WWW.EXFILE.COM, INC. -- 888-775-4789 -- DATAWATCH CORPORATION -- FORM 10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
ý
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the Quarterly Period Ended December 31, 2008
OR
|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD
FROM
TO
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Commission
File Number: 000-19960
DATAWATCH
CORPORATION
(Exact name of registrant as
specified in its charter)
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DELAWARE
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02-0405716
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer
Identification
No.)
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271
MILL ROAD
QUORUM
OFFICE PARK
CHELMSFORD,
MASSACHUSETTS 01824
(978)
441-2200
(Address
and telephone number of principal executive office)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
ý No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer o
|
Accelerated
filer o
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Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
Yes
o No ý
The
number of shares of the registrant’s common stock, $.01 par value, outstanding
as of February 11, 2009 was 5,914,358.
DATAWATCH
CORPORATION
QUARTERLY
REPORT ON FORM 10-Q
For
the Quarterly Period Ended December 31, 2008
TABLE
OF CONTENTS
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Page
#
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3
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4
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Three Months Ended December 31, 2008
and 2007
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5
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6
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16
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26
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27
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28
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28
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28
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29
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30
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DATAWATCH
CORPORATION
(In
thousands, except share and per share amounts)
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December
31,
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September
30,
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2008
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2008
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ASSETS
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CURRENT
ASSETS:
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Cash
and equivalents
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$ |
4,920 |
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$ |
4,885 |
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Accounts
receivable, net
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3,212 |
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3,287 |
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Inventories
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44 |
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57 |
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Prepaid
expenses
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450 |
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361 |
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Total
current assets
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8,626 |
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8,590 |
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Property
and equipment, net
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656 |
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737 |
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Goodwill
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6,116 |
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6,116 |
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Other
intangible assets, net
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2,636 |
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2,577 |
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Restricted
cash
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125 |
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125 |
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Other
long-term assets
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20 |
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24 |
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$ |
18,179 |
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$ |
18,169 |
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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CURRENT
LIABILITIES:
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Accounts
payable
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$ |
695 |
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$ |
1,028 |
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Accrued
expenses
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2,140 |
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2,385 |
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Deferred
revenue
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4,456 |
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4,047 |
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Total
current liabilities
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7,291 |
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7,460 |
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LONG-TERM
LIABILITIES:
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Deferred
rent
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|
105 |
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120 |
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Deferred
revenue - long-term
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187 |
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145 |
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Deferred
tax liability
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291 |
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262 |
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Other
liabilities
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106 |
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100 |
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Total
long-term liabilities
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689 |
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627 |
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COMMITMENTS
AND CONTINGENCIES
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SHAREHOLDERS’
EQUITY:
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Common
stock, par value $.01; 20,000,000 shares authorized;
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issued,
5,928,604 shares for both periods;
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outstanding,
5,914,358 shares for both periods
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59 |
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59 |
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Additional
paid-in capital
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23,479 |
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23,421 |
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Accumulated
deficit
|
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(12,045 |
) |
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(12,430 |
) |
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Accumulated
other comprehensive loss
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(1,154 |
) |
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(828 |
) |
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10,339 |
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10,222 |
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Less
treasury stock, at cost—14,246 shares
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(140 |
) |
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(140 |
) |
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Total
shareholders’ equity
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10,199 |
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10,082 |
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$ |
18,179 |
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$ |
18,169 |
|
See
notes to condensed consolidated financial statements.
DATAWATCH
CORPORATION
(In
thousands, except per share amounts)
|
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Three
Months Ended December 31,
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2008
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2007
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REVENUE:
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Software
licenses and subscriptions
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$ |
2,840 |
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$ |
3,333 |
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Maintenance
and services
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2,362 |
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2,734 |
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Total
revenue
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5,202 |
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6,067 |
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COSTS
AND EXPENSES:
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Cost
of software licenses and subscriptions
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530 |
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572 |
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Cost
of maintenance and services
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873 |
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1,120 |
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Sales
and marketing
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1,661 |
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2,220 |
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Engineering
and product development
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713 |
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749 |
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General
and administrative
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1,166 |
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1,206 |
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Total
costs and expenses
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4,943 |
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5,867 |
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INCOME
FROM OPERATIONS
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259 |
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200 |
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Interest
income and other income (expense), net
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|
170 |
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96 |
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INCOME
BEFORE INCOME TAXES
|
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429 |
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296 |
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Provision
for income taxes
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44 |
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49 |
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NET
INCOME
|
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$ |
385 |
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$ |
247 |
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Net
income per share—Basic
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$ |
0.07 |
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$ |
0.04 |
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Net
income per share—Diluted
|
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$ |
0.06 |
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$ |
0.04 |
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Weighted-Average
Shares Outstanding—Basic
|
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5,914,358 |
|
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5,654,493 |
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Weighted-Average
Shares Outstanding—Diluted
|
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|
5,943,255 |
|
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|
5,910,091 |
|
See
notes to condensed consolidated financial statements.
DATAWATCH
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In
thousands)
|
|
|
Three
Months Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
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|
2007
|
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CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
385 |
|
|
$ |
247 |
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|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
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Depreciation
and amortization
|
|
|
222 |
|
|
|
205 |
|
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Provision
for doubtful accounts and sales returns
|
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|
61 |
|
|
|
55 |
|
|
Stock-based
compensation
|
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|
58 |
|
|
|
51 |
|
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Deferred
income taxes
|
|
|
29 |
|
|
|
29 |
|
|
Changes
in current assets and liabilities:
|
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|
|
|
|
|
|
|
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Accounts
receivable
|
|
|
(208 |
) |
|
|
138 |
|
|
Inventories
|
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|
11 |
|
|
|
(6 |
) |
|
Prepaid
expenses and other assets
|
|
|
(103 |
) |
|
|
75 |
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(457 |
) |
|
|
(445 |
) |
|
Deferred
revenue
|
|
|
769 |
|
|
|
(41 |
) |
|
Cash
provided by operating activities
|
|
|
767 |
|
|
|
308 |
|
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|
|
|
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CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment and fixtures
|
|
|
(9 |
) |
|
|
(100 |
) |
|
Purchase
of IDARS business
|
|
|
— |
|
|
|
(425 |
) |
|
Capitalized
software development costs
|
|
|
(199 |
) |
|
|
— |
|
|
Other
assets
|
|
|
1 |
|
|
|
4 |
|
|
Cash
used in investing activities
|
|
|
(207 |
) |
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
— |
|
|
|
233 |
|
|
Cash
provided by financing activities
|
|
|
— |
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS
|
|
|
(525 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS
|
|
|
35 |
|
|
|
(8 |
) |
|
CASH
AND EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
4,885 |
|
|
|
3,841 |
|
|
CASH
AND EQUIVALENTS, END OF PERIOD
|
|
$ |
4,920 |
|
|
$ |
3,833 |
|
|
|
|
|
|
|
|
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SUPPLEMENTAL
INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
— |
|
|
$ |
— |
|
|
Income
taxes paid
|
|
$ |
8 |
|
|
$ |
15 |
|
See
notes to condensed consolidated financial statements.
DATAWATCH
CORPORATION
(UNAUDITED)
Note
1 - Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of
Datawatch Corporation (the “Company”) and its wholly-owned subsidiaries and have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States of America for complete financial
statements and should be read in conjunction with the audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for
the year ended September 30, 2008 filed with the Securities and Exchange
Commission (the “SEC”). All intercompany accounts and transactions have been
eliminated.
In the
opinion of management, the accompanying condensed consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements for the fiscal year ended September 30, 2008, and include
all adjustments necessary for fair presentation of the results of the interim
periods presented. The operating results for the interim periods presented are
not necessarily indicative of the results expected for the full
year.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments, which are evaluated on an on-going basis, that affect
the amounts reported in the Company’s condensed consolidated financial
statements and accompanying notes. Management bases its estimates on historical
experience and on various other assumptions that it believes are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those
estimates and judgments. In particular, significant estimates and judgments
include those related to revenue recognition, allowance for doubtful accounts,
sales returns reserve, useful lives of property and equipment, valuation of net
deferred tax assets, valuation of goodwill and other intangible assets and
valuation of share-based awards.
