related to
our intangibles assets and goodwill.
In November 2016, the
FASB issued ASU 2016-18,
Restricted Cash
, which requires that
a
statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described
as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows
. This guidance is effective for fiscal years beginning after December 15, 2017, including
interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the
potential impacts of this new guidance on the Company’s consolidated financial statements and related disclosures.
In June 2016, the FASB
issued Accounting Standard Update (“ASU”) 2016-13
, Financial Instruments – Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments,
which requires entities to estimate all expected credit losses for certain types
of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial
statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This guidance
is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early
adoption is permitted. The Company is in the process of evaluating the potential impacts of this new guidance on the Company’s
consolidated financial statements and related disclosures.
In March 2016, the FASB
issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which is intended to simplify various aspects
of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.
The Company is currently evaluating the effect this standard will have on the Company’s consolidated financial statements
and related disclosures.
In February 2016, the
FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires lessees to recognize, on the balance sheet, leases with a lease
term of greater than twelve months as a right-of-use asset and a lease liability. The standard is effective for fiscal years beginning
after December 15, 2018. The Company is currently evaluating the effect that the standard will have on the Company’s consolidated
financial statements and related disclosures.
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 was initially effective
for annual reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB voted to delay the effective date of
the new revenue standard by one year, but to permit entities to choose to adopt the standard as of the original effective date.
We plan to elect the full
retrospective adoption model, which will be effective October 1, 2018. Quarterly results in the 2019 fiscal year and comparative
prior periods will be compliant with ASC Topic 606, with the Annual Report on Form 10-K for the year ended September 30, 2019 being
the first such Annual Report issued in compliance with ASC Topic 606.
We have begun to evaluate
the effect the new revenue standard will have on our consolidated financial statements and related disclosures, but have not completed
our evaluation and implementation processes. Based on evaluations to date, the Company expects the following impacts:
|
§
|
Currently, we recognize revenue from subscription licenses ratably over the term of the agreement.
The adoption of the new revenue standard will result in revenue for performance obligations recognized as they are satisfied. Therefore,
revenue from the subscription license performance obligation is expected to be recognized upon delivery. Revenue from maintenance
includes two performance obligations, upgrades and customer support, and is expected to be recognized on a straight-line basis
over the contractual term.
|
|
§
|
We have also assessed accounting for incremental costs to obtain a contract and costs incurred
in fulfilling a contract. Based on preliminary results of the evaluation, which is still in process, the Company currently believes
the most significant potential change to be accounting for commissions, as these incremental costs are expected to be capitalized
and will be amortized over a period of time which could extend beyond the initial contract term.
|
|
|
|
|
§
|
There will be a corresponding effect on tax liabilities in relation to all of the above impacts.
|
|
|
|
|
§
|
Once we adopt ASU 2014-09, we do not anticipate that our internal control framework will materially
change, but rather that existing internal controls will be modified and augmented, as necessary, to consider our new revenue recognition
policy effective October 1, 2018. As we implement the new standard, we will develop internal controls to ensure that we adequately
evaluate our contracts under the five-step model and accurately restate our prior-period operating results under ASU 2014-09.
|
The foregoing expectations are subject
to change as we complete our evaluation and implementation processes.
The Company has considered
all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material
impact on its consolidated financial statements.
NOTE 2. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30, 2017
and 2016:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Royalties and commissions
|
|
$
|
1,709
|
|
|
$
|
845
|
|
Payroll and related expenses
|
|
|
813
|
|
|
|
609
|
|
Professional fees and consulting
|
|
|
294
|
|
|
|
346
|
|
Other
|
|
|
705
|
|
|
|
519
|
|
Total
|
|
$
|
3,521
|
|
|
$
|
2,319
|
|
NOTE 3. 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 2022.
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 $1.0 million, $1.1 million and $1.0 million for fiscal years 2017, 2016 and 2015 respectively.
At September 30, 2017 and 2016, deferred rent totaled $0.3 million and $0.4 million, respectively, which is
included
under the caption “
Other long-term liabilities
” in
the Company’s consolidated balance sheets, for the year ended September 30, 2017
and 2016. Certain of the Company's
facility leases include options to renew.
