ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR
THE TRANSITION PERIOD FROM _________________ TO _________________
|
DATAWATCH
CORPORATION
|
||
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
02-0405716
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
271
MILL ROAD
QUORUM
OFFICE PARK
CHELMSFORD,
MASSACHUSETTS 01824
(978)
441-2200
|
||
(Address
and telephone number of principal executive office)
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer ý
|
PART
I.
|
FINANCIAL
INFORMATION
|
Page
#
|
||
Item
1.
|
Financial
Statements (Unaudited)
|
|||
a)
|
Condensed
Consolidated Balance Sheets:
|
|||
June
30, 2007 and September 30, 2006
|
3
|
|||
b)
|
|
Condensed
Consolidated Statements of Operations:
|
||
Three
and Nine Months Ended June 30, 2007 and 2006
|
4
|
|||
c)
|
Condensed
Consolidated Statements of Cash Flows:
|
|||
Nine
Months Ended June 30, 2007 and 2006
|
5
|
|||
d)
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
||
Item
4.
|
Controls
and Procedures
|
29
|
||
PART
II.
|
OTHER
INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
31
|
||
Item
1A.
|
Risk
Factors
|
31
|
||
Item
6.
|
Exhibits
|
31
|
||
SIGNATURES
|
32
|
|||
CERTIFICATIONS
|
33
|
June 30,
2007
|
September
30,
2006
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and equivalents
|
$ |
2,591
|
$ | 1,862 | ||||
Accounts
receivable, net
|
4,345
|
3,786
|
||||||
Inventories
|
22
|
37
|
||||||
Prepaid
expenses
|
577
|
653
|
||||||
Total
current assets
|
7,535
|
6,338
|
||||||
Property
and equipment, net
|
932
|
1,129
|
||||||
Goodwill
|
6,032
|
5,236
|
||||||
Other
intangible assets, net
|
2,800
|
3,155
|
||||||
Restricted
cash
|
125
|
125
|
||||||
Other
long-term assets
|
43
|
42
|
||||||
$ |
17,467
|
$ | 16,025 | |||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Line
of credit
|
$ |
—
|
$ | 1,000 | ||||
Accounts
payable
|
1,412
|
1,302
|
||||||
Accrued
expenses
|
2,349
|
1,819
|
||||||
Deferred
revenue
|
4,350
|
4,468
|
||||||
Accrued
acquisition costs
|
734
|
215
|
||||||
Total
current liabilities
|
8,845
|
8,804
|
||||||
LONG-TERM
LIABILITIES:
|
||||||||
Deferred
rent
|
192
|
230
|
||||||
Deferred
revenue – long-term
|
198
|
—
|
||||||
Deferred
tax liability
|
111
|
36
|
||||||
Total
long-term liabilities
|
501
|
266
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS’
EQUITY:
|
||||||||
Common
stock, par value $.01; 20,000,000 shares authorized; issued,
5,624,999
shares and 5,526,485 shares, respectively; outstanding, 5,610,753
shares
and 5,512,239 shares, respectively
|
56
|
55
|
||||||
Additional
paid-in capital
|
22,582
|
22,204
|
||||||
Accumulated
deficit
|
(13,902 | ) | (14,742 | ) | ||||
Accumulated
other comprehensive loss
|
(475 | ) | (422 | ) | ||||
8,261
|
7,095
|
|||||||
Less
treasury stock, at cost—14,246 shares
|
(140 | ) | (140 | ) | ||||
Total
shareholders’ equity
|
8,121
|
6,955
|
||||||
$ |
17,467
|
$ | 16,025 |
Three
Months Ended June 30,
|
Nine
Months Ended June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
REVENUE:
|
||||||||||||||||
Software
licenses and subscriptions
|
$ |
4,091
|
$ |
3,386
|
$ |
10,786
|
$ |
9,984
|
||||||||
Maintenance
and services
|
2,392
|
1,958
|
7,622
|
5,501
|
||||||||||||
Total
Revenue
|
6,483
|
5,344
|
18,408
|
15,485
|
||||||||||||
COSTS
AND EXPENSES:
|
||||||||||||||||
Cost
of software licenses and subscriptions
|