Revenue
Recognition
The
Company follows the guidance as defined by the American Institute of Certified
Public Accountants (“AICPA”) Statement of Position 97-2, “Software Revenue Recognition”
(“SOP 97-2”), as amended by Statement of Position 98-9, “Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”)
in recognizing revenue on software transactions. SOP 97-2 requires that revenue
allocated to software products, specified upgrades and enhancements be
recognized upon delivery of the related product, upgrades or enhancements.
Revenue is allocated by vendor specific objective evidence (“VSOE”) of fair
value to post-contract customer support (primarily maintenance) and is
recognized ratably over the term of the support, and revenue allocated by VSOE
to service elements (primarily training and consulting) is recognized as the
services are performed. 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. 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 in accordance with
relevant sections of SOP 97-2 and (2) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements.
The
Company has two types of software product offerings: (1) Enterprise Software and
(2) Desktop and Server Software. Enterprise Software products are sold directly
to end-users and through value added resellers. The Company sells its Desktop
and Server Software products directly to end-users and through distributors and
resellers.
Sales to distributors and resellers accounted for approximately 42% and 40%, of
total sales for the three months ended December 31, 2008 and 2007, respectively.
Revenue from the sale of all software products (when separately sold) is
generally recognized at the time of shipment, provided there are no
uncertainties surrounding product acceptance, the fee is fixed or determinable,
collection is considered probable, persuasive evidence of the arrangement exists
and there are no significant obligations remaining. Both types of the Company’s
software product offerings are “off-the-shelf” as such term is defined by SOP
97-2. The Company’s software products can be installed and used by customers on
their own with little or no customization required. Multi-user licenses marketed
by the Company are sold as a right to use the number of licenses and license fee
revenue is recognized upon delivery of all software required to satisfy the
number of licenses sold. Upon delivery, the licensing fee is payable without
further delivery obligations to the Company.
Desktop
and Server Software products are generally not sold in multiple element
arrangements. Enterprise Software sales are generally multiple element
arrangements which may include software licenses, professional services and
post-contract customer support. In such multiple element arrangements, the
Company applies the residual method in determining revenue to be allocated to
the software license. In applying the residual method, the Company deducts from
the sale proceeds the VSOE of fair value of the professional services and
post-contract customer support in determining the residual fair value of the
software license. The VSOE of fair value of the services and post-contract
customer support is based on the amounts charged for these elements when sold
separately. Professional services include implementation, integration, training
and consulting services with revenue recognized as the services are performed.
These services are generally delivered on a time and materials basis, are billed
on a current basis as the work is performed, and do not involve modification or
customization of the software or any unusual acceptance clauses or terms.
Post-contract customer support 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
post-contract customer support services is deferred and recognized ratably over
the period of support (generally one year). Such deferred amounts are recorded
as part of deferred revenue in the Company’s condensed consolidated balance
sheets.
The
Company also sells 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 for an initial 90 day service period 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 of the subscription. The
customer is then invoiced every 90 days and revenue is recognized ratably over
the period of the subscription. The subscription arrangement includes software,
maintenance and unspecified future upgrades including major version upgrades.
The subscription renewal rate is the same as the initial subscription rate.
Subscriptions can be cancelled by the customer at any time by providing 90 days
prior written notice following the first year of the subscription
term.
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.
Certain software products, including desktop versions of Monarch, Monarch Data
Pump, BI Server and VorteXML sold directly to end-users, include a guarantee
under which such customers may return products within 30 days for a full refund.
Additionally, the Company provides its distributors with stock-balancing rights
and applies the guidance found in Statement of Financial Accounting Standards
(“SFAS”) No. 48, “Revenue
Recognition when Right of Return Exists.” Revenue from the sale of
software products to distributors and resellers is recognized at the time of
shipment providing all other criteria for revenue recognition 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 allow for reasonable
estimates of future returns. Among other things, estimates of potential future
returns are made based on the inventory levels at the various distributors and
resellers, which the Company monitors frequently.
Stock-Based
Compensation
The
Company recognizes stock-based compensation expense in accordance with SFAS No.
123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment.” SFAS
123(R) requires all share-based awards, including grants of employee stock
options, to be recognized in the financial statements based on their fair
value.
Under the
provisions of SFAS No. 123(R), 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 stock-based compensation disclosure in Note 4 to
the Company’s condensed consolidated financial statements.
Concentration
of Credit Risks and Major Customers
The
Company sells its products and services to U.S. and non-U.S. dealers and other
software distributors, as well as to end users, under customary credit terms.
One customer, Ingram Micro, Inc., individually accounted for 23% and 19% of
total revenue for the three months ended December 31, 2008 and 2007,
respectively. Ingram Micro, Inc. accounted for 20% and 26% of outstanding gross
trade receivables as of December 31, 2008 and September 30, 2008, respectively.
The Company sells to Ingram Micro, Inc. under a distribution agreement which
automatically renews for successive one-year terms unless terminated. Other than
Ingram Micro, Inc., no other customer constitutes a significant portion (more
than 10%) of sales or accounts receivable. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral before
extending credit. Allowances are provided for anticipated doubtful accounts and
sales returns based on management’s review of receivables, inventory and
historical trends.
Capitalized
Software Development Costs
The
Company capitalizes certain software development costs as well as purchased
software upon achieving technological feasibility of the related products.
Software development costs incurred and software purchased prior to achieving
technological feasibility are charged to research and development expense as
incurred. Commencing upon initial product release, capitalized costs
are amortized to cost of software licenses using the straight-line method over
the estimated life (which approximates the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross revenues for
that product), which is generally 24 to 36 months. The net amount of capitalized
software development costs and purchased software was approximately $807,000 and
$664,000 at December 31, 2008 and September 30, 2008, respectively. During the
three months ended December 31, 2008, the Company capitalized approximately
$199,000 of software development costs related to new products in development.
No amounts were capitalized during the three months ended December 31,
2007.
Goodwill
and Other Intangible Assets
Other
intangible assets consist of internally developed software costs, acquired
technology, patents, customer lists, trademarks and non-compete agreements
acquired through business combinations. The values allocated to the majority of
these intangible assets are amortized using the
straight-line method over the estimated useful life of the related asset and are
recorded in cost of software licenses and subscriptions. The values allocated to
customer relationships and non-compete agreements are amortized using the
straight-line method over the estimated useful life of the related asset and are
recorded in sales and marketing expenses. 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.
Goodwill
and one indefinite lived trademark are not subject to amortization and are
tested annually, on May 31st, for
impairment or more frequently if events and circumstances indicate that the
asset might be impaired. Factors the Company believes could trigger interim
impairment reviews include, but are not limited to, significant underperformance
relative to historical or projected future operating results, significant
changes in the manner of use of the acquired assets or the strategy for the
Company’s overall business, significant negative industry or
economic
trends, a significant decline in the Company’s stock price for a sustained
period, and significant decreases in the Company’s market capitalization for a
sustained period.
The
Company performed interim tests of impairment for its goodwill and its
indefinite lived trademark at September 30, 2008 and again at December 31, 2008
in accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets” due to uncertainties surrounding the global economy and the
volatility in the Company’s stock price. The Company tests goodwill for
impairment using a two-step approach. The first step is to compare the fair
value of the reporting unit to its carrying amount, including goodwill. If the
fair value of the reporting unit is greater than its carrying amount, goodwill
is not considered impaired, but if the fair value of the reporting unit is less
than its carrying amount, the amount of the impairment loss, if any, must be
measured. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset’s fair value. The Company estimates its fair value
using the best information available, including market information and
discounted cash flow projections also referred to as the income approach. The
income approach uses future estimated operating results and cash flows that are
discounted using a weighted-average cost of capital that reflects current market
conditions. The projection uses management’s best estimates of economic and
market conditions over the projected period, including growth rates in sales,
costs, estimates of future expected changes in operating margins and cash
expenditures. Other significant estimates and assumptions include terminal value
growth rates, future estimates of capital expenditures and changes in future
working capital requirements. The Company validates its estimates of fair value
under the income approach by comparing the values to fair value estimates using
a market approach. A market approach estimates fair value by applying cash flow
multiples to the reporting unit’s operating performance. The multiples are
derived from comparable publicly traded companies with similar operating and
investment characteristics of the reporting units. The results of the interim
valuation analyses indicated that the Company’s estimated fair value exceeded
its book value at each assessment date and that there was no impairment of the
Company’s goodwill at September 30, 2008 or December 31, 2008.