As of September 30, 2017,
future minimum rental commitments under non-cancelable operating leases are as follows (in thousands):
Years Ending September 30,
|
|
|
|
2018
|
|
$
|
811
|
|
2019
|
|
|
673
|
|
2020
|
|
|
575
|
|
2021
|
|
|
576
|
|
2022
|
|
|
586
|
|
Thereafter
|
|
|
146
|
|
Total future minimum lease payments
|
|
$
|
3,367
|
|
Royalties
Royalty expense included
in cost of software licenses was $0.6 million, $0.7 million and $0.6 million for the years ended September 30, 2017, 2016 and 2015,
respectively. Minimum royalty obligations were insignificant for fiscal years 2017, 2016 and 2015.
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 4. INCOME TAXES
Loss from operations before
income taxes consists of the following for the years ended September 30:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(2,569
|
)
|
|
$
|
(11,227
|
)
|
|
$
|
(45,812
|
)
|
Foreign
|
|
|
(1,442
|
)
|
|
|
(1,932
|
)
|
|
|
(6,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,011
|
)
|
|
$
|
(13,159
|
)
|
|
$
|
(52,511
|
)
|
The (provision) benefit
for income taxes consisted of the following for the years ended September 30:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
66
|
|
|
$
|
53
|
|
State
|
|
|
(9
|
)
|
|
|
12
|
|
|
|
4
|
|
Foreign
|
|
|
27
|
|
|
|
16
|
|
|
|
-
|
|
|
|
|
18
|
|
|
|
94
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,968
|
|
|
|
(4,766
|
)
|
|
|
(5,975
|
)
|
State
|
|
|
55
|
|
|
|
(397
|
)
|
|
|
(853
|
)
|
Foreign
|
|
|
(238
|
)
|
|
|
(861
|
)
|
|
|
3,221
|
|
Change in valuation allowance
|
|
|
(1,785
|
)
|
|
|
4,457
|
|
|
|
6,274
|
|
|
|
|
-
|
|
|
|
(1,567
|
)
|
|
|
2,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (provision) benefit
|
|
$
|
18
|
|
|
$
|
(1,473
|
)
|
|
$
|
2,724
|
|
At September 30, 2017,
the Company had U.S. federal tax loss carryforwards of approximately $53.4 million, expiring at various dates through 2037, including
approximately $0.2 million resulting from an acquisition during 2004 which are subject to additional annual limitations as a result
of the changes in ownership, and had approximately $28.1 million in state tax loss carryforwards, which also expire at various
dates through 2037. Included in the Federal and state net operating loss carryforwards are approximately $8.2 million of tax deductions
from share based compensation, which will be recorded as additional paid-in capital when realized. These loss carryforwards are
available to reduce future federal, state and foreign taxable income but are subject to review and possible adjustment by the appropriate
taxing authorities. The loss carryforwards, which may be utilized in any future period, may be subject to limitations based upon
changes in the ownership of the Company’s stock. An alternative minimum tax credit of approximately $7,000 is available to
offset future regular federal taxes. Federal research and development credits of approximately $1.1 million expire beginning in
2021. State credits of approximately $0.7 million expire at various years through 2031. In addition, the Company has the following
net operating loss carryforwards: U.K. losses of approximately $13.9 million with no expiration date, Australia losses of approximately
$3.5 million with no expiration date, Germany losses of approximately $2.3 million with no expiration date, Singapore losses of
approximately $2.6 million with no expiration date, and Sweden losses of approximately $12.2 million with no expiration date.