691
|
580
|
1,788
|
1,744
|
||||||||||||
Cost
of maintenance and services
|
922
|
1,000
|
2,937
|
2,804
|
||||||||||||
Sales
and marketing
|
2,515
|
2,488
|
7,000
|
6,637
|
||||||||||||
Engineering
and product development
|
750
|
571
|
2,243
|
1,426
|
||||||||||||
General
and administrative
|
1,205
|
996
|
3,483
|
2,907
|
||||||||||||
Total
costs and expenses
|
6,083
|
5,635
|
17,451
|
15,518
|
||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
400
|
(291 | ) |
957
|
(33 | ) | ||||||||||
Interest
expense
|
—
|
(14 | ) | (33 | ) | (15 | ) | |||||||||
Interest
income and other income (expense), net
|
10
|
5
|
(9 | ) |
39
|
|||||||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
410
|
(300 | ) |
915
|
(9 | ) | ||||||||||
Provision
for income taxes
|
28
|
15
|
75
|
15
|
||||||||||||
NET
INCOME (LOSS)
|
$ |
382
|
$ | (315 | ) | $ |
840
|
$ | (24 | ) | ||||||
Net
income (loss) per share - Basic
|
$ |
0.07
|
$ | (0.06 | ) | $ |
0.15
|
$ | (0.00 | ) | ||||||
Net
income (loss) per share - Diluted
|
$ |
0.06
|
$ | (0.06 | ) | $ |
0.14
|
$ | (0.00 | ) | ||||||
Weighted-Average
|
||||||||||||||||
Shares
Outstanding – Basic
|
5,570
|
5,508
|
5,534
|
5,470
|
||||||||||||
Weighted-Average
|
||||||||||||||||
Shares
Outstanding – Diluted
|
6,032
|
5,508
|
5,976
|
5,470
|
(In
thousands)
|
||||||||
Nine
Months Ended June 30,
|
||||||||
2007
|
2006
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income (loss)
|
$ |
840
|
$ | (24 | ) | |||
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
713
|
642
|
||||||
Allowances
for doubtful accounts and sales returns
|
87
|
(125 | ) | |||||
Loss
on disposition of equipment
|
3
|
8
|
||||||
Stock-based
compensation expense
|
92
|
44
|
||||||
Deferred
income taxes
|
75
|
15
|
||||||
Changes
in current assets and liabilities:
|
||||||||
Accounts
receivable
|
(559 | ) |
564
|
|||||
Inventories
|
15
|
27
|
||||||
Prepaid
expenses and other
|
96
|
(14 | ) | |||||
Proceeds
from tenant improvements, offset against deferred rent
|
—
|
139
|
||||||
Accounts
payable and accrued expenses
|
249
|
(376 | ) | |||||
Deferred
revenue
|
(41 | ) | (229 | ) | ||||
Cash
provided by operating activities
|
1,570
|
671
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases
of property and equipment
|
(116 | ) | (873 | ) | ||||
Proceeds
from sale of equipment
|
1
|
2
|
||||||
Acquisition
of IDARS business
|
—
|
(4,553 | ) | |||||
Restricted
cash
|
—
|
140
|
||||||
Capitalized
software development costs
|
(43 | ) |
—
|
|||||
Other
assets
|
—
|
(9 | ) | |||||
Cash
used in investing activities
|
(158 | ) | (5,293 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
(Repayments)
borrowings on line of credit
|
(1,000 | ) |
1,000
|
|||||
Net
proceeds from exercise of stock options
|
286
|
181
|
||||||
Cash
(used in) provided by financing activities
|
(714 | ) |
1,181
|
|||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS
|
31
|
(5 | ) | |||||
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS
|
729
|
(3,446 | ) | |||||
CASH
AND EQUIVALENTS, BEGINNING OF PERIOD
|
1,862
|
4,901
|
||||||
CASH
AND EQUIVALENTS, END OF PERIOD
|
$ |
2,591
|
$ |
1,455
|
||||
SUPPLEMENTAL
INFORMATION:
|
||||||||
Interest
paid
|
$ |
42
|
$ |
15
|
||||
Income
taxes paid
|
$ |
4
|
$ |
—
|
(In
thousands)
|
||||||||||||||||||||||||||||
Weighted
|
June
30, 2007
|
September
30, 2006
|
