UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION  

WASHINGTON, D.C. 20549  

 

FORM 10-K 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2016 OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                          TO

 

COMMISSION FILE NUMBER: 000-19960  

 

DATAWATCH CORPORATION 

(Exact name of registrant as specified in its charter)  

 

DELAWARE   02-0405716
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

4 CROSBY DRIVE  

BEDFORD, MASSACHUSETTS 01730 

(978) 441-2200  

(Address and telephone number of principal executive office) 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Common Stock $0.01 PAR VALUE   NASDAQ
(Title of Class)   (Name of Exchange on which Registered) 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE  

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    x     No    ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

 

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨     Accelerated filer ¨

Non-accelerated filer    ¨  (Do not check if a smaller reporting company) 

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yes ¨ No x

 

The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the registrant’s common stock on March 31, 2016, the last business day of the Company’s most recently completed second fiscal quarter, as reported by the NASDAQ Capital Market was $46,637,207.

 

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of November 8, 2016 was 11,923,786.

 

Documents Incorporated By Reference 

 

Registrant intends to file a definitive Proxy Statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended September 30, 2016. Portions of such Proxy Statement are incorporated by reference in Part III of this report.

 

 

 

 

 

 

DATAWATCH CORPORATION 

ANNUAL REPORT ON FORM 10-K 

 

TABLE OF CONTENTS 

   

    Page
Part I    
     
Item 1. Business 3
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 18
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Mine Safety Disclosures 19
     
Part II    
     
Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities 20
Item 6. Selected Consolidated Financial Data 21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 65
Item 9A. Controls and Procedures 65
Item 9B. Other Information 66
     
Part III    
     
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 67
Item 13. Certain Relationships and Related Transactions, and Director Independence 67
Item 14. Principal Accountant Fees and Services 67
     
Part IV    
     
Item 15. Exhibits and Financial Statement Schedules 68

 

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PART I  

 

Item 1. BUSINESS  

 

GENERAL  

 

Datawatch Corporation (NASDAQ-CM:  DWCH ) (“Datawatch”, “We”, “Us”, “Our”) provides self-service data preparation and visual data discovery software that optimizes multiple sources and a variety of data – regardless of its variety, volume, or velocity – delivering next generation analytics to reveal valuable insights for improving business. Its ability to integrate structured, unstructured, and semi-structured sources like reports, PDF files and EDI streams with real-time streaming data into visually rich analytic applications allows users to dynamically discover key factors that impact any operational aspect of their business. We believe this ability to perform visual discovery against multiple sources and a variety of data sets Datawatch apart in the Big Data and visualization markets. Organizations of every size, worldwide use Datawatch products, including 99 of the Fortune 100. Datawatch is headquartered in Bedford, Massachusetts, with offices in New York, London, Stockholm, Singapore, and Manila, and with partners and customers in more than 100 countries worldwide.

 

Datawatch is a Delaware corporation, formed in 1986, with executive offices located at 4 Crosby Drive, Bedford, MA 01730 and our telephone number is (978) 441-2200. Periodic reports, proxy statements and other information are available to the public, free of charge, on our website, www.datawatch.com , as soon as reasonably practicable after they have been filed with the SEC and through the SEC’s website, www.sec.gov . Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. 

 

OUR MARKET

 

We sell and compete in the data preparation and visualization market, which is an emerging and fast growing segment of the overall business analytics space. The analytics market has evolved over the past several years from large systems implemented and managed by IT, to more agile, self-service systems owned and operated by the various business functions.

 

The self-service data preparation market addresses the needs of business users who are creating and analyzing data without IT intervention. Users need to access, clean and blend data from a wide variety of systems before it can be visualized. It is estimated that up to 80% of user time is spent preparing data versus analyzing data.

 

The visual data discovery market continues to evolve with new requirements that make Datawatch a more relevant player in this market. While ease of use is still a critical factor in the adoption of visualization technologies, the types of use cases that organizations are applying these technologies to have changed. To support these new use cases visual data discovery technologies are evolving from products to platforms that deal with not only the development of visualizations, but also the acquisition, preparation, automation and management of any source of data to be used in visual data discovery applications. Datawatch’s extensive experience in these areas has allowed us to take on these challenges and deliver high value results to our customers in these mission critical use cases. Two use cases that have dramatically changed how visualization technologies are used are the emergence of the internet of things (“IoT”), specifically the industrial internet, and the expanded use of enterprise content management sources as data in visualization applications.

 

The Internet of Things (IoT)

 

With billions of connected “smart objects” generating information from everything from toasters to jet engines, and that number set to grow to over 50 billion devices by 2020 according to the Industrial Internet Consortium, the IoT promises to change the way businesses view everything from their customers to every aspect of their operations. While there is unlimited potential for the use of data from the IoT, the area that holds the highest value is in the use of data from the industrial internet – the monitoring and management of equipment, logistical information and supply chain related to industries such as energy, transportation, manufacturing and health care. To leverage this type of information, organizations will require a visual data discovery platform that can ingest, prepare and blend high velocity in-motion data from these sensors with business data that provides historical perspective and context to this information. We believe that Datawatch is unique in its ability to provide this capability coupled with a self-service end-user design experience and that this combination will place Datawatch at the forefront of this growing market, opening up partnership opportunities with key IoT infrastructure providers.

 

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Enterprise Content Management (ECM)

 

For years, organizations have stored vast amounts of unstructured and semi-structured content in enterprise content management (“ECM”) systems. While some of this data was stored originally as a result of compliance requirements, many organizations are now looking to do more with that information to better understand their businesses or to utilize Big Data sources to drive decisions within their businesses. Traditional enterprise content management systems are not equipped to do much more than search and retrieve documents. Their inability to take any action against the returned information is a significant limitation. By including Datawatch as part of the solution, ECM systems can be transformed from simple search technologies into “search-to-action” solutions, providing better analytical information to users. This information can be included as another data source in Next Generation Analytics applications, thus providing even greater insight to organizations’ operations.

 

While IoT and ECM based visual data discovery solutions are only two of many examples of changes in the market that are driving new requirements for visual data discovery vendors, they are not alone. An increase in the use of NoSQL data and other multi-structured sources coupled with the desire for a more manageable and governed deployment of visualization solutions are also driving additional changes in industries such as capital markets, government, retail, and telecommunications.

 

OUR PRODUCTS  

 

The Datawatch product family enables organizations to maximize the return on all of their information assets, regardless of the form of that data. Datawatch Monarch, the self-service data preparation solution, is the first step in unlocking value from data contained in a wide variety of sources. Datawatch Panopticon enables real-time preparation of streaming data for fast data analysis. Both of these data preparation engines are integrated technically. Monarch and Panopticon provide the broadest solution for unlocking, preparing and visualizing the widest variety of enterprise data. Using all available information enables organizations to make more insightful decisions that yield better and faster results

 

The Datawatch product family includes the following products:  

 

Datawatch Monarch™ — Access and Prepare Data from Virtually Any Source

 

Datawatch Monarch is a self-service data preparation tool which lets users explore, manipulate and merge new data sources. With Datawatch Monarch, users can bring all the data that is needed to manage the business to life, whether that information is stored in structured sources like databases, or in less conventional places like unstructured or semi-structured content including PDF files, reports, EDI or text files. Products in the Monarch family include Datawatch Monarch and Datawatch Monarch Server.

 

Datawatch Panopticon ™ — Visually Design, Discover and Explore New Insights

 

Datawatch Panopticon lets users quickly start asking questions to see hidden patterns, spot problems and identify missed opportunities without programming or scripting. Our in-memory analytics engine enables on-the-fly aggregations and intuitive navigation and integration of data from virtually any data source. With a simple drag-and-drop interface, users can set up hierarchies and filters in their dashboards to make it easier to spot outliers and to see how different subsets of data correlate with each other. Datawatch Panopticon provides a range of specialized visualizations designed specifically to make analyzing streaming data, time series data and historical data, more impactful. Integrated data preparation capabilities and pre-built connectors make it simple to access and combine information from any data source, including data streams from message brokers and complex event processing engines. Products in the Panopticon family include Datawatch Panopticon Designer and Datawatch Panopticon Server.

 

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Datawatch Report Mining Server ™ — Unlocking the Power of Content

 

Datawatch Report Mining Server (“RMS”) is a web-based report analytics solution that integrates with any existing enterprise content management system such as Datawatch Report Manager On-Demand, IBM Content Manager On-Demand, Microsoft SharePoint, Hyland OnBase, ASG Mobius ViewDirect and others. Datawatch RMS opens up the corporate data locked in content management systems, static reports and business documents, enabling dynamic business-driven analysis of information using Datawatch Panopticon Designer or other productivity tools with no user programming.

 

OUR SERVICES  

 

Datawatch complements its core products with a range of services to ensure successful deployment and usage of our self-service data preparation and visual data discovery software. This includes educational services for customers and partners implementing and learning about the platform, maintenance and support, and professional services to provide in-depth technical assistance for software implementations.

 

Educational Services

 

Datawatch Educational Services offers a number of training choices to customers and partners to support the knowledge and skills development needed to take advantage of their investment in our self-service data preparation and visual data discovery software. We offer an array of live and virtual classroom instruction, including private onsite classes. Courses include training on all aspects of our platform, from beginning model building basics to the deployment of sophisticated dashboards sourced from data harvested by our platform.

 

Professional Services

 

To assist customers in achieving rapid time-to-value, Datawatch has established a professional services team. This team supports customers and partners with more in-depth technical consulting and best practices about our platform including advanced modeling, application design, implementation and configuration and process optimization.

 

Customer Support

 

Datawatch’s customers pay for one year of software maintenance and support with their purchase of our software license platform and have the option to annually renew their maintenance agreements. These annual maintenance agreements provide customers the right to receive software updates on a when-and-if available basis, maintenance releases and patches, and access to telephone support services. The maintenance agreement also allows access to an on-line user forum where experienced users from around the world can share their tips and tricks.

  

Datawatch has determined that it has only one operating segment. See Note 10 to our accompanying consolidated financial statements for information about our revenue by geographic operations. 

 

MARKETING, SALES AND DISTRIBUTION STRATEGY

 

We market and sell our products and services through our direct sales force, a distribution channel and an indirect sales channel comprised of a global partner network. Our direct sales force consists of professional sales and pre-sales personnel who typically have several years of experience selling and demonstrating enterprise software solutions. Our distribution channel is predominantly for our Datawatch Monarch product and consists of a two-tier reselling network in North America and single-tier resellers in the rest of the world. Our global partner network brings significant technological and industry expertise, as well as added geographic presence, that enable us to reach customer organizations around the world. These indirect sales channels often help to shorten sales cycles with prospective customers.

 

Our global partner network includes strategic, geographic and product-specific resellers. These partners are typically authorized to sell licenses, implement and, in some instances, provide first line support for our software products. Additionally, we work with global, national and local system integrators, implementation partners and referral partners who may sell licenses and provide complementary skills, domain or industry experience, as well as geographic coverage.

 

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Our global partner network also includes original equipment manufacturer (“OEM”) partners and value-added reseller (“VAR”) partners who use our technologies as an embedded or bundled add-on features in their products and services. Typically, OEM and VAR partners include software companies, SaaS vendors and information providers. More broadly, this category includes any organization seeking to leverage Datawatch products to access and analyze semi-structured and unstructured data for use in an existing or new product or in a service offering. We invest both development and business resources to ensure that Datawatch products are optimized and certified for leading technology platforms, allowing our customers to benefit from these expanded solutions with seamless integration.

 

We support our global partner network based on three fundamental principles:

 

· enable partners through sales training, demonstration training, technical support and education;
· market with and for partners through lead generation programs, customer marketing and awareness; and,
· position and sell Datawatch products with effective sales tools and sales support.

 

As of September 30, 2016, our global partner network was comprised of more than 100 partners worldwide. No one customer accounted for more than 10% of our total revenue for the years ended September 30, 2016 and 2015. One distribution partner, Lifeboat Distribution (“Lifeboat”), accounted for 15% of total revenue for the year ended September 30, 2014. Other than this customer, no other customer accounted for more than 10% of our total revenue in fiscal 2014. Our agreement with Lifeboat expired in early 2015 and, to manage the transition, we refocused part of our Inside Sales Team to manage and pursue the book of business previously handled by Lifeboat.

  

Prior to the expiration of our agreement, we offered Lifeboat the ability to return slow-moving and obsolete versions of our products for credit. Based on our historical experience relative to products sold to distributors, we believe that our exposure to such returns was minimal. While the agreement was in place, we recorded a provision for such estimated returns in our accompanying consolidated financial statements.

 

Our software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. We also offer a 30 day money-back guarantee on our Datawatch Monarch product sold directly to end-users. To date, we have not experienced any significant product returns under our money-back guarantee. 

 

We focus our marketing efforts on generating qualified sales leads for our direct sales force and our global partners, increasing brand awareness, communicating our positioning in the market and promoting product advantages. We rely on a variety of marketing initiatives including internet-based marketing campaigns, user group meetings, trade shows, our website, industry research, public relations and advertising. In addition, we work closely with a number of our global partners on co-marketing and lead generation initiatives in an effort to broaden our marketing reach.

   

 Our revenues from outside of the United States are primarily the result of sales through the direct sales force of our wholly-owned subsidiaries, Datawatch International Limited, which is located in the United Kingdom and its subsidiaries which are located in Germany, Singapore and Australia, and Datawatch AB, which is located in Sweden, as well as through international resellers. Such international sales represented 14%, 21% and 17% of our total revenue for fiscal 2016, 2015 and 2014, respectively.  Further geographic information is included in Note 10, “Segment Information and Revenue by Geographic Location,” to our accompanying consolidated financial statements.

 

OUR RESEARCH AND DEVELOPMENT OPERATIONS

 

We believe that timely development of new products and enhancements to our existing products are essential to maintain strong positions in our markets. We intend to continue to invest significant amounts in research and product development to ensure that our products meet the current and future demands of our markets as well as to take advantage of evolving technology trends. 

 

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Our product managers work closely with developers, whether independent or in-house, to define product specifications. The initial concept for a product originates from this cooperative effort.  The developer is generally responsible for coding the development project. Our product managers maintain close technical control over the products, giving us the freedom to designate which modifications and enhancements are most important and when they should be implemented. The product managers and their staff work in parallel with the developers to produce printed documentation, on-line help files, tutorials and installation software. In some cases, we may choose to subcontract a portion of this work on a project basis to third-party suppliers under contracts. Our personnel also perform extensive quality assurance testing for all products and coordinate external beta test programs. 

   

Datawatch products have been developed through in-house software development, by offshore software development companies hired under contract or by acquisition. We maintain source code and full product control for these products, which include Datawatch Monarch, Datawatch Monarch Server, Datawatch Panopticon Designer, Datawatch Panopticon Server, Datawatch Software Developers Kit, Datawatch Report Mining Server and legacy products including Datawatch Report Manager On-Demand.

 

Our total engineering and product development expense was $8.2 million, $8.9 million and $9.1 million for fiscal years 2016, 2015 and 2014, respectively. 

 

OUR COMPETITION  

 

The differentiated technology underlying Datawatch’s self-service data preparation and visual data discovery software enables us to compete within the broader, highly competitive, business analytics market and specifically the data visualization market. While we believe that there is no single competitor that addresses the full range of capabilities of our software, we face competition from several companies that are offering, or soon may offer, products that compete with portions or aspects of our software.

 

Competitors can be classified into four broad categories:

 

· Large software companies, including suppliers of traditional business intelligence products that provide one or more capabilities that are competitive with our products, such as IBM, Microsoft, Oracle and SAP.
· New and emerging vendors focused on data preparation, such as Informatica, Alteryx, Paxata and Trifacta.
· Business analytics vendors focused on real-time visualization, such as First Derivatives and Zoomdata.
· Independent vendors that focus on extracting specific data formats or sources such as machine data, data in content management systems, EDI, XBRL, HTML and PDFs. These competitors include Splunk, Actuate (Xenos) and Informatica, among others.

 

We believe that generally, we compete favorably with respect to these companies and competitive offerings; however, some of our current competitors and potential competitors have advantages over us, including: 

 

· longer operating histories,
· significantly greater financial, technical, marketing or other resources,
· stronger brand and business user recognition, and
· broader global distribution and presence.

 

Competition in our industry is likely to intensify as current competitors expand their product lines and as new competitors enter the market.

 

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OUR EMPLOYEES  

 

As of November 8, 2016, we had 146 full-time and 7 contract, temporary or part-time employees, including 60 engaged in marketing and sales; 27 engaged in product consulting, training and technical support; 43 engaged in product management, development and quality assurance; and 23 providing general, administrative, accounting, IT and software production and warehousing functions.

 

OTHER BUSINESS CONSIDERATIONS

 

Product Protection  

 

We rely on a combination of trade secrets, copyright and trademark laws, nondisclosure and other contractual agreements, and technical measures to protect our rights in our products. Additionally, on June 30, 2015, we applied with the United States Patent and Trademark Office (USPTO) for patent protection for our proprietary systems and methods for automatically generating tables using auto-generated templates and, on January 12, 2016, we applied with the USPTO for patent protection for our proprietary systems and methods for generating tables from print-ready digital source documents. Despite these precautions, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. We believe that, because of the rapid pace of technological change in the software industry, the legal protections for our products are less significant than the knowledge, ability and experience of our employees and developers, the frequency of product enhancements and the timeliness and quality of our support services. We believe that none of our products, trademarks, and other proprietary rights infringes on the proprietary rights of third parties, but there can be no assurance that third parties will not assert infringement claims against us in the future. 

  

Backlog

 

Our software products are generally shipped within three business days of receipt of an order. Accordingly, we do not believe that backlog for our product is a meaningful indicator of future business. We do maintain a backlog of services commitments primarily related to Datawatch Monarch Server and Datawatch Report Manager On-Demand business. While this services backlog will provide future revenue to Datawatch, we believe that it is not a meaningful indicator of future business. 

 

Item 1A. RISK FACTORS

 

We do not provide forecasts of our future financial performance. However, from time to time, information provided by us or statements made by our employees may contain “forward looking” information that involves risks and uncertainties. In particular, statements contained in this Annual Report on Form 10-K that are not historical facts (including, but not limited to statements contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of this Annual Report on Form 10-K relating to liquidity and capital resources) may constitute forward looking statements and are made under the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. We caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Our actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, without limitation, the risks, uncertainties and other information discussed below and within this Annual Report on Form 10-K, as well as the accuracy of our internal estimates of revenue and operating expense levels. The following discussion of our risk factors should be read in conjunction with the financial statements contained herein and related notes thereto. Such factors, among others, may have a material adverse effect upon our business, results of operations and financial condition. 

 

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Risks Relating to our Business

 

Actions of activist stockholders against us could be disruptive and potentially costly and the possibility that activist stockholders may seek changes that contest, or conflict with, our strategic direction could cause uncertainty about the strategic direction of our business.

 

Activist stockholders may from time to time attempt to effect changes in our strategic direction and, in furtherance thereof, may seek changes in how the Company is governed. While our Board of Directors and management team strive to maintain constructive, ongoing communications with all of the Company’s stockholders, including activist stockholders, and welcome their views and opinions with the goal of working together constructively to enhance value for all stockholders, activist campaigns that contest, or conflict with, our strategic direction could have an adverse effect on our business because:

 

· Responding to proxy contests and other actions by activist stockholders can disrupt our operations, be costly and time-consuming, and divert the attention of our Board of Directors and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition;

· Perceived uncertainties as to our future direction as a result of changes to the composition of our Board of Directors may lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, may result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners;

· These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business; and

 

If individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders.

 

A Weak Global Economy and Softening in the Computer Software Market May Result in Decreased Revenues or Lower Revenue Growth Rates   

 

The growth and profitability of our business depends on the overall demand for computer software and services, particularly in the financial services markets and other markets in which we compete. Tighter credit and negative financial news that may result from challenging economic conditions worldwide and, in the U.S., have an adverse effect on capital spending by corporations, including the demand for computer software. Because our sales are primarily to major corporate customers, poor economic conditions may soften the demand for computer software and services which may result in decreased revenues, lower revenue growth rates and reduced profitability. In addition, a weak global economy may result in longer sales cycles, reduced, deferred or cancelled orders, or greater than anticipated uncollectible accounts receivables. In a weakened economy, we cannot be assured that we will be able to effectively promote future growth in our software and services revenues or operate profitability. 

 

Our Dependence on our Principal Products, our Failure to Develop Enhanced or New Products and our Concentration of Customers within the Financial Sector May Have a Material Adverse Effect on our Business, Financial Condition or Results of Operations  

 

Our future financial performance will depend in part on the successful introduction of new and enhanced versions of these products and development of new versions of these and other products and subsequent customer acceptance of such new and enhanced products. We are primarily dependent on our ability to successfully market and sell our self-service data preparation and visual data discovery products. Currently customers in the financial sector, and particularly in capital markets, comprise a significant portion of our customer base. Any factor adversely affecting the financial sector and capital markets in particular could adversely affect sales of our products within such sector, which could have a material adverse effect on us. 

 

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Fluctuations in Quarterly Operating Results Could Have a Material Adverse Effect on our Business, Financial Condition or Results of Operations   

 

Our future operating results could vary substantially from quarter-to-quarter because of uncertainties and/or risks associated with such matters as current economic conditions, technological change, competition, delays in the introduction of new products or product enhancements, and market acceptance of those new products and product enhancements, and general market trends. In addition, as we focus on increasing enterprise sales to large customers, the timing of significant orders may cause fluctuations in quarterly operating results. Large enterprise sales arrangements often involve multiple elements and may require more complex accounting than the sales transactions we have entered into in the past, which also makes projecting future operating results more difficult. Historically, we have operated with minimal backlog of orders because our software products are generally shipped as orders are received. As a result, net sales in any quarter are substantially dependent on orders booked and shipped in that quarter. Further, any increases in sales under our subscription sales model or cloud offering could result in decreased revenues over the short term. Because our staffing and operating expenses are based on anticipated revenue levels and a high percentage of our costs are fixed in the short-term, small variations in the timing of revenues can cause significant variations in operating results from quarter-to-quarter. In addition, at September 30, 2016, we had no unrecognized compensation costs related to options, and $3.0 million of unrecognized compensation costs related to RSUs, which is expected to be recognized over a weighted-average period of 1.91 years, which costs will have a negative effect on our profitability on a GAAP reporting basis. Because of these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. We can give no assurance that we will not experience such variations in operating results in the future or that such variations will not have a material adverse effect on our business, financial condition or results of operations. 

 

The Sales Cycle for our Enterprise Products is Long and Unpredictable, Particularly with Respect to Large Customers, and our Sales Efforts Require Considerable Time and Expense

 

Our operating results may fluctuate, in part, because of the resource intensive nature of our sales efforts, the length and variability of the sales cycle of our enterprise software licensing offerings and the short-term difficulty in adjusting our operating expenses. Our operating results depend in part on sales to large customers and conversions of users that have downloaded the desktop version of our Datawatch Monarch software into enterprise customers. The length of our sales cycle, from initial evaluation to delivery of and payment for the software license, varies substantially from customer to customer. It is difficult to predict exactly when, or even if, we will make a sale with a potential customer or if a user that has licensed desktop versions of our Datawatch Monarch software will upgrade to a larger server license. As a result, large individual sales may, in some cases, occur in quarters subsequent to those we anticipate, or not at all. The loss or delay of one or more large transactions in a quarter could impact our operating results for that quarter and any future quarters for which revenue from that transaction is delayed. As a result of these factors, it is difficult for us to forecast our revenues accurately in any quarter. Because a substantial portion of our expenses are relatively fixed in the short-term, our operating results will suffer if revenues fall below our expectations in a particular quarter, which could cause the price of our common stock to decline.

  

If we are Unable to Attract New Customers and Expand Sales to Existing Customers, our Growth Could be Slower than we Expect and our Business May Be Harmed.

 

Our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenues in the future will depend, in large part, upon the effectiveness of our marketing efforts, both domestically and internationally, and our ability to attract new customers. If we fail to attract new customers and maintain and expand those customer relationships, our revenues will grow more slowly than expected and our business operations and financial results will be harmed.

 

Our future growth also depends upon expanding sales of our products to and renewing license and maintenance agreements with existing customers. In particular, part of our sales strategy is to leverage our desktop Monarch data preparation product to drive enterprise sales of our managed analytics platform. In order for us to improve our operating results, it is important that our existing customers make additional significant purchases of our products. If our customers do not purchase additional licenses or capabilities, our revenues may grow more slowly than expected, may not grow at all or may decline. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our products or services, our pricing or pricing structure, the pricing or capabilities of products or services offered by our competitors, the effects of economic conditions, or reductions in our customers’ spending levels. If our customers do not renew their agreements with us, or renew on terms less favorable to us, our revenues may decline and our business operations and financial results may be harmed.

 

  10  

 

 

The Markets for our Self-Service Data Preparation and Data Visualization Products are Emerging and May Not Grow

 

Because the market for our self-service data preparation and visual data discovery products are still emerging, it is difficult to predict customer adoption and renewal rates, customer demand for our enterprise software licenses, the size and growth rate of these markets, the entry of competitive products or the success of existing competitive products. Any expansion in our markets depends on a number of factors, including the cost, performance and perceived value associated with such software licenses. If the markets for our enterprise software licenses do not achieve widespread adoption or there is a reduction in demand for software in these markets caused by a lack of customer acceptance, technological challenges, competing technologies and products, decreases in corporate spending, weakening economic conditions, or otherwise, it could result in reduced customer orders, early terminations, reduced renewal rates or decreased revenues, any of which would adversely affect our business operations and financial results.

 

Dependence on New Product Introductions and New Product Delays or Defects Could Have a Material Adverse Effect on our Business 

 

The markets for data preparation and visual data discovery products is evolving rapidly. Growth in our business depends in substantial part on the continuing introduction of new products, to address the emerging needs of this market. The length of product life cycles depends in part on end-user demand for new or additional functionality in our products and our ability to update our products to meet such demands. If we fail to accurately anticipate the demand for, or encounter any significant delays in developing or introducing, new products or additional functionality in our products, there could be a material adverse effect on our business. Our product life cycles can also be affected if suppliers of software systems with which we interact introduce new or changed functionality within their products. Our failure to anticipate the introduction of additional functionality in products developed by such suppliers could have a material adverse effect on our business. In addition, our competitors may introduce products with more features and lower prices than our products. Such increase in competition could adversely affect the life cycles of our products, which in turn could have a material adverse effect on our business. 

 

Software products, whether developed internally or licensed from third parties, may contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing by us and by current and potential end-users, errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance. Any failure by us to anticipate or respond adequately to changes in technology and customer preferences, or any significant delays in product development or introduction, could have a material adverse effect on our business. 

 

A Significant Percentage of our Total Revenue is Subject to Risks Associated with International Sales 

 

In the years ended September 30, 2016, 2015 and 2014, international sales accounted for 14%, 21% and 17%, respectively, of our total revenue. We anticipate that international sales will continue to account for a significant, and perhaps increasing, percentage of our total revenue. A significant portion of our total revenue will therefore be subject to risks associated with international sales, including deterioration of international economic conditions, unexpected changes in legal and regulatory requirements, changes in tariffs, currency exchange rates and other import or export controls, political and economic instability, possible effects of war and acts of terrorism, difficulties in accounts receivable collection, difficulties in managing distributors or representatives, difficulties in staffing and managing international operations, difficulties in protecting our intellectual property overseas, seasonality of sales and potentially adverse foreign tax consequences. 

 

  11  

 

 

On June 23, 2016, the United Kingdom held a referendum in which United Kingdom voters approved an exit from the European Union commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the future terms of the United Kingdom’s relationship with the European Union, including the terms of trade between the United Kingdom and the European Union. The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The future effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and may cause our customers to closely monitor their costs and reduce their spending budget on our products and services. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the United Kingdom from the European Union would have and how such withdrawal would affect us. Adverse consequences such as deterioration in economic conditions, volatility in currency exchange rates, and prohibitive laws and regulations could have a negative impact on our business, operating results, and financial condition.

 

Future Acquisitions May be Difficult to Integrate, Disrupt our Business, Dilute Stockholder Value or Divert Management Attention 

 

In the future, we could acquire additional products, technologies or businesses, or enter into joint venture arrangements, for the purpose of complementing or expanding our business and to address the need to develop new products. Integrating the operations of an acquired company, product or business successfully or otherwise realizing the anticipated benefits of an acquisition, including additional revenue opportunities, involves a number of challenges and risks. The failure to meet these integration challenges could seriously harm our results of operations, and the market price of our common stock may decline as a result. Realizing the benefits of an acquisition will depend in part on the integration of technology, operations, personnel and sales activity of the two companies. These integration activities are complex and time - consuming, and we may encounter unexpected difficulties or incur unexpected costs, including:

 

· challenges in combining product offerings, including integration of the underlying technology, and sales and marketing activities;

· our inability to achieve the cost savings and operating synergies anticipated in the transaction, which would prevent us from achieving the positive earnings gains expected as a result of the transaction;

· diversion of management attention from ongoing business concerns to integration matters;

· difficulties in consolidating and rationalizing information technology platforms and administrative infrastructures;

· complexities in managing a larger and more geographically dispersed company than before the completion of transaction;

· difficulties in the assimilation of personnel and the integration of two business cultures;

· challenges in demonstrating to our customers and to customers of the acquired company that the transaction will not result in adverse changes in product and technology offerings, customer service standards or business focus; and

· possible cash flow interruption or loss of revenue as a result of change of ownership transitional matters.

 

We Recorded Substantial Impairment Charges in Fiscal 2015. Any Future Impairments of Our Assets Could Negatively Impact Our Results of Operations .

 

Non-amortizing intangible assets, including goodwill, are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment test is also required for other long-lived assets if events or changes in circumstances indicate that the carrying value may not be recoverable. Examples of events or changes in circumstances indicating that the carrying value of such intangible assets may not be recoverable could include a significant adverse long term outlook; unanticipated competition or the introduction of disruptive technology; failure of an anticipated product or product line; testing for recoverability in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10 Impairment or Disposal of Long-Lived Assets ; loss of key personnel; or a more-likely-than-not expectation that a significant portion of the company will be sold or otherwise disposed of. During the first quarter of fiscal 2015, the Company recorded an impairment of goodwill and long-lived assets in the amount of $32.0 million, related to assets obtained in the acquisition of Panopticon Software AB (now known as Datawatch AB) (“Panopticon”), as a result of revenue shortfalls and operational changes in the sales organization as well as a sustained decline in our share price. Any future impairment of goodwill, other intangible assets, or other long-lived assets, and the performance issues underlying any such impairment, could have a negative impact on our profitability and financial results.

 

  12  

 

 

If Material Weaknesses or Other Deficiencies are Discovered in our Internal Accounting Procedures, our Stock Price May be Adversely Affected

 

Section 404 of the Sarbanes-Oxley Act requires that management report annually on the effectiveness of our internal control over financial reporting and identify any material weaknesses in our internal control and financial reporting environment. If management identifies any material weaknesses, their correction could require remedial measures which could be costly and time-consuming. We are not currently an “accelerated filer”, and as a result, our independent registered public accounting firm does not attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting. In addition, at such time, if any, as we are no longer a “smaller reporting company,” our independent registered public accounting firm will have to attest to and report on management’s assessment of the effectiveness of such internal control over financial reporting. Any identification by us or our independent registered public accounting firm of material weaknesses, even if quickly remedied, could damage investor confidence in the accuracy and completeness of our financial reports, which could affect our stock price and potentially subject us to litigation.

 

The continuous process of maintaining and adapting our internal controls and complying with Section 404 is expensive and time-consuming, and requires significant management attention. We cannot be sure that our internal control measures will continue to provide adequate control over our financial processes and reporting and ensure compliance with Section 404. Any failure by us to comply with Section 404 could subject us to a variety of administrative sanctions and harm our reputation, which could reduce our stock price.

 

We Face Significant Competition in the Software Industry 

 

Our self-service data preparation and visual data discovery products compete with other companies in the Big Data and business analytics market. These markets are highly competitive and include companies such as Tableau Software, TIBCO Spotfire (a subsidiary of TIBCO Software Inc.), Qlik Technologies, Inc, Informatica, Alteryx, Paxata, Trifacta and First Derivatives, as well as larger technology companies such as IBM, SAP, MicroStrategy, Inc., SAS and Oracle. Many of the competitors in these markets have longer operating histories, greater name recognition and substantially greater financial, marketing and technological resources than we do. No assurance can be given that our business will have the resources required to compete successfully in the future. In addition, many of these competitors have strong relationships with current and potential customers and extensive knowledge of the business analytics industry. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. If we are unable to compete successfully against current and future competitors, the business, results of operations and financial condition of the combined business would be harmed. In addition, competitive pressures or other factors may result in significant price erosion that could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

Maintaining and enhancing the Datawatch brand and our reputation is critical to our relationships with our customers and channel partners and to our ability to attract new customers and channel partners. We believe that the importance of our brand recognition and reputation will continue to increase as competition in our market continues to develop. The failure to maintain or enhance our brand recognition or reputation would likely adversely affect our business and results of operations.

 

Our Success is Dependent on Proprietary Software Technology 

 

Our success is dependent upon proprietary software technology. We do not currently own patents on any such technology and we rely principally on a combination of trade secrets, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our rights to such proprietary technology. Additionally, on June 30, 2015, we applied with the United States Patent and Trademark Office (USPTO) for patent protection for our proprietary systems and methods for automatically generating tables using auto-generated templates and, on January 12, 2016, we applied with the USPTO for patent protection for our proprietary systems and methods for generating tables from print-ready digital source documents.  Despite such precautions, there can be no assurance that such steps will be adequate to deter misappropriation of such technology. 

 

  13  

 

 

Our Use of Open Source Software Could Negatively Affect our Ability to Sell our Products and Subject us to Possible Litigation.

 

We use open source software in our products and expect to continue to use open source software in the future. We may face claims from others claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase costly licenses or require us to devote additional research and development resources to change our products, any of which would have a negative effect on our business and operating results. In addition, if the license terms for the open source code change, we may be forced to re-engineer our products or incur additional costs. Finally, we cannot assure that we have incorporated additional open source software in our products in a manner that is consistent with our current policies and procedures.

 

We May be Subject to Intellectual Property Rights Claims by Third Parties, Which are Extremely Costly to Defend, Could Require us to Pay Significant Damages and Could Limit our Ability to use Certain Technologies.

 

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We may receive notices that claim we have misappropriated, misused or infringed other parties’ intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to the business analytics software market.

 

There may be third-party intellectual property rights, including issued or pending patents that cover significant aspects of our technologies or business methods. Any intellectual property claims, with or without merit, could be very time-consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Such claims could also result in our having to stop using technology found to be in violation of a third party’s rights or to seek a license to use such technology, which may not be available on reasonable terms or may require us to pay significant royalties, increasing our operating expenses. As a result, we may need to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively. Any of these outcomes would adversely affect our business operations and financial results.

 

Government Regulation of the Internet and e-commerce and of the International Exchange of Certain Technologies is Subject to Possible Unfavorable Changes, and our Failure to Comply with Applicable Regulations Could Harm our Business and Operating Results

 

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. For example, increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for our products and services. In addition, taxation of products and services provided over the Internet or other charges by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting the exchange of information over the Internet could result in reduced growth or a decline in the use of the Internet and could diminish the viability of our Internet-based services, which could harm our business and operating results.

 

  14  

 

 

We May Not be Able to Hire and Retain Highly Skilled Employees, Which Could Affect our Ability to Compete Effectively Because our Business is Technology-Based 

 

Qualified personnel are in great demand throughout the software industry. Our success depends, in large part, upon our ability to attract, train, motivate and retain highly skilled employees, particularly technical personnel and product development and professional services personnel, sales and marketing personnel and other senior personnel. Our failure to attract and retain the highly trained technical personnel that are integral to our product development, professional services and sales and marketing teams may limit the rate at which we can generate sales and develop new products or product enhancements. We have hired a number of key executives during the past three years, including key executives in sales, marketing, finance and human resources functions. A loss of these personnel or other changes in key management could have a material adverse effect on our business, operating results and financial condition. 

 

Evolving Regulation of Corporate Governance and Public Disclosure May Result in Additional Expenses and Continuing Uncertainty 

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Sarbanes-Oxley Act of 2002 and related SEC regulations as well as the listing standards of the NASDAQ Stock Market, have created and are continuing to create uncertainty for public companies. We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs incurred or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we have invested resources to comply with evolving laws, regulations and standards. This investment has resulted and may continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed. 

 

The Failure of Indirect Distribution Channels Could Have a Material Adverse Effect on our Operating Results 

 

We sell a significant portion of our products through distributors, value-added resellers, OEMs and other business partners, none of which are under our direct control. Sales to indirect distribution channels accounted for 35%, 40% and 44%, of total sales for fiscal years 2016, 2015 and 2014, respectively. Our agreement with Lifeboat expired in early 2015 and, to manage the transition, we have refocused part of our Inside Sales Team to manage and pursue the book of business previously handled by Lifeboat. The loss of major distributors or resellers of our products, or a significant decline in their sales, could have a material adverse effect on our operating results. We actively seek to develop new distributor and reseller relationships on the basis of their business credentials and their ability to add value through expertise in specific vertical markets or application programming expertise, although there can be no assurance that we will be able to attract or retain qualified distributors or resellers or that the distributors or resellers will be able to effectively sell our products. In addition, we may rely on resellers to provide post-sales service and support, and any deficiencies in such service and support could adversely affect our business. 

 

Failure to Maintain an Adequate Sales Returns Reserve Could Have a Material Adverse Effect on our Financial Position and Results of Operations 

 

Revenue from the sale of all our software products (when separately sold) is generally recognized at the time of shipment. We estimate and maintain reserves for potential future product returns from distributors based on our experience and history with our various distributors and resellers. While actual returns have historically been within the range estimated by management, future actual results could differ from the reserve for sales returns recorded, and this difference could have a material effect on our financial position and results of operations. As of September 30, 2016, we had no distributors. 

 

  15  

 

 

Our Subscription Sales Model for our Enterprise Products Could Result in Decreased or Delayed Revenues and Cash Flows 

 

We sell our enterprise products through the sale of perpetual licenses and through a subscription pricing model. The subscription pricing model allows customers to use our products at a lower initial cost of software acquisition when compared to the more traditional perpetual license sale. Although the subscription sales model is designed to increase the number of enterprise solutions sold and also reduce dependency on short-term sales by building a recurring revenue stream, it introduces increased risks for us primarily associated with the timing of revenue recognition and reduced cash flows. The subscription model delays revenue recognition when compared to the typical perpetual license sale and also, as we allow termination of certain subscriptions with 90 days’ notice, it could result in decreased revenue for solutions sold under the model if we experience a high percentage of subscription cancellations following the first 12 months of the subscription. Further, as amounts due from customers are invoiced annually over the life of the subscription, there are delayed cash flows from subscription sales when compared to perpetual license sales. 

 

If our Security Measures are Breached or Other Unauthorized Access to Customer Data is Otherwise Obtained, our Software May be Perceived as not being Secure, Customers May Reduce the Use of or Stop Using our Software, and we May Incur Significant Liabilities

 

Our software, when installed on our customer’s premises, may involve the storage and transmission of customer data, and security breaches could result in the loss of this information, litigation, indemnity obligations and other liability. While we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through our customer support services or customer usage of our products, we do not have the ability to monitor or review the content that our customers store, and therefore, we have no direct control over the substance of that content. Therefore, if customers use our software for the transmission or storage of personally identifiable information and our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may suffer, and we could incur significant liability. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Further, while we have taken steps to maintain compliance with laws and regulations relating to privacy and data security, including the adoption of internationally recognized standards of data protection and security, the loss, retention or misuse of certain information and/or alleged violations of such laws and regulations may expose us to significant liability. Any or all of these issues could negatively impact our ability to attract new customers and increase engagement by existing customers, cause existing customers to elect to not renew their subscriptions, or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby adversely affecting our financial results.

 

We May Require Additional Capital to Grow our Business, and Our Financing Arrangements Expose us to Interest Rate and Default Risk

 

Our business may require additional capital to operate and expand. We have historically relied upon cash generated from operations and bank credit lines to satisfy our capital needs and finance growth. If we determine in the future to make significant investments in our business, including by acquiring assets or businesses from third parties, we may attempt to raise additional funds by securing additional debt financing or selling equity securities in either the public or the private markets. As the financial markets change and new regulations come into effect, the cost of acquiring financing and the methods of financing may change. We may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests and the value of shares of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to make acquisitions. Our inability to do any of the foregoing could reduce our ability to compete successfully and adversely affect our results of operations. Changes in our credit rating or other market factors may increase our interest expense or other costs of capital, or capital may not be available to us on acceptable terms to fund our needs.