The components of
the Company’s net deferred tax assets are as follows at September 30:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
(405
|
)
|
|
$
|
(296
|
)
|
Acquired intangibles
|
|
|
(533
|
)
|
|
|
(608
|
)
|
|
|
|
(938
|
)
|
|
|
(904
|
)
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
24,902
|
|
|
|
23,134
|
|
Research and development credits
|
|
|
1,546
|
|
|
|
1,316
|
|
Alternative minimum tax credits
|
|
|
7
|
|
|
|
7
|
|
Accounts and notes receivable reserves
|
|
|
24
|
|
|
|
18
|
|
Depreciation and amortization
|
|
|
2,569
|
|
|
|
2,709
|
|
Deferred rent
|
|
|
114
|
|
|
|
138
|
|
Other
|
|
|
284
|
|
|
|
306
|
|
|
|
|
29,446
|
|
|
|
27,628
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28,508
|
|
|
|
26,724
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(28,508
|
)
|
|
|
(26,724
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance
relates to the Company’s U.S. and foreign net operating losses and other deferred tax assets and is recorded based upon the
uncertainty surrounding their realizability, as these assets can only be realized via profitable operations in the respective tax
jurisdictions. The Company records a deferred tax asset or liability based on the difference between the financial statement and
tax basis of assets and liabilities, as measured by enacted tax rates assumed to be in effect when these differences reverse. In
evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative
evidence including its past operating results, the existence of cumulative income in the most recent fiscal years, changes in the
business in which the Company operates and its forecast of future taxable income. In determining future taxable income, the Company
is responsible for assumptions utilized including the amount of federal, state and international pre-tax operating income, the
reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.
During the year ended
September 30, 2016, the Company reassessed its valuation allowance assertion with regards to Datawatch AB, the Company’s
subsidiary located in Sweden. The Company analyzed forecasted profits, carryback potential, tax planning strategies, and the reversal
of existing taxable temporary differences of the same type in the same period. Factors the Company considered were as follows:
|
·
|
History of net operating losses in Sweden;
|
|
·
|
The Company’s revised forecast indicates that it's Sweden subsidiary will not achieve profitability
with certainty in the foreseeable future;
|
|
·
|
Net operating losses have no expiration period;
|
|
·
|
Sweden has no carryback potential;
|
|
·
|
Sweden has no tax planning strategies available to recognize its deferred tax assets; and
|
|
·
|
Reversal temporary differences in Sweden will not allow the company to utilize its existing deferred
tax assets.
|
Although the Swedish
subsidiary has no expiration on its net operating loss carryovers, the negative evidence noted above outweighs this positive evidence.
Accordingly, the Company recorded a full valuation allowance on its deferred tax assets in Sweden during the fiscal year ended
September 30, 2016.
These assumptions require significant judgment about the forecasts of future taxable income and are consistent
with the plans and estimates that the Company is using to manage the underlying business. The Company has experienced cumulative
tax losses on a three-year running basis covering the years ended September 30, 2017, 2016 and 2015. Accordingly, as of September
30, 2017, the Company determined that it is more likely than not that the deferred tax assets will not be realized in all of its
jurisdictions and a full valuation allowance has been recorded in all jurisdictions. The Company increased the allowance from
$26.7 million on September 30, 2016 to $28.5 million on September 30, 2017.
The following table reconciles
the Company’s tax provision based on its effective tax rate to its tax provision based on the federal statutory rate of 34%
for the years ended September 30, 2017, 2016 and 2015 (in thousands):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Benefit at federal statutory rate
|
|
$
|
1,369
|
|
|
$
|
4,470
|
|
|
$
|
17,853
|
|
State, net of federal impact
|
|
|
4
|
|
|
|
264
|
|
|
|
579
|
|
Foreign income taxes
|
|
|
115
|
|
|
|
204
|
|
|
|
(555
|
)
|
Valuation allowance increase
|
|
|
(1,785
|
)
|
|
|
(6,385
|
)
|
|
|
(6,164
|
)
|
Return to provision adjustments
|
|
|
421
|
|
|
|
345
|
|
|
|
(621
|
)
|
Stock-based compensation
|
|
|
(148
|
)
|
|
|
(545
|
)
|
|
|
(946
|
)
|
Change in uncertain tax positions
|
|
|
30
|
|
|
|
105
|
|
|
|
67
|
|
Goodwill and intangible asset impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,377
|
)
|
Other
|
|
|
12
|
|
|
|
69
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
$
|
18
|
|
|
$
|
(1,473
|
)
|
|
$
|
2,724
|
|
The
Company’s deferred tax assets include net operating loss carry forwards and tax credits that expire at different times through
2037 or have an unlimited carry forward. 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. 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 all jurisdictions at September 30, 2017.