The
Company tests its indefinite lived intangible asset for impairment by comparing
the fair value to the net book value of the asset. The Company estimates the
fair value of its trademark using the relief-from-royalty method, which requires
assumptions related to projected revenues and assumed royalty rates that could
be payable if it did not own the trademark, as well as an estimated discount
rate. The results of the interim valuation analyses indicated that there was no
impairment of the Company’s indefinite lived trademark at September 30, 2008 or
December 31, 2008.
The
Company continues to be profitable, generates cash flow from operations, is
debt-free and has a significant cash balance, however, the Company’s stock price
has experienced significant declines since September 30, 2008 and is highly
volatile. If the Company’s stock price does not improve or if other factors
indicate that it is more likely than not that impairment may exist, the Company
could determine that additional future interim impairment tests are required,
which could result in a non-cash impairment charge.
Income
Taxes
Deferred
income taxes are provided for the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes and operating loss carryforwards
and credits. Valuation allowances are recorded to reduce the net deferred tax
assets to amounts the Company believes are more likely than not to be
realized.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board issued Statement No.
157, “Fair Value
Measurements” (“SFAS 157”), which establishes a framework for
measuring fair value and expands disclosures about the use of fair value
measurements and liabilities in interim and annual reporting periods subsequent
to initial recognition. Prior to SFAS 157, which emphasizes that fair
value is a market-based measurement and not an entity-specific measurement,
there were different definitions of fair value and limited guidance for applying
those definitions in generally accepted accounting principles. SFAS 157 is
effective for the Company on a prospective basis for the reporting period
beginning October 1, 2008. In February 2008, the FASB delayed the effective
date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial
assets and nonfinancial
liabilities
until fiscal years beginning after November 15, 2008. The Company adopted SFAS
157 for financial assets and liabilities on October 1, 2008, which did not have
a material impact on the Company’s financial
position or results of operations. The Company does not expect that the adoption
of SFAS 157 related to nonfinancial assets and liabilities will have a material
impact on its financial position or results of operations.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. This Statement is effective for the Company beginning October 1,
2008. The Company did not elect to measure any eligible financial assets and
liabilities at fair value and therefore adoption of this Statement did not have
an impact on the Company’s consolidated financial statements.
In
December 2007, the FASB issued Statement No. 141(R), “Business Combinations”
(“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired, as well
as the treatment of acquisition-related costs. The Statement also establishes
disclosure requirements which will enable users to evaluate the nature and
financial effects of the business combination. SFAS 141(R) is effective for
fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) will
have an impact on accounting for business combinations once adopted, but the
effect is dependent upon acquisitions after that time.
In
December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
does not believe this Statement will have any impact on its consolidated
financial statements upon adoption.
In March
2008, the FASB issued Statement No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133” (“SFAS 161”). SFAS 161 amends and expands the disclosure
requirements of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments and disclosures about credit-risk-related contingent
features in derivative agreements. SFAS 161 also amends SFAS No. 107, “Disclosures About Fair Value of
Financial Instruments” (“SFAS 107”), to clarify that derivative
instruments are subject to SFAS 107’s concentration-of-credit risk disclosures.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Early adoption is
permitted, and entities are encouraged, but not required, to provide comparative
disclosures for earlier periods. The adoption of SFAS 161 will not affect the
Company’s consolidated financial statements or financial condition, but may
require additional disclosures if the Company enters into derivative and hedging
activities.
Note
2 – Other Intangible Assets, Net
Other
intangible assets, net, were comprised of the following as of December 31, 2008
and September 30, 2008:
|
|
|
Weighted
|
|
December
31, 2008
|
|
September
30, 2008
|
|
|
|
Average
|
|
Gross
|
|
|
|
Net
|
|
Gross
|
|
|
|
Net
|
|
Identified
Intangible
|
|
Useful
Life
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Asset
|
|
in
Years
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
software
|
|
2
|
|
$2,027
|
|
$1,415
|
|
$612
|
|
$1,828
|
|
$1,384
|
|
$444
|
|
Purchased
software
|
|
5
|
|
700
|
|
505
|
|
195
|
|
700
|
|
480
|
|
220
|
|
Patents
|
|
20
|
|
160
|
|
34
|
|
126
|
|
160
|
|
33
|
|
127
|
|
Customer
lists
|
|
10
|
|
1,790
|
|
573
|
|
1,217
|
|
1,790
|
|
531
|
|
1,259
|
|
Non-compete
agreements
|
|
4
|
|
640
|
|
447
|
|
193
|
|
640
|
|
409
|
|
231
|
|
Trademark
|
|
2
|
|
21
|
|
13
|
|
8
|
|
21
|
|
10
|
|
11
|
|
Trademark
|
|
indefinite
|
|
285
|
|
—
|
|
285
|
|
285
|
|
—
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$5,623
|
|
$2,987
|
|
$2,636
|
|
$5,424
|
|
$2,847
|
|
$2,577
|
For the
three months ended December 31, 2008 and 2007, amortization expense related to
intangible assets was $140,000 and $124,000, respectively.
The
estimated future amortization expense related to other intangible assets as of
December 31, 2008 is as follows:
|
Fiscal
Years Ended September 30,
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Remainder
of fiscal 2009
|
|
$ |
774 |
|
|
2010
|
|
|
561 |
|
|
2011
|
|
|
195 |
|
|
2012
|
|
|
174 |
|
|
2013
|
|
|
174 |
|
|
2014
|
|
|
174 |
|
|
Thereafter
|
|
|
299 |
|
|
|
|
|
|
|
|
Total
estimated future amortization expense
|
|
$ |
2,351 |
|
Note
3 – Income Taxes
SFAS No.
109, “Accounting for Income
Taxes,” requires recognition of deferred tax liabilities and deferred tax
assets (and related valuation allowances, if necessary) for the excess of
tax-deductible goodwill over goodwill for financial reporting purposes. The tax
benefit for the excess tax-deductible goodwill is recognized when realized on
the tax return. During fiscal year 2006, Datawatch acquired the business assets
of IDARS that resulted in tax-deductible goodwill for which a deferred tax
expense is recognized each period with a corresponding deferred tax liability
equal to the excess of tax amortization over the amortization for financial
reporting purposes. During each of the three months ended December 31, 2008 and
2007, the Company recorded deferred tax expense of approximately $29,000.
Additionally, during the three months ended December 31, 2008 and 2007, the
Company recorded $9,000 and $14,000, respectively, related to estimated
alternative minimum taxes as well as approximately $6,000 during each of the
three months ended December 31, 2008 and 2007 related to uncertain tax positions
relative to foreign taxes.
Deferred Tax
Assets
The
Company’s deferred tax assets include net operating loss carry forwards and tax
credits that expire at different times through and until 2028. 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.
FASB Interpretation
No. 48
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement No. 109”
(“FIN 48”) on October 1, 2007. FIN 48 provides 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.
Under
FIN 48, the Company first determines whether it would “more likely than
not” sustain its tax position if it were analyzed 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, 2008, the Company had a $100,000 tax liability related to tax
exposures that could result in cash payments, of which approximately $6,000 was
recorded during the three months ended December 31, 2007. The Company increased
its tax liability by $6,000 during the three months ended December 31, 2008. The
Company also recorded additional uncertain tax positions of approximately $2,000
during the three months ended December 31, 2008 which were recorded as a
reduction of the Company’s deferred tax asset and its valuation allowance. 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. To date, the Company has not accrued any
amounts for interest and penalties associated with this liability as such
amounts have been de minimis.
As of
October 1, 2008, the Company had approximately $759,000 of total gross
unrecognized tax benefits (before consideration of any valuation allowance).
These unrecognized tax benefits represent differences between tax positions
taken by the Company in its various consolidated and separate worldwide tax
returns and the benefits recognized and measured pursuant to FIN 48. 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 three months ended December
31, 2008 was as follows:
|
|
|
|
|
|
Balance
at October 1, 2008
|
|
$
|
759
|
|
|
Additions
for prior year tax positions
|
|
8
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$
|
767
|
|
In the
normal course of business, the Company is subject to examination by taxing
authorities throughout the world, including such jurisdictions as the United
Kingdom, 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, 2005 through September 30, 2008 are generally still open to examination in
the jurisdictions listed above.