  

  16  

 

 

Catastrophic Events May Adversely Affect Our Business 

 

Our company is a highly automated business which relies on our network infrastructure and enterprise applications, internal technology systems and website for development, marketing, operational, support and sales activities. A disruption or failure of these systems in the event of a major storm, earthquake, fire, telecommunications failure, cyber-attack, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, delays in our product development and loss of critical data and could affect our ability to sell and deliver products and services and other critical functions of our business. 

 

Risks Relating to an Investment in our Common Stock

 

The Market Price of our Stock Has Been and May Continue to Be Volatile

 

As has recently been the case with the stocks of high technology companies, the market price of our common stock has been, and may continue to be, volatile. O ur stock price may be adversely affected by many factors, including:

 

· actual or anticipated fluctuations in our operating results, including those resulting from changes in accounting rules;
· increased competition;
· general market conditions;
· announcements of technical innovations;
· announcements related to the Board’s review of strategic alternatives to increase shareholder value;
· new products or services offered by us, our suppliers or our competitors;
· expenses or other difficulties associated with assimilating companies acquired by us;
· changes in the mix of sales channels;
· the timing of significant customer orders;
· changes in estimates or recommendations by securities analysts of our future financial performance, failure to obtain analyst coverage of our common stock or our failure to achieve analyst earnings estimates;
· the issuance of additional shares to obtain financing or for acquisitions;
· our compliance with SEC and NASDAQ rules and regulations, including the Sarbanes-Oxley Act of 2002;
· trading volume of our common stock;
· the timing of stock sales under 10b5-1 plans or otherwise by our shareholders in the future; and
· political instability, natural disasters, war and/or events of terrorism.

 

Even though we do not presently provide forecasts of our future financial performance, any shortfall in revenue or earnings from the levels anticipated by securities analysts or investors could have an immediate and significant adverse effect on the market price of our common stock in any given period. In addition, the stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market price for many high technology companies and which, on occasion, have appeared to be unrelated to the operating performance of such companies. Finally, to maintain our stock listing with NASDAQ, we must be in compliance with NASDAQ Marketplace Rules. If we are not able to maintain compliance with these rules, and if our common stock does not qualify for, or is subsequently delisted from, the NASDAQ Capital Market, investors may have difficulty converting their investment into cash efficiently. The price of our common stock and the ability of holders to sell such stock would be adversely affected. 

 

Because We do Not Expect to Pay Dividends on Our Common Stock, Stockholders Will Benefit from an Investment in our Common Stock Only if it Appreciates in Value

 

We have never paid cash dividends on our common stock and have no present intention to pay any dividends in the future.  We are not profitable and may not earn sufficient revenue to meet all operating cash needs for at least several years, if at all.  As a result, we intend to use all available cash and liquid assets in the development of our business.  Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, if any, our capital requirements, our operating and financial conditions and on such other factors as our board of directors may deem relevant.  As a result, the success of an investment in our common stock will depend upon any future appreciation in its value.  There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

 

  17  

 

 

Sales of a Substantial Number of Shares of Our Common Stock in the Public Market by Us or by Existing Stockholders, or the Perception that they may Occur, Could Cause our Stock Price to Decline.

 

Insiders presently hold a significant percentage of our stock, and our shares are thinly traded in the public market. Sales of substantial amounts of our common stock by us or by our stockholders, announcements of the proposed sales of substantial amounts of our common stock or the perception that substantial sales may be made, could cause the market price of our common stock to decline. We may issue additional shares of our common stock in follow-on offerings to raise additional capital or in connection with acquisitions or corporate alliances and we plan to issue additional shares to our employees and directors in connection with their services to us. Any issuance of additional common stock will dilute the ownership interest of existing common shareholders. All of the currently outstanding shares of our common stock are freely tradable under federal and state securities laws, except for shares held by our employees, directors, officers and certain greater than five percent shareholders, which may be subject to volume limitations. Sales of a substantial number of shares of our common stock in the public market could occur at any time and could reduce the market price of our common stock.

 

We Can Issue Shares of Preferred Stock that May Adversely Affect the Rights of Holders of Our Common Stock

 

Our certificate of incorporation authorizes us to issue up to 1,000,000 shares of preferred stock with designations, rights, and preferences determined from time to time by our board of directors.  Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock.  For example, an issuance of shares of preferred stock could:

 

· adversely affect the voting power of the holders of our common stock;
· make it more difficult for a third party to gain control of us;
· discourage bids for our common stock at a premium;
· limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or
· otherwise adversely affect the market price or our common stock.

 

If Securities or Industry Analysts Publish Research or Reports About Our Business, or if they Change their Recommendations Regarding Our Stock, the Price of Our Stock and Trading Volume Could Decline

 

The trading market for our common stock is influenced by the research reports and opinions that are published about our business. If the analysts that cover us fail to publish reports in a regular manner, we could lose visibility in the financial markets, which could cause a significant and prolonged decline in our stock price due to lack of investor awareness. Furthermore, if one or more analysts downgrade our stock or comment negatively about our prospects or the prospects of other companies operating in our industry, our stock price could decline significantly.

 

Our Governing Documents and Delaware Law may Discourage the Potential Acquisition of Our Business and Adversely Affect the Rights of our Common Stock

 

Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. In addition, we are subject to anti-takeover provisions of Delaware law. These provisions may deter or discourage takeover attempts and other changes in control of us not approved by our board of directors. If potential acquirers are deterred, you may lose an opportunity to profit from a possible acquisition premium in our stock price.

 

Item 1B. UNRESOLVED STAFF COMMENTS 

 

Not applicable.

  

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Item 2. PROPERTIES  

 

Datawatch is currently headquartered in 20,360 square feet of leased office space in Bedford, Massachusetts pursuant to a lease agreement executed on June 23, 2015. The lease expires in December 2022. The aggregate rent expense for the remaining term of the lease is $3.5 million. In addition to rent, the lease requires us to pay certain taxes, insurance and operating costs related to the leased facility based on our pro-rata share of such costs. In conjunction with entering into the lease, the Company was required to deposit $0.2 million into a restricted cash account as collateral for a Letter of Credit, which is included under the caption “ Other long-term assets ” in our consolidated balance sheets, for the period ended September 30, 2016.

 

 We also maintain sales and development offices in the U.S., and international sales, administrative and development offices in the U.K., Singapore and Sweden. In addition, we maintain a software development and testing facility in the Philippines.

  

Item 3. LEGAL PROCEEDINGS  

 

We are occasionally involved in legal proceedings and other claims arising out of our operations in the normal course of business. We are not party to any litigation that we believe will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

 

Item 4. MINE SAFETY DISCLOSURES  

 

Not applicable.

 

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PART II  

 

Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS   AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is listed and traded on the NASDAQ Capital Market under the symbol DWCH. The range of high and low closing prices during each fiscal quarter for the last two fiscal years is set forth below: 

 

For the Year Ended   Common Stock  
September 30, 2016   High ($)     Low ($)  
             
4th Quarter     7.65       5.45  
3rd Quarter     5.65       4.56  
2nd Quarter     6.09       3.57  
1st Quarter     6.65       5.14  

 

For the Year Ended   Common Stock  
September 30, 2015   High ($)     Low ($)  
             
4th Quarter     7.02       4.73  
3rd Quarter     8.10       6.39  
2nd Quarter     8.70       5.37  
1st Quarter     11.14       8.38  

 

Holders

 

There were 81 shareholders of record as of November 8, 2016. We believe that the number of beneficial holders of common stock is 2,534. The last reported sale of our common stock on November 8, 2016 was at $6.55. 

 

Dividends

 

We have not paid any cash dividends and it is anticipated that none will be declared in the foreseeable future. We intend to retain future earnings, if any, to provide funds for the operation, development and expansion of our business. 

 

Equity Plan Information

 

The following table provides information about the Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of September 30, 2016, including the Company’s 2006 Equity Compensation and Incentive Plan (the “2006 Plan”) and the Company’s Second Amended and Restated 2011 Equity Compensation and Incentive Plan (the “2011 Plan”). The 2006 Plan and the 2011 Plan have previously been approved by our stockholders.

 

    Number of     Weighted      
    Securities to be     average exercise     Number of  
    issued upon     price of     securities  
    exercise of     outstanding     remaining  
    outstanding     options,     available  
    options, warrants     warrants and     for future  
Plan Category   and rights(1)     rights(2)     issuance  
                   
Equity compensation plans approved by security holders     884,565     $ 6.31       176,904  
Equity compensation plans not approved by security holders     -               -  
                         
Total     884,565               176,904  

 

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(1) Of these shares, 734,565 were granted under the 2011 Plan and 150,000 were granted under the 2006 Plan. As of September 30, 2016, 176,904 shares remained available for grant under the 2011 Plan.

 

(2) Weighted-average exercise prices do not include restricted stock units as these do not contain exercise prices.

 

Stock Performance Graph

 

The following graph compares the yearly change in the cumulative total stockholder return on the Company’s Common Stock during the period from September 30, 2011 through September 30, 2016, with the cumulative total return on (i) an SIC Index that includes all organizations in the Company’s Standard Industrial Classification (SIC) Code 7372-Prepackaged Software (the “SIC Code Index”) and (ii) the Media General Market Weighted Nasdaq Index Return (the “Nasdaq Market Index”). The comparison assumes that $100 was invested on October 1, 2011 in the Company’s Common Stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.

 

 

 

The stock price performance shown on the graph and in the table above is not necessarily indicative of future price performance. Information used in the graph and table was obtained from Zacks Investment Research, a source believed to be reliable, but the Company is not responsible for any errors or omissions in such information.

 

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA  

 

The following table sets forth selected consolidated financial data for the periods indicated. The selected consolidated financial data for and as of the end of the years in the five-year period ended September 30, 2016 are derived from our consolidated financial statements. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes which appear elsewhere in this Annual Report on Form 10-K. 

 

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Statements of Operations Data:                              
Years Ended September 30,   2016     2015     2014     2013     2012  
    (In thousands, except per share data)  
                               
Revenue   $ 30,462     $ 30,221     $ 35,087     $ 30,296     $ 26,006  
Costs and Expenses     43,591       82,663       56,752       34,113       24,463  
(Loss) Income from Operations     (13,129 )     (52,442 )     (21,665 )     (3,817 )     1,543  
Net (Loss) Income   $ (14,632 )   $ (49,787 )   $ (22,383 )   $ (4,197 )   $ 1,034  
                                         
(Loss) Earnings per Common Share:                                        
Basic   $ (1.24 )   $ (4.38 )   $ (2.24 )   $ (0.63 )   $ 0.17  
Diluted   $ (1.24 )   $ (4.38 )   $ (2.24 )   $ (0.63 )   $ 0.15  

 

Balance Sheet Data:                              
September 30,   2016     2015     2014     2013     2012  
    (In thousands)  
                               
Total Assets   $ 48,431     $ 58,931     $ 103,597     $ 68,914     $ 22,805  
Working Capital   $ 23,524     $ 31,328     $ 44,876     $ 4,112     $ 4,041  
Long-term Obligations   $ 766     $ 461     $ 1,238     $ 3,594     $ 3,448  
Shareholders’ Equity   $ 33,958     $ 45,542     $ 90,910     $ 51,375     $ 9,694  

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

 

The following discussion and analysis is qualified by reference to, and should be read in conjunction with, our consolidated financial statements which appear elsewhere in this Annual Report on Form 10-K. 

 

GENERAL  

 

Introduction 

 

We are engaged in the design, development, marketing, distribution and support of business computer software primarily for the self-service data preparation and visual data discovery markets to allow organizations to access, analyze and visualize information in a more meaningful fashion. The Datawatch platform is an enterprise solution that bridges the gap between the ease-of-use and agility that business users demand together with the scalability, automation and governance needed by IT.

 

We offer our 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. During fiscal years 2016, 2015 and 2014, subscription revenues were $2.4 million, $0.7 million and $0.4 million, respectively.

   

CRITICAL ACCOUNTING POLICIES  

 

In the preparation of financial statements and other financial data, management applies certain accounting policies to transactions that, depending on judgments made by management, can result in different outcomes. In order for a reader to understand the following information regarding our financial performance and condition, an underlying understanding of those accounting policies is important. Certain of those policies are comparatively more important to our financial results and condition than others. The policies that we believe are most important for a reader’s understanding of the financial information provided in this report are described below.

 

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Revenue Recognition and Allowance for Bad Debts

 

We license our software products directly to end-users and indirectly to end-users, through value-added resellers, strategic partners and distributors. Sales to indirect distribution channels accounted for 35%, 40% and 44%, of total sales for fiscal years 2016, 2015 and 2014, 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, collectability is reasonably assured, persuasive evidence of the arrangement exists and there are no significant obligations remaining. Our software product offerings do not require customization. Our software products can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by us are sold as a right to use the number of licenses, and the 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 by us. 

 

Our software products are generally sold in multiple element arrangements which may include software licenses, professional services, educational services and customer support. In such multiple element arrangements, we apply the residual method in determining revenue to be allocated to the software license. In applying the residual method, we deduct from the sale proceeds the vendor specific objective evidence (“VSOE”) of fair value of the professional services, educational services and customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and customer support is based on the amounts charged for these elements when sold separately. Professional services include advanced modeling, application design, implementation and configuration and process optimization with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed as the work is performed, and do not involve modification or customization of the software or any other unusual acceptance clauses or terms. 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 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 accompanying consolidated balance sheets. 

 

We also license our enterprise software using a subscription model. At the time a customer enters into a binding agreement to purchase a subscription, the customer is invoiced annually in advance and an account receivable and deferred revenue are recorded. Beginning on the date the software is installed at the customer site and available for use by the customer, and provided that all other criteria for revenue recognition are met, the deferred revenue amount is recognized ratably over the period the service is provided. The subscription arrangement includes software, maintenance and unspecified future upgrades including major version upgrades on a when-and-if available basis. The subscription renewal rate is the same as the initial subscription rate. 

  

Our software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. We also offer a 30 day money-back guarantee on our Datawatch Monarch product sold directly to end-users.

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. We analyze 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 collectability of our accounts receivable, we record 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 our financial position and results of operations. Our allowance for doubtful accounts was $28,000 and $0.1 million as of September 30, 2016 and 2015, respectively.

 

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Income Taxes

 

We have deferred tax assets primarily related to net operating loss carryforwards and tax credits that expire at different times through 2036 or have an unlimited carryforward. At September 30, 2016, we had U.S. federal tax loss carryforwards of $50.2 million, expiring at various dates through 2036, including $0.2 million resulting from an acquisition undertaken during 2004 which are subject to additional annual limitations as a result of the changes in ownership, and had $28.5 million in state tax loss carryforwards, which also expire at various dates through 2036. Included in the Federal and state net operating loss carryforwards are $7.6 million of tax deductions from share-based compensation, which will be recorded as additional paid-in capital when realized. An alternative minimum tax credit of $7,000 is available to offset future regular federal taxes. We have federal research and development credits of $1.0 million that begin to expire in 2021 and state credits of $0.5 million that expire at various dates through 2030. In addition, we have the following foreign net operating loss carryforwards: U.K. losses of $9.8 million with no expiration date, Australia losses of $3.5 million with no expiration date, Germany losses of $2.2 million with no expiration date, Singapore losses of $2.9 million with no expiration date, and Sweden losses of $10.6 million with no expiration date.

 

Significant judgment is required in determining our 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 our deferred tax assets will be recoverable are considered in making these determinations. We do not believe the deferred tax assets in all of our jurisdictions are more likely than not to be realized and therefore a full valuation allowance has been provided against the deferred tax assets in the U.S., U.K., Australia, Germany, Singapore, and Sweden at September 30, 2016 and in the U.S., U.K., Australia, Germany, and Singapore at September 30, 2015. 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 us 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 $26.7 million as of September 30, 2016.

 

We follow the accounting guidance for uncertain tax positions. The comprehensive model addresses the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. In accordance with these requirements, we first determine whether a tax authority would “more likely than not” sustain our 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, we measure the amount of tax benefit based on the largest amount of tax benefit that we have a greater than 50 percent 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. We maintain a cumulative risk portfolio relating to all of our uncertainties in income taxes in order to perform this analysis, but the evaluation of our tax positions 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 our tax positions, if significantly different from our estimates, could materially impact the financial statements.

 

At October 1, 2014, we had a cumulative tax liability of $0.3 million related to U.S. and foreign tax exposure. During the fiscal year ended September 30, 2014, we increased our uncertain tax liability by $18,000. During the fiscal year ended September 30, 2015, we decreased our uncertain tax liability by $0.1 million due to the statute of limitations expiring and the effective settlement of uncertain tax liabilities. During the fiscal year ended September 30, 2016 we decreased our uncertain tax liability by $0.1 million due to the statute of limitations expiring. This results in a cumulative tax liability of $0.2 million at September 30, 2016. These amounts have been recorded in other long-term liabilities in our accompanying consolidated balance sheets.

 

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Software Development Costs 

 

We capitalize 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 engineering and product 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 of the product (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 nine to eighteen months. During fiscal years 2016 and 2015, no software development costs were capitalized as there were no significant costs incurred during the period after technological feasibility was established and the time in which the product became available for general release. During fiscal year 2014, we capitalized $0.3 million of software development costs.

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of acquired businesses. Indefinite-lived intangibles are intangible assets whose useful lives are indefinite in that their lives extend beyond the foreseeable horizon – that is, there is no foreseeable limit on the period of time over which they are expected to contribute to the cash flows of the reporting entity. We account for these items in accordance with ASC 350 Intangibles- Goodwill and Other , under which goodwill and intangible assets having indefinite lives are not amortized but instead are reviewed annually, or more frequently as a result of an event or change in circumstances, for possible impairment with impaired assets written down to fair value.

 

We review goodwill and intangible assets annually during the fourth quarter and more frequently if events and circumstances indicate that the asset may be impaired, such as a significant reduction in cash flows associated with the asset. Should the fair value of our 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. We did not record any impairment charges during fiscal 2016. During the first quarter of fiscal 2015, we identified several events, that when combined, were determined to require an interim impairment test. As a result, the Company recognized a non-cash, pre-tax impairment charge of $21.7 million for goodwill and $10.3 million for long-lived assets (other than goodwill). See Note 2 to our accompanying consolidated financial statements for information about our impairment of goodwill and intangible assets. 

 

There was no amortization of software development costs for fiscal years 2016 or 2015. The intangible asset amounts amortized to cost of software licenses totaled $0.6 million for fiscal 2014. Intangible asset amounts amortized to sales and marketing expense totaled $0.2 million, $0.3 million and $0.6 million for fiscal 2016, 2015 and 2014, respectively. Intangible asset amounts amortized to general and administrative expense totaled $20,000 for fiscal year 2016 and totaled $48,000 for both fiscal years 2015 and 2014. There were no intangible assets amortized to interest expense for fiscal 2016 or 2015. Intangible asset amounts amortized to interest expense totaled $0.1 million for fiscal 2014.

  

Share-Based Compensation 

 

We recognize share-based compensation expense in accordance with U.S. generally accepted accounting principles which require that all share-based awards, including grants of employee stock options and restricted stock units, be recognized in the financial statements based on their fair value at date of grant.  

 

We recognize the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. For the fiscal year ended September 30, 2016, we recorded share-based compensation expense of $2.8 million, of which $0.1 million pertained to options. At September 30, 2016, we had no unrecognized compensation costs related to options.  

 

We periodically grant awards of restricted stock units (“RSUs”) to our non-employee directors and employees on a discretionary basis pursuant to our stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of our common stock. Each RSU typically vest at the rate of 33.33% on each of the first through third anniversaries of the grant date. Additionally, some of the RSUs are subject to a further vesting condition that our common stock must trade at prices greater than certain minimum per share prices on a national securities exchange for a period of twenty consecutive days prior to the fourth or fifth anniversary of the grant date depending on the grant. For such RSUs, we apply the Monte Carlo option-pricing model for determining the fair value on the date of grant. There were no such RSUs issued during the fiscal years ended September 30, 2016 or 2015. For the fiscal year ended September 30, 2016, we recorded share-based compensation expense of $2.7 million related to RSUs. At September 30, 2016, we had $3.0 million of unrecognized compensation costs related to RSUs, which is expected to be recognized over a weighted-average period of 1.91 years.

 

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OVERVIEW

 

We believe that we have the opportunity to become the leading provider of self-service data preparation solutions. Among our current challenges in realizing that opportunity are the development of a robust channel of distribution partners, finding new customers to capitalize on the self-service data preparation opportunity and expanding license revenue with our largest existing Monarch and data visualization customers.

 

Our total revenue for fiscal 2016 was $30.5 million, a 1% increase from revenue of $30.2 million in fiscal 2015. While overall we believe that our cash position remains strong, our cash and cash equivalent balance at the end of fiscal 2016 was down $7.1 million to $28.0 million as compared to the end of fiscal year 2015 and was only down $0.8 million from the end of fiscal year 2016 compared to the end of the preceding fiscal quarter.

 

During the second half of the year, we implemented several new organizational changes, including realigning certain sales team personnel, implementing new sales processes and adding heightened forecast discipline. Such organizational changes enabled the sales team to produce improved results during the fourth quarter of fiscal year 2016.

 

Sales execution

 

Total revenue for the fourth quarter of fiscal 2016 was $8.6 million, an increase of 17% from the $7.4 million recorded in the third quarter of fiscal 2016, and an increase of 7% from total revenue of $8.0 million in the fourth quarter of fiscal 2015. In addition, we increased our deferred revenue $1.2 million, or 15%, compared to the prior year. The increase in deferred revenue was primarily the result of a shift in our pricing policy to a subscription based model in the third quarter of fiscal year 2015 .

 

Market awareness

 

During fiscal year 2016, we teamed with IBM to deliver better and faster data access and self-service data preparation to IBM Watson Analytics and IBM Cognos Analytics users. As part of this partnership, IBM agreed to resell Monarch for self-service data preparation. In the fourth quarter of fiscal year 2016, Harley Davidson, one of the most recognized brands for custom, cruiser and touring motorcycles, became one of the first joint customers of Datawatch Monarch and IBM Watson Analytics for self-service data preparation and automated data analysis, automatic visualization and predictive analysis.

 

Innovation to product platform

 

During the fourth quarter of fiscal year 2016, we introduced two major, innovative software releases that allow us to address the evolving Big Data and fast data analytics needs of business analysts, data scientists and IT users. The latest release of Monarch includes expanded support for data sources, including Google Analytics and Salesforce, new export integrations, including Microsoft Power BI, and advanced data preparation features for large data sets. The latest release of Panopticon is the most significant since the original launch of the product, and expands upon Datawatch’s approach to fast data analytics with a Web client architecture that supports the most challenging real-time visualization requirements for data in motion.

 

RESULTS OF OPERATIONS

 

The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. The data has been derived from our accompanying consolidated financial statements. The operating results for any period should not be considered indicative of the results expected for any future period. 

 

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    Years Ended  
    September 30,  
    2016     2015     2014  
REVENUE:                        
Software licenses     50 %     51 %     59 %
Maintenance     46       45       37  
Professional services     4       4       4  
Total revenues     100 %     100 %     100 %
                         
COSTS AND EXPENSES:                        
Cost of software licenses     9 %     10 %     11 %
Cost of maintenance and services     7       10       10  
Sales and marketing     68       89       89  
Engineering and product development     27       29       26  
General and administrative     32       28       26  
Impairment of goodwill and long-lived assets     -       106       -  
Total costs and expenses     143 %     272 %     162 %
                         
LOSS FROM OPERATIONS     (43 )%     (172 )%     (62 )%
                         
Interest expense     - %     - %     (1 )%
Other income (expense)     -       -       (2 )
Foreign currency transaction loss     -       -       -  
                         
LOSS FROM OPERATIONS BEFORE INCOME TAXES     (43 )%     (172 )%     (65 )%
Income tax (expense) benefit     (5 )     9       1  
                         
NET LOSS     (48 )%     (163 )%     (64 )%

 

Fiscal Year Ended September 30, 2016 as Compared to

Fiscal Year Ended September 30, 2015

 

Total Revenues  

 

    Years Ended              
    September 30,     Increase     Percentage  
    2016     2015     (Decrease)     Change  
Software licenses   $ 15,219     $ 15,304     $ (85 )     (1 )%
Maintenance     13,915       13,529       386       3  
Professional services     1,328       1,388       (60 )     (4 )
Total revenue   $ 30,462     $ 30,221     $ 241       1 %

 

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Software license revenue. Software license revenue decreased $0.1 million compared with software license revenue for fiscal year 2015. During the second half of fiscal year 2015, we implemented a change in our pricing practice for Monarch which requires all new or non-current maintenance customers purchasing fewer than ten seats of Monarch, to purchase term licenses instead of perpetual licenses. The decrease in software license revenue for fiscal year 2016 was due to a decrease in perpetual software license revenue of $1.9 million, caused in part by the pricing change, offset by an increase in subscription license revenue of $1.8 million compared to fiscal year 2015. We have observed the continued growth of our deferred revenue related to subscription software, which we believe will translate into software license revenue in future quarters. Overall our deferred revenue increased $1.2 million as of September 30, 2016 compared to September 30, 2015. Of the total deferred revenue increases, deferred license revenue increased $1.0 million, or 104%, as a direct result of the pricing change. The average deal size for perpetual licenses increased 24% from $6,500 in fiscal year 2015 to $8,000 in fiscal year 2016.

 

Maintenance revenue. Maintenance revenue grew $0.4 million compared to fiscal year 2015 driven primarily by strong renewal bookings of both enterprise and desktop software. Maintenance revenue from renewal business increased $1.4 million offset by a decrease of $1.0 million in maintenance revenue from new business. The renewal rate for fiscal year 2016 was 78% compared to 70% for fiscal year 2015.

 

Professional services. Professional services revenue remained relatively flat compared to last fiscal year.

 

Total Costs and Expenses  

 

    Years Ended              
    September 30,     Increase     Percentage  
    2016     2015     (Decrease)     Change  
Cost of software licenses   $ 2,828     $ 3,002     $ (174 )     (6 )%
Cost of maintenance and services     2,177       3,122       (945 )     (30 )
Sales and marketing     20,783       27,037       (6,254 )     (23 )
Engineering and product development     8,167       8,894       (727 )     (8 )
General and administrative     9,636       8,599       1,037       12  
Impairment of goodwill and long-lived assets     -       32,009       (32,009 )     100  
Total costs and expenses   $ 43,591     $ 82,663     $ (39,072 )     (47 )%

 

Cost of software licenses. The $0.2 million decrease was primarily due to lower amortization expense driven by the reduction in carrying value of the Panopticon intellectual property asset as a result of the impairment charge recorded during the first quarter of fiscal 2015.

 

Cost of maintenance and services. The $0.9 million decrease was primarily driven by a decrease in employee related costs and restructuring charges. As a result of workforce reductions that occurred during fiscal 2015, employee related expenses, such as salaries, payroll taxes and benefits decreased $0.7 million for the fiscal year ended September 30, 2016 when compared to fiscal year 2015. In addition, restructuring charges due to the workforce reductions, decreased $0.4 million for fiscal year 2016 when compared to fiscal year 2015. The decrease in employee related costs and restructuring charges were partially offset by a $0.1 million increase in outside consulting services.

 

Sales and marketing expenses. The $6.3 million decrease in sales and marketing expenses was comprised of a decrease in sales expense of $6.1 million and a decrease in marketing expense of $0.2 million. The decrease in sales expenses was primarily driven by workforce reductions which occurred during fiscal year 2015, including a decrease of $2.8 million in employee related expenses, such as salaries, payroll taxes and benefits, and a $0.7 million decrease in travel related expenses. Share-based compensation decreased $1.9 million as a result of numerous factors, including a $1.3 million decrease due to the reduction in headcount, a decrease in expense of $0.3 million due to the departure of our Chief Revenue Officer and a $0.3 million decrease due to the decreased fair value of share-based awards issued to consultants. In addition to the decreased expenses resulting from the workforce reductions and the decreased share-based compensation, we also realized a $0.5 million decrease in spending related to outside consultants and a $0.2 million reduction in amortization expense due to the impairment of goodwill and long-lived assets which occurred during fiscal year 2015. The decrease in marketing expenses was primarily driven by workforce reductions which occurred during fiscal year 2015, including a decrease of $0.3 million in employee related expenses, such as salaries, payroll taxes and benefits, and a $0.3 million decrease in restructuring charges. In addition, to the decreased expenses resulting from the workforce reductions, we also realized a $0.5 million decrease in spending related to outside consultants and a $0.2 million decrease in share-based compensation expenses due to workforce reductions, which occurred during the fiscal year 2015. The decreases in marketing expenses were partially offset by an increase of $1.0 million in advertising, public relations and lead generation activities.

 

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Engineering and product development expenses. The $0.7 million decrease was driven primarily by workforce reductions which occurred during fiscal year 2015, including a $0.7 million decrease in employee related expenses such as salaries, payroll taxes and benefits, and a $0.4 million decrease in restructuring charges. The planned decreased headcount was primarily related to resources focused on legacy products. The cost reductions related to the decrease in headcount were partially offset by a $0.4 million increase in consulting expenses related to outside development services during fiscal year 2016.

 

General and administrative expenses. The $1.0 million increase was driven primarily by a $0.7 million increase in outside consulting and professional services expenses related to the contested election of our directors at our 2016 annual shareholders meeting in April 2016. In addition, there was a $0.3 million increase in share-based compensation for the fiscal year 2016 when compared to fiscal year 2015.

 

Impairment of goodwill and long-lived assets. There were no impairment charges related to goodwill and long-lived assets in fiscal year 2016. In fiscal year 2015, we recorded goodwill and long-lived assets impairment charges of $21.7 million and $10.3 million, respectively, as a result of performing an interim impairment review as required under ASC 350 Intangibles – Goodwill and Other .

 

Other income (expense)

 

    Years Ended              
    September 30,     Increase     Percentage  
    2016     2015     (Decrease)     Change  
Other income (expense)   $ 44     $ 9     $ 35       4 %
Foreign currency transaction loss   $ (74 )   $ (78 )   $ (4 )     (5 )%

 

Other income (expense). There was a minimal amount of other income for the fiscal years 2016 and 2015.

 

Foreign currency transactions loss. The foreign currency loss for the fiscal years 2016 and 2015 was attributable to fluctuation of the British pound sterling and other foreign currencies in which we transact.

 

Income tax (expense) benefit

 

    Years Ended              
    September 30,           Percentage  
    2016     2015     (Decrease)     Change  
Income tax (expense) benefit   $ (1,473 )   $ 2,724     $ (4,197 )     (154 )%

 

Income tax (expense) benefit. Income tax provision for the fiscal year 2016 was $1.5 million as compared to an income tax benefit of $2.7 million for the fiscal year 2015. The income tax provision for the fiscal year 2016 was comprised of a state tax provision of $10,000, a foreign tax provision of $1.6 million, primarily related to establishing a valuation allowance on the Swedish subsidiary’s deferred tax assets, and a benefit for uncertain tax positions relative to U.S., state, and foreign tax of $0.1 million. The income tax benefit for the fiscal year 2015 was comprised primarily of the change in the deferred tax liability in Sweden as a result of impairing non-goodwill intangibles and amortization, losses generated in Sweden, estimated state taxes, return to provision adjustments, reduction to uncertain tax positions, and accruing interest on uncertain tax positions.

 

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Fiscal Year Ended September 30, 2015 as Compared to

Fiscal Year Ended September 30, 2014

 

Total Revenues  

 

    Years Ended              
    September 30,     Increase     Percentage  
    2015     2014     (Decrease)     Change  
Software licenses   $ 15,304     $ 20,627     $ (5,323 )     (26 )%
Maintenance     13,529       12,845       684       5  
Professional services     1,388       1,615       (227 )     (14 )
Total revenue   $ 30,221     $ 35,087     $ (4,866 )     (14 )%

  

Software license revenue. During the fiscal year ended September 30, 2015, we transitioned our business and sales approach to one that emphasizes what we view as the higher value differentiation of our complete managed analytics platform and places more focus on the potential offered by our Monarch customer base, investing more in a ‘high velocity’ inside selling model and shifting our partner program to a centralized global model. The disruption associated with this realignment of our focus was the primary driver of the $5.3 million decrease in software license revenue for the fiscal year 2015 as compared to the fiscal year 2014. During the fiscal year 2015, we implemented a new pricing policy which requires a subscription based model for smaller sized Monarch orders. As a result of this policy change, we increased our license deferred revenue by $0.9 million over the fiscal year 2014.

 

Maintenance revenue. The $0.7 million increase in maintenance revenue was primarily driven by strong renewal bookings of both enterprise and desktop software.

 

Professional services. Professional services revenue decreased $0.2 million, as a result of changes in selling approach which previously required professional services to be included on all enterprise deals.

 

Total Costs and Expenses  

 

    Years Ended              
    September 30,     Increase     Percentage  
    2015     2014     (Decrease)     Change  
Cost of software licenses   $ 3,002     $ 4,013     $ (1,011 )     (25 )%
Cost of maintenance and services     3,122       3,351       (229 )     (7 )
Sales and marketing     27,037       31,133       (4,096 )     (13 )
Engineering and product development     8,894       9,074       (180 )     (2 )
General and administrative     8,599       9,181       (582 )     (6 )
Impairment of goodwill and long-lived assets     32,009       -       32,009       100  
Total costs and expenses   $ 82,663     $ 56,752     $ 25,911       46 %

 

Cost of software licenses. The $1.0 million decrease was primarily due to lower amortization expense. Our amortization of capitalized development costs pertaining to a prior release of our Datawatch Monarch and Datawatch Server products which were fully amortized as of September 30, 2014 decreased $0.6 million. In addition, amortization of acquired intangibles decreased by $0.6 million due to the reduction in carrying value of the Panopticon intellectual property asset as a result of the impairment charge recorded during the first fiscal quarter. These decreases in amortization expense were offset by a $0.2 million increase in royalties paid.

 

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Cost of maintenance and services. Costs of maintenance and services decreased $0.2 million as a result of a $0.6 million decrease in employee related expenses resulting from a 28% decrease in maintenance and services headcount due to the restructuring efforts that occurred during fiscal year 2015 and a shift to a web enabled, on-line approach to the delivery of training, which were offset by a $0.4 million increase in restructuring charges.

 

Sales and marketing expenses. The $4.1 million decrease in sales and marketing expenses was comprised of a decrease in sales expense of $0.9 million and a decrease in marketing expense of $3.2 million. The decreased sales expense resulted from decreases of $1.4 million of share-based compensation and $0.5 million in employee-related costs attributable to a 15% decrease in sales headcount resulting from the restructuring efforts, and a $0.2 million decrease in amortization which resulted from the reduction in the carrying value of intangibles due to the impairment charges recorded during the fiscal year. These decreases were partially offset by a $0.6 million increase in professional services and a $0.4 million increase in restructuring charges. The marketing decrease was primarily driven by the restructuring effort which reduced marketing headcount by 36% and resulted in (i) an increase of $0.4 million of restructuring charges offset by a $1.9 million decrease in marketing and promotional expenses compared to fiscal 2014 resulting from expenses incurred during 2014 in connection with the redesign of our website and a decrease in other marketing materials as we refocus our lead generation programs, (ii) a $0.8 million decrease in share-based compensation, and (iii) a $0.5 million decrease in other employee related costs. In addition, consulting costs decreased $0.4 million.

 

Engineering and product development expenses. The $0.2 million decrease was driven mainly by a $1.2 million decrease in share-based compensation resulting from a 32% decrease in engineering and product development headcount associated with the restructuring efforts, which were offset by an increase of $0.3 million in restructuring costs. In addition, consulting costs increased $0.5 million and facility related expenses increased $0.3 million driven by an increased focus on product development to support ongoing development of our managed analytics platform.

 

General and administrative expenses. The $0.6 million decrease was mainly the result of a $0.5 million decrease in external consulting costs, offset by a $0.1 million increase in employee related costs as we phased out the use of consultants by hiring employees. In addition, we incurred $0.2 million in restructuring charges, which were offset by a $0.3 million decrease in share-based compensation.

 

Impairment of goodwill and long-lived assets. In fiscal year 2015, we recorded goodwill and long-lived assets impairment charges of $21.7 million and $10.3 million, respectively, as a result of performing an interim impairment review as required under ASC 350 Intangibles – Goodwill and Other . The write-down of the long-lived assets will have a favorable effect on the statements of operations from reduced future intangible amortization expense. 

 

Other income (expense)

 

    Years Ended              
    September 30,     Increase     Percentage  
    2015     2014     (Decrease)     Change  
Interest expense   $ -     $ (406 )   $ (406 )     (100 )%
Other income (expense)   $ 9     $ (755 )   $ (764 )     (101 )%
Foreign currency transaction loss   $ (78 )   $ (76 )   $ 2       3 %

 

Interest expense. There was no interest expense for the fiscal year 2015. Interest expense of $0.4 million for the fiscal year 2014 represents primarily interest expense related to our $4.0 million subordinated notes with a private investment company and borrowings under a $2.0 million revolving credit facility with a bank, each of which were paid off in full and terminated during the fiscal year 2014.

 

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Other income (expense). There was a minimal amount of other income for the fiscal year 2015. Other expense for the fiscal year 2014 of $0.8 million was primarily due to a loss on extinguishment of debt recorded as a result of paying down the $2.0 million subordinated note with a private investment company. The loss represented the unamortized debt discount on the subordinated note.

 

Foreign currency transactions loss. The foreign currency loss for the fiscal years 2015 and 2014 was attributable to fluctuation of the British pound sterling and other foreign currencies in which we transact.

 

Benefit for income taxes

 

    Years Ended              
    September 30,           Percentage  
    2015     2014     Increase     Change  
Income tax benefit   $ 2,724     $ 519     $ 2,205       425 %

 

Income tax benefit. During the fiscal year 2015, we recorded a tax benefit of $2.7 million, primarily related to the change in the deferred tax liability in Sweden as a result of impairing non-goodwill intangibles and amortization, losses generated in Sweden, estimated state taxes, return to provision adjustments, reduction to uncertain tax positions, and accruing interest on uncertain tax positions. During the fiscal year 2014, we recorded a tax benefit of $0.5 million, primarily related to losses generated in Sweden, estimated state taxes, return to provision adjustments, and accrued interest and penalties on uncertain tax positions.

 

OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS  

 

We lease various facilities and equipment in the U.S. and overseas under non-cancelable operating leases that expire through 2022. The lease agreements generally provide for the payment of minimum annual rentals, pro rata share of taxes, and maintenance expenses. Rental expense for all operating leases was $1.1 million for the fiscal year 2016, and $1.0 million for both fiscal years 2015 and 2014. Certain of our facility leases include options to renew.

 

On June 23, 2015, we entered into a facility lease in Bedford, MA for our corporate headquarters. The lease is for 20,360 square feet commencing January 2016 and ending December 2022 with a monthly expense of $42,000. In conjunction with entering into the lease, we were required to deposit $0.2 million into a restricted cash account as collateral for a Letter of Credit, which is included under the caption “ Other long-term assets ” in our consolidated balance sheets, for the year ended September 30, 2016. At September 30, 2016, deferred rent totaled $0.4 million, which is included under the caption “ Other long-term liabilities ” in our consolidated balance sheets, for the year ended September 30, 2016. There was no deferred rent for the year ended September 30, 2015.

 

As of September 30, 2016, our contractual obligations include minimum rental commitments under non-cancelable operating leases, debt obligations and other long-term liabilities related to uncertain tax positions as follows (in thousands):  

 

          Less than                 More than  
Contractual Obligations:   Total     1 Year     1 – 2 Years     3 – 5 Years     5 Years  
Operating lease obligations   $ 4,123     $ 889     $ 1,350     $ 1,151     $ 733  
Other long-term liabilities   $ 522     $ -     $ -     $ -     $ 522  

 

Royalty expense included in cost of software licenses was $0.7 million, $0.6 million and $0.4 million, respectively, for the years ended September 30, 2016, 2015 and 2014, respectively.

  

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Our 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, we would provide for the estimated cost of warranties based on specific warranty claims and claim history. However, we have never incurred significant expense under our product or service warranties. As a result, we believe our exposure related to these warranty agreements is minimal. Accordingly, there are no liabilities recorded for warranty claims as of September 30, 2016. 

 

We enter into indemnification agreements in the ordinary course of business. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe our exposure related to these agreements is minimal. Accordingly, we have no liabilities recorded for these potential obligations as of September 30, 2016.