Provision for
Uncertain Tax Positions
The Company applies
the accounting requirements for uncertain tax positions which provide a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. In accordance
with these requirements, the Company first determines whether a tax authority would “more likely than not” sustain
its tax position if it were to audit the position with full knowledge of all the relevant facts and other information. For those
tax positions that meet this threshold, the Company measures the amount of tax benefit based on the largest amount of tax benefit
that the Company has a greater than 50% chance of realizing in a final settlement with the relevant authority. Those tax positions
failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not
standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations.
At September 30, 2016,
the Company had a cumulative tax liability of $0.2 million related to Federal and foreign tax exposure that could result in cash
payments. The Company decreased the tax liability by $30,000 during the fiscal year ended September 30, 2017. The decrease related
to the statute of limitations expiring on foreign uncertain tax positions. 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 has not accrued interest
or penalties associated with this liability for the fiscal year ended September 30, 2017.
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 fiscal year ended September 30, 2017 was
as follows (in thousands):
Balance at September 30, 2015
|
|
$
|
269
|
|
Reductions for prior year tax positions
|
|
|
(114
|
)
|
Balance at September 30, 2016
|
|
|
155
|
|
Reductions for prior year tax positions
|
|
|
(30
|
)
|
Balance at September 30, 2017
|
|
$
|
125
|
|
In the normal course of
business, the Company is subject to examination by taxing authorities throughout the world, including such jurisdictions as Sweden,
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, 2014 through September 30, 2016 are generally still open to examination in the jurisdictions listed above. During the year
ended September 30, 2017, the Company's Singapore tax returns for the fiscal tax year's ended September 30, 2013 through September
30, 2016 were audited by the Inland Revenue Authority of Singapore. The audit was completed during the fourth quarter ended September
30, 2017 and resulted in the reduction of NOL carryover of approximately $0.3 million. The Company has reduced its NOL deferred
tax asset and corresponding valuation allowance in Singapore to reflect the changes from the audit. During the fiscal year ended
September 30, 2017, the Swedish tax authorities began an audit of the Company’s subsidiary in Sweden. The Swedish tax authorities
are auditing the fiscal years ended September 30, 2013 through September 30, 2015. The Company does not anticipate material adjustments
as a result of this audit.
NOTE 5. SHARE-BASED COMPENSATION
The Company provides its
employees, officers, consultants and directors with stock options, restricted stock units (“RSUs”) and other stock
rights for common stock of the Company on a discretionary basis. All option and RSU grants are subject to the terms and conditions
determined by the Compensation and Stock Committee of the Board of Directors (the “Committee”), and generally vest
over a three-year period and expire either seven or ten years from the date of grant.
On January 20, 2006, the
Company established the Third Amended and Restated Datawatch Corporation 2006 Equity Compensation and Incentive Plan (the “2006
Plan”), which provides for the granting of both incentive stock options and non-qualified options, the award of Company common
stock and opportunities to make direct purchases of Company common stock, as determined by the Committee. Options pursuant to this
plan were available to be granted through April 26, 2011 and vest as specified by the Committee.
On April 26, 2011, the
Company established the Datawatch Corporation 2011 Equity Compensation and Incentive Plan (the “2011 Plan”), which
provides for the granting of both incentive stock options and non-qualified options, the award of restricted stock, RSUs, and any
other equity-based interests (collectively, “Stock Rights”), as determined by the Committee. Options pursuant to this
plan may be granted through April 25, 2021 and shall vest as specified by the committee.
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, which amended 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.
On April 18, 2017, the
stockholders of the Company approved the adoption of the Company’s Third Amended and Restated 2011 Equity Compensation and
Incentive Plan (the “Amended 2011 Plan”), which amended the previous Second Amended and Restated 2011 Equity Compensation
and Incentive Plan to increase the shares authorized for issuance under such plan by 1,000,000 shares to 3,275,392 shares. At September
30, 2017, 623,437 shares were available for future issuance under the 2011 Plan.