Note
4 – Shareholders’ Equity
Stock-based
compensation expense for the three months ended December 31, 2008 and 2007 was
$58,000 and $51,000, respectively, as included in the following expense
categories:
|
|
|
Three
months Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
13 |
|
|
$ |
25 |
|
|
Engineering
and product development
|
|
|
4 |
|
|
|
4 |
|
|
General
and administrative
|
|
|
41 |
|
|
|
22 |
|
|
|
|
$ |
58 |
|
|
$ |
51 |
|
The
Company’s stock compensation plans provide for the granting of restricted shares
and either incentive or nonqualified stock options to employees and non-employee
directors. Options are subject to terms and conditions determined by the
Compensation and Stock Committee of the Board of Directors, and generally vest
over a three year period beginning three months from the date of grant and
expire either seven or ten years from the date of grant.
Stock
Options
The
Company uses the Black-Scholes option-pricing model to calculate the fair value
of options. The key assumptions for this valuation method include the expected
life of the option, stock price volatility, risk-free interest rate and dividend
yield. No options were granted under the stock option plans for the three months
ended December 31, 2008. The weighted-average fair value of the options granted
under the stock option plans for the three months ended December 31, 2007 was
$3.14. No options were exercised during the three months ended December 31,
2008. The total intrinsic value of options exercised during the three months
ended December 31, 2007 was approximately $550,000. Cash received from option
exercises during the three months ended December 31, 2007 was approximately
$233,000. As of December 31, 2008, there was $262,000 of total unrecognized
compensation cost related to nonvested stock option arrangements, which is
expected to be recognized over a weighted-average period of 1.79
years.
Many of
the assumptions used in the determination of compensation expense are judgmental
and highly volatile. The table below indicates the key assumptions used in the
option valuation calculations for options granted in the three months ended
December 31, 2007:
|
|
|
2007
|
|
|
Expected
life
|
5
years
|
|
|
Expected
volatility
|
72.79%
|
|
|
Weighted-average
volatility
|
72.79%
|
|
|
Risk
free interest rate
|
4.03%
|
|
|
Dividend
yield
|
0.0%
|
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 uses an expected stock-price volatility assumption that is based on
historical volatilities of the underlying stock which are obtained from public
data sources. The risk-free interest rate is equal to the historical U.S.
Treasury zero-coupon bond rate with a remaining term equal to the expected life
of the option. The dividend yield of zero is based on the fact that the Company
has never paid cash dividends and has no present intention to pay cash
dividends. Based on the Company’s historical voluntary turnover rates, an
annualized estimated forfeiture rate of 10% has been used in calculating the
estimated cost. Additional expense will be recorded if the actual forfeiture
rate is lower than estimated, and a recovery of prior expense will be recorded
if the actual forfeiture rate is higher than estimated.
The
following table summarizes information about the Company’s stock option plans
for the three months ended December 31, 2008.
|
|
Number
of Options
Outstanding
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining Contractual Term
|
|
Aggregate
Intrinsic Value $(000)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
October 1, 2008
|
581,856
|
|
$
|
3.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
—
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2008
|
581,856
|
|
$
|
3.10
|
|
4.79
|
|
$
34
|
|
|
|
|
|
|
|
|
|
|
Vested
or expected to vest December 31, 2008
|
570,954
|
|
$
|
3.08
|
|
4.52
|
|
$
34
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2008
|
472,836
|
|
$
|
2.85
|
|
4.47
|
|
$
34
|
Restricted
Stock Units
The
Company periodically grants awards of restricted stock units (“RSU”) to each of
its non-employee Directors on a discretionary basis pursuant to its 2006 Equity
Compensation and Incentive Plan. Company employees may also receive RSUs under
this plan from time to time. Each RSU typically 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 December 31, 2008 was 27,496.
Each RSU vests at the rate of 33.33% on each of the first through third
anniversaries of the grant date with final vesting of the most recent grants
scheduled to occur in March 2011. The fair value related to the RSUs was
calculated based on the average stock price of the Company’s common stock on the
date of the grant and is being amortized evenly on a pro-rata basis over the
vesting period to general and administrative expense. There were no grants of
RSUs in the three months ended December 31, 2008 or 2007. No RSUs vested during
either the three months ended December 31, 2008 or 2007. The Company recorded
compensation expense related to RSUs of approximately $10,000 and $4,000 for the
three months ended December 31, 2008 and 2007, respectively. These amounts are
included in the total stock-based compensation expense disclosed above. As of
December 31, 2008, there was $68,000 of total unrecognized compensation cost
related to RSUs, which is expected to be recognized over a weighted average
period of 1.9 years.
Note
5 - Comprehensive Income
The
following table sets forth the reconciliation of net income to comprehensive
income:
|
|
|
Three
Months Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
385 |
|
|
$ |
247 |
|
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(326 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
59 |
|
|
$ |
225 |
|
Accumulated
other comprehensive loss reported in the condensed consolidated balance sheets
consists solely of foreign currency translation adjustments.
Note
6 - Basic and Diluted Net Income Per Share
Basic net
income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
net income per share reflects the impact, when dilutive, of the exercise of
stock options and RSUs using the treasury stock method.
Potentially
dilutive common stock options aggregating 508,630 and 33,350 shares for the
three months ended December 31, 2008 and 2007, respectively, have been excluded
from the computation of diluted net income per share because their inclusion
would be anti-dilutive. Potentially dilutive restricted stock units aggregating
27,496 and 1,666 shares for the three months ended December 31, 2008 and 2007,
respectively, have been excluded from the computation of diluted net income per
share because their inclusion would be anti-dilutive.
Note
7 - Commitments and Contingencies
On August
11, 2004, the Company acquired 100% of the shares of Mergence Technologies
Corporation. The purchase agreement includes a provision for quarterly cash
payments to the former Mergence shareholders equal to 10% of revenue, as
defined, of the Datawatch Researcher product until September 30, 2010. No
amounts were expensed under this agreement for the three months ended December
31, 2008 or 2007.
The
Company is also obligated to pay royalties ranging from 7% to 50% on revenue
generated by the sale of certain licensed software products. Royalty expense
included in cost of software licenses was approximately $392,000 and $457,000,
respectively, for the three months ended December 31, 2008 and 2007. The Company
is not obligated to pay any minimum amounts for royalties.
From time
to time, the Company is subject to other claims and may be party to other
actions that arise in the normal course of business. The Company does not
believe the eventual outcome of any pending matters will have a material effect
on the Company’s consolidated financial condition or results of
operations.
Note
8 - Segment Information
The
Company has determined that it has only one reportable segment. The Company’s
chief operating decision maker, its Chief Executive Officer, does not manage any
part of the Company separately, and the allocation of resources and assessment
of performance is based solely on the Company’s consolidated operations and
operating results.
The
following table presents information about the Company’s revenue by product
lines:
|
|
Three
Months Ended
|
|
|
December
31,
|
|
|
2008
|
2007
|
|
|
|
|
|
Business
Intelligence Solutions (including Monarch, Monarch
Data Pump, Monarch RMS, Monarch BI Server, Datawatch ES, Datawatch
Researcher, Visual Insight, iMergence and VorteXML)
|
70%
|
67%
|
|
Content
Management Solutions (including Datawatch
BDS and Datawatch MailManager)
|
18%
|
15%
|
|
Service
Management Solutions (including Visual QSM and
Visual HD)
|
12%
|
18%
|
|
|
|
|
|
Total
|
100%
|
100%
|
The
Company conducts operations in the U.S. and internationally (principally in the
United Kingdom). The following table presents information about the Company’s
geographic operations:
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Principally
|
|
|
Intercompany
|
|
|
|
|
|
|
|
Domestic
|
|
|
(U.K.)