 

Certain of our agreements also provide for the performance of services at customer sites. These agreements may contain indemnification clauses, whereby we will indemnify the customer from any and all damages, losses, judgments, costs and expenses for acts of our employees or subcontractors resulting in bodily injury or property damage. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have general and umbrella insurance policies that would enable us to recover a portion of any amounts paid. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe our exposure related to these agreements is minimal. Accordingly, we have no liabilities recorded for these potential obligations as of September 30, 2016.

 

As permitted under Delaware law, we have agreements with our directors whereby we will indemnify them for certain events or occurrences while the director is, or was, serving at our request in such capacity. The term of the director indemnification period is for the later of ten years after the date that the director ceases to serve in such capacity or the final termination of proceedings against the director as outlined in the indemnification agreement. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, our director and officer insurance policy would enable us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe our exposure related to these indemnification agreements is minimal. Accordingly, we have no liabilities recorded for these potential obligations as of September 30, 2016.

   

LIQUIDITY AND CAPITAL RESOURCES  

 

We believe that our current cash balances and cash generated from operations will be sufficient to meet our cash needs for working capital and anticipated capital expenditures for at least the next twelve months. At September 30, 2016, we had $28.0 million of cash and cash equivalents as compared to $35.2 million as of September 30, 2015, a decrease of $7.1 million.  $1.2 million of cash and cash equivalents at September 30, 2016 was located in foreign banks.

 

At September 30, 2016, we had working capital of $23.5 million as compared to $31.3 million as of September 30, 2015. We do not anticipate additional cash requirements to fund growth or the acquisition of additional complementary technology or businesses. However, if in the future, such expenditures are anticipated or required, we may seek additional financing by issuing equity or obtaining credit facilities to fund such requirements. There can be no assurance that we will be able to issue additional equity or obtain a new or expanded credit facility at attractive prices or rates, or at all. 

  

We had a net loss of $14.6 million, $49.8 million and $22.4 million for the years ended September 30, 2016, 2015 and 2014, respectively. During the years ended September 30, 2016, 2015 and 2014, $6.3 million, $11.9 million and $11.0 million of cash was used in our operating activities, respectively. During fiscal year 2016, the main use of cash in operations was net loss adjusted for depreciation and amortization, share-based compensation expense and deferred income taxes as well as the increase in prepaid expenses and other assets, offset by an increase in accounts payable, accrued expenses and other liabilities and deferred revenue.  During fiscal year 2015, the main use of cash in operations was net loss adjusted for depreciation and amortization, share-based compensation expense, deferred income taxes and the impairment of goodwill and long-lived assets as well as the increase in prepaid expenses and other assets, offset by an increase in deferred revenue. During fiscal year 2014, the main use of cash from operations was net loss adjusted for depreciation and amortization and share-based compensation expense, as well as decreases in accounts payable, accrued expenses and other liabilities offset by increases in accounts receivable and prepaid expenses and other assets.  

 

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Net cash used in investing activities for the years ended September 30, 2016 and 2015 of $1.0 million and $0.5 million, respectively, was related to the purchase of property and equipment. Net cash used in investing activities for the year ended September 30, 2014 of $0.5 million is attributable to increases in capitalized software development costs and purchases of property and equipment. 

 

On February 19, 2014, we completed a public offering of 2,018,250 shares of common stock at a price to the public of $28.50 per share. The number of shares we sold includes the underwriters’ full exercise of their over-allotment option of 263,250 shares. Net proceeds from the offering, after underwriting discounts and expenses, were $53.6 million.

 

Net cash provided by financing activities for both years ended September 30, 2016 and 2015 of $0.1 million, was related to the proceeds from the issuance of common stock upon the exercise of outstanding stock options previously awarded under equity compensation plans. Net cash provided by financing activities for the year ended September 30, 2014 was $49.0 million and was primarily attributable to the public offering completed on February 19, 2014 offset by the repayments of debt and repayments on the line of credit.  

 

We believe that our current operations have not been materially impacted by the effects of inflation.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13 , Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We are in the process of evaluating the potential impacts of this new guidance on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting , which is intended to simplify various aspects of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which requires lessees to recognize, on the balance sheet, leases with a lease terms of greater than twelve months as a right-of-use asset and a lease liability. The standard is effective for fiscal years beginning after December 15, 2018. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes , which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify the presentation of deferred income taxes. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. As of October 1, 2015, we elected to adopt early the pronouncement on a prospective basis. Adoption of this amendment did not have an effect on our financial position or results of operations, and prior periods were not retrospectively adjusted.

 

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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU is the result of a joint project by the FASB and the International Accounting Standards Board (“IASB”) to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that would: remove inconsistencies and weaknesses, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices across entities, jurisdictions, industries, and capital markets, improve disclosure requirements and resulting financial statements, and simplify the presentation of financial statements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU was initially effective for annual reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB voted to delay the effective date of the new revenue standard by one year, but to permit entities to choose to adopt the standard as of the original effective date. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

 

We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our accompanying consolidated financial statements.

 

Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

 

Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments 

 

At September 30, 2016, we did not participate in or hold any derivative financial instruments or commodity instruments and we did not hold any investment securities that possess significant market risk. 

 

Primary Market Risk Exposures 

 

Our primary market risk exposure is foreign currency exchange rate risk. International revenues and expenses are generally transacted by our foreign subsidiaries and are denominated in local currency. 14%, 21% and 17% of our revenues for fiscal years 2016, 2015 and 2014, respectively, were from our foreign subsidiaries. In addition, 19%, 16% and 22% of our operating expenses for fiscal years 2016, 2015 and 2014 respectively, were from our foreign subsidiaries. 

 

We are exposed to foreign currency exchange rate risk inherent in conducting business globally in several currencies, of which the most significant to our operations has historically been the British Pound. Our exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of our international subsidiaries are almost exclusively conducted in their respective local currencies, and dollar advances to our international subsidiaries, if any, are usually considered to be of a long-term investment nature. Accordingly, the majority of currency movements are reflected in our other comprehensive income (loss). Foreign currency translation gains arising during fiscal year 2016 were $0.1 million, and foreign currency translation losses arising during fiscal years 2015 and 2014 were $0.4 million and $0.3 million, respectively. There are, however, certain situations where we will invoice customers in currencies other than our own. Such gains or losses from operating activity, whether realized or unrealized, are reflected in foreign currency transaction (losses) gains in the accompanying consolidated statements of operations and were losses of $0.1 million for the fiscal years 2016, 2015 and 2014.

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

 

The following consolidated financial statements and the related notes thereto of Datawatch Corporation and the Report of Independent Registered Public Accounting Firm thereon are filed as part of this Annual Report on Form 10-K. 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 37
   
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 AND 2015 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 2016:  
   
Consolidated Balance Sheets 38
   
Consolidated Statements of Operations 39
   
Consolidated Statements of Comprehensive Loss 40
   
Consolidated Statements of Shareholders’ Equity 41
   
Consolidated Statements of Cash Flows 42
   
Notes to Consolidated Financial Statements 43

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders

Datawatch Corporation and Subsidiaries

 

 

We have audited the accompanying consolidated balance sheets of Datawatch Corporation and Subsidiaries (“the Company”) as of September 30, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Datawatch Corporation and Subsidiaries as of September 30, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2016, in conformity with U.S. generally accepted accounting principles.

 

/s/ RSM US LLP

 

RSM US LLP

Boston, MA

November 10, 2016

 

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DATAWATCH CORPORATION

CONSOLIDATED BALANCE SHEETS 

(In thousands, except share amounts)

 

    September 30,     September 30,  
    2016     2015  
ASSETS                
CURRENT ASSETS:                
Cash and cash equivalents   $ 28,034     $ 35,162  
Accounts receivable, net of allowance for doubtful accounts of $28 and $106 as of September 30, 2016 and September 30, 2015, respectively     6,932       7,081  
Prepaid expenses and other current assets     2,265       2,013  
Total current assets     37,231       44,256  
                 
Property and equipment, net     1,210       614  
Acquired intellectual property, net     1,998       3,981  
Other intangible assets, net     1,061       1,270  
Goodwill and indefinite-lived assets     6,685       6,685  
Deferred tax asset, net     -       1,839  
Other long-term assets     246       286  
Total assets   $ 48,431     $ 58,931  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
CURRENT LIABILITIES:                
Accounts payable   $ 1,758     $ 1,546  
Accrued expenses     2,319       2,656  
Deferred revenue     9,630       8,452  
Deferred tax liability, current     -       274  
Total current liabilities     13,707       12,928  
                 
LONG-TERM LIABILITIES:                
Deferred revenue, long-term     237       192  
Other long-term liabilities     529       269  
Total long-term liabilities     766       461  
Total liabilities     14,473       13,389  
                 
COMMITMENTS AND CONTINGENCIES (Note 4)                
                 
SHAREHOLDERS’ EQUITY:                
Common stock, par value $0.01; authorized: 20,000,000 shares; issued and outstanding: 11,938,032 shares and 11,923,786 shares, respectively, as of September 30, 2016 and 11,640,097 shares and 11,625,851 shares, respectively, as of September 30, 2015     119       116  
Additional paid-in capital     142,668       139,732  
Accumulated deficit     (106,823 )     (92,191 )
Accumulated other comprehensive loss     (1,866 )     (1,975 )
      34,098       45,682  
Less treasury stock, at cost, 14,246 shares     (140 )     (140 )
Total shareholders’ equity     33,958       45,542  
                 
Total liabilities and shareholders’ equity   $ 48,431     $ 58,931  

 

See accompanying notes to these consolidated financial statements.

 

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DATAWATCH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS 

(In thousands, except per share amounts)

 

    Years Ended  
    September 30,  
    2016     2015     2014  
REVENUE:                        
Software licenses   $ 15,219     $ 15,304     $ 20,627  
Maintenance     13,915       13,529       12,845  
Professional services     1,328       1,388       1,615  
Total revenues     30,462       30,221       35,087  
                         
COSTS AND EXPENSES:                        
Cost of software licenses     2,828       3,002       4,013  
Cost of maintenance and services (1)     2,177       3,122       3,351  
Sales and marketing (1)     20,783       27,037       31,133  
Engineering and product development (1)     8,167       8,894       9,074  
General and administrative (1)     9,636       8,599       9,181  
Impairment of goodwill and long-lived assets     -       32,009       -  
Total costs and expenses     43,591       82,663       56,752  
                         
LOSS FROM OPERATIONS     (13,129 )     (52,442 )     (21,665 )
                         
Interest expense     -       -       (406 )
Other income (expense)     44       9       (755 )
Foreign currency transaction loss     (74 )     (78 )     (76 )
                         
LOSS FROM OPERATIONS BEFORE INCOME TAXES     (13,159 )     (52,511 )     (22,902 )
Income tax (expense) benefit     (1,473 )     2,724       519  
                         
NET LOSS   $ (14,632 )   $ (49,787 )   $ (22,383 )
                         
Net loss per share – basic:   $ (1.24 )   $ (4.38 )   $ (2.24 )
Net loss per share – diluted:   $ (1.24 )   $ (4.38 )   $ (2.24 )
                         
Weighted-average shares outstanding – basic     11,758       11,368       9,998  
Weighted-average shares outstanding – diluted     11,758       11,368       9,998  
                         
(1) Includes share-based compensation as follows:                        
                         
Cost of maintenance and services   $ 37     $ 63     $ 143  
Sales and marketing     1,028       3,110       5,243  
Engineering and product development     359       417       1,585  
General and administrative     1,407       1,143       1,475  
    $ 2,831     $ 4,733     $ 8,446  

 

See accompanying notes to these consolidated financial statements.

 

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DATAWATCH CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

    Years Ended September 30,  
    2016     2015     2014  
                   
Net loss   $ (14,632 )   $ (49,787 )   $ (22,383 )
Other comprehensive gain (loss):                        
Foreign currency translation adjustments     109       (355 )     (342 )
Comprehensive loss   $ (14,523 )   $ (50,142 )   $ (22,725 )

 

See accompanying notes to these consolidated financial statements.

 

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DATAWATCH CORPORATION  

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts) 

 

                            Accumulated                    
                Additional           Other                    
    Common Stock     Paid-In     Accumulated     Comprehensive     Treasury Stock        
    Shares     Amount     Capital     Deficit     Loss     Shares     Amount     Total  
                                                 
BALANCE, SEPTEMBER 30, 2013     8,795,023     $ 88     $ 72,726     $ (20,021 )   $ (1,278 )     (14,246 )   $ (140 )   $ 51,375  
Issuance of common stock     2,018,250       20       53,608       -       -       -       -       53,628  
Exercise of stock options     42,709       6       173       -       -       -       -       179  
Vesting of restricted stock     433,116       -       -       -       -       -       -       -  
Share-based compensation expense     -       -       8,446       -       -       -       -       8,446  
Excess tax benefits from share-based compensation awards     -       -       7       -       -       -       -       7  
Translation adjustments     -       -       -       -       (342 )     -       -       (342 )
Net loss     -       -       -       (22,383 )     -       -       -       (22,383 )
                                                                 
BALANCE, SEPTEMBER 30, 2014     11,289,098       114       134,960       (42,404 )     (1,620 )     (14,246 )     (140 )     90,910  
Exercise of stock options     18,000       -       52       -       -       -       -       52  
Vesting of restricted stock     332,999       2       -       -       -       -       -       2  
Share-based compensation expense     -       -       4,733       -       -       -       -       4,733  
Translation adjustments     -       -       (13 )     -       (355 )     -       -       (368 )
Net loss     -       -       -       (49,787 )     -       -       -       (49,787 )
                                                                 
BALANCE, SEPTEMBER 30, 2015     11,640,097       116       139,732       (92,191 )     (1,975 )     (14,246 )     (140 )     45,542  
Exercise of stock options     22,500       -       105       -       -       -       -       105  
Vesting of restricted stock     275,435       3       -       -       -       -       -       3  
Share-based compensation expense     -       -       2,831       -       -       -       -       2,831  
Translation adjustments     -       -               -       109       -       -       109  
Net loss     -       -       -       (14,632 )     -       -       -       (14,632 )
                                                                 
BALANCE, SEPTEMBER 30, 2016     11,938,032     $ 119     $ 142,668     $ (106,823 )   $ (1,866 )     (14,246 )   $ (140 )   $ 33,958  

 

See accompanying notes to these consolidated financial statements.

 

  41  

 

 

DATAWATCH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

 

    Years Ended September 30,  
    2016     2015     2014  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net loss   $ (14,632 )   $ (49,787 )   $ (22,383 )
Adjustments to reconcile net loss to cash used in operating activities:                        
Depreciation and amortization     2,548       2,857       4,237  
Provision for doubtful accounts     (75 )     45       -  
Share-based compensation expense     2,831       4,733       8,446  
Non-cash interest expense     -       -       187  
Loss on extinguishment of debt     -       -       795  
Deferred income taxes     1,567       (2,667 )     (523 )
Impairment of goodwill and long-lived assets     -       32,009       -  
Changes in operating assets and liabilities:                        
Accounts receivable     92       (207 )     (414 )
Prepaid expenses and other assets     (293 )     (607 )     (540 )
Accounts payable, accrued expenses and other liabilities     295       456       (1,092 )
Deferred revenue     1,398       1,237       295  
Cash used in operating activities     (6,269 )     (11,931 )     (10,992 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Capitalized software development costs     -       -       (250 )
Purchases of property and equipment     (966 )     (490 )     (276 )
Cash used in investing activities     (966 )     (490 )     (526 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Proceeds from issuance of common stock, net of issuance costs     -       -       53,628  
Proceeds from exercise of stock options     105       52       179  
Repayments of debt     -       -       (3,944 )
Repayments of line of credit     -       -       (900 )
Excess tax benefits from stock-based compensation awards     -       -       7  
Capitalized debt issuance costs     -       -       (5 )
Cash provided by financing activities     105       52       48,965  
                         
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS     2       (137 )     (91 )
                         
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     (7,128 )     (12,506 )     37,356  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     35,162       47,668       10,312  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 28,034     $ 35,162     $ 47,668  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                        
Interest paid   $ -     $ -     $ 169  
                         
Income taxes paid   $ 34     $ 39     $ 122  

 

See accompanying notes to these consolidated financial statements.

 

  42  

 

 

DATAWATCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

 

Nature of Business  

 

Datawatch Corporation (the “Company” or “Datawatch”) designs, develops, markets and distributes business computer software products. The Company also provides services, including implementation and support of its software products, as well as training on their use and administration. The Company is subject to a number of risks including dependence on key individuals, competition from substitute products and larger companies and the need for successful ongoing development and marketing of products. 

 

Summary of Significant Accounting Policies 

 

Basis of Presentation and Principles of Consolidation  

 

These consolidated financial statements include the accounts of Datawatch and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. 

 

Accounting Estimates  

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments, which are evaluated on an on-going basis, that affect the amounts and disclosures reported in the Company’s consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates and judgments include those related to revenue recognition, the allowance for doubtful accounts, sales returns reserve, valuation of share-based compensation awards, useful lives of property and equipment, and the valuation of long term assets including goodwill, intellectual property and intangibles, capitalized software development costs and deferred tax assets. Actual results could differ from those estimates and judgments.

 

Revenue Recognition  

 

Datawatch software products are generally sold in multiple element arrangements which may include software licenses, professional services and post-contract customer support. The Company licenses its software products directly to end-users and indirectly to end-users through value added resellers and distributors. Sales to indirect distribution channels accounted for 35%, 40% and 44% of total sales for the years ended September 30, 2016, 2015 and 2014, respectively. The Company’s software product offerings do not require customization and can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses, and the license fee revenue is recognized upon delivery of the software.

 

Revenue typically consists of software licenses, post-contract support (“PCS”) and professional services. Revenue from the sale of all software products is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and there are no significant obligations remaining. PCS is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from PCS agreements is deferred and recognized ratably over the term of the agreements, typically one year. Professional services include advanced modeling, application design, implementation and configuration and process optimization with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, billed on a current basis as the work is performed, and generally do not involve modification or customization of the software or any unusual acceptance clauses or provisions.

 

  43  

 

 

For multiple element arrangements, total fees are allocated to each of the undelivered elements based upon vendor specific objective evidence (“VSOE”) of their fair values, with the residual amount recognized as revenue for the delivered elements. The residual method of revenue recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements, generally the software license. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as revenue related to the delivered elements. The Company has established VSOE of fair value of PCS from either contractually stated renewal rates or using the bell-shaped curve method. Additionally, VSOE of fair value of the professional services is based on the amounts charged for these elements when sold separately. VSOE calculations are routinely updated and reviewed.

 

The Company also licenses its enterprise software using a subscription model. At the time a customer enters into a binding agreement to purchase a subscription, the customer is invoiced annually in advance and an account receivable and deferred revenue are recorded. Beginning on the date the software is installed at the customer site and available for use by the customer, and provided that all other criteria for revenue recognition are met, the deferred revenue amount is recognized ratably over the period the service is provided. The subscription arrangement includes software, maintenance and unspecified future upgrades including major version upgrades on a when-and-if available basis. The subscription renewal rate is the same as the initial subscription rate. 

 

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other revenue recognition criteria are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company’s experience and history with its distributors and resellers allows for reasonable estimates of future returns.

 

Allowance for Doubtful Accounts  

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The Company analyzes accounts receivable and the composition of the accounts receivable aging, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Actual results could differ from the allowances recorded, and this difference could have a material effect on the Company’s financial position and results of operations. Receivables are written off against these allowances in the period they are determined to be uncollectible.

 

For the fiscal years ended September 30, 2016, 2015 and 2014, changes to and ending balances of the allowance for doubtful accounts were as follows: 

 

    September 30,  
    2016     2015     2014  
    (In thousands)  
                   
Allowance for doubtful accounts balance - beginning of year   $ 106     $ 53     $ 43  
Additions to the allowance for doubtful accounts     51       111       18  
Deductions against the allowance for doubtful accounts     (129 )     (58 )     (8 )
Allowance for doubtful accounts balance - end of year   $ 28     $ 106     $ 53  

 

  44  

 

 

Sales Returns Reserve 

 

The Company maintains reserves for potential future product returns from distributors. The Company estimates future product returns based on its experience and history with the Company’s various distributors and resellers as well as by monitoring inventory levels at such companies as described above. Adjustments are recorded as increases or decreases in revenue in the period of adjustment. Actual returns have historically been within the range estimated by management. Actual results could differ from the reserve for sales returns recorded, and this difference could have a material effect on the Company’s financial position and results of operations. The Company’s agreement with its sole distributor, Lifeboat, expired during the year ended September 30, 2015, and as a result, the Company determined that a reserve for future returns was no longer necessary.

 

For the fiscal years ended September 30, 2015 and 2014, changes to and ending balances of the sales returns reserve were as follows: 

 

    2015     2014  
             
Sales returns reserve balance - beginning of year   $ 10     $ 20  
Additions to the sales returns reserve     -       24  
Deductions against the sales returns reserve     (10 )     (34 )
Sales returns reserve balance - end of year   $ -     $ 10  

  

Software Development Costs

 

The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. Costs that are incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software development costs are capitalized until the product is available for general release to customers. Such capitalized costs are amortized to cost of software licenses straight-line over the estimated life of the product, generally nine to 18 months. The Company evaluates the realizability of the assets and the related periods of amortization on a regular basis. Judgment is required in determining when technological feasibility of a product is established as well as its economic life. During fiscal years 2016 and 2015, there were no significant costs incurred during the period after technological feasibility was established and the time in which the product became available for general release. During fiscal year 2014, the Company capitalized $0.3 million of software development costs.

 

For the fiscal year ended September 30, 2014, amounts related to capitalized and purchased software development costs were as follows: 

 

    September 30,  
    2014  
       
Capitalized and purchased software balance - beginning of year   $ 350  
Capitalized software development costs     250  
Amortization of capitalized software development costs     (600 )
Capitalized and purchased software balance - end of year   $ -  

 

Cash and Cash Equivalents 

 

Cash and cash equivalents include cash on hand, cash deposited with banks and highly liquid securities consisting of money market investments with original maturities of 90 days or less.

 

  45  

 

 

Concentration of Credit Risks and Major Customers 

 

Financial instruments, which potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company’s cash is maintained with what management believes to be a high-credit quality financial institution.  At times, deposits held at this bank may exceed the federally insured limits.  Management believes that the financial institutions that hold the Company’s deposits are financially sound and have minimal credit risk. Risks associated with cash and cash equivalents are mitigated by the Company’s investment policy, which limits the Company’s investing of excess cash into only money market mutual funds. 

 

The Company licenses its products and services directly to end-users and indirectly to end-users through U.S. and non-U.S. distributors and other software resellers, under customary credit terms. The Company’s agreement with Lifeboat expired in early 2015 and, to manage the transition, the Company has refocused part of its Inside Sales Team to manage and pursue the book of business previously handled by Lifeboat. No customer constituted a significant portion (more than 10%) of revenues or accounts receivable for the years ended September 30, 2016 and 2015. Other than Lifeboat, no other customer constitutes a significant portion of revenues or accounts receivable for the year ended September 30, 2014. Lifeboat, accounted for 15% of total revenue for the year ended September 30, 2014. The Company performs ongoing credit evaluations of its customers and generally does not require collateral.

 

Deferred Revenue 

 

Deferred revenue consisted of the following at September 30: 

 

    September 30,  
    2016     2015  
    (In thousands)  
             
Maintenance   $ 7,781     $ 7,594  
License     2,001       981  
Other     85       69  
Total     9,867       8,644  
                 
Less: Long-term portion of deferred revenue     (237 )     (192 )
                 
Current portion of deferred revenue   $ 9,630     $ 8,452  

 

Deferred maintenance revenue consists primarily of the unearned portion of customer support services provided by the Company to customers who purchased maintenance agreements for the Company’s products. Maintenance revenues are recognized on a straight-line basis over the term of the maintenance period, generally 12 months. Deferred license revenue consists primarily of the unearned portion of revenue from subscription sales and are recognized on a straight-line basis over the term of the subscription period, generally 12 months.

 

Other deferred revenue consists of deferred professional services revenue generated from arrangements that are invoiced in accordance with the terms and conditions of the arrangement but do not meet all the criteria for revenue recognition and are, therefore, deferred until all revenue recognition criteria are met. 

 

Property and Equipment 

 

Property and equipment consists of office equipment, furniture and fixtures, software and leasehold improvements, all of which are recorded at cost. Depreciation and amortization are provided using the straight-line method over the lesser of the estimated useful lives of the related assets or term of the related leases. Useful lives and lease terms range from three to seven years. Depreciation and amortization expense related to property and equipment was $0.4. million, $0.3 million and $0.2 million, respectively, for the years ended September 30, 2016, 2015 and 2014. 

 

  46  

 

 

Long-Lived Assets  

 

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

 

During fiscal 2015, as a result of an interim impairment test of goodwill and long-lived assets (see Note 2), the Company recorded an impairment charge of $4.9 million for the intellectual property acquired from Panopticon (now known as Datawatch AB) and $5.4 million for the customer lists acquired from Panopticon.

 

Long-Lived Assets: Acquired Intellectual Property

 

Acquired intellectual property consists of software source code acquired through business combinations in prior years. The acquired intellectual property assets are being amortized to cost of software licenses using the straight-line method over the estimated life of the asset, ranging from five to seven and a half years.

 

Acquired intellectual property, net, were comprised of the following at September 30, 2016 and 2015: 

 

September 30, 2016
Identified   Weighted   Gross              
Intangible   Average   Carrying     Accumulated     Net Carrying  
Asset   Useful Life   Amount     Amortization     Amount  
    (In years)                  
                       
Panopticon intellectual property   7.5   $ 3,005     $ (1,859 )   $ 1,146  
Monarch intellectual property   5     8,616       (7,764 )     852  
                             
Total       $ 11,621     $ (9,623 )   $ 1,998  

 

September 30, 2015
Identified   Weighted   Gross              
Intangible   Average   Carrying     Accumulated     Net Carrying  
Asset   Useful Life   Amount     Amortization     Amount  
    (In years)                  
                       
Panopticon intellectual property   7.5   $ 3,005     $ (1,599 )   $ 1,406  
Monarch intellectual property   5     8,616       (6,041 )     2,575  
                             
Total       $ 11,621     $ (7,640 )   $ 3,981  

 

Amortization expense related to the acquired intellectual property assets for the years ended September 30, 2016, 2015 and 2014, was $2.0 million, $2.2 million and $2.8 million, respectively.

 

The future amortization expense related to the acquired intellectual property is as follows (in thousands):

 

Fiscal Years Ending September 30,      
       
2017   $ 1,112  
2018     260  
2019     259  
2020     259  
2021     108  
Total future amortization expense   $ 1,998  

 

  47  

 

 

Long-Lived Assets: Other Intangible Assets  

 

Other intangible assets consist of trade names, patents and customer lists acquired through business combinations in prior years. The values allocated to these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset.

  

Other intangible assets, net, were comprised of the following at September 30, 2016 and 2015: 

 

September 30, 2016
Identified   Weighted   Gross              
Intangible   Average   Carrying     Accumulated     Net Carrying  
Asset   Useful Life   Amount     Amortization     Amount  
    (In years)                  
                       
Patents   20   $ 160     $ (96 )   $ 64  
Customer lists   14     3,574       (2,577 )     997  
Trade names   3     120       (120 )     -  
                             
Total       $ 3,854     $ (2,793 )   $ 1,061  

 

September 30, 2015
Identified   Weighted   Gross              
Intangible   Average   Carrying     Accumulated     Net Carrying  
Asset   Useful Life   Amount     Amortization     Amount  
    (In years)                  
                       
Patents   20   $ 160     $ (88 )   $ 72  
Customer lists   14     3,574       (2,396 )     1,178  
Trade names   3     120       (100 )     20  
                             
Total       $ 3,854     $ (2,584 )   $ 1,270  

 

There was no amortization related to other intangible assets charged to cost of software licenses expense for fiscal 2016 and 2015. Amortization expense related to other intangible assets charged to cost of software licenses totaled $0.6 million for fiscal 2014. Amortization expense related to other intangible assets charged to sales and marketing totaled $0.2 million, $0.3 million and $0.6 million for fiscal 2016, 2015 and 2014, respectively. Amortization expense related to other intangible assets charged to general and administrative expense totaled $20,000 for fiscal 2016 and $48,000 for each of the fiscal years 2015 and 2014. There was no amortization related to other intangible assets charged to interest expense for fiscal 2016 and 2015. Amortization expense related to other intangible asset charged to interest expense totaled $0.1 million for fiscal 2014.

 

  48  

 

 

The future amortization expense related to amortizing other intangible assets is as follows (in thousands): 

 

Fiscal Years Ending September 30,      
       
2017   $ 92  
2018     92  
2019     92  
2020     92  
2021     92  
Thereafter     601  
Total future amortization expense   $ 1,061  

 

Goodwill and Indefinite-Lived Assets

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of acquired businesses. Indefinite-lived intangibles are intangible assets whose useful lives are indefinite in that their lives extend beyond the foreseeable horizon – that is there is no foreseeable limit on the period of time over which they are expected to contribute to the cash flows of the reporting entity. The Company accounts for these items in accordance with FASB’s ASC 350 Intangibles – Goodwill and Other . This requires that goodwill and intangible assets having indefinite lives are not amortized but instead are reviewed annually, or more frequently as a result of an event or change in circumstances, for possible impairment with impaired assets written down to fair value. Goodwill and assembled workforce are considered indefinite-lived intangibles. The Company conducts its annual impairment test for goodwill and indefinite-lived intangible assets during the fourth quarter of each fiscal year. In 2016, the Company conducted its annual goodwill impairment test on July 31, 2016, and concluded that no impairment was indicated. During fiscal year 2015, the Company identified several events, that when combined, were determined to require an interim impairment test. As a result, the Company recognized a non-cash, pre-tax impairment charge of $21.7 million for the impairment of goodwill in fiscal year 2015(see Note 2).

 

Fair Value Measurements

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The estimated fair values have been determined through information obtained from market sources and management estimates.  The estimated fair value of certain financial instruments including cash equivalents, accounts receivable and account payable, approximate the carrying value due to their short-term maturity.

 

The fair value of the Company’s financial assets and liabilities are measured using inputs from the three levels of fair value hierarchy which are as follows:

 

·   Level 1 — Quoted prices in active markets for identical assets or liabilities; 

 

·   Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

·   Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 

 

The Company classified its cash equivalents, which primarily include money market mutual funds, of $18.8 million and $25.7 million as of September 30, 2016 and 2015, respectively, within Level 2 of the fair value hierarchy.

 

  49  

 

 

As of September 30, 2016 and 2015, the Company’s assets that are measured on a recurring basis include the following (in thousands):

 

    September 30, 2016     September 30, 2015  
    Fair Value Measurement     Fair Value Measurement  
    Using Input Types     Using Input Types  
    Level 1     Level 2     Level 3     Level 1     Level 2     Level 3  
Assets:                                                
Money market funds   $ -     $ 18,771     $ -     $ -     $ 25,724     $ -  
Total   $ -     $ 18,771     $ -     $ -     $ 25,724     $ -  

 

Non-financial assets such as goodwill and long-lived assets are also subject to non-recurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset and are accounted for in accordance with FASB’s guidance on fair value measurement. The fair value measurements for these non-financial assets were calculated using a discounted cash flow approach, which includes unobservable inputs classified as Level 3 within the fair value hierarchy. See Note 2 for additional discussion regarding the fair value methods used for these assets.  The amount and timing of future cash flows was based on the Company’s most recent operational forecasts.  The Company uses the assistance of an independent consulting firm to develop valuation assumptions. See Note 2 for additional discussion regarding the impairment of goodwill and long-lived assets.

 

As of September 30, 2016 and 2015, the Company’s assets that are measured on a non-recurring basis include the following (in thousands):

 

    September 30, 2016     September 30, 2015  
    Fair Value Measurement     Fair Value Measurement  
    Using Input Types     Using Input Types  
    Level 1     Level 2     Level 3     Level 1     Level 2     Level 3  
Assets:                                                
Acquired intellectual property, net   $ -     $ -     $ 1,998     $ -     $ -     $ 3,981  
Other intangible assets, net     -       -       1,061       -       -       1,270  
Goodwill and indefinite-lived assets     -       -       6,685       -       -       6,685  
Total   $ -     $ -     $ 9,744     $ -     $ -     $ 11,936  

 

Income Taxes  

 

The provision for income taxes is based on the earnings or losses reported in the consolidated financial statements. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company provides a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company follows the accounting guidance for uncertain tax positions. This guidance clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  

 

Net Loss Per Share  

 

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. 

 

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The following table details the derivation of weighted-average shares outstanding used in the calculation of basic and diluted net loss for each period (in thousands, except share data): 

 

    Years Ended  
    September 30,  
    2016     2015     2014  
                   
Net loss   $ (14,632 )   $ (49,787 )   $ (22,383 )
                         
Weighted-average number of common shares outstanding     11,758       11,368       9,998  
                         
Net loss per share   $ (1.24 )   $ (4.38 )   $ (2.24 )

 

As the Company was in a net loss position in fiscal years 2016, 2015 and 2014, all common stock equivalents in the respective periods were anti-dilutive. As a result of being anti-dilutive, 384,312 shares, 259,424 shares and 11,059 shares for the years ended September 30, 2016, 2015 and 2014, respectively, were excluded in the calculation above.

 

Foreign Currency Translations and Transactions

 

The Company’s foreign subsidiaries functional currency is their local currency. As a result, assets and liabilities of foreign subsidiaries are translated into U.S. dollars at rates in effect at each balance sheet date. Revenues, expenses and cash flows are translated into U.S. dollars at average rates prevailing during the respective period. The related translation adjustments are reported as a separate component of shareholders’ equity under the heading “Accumulated Other Comprehensive Loss.” Included in comprehensive loss are the foreign currency translation adjustments. Foreign currency translation gains in fiscal year 2016 were $0.1 million Foreign currency translation losses in fiscal years 2015 and 2014 were $0.4 million and $0.3 million, respectively.

 

Gains and losses resulting from transactions that are denominated in currencies other than the applicable unit’s functional currency are included in the operating results of the Company and were losses of $0.1 million for the years ended September 30, 2016, 2015, and 2014.

 

Advertising and Promotional Materials  

 

Advertising and promotional costs are expensed as incurred and amounted to $0.6 million, $0.1 million and $0.8 million in fiscal years 2016, 2015 and 2014, respectively.

 

Share-Based Compensation 

 

The Company recognizes the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. See additional share-based compensation disclosure in Note 7.

 

Segment Information and Revenue by Geographic Location

 

The Company has determined that it has only one reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results. See Note 10 for information about the Company’s revenue by geographic operations. 

 

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Guarantees and Indemnifications  

 

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. The Company has never incurred significant expense under its product or service warranties and does not expect to do so in the future. As a result, the Company believes its exposure related to these warranty agreements is minimal. Accordingly, there are no liabilities recorded for warranty claims as of September 30, 2016 or 2015.

 

The Company enters into indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify, hold harmless, and to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally its customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes its exposure related to these agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of September 30, 2016 or 2015. 

 

Certain of the Company’s agreements also provide for the performance of services at customer sites. These agreements may contain indemnification clauses, whereby the Company will indemnify the customer from any and all damages, losses, judgments, costs and expenses for acts of its employees or subcontractors resulting in bodily injury or property damage. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrella insurance policies that would enable it to recover a portion of any amounts paid. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes its exposure related to these agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of September 30, 2016 or 2015. 

 

As permitted under Delaware law, the Company has agreements with its directors whereby the Company will indemnify them for certain events or occurrences while the director is, or was, serving at the Company’s request in such capacity. The term of the director indemnification period is for the later of ten years after the date that the director ceases to serve in such capacity or the final termination of proceedings against the director as outlined in the indemnification agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company’s director and officer insurance policy limits the Company’s exposure and would enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage for directors, the Company believes its exposure related to these indemnification agreements is minimal. The Company has no liabilities recorded for these potential obligations as of September 30, 2016 or 2015. 

 

Research and Development Costs  

 

Research and development costs are expensed as incurred to the extent the costs do not meet the capitalization requirements.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13 , Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the potential impacts of this new guidance on the Company’s consolidated financial statements and related disclosures.

 

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In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , which is intended to simplify various aspects of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect this standard will have on the Company’s consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which requires lessees to recognize, on the balance sheet, leases with a lease terms of greater than twelve months as a right-of-use asset and a lease liability. The standard is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the effect that the standard will have on the Company’s consolidated financial statements and related disclosures.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes , which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify the presentation of deferred income taxes. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. As of October 1, 2015, the Company elected to adopt early the pronouncement on a prospective basis. Adoption of this amendment did not have an effect on the Company's financial position or results of operations, and prior periods were not retrospectively adjusted.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU is the result of a joint project by the FASB and the International Accounting Standards Board (“IASB”) to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that would: remove inconsistencies and weaknesses, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices across entities, jurisdictions, industries, and capital markets, improve disclosure requirements and resulting financial statements, and simplify the presentation of financial statements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU was initially effective for annual reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB voted to delay the effective date of the new revenue standard by one year, but to permit entities to choose to adopt the standard as of the original effective date. The Company is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements and related disclosures.

 

The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its consolidated financial statements.

 

NOTE 2. IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of acquired businesses. Indefinite-lived intangibles are intangible assets whose useful lives are indefinite in that their lives extend beyond the foreseeable horizon – that is there is no foreseeable limit on the period of time over which they are expected to contribute to the cash flows of the reporting entity. The Company accounts for these items in accordance with Accounting Standards Codification (“ASC”) 350 Intangibles – Goodwill and Other , which requires that i mpairment testing for goodwill is performed at least annually at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). The Company has determined that it is comprised of only one reporting unit. The Company performs its annual impairment test as of July 31st. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Examples of these events or circumstances include:

 

· A significant adverse long term outlook;
· Unanticipated competition or the introduction of a disruptive technology;
· Failure of an anticipated product or product line;

 

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· The testing for recoverability under the ASC 360-10 Impairment or Disposal of Long-Lived Assets of a significant asset group;
· A loss of key personnel; and
· An expectation that a significant portion of the Company will be sold or otherwise disposed of.

 

The impairment test for goodwill uses a two-step approach. Step one compares the fair value of the reporting unit to its carrying value including goodwill. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit's goodwill to its implied value (i.e., the fair value of the reporting unit less the fair value of the unit's assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied value, the excess is recorded as an impairment.

 

There were no impairment charges recognized during the fiscal year 2016. During the first quarter of fiscal 2015, the Company identified several events, that when combined, were determined to require an interim impairment test. These events consisted of a material decrease in revenue compared to prior year and compared to the prior quarter which resulted in a decision to pre-release earnings information; necessary operational changes within the Sales Organization which drove a shift in our sales approach; and a sustained decrease in share price.

 

Under Step 1 of the impairment test the Company determined fair value based on discounted cash flows using an income approach with the multi-period excess earnings method which estimates the fair value of the asset by discounting the future projected excess earnings associated with the asset to present value as of the valuation date. Based on the analysis, it was determined that the carrying value of the Company including goodwill exceeded the fair value, requiring the Company to perform Step 2 of the goodwill impairment test to measure the amount of impairment loss, if any.

 

The Company then performed Step 2 of the impairment test, noting fair value of the long-lived assets (other than goodwill), of $3.0 million, was less than the carrying amount of those assets and, as a result, recorded a non-cash, pre-tax impairment charge of $10.3 million during the first fiscal quarter of 2015. The Company then determined the implied value of goodwill was $6.7 million, which was less than its carrying value and, as a result, the Company recognized a non-cash, pre-tax charge of $21.7 million during the first fiscal quarter of 2015. These impairment charges are included under the caption "Impairment of goodwill and long-lived assets" in our consolidated statements of operations.

 

The valuation methods utilized to value the long-lived assets and the goodwill discussed above are based on the amount and timing of expected future cash flows and growth rates and include a determination of an appropriate discount rate. The cash flows utilized in the discounted cash flow analyses were based on financial forecasts developed internally by management. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized. Determining the fair value using a discounted cash flow method requires significant estimates and assumptions, including market conditions, discount rates, and long-term projections of cash flows. The Company’s estimates are based upon historical experience, current market trends, projected future volumes and other information. The Company believes that the estimates and assumptions underlying the valuation methodology are reasonable; however, different estimates and assumptions could result in a different estimate of fair value. In estimating future cash flows, the Company relies on internally generated projections for a defined time period for revenue and operating profits, including capital expenditures, changes in net working capital, and adjustments for non-cash items to arrive at the free cash flow available to invested capital. Where applicable, a terminal value utilizing a constant growth rate of cash flows is used to calculate a terminal value after the explicit projection period. The future projected cash flows for the discrete projection period and the terminal value are discounted at a risk adjusted discount rate to determine the fair value of the reporting unit.