Under the 2006 Plan
and 2011 Plan, stock options are granted at exercise prices not less than the fair market value of the underlying common stock
at the date of grant. All of the Company’s share-based awards are accounted for as equity instruments and there have
been no liability awards granted. Share-based compensation expense for share-based payment awards, issued to employees and directors,
is measured based on the grant-date fair value of the award and recognized on a straight-line basis over the requisite period of
the award. Share-based compensation expense for share-based payment awards, issued to non-employees, is revalued each fiscal quarter
based on the current fair value of the award and recognized on over the requisite period of the award.
All awards granted during
the year ended September 30, 2017 were granted under the 2011 Plan.
Stock Options
The Company estimates
the fair value of each share-based award (except RSUs, 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. No options were granted by the Company in the fiscal years 2017, 2016 and 2015. The
total intrinsic value of options exercised during the years ended September 30, 2017, 2016 and 2015 was $0.7 million, $15,000 and
$0.1 million, respectively. Total cash received from option exercises during the years ended September 30, 2017, 2016 and 2015
was $0.4 million, $0.1 million and $0.1 million, respectively. There was no tax benefit realized from stock option exercised during
the years ended September 30, 2017, 2016 and 2015. As of September 30, 2017, there was no unrecognized compensation cost related
to non-vested stock option arrangements.
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 hisorical 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
rate is higher than estimated.
The following table is
a summary of combined stock option activity under the 2006 Plan and the 2011 Plan:
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Number of
Options
|
|
|
Price
Per Share
|
|
|
Life
(In years)
|
|
|
Value
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2014
|
|
|
320,500
|
|
|
$
|
5.97
|
|
|
|
3.74
|
|
|
$
|
1,572
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(18,000
|
)
|
|
|
2.91
|
|
|
|
0.89
|
|
|
|
71
|
|
Outstanding, September 30, 2015
|
|
|
302,500
|
|
|
$
|
6.15
|
|
|
|
2.86
|
|
|
$
|
446
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Forfeited
|
|
|
(5,000
|
)
|
|
|
3.61
|
|
|
|
-
|
|
|
|
7
|
|
Exercised
|
|
|
(22,500
|
)
|
|
|
4.73
|
|
|
|
1.00
|
|
|
|
15
|
|
Outstanding, September 30, 2016
|
|
|
275,000
|
|
|
$
|
6.31
|
|
|
|
5.01
|
|
|
$
|
715
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(100,000
|
)
|
|
|
4.22
|
|
|
|
-
|
|
|
|
688
|
|
Outstanding, September 30, 2017
|
|
|
175,000
|
|
|
$
|
7.51
|
|
|
|
1.31
|
|
|
$
|
809
|
|
Exercisable, September 30, 2017
|
|
|
175,000
|
|
|
$
|
7.51
|
|
|
|
1.31
|
|
|
$
|
809
|
|
Unvested awards expected to vest, September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The following table presents
weighted-average price and life information regarding options outstanding and exercisable at September 30, 2017:
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Prices
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.46
|
|
|
|
100,000
|
|
|
|
0.37
|
|
|
$
|
3.46
|
|
|
|
100,000
|
|
|
$
|
3.46
|
|
$
|
12.92
|
|
|
|
75,000
|
|
|
|
2.56
|
|
|
$
|
12.92
|
|
|
|
75,000
|
|
|
|
12.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
|
1.31
|
|
|
$
|
7.51
|
|
|
|
175,000
|
|
|
$
|
7.51
|
|
Restricted Stock Units
The Company periodically
grants awards of restricted stock units to its non-employee directors 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 September 30, 2017 was 928,066. Most RSUs vest at the rate
of 33.33% on each of the first through third anniversaries of the grant date.
The fair value related
to the RSUs was calculated based primarily on the closing 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 fiscal years 2017, 2016 and
2015 were $4.6 million (or $7.17 weighted-average fair value per share), $2.7 million (or $5.36 weighted-average fair value per
share) and $2.0 million (or $7.59 weighted-average fair value per share), respectively. The Company recorded compensation expense
related to RSUs of $2.2 million, $2.7 million and $4.5 million during the years ended September 30, 2017, 2016 and 2015, respectively.
These amounts are included in the total share-based compensation expense disclosed above. As of September 30, 2017, there was $4.9
million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted-average period
of 2.26 years.