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended December 31, 2008
|
|
$ |
4,228 |
|
|
$ |
1,215 |
|
|
$ |
(241 |
) |
|
$ |
5,202 |
|
|
Three
months ended December 31, 2007
|
|
$ |
4,539 |
|
|
$ |
1,875 |
|
|
$ |
(347 |
) |
|
$ |
6,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended December 31, 2008
|
|
$ |
235 |
|
|
$ |
24 |
|
|
$ |
- |
|
|
$ |
259 |
|
|
Three
months ended December 31, 2007
|
|
$ |
352 |
|
|
$ |
(152 |
) |
|
$ |
- |
|
|
$ |
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008
|
|
$ |
9,506 |
|
|
$ |
47 |
|
|
$ |
- |
|
|
$ |
9,553 |
|
|
At
September 30, 2008
|
|
$ |
9,515 |
|
|
$ |
64 |
|
|
$ |
- |
|
|
$ |
9,579 |
|
GENERAL
The
Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its 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. The Company cautions
readers not to place undue reliance on any such forward looking-statements,
which speak only as of the date they are made. The Company disclaims 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 the Company’s 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. The Company’s 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 the Company’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2008, as well as the
accuracy of the Company’s internal estimates of revenue and operating expense
levels.
Datawatch
is engaged in the design, development, manufacture, marketing, and support of
business computer software primarily for the Enterprise Information Management
market which incorporates business intelligence, enterprise content management
and service management solutions to allow organizations to access and analyze
information in a more meaningful fashion.
The
Company’s principal products are Business Intelligence Solutions (including
Monarch, Monarch Data Pump, Monarch RMS, Monarch BI Server, Datawatch ES,
Datawatch Researcher, Visual Insight, iMergence and VorteXML), Content
Management Solutions (including Datawatch BDS, Datawatch BDS Workflow and
Datawatch MailManager) and Service Management Solutions (including Visual QSM
and Visual HD). Included in the above categories are: Monarch, a desktop report
mining and business intelligence application that lets users extract and
manipulate data from ASCII report files, PDF files or HTML files produced on any
mainframe, midrange, client/server or PC system; Monarch Data Pump, a data
replication and migration tool that offers a shortcut for populating and
refreshing data marts and data warehouses, for migrating legacy data into new
applications
and for providing automated delivery of reports in a variety of formats via
email; Monarch RMS, a web-based report mining and analysis solution that
integrates with any existing Enterprise Report Management document or content
management archiving solution; Monarch BI Server, an out-of-the-box web-based
Business Intelligence solution developed specifically for small to mid sized
businesses and departments; Datawatch ES, an enterprise business intelligence
system that provides web-enabled report management, mining and distribution as
well as data analysis and MS Excel integration; Datawatch Researcher, a
development platform for building performance management, content and data
aggregation and workflow solutions; Visual Insight, a performance management
solution that provides web-based knowledge management and Key Performance
Indicator reporting; iMergence, an enterprise report mining system; VorteXML, a
data transformation product for the emerging XML market that easily and quickly
converts structured text output from any system into valid XML for web services
and more using any DTD or XDR schema without programming; Datawatch BDS, a
system for high-volume document capture, archiving, and online presentation;
Datawatch BDS Workflow, a web-enabled enterprise business process management
solution that provides highly effective processing of document intensive
business transactions; Datawatch MailManager, a highly scalable email management
solution that provides complete lifecycle, compliance and storage management for
Microsoft Exchange environments; Visual QSM, a fully internet-enabled IT service
management solution that incorporates workflow and network management
capabilities and provides web access to multiple databases via a standard
browser; and Visual Help Desk or Visual HD, a web-based help desk and call
center solution operating on the IBM Lotus Domino platform.
The
Company offers its enterprise products through perpetual licenses and
subscription pricing models. Subscriptions automatically renew unless terminated
with 90 days notice following the first year of the subscription term. The
subscription arrangement includes software, maintenance and unspecified future
upgrades including major version upgrades. The subscription renewal rate is the
same as the initial subscription rate. During the three months ended December
31, 2008 and 2007, subscription revenues were approximately $137,000 and
$144,000, respectively.
CRITICAL
ACCOUNTING POLICIES
In the
preparation of financial statements and other financial data, management applies
certain accounting policies to transactions that, depending on choices made by
management, can result in different outcomes. In order for a reader to
understand the following information regarding the financial performance and
condition of the Company, an understanding of those accounting policies is
important. Certain of those policies are comparatively more important to the
Company’s financial results and condition than others. The policies that the
Company believes are most important for a reader’s understanding of the
financial information provided in this report are described below.
Revenue Recognition,
Allowance for Bad Debts and Returns Reserve
The
Company has two types of software product offerings: Enterprise Software and
Desktop and Server Software. Enterprise Software products are sold directly to
end-users and through the use of value added resellers. The Company sells its
Desktop and Server Software products directly to end-users and through
distributors and resellers. Sales to distributors and resellers accounted for
approximately 42% and 40%, respectively, of total sales for the three months
ended December 31, 2008 and 2007. Revenue from the license of all software
products is generally recognized at the time of shipment, provided there are no
uncertainties surrounding product acceptance, the fee is fixed and determinable,
collection is considered probable, persuasive evidence of the arrangement exists
and there are no significant obligations remaining. Both types of the Company’s
software product offerings are “off-the-shelf” as such term is defined by
Statement of Position No. 97-2, “Software Revenue
Recognition.” The Company’s software products can be installed and used
by customers on their own with little or no customization required. Multi-user
licenses marketed by the Company are sold as a right to use the number of
licenses and license fee revenue is recognized upon delivery of all software
required to satisfy the number of licenses sold. Upon delivery, the licensing
fee is payable without further delivery obligations of the Company.
Desktop
and Server Software products are generally not sold in multiple element
arrangements. Enterprise Software sales are generally multiple element
arrangements which include software license deliverables,
professional
services and post-contract customer support, which primarily consists of
maintenance. In such multiple element arrangements, the Company applies the
residual method in determining revenue to be allocated to a software license. In
applying the residual method, the Company deducts from the sale proceeds the
vendor specific objective evidence (“VSOE”) of fair value of the services and
post-contract customer support in determining the residual fair value of the
software license. The VSOE of fair value of the services and post-contract
customer support is based on the amounts charged for these elements when sold
separately. Professional services include implementation, integration, training
and consulting services with revenue recognized as the services are performed.
These services are generally delivered on a time and materials basis, are billed
on a current basis as the work is performed, and do not involve modification or
customization of the software or any other unusual acceptance clauses or terms.
Post-contract customer support 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
post-contract customer support services is deferred and recognized ratably over
the contract period (generally one year). Such deferred amounts are
recorded as part of deferred revenue in the Company’s condensed consolidated
balance sheets included herein.
The
Company also sells 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 for an initial 90 day service period 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 customer is then invoiced every 90 days and, in accordance with SOP 97-2,
revenue is recognized ratably over the period the service is provided. The
subscription arrangement includes software, maintenance and unspecified future
upgrades including major version upgrades. The subscription renewal rate is the
same as the initial subscription rate. Subscriptions can be cancelled by the
customer at any time by providing 90 days written notice following the first
year of the subscription term.
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.
Certain software products, including desktop versions of Monarch, Monarch Data
Pump, Monarch BI Server and VorteXML licensed directly to end-users, include a
guarantee under which such customers may return products within 30 days for a
full refund. Additionally, the Company provides its distributors with
stock-balancing rights and applies the guidance found in Statement of Financial
Accounting Standards No. 48, “Revenue Recognition when Right of
Return Exists” (“SFAS No. 48”). Revenue from the license of software
products to distributors and resellers is recognized at the time of shipment
providing all other criteria for revenue recognition as stated above are met and
(i) the distributor or reseller is unconditionally obligated to pay for the
products, including no contingency as to product resale, (ii) the distributor or
reseller has independent economic substance apart from the Company, (iii) the
Company is not obligated for future performance to bring about product resale,
and (iv) the amount of future returns can be reasonably estimated. The Company’s
experience and history with its distributors and resellers allows for reasonable
estimates of future returns. Among other things, estimates of potential future
returns are made based on the inventory levels at the various distributors and
resellers, which the Company monitors frequently. Once the estimates of
potential future returns from all sources are made, the Company determines if it
has adequate returns reserves to cover anticipated returns and the returns
reserve is adjusted as required. Adjustments are recorded as increases or
decreases in revenue in the period of adjustment. Actual returns have
historically been within the range estimated by the Company. The Company’s
returns reserves were $85,000 and $65,000 as of December 31, 2008 and September
30, 2008, respectively.
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,
foreign currency exchange rate fluctuations and changes in customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Based
upon the analysis and estimates of the collectibility of its accounts
receivable, the Company records an increase in the allowance for doubtful
accounts when the prospect of collecting a specific account receivable becomes
doubtful. Actual results could differ from the allowances for doubtful accounts
recorded, and this difference may have a material effect on the Company’s
financial position
and
results of operations. The Company’s allowance for doubtful accounts was
$198,000 and $171,000 as of December 31, 2008 and September 30, 2008,
respectively.