||||||||||||||||||||||||||
Identified
Intangible Asset
|
Average
Useful
Life
in
Years
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||||||||||||||||
Capitalized
software
|
2
|
$ |
1,709
|
$ | (1,666 | ) | $ |
43
|
$ |
1,666
|
$ | (1,648 | ) | $ |
18
|
|||||||||||||
Purchased
software
|
5
|
700
|
(354 | ) |
346
|
700
|
(245 | ) |
455
|
|||||||||||||||||||
Patents
|
20
|
160
|
(22 | ) |
138
|
160
|
(16 | ) |
144
|
|||||||||||||||||||
Customer
lists
|
4-10
|
1,790
|
(287 | ) |
1,503
|
1,790
|
(138 | ) |
1,652
|
|||||||||||||||||||
Non-compete
agreements
|
4
|
640
|
(215 | ) |
425
|
640
|
(99 | ) |
541
|
|||||||||||||||||||
Trademarks
|
indefinite
|
345
|
—
|
345
|
345
|
—
|
345
|
|||||||||||||||||||||
Total
|
$ |
5,344
|
$ | (2,544 | ) | $ |
2,800
|
$ |
5,301
|
$ | (2,146 | ) | $ |
3,155
|
Fiscal
Year Ended September 30,
|
(In
thousands)
|
|||
Remainder
of fiscal 2007
|
$
|
122
|
||
2008
|
492
|
|||
2009
|
429
|
|||
2010
|
353
|
|||
2011
|
195
|
|||
2012
|
174
|
|||
Thereafter
|
1,035
|
|||
Total
|
$
|
2,800
|
(In
thousands)
|
||||||||
June
30,
2007
|
September
30,
2006
|
|||||||
(unaudited)
|
||||||||
Maintenance
|
$ |
3,725
|
$ |
3,690
|
||||
Other
|
823
|
778
|
||||||
Total
|
4,548
|
4,468
|
||||||
Less:
long-term component of deferred maintenance
|
(198 | ) |
—
|
|||||
Current
portion
|
$ |
4,350
|
$ |
4,468
|
Three
months ended June 30,
|
Nine
months ended June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Sales
and Marketing
|
$ |
13
|
$ |
8
|
$ |
36
|
$ |
16
|
||||||||
Engineering
and product development
|
3
|
2
|
8
|
5
|
||||||||||||
General
and administrative
|
19
|
12
|
48
|
23
|
||||||||||||
$ |
35
|
$ |
22
|
$ |
92
|
$ |
44
|
2007
|
2006
|
|||
Expected
life
|
5
years
|
5
years
|
||
Expected
volatility
|
65.7%
- 94.1%
|
96.3%
|
||
Risk
free interest rate
|
4.5%
- 5.0%
|
4.6%
|
||
Dividend
yield
|
0.0%
|
0.0%
|
Options
Outstanding
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
$(000)
|
|||||||||||||
Outstanding,
October 1, 2006
|
852,316
|
$ |
2.65
|
|||||||||||||
Granted
|
110,000
|
2.67
|
||||||||||||||
Canceled
|
(27,426 | ) |
4.74
|
|||||||||||||
Exercised
|
(98,514 | ) |
2.91
|
|||||||||||||
Outstanding,
June 30, 2007
|
836,376
|
$ |
2.55
|
5.65
|
$ |
2,459
|
||||||||||
Exercisable,
June 30, 2007
|
692,731
|
$ |
2.43
|
5.10
|
$ |
2,130
|
(In
thousands)
|
||||||||||||||||
|
Three
Months Ended June 30,
|
Nine
Months Ended June 30,
|
||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Net
income (loss)
|
$ |
382
|
$ | (315 | ) | $ |
840
|
$ | (24 | ) | ||||||
Other
comprehensive income (loss):
|
||||||||||||||||
Foreign
currency translation adjustments
|
19
|
(12 | ) | (53 | ) | (36 | ) | |||||||||
Comprehensive
income (loss)
|
$ |
401
|
$ | (327 | ) | $ |
787
|
$ | (60 | ) |
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Desktop
and Server Software (primarily Monarch)
|
60 | % | 59 | % | 53 | % | 59 | % | ||||||||
Report
Management Solutions (including Datawatch|ES, Datawatch|BDS,
Monarch|RMS,
Researcher & iMergence)
|
23 | % | 22 | % | 26 | % | 18 | % | ||||||||
Service
Management Solutions (including Visual|QSM &
Visual|HD)
|
17 | % | 19 | % | 21 | % | 23 | % | ||||||||
Total
|
100 | % | 100 | % | 100 | % | 100 | % |
(In
thousands)
|
||||||||||||||||
International
|
||||||||||||||||
(Principally
|
Intercompany
|
|||||||||||||||
Domestic
|
U.K.)