 

The following table presents the changes in the carrying amount of our goodwill (in thousands):

 

Balance at September 30, 2014   $ 28,383  
Goodwill impairment     (21,698 )
Balance at September 30, 2015     6,685  
Goodwill impairment     -  
Balance at September 30, 2016   $ 6,685  

 

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NOTE 3. ACCRUED EXPENSES

 

Accrued expenses consisted of the following at September 30, 2016 and 2015: 

 

    September 30,  
    2016     2015  
             
Royalties and commissions   $ 845     $ 999  
Payroll and related expenses     609       693  
Professional fees and consulting     346       368  
Other     519       596  
Total   $ 2,319     $ 2,656  

 

NOTE 4. COMMITMENTS AND CONTINGENCIES

 

Leases  

 

The Company leases various facilities and equipment in the U.S. and overseas under non-cancelable operating leases which expire at various dates through 2022. The lease agreements generally provide for the payment of minimum annual rentals, pro-rata share of taxes and maintenance expenses. Rental expense for all operating leases was $1.1 million for fiscal year 2016 and $1.0 million for both fiscal years 2015 and 2014. At September 30, 2016, deferred rent totaled $0.4 million, which is included under the caption “ Other long-term liabilities ” in the Company’s consolidated balance sheets, for the year ended September 30, 2016. There was no deferred rent for the year ended September 30, 2015. Certain of the Company's facility leases include options to renew. 

 

As of September 30, 2016, future minimum rental commitments under non-cancelable operating leases are as follows (in thousands): 

 

Years Ending September 30,      
2017   $ 889  
2018     675  
2019     675  
2020     575  
2021     576  
Thereafter     733  
Total future minimum lease payments   $ 4,123  

 

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Royalties

 

Royalty expense included in cost of software licenses was $0.7 million, $0.6 million and $0.4 million for the years ended September 30, 2016, 2015 and 2014, respectively. Minimum royalty obligations were insignificant for fiscal years 2016, 2015 and 2014.

 

Contingencies 

 

From time to time, the Company is subject to claims and may be party to actions that arise in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company's consolidated financial condition or results of operations.

 

NOTE 5. RESTRUCTURING CHARGES

 

During fiscal year 2015, the Company undertook restructuring efforts to (i) lower expenses by reducing the investment in legacy solutions and realigning international operations, primarily impacting engineering and product development, and (ii) further reduce the workforce across all functional areas of the Company in an effort to rebalance investments to match the go-to-market model. The restructuring efforts began during the quarter ended December 31, 2014 and continued during the quarter ended March 31, 2015, when the remaining employees impacted by the restructuring were notified. The Company recorded restructuring charges of $1.8 million during fiscal year 2015 including severance and related benefit costs related to workforce reductions. The Company completed all restructuring actions associated with these plans during fiscal year 2015. The Company did not undertake any restructuring efforts during fiscal 2016.

 

The following table presents the changes in the accrual for restructuring charges, which is included under the caption “Accrued expenses” in our consolidated balance sheets, as of September 30, 2015 (in thousands):

 

Balance at September 30, 2014   $ -  
Charges     1,786  
Payments     (1,555 )
Balance at September 30, 2015     231  
Charges     -  
Payments     (231 )
Balance at September 30, 2016   $ -  

 

The following table presents restructuring charges included in our consolidated statements of operations, for the year ended September 30, 2015 (in thousands): 

 

Cost of maintenance and services   $ 401  
Sales and marketing     804  
Engineering and product development     345  
General and administrative     236  
Total   $ 1,786  

 

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NOTE 6. INCOME TAXES

 

Loss from operations before income taxes consists of the following for the years ended September 30: 

 

    2016     2015     2014  
    (In thousands)  
                   
Domestic   $ (11,227 )   $ (45,812 )   $ (17,533 )
Foreign     (1,932 )     (6,699 )     (5,369 )
                         
Total   $ (13,159 )   $ (52,511 )   $ (22,902 )

 

The (provision) benefit for income taxes consisted of the following for the years ended September 30: 

 

    2016     2015     2014  
    (In thousands)  
                   
Current:                        
Federal   $ 66   $ 53   $ 8
State     12     4     (12 )
Foreign     16     -       -  
      94     57     (4 )
                         
Deferred:                        
Federal     (4,766 )     (5,975 )     4,890
State     (397 )     (853 )     882
Foreign     (861 )     3,221     (176 )
Change in valuation allowance     4,457     6,274     (5,073 )
      (1,567 )     2,667     523
                         
Total (provision) benefit   $ (1,473 )   $ 2,724   $ 519

  

At September 30, 2016, the Company had U.S. federal tax loss carryforwards of $50.2 million, expiring at various dates through 2036, including $0.2 million resulting from an acquisition during 2004 which are subject to additional annual limitations as a result of the changes in ownership, and had $28.5 million in state tax loss carryforwards, which also expire at various dates through 2036. Included in the Federal and state net operating loss carryforwards are $7.6 million of tax deductions from share based compensation, which will be recorded as additional paid-in capital when realized. These loss carryforwards are available to reduce future federal, state and foreign taxable income but are subject to review and possible adjustment by the appropriate taxing authorities. The loss carryforwards, which may be utilized in any future period, may be subject to limitations based upon changes in the ownership of the Company’s stock. An alternative minimum tax credit of $7,000 is available to offset future regular federal taxes. Federal research and development credits of $1.0 million expire beginning in 2021. State research and development credits of $0.1 million expire at various years through 2030. In addition, the Company has the following net operating loss carryforwards: U.K. losses of $9.8 million with no expiration date, Australia losses of $3.5 million with no expiration date, Germany losses of $2.2 million with no expiration date, Singapore losses of $2.9 million with no expiration date, and Sweden losses of $10.6 million with no expiration date.

 

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The components of the Company’s net deferred tax assets are as follows at September 30: 

 

    2016     2015  
    (In thousands)  
             
Deferred tax liabilities:                
Prepaid expenses   $ (296 )   $ (271 )
Acquired intangibles     (608 )     (688 )
      (904 )     (959 )
Deferred tax assets:                
Net operating loss carryforwards     23,134       19,044  
Research and development credits     1,316       955  
Alternative minimum tax credits     7       7  
Accounts and notes receivable reserves     18       52  
Depreciation and amortization     2,709       2,538  
Deferred rent     138       -  
Other     306       265  
      27,628       22,861  
                 
Total     26,724       21,902  
                 
Valuation allowance     (26,724 )     (20,337 )
                 
Deferred tax asset, net   $ -     $ 1,565  

 

The valuation allowance relates to the Company’s U.S. and foreign net operating losses and other deferred tax assets and is recorded based upon the uncertainty surrounding their realizability, as these assets can only be realized via profitable operations in the respective tax jurisdictions. The Company records a deferred tax asset or liability based on the difference between the financial statement and tax basis of assets and liabilities, as measured by enacted tax rates assumed to be in effect when these differences reverse. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including its past operating results, the existence of cumulative income in the most recent fiscal years, changes in the business in which the Company operates and its forecast of future taxable income. In determining future taxable income, the Company is responsible for assumptions utilized including the amount of federal, state and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

 

During the fiscal year ended September 30, 2016, the Company reassessed its valuation allowance assertion with regards to Datawatch AB, the Company’s subsidiary located in Sweden. The Company analyzed forecasted profits, carryback potential, tax planning strategies, and the reversal of existing taxable temporary differences of the same type in the same period.  Factors the Company considered were as follows:

 

· History of net operating losses in Sweden;
· The Company’s revised forecast indicates that its Sweden subsidiary will not achieve profitability with certainty in the foreseeable future;
· Net operating losses have no expiration period;
· The Swedish subsidiary has no carryback potential;
· The Swedish subsidiary has no tax planning strategies available to recognize its deferred tax assets; and
· Reversal temporary differences in Sweden will not allow the Swedish subsidiary to utilize its existing deferred tax assets.

 

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Although the Swedish subsidiary has no expiration on its net operating loss carryovers, the negative evidence noted above outweighs this positive evidence. Accordingly, the Company has recorded a full valuation allowance on its deferred tax assets in Sweden during the fiscal year ended September 30, 2016.

 

The assumptions underlying the valuation allowance require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that the Company is using to manage the underlying business. The Company had tax losses in each of the fiscal years 2016, 2015 and 2014. Accordingly, as of September 30, 2016, the Company determined that it is more likely than not that the deferred tax assets will not be realized in all of its jurisdictions and a full valuation allowance has been recorded in the U.S., U.K., Australia, Germany, Singapore, and Sweden.

 

The following table reconciles the Company’s tax (provision) benefit based on its effective tax rate to its tax (provision) benefit based on the federal statutory rate of 34% for the years ended September 30, 2016, 2015 and 2014 (in thousands):

 

    2016     2015     2014  
    (In thousands)  
                   
Benefit at federal statutory rate   $ 4,470   $ 17,853   $ 7,757
State, net of federal impact     264     579     474
Foreign income taxes     204     (555 )     642
Valuation allowance increase     (6,385 )     (6,164 )     (5,073 )
Return to provision adjustments     345     (621 )     (48 )
Foreign rate change     -       -       (394 )
Stock-based compensation     (545 )     (946 )     (1,103 )
NOL adjustment due to subsidiary liquidation     -       -       (1,345 )
Acquisition costs     -       -       (59 )
Change in uncertain tax positions     105     67     386
IRS audit adjustments     -       -       (535 )
Goodwill and intangible asset impairment     -       (7,377 )     -  
Other     69     (112 )     (183 )
                         
Income tax (expense) benefit   $ (1,473 )   $ 2,724     $ 519  

 

Provision for Uncertain Tax Positions

 

The Company applies the accounting requirements for uncertain tax positions which provide a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. In accordance with these requirements, the Company first determines whether a tax authority would “more likely than not” sustain its tax position if it were to audit the position with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, the Company measures the amount of tax benefit based on the largest amount of tax benefit that the Company has a greater than 50 percent 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, 2015, the Company had a cumulative tax liability of $0.3 million related to federal, state, and foreign tax exposure that could result in cash payments. The Company decreased the tax liability by $0.1 million during the fiscal year ended September 30, 2016. The decrease related to the statute of limitations expiring on U.S. and foreign uncertain tax positions. The Company does not expect its tax liability to change significantly during the next twelve months. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense in its consolidated statements of operations. The Company has not accrued interest or penalties associated with this liability for the fiscal year ended September 30, 2016.

 

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The Company’s unrecognized tax benefits (before consideration of any valuation allowance) represent differences between tax positions taken by the Company in its various consolidated and separate worldwide tax returns and the benefits recognized and measured for uncertain tax positions. This amount also represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The change in the unrecognized tax benefits during the fiscal year ended September 30, 2016 was as follows (in thousands):

 

Balance at September 30, 2014   $ 335  
Additions/Reductions for prior year tax positions     (66 )
Balance at September 30, 2015     269  
Reductions for prior year tax positions     (114 )
Balance at September 30, 2016   $ 155  

 

In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such jurisdictions as the United Kingdom, Germany, Singapore, Australia and the United States, and as a result, files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The fiscal years ended September 30, 2013 through September 30, 2015 are generally still open to examination in the jurisdictions listed above. The Company was under audit by the Internal Revenue Service for the fiscal year ended September 30, 2011. The audit was completed during the fourth quarter ended September 30,2014 and resulted in the reduction of $0.5 million related to research credits, AMT credits, and NOL carryforwards which had a full valuation. The Company did not have to make any cash payments as a result of this audit.

 

NOTE 7. SHARE-BASED COMPENSATION  

 

The Company provides its employees, officers, consultants and directors with stock options, restricted stock units (“RSUs”) and other stock rights for common stock of the Company on a discretionary basis. All option and RSU grants are subject to the terms and conditions determined by the Compensation and Stock Committee of the Board of Directors (the “Committee”), and generally vest over a three-year period and expire either seven or ten years from the date of grant. All awards granted during the year ended September 30, 2016 were granted under the Company’s Second Amended and Restated Equity Compensation and Incentive Plan (the “2011 Plan”). At September 30, 2016, a total of 2,275,392 shares were authorized for issuance under the 2011 Plan and 176,904 shares remained available for future issuance thereunder.

 

On January 20, 2006, the Company established the Datawatch Corporation 2006 Equity Compensation and Incentive Plan (the “2006 Plan”) which provides for the granting of both incentive stock options and non-qualified options, the award of Company common stock and opportunities to make direct purchases of Company common stock, as determined by the Committee. Options pursuant to this plan were available to be granted through April 26, 2011 and vest as specified by the Committee.  

 

On April 26, 2011, the Company established the 2011 Plan which provides for the granting of both incentive stock options and non-qualified options, the award of restricted stock, RSUs, and any other equity-based interests (collectively, “Stock Rights”), as determined by the Committee. Options pursuant to this plan may be granted through April 25, 2021 and shall vest as specified by the committee.  

 

Under the 2006 Plan and 2011 Plan, stock options are granted at exercise prices not less than the fair market value of the underlying common stock at the date of grant. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. Share-based compensation expense for share-based payment awards, issued to employees and directors, is measured based on the grant-date fair value of the award and recognized on a straight-line basis over the requisite period of the award. Share-based compensation expense for share-based payment awards, issued to non-employees, is revalued each fiscal quarter based on the current fair value of the award and recognized on over the requisite period of the award.

 

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The following table presents share-based compensation expenses included in our audited consolidated statements of operations (in thousands):

 

    Years Ended  
    September 30,  
    2016     2015     2014  
    (In thousands)  
Cost of maintenance and services   $ 37     $ 63     $ 143  
Sales and marketing     1,028       3,110       5,243  
Engineering and product development     359       417       1,585  
General and administrative     1,407       1,143       1,475  
Total   $ 2,831     $ 4,733     $ 8,446  

 

Stock Options

 

The Company estimates the fair value of each share-based award (except RSUs, which are discussed below) using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield. No options were granted by the Company in the fiscal years 2016 and 2015. The total intrinsic value of options exercised during the years ended September 30, 2016, 2015 and 2014 was $15,000, $0.1 million and $0.7 million, respectively. Total cash received from option exercises during the years ended September 30, 2016, 2015 and 2014 was $0.1 million, $0.1 million and $0.2 million, respectively. There was no tax benefit realized from stock option exercised during the years ended September 30, 2016 and 2015. The tax benefit realized from stock options exercised during the fiscal year 2014 was $24,000. As of September 30, 2016, there was no unrecognized compensation cost related to non-vested stock option arrangements. Many of the assumptions used in the determination of share-based compensation expense are judgmental and highly volatile.

 

The expected option life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company determined the volatility for options granted using the historical volatility of the Company’s common stock. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. Dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture rate is higher than estimated.  

 

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The following table is a summary of combined stock option activity under the 2006 Plan and the 2011 Plan:   

 

          Weighted-     Weighted-        
          Average     Average     Aggregate  
          Exercise     Remaining     Intrinsic  
    Number of
Options 		    Price
Per Share 		    Life
(In years) 		    Value
(In thousands) 		 
                         
Outstanding, September 30, 2013     363,209     $ 5.76       4.33     $ 8,042  
Granted     -       -       -       -  
Canceled/Forfeited     -       -       -       -  
Exercised     (42,709 )     4.18       -       719  
Outstanding, September 30, 2014     320,500     $ 5.97       3.74     $ 1,572  
Granted     -       -       -       -  
Canceled/Forfeited     -       -       -       -  
Exercised     (18,000 )     2.91       0.89       71  
Outstanding, September 30, 2015     302,500     $ 6.15       2.86     $ 446  
Granted     -       -       -       -  
Canceled/Forfeited     (5,000 )     3.61       -       7  
Exercised     (22,500 )     4.73       1.00       15  
Outstanding, September 30, 2016     275,000     $ 6.31       5.01     $ 715  
Exercisable, September 30, 2016     275,000     $ 6.31       5.01     $ 715  
Unvested awards expected to vest, September 30, 2016     -     $ -       -     $ -  

 

The following table presents weighted-average price and life information regarding options outstanding and exercisable at September 30, 2016:

 

Outstanding     Exercisable  
            Weighted-                 -  
            Average     Weighted-           Weighted-  
            Remaining     Average           Average  
Exercise     Number of     Contractual     Exercise           Exercise  
Prices     Shares     Life (Years)     Price     Shares     Price  
                                 
$ 3.46       150,000       4.37     $ 3.46       150,000     $ 3.46  
$ 4.97       50,000       4.57       4.97       50,000       4.97  
$ 12.92       75,000       6.56       12.92       75,000       12.92  
                                             
          275,000       5.01     $ 6.31       275,000     $ 6.31  

 

Restricted Stock Units

 

The Company periodically grants awards of restricted stock units to its non-employee directors employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of the Company’s common stock. The total number of RSUs unvested at September 30, 2016 was 609,565. Most RSUs vest at the rate of 33.33% on each of the first through third anniversaries of the grant date.

 

The fair value related to the RSUs was calculated based primarily on the closing stock price of the Company’s common stock on the date of the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product development, professional services and general and administrative expense. The fair values of the RSUs granted in fiscal years 2016, 2015 and 2014 were $2.7 million (or $5.36 weighted-average fair value per share), $2.0 million (or $7.59 weighted-average fair value per share) and $6.0 million (or $19.98 weighted-average fair value per share), respectively. The Company recorded compensation expense related to RSUs of $2.7 million, $4.5 million and $8.2 million during the years ended September 30, 2016, 2015 and 2014, respectively. These amounts are included in the total share-based compensation expense disclosed above. As of September 30, 2016, there was $3.0 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted-average period of 1.91 years.

 

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The following table presents nonvested RSU information for the fiscal years ended September 30, 2016, 2015 and 2014

 

    Number of  
    RSUs  
    Outstanding  
       
Nonvested, September 30, 2014     740,011  
Granted     444,068  
Canceled/Forfeited     (281,516 )
Vested     (332,999 )
         
Nonvested, September 30, 2015     569,564  
Granted     506,800  
Canceled/Forfeited     (191,364 )
Vested     (275,435 )
Nonvested, September 30, 2016     609,565  

 

Note 8. RETIREMENT SAVINGS PLAN  

 

The Company has a 401(k) retirement savings plan covering substantially all of the Company’s full-time U.S. employees. Under the provisions of the plan, employees may contribute a portion of their compensation, subject to certain limitations. The Company, at the discretion of the Board of Directors, may make contributions on behalf of its employees under this plan. Such contributions, if any, become fully vested after five years of continuous service. The Company did not make any contributions to the 401(k) retirement savings plan in fiscal 2016, 2015 or 2014. 

 

Note 9. ISSUANCE OF COMMON STOCK

 

On February 19, 2014, the Company completed a public offering of 2,018,250 shares of common stock at a price to the public of $28.50 per share. The number of shares the Company sold included the underwriters’ full exercise of their over-allotment option of 263,250 shares. Net proceeds to the Company from the offering, after underwriting discounts and expenses, were $53.6 million.

 

Note 10. SEGMENT INFORMATION AND REVENUE BY GEOGRAPHIC LOCATION

 

The Company has determined that it has only one reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results.

 

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The Company conducts operations in the U.S. and internationally. The following table presents information about the Company’s geographic operations (in thousands):

 

    Domestic     International     Total  
                   
Total Revenue                        
                         
Year ended September 30, 2016   $ 26,055     $ 4,407     $ 30,462  
Year ended September 30, 2015   $ 23,793     $ 6,428     $ 30,221  
Year ended September 30, 2014   $ 29,071     $ 6,016     $ 35,087  
                         
Total Operating Loss                        
                         
Year ended September 30, 2016   $ (9,380 )   $ (3,749 )   $ (13,129 )
Year ended September 30, 2015   $ (45,816 )   $ (6,626 )   $ (52,442 )
Year ended September 30, 2014   $ (15,407 )   $ (6,258 )   $ (21,665 )
              .          
Total Long-Lived Assets                        
At September 30, 2016   $ 11,126     $ 74     $ 11,200  
At September 30, 2015   $ 14,515     $ 160     $ 14,675  

 

Note 11. SUBSEQUENT EVENTS

 

The Company has evaluated all events and transactions that occurred after the balance sheet date and through the date that the consolidated financial statements were available to be issued noting none that require recognition or disclosure.

 

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Note 12. QUARTERLY RESULTS (UNAUDITED)

 

Supplementary Information:  

 

    First     Second     Third     Fourth  
    (In thousands, except per share amounts)  
                         
Year Ended September 30, 2016:                                
Software license revenue   $ 3,147     $ 3,645     $ 3,669     $ 4,758  
Maintenance revenue     3,602       3,480       3,335       3,498  
Professional services revenue     306       299       372       351  
Cost of software licenses     689       499       879       761  
Cost of maintenance and services     598       610       499       470  
Expenses     9,809       9,792       9,562       9,423  
Loss from operations     (4,041 )     (3,477 )     (3,564 )     (2,047 )
Net loss     (3,964 )     (3,362 )     (5,374 )     (1,932 )
                                 
Net loss per share – basic   $ (0.34 )   $ (0.29 )   $ (0.45 )   $ (0.16 )
Net loss per share – diluted   $ (0.34 )   $ (0.29 )   $ (0.45 )   $ (0.16 )
                                 
Year Ended September 30, 2015:                                
Software license revenue   $ 3,175     $ 3,911     $ 4,117     $ 4,101  
Maintenance revenue     3,409       3,296       3,311       3,513  
Professional services revenue     377       255       348       408  
Cost of software licenses     861       721       697       723  
Cost of maintenance and services     892       1,084       557       589  
Expenses     44,661       11,423       10,705       9,750  
Loss from operations     (39,453 )     (5,766 )     (4,183 )     (3,040 )
Net loss     (36,876 )     (5,809 )     (4,123 )     (2,979 )
                                 
Net loss per share – basic   $ (3.31 )   $ (0.51 )   $ (0.36 )   $ (0.26 )
Net loss per share – diluted   $ (3.31 )   $ (0.51 )   $ (0.36 )   $ (0.26 )
                                 
Year Ended September 30, 2014:                                
Software license revenue   $ 5,433     $ 4,375     $ 5,580     $ 5,239  
Maintenance revenue     2,993       3,127       3,236       3,489  
Professional services revenue     383       498       412       322  
Cost of software licenses     990       1,024       999       1,000  
Cost of maintenance and services     849       634       979       889  
Expenses     12,427       12,233       12,368       12,360  
Loss from operations     (5,457 )     (5,891 )     (5,118 )     (5,199 )
Net loss     (5,614 )     (6,737 )     (5,157 )     (4,875 )
                                 
Net loss per share – basic   $ (0.66 )   $ (0.70 )   $ (0.48 )   $ (0.40 )
Net loss per share – diluted   $ (0.66 )   $ (0.70 )   $ (0.48 )   $ (0.40 )

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  

 

Not Applicable. 

 

Item 9A. CONTROLS AND PROCEDURES  

 

(a) Evaluation of Disclosure Controls and Procedures

 

The Company evaluated the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Form 10-K. the principal executive officer and principal financial officer participated in this evaluation. Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

  (b) Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

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Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control—Integrated Framework. Based on our assessment, management concluded that, as of September 30, 2016, our internal control over financial reporting was effective based on those criteria.

 

(c) Changes in Internal Control Over Financial Reporting

 

As a result of the evaluation completed by management, and in which the principal executive officer and principal financial officer participated, we have concluded that there were no changes during the fiscal year ended September 30, 2016 in our internal control over financial reporting, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. OTHER INFORMATION

 

None.

 

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PART III

 

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information set forth under the captions “Election of Directors” and “Information Concerning Executive Officers” appearing in the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended September 30, 2016 is incorporated herein by reference.

 

Item 11. EXECUTIVE COMPENSATION

 

The information set forth under the captions “Compensation of Directors” and “Executive Compensation” appearing in the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended September 30, 2016 is incorporated herein by reference.

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information set forth under the caption “Equity Incentive Plan Information” in Item 5 of this Annual Report on Form 10-K and under the caption “Principal Holders of Voting Securities” appearing in the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended September 30, 2016 is incorporated herein by reference.

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information set forth under the caption “Certain Relationships and Related Person Transactions” appearing in the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended September 30, 2016 is incorporated herein by reference.

 

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information set forth under the caption “Independent Registered Public Accounting Firms and Fees” appearing in the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended September 30, 2016 is incorporated herein by reference.

 

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PART IV

 

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

The following documents are filed as part of this report:

 

  (a) 1. Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of September 30, 2016 and 2015

Consolidated Statements of Operations for the Years Ended September 30, 2016, 2015 and 2014

Consolidated Statements of Comprehensive Loss for the Years Ended September 30, 2016, 2015 and 2014

Consolidated Statements of Shareholders’ Equity for the Years Ended September 30, 2016, 2015 and 2014

Consolidated Statements of Cash Flows for the Years Ended September 30, 2016, 2015 and 2014

Notes to Consolidated Financial Statements

 

  2. Financial Statement Schedules

 

All schedules are omitted as the required information is not applicable or is included in the financial statements or related notes.

 

  3. List of Exhibits

 

  Ex. No.   Description
       
(1) 3.1   Restated Certificate of Incorporation of the Registrant (Exhibit 3.2)
(4) 3.2   Certificate of Amendment of Restated Certificate of Incorporation of the Registrant (Exhibit 3.2)
(11) 3.3   Amended and Restated By-Laws of the Registrant (Exhibit 3.1)
(1) 4.1   Specimen certificate representing the Common Stock (Exhibit 4.4)
(2) 10.6   Indemnification Agreement between The Registrant and Richard de J. Osborne, dated January 12, 2001 (Exhibit 10.2)
(3) 10.7   Form of Indemnification Agreement between The Registrant and each of its Non-Employee Directors (Exhibit 10.1)
(3) 10.8*   Advisory Agreement, dated April 5, 2001, by and between The Registrant and Richard de J. Osborne (Exhibit 10.2)
(5) 10.9*   2006 Equity Compensation and Incentive Plan
(6) 10.10*   Form of Non-Qualified Stock Option Agreement for Directors under the 2006 Equity Compensation and Incentive Plan (Exhibit 10.26)
(6) 10.11*   Form of Non-Qualified Stock Option Agreement for Officers under the 2006 Equity Compensation and Incentive Plan (Exhibit 10.27)
(6) 10.12*   Form of Incentive Stock Option Agreement for Officers under the 2006 Equity Compensation and Incentive Plan (Exhibit 10.28)
(7) 10.13*   Form of Restricted Stock Unit Agreement for Directors under the 2006 Equity Compensation and Incentive Plan (Exhibit 10.1)
(8) 10.14*   Executive Agreement dated March 4, 2011 by and between Michael A. Morrison and The Registrant (Exhibit 10.1)
(9) 10.15*   Second Amended and Restated 2011 Equity Compensation and Incentive Plan
(10) 10.16*   Form of Restricted Stock Unit Agreement for Directors and Executives under the 2011 Equity Compensation and Incentive Plan (Exhibit 10.29)
(10) 10.17*   Form of Restricted Stock Unit Agreement for Employees under the 2011 Equity Compensation and Incentive Plan (Exhibit 10.30)
(10) 10.18*   Form of Non-Qualified Stock Option Agreement under the 2011 Equity Compensation and Incentive Plan (Exhibit 10.31)

 

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(10) 10.19*   Form of Incentive Stock Option Agreement under the 2011 Equity Compensation and Incentive Plan (Exhibit 10.32)
(15) 10.20   Lease, dated June 23, 2015, between DIV Bedford, LLC and The Registrant (Exhibit 10.1)
(14) 10.21*   Executive Agreement dated April 23, 2013 by and between James Eliason and The Registrant (Exhibit 10.1)
(12) 10.23*   Executive Agreement dated October 14, 2014 by and between Sanjay Mistry and The Registrant (Exhibit 10.28)
(13) 10.24*   Severance Agreement dated July 19, 2016 by and between Ken Tacelli and The Registrant (Exhibit 10.1)
(16) 10.25   Cooperation Agreement dated April 21, 2016 by and among Potrero Capital Research, LLC, Potrero Capital Research Partners, LP, Potrero Capital Research Partners II, LP, Jack Ripsteen and The Registrant (Exhibit 10.1)
  21.1   Subsidiaries of the Registrant (filed herewith)
  23.1   Consent of RSM US LLP (filed herewith)
  31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
  31.2   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
  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. (furnished herewith)
  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. (furnished herewith)
  101   The following materials from the Company’s Annual Report on Form 10-K for the year ended September 30, 2016 formatted in Extensible Business Reporting Language (XBRL).

  

* Indicates a management contract or compensatory plan or contract.

 

    Note:  The number given in parenthesis next to each item listed above indicates the corresponding exhibit in each filing listed below.
(1)   Previously filed as an exhibit to Registration Statement 33-46290 on Form S-1 and incorporated herein by reference.
(2)   Previously filed as an exhibit to Registrant’s Current Report on Form 8-K dated February 2, 2001 and incorporated herein by reference.
(3)   Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference.
(4)   Previously filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2001 and incorporated herein by reference.
(5)   Previously filed as Appendix A to Registrant’s Definitive Proxy Statement dated January 30, 2006 and incorporated herein by reference.
(6)   Previously filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006 and incorporated herein by reference.
(7)   Previously filed as an exhibit to Registrant’s Current Report on Form 8-K dated August 2, 2007 and incorporated herein by reference.
(8)   Previously filed as an exhibit to Registrant’s Current Report on Form 8-K dated March 10, 2011 and incorporated herein by reference.
(9)   Previously filed as Appendix A to Registrant’s Definitive Proxy Statement on Schedule 14A dated January 28, 2014 and incorporated herein by reference.
(10)   Previously filed as an exhibit to Registrant’s Current Report on Form 10-K for the fiscal year ended September 30, 2011 and incorporated herein by reference.
(11)   Previously filed as an exhibit to Registrant’s Current Report on Form 8-K dated August 28, 2013 and incorporated herein by reference.
(12)   Previously filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013 and incorporated herein by reference.

 

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(13)   Previously filed as an exhibit to Registrant’s Current Report on Form 8-K dated July 25, 2016 and incorporated herein by reference.
(14)   Previously filed as an exhibit to Registrant’s Current Report on Form 8-K dated April 25, 2013 and incorporated herein by reference.
(15)   Filed herewith.
(16)   Previously filed as an exhibit to Registrant’s Current Report on Form 8-K dated April 22, 2016 and incorporated herein by reference.

 

(b) Exhibits

 

The Company hereby files as exhibits to this Annual Report on Form 10-K those exhibits listed in Item 15(a)3 above.

 

(c) Financial Statement Schedules

 

Not applicable.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

    Datawatch Corporation
       
Date: November 10, 2016 By: /s/ Michael A. Morrison
      Michael A. Morrison
      President, Chief Executive Officer
and Director

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

SIGNATURE   TITLE   DATE
         
/s/ Michael A. Morrison   Principal Executive Officer and Director   November 10, 2016
Michael A. Morrison        
         
/s/ James L. Eliason   Principal Financial Officer and Principal Accounting Officer   November 10, 2016
James L. Eliason        
         
/s/ Richard de J. Osborne   Chairman of the Board   November 10, 2016
Richard de J. Osborne        
         
/s/ David C. Mahoney   Vice Chairman of the Board   November 10, 2016
David C. Mahoney        
         
/s/ Christopher T. Cox   Director   November 10, 2016
Christopher T. Cox        
         
/s/ Thomas H. Kelly   Director   November 10, 2016
Thomas H. Kelly        
         
/s/ Joan McArdle   Director   November 10, 2016
Joan McArdle        
         
/s/ Randy Seidl   Director   November 10, 2016
Randy Seidl        
         
/s/ Charles Gillman   Director   November 10, 2016
Charles Gillman        
         
/s/ Donald Friedman   Director   November 10, 2016
Donald Friedman        

 

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Exhibit 10.20

 

EXECUTION COPY

 

XCHANGE AT BEDFORD

 

LEASE

 

between

 

DIV BEDFORD, LLC , as Landlord

 

and

 

DATAWATCH CORPORATION , as Tenant

 

4 Crosby Drive

 

Bedford, Massachusetts

 

As of June 23, 2015

 

 

 

 

TABLE OF CONTENTS

 

ARTICLE 1 GRANT 1
     
ARTICLE 2 TERM 1
     
ARTICLE 3 COMPLETION AND OCCUPANCY OF THE PREMISES 2
     
ARTICLE 4 RENT AND SECURITY 2
     
ARTICLE 5 ADDITIONAL RENT FOR ESCALATIONS IN REAL ESTATE TAXES AND OPERATING EXPENSES 6
     
ARTICLE 6 SERVICES AND UTILITIES 11
     
ARTICLE 7 CONDUCT OF BUSINESS BY TENANT 14
     
ARTICLE 8 ALTERATIONS, IMPROVEMENTS AND SIGNAGE 16
     
ARTICLE 9 INSURANCE 18
     
ARTICLE 10 CASUALTY 20
     
ARTICLE 11 CONDEMNATION 21
     
ARTICLE 12 ASSIGNMENT AND SUBLETTING 22
     
ARTICLE 13 DEFAULTS AND REMEDIES 24
     
ARTICLE 14 SUBORDINATION; ATTORNMENT AND RIGHTS OF MORTGAGE HOLDERS 28
     
ARTICLE 15 NOTICES 29
     
ARTICLE 16 MISCELLANEOUS 30
     
ARTICLE 17 INTENTIONALLY OMITTED 33
     
ARTICLE 18 RIGHT OF FIRST OFFER 33

 

List of Exhibits

 

Exhibit 1.1-1 Premises
Exhibit 1.1-2 Legal Description
Exhibit 1.3 Parking Plan
Exhibit 3.1 Work Letter
Exhibit 6.1 Cleaning Specifications
Exhibit 7.4 Rules and Regulations
Exhibit 8.8 Signage Location
Exhibit 14.1 Form of SNDA
Exhibit 14.4 Form of Estoppel
Exhibit 18.1.1 ROFO Space

 

 

 

 

LEASE

 

This Lease is made and entered into as of June 23, 2015 by and between DIV BEDFORD, LLC , a Massachusetts limited liability company with its principal place of business at c/o The Davis Companies, 125 High Street, 21 st Floor, Boston, Massachusetts 02110 (the " Landlord ") and DATAWATCH CORPORATION, a Delaware corporation with its principal place of business at 271 Mill Road Chelmsford, MA 01824 (the " Tenant ").

 

ARTICLE 1          GRANT

 

1.1            Premises . Landlord, for and in consideration of the rents herein reserved and of the covenants and agreements herein contained on the part of Tenant to be performed, hereby leases to Tenant and Tenant accepts from Landlord, certain space shown on Exhibit 1.1-1 attached hereto and made a part hereof, containing approximately 20,360 rentable square feet in area on the second floor (the “ Premises “) of the office building known as 4 Crosby Drive, Bedford, Massachusetts (the “ Building ”). The Premises, Building, the “ Common Areas ” (defined below) and the land upon which the same are located, which is legally described in Exhibit 1.1-2 (the “ Land ”), together with all other buildings and improvements thereon and thereunder are collectively referred to as the “ Property .” The Property is also known as Xchange at Bedford and currently has an address of 4-18 Crosby Drive. The parties agree that the rentable square footage of the Premises set forth above is conclusive and binding, subject to adjustment only in connection with the expansion of the Premises or as otherwise set forth herein.

 

1.2            Common Areas . Landlord hereby grants to Tenant during the term of this Lease, a license to use, in common with the others entitled to such use, the Common Areas as they from time to time exist, subject to the rights, powers and privileges herein reserved to Landlord. The term “Common Areas” as used herein will include all areas and facilities outside the Premises that are provided and designated by Landlord for general non-exclusive use and convenience of Tenant and other tenants at the Property. Common Areas include but are not limited to the fitness center, cafeteria, hallways, lobbies, stairways, elevators, pedestrian sidewalks, landscaped areas, loading areas, roadways, parking areas, rights of way, walking and jogging paths, if any. Landlord may designate certain Common Areas for the exclusive use of one or more buildings located on the Property.

 

1.3            Parking . During the term of this Lease, Tenant shall be entitled to use at no additional charge (other than to the extent included in Operating Expenses and Taxes) the parking facilities at the Property shown on Exhibit 1.3 attached hereto (the “ Parking Plan ”) in common with other Building tenants (but in any event Tenant’s use shall not exceed the ratio of 3.0 spaces per 1,000 rentable square feet of the Premises) on an unreserved, first-come, first-serve basis. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in the use of parking facilities. Landlord may designate parking facilities at the Property for the handicapped, visitors to the Property, and for exclusive use by other tenants. Landlord may install signage or implement a pass or sticker system to control parking use, and may employ valet parking (including by use of off-site premises) to meet the requirements of this Section. Noted on the Parking Plan are parking spaces currently reserved for the exclusive use of iRobot Corporation, which Landlord represents to Tenant are the only reserved tenant parking spaces in the immediate vicinity of the Building as of the date hereof. In the event that Landlord elects, subsequent to the execution of this Lease, to reserve additional parking spaces in the immediate vicinity of the Building for use by individual tenants, Landlord shall reserve at least four (4) spaces in front of the Building for unreserved visitor parking to the Building. To the extent applicable to Tenant’s use of the parking spaces, the provisions of this Lease shall apply, and Landlord may promulgate rules and regulations of general applicability from time to time with respect to such use.

 

ARTICLE 2          TERM

 

2.1            Lease Term .

 

2.1.1            Commencement Date; Term . The Premises are leased for a term (the “ Term ”) to commence on the " Commencement Date " (as such term is defined in Section 3.1 hereof) and shall end on the date (the " Expiration Date ") that is the last day of the 84th month following the date that Substantial Completion of the Finish Work occurs (as such terms are defined in the Work Letter attached as Exhibit 3.1 ) unless sooner terminated as herein provided.

 

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2.1.2            Lease Year Defined . The first " Lease Year " shall begin on the Commencement Date and shall end on the last day of the twelfth (12th) full calendar month following the Commencement Date. Each Lease Year thereafter shall consist of twelve (12) consecutive calendar months following the end of the immediately preceding Lease Year.

 

2.2            Holding Over . In the event that Tenant retains occupancy of the Premises, or any part thereof, after the end of the Term, Tenant’s occupancy of the Premises shall be as a tenant at will terminable at any time by Landlord. Tenant shall pay Landlord rent for such time as Tenant remains in possession of the Premises at the rate equal to the higher of (a) two hundred percent (200%) of the Base Rent payable during the last month of the Lease Term, or (b) one hundred twenty-five percent (125%) of the then market-rate for the Premises, plus all Additional Rent and other sums due under this Lease. In addition, if Tenant’s holdover continues for more than thirty (30) days, Tenant shall pay Landlord for all damages sustained by reason of Tenant’s retention of possession of the Premises after the end of the Term. The provisions hereof do not limit or restrict Landlord’s rights or remedies under this Lease in the event of any holding over by Tenant.

 

ARTICLE 3          COMPLETION AND OCCUPANCY OF THE PREMISES

 

3.1            Condition of the Premises; Finish Work . Landlord shall construct the Finish Work in accordance with Exhibit 3.1 , attached hereto and made a part hereof (the “ Work Letter ”). The term of this Lease and the obligations of the parties hereto shall commence on a date (hereinafter referred to as the “ Commencement Date ”) which shall be the sooner of (a) the date Tenant commences operation of its business in all or any portion of the Premises, or (b) the later of (i) the date that the Finish Work has been “Substantially Completed” (as defined in the Work Letter) and Landlord has delivered the Premises to Tenant (A) in compliance with all applicable governmental requirements (without regard for Tenant’s particular use of the Premises, the installation of Tenant’s FF&E (as defined in the Work Letter) and any alterations that Tenant may elect to make to the Premises), (B) with all base building systems serving the Premises in good working order and condition, (C) broom clean, free of all debris and personal property, and (D) free of all tenants and occupants, or (ii) November 1, 2015. Tenant acknowledges that, except as expressly set forth in this Lease, neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the condition of the Premises, the Building or the Property, or with respect to the suitability of the Premises, the Building or the Property for the conduct of Tenant’s business. Tenant acknowledges that (a) it is fully familiar with the condition of the Premises and agrees to take the same in its condition “as is” as of the Commencement Date and (b) Landlord shall have no obligation to alter, repair or otherwise prepare the Premises for Tenant’s occupancy or to pay for or construct any improvements to the Premises, except in accordance with the Work Letter. Tenant’s taking of possession of the Premises shall conclusively establish that the Premises, the Building and the Property were at such time in good, sanitary and satisfactory condition and repair.