Income
Taxes
The
Company has deferred tax assets related to net operating loss carryforwards and
tax credits that expire at different times through and until 2028. 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 continues to be
provided. Management evaluates the realizability of the deferred tax assets
quarterly and, if current economic conditions change or future results of
operations are better than expected, future assessments may result in the
Company concluding that it is more likely than not that all or a portion of the
deferred tax assets are realizable. If this conclusion were reached, the
valuation allowance against deferred tax assets would be reduced resulting in a
tax benefit being recorded for financial reporting purposes. Total net deferred
tax assets subject to the full valuation allowance were approximately $3.7
million as of December 31, 2008.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement No. 109”
(“FIN 48”) on October 1, 2007. FIN 48 provides 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.
Under
FIN 48, 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. The Company
maintains a cumulative risk portfolio relating to all of its uncertainties in
income taxes in order to perform this analysis, but the evaluation of the
Company’s tax position in connection with FIN 48 requires significant
judgment and estimation in part because, in certain cases, tax law is subject to
varied interpretation, and whether a tax position will ultimately be sustained
may be uncertain. The actual outcome of the Company’s tax positions, if
significantly different from its estimates, could materially impact the
financial statements.
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. To date, the Company has not accrued any amounts for interest or
penalties as such amounts have been de minimis.
Capitalized Software
Development Costs
The
Company capitalizes certain software development costs as well as purchased
software upon achieving technological feasibility of the related products.
Software development costs incurred and software purchased prior to achieving
technological feasibility are charged to research and development expense as
incurred. Commencing upon initial product release, capitalized costs
are amortized to cost of software licenses using the straight-line method over
the estimated life (which approximates the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross revenues for
that product), which is generally 24 to 36 months. The net amount of acquired
and capitalized software was approximately $807,000 and $664,000 at December 31,
2008 and September 30, 2008, respectively. During the three months ended
December 31, 2008, the Company capitalized approximately $199,000 of software
development costs related to new products in development. No amounts were
capitalized during the three months ended December 31, 2007.
Goodwill, Other Intangible
Assets and Other Long-Lived Assets
The
Company performs an evaluation of whether goodwill is impaired annually or when
events occur or circumstances change that would more likely than not reduce the
fair value of the applicable reporting unit below its carrying amount. The
annual impairment analysis is performed on May 31st of each
applicable fiscal year. Fair value is determined using market comparables for
similar businesses, current market valuations of the Company’s common stock, or
forecasts of discounted future cash flows. A significant amount of judgment is
involved in determining if an indicator of impairment has occurred. Factors the
Company considers important that could trigger an impairment review include, but
are not limited to, significant underperformance relative to historical or
projected future operating results, significant changes in the manner of use of
the acquired assets or the strategy for the Company’s overall business,
significant negative industry or economic trends, a significant decline in the
Company’s stock price for a sustained period, and decreases in the Company’s
market capitalization below the recorded amount of its net assets for a
sustained period.
The
Company performed interim tests of impairment for its goodwill and its
indefinite lived trademark at September 30, 2008 and again at December 31, 2008
in accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets” due to uncertainties surrounding the global economy and the
volatility in the Company’s stock price. The Company tests goodwill for
impairment using a two-step approach. The first step is to compare the fair
value of the reporting unit to its carrying amount, including goodwill. If the
fair value of the reporting unit is greater than its carrying amount, goodwill
is not considered impaired, but if the fair value of the reporting unit is less
than its carrying amount, the amount of the impairment loss, if any, must be
measured. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset’s fair value. The Company estimates its fair value
using the best information available, including market information and
discounted cash flow projections also referred to as the income approach. The
income approach uses future estimated operating results and cash flows that are
discounted using a weighted-average cost of capital that reflects current market
conditions. The projection uses management’s best estimates of economic and
market conditions over the projected period, including growth rates in sales,
costs, estimates of future expected changes in operating margins and cash
expenditures. Other significant estimates and assumptions include terminal value
growth rates, future estimates of capital expenditures and changes in future
working capital requirements. The Company validates its estimates of fair value
under the income approach by comparing the values to fair value estimates using
a market approach. A market approach estimates fair value by applying cash flow
multiples to the reporting unit’s operating performance. The multiples are
derived from comparable publicly traded companies with similar operating and
investment characteristics of the reporting units. The results of the interim
valuation analyses indicated that the Company’s estimated fair value exceeded
its book value at each assessment date and that there was no impairment of the
Company’s goodwill at September 30, 2008 or December 31, 2008.
The
Company also reviews other intangible assets and other long-lived assets when an
indication of potential impairment exists, such as a significant reduction in
cash flows associated with the assets. Should the fair value of the Company’s
long-lived assets decline because of reduced operating performance, market
declines, or other indicators of impairment, a charge to operations for
impairment may be necessary. No impairments of these assets were recorded in the
three months ended December 31, 2008 or 2007.
Accounting for Stock-Based
Compensation
The
Company recognizes stock-based compensation expense in accordance with Statement
of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment.” SFAS
123(R) requires all share-based awards, including grants of employee stock
options, to be recognized in the financial statements based on their fair
value.
Under the
provisions of SFAS No. 123(R), 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. For the three months ended December
31, 2008 and 2007, the Company recorded stock-based compensation expense of
approximately $58,000 and $51,000, respectively. In order to determine the fair
value of stock options on the date of grant, the Company applies the
Black-Scholes option-pricing model. Inherent in the determination of fair value
of
share-based awards are assumptions related to expected stock-price volatility,
option life, risk-free interest rate, dividend yield and expected forfeitures.
While the risk-free interest rate and dividend yield are less subjective
assumptions, typically based on factual data derived from public sources, the
expected stock-price volatility, option life and forfeiture assumptions require
a greater level of judgment which makes them critical accounting
estimates.
The
Company uses an expected stock-price volatility assumption that represents
historical volatilities of the underlying stock which are obtained from public
data sources. The Company believes this approach results in a reasonable
estimate of future volatility.
With
regard to the weighted-average option life assumption, the Company considers the
exercise behavior of past grants and models the pattern of aggregate historical
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.
With
regard to the forfeiture rate assumption, the Company reviews historical
voluntary turnover rates. 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.
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 the
unaudited condensed consolidated financial statements contained in this
Quarterly Report on Form 10-Q. The operating results for any period should not
be considered indicative of the results expected for any future period. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended September 30, 2008.
|
|
|
Three
Months Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
REVENUE:
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
54.6%
|
|
54.9%
|
|
Maintenance
and services
|
|
45.4%
|
|
45.1%
|
|
Total
Revenue
|
|
100.0%
|
|
100.0%
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
10.2%
|
|
9.4%
|
|
Cost
of maintenance and services
|
|
16.8%
|
|
18.4%
|
|
Sales
and marketing
|
|
31.9%
|
|
36.6%
|
|
Engineering
and product development
|
|
13.7%
|
|
12.4%
|
|
General
and administrative
|
|
22.4%
|
|
19.9%
|
|
Total
costs and expenses
|
|
95.0%
|
|
96.7%
|
|
INCOME
FROM OPERATIONS
|
|
5.0%
|
|
3.3%
|
|
Interest
income and other income (expense), net
|
|
3.2%
|
|
1.6%
|
|
INCOME
BEFORE INCOME TAXES
|
|
8.2%
|
|
4.9%
|
|
Provision
for income taxes
|
|
0.8%
|
|
0.8%
|
|
|
|
|
|
|
|
NET
INCOME
|
|
7.4%
|
|
4.1%
|
Three Months Ended December
31, 2008 Compared to
Three Months Ended December
31, 2007
Total
Revenues
The
following table presents total revenue, total revenue decrease and percentage
change in total revenue for the three months ended December 31, 2008 and
2007:
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
$ |
2,840 |
|
|
$ |
3,333 |
|
|
$ |
(493 |
) |
|
|
-14.8 |
% |
|
Maintenance
and services
|
|
|
2,362 |
|
|
|
2,734 |
|
|
|
(372 |
) |
|
|
-13.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
5,202 |
|
|
$ |
6,067 |
|
|
$ |
(865 |
) |
|
|
-14.3 |
% |
Software
licenses and subscriptions revenue for the three months ended December 31, 2008
was $2,840,000 or approximately 55% of total revenue, as compared to $3,333,000
or approximately 55% of total revenue for the three months ended December 31,
2007. This represents a decrease of $493,000 or approximately 15% from the first
quarter of fiscal 2008 to the first quarter of fiscal 2009. The overall net
decrease in software license and subscription revenue for the three months ended
December 31, 2008 consists of a $423,000 decrease in Business Intelligence
Solutions (including Monarch, Monarch Data Pump, Monarch RMS, Monarch BI Server,
Datawatch ES, Datawatch Researcher, Visual Insight, iMergence and VorteXML
products), a $26,000 decrease in Content Management Solutions (including
Datawatch BDS and Datawatch MailManager products) and a $44,000 decrease in
revenue from the Company’s Service Management Solutions (including Visual QSM
and Visual HD products). The overall decrease in software licenses and
subscriptions revenue was partially the result of currency exchange weakening of
the British pound against the U.S. dollar. Additionally, the decrease in
Business Intelligence Solutions is primarily due to decreased Monarch license
sales as compared to the three months ended December 31, 2007. Sales from the
Company’s Monarch product were significantly higher during the three months
ended December 31, 2007 as a result of the continued benefit derived from the
release of Monarch upgrade version 9.0 in February 2007.