|
Eliminations
|
Total
|
|||||||||||||
Total
Revenue
|
||||||||||||||||
Three
months ended June 30, 2007
|
$ |
5,022
|
$ |
1,677
|
$ | (216 | ) | $ |
6,483
|
|||||||
Three
months ended June 30, 2006
|
3,975
|
1,584
|
(215 | ) |
5,344
|
|||||||||||
Nine
months ended June 30, 2007
|
$ |
13,121
|
$ |
6,098
|
$ | (811 | ) | $ |
18,408
|
|||||||
Nine
months ended June 30, 2006
|
11,133
|
5,049
|
(697 | ) |
15,485
|
|||||||||||
Total
Operating Income (Loss)
|
||||||||||||||||
Three
months ended June 30, 2007
|
$ |
396
|
$ |
4
|
$ |
—
|
$ |
400
|
||||||||
Three
months ended June 30, 2006
|
130
|
(421 | ) |
—
|
(291 | ) | ||||||||||
Nine
months ended June 30, 2007
|
$ |
208
|
$ |
749
|
$ |
—
|
$ |
957
|
||||||||
Nine
months ended June 30, 2006
|
558
|
(591 | ) |
—
|
(33 | ) | ||||||||||
Non-current
Assets
|
||||||||||||||||
At
June 30, 2007
|
$ |
9,834
|
$ |
98
|
$ |
—
|
$ |
9,932
|
||||||||
At
September 30, 2006
|
9,588
|
99
|
—
|
9,687
|
Three
Months Ended June 30,
|
Nine
Months Ended June 30,
|
|||||||
2007
|
2006
|
2007
|
2006
|
|||||
REVENUE:
|
||||||||
Software
licenses and subscriptions
|
63.1%
|
63.4%
|
58.6%
|
64.5%
|
||||
Maintenance
and services
|
36.9%
|
36.6%
|
41.4%
|
35.5%
|
||||
Total
Revenue
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
||||
COSTS
AND EXPENSES:
|
||||||||
Cost
of software licenses and subscriptions
|
10.7%
|
10.8%
|
9.7%
|
11.3%
|
||||
Cost
of maintenance and services
|
14.2%
|
18.7%
|
16.0%
|
18.1%
|
||||
Sales
and marketing
|
38.8%
|
46.6%
|
38.0%
|
42.9%
|
||||
Engineering
and product development
|
11.6%
|
10.7%
|
12.2%
|
9.2%
|
||||
General
and administrative
|
18.5%
|
18.6%
|
18.9%
|
18.8%
|
||||
Total
costs and expenses
|
93.8%
|
105.4%
|
94.8%
|
100.3%
|
||||
INCOME
(LOSS) FROM OPERATIONS
|
6.2%
|
(5.4%)
|
5.2%
|
(0.3%)
|
||||
Interest
expense
|
—
|
(0.3)%
|
(0.2%)
|
(0.1%)
|
||||
Interest
income and other income (expense), net
|
0.1%
|
0.1%
|
(0.0%)
|
0.2%
|
||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
6.3%
|
(5.6)%
|
5.0%
|
|
(0.2)%
|
|||
Provision
for income taxes
|
0.4%
|
0.3%
|
0.4%
|
—
|
||||
NET
INCOME (LOSS)
|
5.9%
|
(5.9)%
|
4.6%
|
|
(0.2%)
|
(In
thousands)
|
||||||||||||||||
Three
Months Ended
|
||||||||||||||||
June
30,
|
Percentage
|
|||||||||||||||
2007
|
2006
|
Increase
|
Increase
|
|||||||||||||
Software
licenses and subscriptions
|
$ |
4,091
|
$ |
3,386
|
$ |
705
|
20.8% | |||||||||
Maintenance
and services
|
2,392
|
1,958
|
434
|
22.1% | ||||||||||||
Total
revenue
|
$ |
6,483
|
$ |
5,344
|
$ |
1,139
|
21.3% |
(In
thousands)
|
||||||||||||||||
Three
Months Ended
|
Percentage
|
|||||||||||||||
June
30,
|
Increase
/
|
Increase
/
|
||||||||||||||
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|||||||||||||
Costs
of software licenses and subscriptions
|
$ |
691
|
$ |
580
|
111
|
19.1% | ||||||||||
Costs
of maintenance and services
|
922
|
1,000
|
(78 | ) | (7.8)% | |||||||||||
Sales
and marketing expenses
|
2,515
|
2,488
|
27
|
1.1% | ||||||||||||
Engineering
and product development expenses
|
750
|
571
|
179
|
31.3% | ||||||||||||
General
and administrative expenses
|
1,205
|
996
|
209
|
21.0% | ||||||||||||
Total
costs and operating expenses
|
$ |
6,083
|
$ |
5,635
|
$ |
448
|
8.0% |
(In
thousands)
|