 

3.2            Confirmatory Amendments . When the Commencement Date and Expiration Date hereof have been determined in accordance with the provisions set forth in this Lease, the parties hereto shall execute a document in recordable form, setting forth said dates and said document shall be deemed a supplement to and part of this Lease. The parties hereto agree to execute such confirmatory document not later than fifteen (15) days following the Commencement Date.

 

ARTICLE 4          RENT AND SECURITY

 

4.1            Base Rent .

 

4.1.1            Schedule of Monthly Rent Payments . Beginning with the Commencement Date and continuing throughout the Term, Tenant shall pay to or upon the order of Landlord an annual rental (the “ Base Rent ”) as set forth below which shall be payable in consecutive monthly installments on or before the first day of each calendar month in advance in the monthly amount set forth below:

 

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Period   Annual Base Rent     Annual Base Rent per
Rentable Square Foot 		    Monthly Base Rent  
Lease Year 1 *   $ 527,324.00     $ 25.90     $ 43,943.67  
Lease Year 2   $ 537,504.00     $ 26.40     $ 44,792.00  
Lease Year 3   $ 547,684.00     $ 26.90     $ 45,640.33  
Lease Year 4   $ 557,864.00     $ 27.40     $ 46,488.67  
Lease Year 5   $ 568,044.00     $ 27.90     $ 47,337.00  
Lease Year 6   $ 578,244.00     $ 28.40     $ 48,185.33  
Lease Year 7   $ 588,404.00     $ 28.90     $ 49,033.67  

 

*Provided no uncured Event of Default then exists under this Lease, Base Rent shall be abated during the first nine and one-half (9.5) months of Lease Year 1 (the “ Abatement Period ”); provided, however, that during the Abatement Period, Tenant shall remain responsible for payment of cleaning services and electricity provided to the Premises in accordance with the terms of this Lease.

 

4.1.2            Manner of Payment . All payments of rent shall be made without demand, deduction, counterclaim, set-off, discount or abatement (except as otherwise expressly set forth in this Lease) in lawful money of the United States of America. If the Commencement Date should occur on a day other than the first day of a calendar month, or the Expiration Date should occur on a day other than the last day of a calendar month, then the monthly installment of Base Rent for such fractional month shall be prorated upon a daily basis based upon a thirty (30)-day month. Notwithstanding anything to the contrary contained herein, Tenant shall cause payment of the first installment of rent to be paid to Landlord to be concurrent with the execution of this Lease.

 

4.2            Additional Rent . Tenant shall pay to Landlord all charges and other amounts required under this Lease and the same shall constitute additional rent hereunder (herein called " Additional Rent "), including, without limitation, any sums due resulting from the provisions of Article 5 hereof. All such amounts and charges shall be payable to Landlord in accordance with Section 4.3 hereof. Landlord shall have the same remedies for a default in the payment of Additional Rent as for a default in the payment of Base Rent. The term " Rent " as used in this Lease shall mean the Base Rent and the Additional Rent.

 

4.3            Place of Payment . The Base Rent and all other sums payable to Landlord under this Lease shall be paid to Landlord at c/o The Davis Companies, 125 High Street, 21 st Floor, Boston, MA 02110, or at such other place as Landlord shall designate in writing to Tenant from time to time.

 

4.4            Terms of Payment . Tenant shall pay to Landlord all Base Rent as provided in Section 4.1 above and Tenant shall pay all Additional Rent payable under Article 5 and Article 6 on the terms provided therein. Except as provided in the immediately preceding sentence and as may otherwise be expressly provided by the terms of this Lease, Tenant shall pay to Landlord, within ten (10) days after delivery by Landlord to Tenant of bills or statements therefor: (a) sums equal to all expenditures made and monetary obligations incurred by Landlord in accordance with the terms of this Lease for Tenant's account; and (b) all other sums of money accruing from Tenant to Landlord in accordance with the terms of this Lease.

 

4.5            Late Charges . If Tenant shall fail to pay any Rent within five (5) days after the date same is due and payable or if any check received by Landlord from Tenant shall be dishonored, Tenant agrees that Landlord’s actual damages resulting therefrom are difficult to fix or ascertain. As a result, Tenant shall pay to Landlord (a) an administrative fee equal to five percent (5%) per month on the amount due, and (b) interest on the amount due from its due date until paid at the lesser of eighteen percent (18%) per annum or the maximum legal rate that Landlord may charge Tenant. Such charges shall be paid to Landlord together with such unpaid amounts as an administrative fee to compensate Landlord for administrative expenses and its cost of funds.

 

4.6            Security Deposit .

 

4.6.1       Letter of Credit Amount . Upon execution of this Lease, Tenant shall deliver to Landlord a security deposit (the " Security Deposit ") in the form of a " Letter of Credit " (as defined below) in the amount of $232,443.34 for the faithful performance of all terms, covenants and conditions of this Lease.

 

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4.6.2.    Letter of Credit Requirements . Each letter of credit provided to Landlord hereunder as the Security Deposit shall be in the form of an unconditional, irrevocable, standby letter of credit which shall be in full force and effect for the periods required hereby, and shall meet all of the following conditions (a " Letter of Credit ") :

 

(a)           it shall be issued for the benefit of Landlord by an " Eligible Bank " (defined below) approved by Landlord;

 

(b)           it shall be effective on the date of this Lease and have a term of not less than one (1) year following its date of issuance and contain automatic year-to-year renewal provisions subject to the Letter of Credit issuer's obligation to notify Landlord in writing by certified or registered mail of non-renewal at least sixty (60) days prior to the expiration of the Letter of Credit;

 

(c)           the expiration date of the Letter of Credit for the final Lease Year of the Term shall be at least ninety-five (95) days following the Expiration Date of the Lease;

 

(d)           it shall provide for the amount thereof as set forth in Subsection 4.6.1 to be available to the Landlord in multiple drawings conditioned only upon presentation of a sight draft;

 

(e)           it shall be assignable by Landlord to its successors, assigns and mortgagees and by any successive beneficiaries thereof at no cost to transferor or transferee (Tenant agreeing to pay such charges in connection with any transfer of the Letter of Credit), and shall expressly permit multiple assignments; and

 

(f)           it shall be in such form as shall be acceptable to Landlord in its reasonable discretion.

 

An " Eligible Bank " shall mean a commercial or savings bank organized under the laws of the United States or any state thereof or the District of Columbia and having total assets in excess of $1,000,000,000.00 which shall be a financial institution having a rating of not less than BBB or its equivalent by Standard and Poors Corporation and subject to a Thompson Watch Rating of C or better. Landlord hereby acknowledges that Silicon Valley Bank is an Eligible Bank as of the date hereof. Tenant, at its expense, shall cause the issuing bank to provide Landlord's mortgage lender with a written acknowledgment which evidences its consent to Landlord's collateral assignment of the proceeds of the Letter of Credit and acknowledgment of the security interest of such mortgage lender therein within ten (10) business days following the request of Landlord or Landlord's mortgagee therefor.

 

Provided that (a) upon the Reduction Date (as hereinafter defined) Tenant is not then nor has Tenant been in monetary default of the Lease during the preceding twelve (12) month period, and (b) Tenant provides Landlord with at least thirty (30) days’ advance written notice, which notice (“ Reduction Notice ”) shall include (i) an original replacement Letter of Credit (or an amendment or endorsement of the original Letter of Credit) complying with the terms hereof, then commencing on the date that is thirty (30) days following receipt by Landlord of the Reduction Notice from Tenant, which date may not be prior to the 105th day of the fourth (4th) Lease Year (the “ Reduction Date ”), Landlord shall on the Reduction Date exchange the initial Letter of Credit for the replacement Letter of Credit provided by Tenant or accept the amendment to the Letter of Credit in either case pursuant to which the amount of the Letter of Credit is reduced to the amount of $116,221.67.

 

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4.6.3        Substitute Letter of Credit . Tenant shall deliver to Landlord a substitute Letter of Credit that satisfies the requirements for a Letter of Credit stated in this Subsection 4.6.2 for the applicable period not later than ten (10) days following delivery of a non-renewal notice by the Letter of Credit issuer with respect to the Letter of Credit issued to Landlord or 45 days prior to the scheduled expiration of the Letter of Credit, whichever first occurs (such date, the " Re-Delivery Deadline "). If Tenant fails to deliver the substitute Letter of Credit within such 10-day period, Landlord shall have the right to draw the Letter of Credit and receive the proceeds as a cash Security Deposit. Tenant agrees that notwithstanding any provision of this Lease to the contrary, its failure to furnish Landlord with the required Security Deposit in the form of a substitute Letter of Credit in compliance with the requirements for the initial Letter of Credit prior to the Re-Delivery Deadline shall not be subject to any rights of notice or cure under this Lease.

 

4.6.4        Landlord's Rights Upon Default . Upon the occurrence of any of the Events of Default described in Article 13 hereof, in addition to any other rights or remedies available to Landlord under this Lease, Landlord shall have the right to present the Letter of Credit for payment by the issuing bank and the proceeds thereof shall be due and payable to Landlord in accordance with the terms hereof and the Letter of Credit. Tenant agrees that Landlord may, without waiving any of Landlord's other rights and remedies under this Lease upon the occurrence of any of the Events of Default, apply the Security Deposit to remedy any failure by Tenant to perform any of the terms, covenants or conditions to be performed by Tenant under this Lease and to compensate Landlord for any damages incurred as a result of any such default, including payment of Landlord's expenses to construct the Finish Work and pay leasing brokerage commissions with respect to this Lease. If Landlord uses any portion of the Security Deposit to cure any Event of Default by Tenant hereunder, Tenant shall forthwith replenish the Security Deposit to the original amount within ten (10) days following written notice from Landlord in the manner directed by Landlord in such notice (which may be in the form of a new or amended Letter of Credit, or in the form of a cash payment). If Tenant fails to restore the full amount of the Security Deposit within such 10-day period, then the amount of such deficiency shall be subject to the charges described in Section 4.5 . During any period that Landlord is holding the Security Deposit in the form of cash, Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on any such deposit.

 

4.6.5        Sale of Building . In the event of a sale or other transfer of the Building (or Landlord's interest therein), Landlord shall have the right to transfer the balance of the Security Deposit to the new owner or to transferee. Upon any such transfer and receipt the successor landlord that it has received the Security Deposit and assumes all of Landlord's obligations under this Lease, Landlord shall thereupon be released by Tenant from all liability for the return of the Security Deposit; and Tenant agrees to look to the new landlord for the return of such Security Deposit. If Tenant is not in default hereunder at the end of the Term, Landlord will, within ninety-five (95) days after the expiration or earlier termination of the Lease, return the Security Deposit, or so much as has not been applied by Landlord, to Tenant or the last permitted assignee of Tenant's interest hereunder at the expiration of the Term.

 

4.7            Independence of Covenants . Landlord’s and Tenant’s covenants herein are independent and, without limiting the generality of the foregoing, Tenant acknowledges that its covenant to pay Rent hereunder is independent of Landlord’s obligations hereunder, and that in the event that Tenant shall have a claim against Landlord, Tenant shall not have the right to deduct the amount allegedly owed to Tenant from any Rent due hereunder, it being understood that Tenant’s sole remedy for recovering upon such claim shall be to bring an independent legal action against Landlord. As such, Tenant’s obligation so to pay Rent under the Lease shall be absolute, unconditional, and independent and shall not be discharged or otherwise affected by any law or regulation now or hereafter applicable to the Premises, or any other restriction on Tenant’s use, or, except as expressly provided in the Lease, any casualty or taking, or any failure by Landlord to perform or other occurrence; and Tenant waives all rights now or hereafter existing to terminate, quit or surrender this Lease or the Premises or any part thereof, or to assert any defense in the nature of constructive eviction to any action seeking to recover Rent.

 

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ARTICLE 5          ADDITIONAL RENT FOR ESCALATIONS IN REAL ESTATE TAXES AND OPERATING EXPENSES

 

5.1           Definitions . Base Rent does not anticipate any increase in the amount of taxes on the Property, or in the cost of the operation and maintenance thereof. In order that the Rent payable hereunder shall reflect any such increases, Tenant agrees to pay as Additional Rent, an amount calculated as hereinafter set forth. For purposes of this Article 5 , the following definitions shall apply:

 

" Tax Year ": The fiscal year of the Town of Bedford (July 1 – June 30) or other applicable governmental authority for real estate tax purposes or such other twelve (12)-month period as may be duly adopted in place thereof.

 

" Base Tax Year ": The Town of Bedford’s tax fiscal year of July 1, 2015 through June 30, 2016.

 

" Base Taxes ": The amount of Taxes assessed with respect to the Property for each Tax Year (or portion thereof) which occurs during the Base Tax Year, giving full effect to any revaluation.

 

" Tax Increases ": Attributable to a Tax Year, shall mean the excess, if any, of the Taxes paid or incurred during such Tax Year over the Base Taxes.

 

" Taxes ": All taxes, assessments and charges of every kind and nature levied, assessed or imposed at any time by any governmental authority upon or against the Property or any improvements, fixtures and equipment of Landlord used in the operation thereof whether such taxes and assessments are general or special, ordinary or extraordinary, foreseen or unforeseen in respect of each Tax Year falling wholly or partially within the Term. Taxes shall include, without limitation, all general real property taxes and general and special assessments (provided that, with respect to any special assessments or betterments that may be paid in installments, Taxes for such Tax Year shall include only the amount of the installment plus any interest due and payable during such Tax Year), charges, fees or assessments for all governmental services or purported benefits to the Property, service payments in lieu of taxes, all business privilege taxes, and any tax, fee or excise on the act of entering into this Lease or any other lease of space in the Property, or on the use or occupancy of the Property or any part thereof, or on the rent payable under any lease or in connection with the business of renting space under any lease or in connection with the business of renting space in the Property, that are now or hereafter levied or assessed against Landlord by the United States of America, the Commonwealth of Massachusetts, or any political subdivision, public corporation, district or other political or public entity, including legal fees, experts' and other witnesses' fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Taxes. Taxes shall also include any other tax, fee or other excise, however described, that may be levied or assessed as a substitute for, or as an addition to, in whole or in part, any other Taxes (including, without limitation, any municipal income tax) and any license fees, tax measured or imposed upon rents, or other tax or charge upon Landlord's business of leasing the Property, whether or not now customary or in the contemplation of the parties on the date of this Lease. Taxes shall not include: (a) franchise, transfer, gift, excise, capital stock, estate, succession and inheritance taxes, and federal and state income taxes measured by the net income of Landlord from all sources, unless due to a change in the method of taxation such tax is levied or assessed against Landlord as a substitute for, or as an addition to, in whole or in part, any other Tax that would constitute a Tax; or (b) penalties or interest for late payment of Taxes except to the extent arising from Tenant’s failure to pay such amounts.

 

" Base Expense Year ": The calendar year 2015.

 

" Expense Year ": The first and full calendar year following the Base Expense Year and each calendar year thereafter.

 

" Base Expenses ": The Operating Expenses for the Base Expense Year equitably adjusted to the amount such Operating Expenses would have been if ninety-five percent (95%) of the rentable area in the Property had been occupied during the Base Expense Year if there is less than ninety-five percent (95%) occupancy in the Base Expense Year. Only those component expenses that are affected by variation in occupancy levels shall be "grossed-up." For purposes of determining Tenant's Share of Expense Increases, the Base Expenses shall be deemed to have been incurred by Landlord during the Base Expense Year. Base Expenses shall not include market-wide cost increases due to extraordinary circumstances, including but not limited to Force Majeure, security concerns, boycotts, strikes, embargoes or shortages. For purposes of this paragraph, “market-wide cost increases due to extraordinary circumstances” shall mean an actual, material increase in a category of Operating Expenses under this Lease in excess of the amount reasonably budgeted by Landlord for such expense category in the Operating Expenses that is attributable to some unanticipated event or circumstance occurring during the Base Expense Year and that affects the Property for a temporary period of time.

 

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" Expense Increases ": Attributable to an Expense Year, shall mean the excess, if any, of the Operating Expenses paid or incurred during such Expense Year equitably adjusted, if less than ninety-five percent (95%) occupancy, to the amount such Operating Expenses would have been if ninety-five percent (95%) of the rentable area in the Property had been occupied during the Expense Year over the Base Expenses. Only those component expenses that are affected by variation in occupancy levels shall be "grossed-up".

 

" Operating Expenses ": All costs and expenses (and taxes, if any, thereon) paid or incurred on behalf of Landlord (whether directly or through independent contractors) in connection with the ownership, management, operation, maintenance and repair of the Property and Common Areas (including any sales or other taxes thereon) during the Term as a first-class office park, including, without limitation:

 

(a)          supplies, materials and equipment purchased or rented, total wage and salary costs paid to, and all contract payments made on account of, all persons to the extent engaged in the operation, maintenance, security, cleaning and repair of the Building and the Common Areas at or below the level of building manager (including the amount of any taxes, social security taxes, unemployment insurance contributions, union benefits) and any on-site employees of Landlord’s property management agent;

 

(b)          the maintenance, repair and replacement of building systems, including heating, ventilating, air conditioning, plumbing, electrical, mechanical, sewer, fire detection, sprinkler, life safety and security systems, telecommunications facilities, elevators and escalators, exterior windows and doors, tenant directories, emergency generator, and other equipment used in common by, or for the benefit of, occupants of the Building and Common Areas including such repairs and replacements as may be necessary to maintain the same in proper working order and in compliance with all applicable laws and industry performance standards;

 

(c)          charges of contractors for services and facilities otherwise includable in Operating Expenses, including security, trash removal, cleaning, janitorial, window washing, snow and ice removal, exterior and interior landscaping, the maintenance and repair of the parking facilities, roadways and light poles;

 

(d)          the cost of utility services for the Building and the Common Areas, including, without limitation, water, sanitary sewer, electricity, gas, fuel oil, steam, chilled water; but excluding electricity supplied to the Premises and billed to Tenant pursuant to Section 5.4 and electricity used by other tenants of the Property within their leased space and billed directly to such tenants;

 

(e)          the premiums for fire, extended coverage, loss of rents, boiler, machinery, sprinkler, public liability, property damage, earthquake, flood, and other insurance relative to the Property and the operation and maintenance thereof (including the fitness center described below) and unreimbursed costs incurred by Landlord that are subject to an insurance deductible;

 

(f)          the operation and maintenance of any areas, facilities and amenities located in Common Areas (and in the Building, including, without limitation, the cost of utilities, repairs and insurance associated with such amenities;

 

(g)          the amortized cost of capital items incurred with respect to the ownership, operation, maintenance and repair of the Property for maintenance, repairs, and replacements amortized over the reasonable life of the capital items as determined in the reasonable judgment of Landlord's accountant in accordance with generally accepted accounting principles together with interest at the greater of nine percent (9%) per annum or Landlord’s borrowing rate for such capital items on the unamortized balance of the cost of the capital item and the installation of capital improvements that are made to the Property by Landlord in order to: (i) reduce (or avoid an increase in) operation or maintenance expenses with respect to the Property, (ii) comply with laws, regulations or orders of any governmental or quasi-governmental authority, agency or department which were enacted or became effective after the date hereof, or (iii) comply with the requirements of Landlord's insurers set forth after the date hereof (but, in any event expressly excluding the cost of any site work performed by or on behalf of Landlord in order to create additional parking on the land currently owned by the Massachusetts Department of Transportation and shown on Exhibit 1.3 as “Future Parking Area” in the event that such land is acquired by Landlord subsequent to the execution hereof);

 

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(h)          office costs of administration; legal and accounting fees and other expenses of maintaining and auditing Property accounting records and preparing Landlord's Statements; and

 

(i)          fees for management services whether rendered by Landlord (or affiliate) or a third-party property manager in an amount not to exceed the rate of five percent (5%) of gross income from the Property;

 

Operating Expenses shall not include: (1) utility expenses that are separately metered for any individual tenant in the Property; (2) any expense for which Landlord is reimbursed by a specific tenant by reason of a special agreement or requirement of the occupancy of the Property by such tenant; (3) expenses for services provided by Landlord for the exclusive benefit of a given tenant or tenants for which Landlord is directly reimbursed by such tenant or tenants; (4) all costs, fees and disbursements relating to activities for the solicitation, negotiation and execution of leases for space in the Property (including but not limited to advertising costs, leasing commissions and attorneys' fees therefor); (5) the costs of alterations to or payment of allowance for, or the decorating or the redecorating of, space in the Property leased to other tenants; (6) except as stated in subparagraph (h) of the definition of Operating Expenses, the costs associated with the operation of the business of the ownership or entity which constitutes "Landlord", including costs of selling, syndicating, financing or mortgaging any of Landlord's interest in the Property; (7) rentals payable under any ground or underlying lease, if any; (8) except as stated in subparagraph (g) of the definition of Operating Expenses, depreciation, interest and principal payments on mortgages and other debt costs, if any; (9) repairs or other work required due to fire or other casualty to the extent of insurance proceeds actually received by Landlord; (10) capital expenses for capital improvements that are not included in the definition of "Operating Expenses"; (11) payments to affiliates of Landlord (excluding property management fees) but only to the extent that they exceed market charges; (12) except as set forth above, costs of constructing any additional buildings or improvements; (13) any increase in the cost of Landlord’s insurance caused by a specific use of another tenant; (14) attorneys' fees, costs, disbursements, and other expenses incurred in connection with the disputes with existing tenants; (15) rent for space which is not actually used by Landlord in connection with the management and operation of the Building; (16) all costs or expenses (including fines, penalties and legal fees) incurred due to the violation by Landlord, its employees, agents, contractors or assigns of the terms and conditions of the Lease, or any valid, applicable building code, governmental rule, regulation or law; (17) contingency or replacement reserves; (18) costs incurred in remediation of the Property required as the result of Hazardous Substances therein or thereon; (19) except as permitted above, any capital cost incurred in connection with modifying, removing, upgrading or replacing the Building’s telecommunication systems, including the purchase, installation and operation of any informational displays in the Building’s elevators or lobbies, and (20) costs, other than those incurred in ordinary maintenance and repair, for sculptures, paintings, fountains or other objects of art or the display of such item.

 

Operating Expenses that are incurred jointly for the benefit of the Building and one or more other buildings or properties, whether pursuant to a reciprocal easement agreement, common area agreement or otherwise, may be allocated between the Building and the other buildings or properties in accordance with the ratio of their respective rentable areas calculated using a consistent methodology or on any other reasonable basis determined by Landlord. Operating Expenses incurred for the benefit of less than all of the tenants at the Property or in the Building may be allocated among such tenants based on the rentable square footage of their respective premises or on any other reasonable basis determined by Landlord.

 

" Tenant's Share ": Tenant's Share shall be a fraction, the numerator of which shall be the rentable area of the Premises and the denominator of which shall be the rentable area of the Building, with respect to Operating Expenses of and pertaining to the Building, and the rentable area of the Property, with respect to Operating Expenses of and pertaining to the office park at the Property. On the Commencement Date the Tenant's Share pertaining to the Property is 4.288% (20,360 RSF/474,820 RSF), and the Tenant’s Share pertaining to the Building is 39.118% (20,360 RSF/52,048 RSF). The Tenant's Share shall be recalculated from time to time in the event that there shall be a change in the rentable area of either the Premises, the Building, or the Property

 

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" Landlord's Statement ": An instrument containing a computation of any Additional Rent due pursuant to the provisions of this Article 5 .

 

5.2            Payment of Taxes . Tenant shall pay, as Additional Rent, Tenant's Share of all Taxes payable in respect of any Tax Year falling wholly or partially within the Term, to the extent that Taxes for any such period shall exceed the Base Taxes (which payment shall be adjusted by proration with respect to any partial Tax Year). Within thirty (30) days after the issuance by the Town of Bedford or other applicable governmental authority of the bill for Taxes, Landlord shall submit to Tenant a copy of such bill, together with Landlord's Statement and Tenant shall pay the Additional Rent set forth on such Landlord's Statement (less the amount of estimated payments paid by Tenant on account thereof) as set forth herein. Landlord, at its option, may require Tenant to make monthly payments on account of Tenant's Share of Tax Increases for Tax Years following the Base Tax Year. The monthly payments shall be one-twelfth (1/12th) of the amount of Tenant's Share of Tax Increases and shall be payable on or before the first day of each month during the Term, in advance, in an amount estimated by Landlord and billed by Landlord to Tenant; provided, that , Landlord shall have the right initially to determine such monthly estimates and to revise such estimates from time to time.

 

5.3            Payment of Operating Expenses . Tenant shall pay to Landlord, as Additional Rent, Tenant's Share of all Operating Expenses in respect of each Expense Year to the extent Operating Expenses for each such Expense Year shall exceed Base Expenses. Tenant shall pay a sum equal to one-twelfth (1/12) of the amount of Tenant's Share of Expense Increases for each Expense Year on or before the first day of each month of such Expense Year, in advance, in an amount estimated by Landlord and billed by Landlord to Tenant; provided , that , Landlord shall have the right initially to determine such monthly estimates and to revise such estimates from time to time. Landlord shall endeavor, within one hundred twenty (120) days after the expiration of the Base Expense Year and each Expense Year, to prepare and furnish Tenant with Landlord's Statement showing the Base Expenses or the Operating Expenses incurred during such Expense Year. Within thirty (30) days after receipt of Landlord's Statement for any Expense Year setting forth Tenant's Share of any Expense Increase attributable to such Expense Year, Tenant shall pay Tenant's Share of such Expense Increase (less the amount of estimated payments paid by Tenant on account thereof) to Landlord as Additional Rent. If Landlord’s statement shows that the estimated Expense Increases paid by Tenant exceed the actual Expense Increase for such Expense Year, Landlord shall, at Landlord’s election, either (i) reimburse Tenant for the amount so overpaid by Tenant within thirty (30) days after the issuance of Landlord’s Statement, or (ii) credit such amount against Tenant’s estimated Expense Increase payments next coming due (except at the end of the Lease Term, in which cause alternative (i) shall be implemented).

 

5.4            Payment of Electric Expense . Tenant agrees to pay, or cause to be paid, all charges for electricity consumed in the Premises (or by special facilities serving the Premises). Tenant will comply with all contracts relating to any such services. Tenant’s charges for such utility usage shall be based upon Tenant’s actual usage (without markup by Landlord) based on check metering (i.e., submeters) or separate meters provided as part of the Finish Work for lights, plugs and VAV fan circulation only (not for heating), and specifically excluding the roof top HVAC units serving the Premises, and at Landlord’s option, shall be paid (i) to Landlord or Landlord’s representative (as determined by Landlord) as Additional Rent or (ii) directly to the utility company. If such payments are made to Landlord, during the Term, Tenant's rate of payment shall increase from time to time based upon the increases in rate charged by the utility company to the Landlord; and Landlord shall have the right to issue supplemental billing to Tenant from time to time to account for such increases. The electrical charges payable to Landlord in respect of the Premises shall constitute Additional Rent under this Lease (but shall not be included as an Operating Expense), and shall be due and payable monthly in advance on the first day of each calendar month during the Term. On the Commencement Date and thereafter during the Term, Landlord shall have the right to charge Tenant an estimated amount, payable as Additional Rent on the first of each month, in advance, together with payments of Base Rent, on account of Tenant’s estimated electricity usage based on prior Building history for the first month of the Term and thereafter on Tenant’s actual usage, with an annual reconciliation based on actual meter readings such that Tenant will pay the amount due hereunder.

 

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5.5           Landlord's Statements .

 

5.5.1            Delivery of Statements . Landlord will deliver Landlord's Statements to Tenant during the Term. Landlord’s delay or failure to render Landlord's Statement with respect to the Base Expense Year, any Expense Year or any Tax Year beyond a date specified herein shall not prejudice Landlord's right to render a Landlord's Statement with respect to that or any subsequent Expense Year or subsequent Tax Year. The obligations of Landlord and Tenant under the provisions of this Article with respect to any Additional Rent incurred during the Term shall survive the expiration or any sooner termination of the Term. If Landlord fails to give Tenant a statement of projected Operating Expenses prior to the commencement of any Expense Year, Tenant shall continue to pay Operating Expenses in accordance with the previous statement, until Tenant receives a new statement from Landlord. Landlord’s Statements shall be conclusive between the parties absent manifest error, subject to the provisions of Section 5.5.2 , below.

 

5.5.2            Tenant Inspection Rights . During the sixty (60)-day period after receipt of any Landlord's Statement (the " Review Period "), Tenant may inspect and audit Landlord's records relevant to the cost and expense items reflected in such Landlord's Statement (a “ Tenant Audit ”) at a reasonable time mutually agreeable to Landlord and Tenant during Landlord's usual business hours. Each Landlord's Statement shall be conclusive and binding upon Tenant unless within sixty (60) days after receipt of such Landlord's Statement Tenant shall notify Landlord that it disputes the correctness of Landlord's Statement, specifying the respects in which Landlord's Statement is claimed to be incorrect. Tenant’s right to conduct any Tenant Audit shall be conditioned upon the following: (a) no monetary Event of Default shall be ongoing at the time that Tenant seeks to conduct the Tenant Audit; (b) in no event shall any Tenant Audit be performed by a firm retained on a “contingency fee” basis; (c) the Tenant Audit shall be concluded no later than thirty (30) days after the end of the Review Period; (d) any Tenant Audit shall not unreasonably interfere with the conduct of Landlord’s business; (e) Tenant and its accounting firm shall treat any information gained in the course of any Tenant Audit in a confidential manner and shall each execute Landlord’s confidentiality agreement for Landlord’s benefit prior to commencing any Tenant Audit; (f) Tenant’s accounting firm’s audit report shall, at no charge to Landlord, be submitted in draft form for Landlord’s review and comment before the final approved audit report is delivered to Landlord, and Landlord shall have the right to point out errors or make suggestions with respect to such audit report, and any appropriate comments or clarifications by Landlord which are accepted by Tenant’s auditor shall be incorporated into the final audit report, it being the intention of the parties that Landlord’s right to review is intended to prevent errors and avoid the dispute resolution mechanism set forth below and not to unduly influence Tenant’s auditor in the preparation of the final audit report; and (g) the Tenant Audit shall be conducted by Tenant at its sole cost and expense unless the results of such Tenant Audit show that Landlord’s Statement overstated the amount of Operating Expenses owed by Tenant for the relevant billing period by more than five percent (5%) in which case Landlord shall be responsible for payment of such costs and expenses. If Tenant makes a timely exception within the Review Period, Tenant shall nonetheless pay the amount shown on the Landlord’s Statement in the manner prescribed in this Lease, without any prejudice to such exception, and any overpayments identified during any Tenant Audit, if any, shall be applied as a credit against the amount of Additional Rent owed by Tenant immediately following the Tenant Audit.

 

5.6            Adjustments . If the actual amount of Tenant's Share of the Expense Increases for any Expense Year or Tenant's Share of Tax Increases for any Tax Year exceeds the estimated amount thereof paid by Tenant for such Expense Year or Tax Year, then Tenant shall pay to Landlord the difference between the estimated amount paid by Tenant and the actual amount of such Additional Rent payable by Tenant. This Additional Rent payment shall be due and payable within thirty (30) days following delivery of Landlord's Statement. If the total amount of estimated payments made by Tenant in respect of Tenant's Share of Expense Increases for such Expense Year or Tenant's Share of Tax Increases for any Tax Year shall exceed the actual amount of such Additional Rent payable by Tenant, then such excess amount shall be credited against the monthly installments of Additional Rent due and payable from Tenant to Landlord hereunder until such amount shall have been refunded in full to Tenant (or refunded in accordance with Section 5.3 ). Any excess payments made by Tenant during the Term that have not been so applied and are outstanding at the end of the Term shall be paid to Tenant promptly following delivery of Landlord's Statement for the final Expense Year and final Tax Year, as applicable. Even though the Term has expired and Tenant has vacated the Premises, when final determination is made of Tenant's Share of Expense Increases or Tax Increases for the year in which this Lease terminates, Tenant shall pay any increase due over the estimated Expense Increases or Tax Increases paid within fifteen (15) days after Landlord’s delivery of Landlord’s Statement therefor.

 

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ARTICLE 6          SERVICES AND UTILITIES

 

6.1          Services . Landlord shall provide the following services to the Building and Premises (subject to Tenant’s reimbursement and payment obligations therefore in accordance with the operation of Article 5 hereof):

 

(a)          Janitor services in and about the Premises in accordance with the cleaning specifications set forth in Exhibit 6.1 , Saturdays, Sundays and union and state and federal government holidays (the “ Holidays ”) excepted. Tenant shall not provide any janitor service without Landlord’s written consent. If Landlord’s consent is given, such janitor services shall be subject to Landlord’s supervision and control, but shall be performed at Tenant’s sole cost and responsibility.

 

(b)          Heat and air-conditioning as required to maintain comfortable temperature (excluding specialized temperature and humidity control for computers, printers and other equipment) daily from 8:00 a.m. to 6:00 p.m. Monday through Friday (“ Normal Business Hours ”), Saturdays, Sundays and Holidays excepted, consistent with such service typical of comparable buildings in the Route 128 North submarket.

 

(c)          Hot running water for lavatory purposes and cold water for cleaning, landscaping, grounds maintenance, fire protection, drinking, lavatory and toilet purposes drawn through fixtures installed by Landlord or by Tenant with Landlord’s written consent. If Tenant’s water use increases beyond customary office user levels, Landlord shall have the right to install a water meter at Tenant’s expense and to charge Tenant as Additional Rent for its water consumption in the Premises in accordance with readings from such meter.

 

(d)          Distribution of electric current from providers selected by Landlord, in amounts required for normal lighting by building standard lighting overhead fixtures and for electrical outlets for normal business operations, including without limitation, personal computers, copiers, facsimiles and other ordinary business equipment, subject , however , to Landlord’s approval of Tenant’s final electrical plan for the Premises (but specifically excluding electric current surge protection).

 

(e)          Maintenance of the Common Areas so that they are clean and free from accumulations of debris, rubbish and garbage and exterior drives, walkways and parking areas free of accumulations of snow.

 

(f)          Access by Tenant to the Premises and use of designated elevator service twenty-four (24) hours per day, seven (7) days per week, fifty-two (52) weeks per year, except for emergency situations outside of Landlord’s control and subject to the operation of Landlord’s computerized access system at the Building’s entrances and to Landlord’s Rules and Regulations. Overtime HVAC and other services shall be available as provided in Section 6.2 hereof.

 

Landlord shall have the right to select the utility providers and Tenant shall pay all actual costs associated with obtaining the utility service as provided in Article 5 hereof. Landlord agrees to furnish or cause to be furnished to the Premises the utilities and services described herein, subject to the conditions and in accordance with the standards set forth herein. Landlord’s failure to furnish any of such services when such failure is caused by accidents, the making of repairs, alterations or improvements, labor difficulties, difficulty in obtaining adequate supply of fuel, electricity, steam, water or other service or supplies from the sources from which they are usually obtained for the Building, or governmental constraints or any other cause beyond Landlord’s reasonable control, shall not result in any liability to Landlord. Tenant shall not be entitled to any abatement or reduction of rent by reason of such failure, no eviction of Tenant shall result from such failure and Tenant shall not be relieved from the performance of any covenant or agreement in this Lease. In the event of any failure, stoppage or interruption thereof, Landlord shall diligently attempt to resume service promptly.

 

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Notwithstanding the foregoing, if there shall be an interruption, curtailment or suspension of any service necessary for the occupancy of the Premises and required to be provided by Landlord pursuant to this Section 6.1 (and no reasonably equivalent alternative service or supply is provided by Landlord) that shall materially interfere with Tenant’s use and enjoyment of all or a material portion of the Premises (a “ Service Interruption ”), and if (i) such Service Interruption shall continue for five (5) consecutive business days following receipt by Landlord of written notice from Tenant describing such Service Interruption (the “ Service Interruption Notice ”), (ii) such Service Interruption is not the result of Force Majeure or any of Tenant’s acts or omissions, and (iii) the restoration of such Service Interruption is in the reasonable control of Landlord, then Tenant shall be entitled to an equitable abatement of Base Rent, based on the nature and duration of the Service Interruption, the area of the Premises affected, and the then current Base Rent amounts, for the period that shall begin on the 6th day of such Service Interruption and that shall end on the day such Service Interruption ceases. Notwithstanding anything in this Lease to the contrary, but subject to Article 10 and Article 11 (which shall govern in the event of a casualty or condemnation), the remedies expressly provided in this paragraph shall be Tenant’s sole recourse and remedy in the event of an interruption of Landlord services to the Premises

 

6.2          Additional Services . Landlord shall impose reasonable charges and may establish reasonable rules and regulations for the following: (a) the use of any heating, air-conditioning, ventilation, electric current or other utility services or equipment by Tenant after Normal Business Hours (“ Overtime HVAC ”); (b) the use or consumption of any other building services, supplies or utilities after Normal Business Hours and any unanticipated, additional costs incurred by Landlord to operate the Building after Normal Business Hours as a result thereof; (c) additional or unusual janitorial services required because of any non-building standard improvements in the Premises, the carelessness of Tenant, the nature of Tenant’s business (including the operation of Tenant’s business after Normal Business Hours); and (d) the removal of any refuse and rubbish from the Premises except for discarded material placed in wastepaper baskets and left for emptying as an incident to Landlord’s normal cleaning of the Premises in accordance with Exhibit 6.1 . The expense charged by Landlord to Tenant for any Overtime HVAC shall be (i) reasonably calculated by Landlord based on Landlord’s actual historical costs (which shall include the cost of utilities, repairs and maintenance, and additional wear and tear on the HVAC equipment), currently, $100 per hour, (ii) shall be adjusted from time to time to reflect Landlord’s actual costs, and (iii) shall constitute Additional Rent and shall be payable in accordance with Section 4.4 .

 

6.3          Excessive Current .

 

6.3.1            Prohibited Activities . Tenant shall comply with the conditions of occupancy and connected electrical load reasonably established by Landlord for the Building and Tenant shall not use utilities or other services in excess of the services described above in Section 6.1 or in a manner which exceeds or interferes with any Building systems or service equipment or Landlord’s ability to provide services to other tenants in the Building. Tenant shall not, without Landlord’s prior consent in each instance, connect air conditioning equipment, computers, (excluding personal computers and printers and office copiers and facsimile machines), major appliances (excluding coffee makers, microwave ovens and other similar food preparation appliances) or heavy duty equipment (“ High Usage Equipment ”) to the Building’s electrical system. Tenant covenants that at no time shall the use of electrical energy in the Premises exceed the capacity of the existing feeders or wiring installations then serving the Premises, Landlord agreeing that normal office use by Tenant based upon the occupancy level indicated on the Final Concept Plans (as defined in the Work Letter) by Tenant shall not exceed such capacity. Tenant shall not, without prior consent of Landlord in each instance, make or perform, or permit the making or performing of, any alteration to wiring installations or other electrical facilities in or serving the Premises or any additions to the electrical fixtures, machines, equipment or other appliances in the Premises which utilize electrical energy.

 

6.3.2            Landlord’s Right to Survey Usage . Landlord may survey Tenant’s use of services from time to time. Tenant shall pay Landlord all costs arising out of any excess use or other connection of High Usage Equipment, including the cost of all repairs and alterations to the Building’s mechanical and electrical systems (including the installation of meters) and the cost of additional electricity made available to Tenant, if any. Such costs shall constitute Additional Rent and Tenant shall pay such costs pursuant to Section 4.4 .

 

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6.4          Maintenance of Common Areas . The manner in which the Common Areas are maintained and operated and the expenditures therefore shall be at the sole discretion of Landlord and in accordance with the standards of comparable buildings in the Bedford submarket of the Route 128 North submarket. Landlord reserves the right from time to time to (a) make changes in the shape, size, location and appearance of the land and improvements which constitute the Common Areas, provided that Landlord shall not materially impair the Tenant’s ability to operate its business or reasonable access to the Premises, except temporary impairments required by said changes; (b) make such improvements, alterations and repairs to the Common Areas as may be required by governmental authorities or by utility companies servicing the Property; (c) construct, maintain and operate lighting and other facilities on all said areas and improvements; (d) grant exclusive parking rights to Property tenants; and (e) to add or remove improvements and facilities to or from the Common Areas. The use of the Common Areas shall be subject to such reasonable regulations and changes therein as Landlord shall make from time to time, including (but not by way of limitation) the right to close from time to time, if necessary, all or any portion of the Common Areas to such extent as may be legally sufficient, in the opinion of Landlord’s counsel, to prevent a dedication thereof or the accrual of rights of any person or of the public therein; provided , however , Landlord shall do so at such times and in such manner as shall minimize any disruption to Tenant to the extent reasonably possible.