Maintenance
and services revenue for the three months ended December 31, 2008 was $2,362,000
or approximately 45% of total revenue, as compared to $2,734,000 or
approximately 45% of total revenue for the three months ended December 31, 2007.
This represents a decrease of $372,000 or approximately 14% from the first
quarter of fiscal 2008 to the first quarter of fiscal 2009. The overall decrease
in maintenance and services revenue consists of a $418,000 decrease in Service
Management Solutions (including Visual QSM and Visual HD products) which was
partially offset by a $33,000 increase in Content Management Solutions
(primarily Datawatch BDS) and a $13,000 increase in Business Intelligence
Solutions (including Monarch, Monarch Data Pump, Monarch RMS, Monarch BI Server,
Datawatch ES, Datawatch Researcher, Visual Insight, iMergence and VorteXML
products). The overall decrease in maintenance and services revenue was
partially the result of currency exchange weakening of the British pound against
the U.S. dollar. Additionally, the decrease in maintenance and services revenue
for the Service Management Solutions product line was partially due to a
$267,000 decrease in professional services work within the Company’s Visual
QSM product line during the three months ended December 31, 2008.
Costs
and Operating Expenses
The
following table presents costs and operating expenses, decrease in costs and
operating expenses and percentage changes in costs and operating expenses for
the three months ended December 31, 2008 and 2007:
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
$ |
530 |
|
|
$ |
572 |
|
|
$ |
(42 |
) |
|
|
-7.3 |
% |
|
Cost
of maintenance and services
|
|
|
873 |
|
|
|
1,120 |
|
|
|
(247 |
) |
|
|
-22.1 |
% |
|
Sales
and marketing
|
|
|
1,661 |
|
|
|
2,220 |
|
|
|
(559 |
) |
|
|
-25.2 |
% |
|
Engineering
and product development
|
|
|
713 |
|
|
|
749 |
|
|
|
(36 |
) |
|
|
-4.8 |
% |
|
General
and administrative
|
|
|
1,166 |
|
|
|
1,206 |
|
|
|
(40 |
) |
|
|
-3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and operating expenses
|
|
$ |
4,943 |
|
|
$ |
5,867 |
|
|
$ |
(924 |
) |
|
|
-15.7 |
% |
Cost of
software licenses and subscriptions for the three months ended December 31, 2008
was $530,000 or approximately 19% of software license and subscription revenues,
as compared to $572,000 or approximately 17% of software license and
subscription revenue for the three months ended December 31, 2007. The decrease
in cost of software licenses and subscriptions of $42,000 is primarily due to
lower royalty costs associated with decreased sales of Monarch during the three
months ended December 31, 2008 which was partially offset by a $19,000 increase
in amortization of capitalized software costs.
Cost of
maintenance and services for the three months ended December 31, 2008 was
$873,000 or approximately 37% of maintenance and services revenue, as compared
to $1,120,000 or approximately 41% of maintenance and services revenue for the
three months ended December 31, 2007. The overall decrease in cost of
maintenance and services of $247,000 was partially the result of currency
exchange weakening of the British pound against the U.S. dollar. Additionally,
the decrease in total cost of maintenance and services was due to lower
employee-related costs, travel and outside consulting expenses.
Sales and
marketing expenses for the three months ended December 31, 2008 were $1,661,000,
or 32% of total revenues as compared to $2,220,000 or 37% of total revenues for
the three months ended December 31, 2007. The decrease in sales and marketing
expenses of $559,000, or approximately 25%, was partially the result of
currency exchange weakening of the British pound against the U.S. dollar.
Additionally, the decrease in sales and marketing expenses was due to lower
employee-related costs, travel and outside consulting expenses as well as
decreased marketing expenses due to the timing of new product
releases.
Engineering
and product development expenses for the three months ended December 31, 2008
were $713,000 or 14% of total revenues as compared to $749,000, or 12% of total
revenues for the three months ended December 31, 2007. The decrease in
engineering and product development expenses of $36,000, or approximately 5%, is
primarily attributable to lower use of external consulting resources on
maintenance releases and capitalized development costs related to new product
features.
General
and administrative expenses for the three months ended December 31, 2008 were
$1,166,000, or 22% of total revenues as compared to $1,206,000, or 20% of total
revenues for the three months ended December 31, 2007. The decrease in general
and administrative expenses of $40,000, or 3%, is primarily attributable to
lower professional services fees, lower depreciation expense and lower
facility-related costs, as well as the foreign exchange effects of the weakening
British pound compared to the U.S. dollar.
Interest
income and other income (expense) includes primarily the following two
components: interest income; and gains (losses) on foreign currency
transactions. Interest income for the three months ended December 31, 2008 was
approximately $21,000 as compared to $40,000 for the three months ended December
31, 2007. The decrease in interest income is primarily the result of lower
interest rates on interest bearing cash and equivalents. Gain (loss) on foreign
currency transactions for the three months ended December 31, 2008 was a gain of
approximately $149,000 as compared to a gain of $57,000 for the three months
ended December 31, 2007, primarily due to the favorable foreign exchange rates
in British pound denominated transactions.
Income
taxes for the three months ended December 31, 2008 were $44,000 as compared to
$49,000 for the three months ended December 31, 2007. Income tax expense for
both periods includes additional deferred tax
expense
related to the tax-deductible goodwill generated by the Company’s acquisition of
the business assets of IDARS. The goodwill resulting from this transaction is
deductible for tax purposes and a deferred tax expense is recognized for
financial reporting purposes equal to the tax rate on the excess of tax
amortization over the amortization for financial reporting purposes, which is
zero unless there is an impairment. Income tax expense for both periods also
includes a provision for uncertain tax positions relative to foreign taxes. The
decrease in income taxes of $5,000 is a result of a decrease in estimated
alternative minimum taxes in the U.S.
Net
income for the three months ended December 31, 2008 was $385,000 as compared to
net income of $247,000 for the three months ended December 31, 2007. The
increase in net income was the result of a decrease in costs and expenses of
$924,000, partially offset by a reduction in total revenues of
$865,000.
OFF
BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES
AND COMMITMENTS
The
Company leases various facilities and equipment in the U.S. and overseas under
non-cancelable operating leases that expire through 2011. The lease agreements
generally provide for the payment of minimum annual rentals, pro rata share of
taxes, and maintenance expenses. Rental expense for all operating leases was
approximately $83,000 and $151,000 for the three months ended December 31, 2008
and 2007, respectively.
As of
December 31, 2008, the Company’s contractual obligations include minimum rental
commitments under non-cancelable operating leases and long-term liabilities
related to potential tax exposures pursuant to FIN 48 as follows:
|
Contractual
Obligations:
|
|
Total
|
|
|
Less
than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5 Years
|
|
|
|
|
(in
thousands)
|
|
|
Operating
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
$ |
571 |
|
|
$ |
284 |
|
|
$ |
287 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
$ |
106 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
106 |
|
The
Company is also obligated to pay royalties ranging from 7% to 50% on revenue
generated by the sale of certain licensed software products. Royalty expense
included in cost of software licenses was approximately $392,000 and $457,000,
respectively, for the three months ended December 31, 2008 and 2007. The Company
is not obligated to pay any minimum amounts for royalties.