The following table presents
nonvested RSU information for the fiscal years ended September 30, 2017, 2016 and 2015
|
|
Number of
|
|
|
|
RSUs
|
|
|
|
Nonvested
|
|
|
|
|
|
Nonvested, September 30, 2015
|
|
|
569,564
|
|
Granted
|
|
|
506,800
|
|
Canceled/Forfeited
|
|
|
(191,364
|
)
|
Vested
|
|
|
(275,435
|
)
|
|
|
|
|
|
Nonvested, September 30, 2016
|
|
|
609,565
|
|
Granted
|
|
|
644,250
|
|
Canceled/Forfeited
|
|
|
(91,077
|
)
|
Vested
|
|
|
(234,672
|
)
|
Nonvested, September 30, 2017
|
|
|
928,066
|
|
NOTE 6. IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the
excess of the purchase price over the fair value of identifiable net assets of acquired businesses. Indefinite-lived intangibles
are intangible assets whose useful lives are indefinite in that their lives extend beyond the foreseeable horizon – that
is there is no foreseeable limit on the period of time over which they are expected to contribute to the cash flows of the reporting
entity. The Company accounts for these items in accordance with Accounting Standards Codification (“ASC”) 350
Intangibles
– Goodwill and Other
, which requires that i
mpairment testing
for goodwill is performed at least annually at the reporting unit level. A reporting unit is an operating segment or one level
below an operating segment (also known as a component). The Company has determined that it is comprised of only one reporting unit.
The Company performs its annual impairment test as of July 31st. Goodwill is also tested for impairment between annual tests if
an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
value.
Examples of these events or circumstances include:
|
·
|
A significant adverse long-term outlook;
|
|
·
|
Unanticipated competition or the introduction of a disruptive technology;
|
|
·
|
Failure of an anticipated product or product line;
|
|
·
|
The testing for recoverability under the ASC 360-10
Impairment or Disposal of Long-Lived Assets
of a significant asset group;
|
|
·
|
A loss of key personnel; and
|
|
·
|
An expectation that a significant portion of the Company will be sold or otherwise disposed of.
|
The impairment test for
goodwill uses a two-step approach. Step one compares the fair value of the reporting unit to its carrying value including goodwill.
If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares
the carrying value of the reporting unit's goodwill to its implied value (i.e., the fair value of the reporting unit less the fair
value of the unit's assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds
its implied value, the excess is recorded as an impairment.
There were no impairment
charges recognized during the fiscal years 2017 and 2016. During the first quarter of fiscal 2015, the Company identified several
events, that when combined, were determined to require an interim impairment test. These events consisted of a material decrease
in revenue compared to prior year and compared to the prior quarter which resulted in a decision to pre-release earnings information;
necessary operational changes within the Sales Organization which drove a shift in our sales approach; and a sustained decrease
in share price.
Under Step 1 of the impairment
test the Company determined fair value based on discounted cash flows using an income approach with the multi-period excess earnings
method which estimates the fair value of the asset by discounting the future projected excess earnings associated with the asset
to present value as of the valuation date. Based on the analysis, it was determined that the carrying value of the Company including
goodwill exceeded the fair value, requiring the Company to perform Step 2 of the goodwill impairment test to measure the amount
of impairment loss, if any.
The Company then performed
Step 2 of the impairment test, noting fair value of the long-lived assets (other than goodwill), of $3.0 million, was less than
the carrying amount of those assets and, as a result, recorded a non-cash, pre-tax impairment charge of $10.3 million during the
first fiscal quarter of 2015. The Company then determined the implied value of goodwill was $6.7 million, which was less than its
carrying value and, as a result, the Company recognized a non-cash, pre-tax charge of $21.7 million during the first fiscal quarter
of 2015. These impairment charges are included under the caption "Impairment of goodwill and long-lived assets" in our
consolidated statements of operations.