 

Landlord further reserves the right to add to the Property and to develop and finance additions and other improvements in the Common Areas of the Property as it may determine in its discretion. This may entail subdivision of the land at the Property, a separate ground lease of a portion of the land at the Property, or creation of a condominium or common interest community in a manner that allows development of any addition or other improvements as an independent project. In the case of the development of any addition or other improvements as an independent project, the same shall be excluded from the term "Property" as used in this Lease. In the event any land is added to the Property, Exhibit 1.1-2 shall be deemed amended accordingly. In the event the Property, as originally defined herein, is subdivided, then the term "Property" shall be deemed to refer only to the parcel or parcels of land on which the Building is located and Exhibit 1.1-2 shall be deemed amended accordingly. In the event the Property is submitted to a condominium regime, the Property shall be deemed to be the condominium unit in which the Building is located and all common areas and facilities of the condominium. This Lease shall be subject and subordinate to any such subdivision, ground lease, or condominium (and covenants and easements granted in connection therewith) so long as the same are not inconsistent in any material respect with Tenant's rights under this Lease. Tenant agrees to enter into any instruments reasonably requested by Landlord in connection with the foregoing so long as the same are not inconsistent with the rights of Tenant under this Lease, including a subordination of this Lease to a ground lease or documents creating a condominium or common interest community at the Property. Tenant agrees not to take any action to oppose any application by Landlord for any permits, consents or approvals from any governmental authorities for any redevelopment or additional development of all or any part of the Property, and will use all commercially reasonable efforts to prevent any of Tenant's subtenants or assigns, and Tenant's and their respective officers, directors, employees, agents, contractors and consultants (collectively, " Tenant Responsible Parties ") from doing so. For purposes hereof, action to oppose any such application shall include, without limitation, communications with any governmental authorities requesting that any such application be limited or altered. Also for purposes hereof, commercially reasonable efforts shall include, without limitation, commercially reasonable efforts, upon receiving notice of any such action to oppose any application on the part of any Tenant Responsible Parties, to obtain injunctive relief, and, in the case of a subtenant, exercising remedies against the subtenant under its sublease.

 

6.5          Access to Premises .

 

6.5.1            Landlord’s Right of Entry . Landlord shall have the right to enter the Premises without abatement of Rent at all reasonable times upon reasonable prior notice to Tenant (except in emergencies when no advance notice shall be required), (a) to supply any service to be provided by Landlord to Tenant hereunder, (b) to show the Premises to Landlord’s Mortgagee and to prospective purchasers, mortgagees and, during the last twelve (12) months of the Term, tenants, (c) to inspect, alter, improve or repair the Premises and any portion of the Property, and (d) to introduce conduits, risers, pipes and ducts to and through the Premises, provided that in exercising any such right, Landlord will cause all such conduits, risers, pipes and ducts to be placed above dropped ceilings, within walls, or below floors or in closets, to the extent reasonably practicable. In conducting any such activities, Landlord shall use reasonable efforts not to disrupt the conduct of Tenant’s business operations.

 

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6.5.2            Tenant’s Keys . For each of the purposes stated above in this Section 6.5 , Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant’s vaults and safes, or special security areas, and Landlord shall have the right to use any and all means that Landlord may deem necessary or proper to open said doors in an emergency, in order to obtain entry to any portion of the Premises.

 

6.6          Cafeteria and Fitness Center . The Common Areas may contain a fitness center (the “ Fitness Center ”) and a cafeteria (the “ Cafeteria ”) that will be operated and maintained by the Landlord (or an operator selected by the Landlord). The Cafeteria and Fitness Center, if any, may not be temporarily available from time to time due to construction activities, repairs, maintenance or alterations, or a change in the managing or operating company hired by Landlord, and Landlord reserves the right to change the use of such facilities if the same is uneconomic or insufficiently used by tenants of the Building or Property in which case such facilities shall be subject to discontinuance and removal by Landlord, as determined by Landlord in its sole discretion. Landlord agrees to make the Fitness Center (and its facilities and equipment), if any, available to Tenant’s employees on a direct, non-exclusive basis subject to (a) Landlord’s Rules and Regulations regarding the use thereof; (b) payment of a monthly or other periodic user fee; and (c) execution of a waiver of liability and indemnity agreement for Landlord’s benefit in form and substance satisfactory to Landlord prior to such person’s use of the Fitness Center. If, at any time, the Fitness Center and/or Cafeteria are located within the Property in an area outside of the Building, Tenant acknowledges and agrees that Tenant’s use of such facilities shall be subject to discontinuance if the Building and Property are no longer owned by the same entity.

 

ARTICLE 7          CONDUCT OF BUSINESS BY TENANT

 

7.1          Permitted Use . The Premises shall be used and occupied only for general office purposes and customary accessory uses ancillary to office, as permitted per Applicable Laws (the “ Permitted Use ”), but expressly excluding medical, clinical, government and education (as distinguished from training of staff) offices. Tenant shall not use or occupy, or permit the use or occupancy of, the Premises or any part thereof for any use other than the Permitted Use specifically set forth above or in any illegal manner, or in any manner that, in Landlord's judgment, would adversely affect or interfere with any services required to be furnished by Landlord to Tenant or to any other tenant or occupant of the Property, or with the proper and economical rendition of any such service, or with the use and enjoyment of any part of the Property by any other tenant or occupant. In no event shall the Permitted Use include any governmental, medical, clinical, retail and/or laboratory uses. Tenant agrees that it will not exceed the maximum floor bearing capacity for the Premises.

 

7.2          Tenant's Personal Property . Tenant shall be responsible for any ad valorem taxes on its personal property (whether owned or leased) and on the value of its leasehold improvements in the Premises (which are in excess of building standard improvements), and if the taxing authorities do not separately assess Tenant's leasehold improvements, Landlord may make a reasonable allocation of the impositions to such improvements and charge Tenant for the same as Additional Rent.

 

7.3          Compliance with Laws .

 

7.3.1            Tenant’s Compliance Obligations . From and after the Commencement Date, Tenant, at Tenant's expense, shall comply promptly with the laws, ordinances, rules, regulations and orders of all governmental authorities in effect from time to time during the Term including, without limitation, the Americans with Disabilities Act (" ADA "), and all applicable federal, state and municipal building, zoning, fire, health, safety and environmental laws (the “ Applicable Laws ”) that shall impose any duty on Tenant with respect to the Premises or the use, occupancy or operation thereof. Tenant will obtain and maintain in full force and effect any and all licenses and permits necessary for its use. Tenant shall make any Alterations in or to the Premises in order to comply with the foregoing, which are necessitated or occasioned, in whole or in part by the use or occupancy or manner of use, occupancy or operation of the Premises by Tenant or any of its officers, employees, agents, contractors, invitees, licensees or subtenants (the " Tenant Parties "). Notwithstanding the foregoing, Tenant shall not be required to make any alterations or additions to the structure, roof, exterior and load bearing walls, foundation, structural floor slabs and other structural elements of the Building or any of the life safety systems serving the Premises unless the same are (x) required by Tenant’s particular use of the Premises (as opposed to office use, generally) or (y) result from any Alterations (as defined below) made by Tenant.

 

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7.3.2            Landlord’s Compliance Obligations . Landlord shall comply with all Applicable Laws in effect from time to time during the Term that shall impose any duty on Landlord with respect to the Common Areas, excluding any matters that are Tenant's responsibility under this Lease or the responsibility of other tenants of the Property. The Premises and the Finish Work designed and constructed by Landlord will conform upon completion to all Applicable Laws, including, without limitation, the requirements of Title III of the ADA. Notwithstanding anything to the contrary contained herein, from and after the Commencement Date, Tenant shall be responsible for legal compliance, including the requirements of the ADA, with respect to (a) any and all requirements on account of Tenant's particular use of, or operations in, the Premises (as opposed to office use, generally), and (b) all Alterations designed or constructed by Tenant or its contractors or agents.

 

7.4          Landlord's Rules and Regulations . Tenant shall observe and comply with the rules and regulations attached to this Lease as Exhibit 7.4 , and all reasonable modifications thereof and additions thereto from time to time put into effect by Landlord (the " Rules and Regulations "). Tenant shall not use or permit the use of the Premises in any manner that will create waste or a nuisance, or which shall tend to unreasonably disturb other tenants of the Property.

 

7.5          No Liens . Tenant shall keep the Premises and Property free from any liens or encumbrances arising out of any work performed, material furnished or obligations incurred by or for Tenant or any person or entity claiming through or under Tenant. Any claim to, or lien upon, the Premises or the Property arising from any act or omission of Tenant shall accrue only against the leasehold estate of Tenant and shall be subject and subordinate to the paramount title and rights of Landlord in and to the Premises and the Property. If any mechanics' or other lien shall be filed against the Premises or the Property purporting to be for services, labor or material furnished or to be furnished at the request of the Tenant, then Tenant shall at its expense cause such lien to be discharged of record by payment, bond or otherwise, within ten (10) days after the filing thereof.

 

7.6          Hazardous Substances .

 

7.6.1            Prohibition on Use; Remediation . Tenant shall not generate, store (except customary cleaning supplies maintained in small quantities and in a manner consistent with reasonable commercial office practices if stored, used and disposed of, in accordance with all Applicable Laws and the fire protection requirements of any Property insurers), dispose of or release, or permit the storage, use, disposal or release of, any “ Hazardous Substances ” (as defined below), in, above, on or under the Premises or the Property. Tenant shall promptly remove, clean up and remediate any Hazardous Substance on the Premises in accordance with Applicable Laws, provided that the presence of such Hazardous Substance resulted from the action or inaction of Tenant, or any Tenant Parties; provided, however , Landlord reserves the right to notify Tenant that it will conduct the remediation and, in such case, Landlord shall remediate such condition and Tenant shall reimburse Landlord for all costs and expenses upon written demand by Landlord.

 

7.6.2            Hazardous Substances . As used in this Lease, the term " Hazardous Substances " shall mean any material or substance that, whether by its nature or use, is now or hereafter defined as a hazardous waste, hazardous substance, hazardous material, hazardous chemical substance or mixture, pollutant or contaminant under the Comprehensive Environmental response Compensation and Liability Act, as amended (42 U.S.C. §9601 et seq. ), Hazardous Materials Transportation Act, as amended (49 U.S.C. §1801 et seq. ), the Resource Conservation and Recovery Act, as amended (42 U.S.C. §6901 et seq. ), Toxic Substances Contract Act, as amended (15 U.S.C. §2601 et seq. ), or which is now or hereafter regulated under any Applicable Laws, or which is or contains petroleum, gasoline, diesel fuel or another petroleum hydrocarbon product or material, or which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous.

 

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ARTICLE 8          ALTERATIONS, IMPROVEMENTS AND SIGNAGE

 

8.1          Landlord’s Obligations . Landlord will maintain in good repair, reasonable wear and use, (except casualty and condemnation which shall be governed by Article 10 and Article 11 , respectively) (a) all structural components of the Building and Common Areas, including, without limitation, the roof structure, foundation, exterior and load-bearing walls, the structural floor slabs; (b) the Building Systems (defined below in Subsection 8.3.1 ) serving the Building (excluding any Building Systems that exclusively serve Tenant and any Tenant installations, fixtures and supplemental HVAC units that are dedicated to Tenant’s exclusive use). The cost of this maintenance and repair shall be included in Operating Expenses and shall be subject to reimbursement under Article 5 hereof to the extent provided therein. Maintenance and repair expenses caused by Tenant’s willful misconduct or negligent acts or omissions shall be paid directly to Landlord by Tenant in accordance with Section 4.4 , and shall not constitute an Operating Expense.

 

8.2          Tenant’s Obligations . Tenant shall take good care of the Premises, any Building Systems that exclusively serve Tenant, and any Tenant installations, fixtures and supplemental HVAC units that are dedicated to Tenant’s exclusive use), and at Tenant’s cost and expense, shall make all repairs and replacements necessary to preserve the same in good working order and in a clean, safe and sanitary condition, and will suffer no waste. Tenant shall maintain, at its own expense, in good order, condition and repair to Landlord’s reasonable satisfaction, all plumbing facilities and electrical fixtures and devices (including replacement of all lamps, starters and ballasts) located within the Premises. Tenant shall repair, at its cost, all deteriorations or damages to the Property occasioned by its negligent acts or omissions or willful misconduct. If Tenant does not make such repairs to the Building within twenty (20) days following notice from Landlord, Landlord may, but need not, make such repairs, and Tenant shall pay the cost thereof as provided in Section 8.7 hereof.

 

8.3          Tenant’s Alterations .

 

8.3.1            Landlord’s Consent to Alterations . Tenant shall not make or permit any improvements, installations, alterations or additions (“ Alterations ”) in or to the Premises, the Building or the Property that involve or affect the structural portions of the Premises or the Property (the “ Building Structure ”) or any of the Property’s HVAC, mechanical, electrical, telecommunications, cabling, plumbing or other systems or equipment (the “ Building Systems ”) or the interior walls or corridors within the Premises. Tenant may make Alterations to the Premises that do not involve or affect the Building Structure or the Building Systems, subject to Landlord’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed, provided it shall be deemed reasonable for Landlord to withhold its consent to any Alteration which adversely affects the structural portions or the systems or equipment of the Building or is visible from the exterior of the Building, or which would violate any certificate of occupancy for the Building or any other permits or licenses relating to the Building. Landlord’s prior written consent shall not be required for minor decorations in the Premises for which Tenant provides advance notice to Landlord and which do not exceed $25,000.00 in the aggregate on an annual basis.

 

8.3.2            Construction Standards . All Alterations made by or on behalf of Tenant shall be made and performed: (a) by contractors or mechanics approved by Landlord in its reasonable discretion, who shall carry liability insurance of a type and in such amounts as Landlord shall reasonably require, naming Landlord and Tenant as additional insureds, (b) in a good and workmanlike manner, (c) so that same shall be at least equal in quality, value, and utility to the original work or installation and shall be in conformity with Landlord’s building standard specifications, as the same may be amended by Landlord and in effect at such time, (d) in accordance with all Applicable Laws, and (e) pursuant to plans, drawings and specifications (“ Tenant’s Plans ”) which have been reviewed and approved by Landlord prior to the commencement of the repairs or replacements and approved by, and filed with, all applicable governmental authorities (the “ Construction Standards ”).

 

8.3.4            Security System . Subject to Tenant’s compliance with the provisions of Subsection 6.5.2 and Subsection 8.3.2 above, Tenant shall have the right to install, at its expense, a security system to secure the Premises.

 

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8.4            Tenant’s Property . All trade fixtures, furnishings, equipment and personal property placed in the Premises by Tenant and all computer, telecommunications or other cabling and wiring installed in the Premises or elsewhere at the Property by or for the benefit of Tenant (collectively, the “ Tenant’s Property ”) shall be removed by Tenant at the expiration of the Term. Tenant shall, at its cost and expense, repair any damage to the Premises or the Property caused by such removal. Any of Tenant’s Property not removed from the Premises prior to the Expiration Date shall, at Landlord’s option, become the property of Landlord. Landlord may remove such Tenant’s Property, and Tenant shall pay to Landlord, Landlord’s cost of removal and of any repairs in connection therewith in accordance with Section 4.4 hereof.

 

8.5            Ownership and Removal . All additions, fixtures and improvements attached to or installed in or upon the Premises by Tenant or by Landlord shall be Landlord’s property and shall remain upon the Premises at the termination of this Lease without compensation or allowance or credit to Tenant.  Provided that Landlord so notifies Tenant at the time Landlord grants its consent to alterations or additions (other than approvals with respect to Alterations which are structural in nature, affect the Building Structure or the Building Systems, or are above Building standard, with respect to which no such notification by Landlord shall be required), Landlord may require at the Expiration Date, or the sooner date of termination of this Lease, that Tenant, at Tenant’s expense, remove any of Tenant’s Property or Alterations which have been attached to or installed in the Premises (excluding the Finish Work to the extent consistent with Schedule 1.1 to the Work Letter attached to the Lease, which may remain upon the Premises at the termination of this Lease, with the exception of any computer, telecommunications or other cabling and wiring, and any specialized equipment or supplemental HVAC units that may be included therein), and if Tenant fails to do so, then Landlord may remove the same and, Tenant shall pay to Landlord the cost of such removal and of any repairs for any damage to the Premises or Property in connection therewith.

 

8.6            Surrender . Upon the expiration or sooner termination of the Term, Tenant will quietly and peacefully surrender to Landlord the Premises in as good condition as when Tenant took possession, ordinary wear and tear and damage by fire or other casualty excepted, and otherwise as is required in Article 8. In addition, at such time Tenant shall remove all Hazardous Substances stored, or disposed of, or generated by Tenant in its use or operation of the Premises and all equipment and materials contaminated or affected by such Hazardous Substances in conformity with the Hazardous Substance laws.

 

8.7            Tenant’s Failure to Maintain . If Landlord gives Tenant written notice of the necessity of any repairs or replacements required to be made under Section 8.2 and Tenant fails to commence diligently to cure the same within twenty (20) days thereafter (except that no notice will be required in case of any emergency repair or replacement necessary to prevent substantial damage or deterioration), Landlord, at its option and in addition to any other remedies, may proceed to make such repairs or replacements and the expenses incurred by Landlord in connection therewith plus five percent (5%) thereof for Landlord’s supervision, shall be due and payable from Tenant in accordance with Section 4.4 hereof, as Additional Rent; provided , that, Landlord’s making any such repairs or replacements shall not be deemed a waiver of Tenant’s default in failing to make the same.

 

8.8            Signs . Landlord shall provide Tenant with a listing on the Building directory located in the Building lobby. Except as expressly set forth in this Section 8.8 , Tenant shall not place or erect any signs, monuments or other structures in or on the Building or Property. Except as expressly set forth in this Section 8.8 , Tenant shall not place any signage on the exterior of the Premises nor on the inside of the Premises which are visible from the exterior of the Premises. Tenant shall pay for all costs to change signage as a result of a change in the name of the business occupying the Premises. Notwithstanding the foregoing, Tenant may install an identification sign at the entrance to the Premises in accordance with the provisions of Section 8.3 , above, subject to Landlord’s reasonable approval.

 

Subject to Landlord’s reasonable approval as to design and method of installation, and to Applicable Laws, Tenant, at its sole cost and expense, shall have the right, prior to the Commencement Date, to install and thereafter maintain one sign, of a size and in the location identified on Exhibit 8.8 attached hereto, which sign shall identify the originally named Tenant hereunder (the “Exterior Building Signage”). Tenant shall be responsible, at Tenant’s expense, for obtaining all permits related to the installation and maintenance of the Exterior Building Signage. The provisions of this paragraph are personal to the originally named Tenant and any Affiliate (as defined in Section 12.6 of this Lease) pursuant to a Permitted Transfer (as defined in Section 12.6 of this Lease). If the Exterior Building Signage requires municipal or other governmental approval, and such approval is denied, Landlord shall not be deemed to be in default hereunder and this Lease shall continue in full force and effect. If Tenant does not install the Exterior Building Signage within the twelve (12) month period following the Commencement Date (as the same may be reasonably extended due to any delay caused by Force Majeure) in accordance with this Section 8.8 , then Tenant’s rights to install Exterior Building Signage shall terminate. Landlord shall have the right to relocate the Exterior Building Signage on a temporary basis in connection with the maintenance and repair of the Building.

 

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ARTICLE 9           INSURANCE

 

9.1            Tenant’s Insurance . Tenant, at its own expense, shall provide and keep in force with companies which are rated A/XV or better by A.M. Best Company and licensed in the Commonwealth of Massachusetts: (a) combined single limit commercial general liability insurance insuring against liability for personal injury and property damage, including contractual liability, in the amount of $4,000,000.00 per occurrence/$4,000,000.00 annual aggregate limit which may be achieved through a combination of General Liability and umbrella insurance (provided that any umbrella coverage is on a ‘following-form’ basis); (b) “Special Form” property insurance, including standard fire and extended coverage insurance, in amounts necessary to provide replacement cost coverage, for Tenant’s Property, machinery, electronic data and any Alterations in which Tenant has an insurable property interest, including, without limitation, vandalism and malicious mischief and sprinkler leakage coverage, and “all risk” Builder’s Risk insurance, completed value, non-reporting form at any time that Tenant has commenced construction of any leasehold improvements or any Alterations, and at any time any other construction activities are underway at the Premises; (c) plate glass insurance for the Premises (if applicable); (d) Workers’ Compensation Insurance in statutory limits as required by applicable law; and (e) any other insurance reasonably required by Landlord. At Landlord’s request, which shall be made no more often than once every three (3) years (unless required by Applicable Laws), the amounts and kinds of insurance coverages described herein may be reasonably increased or expanded to reflect amounts and coverages then typically being carried for similar business operations in institutionally owned or financed properties.

 

9.2            Delivery of Policies . Each such insurance policy shall: (a) be provided in form, substance and amounts (where not above stated) satisfactory to Landlord and to Landlord’s Mortgagee in their reasonable discretion; (b) specifically include the liability assumed hereunder by Tenant (provided that the amount of such insurance shall not be construed to limit the liability of Tenant hereunder); (c) shall provide that it is primary insurance, and not excess over or contributory with any other valid, existing and applicable insurance in force for or on behalf of Landlord. Tenant shall insure that Landlord shall receive thirty (30) days’ written notice prior to any cancellation or change of coverage. Tenant shall deliver policies of such insurance or certificates thereof to Landlord on or before the Commencement Date, and thereafter at least thirty (30) days before the expiration dates of expiring policies. All such insurance certificates shall provide that Landlord, its mortgagees, any ground lessors and Landlord’s managing agent shall each be named as an additional insured. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificates, Landlord may, at its option, procure same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent within five (5) days after delivery to Tenant of bills therefor. Tenant’s compliance with the provisions of this Article 9 shall in no way limit Tenant’s liability under any of the other provisions of this Lease.

 

9.3            Increased Insurance Risk . Tenant shall not do or permit anything to be done, or keep or permit anything to be kept in the Premises, which would: (a) be in violation of any governmental law, regulation or requirement, (b) invalidate or be in conflict with the provision of any fire or other insurance policies covering the Property or any property located therein, (c) result in a refusal by fire insurance companies of good standing to insure the Property or any such property in amounts required by Landlord’s Mortgagee (as hereinafter defined) or reasonably satisfactory to Landlord, (d) subject Landlord to any liability or responsibility for injury to any person or property by reason of any business operation being conducted in the Premises, or (e) cause any increase in the fire insurance rates applicable to the Property or property located therein at the beginning of the Term or at any time thereafter. In the event that any use of the Premises by Tenant increases such cost of insurance, Landlord shall give Tenant written notice of such increase and a reasonable opportunity to cure its use to prevent such increase; provided , however , if Tenant fails to do so, Tenant shall pay such increased cost to Landlord in accordance with Section 4.4 hereof. Acceptance of such payment shall not be construed as a consent by Landlord to Tenant’s such use, or limit Landlord’s remedies under this Lease.

 

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9.4            Indemnity . Tenant shall defend with counsel approved by Landlord in Landlord’s reasonable discretion, indemnify and hold harmless Landlord, all employees, officers, directors, partners, members and shareholders of Landlord, Mortgagees of the Property and any other party having an interest therein from and against any and all liabilities, losses, damages, costs, expenses (including reasonable attorneys’ fees and expenses), causes of action, suits, claims, demands or judgments of any nature arising from or with respect to (a) any injury to or death of any person or damage to or loss of property in, on or about the Premises or connected with the use, condition or occupancy of any thereof, except to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees or contractors, (b) any breach or violation by Tenant of any of the terms, conditions or provisions of this Lease, (c) any act, omission, fault, misconduct, negligence or violation of applicable laws and regulations by Tenant or any Tenant Parties, (d) any Hazardous Substances or other pollutants brought, generated, stored, used, installed, disposed of, spilled, released, emitted or discharged on, in or from the Premises or the Property, or allowed, permitted or suffered to be brought, generated, stored, used, installed, disposed of, spilled, released, emitted or discharged thereon, therein or therefrom, by Tenant or any Tenant Parties, in violation of Section 7.6 or otherwise, (e) any construction or other work by Tenant on or about the Premises pursuant to Article 8 or otherwise.

 

9.5            Tenant’s Use and Occupancy . Tenant’s use and occupancy of the Premises and the Property and use by all Tenant Parties, and all Tenant’s and said parties’ furnishings, fixtures, equipment, improvements, materials, supplies, inventory, effects and property of every kind, nature and description which, during the continuance of this Lease or any occupancy of the Premises by Tenant or anyone claiming under Tenant, may be in, on or about the Premises, shall be at Tenant’s and said parties’ sole risk and hazard. To the extent permitted pursuant to Applicable Law, Landlord shall not be liable to Tenant or any other party for injury to or death of any person or damage to or destruction of any property in, on or about the Premises, nor for any interruption in Tenant’s use of the Premises or the conduct of its business therein, nor for any other losses, damages, costs, expenses or liabilities whatsoever, including without limitation where caused by fire, water, explosion, collapse, the leakage or bursting of water, steam, or other pipes, any environmental or other condition in, on, or about the Premises, or any other event, occurrence, condition or cause, except to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees or contractors. It is Tenant’s responsibility to maintain insurance against any such loss or casualty.

 

9.6            Waiver of Subrogation Rights .

 

9.6.1            Mutual Waiver . Notwithstanding anything contained in this Lease to the contrary, Landlord and Tenant hereby agree and hereby waive any and all rights of recovery against each other for loss or damage occurring to the Premises or the Property or any of Landlord’s or Tenant’s Property contained therein regardless of the cause of such loss or damage to the extent that the loss or damage is covered by the injured party’s insurance or the insurance the injured party is required to carry under this Lease, whichever is greater (without regard to any deductible provision in any policy). This waiver does not apply to claims caused by a party’s willful misconduct. This waiver also applies to each party’s directors, officers, employees, shareholders, and agents.

 

9.6.2            Insurance Policy Coverage . Each party will assure that its insurance permits waiver of liability and contains a waiver of subrogation. Each party shall secure an appropriate clause in, or an endorsement to, each insurance policy obtained by or required to be obtained by Landlord or Tenant, as the case may be, under this Lease, pursuant to which the insurance company: (a) waives any right of subrogation against Landlord or Tenant as the same may be applicable, or (b) permits Landlord or Tenant, prior to any loss to agree to waive any claim it might have against the other without invalidating the coverage under the insurance policy. If, at any time, the insurance carrier of either party refuses to write (and no other insurance carrier licensed in Massachusetts will write) insurance policies which consent to or permit such release of liability, then such party shall notify the other party and upon the giving of such notice, this Section 9.6.2 shall be void and of no effect.

 

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ARTICLE 10           CASUALTY

 

10.1          Damage or Destruction .

 

10.1.1            Landlord’s Repair Obligation . Tenant shall give prompt notice to Landlord of any damage by fire or other casualty (a “ Casualty ”) to the Premises or any portion thereof. During the thirty (30)-day period following the occurrence of a Casualty (the “ Notice Period ”), Landlord will notify Tenant of Landlord’s estimate (the “ Landlord’s Estimate ”) of the period of time required to complete the restoration work. In the event that the Premises, or any part thereof, or access thereto, shall be so damaged or destroyed by fire or other insured Casualty that the Tenant shall not have reasonably convenient access to the Premises or any material portion of the Premises shall thereby be otherwise rendered unfit for use and occupancy by the Tenant for the purposes set forth in Section 7.1 , and if in the judgment of the Landlord the damage or destruction may be repaired within three hundred sixty five (365) days with available insurance proceeds, then the Landlord shall so notify the Tenant and shall repair such damage or destruction as provided in Section 10.4 hereof with reasonable diligence, subject to the limitations, if any, of Applicable Laws. If in the judgment of the Landlord the Premises, or means of access thereto, cannot be repaired within two hundred seventy (270) days after the elapse of the Notice Period with available insurance proceeds, then either party shall have the right to terminate the term of this Lease by giving written notice of such termination to the other party within the period of thirty (30) to forty-five (45) days after the occurrence of the Casualty. If the reconstruction period estimated by Landlord is more than two hundred seventy (270) days and neither party terminates this Lease on account thereof, Landlord shall repair such damage or destruction as provided in Section 10.4 hereof with reasonable deliveries subject to the limitations, if any, of Applicable Laws to be the period so estimated by Landlord.

 

10.1.2            Failure to Complete Repairs; Rights of Termination . If Landlord is obligated, or elects to repair the damage to the Premises and fails to substantially complete the repairs within the longer of the period of time required or permitted by this Section 10.1 or the time set forth in Landlord’s Estimate plus a contingency period equal to 10% of the time set forth in Landlord’s Estimate (as the same may be reasonably extended due to any delay caused by Force Majeure) (the “ Reconstruction Period ”) then, Tenant shall have the right to terminate this Lease by delivery of written notice to Landlord not later than ten (10) days following the end of the Reconstruction Period.

 

10.2          Abatement of Rent . Base Rent and Additional Rent shall not be abated or suspended if, following any Casualty, Tenant shall continue to have reasonably convenient access to the Premises and the Premises are not rendered unfit for use and occupancy. If Tenant shall not have reasonably convenient access to the Premises or any portion of the Premises shall be otherwise rendered unfit for use and occupancy by the Tenant for the purposes set forth in Section 7.1 by reason of such Casualty, then Rent shall be equitably suspended or abated relative to the portion of the Premises that cannot be used by Tenant for any of its business operations, effective as of the date of the Casualty until Landlord has (a) substantially completed the repair of the Premises and the means of access thereto, and (b) has delivered notice thereof to Tenant.

 

10.3          Events of Termination . Notwithstanding the provisions of this Article 10 , if, prior to or during the Term the Property shall be so damaged by Casualty that, in Landlord’s reasonable estimate, the cost to repair the damage will be more than twenty-five percent (25%) of the replacement value of the Building or the buildings located at the Property immediately prior to the occurrence of the Casualty (whether or not the Premises shall have been damaged or rendered untenantable), then, in any of such events, Landlord, may give to Tenant, within ninety (90) days after such Casualty, a sixty (60) days’ notice of the termination of this Lease and, in the event such notice is given, this Lease and the term shall terminate upon the expiration of such sixty (60) days with the same effect as if such date were the Expiration Date. If more than twenty-five percent (25%) of the gross rentable area of the Premises shall be wholly or substantially damaged or destroyed by Casualty at any time during the last six (6) months of the Term, either Landlord or Tenant may terminate this Lease by delivery of written notice of such termination to the other party within thirty (30) days after the occurrence of such damage.

 

10.4          Scope of Landlord’s Repairs . In the event Landlord elects or shall be obligated to repair or restore any damage or destruction to the Premises pursuant to this Article 10 , Landlord shall not be obligated to restore or replace Tenant’s Property or Tenant’s Alterations or reconstruct the Finish Work except such building standard Finish Work. No damages, compensation or claim shall be payable by the Landlord to Tenant, or any other person, by reason of inconvenience, loss of business or annoyance arising from any damage or destruction, or any repair thereof, as is referred to in this Article 10 .

 

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ARTICLE 11           CONDEMNATION

 

11.1          Entire Condemnation . In the event that the whole of the Premises shall be taken under the power of eminent domain or by any proceeding for taking for public or quasi-public use (a “ Condemnation ”), this Lease and the term and estate hereby granted shall automatically terminate as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such taking.

 

11.2          Partial Condemnation .

 

11.2.1            Effect of Partial Condemnation . In the event that only a part of the Premises shall be taken by Condemnation and the remaining Premises are suitable for general office use without material interference with Tenant’s business operations and Tenant shall have reasonable, convenient access to and from the Premises, the Term shall expire as to that portion of the Premises condemned effective as of the date of the vesting of title in the condemning authority, and this Lease shall continue in full force and effect as to the part of the Premises not so taken. In the event of a partial Condemnation of the Premises which results in a lack of reasonable, convenient access to and from the Premises or which results in insufficient space for Tenant to carry on its business without material interference with its business, Tenant shall have the right to terminate this Lease if Landlord cannot relocate Tenant to comparable space elsewhere in the Property following the effective date of the Condemnation.

 

11.2.2            Landlord’s Option to Terminate . In the event that a part of the Property shall be subject to Condemnation (whether or not the Premises are affected), Landlord may, at its option, terminate this Lease as of the date of such vesting of title, by notifying Tenant in writing of such termination within ninety (90) days following the date on which Landlord shall have received notice of the vesting of title in the condemning authority if in Landlord’s reasonable opinion: (a) a substantial alteration or reconstruction of the Property (or any portion thereof) shall be necessary or appropriate, or (b) the portion of the Property so condemned has the effect of rendering the remainder of the Property uneconomic to maintain.

 

11.2.3            Landlord’s Repair Obligations . In the event that this Lease is not terminated in accordance with Subsection 11.2.2 hereof, Landlord shall, upon receipt of the award in condemnation, make all necessary repairs or alterations to the Building in which the Premises are located so as to constitute the remaining Premises a complete architectural unit to the extent feasible and permitted by applicable law, but Landlord shall not be required to spend for such work an amount in excess of the amount received by Landlord as damages for the part of the Premises so taken. “Amount received by Landlord” shall mean that part of the award in condemnation which is free and clear to Landlord of any collection by Mortgagees and after payment of all costs involved in collection, including but not limited to attorney’s fees. Tenant, at its own cost and expense shall, restore all exterior signs, trade fixtures, equipment, furniture, furnishings and other installations of personalty of Tenant which are not taken to as near its former condition as the circumstances will permit. In the event of a partial taking, all provisions of this Lease shall remain in full force and effect.

 

11.3          Temporary Taking . If there is a taking of the Premises for temporary use arising out of a temporary emergency or other temporary situation, this Lease shall continue in full force and effect, and Tenant shall continue to comply with Tenant’s obligations under this Lease, except to the extent compliance shall be rendered impossible or impracticable by reason of the taking, and Tenant shall be entitled to the award for its leasehold interest.

 

11.4          Condemnation Awards . Except as provided in the preceding Section 11.3 , Landlord shall be entitled to the entire award in any condemnation proceeding or other proceeding for taking for public or quasi-public use, including, without limitation, any award made for the value of the leasehold estate created by this Lease. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in such condemnation or other taking, together with any and all rights of Tenant now or hereafter arising in or to same or any part thereof; provided , however , that nothing contained herein shall be deemed to give Landlord any interest in or to require Tenant to assign to Landlord any award made to Tenant specifically for its relocation expenses or the taking of Tenant’s Property provided that such award does not diminish or reduce the amount of the award payable to Landlord.

 

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11.5          Proration . In the event of a partial condemnation or other taking that does not result in a termination of this Lease as to the entire Premises, then the Base Rent and Tenant’s Share shall be adjusted in proportion to that portion of the Premises taken by such condemnation or other taking.

 

ARTICLE 12           ASSIGNMENT AND SUBLETTING

 

12.1          Assignment and Subletting . Tenant shall not, without the prior written consent of the Landlord, assign, mortgage, encumber or otherwise transfer this Lease or any interest herein directly or indirectly, by operation of law or otherwise, or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (any such action, a " Transfer "). If at any time or from time to time during the Term, when no Event of Default has occurred and is continuing, Tenant desires to effect a Transfer, Tenant shall deliver to Landlord written notice (" Transfer Notice ") setting forth the terms of the proposed Transfer and the identity of the proposed assignee, sublessee or other transferee (each, a " Transferee "). Landlord shall not unreasonably withhold, condition or delay its consent to any assignment of this Lease or sublet of the Premises, subject to the conditions of this Article 12. Tenant shall also deliver to Landlord with the Transfer Notice an acceptable assumption agreement for Tenant's obligations under this Lease (in the case where the Transfer is a proposed assignment of this Lease) together with all relevant information reasonably requested by Landlord concerning the proposed Transferee to assist Landlord in making an informed judgment regarding the Transferee’s proposed use of the Premises (which use must be permitted by Applicable Laws), and the financial responsibility, creditworthiness, reputation, and business experience of the Transferee. The provisions of this Section 12.1 shall apply to a Transfer (by one or more Transfers) of a controlling portion of or interest in the stock or partnership or membership interests or other evidences of equity interests of Tenant as if such Transfer were an assignment of this Lease; provided that if equity interests in Tenant at any time are or become traded on a public stock exchange, the transfer of equity interests in Tenant on a public stock exchange shall not be deemed an assignment within the meaning of this Section 12.1 .

 

12.2          Landlord's Options . Landlord shall have the option, exercisable by written notice delivered to Tenant within thirty (30) days after Landlord's receipt of a Transfer Notice accompanied by the other information described in Section 12.1 , to: (a) permit Tenant to Transfer the Premises; or (b) disapprove the Tenant's Transfer of the Premises and to continue the Lease in full force and effect as to the entire Premises; or (c) in the event that any such Transfer impacts forty percent (40%) or less of the rentable square footage of the Premises for a period of three (3) years or more, terminate the Lease as to the portion of the Premises affected by the Transfer as of the date set forth in Landlord's notice of exercise of such option, which date shall not be less than thirty (30) days nor more than ninety (90) days following the giving of such notice; or (d) in the event that any such Transfer impacts forty percent (40%) or more of the rentable square footage of the Premises for the remainder of the Term, terminate the Lease (a “ Recapture ”) as of the date set forth in Landlord’s notice of exercise of such option, which date shall not be less than sixty (60) days nor more than ninety (90) days following the giving of such notice; provided, however, that Tenant may, prior to the delivery of a Transfer Notice, request in writing designating the affected area of the Premises, identifying the prospective subtenant, and providing such other information as Landlord may reasonably request, whether Landlord will exercise a Recapture of the Premises (a “ Recapture Notice ”) and Landlord shall notify Tenant whether it shall Recapture the Premises within ten (10) business days of receipt of the Recapture Notice (or if later, the receipt of such information). If Landlord approves of the proposed Transfer pursuant to Section 12.1 above, Tenant may enter into the proposed Transfer with such proposed Transferee subject to the following conditions: (i) the Transfer shall be on the same terms set forth in the Transfer Notice; and (ii) no Transfer shall be valid and no Transferee shall take possession of the Premises until an executed counterpart of the assignment, sublease or other instrument effecting the Transfer (in the form approved by Landlord) has been delivered to Landlord pursuant to which the Transferee shall expressly assume all of Tenant's obligations under this Lease (provided that, for a subtenant, the rental obligations shall be governed by the terms of the applicable sublease).

 

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If Landlord exercises its option to terminate this Lease (or in the case of a partial sublet to release Tenant with respect to a portion of the Premises), Tenant shall surrender possession of such Premises on the date set forth in Landlord's notice, and thereafter neither Landlord nor Tenant shall have any further liability with respect thereto. If this Lease shall be terminated as to a portion of the Premises only, Rent and Tenant's parking allocation shall be readjusted proportionately according to the ratio that the number of square feet and the portion of the space surrendered compares to the floor area of Tenant's Premises during the Term of the proposed sublet.

 

12.3          Additional Conditions . Tenant shall not offer to make, or enter into negotiations with respect to any Transfer to: (a) any tenant of the Property or any entity owned by, or under the common control of, whether directly or indirectly, a tenant in the Property unless there is no competing space then available for leases therein; or (b) any bona fide prospective tenant with whom Landlord is then negotiating with respect to other space in the Property; or (c) any party which would be of such type, character, or condition as to be inappropriate as a tenant for the Property. It shall not be unreasonable for Landlord to disapprove any proposed assignment or any proposed sublet of 75% or more of the Premises to any of the foregoing entities or to an entity that does not have at least equal financial strength to Tenant’s as of the date of this Lease. Tenant shall be permitted to list or advertise the Premises for assignment or sublease, whether through a broker, agent or representative, or otherwise so long as such advertisement does not list a rental rate. Notwithstanding the preceding sentence, Tenant shall be permitted to provide a rental rate on a confidential basis in response to inquiries. Furthermore, Landlord shall not be deemed to be unreasonably withholding its consent to any proposed Transfer if:

 

(i)          the character of the business to be conducted or the proposed use of the Premises by the proposed subtenant or assignee shall (A) be likely to materially increase Landlord’s Operating Expenses; (B) be likely to materially increase the burden on elevators or other Building systems; or (C) violate or be likely to violate any provisions or restrictions contained herein relating to the use or occupancy of the Premises; or

 

(ii)         due to the identity or business of a proposed assignee or subtenant, such approval would cause Landlord to be in violation of any covenant or restriction contained in another lease or other agreement affecting space elsewhere in the Property.