On August
11, 2004, the Company acquired 100% of the shares of Mergence Technologies
Corporation. The purchase agreement includes a provision for quarterly cash
payments to the former Mergence shareholders equal to 10% of revenue, as
defined, of the Datawatch Researcher product until September 30, 2010. No
amounts were expensed for the three months ended December 31, 2008 or 2007 under
this agreement.
The
Company’s software products are sold under warranty against certain defects in
material and workmanship for a period of 30 days from the date of purchase. If
necessary, the Company would provide for the estimated cost of warranties based
on specific warranty claims and claim history. However, the Company has never
incurred significant expense under its product or service warranties. As a
result, the Company believes the estimated fair value of these warranty
agreements is minimal and there are no liabilities recorded for warranty claims
as of December 31, 2008.
The
Company is required by the sublease agreement related to its Chelmsford,
Massachusetts facility to provide a letter of credit in the amount of
approximately $125,000 as a security deposit to the landlord of amounts due
under the lease. Cash on deposit providing security in the amount of this letter
of credit is classified as restricted cash in the Company’s condensed
consolidated balance sheets as of December 31, 2008 and September 30,
2008.
The
Company enters into indemnification agreements in the ordinary course of
business. Pursuant to these agreements, the Company generally agrees to
indemnify, hold harmless, and reimburse the indemnified party for losses
suffered or incurred by the indemnified party, generally its customers, in
connection with any patent, copyright or other intellectual property
infringement claim by any third party with respect to the Company’s products.
The term of these indemnification agreements is generally perpetual. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is generally unlimited. The Company has never
incurred costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of December 31, 2008.
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, among other things, bodily injury, property damage or disclosure
of non-public information. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
generally 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 the
estimated fair value of these agreements is minimal. Accordingly, the Company
has no liabilities recorded for these agreements as of December 31,
2008.
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 would
enable it to recover a portion of any future amounts paid. As a result of its
insurance policy coverage, the Company believes the estimated fair value of
these indemnification agreements is minimal. The Company has no liabilities
recorded for these agreements as of December 31, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
Management
believes that its current cash balances and cash generated from operations will
be sufficient to meet the Company’s cash needs for
working capital and anticipated capital expenditures for at least the next
twelve months. At December 31, 2008, the Company had $4,920,000 of cash and
equivalents, an increase of $35,000 from September 30, 2008.
At
December 31, 2008, the Company had working capital of $1,335,000 as compared to
working capital of $1,130,000 at September 30, 2008. The Company currently does
not anticipate additional cash requirements other than cash flows from
operations to fund its planned growth. However, if future expenditures for
significant growth or acquisitions of complementary technology or businesses are
anticipated or required, the Company may need to seek additional financing by
issuing equity or obtaining credit facilities to fund such requirements. There
can be no assurance that the Company will be able to issue additional equity or
obtain a new credit facility at attractive prices or rates, or at
all.
The
Company had net income of approximately $385,000 for the three months ended
December 31, 2008 as compared to net income of approximately $247,000 for the
three months ended December 31, 2007. During the three months ended December 31,
2008 and 2007, approximately $767,000 and $308,000, respectively, of cash was
provided by the Company’s operations. During the three months ended
December 31, 2008, the main source of cash from operations was net income
adjusted for depreciation and amortization as well as an increase in deferred
revenue.
Net cash
used in investing activities for the three months ended December 31, 2008 of
$207,000 is primarily
related
to capitalized software development costs related to new products and new
versions of products in development.
The
Mergence purchase agreement dated August 11, 2004 includes a provision for
quarterly cash payments to the former Mergence shareholders equal to 10% of
revenue, as defined, of the Datawatch Researcher product for a period of six
years. As the cash payments are based on recognized revenue and no minimum
payments are required, they are not expected to have a significant impact on the
Company’s liquidity or cash flows. See the section titled “Off Balance
Sheet Arrangements, Contractual Obligations and Contingent Liabilities and
Commitments” included elsewhere herein for a more complete disclosure of the
Company’s commitments and contingent liabilities.
An
existing agreement between Datawatch and Math Strategies grants the Company
exclusive worldwide rights to use and distribute certain intellectual property
owned by Math Strategies and incorporated by the Company in its Monarch, Monarch
Data Pump, VorteXML and certain other products. On April 29, 2004, the
Company entered into a two year Option Purchase Agreement with Math Strategies
giving the Company the option to purchase these intellectual property rights for
$8 million (“Option Purchase Agreement”). In February 2006, the Company entered
into an amendment to the original license agreement with Math Strategies dated
January 19, 1989. Pursuant to the amendment, the term of the license
agreement was extended to April 30, 2015. Contemporaneous with the license
amendment, the Company also entered into an amendment to the Option Purchase
Agreement. After amending this agreement, the option has been extended to April
30, 2015. The option purchase amendment changes the purchase price for the
option to a formula price based on a multiple of the aggregate royalties paid to
Math Strategies by the Company for the four fiscal quarters preceding the
exercise of the option. This option, if exercised, would provide the Company
with increased flexibility to utilize the purchased technology in the
future.
Management
believes that the Company’s current operations have not been materially impacted
by the effects of inflation.
Derivative
Financial Instruments, Other Financial Instruments, and Derivative Commodity
Instruments
At
December 31, 2008, the Company did not participate in or hold any derivative
financial instruments or commodity instruments. The Company holds no investment
securities that possess significant market risk.
Primary
Market Risk Exposures
The
Company’s primary market risk exposure is foreign currency exchange rate risk.
The recent deterioration of worldwide economic conditions, including tighter
credit and negative financial news may have an adverse effect on the market for
computer software and could result in significant fluctuations in the value of
foreign currencies. Subject to these concerns, the Company believes that its
exposure to currency exchange rate fluctuations has been and is expected to
continue to be modest due to the fact that the operations of its international
subsidiaries are almost exclusively conducted in their respective local
currencies, and dollar advances to the Company’s international subsidiaries, if
any, are usually considered to be of a long-term investment nature. Therefore,
the majority of currency movements are reflected in the Company’s other
comprehensive income (loss). There are, however, certain situations where the
Company will invoice customers in currencies other than its own. Such gains or
losses from operating activity, whether realized or unrealized, are reflected in
interest income and other income (expense), net in the condensed consolidated
statements of operations. Currently, the Company does not engage in foreign
currency hedging activities.
Item
4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls
and Procedures.
The
principal executive officer and principal financial officer, with the
participation of the Company’s management, evaluated the effectiveness of the
Company’s disclosure controls and procedures as of December 31, 2008. The term
“disclosure controls and procedures,” as defined in Rules 13a−15(e) and
15d−15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any system of controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
their objectives. Based upon that evaluation, the Company’s principal executive
officer and principal financial officer concluded that the Company’s disclosure
controls and procedures are effective in enabling the Company to record,
process, summarize and report information required to be included in the
Company’s periodic SEC filings within the required time period.
(b)
Changes in Internal
Controls.
PART
II. OTHER INFORMATION
The
Company is occasionally involved in legal proceedings and other claims arising
out of its operations in the normal course of business. The Company is not party
to any litigation that management believes will have a material adverse effect
on the Company’s consolidated financial condition, results of operations or cash
flows.
Item
1A. Risk
Factors
In
addition to the other information set forth in this report, the reader should
carefully consider the factors discussed in Part I, Item 1A under the heading
“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended
September 30, 2008, which could materially affect its business, financial
condition or future results. The risks described in the Company’s Annual Report
on Form 10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known or that it currently deems to be immaterial
also may materially adversely affect the Company’s business, financial condition
and/or operating results.
Item
6. Exhibits
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized on February 17, 2009.
|
|
DATAWATCH
CORPORATION
|
|
|
|
|
|
|
|
/s/
Kenneth P. Bero
|
|
|
|
|
Kenneth
P. Bero
|
|
|
|
President,
Chief Executive Officer, and
|
|
|
|
Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Murray P. Fish
|
|
|
|
|
Murray
P. Fish
|
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|
|