||||||||||||||||
Nine
Months Ended
|
||||||||||||||||
June
30,
|
Percentage
|
|||||||||||||||
2007
|
2006
|
Increase
|
Increase
|
|||||||||||||
Software
licenses and subscriptions
|
$ |
10,786
|
$ |
9,984
|
802
|
8.0% | ||||||||||
Maintenance
and services
|
7,622
|
5,501
|
2,121
|
38.6% | ||||||||||||
Total
revenue
|
$ |
18,408
|
$ |
15,485
|
$ |
2,923
|
18.9% |
(In
thousands)
|
||||||||||||||||
Nine
Months Ended
|
||||||||||||||||
June
30,
|
Percentage
|
|||||||||||||||
2007
|
2006
|
Increase
|
Increase
|
|||||||||||||
Costs
of software licenses and subscriptions
|
$ |
1,788
|
$ |
1,744
|
44
|
2.5% | ||||||||||
Costs
of maintenance and services
|
2,937
|
2,804
|
133
|
4.7% | ||||||||||||
Sales
and marketing expenses
|
7,000
|
6,637
|
363
|
5.5% | ||||||||||||
Engineering
and product development expenses
|
2,243
|
1,426
|
817
|
57.3% | ||||||||||||
General
and administrative expenses
|
3,483
|
2,907
|
576
|
19.8% | ||||||||||||
Total
costs and operating expenses
|
$ |
17,451
|
$ |
15,518
|
$ |
1,933
|
12.5% |
Contractual
Obligations:
|
Total
|
Less
than 1 Year
|
1-3
Years
|
3-5
Years
|
More
than 5
Years
|
|||||||||||||||
Operating
Lease Obligations
|
$ |
902
|
$ |
329
|
$ |
385
|
$ |
188
|
$ |
—
|
·
|
Hiring
of additional personnel with software revenue recognition
experience:
|
o
|
In
January 2007, the Company hired a consultant, with several years
of
software revenue recognition experience at a public software company.
Effective February 1, 2007 the consultant was appointed to the
position of
interim Chief Financial Officer. On March 26, 2007, the Company
hired a
Chief Financial Officer with software revenue recognition experience
and
the consultant, mentioned above, remained with the Company to help
continue to address these controls until May
2007.
|
·
|
Initiate
additional training of sales organization regarding revenue recognition
rules and best practices:
|
o
|
During
the nine months ended June 30, 2007, the Company initiated additional
training of its sales organization regarding revenue recognition
rules and best practices.
|
·
|
Formulate
checklists to define revenue recognition criteria and to document
related
transactional
information:
|
o
|
During
the nine months ended June 30, 2007, the Company used various checklists
for revenue recognition criteria on all non-standard orders as
well as all
orders containing multiple-element
arrangements.
|
·
|
Implement
a policy requiring quarterly certifications from all sales managers,
in
order to assist management in detecting issues that may affect
revenue
recognition and the accuracy of its financial
statements:
|
o
|
This
initiative was fully implemented for certifications starting with
the
Company’s Report on Form 10-Q for the Quarterly Period Ended March 31,
2007 and were obtained prior to filing this Report on Form
10-Q.
|
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.
|
DATAWATCH
CORPORATION
|
||||
/s/
Robert W. Hagger
|
||||
Robert
W. Hagger
|
||||
President,
Chief Executive Officer, and Director
|
||||
(Principal
Executive Officer)
|
||||
/s/
Murray P. Fish
|
||||
Murray
P. Fish
|
||||
Chief
Financial Officer, Vice President of Finance, Treasurer and Assistant
Secretary
|
||||
(Principal
Financial Officer)
|