 

12.4          No Release . Landlord's consent to a Transfer or any Transfer permitted without Landlord’s consent shall not release Tenant of Tenant's obligations under this Lease and this Lease and all of the obligations of Tenant under this Lease shall continue in full force and effect as the obligations of a principal (and not as the obligations of a guarantor or surety). From and after any Transfer, the Lease obligations of the Transferee and of the original Tenant named in this Lease shall be joint and several. No acceptance of Rent by Landlord from or recognition in any way of the occupancy of the Premises by a Transferee shall be deemed a consent to such Transfer, or a release of Tenant from direct and primary liability for the further performance of Tenant's covenants hereunder. The consent by Landlord to a particular Transfer shall not relieve Tenant from the requirement of obtaining the consent of Landlord to any further Transfer. Each violation of any of the covenants, agreements, terms or conditions of this Lease, whether by act or omission, by any of Tenant's permitted Transferees, shall constitute a violation thereof by Tenant. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor.

 

12.5          Transfer Profit . Tenant shall pay to Landlord, as Additional Rent, an amount (the “ Transfer Profit ”) equal to fifty percent (50%) of any rent and other economic consideration received by Tenant as a result of any Transfer (other than Permitted Transfers) which exceeds, in the aggregate: (a) the total of the remaining rent which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased) plus (b) any reasonable tenant fit-up costs, brokerage commissions and attorneys' fees actually paid by Tenant in connection with such Transfer amortized on a straight-line basis over the term of the Transfer (specifically excluding moving or relocation costs paid to the Transferee and any rent abatement provided to the Transferee). Tenant shall pay such Transfer Profit to Landlord on a monthly basis within ten (10) days after receipt thereof, without affecting or reducing any other obligations of Tenant hereunder. Each such payment shall be sent with a detailed statement. Landlord shall have the right to audit Tenant's books and records to verify the accuracy of the detailed statement.

 

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12.6          Permitted Transfers . Notwithstanding the above, provided Tenant is not in default of this Lease, then Tenant shall have the right to assign this Lease or sublet the Premises without Landlord’s consent (a “ Permitted Transfer ”), but with no less than thirty (30) days’ prior notice to Landlord, to (i) any person that as of the date of determination and at all times thereafter directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Tenant, or (ii) any entity into or with which Tenant is merged or consolidated, or to which all or substantially all of Tenant’s assets are transferred (any of the foregoing, an “ Affiliated Company ”); provided , however , that in any such event: (i) use of the Premises shall be for the Permitted Use; (ii) the assignee shall be at least as creditworthy as the original Tenant as of the date of execution of this Lease, and Landlord has been provided with financial statements or evidence otherwise reasonably satisfactory to Landlord of the same; (iii) any such assignment shall be for an independent business purpose and not a means to circumvent the provisions of this Article 12 , and (iv) the purpose or result of such Transfer shall not be to liquidate or substantially reduce the net worth of Tenant or such assignee. For the purposes of this Section 12.6 , the term “control” shall mean the direct or indirect ownership of 50% or more of an entity and the ability to control the day-to-day operations of such entity whether through the board of directors or otherwise.

 

ARTICLE 13           DEFAULTS AND REMEDIES

 

13.1          Events of Default . The occurrence of any one or more of the following events shall constitute an event of default (each an "Event of Default" ) hereunder:

 

13.1.1            Nonpayment of Base Rent or Additional Rent . Failure by Tenant to pay any installment of Base Rent, Additional Rent or any other amount, deposit, reimbursement or sum due and payable hereunder, upon the date when said payment is due; provided , however , on the first two (2) occasions only during any Lease Year with respect to Base Rent, Landlord shall furnish Tenant with written notice of such failure and permit Tenant a five (5)-day period to cure such failure.

 

13.1.2            Certain Obligations . Failure by Tenant to perform, observe or comply with any non-monetary obligation contained in Section 4.6 (“ Security Deposit ”), Section 7.5 (“ No Liens ”) and Article 12 (" Assignment and Subletting ") of this Lease.

 

13.1.3            Other Obligations . Failure by Tenant to perform any non-monetary obligation, agreement or covenant under this Lease other than those matters specified in Subsection 13.1.2 , and such failure continues for thirty (30) days after written notice by Landlord to Tenant of such failure; provided , however , that if the nature of Tenant's obligation is such that more than thirty (30) days are required for performance, then Tenant shall not be in default if Tenant commences performance within such thirty (30)-day period and thereafter diligently and continuously prosecutes the same to completion within ninety (90) days following the date of Landlord's written notice with respect to such failure.

 

13.1.4            Assignment; Receivership; Attachment . (a) The making by Tenant of any arrangement or assignment for the benefit of creditors; (b) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (iii) the attachment, execution, or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days.

 

13.1.5            Bankruptcy . The admission by Tenant or Tenant's guarantor (if any) in writing of its inability to pay its debts as they become due, the filing by Tenant or Tenant's guarantor (if any) of a petition in bankruptcy seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the filing by Tenant or Tenant's guarantor (if any) of an answer admitting or failing timely to contest a material allegation of a petition filed against Tenant or Tenant's guarantor (if any) in any such proceeding or, if within sixty (60) days after the commencement of any proceeding against Tenant or Tenant's guarantor (if any) seeking any involuntary reorganization, or arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation by any of Tenant's creditors or such guarantor's creditors, such proceeding shall not have been dismissed.

 

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13.1.6            Abandonment . Abandonment of the Premises by Tenant for a continuous period in excess of thirty (30) days.

 

13.2          Remedies . If an Event of Default occurs, Landlord shall have the following rights and remedies, in addition to any and all other rights or remedies available to Landlord in law or equity:

 

13.2.1            Notice to Quit . Landlord shall have the right to deliver written notice to Tenant to quit possession and occupancy of the Premises and to declare the Lease terminated. Upon Landlord’s termination of this Lease, Tenant shall quit and peaceably surrender the Premises, and all portions thereof, to Landlord, and Landlord shall have the right to receive all rental and other income of and from the same. At Landlord’s election, any written notice of default may also be designated a notice to quit (provided that nothing in this sentence shall be deemed to deny Tenant the right to applicable cure periods set forth in Section 13.1 , above).

 

13.2.2            Right of Re-Entry . Landlord shall have the right, with or without terminating this Lease, to re-enter the Premises and take possession thereof by summary proceeding, eviction, ejectment or otherwise and may dispossess all other persons and property from the Premises. Tenant’s property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry or taking possession of the Premises by Landlord pursuant to this Subsection 13.2.2 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Tenant thereby waives all statutory rights, including without limitation the right to a notice to quit, notice before exercise of any prejudgment remedy, and any rights of redemption, all to the extent such rights may be lawfully waived.

 

13.2.3            Recovery of Rent and Damages . Landlord shall have the right to recover from Tenant all loss of Rent and other payments that Landlord may incur by reason of termination of the Lease, including, without limitation: (a) all Rent and other sums due and payable by Tenant as of the date of termination; (b) all Rent that would otherwise be payable for the remainder of the Term in accordance with the terms of this Lease, as and when due, and Tenant shall indemnify Landlord for the same; (c) all of Landlord’s then unamortized costs of special inducements provided to Tenant (including without limitation rent concessions, tenant construction allowances, rent waivers, above building standard leasehold improvements, and the like); (d) the costs of collecting amounts due from Tenant under the Lease and the costs of recovering possession of the Premises (including attorneys fees and litigation costs); (e) the costs of curing Tenant's defaults existing at or prior to the date of termination; (f) all “ Reletting Expenses ” (as defined below); and (g) all Landlord’s other reasonable expenditures arising from the termination. Tenant shall reimburse Landlord for all such items, and the same shall be due and payable immediately from time to time upon notice from Landlord that an expense has been incurred, without regard to whether the expense was incurred before or after the termination. Notwithstanding the foregoing, except as set in Section 2.2 of this Lease, Tenant shall not be liable for any of Landlord’s indirect or consequential damages arising from an Event of Default by Tenant.

 

13.2.4            Acceleration of Future Rentals . Following termination of this Lease, Landlord, at its written election, shall be entitled to receive as liquidated damages for all Rent that would otherwise be due and payable pursuant to clause (b) of Subsection 13.2.3 , above, an amount equal to : (x) a lump sum payment representing the then present value of the amount of Rent that would have been paid in accordance with this Lease for the remainder of the Term minus the then present value of the aggregate fair market rent and additional charges payable for the Premises for the remainder of the Term (if less than the Rent payable hereunder) estimated by Landlord as of the date of termination, and taking into account Landlord’s reasonable projections of vacancy and time required to re-lease the Premises; or (y) a lump sum payment equal to one year’s Base Rent at the rate applicable under the Lease at the time of such election. Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, such amount as final damages for Tenant's default with respect to the Rents payable for the remainder of the Term as described above. In the computation of present value, a discount at the then market discount rate as reasonably determined by Landlord shall be employed.

 

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13.2.5            Rents Due After Re-Entry by Landlord . If Landlord re-enters or otherwise takes possession of the Premises without terminating this Lease (but terminating only Tenant’s right of possession in the Premises), then the Lease and Tenant’s liabilities and obligations thereunder shall survive such action. In the event of any such termination of Tenant's right of possession, whether or not the Premises, or any portion thereof, shall have been relet, Tenant shall pay the Landlord a sum equal to the Rent and any other charges required to be paid by Tenant up to the time of such termination of such right of possession and thereafter Tenant, until the end of the Term, shall be liable to Landlord for and shall pay to Landlord: (a) the equivalent of the amount of the Rent payable under this Lease, less (b) the net proceeds of any reletting effected pursuant to the provisions hereof after deducting all of Landlord's Reletting Expenses. Tenant shall pay such amounts in accordance with the terms of this Subsection 13.2.5 as set forth in a written statement thereof from Landlord to Tenant (the " Deficiency ") to Landlord in monthly installments on the days on which the Base Rent is payable under this Lease, and Landlord shall be entitled to recover from Tenant each monthly installment of the Deficiency as the same shall arise. Tenant shall also pay to Landlord upon demand the costs incurred by Landlord in curing Tenant's defaults existing at or prior to the date of such termination, the cost of recovering possession of the Premises and the Reletting Expenses. Tenant agrees that Landlord may file suit to recover any sums that become due under the terms of this Section from time to time, and all reasonable costs and expenses of Landlord, including attorneys' fees and costs incurred in connection with such suits shall be payable by Tenant on demand.

 

13.2.6            Certain Terms Defined . For purposes of this Subsection 13.2.6 , " Reletting Alterations " shall mean all repairs, changes, improvements, alterations or additions made by Landlord in or to the Premises to the extent deemed reasonably necessary by Landlord to prepare the Premises for the re-leasing following an Event of Default; and " Reletting Expenses " shall mean the reasonable expenses paid or incurred by Landlord in connection with any re-leasing of the Premises following an Event of Default, including, without limitation, marketing expenses, brokerage commissions, attorneys' fees, the costs of Reletting Alterations, tenant allowances and other economic concessions provided to the new tenant.

 

13.3          Landlord's Right to Cure Defaults . If the Tenant shall default in the observance or performance of any condition or covenant on Tenant's part to be observed or performed under or by virtue of any of the provisions of this Lease, and such default continues beyond any applicable notice and cure period or Landlord reasonably determines that an emergency exists, the Landlord, without being under any obligation to do so and without thereby waiving such default, may, after prior notice (except in the event of an emergency) remedy such default for the account and at the expense of the Tenant. If the Landlord makes any expenditures or incurs any obligations for the payment of money in connection therewith, including but not limited to reasonable attorney's fees in instituting, prosecuting or defending any action or proceeding, such sums paid or obligation incurred and costs, shall be paid upon demand to the Landlord by the Tenant as Additional Rent pursuant to Section 4.4 hereof and if not so paid with interest from its due date until paid at the lesser of eighteen percent (18%) per annum or the maximum legal rate that Landlord may charge Tenant.

 

13.4          Disposition of Tenant’s Property . In addition to Landlord’s rights under Section 8.4 hereof, Landlord shall have the right to handle, remove, discard or store in a commercial warehouse or otherwise, at Tenant’s sole risk and expense, any of Tenant’s Property that is not removed by Tenant at the end of the Term. Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all expenses incurred in such removal and all storage charges for such property so long as the same shall be in Landlord’s possession or under Landlord’s control.

 

13.5          Reletting . In connection with any reletting of the Premises following an Event of Default, Landlord shall be entitled to grant such rental and economic concessions and other incentives as may be customary for similar space in the Route 128 North submarket. Subject to applicable law, Landlord shall not be required to accept any tenant offered by Tenant or observe any instruction given by Tenant about such reletting or do any act or exercise any care or diligence with respect to such reletting or to the mitigation of damages. Notwithstanding anything in this Lease to the contrary, Landlord shall, after any termination of this Lease on account of a Default of Tenant, use commercially reasonable efforts to mitigate its damages by attempting to relet the Premises, for any term(s), and may grant market concessions or free rent to the extent that Landlord considers reasonably advisable and necessary to relet the same, and may make such reasonable alterations, repairs and decorations in the Premises as Landlord in its reasonable judgment considers advisable or necessary for the purpose of reletting the Premises. The making of such alterations, repairs and decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. The marketing of the Premises in a manner similar to the manner in which Landlord markets other premises within Landlord’s control within the Building shall be deemed to have satisfied Landlord’s obligation to use “reasonable efforts” hereunder and in no event shall Landlord be required to (i) solicit or entertain negotiations with any other prospective tenant for the Premises until Landlord obtains full and complete possession of the Premises, (ii) relet the Premises before leasing other vacant space in the Building or to show the Premises on a priority basis, or (iii) lease the Premises for a rental less than the current fair market rent then prevailing for similar office space in comparable buildings.

 

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13.6          No Accord and Satisfaction . Landlord may collect and receive any rent due from Tenant, and the payment thereof shall not constitute a waiver of or affect any notice or demand given, suit instituted or judgment obtained by Landlord, or be held to waive, affect, change, modify or alter the rights or remedies that Landlord has against Tenant in equity, at law, or by virtue of this Lease. No receipt or acceptance by Landlord from Tenant of less than the monthly rent herein stipulated shall be deemed to be other than a partial payment on account for any due and unpaid stipulated rent; no endorsement or statement on any check or any letter or other writing accompanying any check or payment of rent to Landlord shall be deemed an accord and satisfaction, and Landlord may accept and negotiate such check or payment without prejudice to Landlord's rights to (a) recover the remaining balance of such unpaid rent, or (b) pursue any other remedy provided in this Lease.

 

13.7          Claims in Bankruptcy . Nothing herein shall limit or prejudice the right of Landlord to prove and obtain in proceeding for bankruptcy, insolvency, arrangement or reorganization by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount is greater, equal to or less than the amount of the loss or damage that Landlord has suffered. Without limiting any of the provisions of this Article 13 , if pursuant to the Bankruptcy Code, as the same may be amended, Tenant is permitted to assign this Lease in disregard of the restrictions contained in Article 12 , Tenant agrees that adequate assurance of future performance by the assignee permitted under the Bankruptcy Code shall mean the deposit of cash security with Landlord in any amount equal to all Rent payable under this Lease for the calendar year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord, without interest, for the balance of the term as security for the full and faithful performance of all of the obligations under this Lease on the part of Tenant yet to be performed. If Tenant receives or is to receive any valuable consideration for such an assignment of this Lease, such consideration, after deducting therefrom (a) the brokerage commissions, if any, and other expenses reasonably designated by the assignee as paid for the purchase of Tenant's property in the Premises, shall be and become the sole exclusive property of Landlord and shall be paid over to Landlord directly by such assignee. In addition, adequate assurance shall mean that any such assignee of this Lease shall have a net worth indicating said assignee's reasonable ability to pay the Rent, and abide by the terms of this Lease for the remaining portion thereof applying commercially reasonable standards.

 

13.8          Arbitration . Any dispute arising out of or relating to Article 5 of this Lease (with respect to the issues expressly stated therein) shall be submitted to and determined in binding arbitration under the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted before and by a single arbitrator selected by the parties. If the parties have not selected an arbitrator within thirty (30) days of written demand for arbitration, the arbitrator shall be selected by the Boston office of the American Arbitration Association pursuant to the then current rules of that Association on application by either party. The arbitrator shall have authority to fashion such just, equitable and legal relief as he, in his sole discretion, may determine. The parties agree that the arbitration hearing shall be held within thirty (30) business days following notification to the parties of the appointment of such arbitrator, and that the arbitration proceedings shall be concluded within thirty (30) business days following the first scheduled arbitration hearing. Each party shall bear all its own expenses of arbitration and shall bear equally the costs and expenses of the arbitrator. All arbitration proceedings shall be conducted in the City of Boston, Commonwealth of Massachusetts. Landlord and Tenant further agree that they will faithfully observe this agreement and rules, and that they will abide by and perform any award rendered by the arbitrator and that a judgment of the court having jurisdiction may be entered upon the award. The duty to arbitrate shall survive the cancellation or termination of this Lease.

 

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13.9          Waiver of Trial By Jury . TO THE EXTENT PERMITTED BY APPLICABLE LAW, LANDLORD AND TENANT HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER IN CONTRACT, TORT OR OTHERWISE, BROUGHT BY EITHER AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, OR TENANT'S USE OR OCCUPANCY OF THE PREMISES, OR ANY SUMMARY PROCESS, EVICTION OR OTHER STATUTORY REMEDY WITH RESPECT THERETO. EACH PARTY HAS BEEN REPRESENTED BY, AND HAS RECEIVED THE ADVICE OF, LEGAL COUNSEL WITH RESPECT TO THIS WAIVER.

 

ARTICLE 14           SUBORDINATION; ATTORNMENT AND RIGHTS OF MORTGAGE HOLDERS

 

14.1          Subordination . This Lease and all of Tenant’s rights hereunder are, and shall be, subject and subordinate at all times to any mortgages or ground leases (each, a “ Mortgage ”) which may now exist or hereafter affect the Property, or any portion thereof, in any amount, and to all renewals, modifications, consolidations, replacements, and extensions of such Mortgages. This Section shall be self-operative and no further subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord or the holder of any Mortgage or its assigns or successors in interest (each such holder, a “ Mortgagee ”) may reasonably request to evidence such subordination.

 

Landlord shall use commercially reasonable efforts to deliver to Tenant a recordable agreement on the standard form then utilized by the holder of any such Mortgage hereafter affecting the Property by which such Mortgagee shall agree not to disturb Tenant's possession and occupancy of the Premises or join Tenant in any such action as a party defendant so long as Tenant is not in default in the performance or observance of any of the terms, covenants or conditions contained in the Lease beyond any applicable grace or cure period. Provided, Landlord’s inability to obtain a non-disturbance agreement shall not affect Tenant’s subordination agreement herein.

 

Landlord and Tenant confirm and agree that the form of Non-Disturbance Agreement attached hereto as Exhibit 14.1 is acceptable to Landlord and Tenant, and Landlord shall use commercially reasonable efforts to obtain an agreement in substantially such form from Landlord’s existing Mortgagee following the execution and delivery of this Lease. Provided, Landlord’s inability to obtain a signed non-disturbance agreement from its existing Mortgagee following the execution and delivery of this Lease shall not affect Tenant’s subordination agreement herein.

 

14.2          Attornment by Tenant . In the event that any such first Mortgage is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, at the option of the Mortgagee or the grantee or purchaser in foreclosure, notwithstanding any subordination of any such lien to this Lease, attorn to and become the Tenant of the successor in interest to Landlord at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, within ten (10) business days following delivery of request by Landlord, Mortgagee, or by Landlord's successor in interest and in the form reasonably requested by Landlord, Mortgagee, or by Landlord's successor in interest, any additional documents evidencing the priority or subordination of this Lease with respect to the lien of any such first Mortgage, which additional documents shall be satisfactory to Landlord, Mortgagee, and Landlord's successors in interest.

 

14.3          Limitation of Mortgagees' Liability . Notwithstanding any other provision of this Lease to the contrary, no holder of any such Mortgage shall be obligated to perform or liable in damages for failure to perform any of Landlord’s obligations under this Lease unless and until such holder shall foreclose such mortgage or otherwise acquire title to or succeed to the interest of Landlord in the Property, and then shall only be liable for Landlord’s obligations arising or accruing after such foreclosure, succession or acquisition of title. No such holder shall ever be obligated to perform or be liable in damages for any of Landlord’s obligations arising or accruing before such foreclosure or acquisition of title. Such holder’s obligations and liabilities shall in any event be subject to, and holder shall have the benefit of, Section 16.15 hereof. Tenant shall never pay the Base Rent, Additional Rent or any other charge more than ten (10) days prior to the due date thereof, and any payments made by Tenant in violation of this provision shall be a nullity as to such holder, and Tenant shall remain liable to such holder therefor. Tenant agrees on request of Landlord to execute and deliver from time to time any reasonable agreement which may be necessary to implement the provisions of this Section 14.3 .

 

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14.4          Estoppel Certificates . Tenant shall at any time, and from time to time, upon not less than ten (10) days prior written notice from Landlord execute, acknowledge and deliver to Landlord, to any prospective purchaser, or Mortgagee, a written estoppel certificate of Tenant in the form attached as Exhibit 14.4 or any other commercially reasonable form. It is intended that any such certificate of Tenant delivered pursuant to this Section 14.4 may be relied upon by Landlord and any prospective purchaser or the Mortgagee of any part of the Property.

 

14.5          Quiet Enjoyment . Upon Tenant paying the Base Rent and Additional Rent and performing all of Tenant's obligations under this Lease, Tenant may peacefully and quietly enjoy the Premises during the Term as against all persons or entities lawfully claiming by or through Landlord; subject, however, to the provisions of this Lease and to the rights of Landlord's Mortgagee.

 

14.6          Mortgagee Approval . Landlord and Tenant hereby agree that this Lease is subject to the review and approval of Landlord’s Mortgagee in accordance with the terms of the mortgage loan documents executed by Landlord in connection with its financing of the Property. Landlord shall submit this Lease to its Mortgagee promptly upon Tenant’s execution and delivery of this Lease to Landlord, and Landlord shall promptly advise Tenant of its Mortgagee’s decision.

 

ARTICLE 15           NOTICES

 

15.1          Manner of Notice .

 

15.1.1            Notices; Addresses . All notices, demands and other communications (“ notices ”) permitted or required to be given under this Lease shall be in writing and sent by personal service, telecopy transmission (if a copy thereof is also sent on the same day by a nationally recognized overnight courier service), certified mail (postage prepaid) return receipt requested or by a nationally recognized overnight courier service to the following addresses or to such other address as either Landlord or Tenant may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Section 15.1 :

 

  If to Tenant: Datawatch Corporation
  (prior to 271 Mill Road
  Commencement Chelmsford, MA 01824
  Date)  
     
  If to Tenant: at the Premises
  (after  
  Commencement  
  Date)  
     
  With copies to: Looney Cohen & Aisenberg LLP
    33 Broad Street
    Boston, MA  02109
    Attention:  James H. Cohen
     
  If to Landlord: DIV Bedford, LLC
    c/o The Davis Companies
    125 High Street, 21 st Floor
    Boston, MA 02110
    Attention:  Cappy Daume
     
  With copies to: DIV Bedford, LLC
    c/o The Davis Companies
    125 High Street, 21 st Floor
    Boston, MA  02110
    Attention:  General Counsel

 

15.1.2            Delivery . Notices shall be deemed to have been given (a) when hand delivered (provided that delivery shall be evidenced by a receipt executed by or on behalf of the addressee if delivered by personal service) if personal service is used, (b) on the date of transmission if sent before 4:00 p.m. (Boston time) on a business day when telecopy transmission is used, (c) the sooner of the date of receipt or the date that is three (3) days after the date of mailing thereof if sent by postage pre-paid registered or certified mail, return receipt requested, and (d) one (1) day after being sent by Federal Express or other reputable overnight courier service (with delivery evidenced by written receipt) if overnight courier service is used.

 

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ARTICLE 16           MISCELLANEOUS

 

16.1          Brokers . Landlord and Tenant warrant to each other that they have had no dealings with any broker, agent or finder in connection with this Lease except CB Richard Ellis and T3 Advisors (together, the “ Brokers ”) and/or representatives of Landlord. Landlord agrees to pay the commissions due to such brokerage companies pursuant to separate agreements. Both parties hereto agree to protect, indemnify and hold harmless the other from and against any and all expenses with respect to any compensation, commissions and charges claimed by any other broker, agent or finder not identified above with respect to this Lease or the negotiation thereof that is made by reason of any action or agreement by such party.

 

16.2          Building Name . The Building and the Property may be known by such name as Landlord, in its sole discretion, may elect, and Landlord shall have the right from time to time to change such designation or name without Tenant's consent upon prior written notice to Tenant.

 

16.3          Authority . If Tenant signs as a corporation, limited liability company, or a partnership, or other business entity each person executing this Lease on behalf of Tenant hereby covenants and warrants that Tenant is a duly authorized and existing entity, that Tenant is duly qualified to do business in Massachusetts, that Tenant has full right and authority to enter into this Lease, and that each person signing on behalf of Tenant is duly authorized to do so and that no other signatures are necessary. Upon Landlord's request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties.

 

16.4          Interpretation . The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. The words used in neuter gender include the masculine and feminine. If there is more than one Tenant, the obligations under this Lease imposed on Tenant shall be joint and several. The captions preceding the articles of this Lease have been inserted solely as a matter of convenience and such captions in no way define or limit the scope or intent of any provision of this Lease. This Lease may be executed in several counterparts and by each party on a separate counterpart, each of which, when so executed and delivered, shall be an original and all of which together shall constitute one instrument.

 

16.5          Modifications . Neither this Lease nor any term or provision hereof may be changed, waived, discharged or terminated orally, and no breach thereof shall be waived, altered or modified, except by a written instrument signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. Any right to change, waive, discharge, alter or modify, or terminate this Lease shall be subject to the prior express written consent of Landlord's Mortgagee to the extent required by Landlord’s financing documents and any subordination agreement entered into between Tenant and such Mortgagee.

 

16.6          Severability . If any provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and enforceable to the full extent permitted by law.

 

16.7          Entire Agreement . Landlord’s employees, representatives and agents have no authority to make or agree to make a lease or any other agreement or undertaking in connection herewith. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Premises, and this document shall be effective and binding only upon the execution and delivery hereof by both Landlord and Tenant. This Lease, including the Exhibits hereto, which are made part of this Lease, contain the entire agreement of the parties and all prior negotiations and agreements are merged herein. Neither Landlord nor Landlord's agents have made any representations or warranties with respect to the Premises, the Building, the Property, or this Lease except as expressly set forth herein, and no rights, easements or licenses are or shall be acquired by Tenant by implication or otherwise unless expressly set forth herein.

 

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16.8          No Merger . There shall be no merger of this Lease or of the leasehold estate hereby created with the fee estate in the Premises or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as well as the fee estate in the leasehold Premises or any interest in such fee estate.

 

16.9          Easements . Landlord reserves the right, from time to time, to grant easements and rights, make dedications, agree to restrictions and record maps affecting the Property as Landlord may deem necessary or desirable, so long as such easements, rights, dedications, restrictions, and maps do not unreasonably interfere with the use of the Premises by Tenant; and this Lease shall be subordinate to such instruments. Subject to the provisions of Article 14 , above, this Lease is subject and subordinate to all matters of record now existing or hereafter affecting the Property. Tenant specifically acknowledges that the Property is subject to that certain Notice of Activity and Use Limitation dated October 6, 2011 and recorded at Book 57925, Page 557 of the Middlesex South Registry of Deeds, the provisions of which are incorporated herein by reference.

 

16.10          Bind and Inure . The terms, provisions, covenants and conditions contained in this Lease shall bind and inure to the benefit of Landlord and Tenant, and, except as otherwise provided herein, their respective heirs, legal representatives, successors and assigns. If two or more individuals, corporations, partnerships or other business associations (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership or other business association to pay Rent and perform all other obligations hereunder shall be deemed to be joint and several. All agreements, covenants and indemnifications contained herein or made in writing pursuant to the terms of this Lease by or on behalf of Tenant shall be deemed material and shall survive expiration or sooner termination of this Lease.

 

16.11          Remedies Cumulative; No Waiver . No remedy or election hereunder shall be deemed exclusive, but shall wherever possible, be cumulative with all other remedies at law or in equity. No waiver of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach of the same or any other provision. No waiver of any breach shall affect or alter this Lease, but each and every term, covenant and condition of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. No reference to any specific right or remedy shall preclude the exercise of any other right or remedy permitted hereunder or that may be available at law or in equity. No failure by Landlord to insist upon the strict performance of any agreement, term, covenant or condition hereof, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach, agreement, term, covenant or condition.

 

16.12          Tenant's Financial Statements . Unless Tenant is a publicly traded company, Tenant shall, upon Landlord’s request, furnish Landlord annually, within ninety (90) days after the end of each fiscal year of Tenant, copies of the balance sheets of Tenant, as at the close of such fiscal year, and statements of income and retained earnings of Tenant for such year, prepared in accordance with generally accepted accounting principles and, if such is Tenant’s normal practice, audited by Tenant's independent certified public accountants. Landlord shall keep Tenant’s financial statements provided by Tenant pursuant to this Section 16.12 confidential other than to Landlord’s officers, directors, employees, agents, accountants, attorneys, mortgagees, or prospective mortgagees, or purchasers or prospective purchasers of Landlord’s interest in the Building, provided that such recipients hold such information confidential. Tenant also agrees to furnish to Landlord within ten (10) days following Landlord’s written request therefor (which request shall not be made more than once in any fiscal year unless made in connection with a proposed sale, financing or re-financing of the Building, re-capitalization of Landlord, or following an Event of Default), copies of such financial statements identified above as are then available and financial statements for the then current fiscal year prepared in accordance with generally accepted accounting principles and on an unaudited basis certified as true and correct by such company’s chief financial officer.

 

16.13          Attorney's Fees . If on account of any default by Tenant in Tenant's obligations under the terms of this Lease, it becomes necessary or appropriate for Landlord to employ attorneys or other persons to enforce any of Landlord's rights or remedies hereunder, Tenant shall pay upon demand as Additional Rent hereunder all reasonable fees of such attorneys and other persons and all other costs of any kind so incurred. Where the phrase “attorneys’ fees,” “legal fees” or “legal expenses” or similar phrases are used, such phrase shall specifically include the fees and expenses of the in-house legal staff of Landlord and its affiliates.

 

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16.14          Landlord Approvals . Whenever Tenant is required to obtain Landlord’s consent hereunder, Tenant agrees to reimburse Landlord all out-of-pocket expenses incurred by Landlord, including reasonable attorney’s fees in order to review documentation or otherwise determine whether to give its consent. Tenant shall pay Landlord’s invoice for any such amounts within ten (10) days following Landlord’s delivery of its invoice therefor. Any provision of this Lease which requires the Tenant to obtain Landlord’s consent to any proposed action by Tenant shall not be the basis for an award of damages or give rise to a right of setoff on Tenant’s behalf, but may be the basis for a declaratory judgment or injunction with respect to the matter in question.

 

16.15          Landlord's Liability . Tenant shall look only to Landlord’s estate in the Property (or the proceeds thereof) for the satisfaction of Tenant’s remedies with respect to any liability, default or obligation of Landlord under this Lease or otherwise regarding Tenant’s leasing, use and occupancy of the Premises pursuant hereto, including without limitation for the collection of any monetary obligation, judgment or other judicial process requiring the payment of money by Landlord. Neither Landlord nor any of its members, stockholders, officers, directors, partners, trustees, beneficiaries or employees shall be personally liable hereunder, nor shall any of its or their property, other than the Property, be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s said remedies. Landlord shall not under any circumstances be liable for any special, indirect or consequential damages of Tenant, including lost profits or revenues. No owner of the Property shall be liable under this Lease except for breaches of Landlord’s obligations occurring while such party owns the Property.

 

16.16          Time of Essence . TIME IS OF THE ESSENCE with respect to the due performance of the terms, covenants and conditions herein contained; provided , however, that no delay or failure to enforce any of the provisions herein contained and no conduct or statement shall waive or affect any of Landlord's rights hereunder.

 

16.17          Confidentiality . Tenant agrees: (a) to treat the terms of the Lease, and the terms of any existing and future amendments and modifications to the Lease (the “ Confidential Information ”) as confidential during the term of this Lease and for the three (3) year period following the expiration or sooner termination of the Lease (the “ Non-Disclosure Period ”), (b) not to disclose, directly or indirectly, to any third party nor permit any third party to have access to any or all of such Confidential Information during the Non-Disclosure Period, including, without limitation, any Property tenants and any brokers (but excluding Tenant’s agents, attorneys and accountants, provided that any disclosures to the same are held subject to the provisions of this Section 16.17 ), and (c) to indemnify, defend and hold harmless Landlord from any loss, cost, expense, damage and liability, including Landlord’s reasonable legal fees and expenses, resulting from Tenant’s breach of the foregoing confidentiality agreements. Landlord acknowledges that Tenant shall have the right to disclose such Confidential Information only to the extent that such disclosure is required by law or court order or by discovery rules in any legal proceeding. Tenant’s agreements and indemnity with respect to the Confidential Information shall survive the expiration or earlier termination of the Lease.

 

16.18          Submission . Submission of this instrument for examination does not constitute a reservation of or option for lease of the Premises, and it is not effective as a lease or otherwise until this Lease has been executed by both Landlord and Tenant and a fully executed copy has been delivered to each.

 

16.19          Governing Law . This Lease and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with the laws of The Commonwealth of Massachusetts.

 

16.20          OFAC List . Tenant represents and warrants that it is not listed, nor is it owned or controlled by, or acting for or on behalf of any person or entity, on the list of Specially Designated Nationals and Blocked Persons maintained by the Office of Foreign Assets Control of the United States Department of the Treasury, or any other list of persons or entities with whom Landlord is restricted from doing business with (“ OFAC List ”). Notwithstanding anything to the contrary herein contained, Tenant shall not permit the Premises or any portion thereof to be used, occupied or operated by or for the benefit of any person or entity that is on the OFAC List. Tenant shall provide documentary and other evidence of Tenant’s identity and ownership as may be reasonably requested by Landlord at any time to enable Landlord to verify Tenant’s identity or to comply with any legal requirement or applicable laws. Tenant acknowledges and agrees that as a condition to the requirement or effectiveness of any consent to any Transfer by Landlord pursuant to Section 12.1 , Tenant shall cause the Transferee, for the benefit of Landlord, to reaffirm, on behalf of such Transferee, the representations of, and to otherwise comply with the obligations set forth in, this Section 16.20 , and it shall be reasonable for Landlord to refuse to consent to a Transfer in the absence of such reaffirmation and compliance. Tenant agrees that breach of the representations and warranties set forth in this Section 16.20 shall at Landlord’s election be a default under this Lease for which there shall be no cure. This Section 16.20 shall survive the termination or earlier expiration of the Lease.

 

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16.21          Rent Not Based On Income . No rent or other payment in respect of the Premises shall be based in any way upon net income or profits from the Premises. Tenant may not enter into or permit any sublease or license or other agreement in connection with the Premises which provides for a rental or other payment based on net income or profit.

 

16.22          Force Majeure . In the event Landlord shall be delayed or hindered in or prevented from the performance of any act required under this Lease to be performed by Landlord by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, restricted governmental law or regulations, riots, insurrection, war or other reason of a like nature (collectively, “ Force Majeure ”), then performance of such act shall be excused for the period of the delay, and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay.

 

ARTICLE 17           INTENTIONALLY OMITTED

 

ARTICLE 18           RIGHT OF FIRST OFFER

 

18.1          Right of First Offer . Tenant shall have a one-time right of first offer (the “ Right of First Offer ”) to lease certain ROFO Space (hereinafter defined), subject to the terms and conditions of this Article 18 .

 

18.1.1            Notice Of Availability . At such time as all or any portion of the second floor space in Building 4 at the Property as shown on Exhibit 18.1.1 hereto (such space, the “ ROFO Space ”), becomes “Available” (as hereinafter defined), Landlord shall give Tenant written notice identifying the applicable portion of the ROFO Space that is Available (the “ ROFO Notice ”). The ROFO Space shall be deemed to become “ Available ” when any existing lease expires or terminates and any prior rights to lease any such ROFO Space expire or terminate, such space becomes vacant and Landlord decides to market such space to other prospective third-party tenants. The ROFO Notice shall set out the terms and conditions stated in Subsection 18.1.3 hereof as well as any material economic terms upon which Landlord would at that time offer in good faith to other possible tenants of the ROFO Space.

 

18.1.2            Conditions to Exercise . In addition to any other terms or conditions set forth herein, Tenant’s exercise of its Right of First Offer is conditioned upon Tenant’s compliance with the following requirements:

 

(a)          Tenant delivers to Landlord written notice exercising its right to lease the ROFO Space within ten (10) business days after Tenant’s receipt of the ROFO Notice, it being agreed and acknowledged by the parties hereto that in the event of any failure by Tenant to timely exercise its right to lease the ROFO Space Landlord shall have the right to lease the ROFO Space to any third party upon terms acceptable to Landlord and such third party and this Right of First Offer shall terminate;

 

(b)          Tenant is not in default under this Lease beyond all applicable notice and cure periods at the time Landlord gives the ROFO Notice and at the commencement of the lease of ROFO Space by Tenant; and

 

(c)          Tenant must lease all of the premises then being offered by Landlord in Landlord’s notice of availability of the ROFO Space.

 

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18.1.3            Terms . Except as expressly set forth in the ROFO Notice, terms and conditions, including, without limitation, the payment by Tenant of Additional Rent and other charges, shall be the same as set forth in this Lease.

 

18.1.4            Documentation . Within fifteen (15) days of receipt from Landlord, Tenant shall execute and deliver to Landlord those instruments Landlord reasonably requests to evidence any lease of ROFO Space under this Article 18 .

 

18.1.5            Subordinate . The rights of Tenant pursuant to this Article 18 are subject and subordinate to the existing rights of other tenants as of the date of the Lease and to Landlord’s right to renew or extend the term of any then-occupant of the ROFO Space.

 

18.1.6.           Personal to Tenant . The Right of First Offer may not be exercised by, or assigned or otherwise transferred to any person or entity voluntarily or involuntarily, except the Tenant named in this Lease or in connection with a Permitted Transfer.  The parties hereto agree that if Tenant assigns any of its interest in this Lease or subleases the entire Premises (or in excess of 40% of the Premises) to any person other than pursuant to a Permitted Transfer for a period in excess of three (3) years, this Right of First Offer shall terminate immediately without the need for any act or notice by either party to be effective.

 

18.1.7.           Offer of Part of ROFO Space . In the event that the ROFO Notice identifies less than all of the ROFO Space as being Available, then the Right of First Offer of Tenant shall continue solely with respect to the ROFO Space that was not offered to Tenant for lease pursuant to this Article 18 until such time as all of the ROFO Space has been offered to Tenant in accordance with this Article 18 .

 

18.2          Termination of Right of First Offer . The Right of First Offer granted hereby shall expire by its own terms twenty-four (24) months prior to the expiration of the Term.

 

[ remainder of page left intentionally blank – signatures on following page ]

 

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IN WITNESS WHEREOF , Landlord and Tenant have executed this Lease the day and year first above written.