The valuation methods
utilized to value the long-lived assets and the goodwill discussed above are based on the amount and timing of expected future
cash flows and growth rates and include a determination of an appropriate discount rate. The cash flows utilized in the discounted
cash flow analyses were based on financial forecasts developed internally by management. Estimating future cash flows requires
significant judgment and projections may vary from the cash flows eventually realized. Determining the fair value using a discounted
cash flow method requires significant estimates and assumptions, including market conditions, discount rates, and long-term projections
of cash flows. The Company’s estimates are based upon historical experience, current market trends, projected future volumes
and other information. The Company believes that the estimates and assumptions underlying the valuation methodology are reasonable;
however, different estimates and assumptions could result in a different estimate of fair value. In estimating future cash flows,
the Company relies on internally generated projections for a defined time period for revenue and operating profits, including capital
expenditures, changes in net working capital, and adjustments for non-cash items to arrive at the free cash flow available to invested
capital. Where applicable, a terminal value utilizing a constant growth rate of cash flows is used to calculate a terminal value
after the explicit projection period. The future projected cash flows for the discrete projection period and the terminal value
are discounted at a risk adjusted discount rate to determine the fair value of the reporting unit.
The following table presents the changes in the
carrying amount of our goodwill (in thousands):
Balance at September 30, 2014
|
|
$
|
28,383
|
|
Goodwill impairment
|
|
|
(21,698
|
)
|
Balance at September 30, 2015
|
|
|
6,685
|
|
Goodwill impairment
|
|
|
-
|
|
Balance at September 30, 2016
|
|
|
6,685
|
|
Goodwill impairment
|
|
|
-
|
|
Balance at September 30, 2017
|
|
$
|
6,685
|
|
NOTE 7. RESTRUCTURING CHARGES
During fiscal year 2015,
the Company undertook restructuring efforts to (i) lower expenses by reducing the investment in legacy solutions and realigning
international operations, primarily impacting engineering and product development, and (ii) further reduce the workforce across
all functional areas of the Company in an effort to rebalance investments to match the go-to-market model. The restructuring efforts
began during the quarter ended December 31, 2014 and continued during the quarter ended March 31, 2015, when the remaining employees
impacted by the restructuring were notified. The Company recorded restructuring charges of $1.8 million during fiscal year 2015
including severance and related benefit costs related to workforce reductions. The Company completed all restructuring actions
associated with these plans during fiscal year 2015. The Company did not undertake any restructuring efforts during fiscal 2017
or 2016.
The following table presents restructuring
charges included in our consolidated statements of operations, for the year ended September 30, 2015 (in thousands):
Cost of maintenance and services
|
|
$
|
401
|
|
Sales and marketing
|
|
|
804
|
|
Engineering and product development
|
|
|
345
|
|
General and administrative
|
|
|
236
|
|
Total
|
|
$
|
1,786
|
|
NOTE 8. RETIREMENT SAVINGS PLAN
The Company has
a 401(k) retirement savings plan covering substantially all of the Company’s full-time U.S. employees. Under the provisions
of the plan, employees may contribute a portion of their compensation, subject to certain limitations. The Company, at the discretion
of the Board of Directors, may make contributions on behalf of its employees under this plan. Such contributions, if any, become
fully vested after five years of continuous service. The Company did not make any contributions to the 401(k) retirement savings
plan in fiscal 2017, 2016 or 2015.
NOTE 9. SEGMENT INFORMATION AND REVENUE
BY GEOGRAPHIC LOCATION
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):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2017
|
|
$
|
29,969
|
|
|
$
|
6,294
|
|
|
$
|
36,263
|
|
Year ended September 30, 2016
|
|
$
|
26,055
|
|
|
$
|
4,407
|
|
|
$
|
30,462
|
|
Year ended September 30, 2015
|
|
$
|
23,793
|
|
|
$
|
6,428
|
|
|
$
|
30,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2017
|
|
$
|
(2,280
|
)
|
|
$
|
(2,490
|
)
|
|
$
|
(4,770
|
)
|
Year ended September 30, 2016
|
|
$
|
(9,380
|
)
|
|
$
|
(3,749
|
)
|
|
$
|
(13,129
|
)
|
Year ended September 30, 2015
|
|
$
|
(45,816
|
)
|
|
$
|
(6,626
|
)
|
|
$
|
(52,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2017
|
|
$
|
9,812
|
|
|
$
|
47
|
|
|
$
|
9,859
|
|
At September 30, 2016
|
|
$
|
11,126
|
|
|
$
|
74
|
|
|
$
|
11,200
|
|
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 consolidated financial statements
were available to be issued noting none that require recognition or disclosure.
NOTE 11. QUARTERLY RESULTS (UNAUDITED)
Supplementary Information:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license revenue
|
|
$
|
4,357
|
|
|
$
|
4,889
|
|
|
$
|
4,912
|
|
|
$
|
5,893
|
|
Maintenance revenue
|
|
|
3,555
|
|
|
|
3,560
|
|
|
|
3,729
|
|
|
|
3,629
|
|
Professional services revenue
|
|
|
321
|
|
|
|
311
|
|
|
|
425
|
|
|
|
682
|
|
Cost of software licenses
|
|
|
703
|
|
|
|
733
|
|
|
|
231
|
|
|
|
228
|
|
Cost of maintenance and services
|
|
|
532
|
|
|
|
545
|
|
|
|
617
|
|
|
|
655
|
|
Expenses
|
|
|
9,165
|
|
|
|
8,637
|
|
|
|
8,761
|
|
|
|
10,226
|
|
Loss from operations
|
|
|
(2,167
|
)
|
|
|
(1,155
|
)
|
|
|
(543
|
)
|
|
|
(905
|
)
|
Net loss
|
|
|
(2,231
|
)
|
|
|
(449
|
)
|
|
|
(499
|
)
|
|
|
(814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic
|
|
$
|
(0.19
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
Net loss per share – diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license revenue
|
|
$
|
3,147
|
|
|
$
|
3,645
|
|
|
$
|
3,669
|
|
|
$
|
4,758
|
|
Maintenance revenue
|
|
|
3,602
|
|
|
|
3,480
|
|
|
|
3,335
|
|
|
|
3,498
|
|
Professional services revenue
|
|
|
306
|
|
|
|
299
|
|
|
|
372
|
|
|
|
351
|
|
Cost of software licenses
|
|
|
689
|
|
|
|
499
|
|
|
|
879
|
|
|
|
761
|
|
Cost of maintenance and services
|
|
|
598
|
|
|
|
610
|
|
|
|
499
|
|
|
|
470
|
|
Expenses
|
|
|
9,809
|
|
|
|
9,792
|
|
|
|
9,562
|
|
|
|
9,423
|
|
Loss from operations
|
|
|
(4,041
|
)
|
|
|
(3,477
|
)
|
|
|
(3,564
|
)
|
|
|
(2,047
|
)
|
Net loss
|
|
|
(3,964
|
)
|
|
|
(3,362
|
)
|
|
|
(5,374
|
)
|
|
|
(1,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic
|
|
$
|
(0.34
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.16
|
)
|
Net loss per share – diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license revenue
|
|
$
|
3,175
|
|
|
$
|
3,911
|
|
|
$
|
4,117
|
|
|
$
|
4,101
|
|
Maintenance revenue
|
|
|
3,409
|
|
|
|
3,296
|
|
|
|
3,311
|
|
|
|
3,513
|
|
Professional services revenue
|
|
|
377
|
|
|
|
255
|
|
|
|
348
|
|
|
|
408
|
|
Cost of software licenses
|
|
|
861
|
|
|
|
721
|
|
|
|
697
|
|
|
|
723
|
|
Cost of maintenance and services
|
|
|
892
|
|
|
|
1,084
|
|
|
|
557
|
|
|
|
589
|
|
Expenses
|
|
|
44,661
|
|
|
|
11,423
|
|
|
|
10,705
|
|
|
|
9,750
|
|
Loss from operations
|
|
|
(39,453
|
)
|
|
|
(5,766
|
)
|
|
|
(4,183
|
)
|
|
|
(3,040
|
)
|
Net loss
|
|
|
(36,876
|
)
|
|
|
(5,809
|
)
|
|
|
(4,123
|
)
|
|
|
(2,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic
|
|
$
|
(3.31
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.26
|
)
|
Net loss per share – diluted
|
|
$
|
(3.31
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.26
|
)
|