 

    LANDLORD :
     
    DIV BEDFORD, LLC
    a Massachusetts limited liability company
     
    By:   Bedford Manager Corp., a
      Massachusetts corporation
     
      By: /s/ Richard McCready
      Name: Richard McCready
      Title: President
     
    TENANT :
     
    DATAWATCH CORPORATION, a
    Delaware corporation
     
    By: /s/ James L. Eliason
    Name: James L. Eliason
    Title: Treasurer and Chief Financial Office

 

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EXHIBIT 1.1-1

 

PLAN OF PREMISES

 

 

 

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EXHIBIT 1.1-2

 

LEGAL DESCRIPTION

 

4-18 Crosby Drive, Bedford, Massachusetts

 

EXHIBIT A

 

Legal Description

 

Real property at 4-18 Crosby Drive, in the Town of Bedford, County of Middlesex, Commonwealth of Massachusetts, described as follows:

 

Parcels 1 & 2

 

A certain parcel of land situated on the westerly side of Crosby Drive in the Town of Bedford, in the County of Middlesex, Commonwealth of Massachusetts, bounded and described as follows:

 

Beginning at a point in the westerly line of Crosby Drive at the most northerly corner of the granted premises at land now or formerly of Beacon Properties Limited Partnership, thence

 

S 16° 24'24" E a distance of Nine Hundred Ninety-Two and Fifty-Four Hundredths feet (992.54') to a point; thence
   
S 15° 54' 05" E a distance of Two Hundred Twenty-Six and Eight Hundredths feet (226.08') to a point; thence
   
S 74° 05' 55" W a distance of Twenty-Two and No Hundredths feet (22.00') to a point; thence
   
S 15° 54' 05" E a distance of Four and Three Hundredths feet (4.03') to a point; thence
   
SOUTHERLY and curving to the left along the arc of a curve having a radius of Nine Hundred Seventy and Seventy-Three Hundredths feet (970.73’), a length on One Hundred Fifty-Nine and Sixty-Nine Hundredths feet (159.69') to a point; thence
   
SOUTHERLY and curving to the right along the arc of a curve having a radius of Twenty and No Hundredths feet (20.00'), a length of Thirty-One and Four Hundredths feet (31.04') to a point; the previous six (6) courses being along the westerly line of Crosby Drive; thence
   
S 63° 35' 55" W a distance of Sixty-Five and Ninety Hundredths feet (65.90') to a point; thence
   
WESTERLY and curving to the right along the arc of a curve having a radius of Thirty and No Hundredths Feet (30.00'), a length of Thirty-Five and Fifty-Five Hundredths feet (35.55') to a point; thence
   
  And curving to the left along the arc of a curve having a radius of Four Hundred Twenty and no hundredths feet (420.00'), a length of Three Hundred Two and Eighty Hundredths feet (302.80') to a point; thence
   
N 89°49' 15" W a distance of Two Hundred Ninety-Three and Four Hundredths feet (293.04') to a point; thence
   
NORTHWESTERLY and curving to the right along the arc of a curve having a radius of One Hundred and No Hundredths feet (100.00'), a length of One Hundred Nineteen and Thirty-Six Hundredths feet (119.36') to a point at a Parcel 4; the previous five (5) courses being along the northerly line of Crosby Road; thence

 

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N 21° 25' 56” W

a distance of Five Hundred Four and Seventy Hundredths feet (504.70') to a point; thence
   
N 21° 56' 20" W a distance  of Two Hundred Eighty-Three and One Hundredth feet (283.01') to a point at Parcel 3; the previous two (2) courses by Parcel 4; thence
   
N 64°00' 04" E a distance of Sixty-Four and Forty-Three Hundredths feet (63.43') to a point; thence
   
N 41°27' 31" E a distance of One Hundred Seventy and Thirty-Three Hundredths feet (170.33') to a point at land now or formerly of Beacon Properties Limited Partnership, the previous two (2) courses by Parcel 3; thence
   
N 57° 00' 14" E a distance of Two Hundred  Ninety-Two and Thirty-Four Hundredths feet (292.34') to a drill hole; thence
   
N 58° 05' 16" E a distance of Ninety-One and Ten Hundredths feet (91.10') to a drill hole; thence
   
N 57° 40' 22" E a distance of Two Hundred Fifteen and Ninety-Nine Hundredths feet (215.99') to the Point of Beginning.

 

The above described Parcel of land contains an area of 838,376 square feet, more or less or 19.2465 acres, more or less, and is more particularly shown as Parcel 1 & 2 on a plan entitled "Plan of Land at 2-14 Crosby Drive, Bedford, Mass (Middlesex County) prepared for Bedford Business Park Limited Partnership, Scale: 50 feet to an inch, dated Nov. 1, 1996, by the BSC Group, Inc.," recorded with the Middlesex South District Registry of Deeds as Plan No. 1246 of 1996.

 

Parcel 3

 

A certain parcel of land situated off the northwesterly end of Crosby Road in the Town of Bedford, in the County of Middlesex, Commonwealth of Massachusetts bounded and described as follows:

 

Beginning at a point in the most southerly corner of the granted premises at the most westerly corner of Parcel 1 & 2 at Parcel 4; said point being Seven Hundred Eighty-seven and Seventy-One Hundredths feet (787.71') along the line separating Parcel 1 & 2 and Parcel 4 from the most northwesterly end of Crosby Road, thence

 

N 23° 06' 22" W by Parcel 4, a distance of Two Hundred Ninety-Nine and Fifty-One Hundredths feet (299.51') to a point at land now or formerly of Beacon Properties Limited Partnership; thence
   
N 59° 22' 33" E a distance of Two Hundred Nine and Ninety-Five Hundredths feet (200.95') to a point; thence
   
S 25° 23' 47" E a distance of Two Hundred Fifty and Seventy-Seven Hundredths feet (250.77') to a point at Parcel 1 & 2; the previous two (2) courses by land now or formerly of Beacon Properties Limited Partnership; thence
   
S 41° 27' 31" W a distance of One Hundred Seventy and Thirty-Three Hundredths feet (170.33') to a point; thence
   
S 64° 00' 04" W a distance of Sixty-Four and Forty-Three Hundredths feet (64.43') to the Point of Beginning; the previous two (2) courses by Parcel 1 & 2.

 

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The above described Parcel of land contains an area of 60,990 square feet, more or less, or 1.4001 acres, more or less, and is more particularly shown as Parcel 3 on a plan entitled "Plan of Land at 2-14 Crosby Drive, Bedford, Mass. (Middlesex County) prepared for Bedford Business Park Limited Partnership, scale 50 feet to an inch, dated Nov. 1, 1996 by the BSC Group, Inc." recorded with the Middlesex South District Registry of Deeds as Plan No. 1246 of 1996.

 

Parcel 4

 

All of Bedford Business Park Limited Partnership's Right, Title and Interest in and to the following described Parcel of Land:

 

A certain Parcel of land situated on the northwesterly end of Crosby Road in the Town of Bedford, in the County of Middlesex, Commonwealth of Massachusetts, bounded and described as follows:

 

Beginning at a point in the most westerly end of Crosby Road at the most southerly corner of the granted premises at the easterly line of Route 3; thence

 

N 21°25; 56" W by the easterly line of Route 3, a distance of Four Hundred Fifty-Three and Seven Hundredths feet (453.07') to a stone bound at land now or formerly of Beacon Properties of Limited Partnership; thence
   
N 21°48' 17" W a distance of Three Hundred Ninety-One and Ninety-One Hundredths feet (391.91') to a point; thence
   
N 23° 01'27"W a distance of One Hundred seventeen and Eighty-two Hundredths feet (117.82') to a point; thence
   
N 05° 17' 44" W a distance of Forty-One and Thirty-Two Hundredths feet (41.32') to a point; thence
   
N 22° 50'28" W a distance of One Hundred Seven and Nine Hundredths feet (107.09') to a point; thence
   
N 00° 22' 29" W a distance of Fourteen and Ninety-Six Hundredths feet (14.96') to a point; thence
   
N 59° 22' 23" E a distance to Twenty-Four and Fourteen Hundredths feet (24.14') to a point at Parcel 3; the previous six courses by land now or formerly of Beacon Properties Limited Partnership; thence
   
S 23° 06' 22" E by Parcel 3, a distance of Two Hundred Ninety-Nine and Fifty-One Hundredths feet (299.51') to a point at Parcel 1 & 2; thence
   
S 21° 56' 20" E a distance of Two Hundred Eighty-Three and One Hundredth feet (283.01') to a point; thence
   
S 21° 25' 56" E a distance of Five Hundred Four and Seventy Hundredths feet (504.70') to a point in the northwesterly end of Crosby Road; the previous two (2) courses by Parcel 1 & 2; thence
   
S 25°47' 26" W along the northwesterly end of Crosby Road, a distance of Fifty-Nine and Twenty-Five Hundredths feet (59.25') to the Point of Beginning.

 

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The above described Parcel of land contains an area of 46,110 square feet, more or less, or 1,0585 acres, more or less, and is more particularly shown as Parcel 4 on a plan entitled “Plan of Land at 2-14 Crosby Drive, Bedford, Mass. (Middlesex County) prepared for Bedford Business Park Limited Partnership, scale 50 feet to an inch, dated Nov. 1, 1996 by the BSC Group, Inc.” recorded with the Middlesex South District Registry of Deeds as Plan No. 1246 of 1996.

 

LESS AND EXCEPT so much of Parcel 4 as was taken by virtue of Layout No. 7652 and Order of Taking by the Massachusetts Department of Highways, for the alteration of Route 3, dated September 11, 2002, recorded in Book 36449, Page 166, as shown on Plan No. 998 of 2002, recorded therewith.

 

A portion of Parcel 4 is Registered Land as follows:

 

One-half Crosby Road opposite Lot 2, but not opposite Lot 1, as shown on a subdivision plan, as approved by the Court, filed in the Land Registration Office for the South Registry District of the Middlesex County in Registration Book 855, Page 41, with Certificate No. 144991 (Plan No. 31882B).

 

Together with benefit of that certain appurtenant easement as set forth in Easement Agreement by and between MA-Crosby Corporate Center, L.L.C. as Grantor, and Boston Properties Limited Partnership, as Grantee, dated as of May 7, 2004, recorded in Book 43035, Page 303 and filed as Document No. 1337304.

 

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EXHIBIT 1.3

 

Parking Plan

 

 

 

41  

 

 

EXHIBIT 3.1

 

WORK LETTER

 

1. Design and Construction of Finish Work . Landlord shall cause its architect, Walsh/Cochis Associates, Inc. (“ Landlord’s Architect ”), to prepare construction documents for the initial improvements to the Premises substantially consistent with the space plans and specifications dated June 5, 2015 (“ Final Concept Plans ”), the Base Building Construction for Tenant Improvements dated June 23, 2015that are attached hereto as Schedule 1.1 and Schedule 1.2 , respectively (such construction documents, as they may be modified in accordance with this Exhibit 3.1 , being referred to herein as the “ Construction Plans ”). The improvements to be performed by Landlord in accordance with the Construction Plans are hereinafter referred to as the " Finish Work ." It is agreed that construction of the Finish Work is intended to be " turnkey " and will be completed at Landlord's sole cost and expense (except as otherwise set forth in this Exhibit 3.1 ) using Building standard methods, materials and finishes , except as otherwise expressly provided in this Exhibit 3.1 . Landlord shall enter into a direct contract for the Finish Work with a general contractor selected by Landlord. In addition, Landlord shall have the right to select and/or approve of any subcontractors used in connection with the Finish Work. Following receipt of any subcontractor bids, Tenant shall be advised as to the identity of the bidders and shall be provided with the information in the final bid necessary to substantiate the amount of add/alternate costs described in the Final Concept Plans (if any). The amount of any increases in the Direct Costs of the Finish Work on account of the add/alternate items (the “ Tenant Add/Alternate Costs ”) shall be paid to Landlord within 15 days after invoice as Additional Rent. Landlord's supervision or performance of any work for or on behalf of Tenant shall not be deemed a representation by Landlord that such Construction Plans or the revisions thereto will be adequate for Tenant's use.

 

Tenant understands that time is of the essence to Landlord in causing the date of Substantial Completion to occur on or before the Target Delivery Date (as defined below). At all times, Tenant will act promptly (and in any case within three (3) business days unless a longer period of time is specified herein) on any construction-related questions or matters, including color approvals. Prior to commencing the Finish Work, Landlord shall provide Tenant with a copy of the Construction Plans for Tenant review and comment and to confirm that the Construction Plans are substantially consistent with the Final Concept Plans attached hereto as Schedule 1.1 . Landlord shall endeavor to provide the Construction Plans to Tenant no later than July 20, 2015 (subject to extension for Tenant Delay and Force Majeure). Tenant shall provide any comments to the Construction Plans to Landlord within three (3) business days following delivery by Landlord. Landlord shall respond to such comments by the date that is three (3) business days after the giving of such comments.

 

If Tenant shall fail to act in a timely fashion as required hereunder on any construction-related question or matter, then Tenant’s failure shall constitute a Tenant Delay (as defined in Section 12) and, as set forth in Section 12, Substantial Completion shall be deemed to have occurred earlier than the actual date thereof by the number of days by which Tenant’s action is delayed.

 

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2. Late Delivery . Landlord shall use commercially reasonable efforts to Substantially Complete the Finish Work on or before November 1, 2015 (the “ Target Delivery Date ”). If Landlord does not Substantially Complete the Finish Work by the Target Delivery Date, then it shall not be deemed a default hereunder and the Lease shall continue in full force and effect. Notwithstanding the foregoing, in the event that Substantial Completion does not occur by January 1, 2016, subject to extension for Tenant Delay and Force Majeure ( the “ Outside Commencement Date ”) then Tenant shall be entitled to an abatement of Base Rent equal to one (1) day for each day following the Outside Commencement Date until the Commencement Date occurs.

 

3. Change Orders . Tenant shall have the right to request revisions to the Construction Plans for any Tenant Add/Alternate Costs (any such request for a revision being referred to as a “ Change Order ”) on a form provided or otherwise approved by Landlord. Any such Change Order shall be prepared by Landlord’s Architect at Tenant's sole cost and expense. Promptly upon completion of the revisions, Landlord shall notify Tenant in writing of the estimated increased cost in the Finish Work, if any, resulting from such Change Order. Tenant, within three (3) business days, shall notify Landlord in writing whether it desires to proceed with such revisions. In the absence of such written authorization, Landlord shall have the option to continue work on the Premises disregarding the requested revision. Tenant shall be responsible for any Tenant Delay in completion of the Premises resulting from any Change Order. If a Change Order results in an increase in the cost of Finish Work, such increased costs, plus any applicable state sales or use tax thereon, shall be payable by Tenant within fifteen (15) days of demand. Notwithstanding anything herein to the contrary, all Change Orders shall be subject to the approval of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed (subject to the immediately following paragraph).

 

Landlord has no obligation to approve any Change Order if, in Landlord’s reasonable judgment, such Finish Work (i) would delay completion of the applicable Finish Work beyond the Target Delivery Date, (ii)  would materially increase the cost of operating the Building or increase the cost of performing any other work in the Building, (iii) is incompatible with the design, quality, equipment or systems of the Building, (iv)  would require unusual expense to readapt the Premises to general purpose office, or (v) otherwise does not comply with the provisions of the Lease (including, without limitation, Article 8 ). By its execution of the Lease, and submission of Change Orders, Tenant will be deemed to have approved of such Change Orders. Notwithstanding the foregoing or anything herein to the contrary, if any Change Order reasonably specifies a long lead item, such as custom cabinetry or a piece of specialized equipment, that Landlord reasonably determines could not be delivered and installed in a manner consistent with the completion of the applicable portion of the Finish Work by the Target Delivery Date, then such long lead item may be completed by Landlord following the date that all of the Finish Work is Substantially Complete without constituting a Landlord delay. Landlord shall have the right to make reasonable and non-material changes/field adjustments in and to the Finish Work to the extent that the same shall be necessary or desirable in order to adjust to actual field conditions or to cause the Finish Work to comply with any applicable requirements of public authorities and/or requirements of insurance bodies. All changes/field adjustments shall be noted on the applicable plans or documents, and such plans or documents, as noted with such changes/field adjustments, shall constitute the final as-built drawings and specifications for the Finish Work.

 

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4. Tenant Work for Certificate of Occupancy . Tenant shall substantially complete, at Tenant’s expense, in a timely manner pursuant to Landlord’s construction schedule (the “ Construction Schedule ”) as initially provided to Tenant, as the Construction Schedule may subsequently be revised from time to time by Landlord, the installation of the FF&E (as defined below) necessary to obtain a certificate of occupancy from the Town of Bedford for the Premises at Tenant’s sole cost and expense. If Tenant does not perform such work in a timely manner, then Landlord shall have the right, upon prior written notice to Tenant and a reasonable opportunity to cure, to do such work as is necessary to obtain the certificate of occupancy at Tenant’s expense. Tenant shall retain the vendors performing the work necessary to install its FF&E no later than August 7, 2015, for the purpose of enabling Landlord to cooperate with Tenant regarding the FF&E installation.

 

5. Substantial Completion of the Finish Work . The Finish Work shall be deemed “ Substantially Completed ” when Landlord’s contractor or Landlord’s Architect certifies to Landlord and Tenant in writing that: (a) the Finish Work has been completed in accordance with the Construction Plans, subject only to the Final Punchlist (defined below) and other uncompleted elements of construction, decoration, painting, millwork or other work and mechanical adjustment that will not interfere materially with occupancy by Tenant; and (b) Landlord has obtained a certificate of occupancy (or its equivalent) from the municipality permitting the lawful use and occupancy of the Premises for the purposes specified in this Lease; provided, however, that if Landlord is unable to obtain such certificate of occupancy (or its reasonable equivalent) solely by virtue of the fact that Tenant has not yet completed the installation of its FF&E (defined hereinafter) or for any other reason beyond the reasonable control of Landlord, then the Finish Work shall be deemed substantially complete upon the certification of Landlord’s Architect or contractor as stated in subsection (a), above, notwithstanding anything to the contrary in the foregoing.

 

6. Punchlist . On a date or dates reasonably specified by Landlord, Landlord’s Architect, along with Tenant, shall inspect the Finish Work and Landlord shall, jointly with Tenant, prepare a list of the customary punchlist type items, and any items of a seasonal nature, then remaining to be completed, which items shall be uncompleted elements of construction, decoration, painting, millwork or other work and mechanical adjustment that will not interfere materially with occupancy by Tenant (the “ Final Punchlist ”). Landlord shall cause such items to be completed in a diligent manner during regular business hours, but in a manner that will seek to minimize interruption of Tenant’s use and occupancy of the Premises. In any event, Landlord shall use commercially reasonable efforts to complete all punch list work within sixty (60) days (or such longer period as is reasonably required with respect to applicable items), other than matters that cannot be completed owing to their seasonal nature, and subject to extension for Force Majeure and Tenant Delays.

 

7. Final Completion; Acceptance by Tenant . Except for latent defects and uncompleted items of Finish Work specified in the Final Punchlist, Tenant shall be deemed to have accepted all elements of Finish Work on the Commencement Date. In the case of a dispute concerning the completion of items of Finish Work specified in the Final Punchlist, such items shall be deemed completed and accepted by Tenant upon the delivery to Tenant of a certificate of Landlord’s Architect or contractor certifying that such items have been completed unless Tenant disputes the determination of Landlord’s Architect that such items have been completed within five (5) days of Tenant’s receipt of such certificate. In the case of latent defects in Finish Work appearing after the Commencement Date, Tenant shall be deemed to have waived any claim for correction or cure thereof on the date that is eleven (11) months following the Commencement Date if Tenant has not then given written notice of such defect to Landlord. For the purposes of this Lease, “latent defects” shall mean defects in the construction of the Landlord Work that are not observable by visible inspection at the time the Final Punchlist is prepared. Landlord shall cause Landlord’s contractor so to remedy, repair or replace any such latent defects identified by Tenant within such eleven (11) month period, such action to occur as soon as practicable during normal working hours and so as to avoid any unreasonable interruption of Tenant’s use of the Premises. The foregoing shall constitute Landlord’s entire obligation with respect to all latent defects in the Finish Work.

 

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8. Tenant Payments For Excess Finish Work Costs . As used herein, “ Excess Finish Work Costs ” means any increase in the cost to design and construct the Finish Work (the “ Finish Work Costs ”) resulting from (i) Change Orders requested by Tenant and approved by Landlord, and/or (ii) Tenant Delay. Landlord shall invoice Tenant for Excess Finish Work Costs as incurred, and Tenant shall pay Landlord for Excess Finish Work Costs in monthly progress payments. The price for any Excess Finish Work Costs shall be equal to Landlord’s Direct Costs incurred in connection with performing the Finish Work giving rise to the Excess Finish Work Costs. “ Direct Costs ” shall mean the total cost payable by Landlord (or its general contractor) to contractors, subcontractors, materialmen, laborers, etc. (including any portions of such reasonable amounts designated subcontractor's or materialmen's profit, fee, overhead, and the like), all architect and design fees, life safety testing, additions and modifications, improvements to the structure and building base systems required to build out the Finish Work solely to the extent attributable to the Excess Finish Costs (excluding structural improvements to support FF&E above and beyond normal and customary office use, which shall be performed as Alterations subject to the provisions of Article 8 of the Lease by Tenant if required) plus all costs of insuring the Finish Work in question and all costs of obtaining permits and inspections required by governmental authorities in connection with the Finish Work to the extent attributable to the Excess Finish Costs in question. Tenant shall have no right to object to the cost of any item of Landlord’s Direct Costs after the time that Tenant has authorized Landlord to proceed with any Change Order. Landlord's invoices on account of Excess Finish Work Costs may include any materials and equipment purchased to be part of Finish Work and stored on the Property or some other location approved by Landlord and all deposits made on the purchase of such materials and equipment. Direct Costs shall include a fee equal to 4% of the hard cost of constructing the Finish Work for construction management and supervision by Landlord, which shall not be payable by Tenant except to the extent related to Change Orders.

 

9. Authorized Representative . Tim Maynes, of T3 Realty Advisors, Tenant’s Authorized Representative, shall have full power and authority to act on behalf of Tenant on any matters relating to Finish Work. Tenant may name a replacement Authorized Representative from time to time by written notice to Landlord making reference to this Exhibit 3.1 . Chris Chandor, Landlord’s Authorized Representative, shall have full power and authority to act on behalf of Landlord on any matters relating to Finish Work. Landlord may name a replacement Authorized Representative from time to time by written notice to Tenant making reference to this Exhibit 3.1 .

 

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10. Entry Prior to Commencement . If and as long as Tenant does not interfere in any way with the construction process (by causing disharmony of labor relations at the Property, scheduling or coordination difficulties, etc.), Tenant may, on a reasonable schedule prepared by Landlord and incorporated into the Construction Schedule, and at Tenant’s sole risk and expense, enter the Premises ten (10) business days prior to the then anticipated Commencement Date for the purpose of installing Tenant’s furniture, fixtures, and equipment (collectively, the “FF&E”) and at an earlier date that is mutually agreeable to Tenant and Landlord to install its telecommunications or other cabling and wiring. In no event shall the Finish Work include any FF&E, the responsibility of which shall be Tenant’s. The provisions of this Section 10 shall apply only during the period prior to the Commencement Date. Tenant acknowledges that Landlord’s ability to obtain a certificate of occupancy for the Premises depends upon the completion of all or a portion of FF&E. The installation of the FF&E shall be completed by Tenant no later than the date that is required for Landlord to Substantially Complete the Finish Work on or before the Target Delivery Date. Prior to the Commencement Date Tenant shall comply with and perform, and shall cause its employees, agents, contractors, subcontractors, material suppliers and laborers to comply with and perform, all of Tenant’s obligations under this Lease except the obligations to pay Base Rent and additional charges and other charges and other obligations the performance of which would be clearly incompatible with the installation of the FF&E. Any independent contractor of Tenant (or any employee or agent of Tenant) performing any work in the Premises prior to the Commencement Date shall be subject to all of the terms, conditions and requirements contained herein. Neither Tenant nor any Tenant contractor shall interfere (other than in a de minimis manner not affecting the schedule of the Finish Work or any other work) in any way with construction of, nor damage, the Finish Work or the common areas or other parts of the Building, and each shall do all things reasonably requested by Landlord to expedite construction of the Finish Work. Without limitation, Tenant shall require each Tenant contractor to adjust and coordinate any work or installation in or to the Premises to meet the schedule or requirements of other work being performed by or for Landlord throughout the Building. In all events, Tenant shall indemnify Landlord in the manner provided in the Lease against any claim, loss or cost arising out of any interference with, or damage to, the Finish Work or any other work in the Building, or any delay thereto, or any increase in the cost thereof on account in whole or in part of any act, omission, neglect or default by Tenant or any Tenant contractor. Without limiting the generality of the foregoing, to the extent that the commencement or performance of Finish Work is delayed in whole or in part on account of any act, omission, neglect, or default by Tenant or any Tenant contractor, then such delay shall constitute a Tenant Delay as provided herein. Any requirements of any such Tenant contractor for services from Landlord or Landlord’s contractor, such as hoisting, electrical or mechanical needs, shall be paid for by Tenant and arranged between such Tenant contractor and Landlord or Landlord’s contractor. Should the work of any Tenant contractor depend on the installed field conditions of any item of Finish Work, such Tenant contractor shall ascertain such field conditions after installation of such item of Finish Work. Neither Landlord nor Landlord’s contractor shall ever be required or obliged to alter the method, time or manner for performing Finish Work or work elsewhere in the Building, on account of the work of any such Tenant contractor. Tenant shall cause each Tenant contractor performing work on the Premises to clean up regularly and remove its debris from the Premises and Building.

 

11. Intentionally Omitted .

 

12. Tenant Delay .

 

(a) The period for performance of the Finish Work shall be extended by the number of days of actual construction delay in achieving substantial completion resulting from any “ Tenant Delay ”, meaning any delay in the design or construction of the Finish Work resulting from:

 

(i) Tenant’s failure to comply with any of the delivery dates or comment dates contained in the Lease relative to the design, planning, selection of finishes and pricing for the Finish Work;

 

46  

 

 

(ii) Tenant’s failure to provide response to requests for information, approvals or disapprovals regarding the Finish Work within five (5) business days after request by Landlord or its contractors;

 

(iii) Tenant’s requests for Change Orders, any Change Order causing a delay(unless in either case (x) Tenant agrees in writing that such work constitutes an “ Agreed Tenant Delay ”, and (y) Landlord and Tenant agree in writing to the amount of such Agreed Tenant Delay in writing prior to the approval of the applicable Change Order, provided that in no event shall Landlord have any obligation to agree to Agreed Tenant Delays in excess of ten (10) days in the aggregate), or for the inclusion of materials or installations in the construction of the Finish Work other than building standard items or items with delivery requirements that may have the effect of delaying the Substantial Completion of the Finish Work beyond the Target Delivery Date;

 

(iv) any acts, omissions, non-payment, defaults or misconduct of Tenant (or its agents, employees, design professionals, contractors, licensees or invitees) with respect to the construction of the Finish Work;

 

(v) any request by Tenant that Landlord delay the commencement of, or suspend the performance of, any Finish Work;

 

(vi) failure of Tenant to complete the installation of the FF&E in accordance with Landlord’s Construction Schedule; or

 

(vii) any interference with Landlord’s construction of the Finish Work caused by Tenant or its contractors, subcontractors or suppliers.

 

(b) Adjustment of Commencement Date . If Landlord is unable to substantially complete the Finish Work and deliver possession of the Premises to Tenant on or before the Target Delivery Date specifically identified in Section 3.1 of the Lease as a result of any Tenant Delay, the Commencement Date shall be advanced by the number of days of Tenant Delay experienced by Landlord in order to substantially complete the Finish Work and deliver the Premises to Tenant. The length of any Tenant Delay shall be the actual number of days that the Finish Work is delayed, unless such Tenant Delay shall result from Tenant’s failure to act within the time periods expressly set forth in this Work Letter, in which case such Tenant Delay shall be deemed to be one day for each day measured from the date that Tenant was required to act as set forth herein until Tenant takes the required action. If claiming an acceleration of the Commencement Date hereunder on account of any Tenant Delay, Landlord shall notify Tenant in writing of Landlord’s claimed length of such Tenant Delay(s). Unless Tenant disputes Landlord’s estimate by written notice delivered to Landlord within such two (2) business day period, Landlord’s estimate shall be deemed the conclusive determination of the length of such Tenant Delay. Notwithstanding the foregoing, the parties agree that in the event of any Agreed Tenant Delay, the length of such Tenant Delay shall be as agreed upon in writing by the parties at the time such Tenant Delay arises.

 

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13. All disputes between the parties regarding Tenant Delays and other matters expressly referencing this Section 13 shall be resolved in accordance with this Section 13. Any arbitration decision under this Section 13 shall be enforceable in accordance with applicable law in any court of proper jurisdiction. A party may not initiate arbitration under this Section 13 without notifying the other party and requesting a meeting of senior representatives to resolve the dispute. Within five (5) business days following such notice, senior representatives of Landlord and Tenant that have authority to resolve the dispute shall meet in order to seek a resolution by agreement prior to the arbitration. If the dispute is not so resolved at the meeting (or if one party does not attend) then either party may initiate arbitration. Any arbitration conducted pursuant to this Section 13 shall be conducted in expeditious manner as possible to avoid delays in the construction of the Finish Work. Within ten (10) days after either party or its affiliates requests arbitration by notice to the other, Landlord and Tenant shall seek to agree to a single arbitrator who is an independent third party real estate professional with at least twenty (20) years of experience in construction disputes involving multi-tenant, first-class, office developments that has not worked for either party for the prior five (5) years (a “ Qualified Arbitrator ”) and, if they are unable to agree, then a Qualified Arbitrator shall, upon request by wither party, be appointed by the Boston office of the AAA or successor organization. The arbitrator shall decide the dispute by written decision. The arbitration shall be conducted in the Boston office of the AAA in accordance with the Fast Track Procedures (regardless of the amount in dispute) of the Construction Industry Arbitration Rules of the AAA, as modified and/or supplemented by this Section (or any successor organization) on an expedited basis and shall be concluded, with a decision issued, no later than 10 days after the date that such dispute is submitted for arbitration. The decision of the arbitrator shall be final and binding on the parties. The parties shall comply with any orders of the arbitrator establishing deadlines for any such proceeding. The fee of the arbitrator shall be paid equally by the parties. Each party shall pay all other costs incurred by it in connection with the arbitration.

 

14. This Exhibit shall not be deemed applicable to any additional space added to the Premises at any time or from time to time, whether by any options under the Lease or otherwise, or to any portion of the original Premises or any additions to the Premises in the event of a renewal or extension of the original Term of the Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the Lease.

 

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Schedule 1.1

 

Final Concept Plans

 

 

 

49  

 

 

Schedule 1.2

 

Base Building Construction

For Tenant Improvements

4 Crosby Drive, Bedford MA

Revised 6/23/15

1. Demolition: 

As required per plan.

 

2. Interior Partitions: 

New interior walls shall be constructed of 3-5/8” x 25 Ga. metal studs at 16” O/C with 1/2” gypsum wallboard on both sides. Walls shall extend to 6” above the ceiling grid.

 

Walls surrounding conference rooms shall be constructed of 3-5/8” x 25 Ga. metal studs at 16” O/C with one layer of 1/2” gypsum board on each side. Walls to extend to underside of deck above. Provide acoustical insulation between studs. Glass wall for one main conference room and two secondary meeting rooms, not to exceed in total 33 linear feet.

 

3. Doors, Frames and Hardware: 

Provide new units as required by new layout. Exterior, egress, demising, mechanical and stairwell doors to remain. New interior doors shall consist of hollow metal frames and 3’0” x 7’0”paint grade wooden-veneer doors with passage-set cylindrical hardware.

 

One 2‘glass side light per office, small conference room, meeting room; excluding storage, server and other rooms. Glass side lights will have a 1” aluminum channel on the floor 82” recessed channel at the header.

 

4. Ceilings: 

Provide new Armstrong Cortega Second Look II 2‘x4’ ceiling tiles in 15/16” grid throughout all areas not specified as open ceiling.

 

Install drywall soffit at transition to open ceiling areas.

 

5. Floor Finishes: 

Provide new carpet at all open office areas, private offices and conference rooms, at a cost not to exceed $28 per square yard installed.

 

Provide Armstrong Standard Excelon vinyl floor tile at coffee areas, break rooms, storage rooms, server rooms and labs.

 

Provide new 4” vinyl base on all walls, except where hydronic baseboard heat exists.

 

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Base Building Construction

For Tenant Improvements

4 Crosby Drive

Revised 6/23/15

 

Page 2

 

6. Paint: 

Gypsum board walls throughout all areas shall be painted, and shall receive one primer and two finish coats of latex eggshell finish paint.

 

All doors and frames shall receive a primer and two finish coats of latex acrylic semi gloss paint.

 

Specialty paint or finishes shall be at Tenant cost.

 

7. Lighting: 

Provide new recessed 2x4 direct/indirect Lightolier Alter Classic, or equal light fixtures with T8 lamps and electronic ballast in all areas in ceiling grid.

 

Provide new building standard pendant lighting in specified open ceiling areas.

 

Each room and area shall be individually switched. Provide dual technology occupancy sensor switches at all private offices, storage rooms and conference rooms. Provide ceiling mounted dual technology sensors to control open office lighting with wall switch over ride. Provide standard toggle switches at all other areas.

 

8. Power: 

Provide dedicated 20A circuits for tenant’s open office work stations. Allow 6 work stations per 20 A circuit. Power shall be brought down existing columns or via a “power pole”.

 

Provide 2 duplex receptacles at each private office.

 

Provide 4 duplex receptacles at each conference room. One floor box for main conference room and up to three additional floor boxes per plan.

 

9. HVAC: 

Existing system diffusers and ductwork will be relocated, with new ductwork, diffusers, controls & equipment as required by new layouts. VAV and FPT count shall be approximately 1 per every 1,200 USF.

 

Existing baseboard hydronic heat to remain.

 

10. Plumbing: 

Provide an ADA compliant stainless steel sink for one kitchen or breakroom.

 

Provide electric hot water heater in ceiling for one kitchen or breakroom.

 

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Base Building Construction

For Tenant Improvements

4 Crosby Drive

Revised 6/23/15

 

Page 3

 

Plumbing for appliances and water purification systems shall be at Tenant’s cost.

 

11. Fire Protection: 

Existing sprinkler system is to be modified as required by new layouts.

 

12. Life Safety: 

Modify and add to existing emergency lighting (wall hung), exit signs, fire extinguishers and fire Alarm horn/strobe units as required by new layouts.

 

13. Misc: 

Provide up to 10’ linear plastic laminate clad base and wall cabinets and counter for one kitchen or breakroom.

 

Provide one dishwasher.

 

Landlord will provide blocking and electric outlet box for main conference room.

 

Blinds will be repaired, cleaned or replaced as necessary.

 

14. Work not included: 

Installation of telephone and computer wiring, tel/data outlets.

 

Supplemental HVAC system for any specialty room (e.g. server room).

 

Furnishings including desks, chairs and open office work stations, folding partition walls, and custom millwork.

Security equipment and systems.

 

Tenant Signage

 

Appliances (excluding dishwasher)

 

Projection screens or monitors

 

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Base Building Construction

For Tenant Improvements

4 Crosby Drive

Revised 6/23/15

 

Page 4

 

Responsibility Matrix

 

Category   Description   Lessor
Cost 		  Lessee
Cost
Misc. Metals   UPS/Structural Support       X
             
Finish Carpentry   Cabinets and counters in kitchen   X    
             
    Reception desk       X
             
    Adjustable wall shelving       X
             
    All other millwork       X
             
Doors/Frames   Building standard lessee entry   X    
             
    Hollow metal frame and 3’0” x 7’0 ’ paint grade  Wooden-veneer doors   X    
             
    Welded metal frame   X    
             
    Stain grade doors       X
             
    Interior glass doors       X
             
    Glass sidelights   X    
             
Hard ware   Passage leversets   X    
             
    Locking leversets, interior       X
             
    Locking lever sets, lessee entry   X    
             
Drywall   Interior/office partitions to 6” above ceiling grid     X    
             
    Conference room partitions to deck above   X    
             
    Demising wall to underside of deck above   X    
             
    Drywall ceilings       X
             
    Drywall soffits at transition to open ceiling areas   X    

 

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Base Building Construction

For Tenant Improvements

4 Crosby Drive

Revised 6/23/15

 

Page 5

 

Category   Description   Lessor
Cost 		  Lessee
Cost
Acoustic Ceilings   Building standard Armstrong Cortega Second Look II 2’x4’ ceiling tiles in all areas not specified as open ceiling   X    
             
    Insulation above ceiling       X
             
    Drywall ceilings in offices, reception area, conference rooms       X
             
Flooring   Provide carpet at all open office areas, private offices, and conference rooms, at a cost not to exceed $28 per square yard installed.   X    
             
    VCT in kitchen area, utility room(s) including storage, copy and IT rooms   X    
             
    Vinyl base   X    
             
    Wood base       X
             
    Special Flooring       X
             
Wall Finishes   Paint walls 2 coat latex eggshell   X    
             
    Paint doors and frames 2 coats latex semi-gloss   X    
             
    Paint soffits/ceilings   X    
             
    Wallcovering, specialty paint or other finish      
             
    Wood paneling       X
             
Equipment/Specialties   Purchase and installation of projection screens       X
             
    Purchase and installation of "white boards'       X

 

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Base Building Construction

For Tenant Improvements

4 Crosby Drive

Revised 6/23/15

 

Page 6

 

Category   Description   L essor
Cost 		  Lessee
Cost
    Dishwasher for one kitchen or break room   X    
             
    Purchase and installation of appliances       X
             
    Fire extinguishers   X    
             
    Interior Lessee signage/Logo       X
             
    Folding Partition Walls       X
             
Fire Protection   Sprinkler loop   X    
             
    Pre-Action System       X
             
    Relocating and adding sprinkler heads   X    
             
Electrical   Recessed office and open area lighting   X    
             
    Pendant lighting in open ceiling area   X    
             
    Accent lighting       X
             
    One light switch per room/ 2 per conference room   X    
             
    Emergency and exit lighting   X    
             
    Standard fire alarm devices   X    
             
    Two duplex receptacles per office   X    
             
    Four duplex receptacles in conference room(s)   X    
             
    One quad receptacle in kitchenette data closet and copy room   X    
             
    One GFI receptacle in kitchenette   X    
             
    Dedicated outlets for printers and copiers   X    
             
    Furniture connections (whip)   X    

 

55  

 

 

Base Building Construction

For Tenant Improvements

4 Crosby Drive

Revised 6/23/15

 

Page 7

 

Category   Description   Lessor
Cost 		  Lessee
Cost
HVAC   Re-use, relocate existing ductwork and diffusers.   X    
             
    Install additional ductwork/distribution, VAVs and FPTs as appropriate for the new layout. 1 per 1,200 USF   X    
             
    Provide independent units for server or specialty rooms.       X
             
Security   Keying of Lessee entries   X    
             
    Card access for tenant entry.       X
             
    Interior keying of space       X
             
    CCTV       X
             
Telecommunications   Furniture connections       X
             
    Tele/Data/Furniture design       X
             
    Hire telephone and data vendor and installation of all Tele/Data equipment       X
             
    Cable TV       X
             
Design Sen ices   Architectural and engineering services for Lessor Scope by Lessor's architect   X    
             
Glass wall   Glass wall for one main conference room and two secondary meeting rooms, not to exceed in total 33 linear feet.   X    
             
Plumbing   Supply or re-use and relocate stainless steel single-bowl sink in one kitchen or brcakroom   X    

 

56  

 

 

Base Building Construction

For Tenant Improvements

4 Crosby Drive

Revised 6/23/15

 

Page 8

 

Category   Description   Lessor
Cosl 		  Lessee
Cost
HVAC   Re-use, relocate existing ductwork and diffusers.   X    
             
    Install additional ductwork/distribution. VAVs and FPTs as appropriate for the new layout. 1 per 1,200 USF   X    
             
    Provide independent units for server or specialty rooms.       X
             
Security   Keying of Lessee entries   X    
             
    Card access for tenant entry.       X
             
    Interior keying of space       X
             
    CCTV       X
             
Telecommunications   Furniture connections       X
             
    Tele/Data/Furniture design       X
             
    Hire telephone and data vendor and installation of all Tele/Data equipment       X
             
    Cable TV       X
             
Design Services   Architectural and engineering services for Lessor Scope by Lessor's architect   X    
             
Glass wall   Glass wall for one main conference room and two secondary meeting rooms, not to exceed in total 33 linear feet.   X    
             
Plumbing   Supply or re-use and relocate stainless steel single-bowl sink in one kitchen or breakroom   X    

 

 

57  

 

 

EXHIBIT 6.1

 

CLEANING SPECIFICATIONS

 

CLEANING SPECIFICATIONS

 

TENANT AREAS

 

Frequency   Service Description
     
Nightly   Dust sweep hard surfaces flooring.
     
Nightly   Damp mop hard surfaced flooring to remove spills and stains.
     
Nightly   Vacuum carpeted areas and rugs.  Spot dean stains.
     
Nightly   Empty wastepaper baskets and waste receptacles, etc.  Replace plastic liners in wastebaskets,
     
Nightly   Remove waste paper and waste materials to designated area in the building using janitor carriages.
     
Nightly   Dust and wipe clean windowsills, filing cabinets, table, bookcases, shelves and ledges.  Rotating areas of the building to complete dusting all areas weekly.
     
Nightly   Spot clean to remove dirt, finger marks, smudges, etc. from doors, switch plates, light switches, wall and glass areas adjacent to doors, push plates, handles, railing, etc.
     
Nightly   Clean and sanitize drinking fountains and water coolers.
     
Weekly   Dust baseboards, chair rails, trim, molding and other "low-dust" areas.  Rotating areas of the building to complete weekly.
     
Once every    
Three Months   Perform high dusting which includes the following:  
     
    Dust pictures, frames, charts, graphs and similar wall hangings not reached in nightly cleaning.
     
    Dust partitions, ventilating louvers and vents, walls, trim, etc. not reached in nightly cleaning.
     
    Dust tops of cabinets, files, etc. not reached in nightly cleaning.

 

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CLEANING SPECIFICATIONS

 

ELEVATOR LOBBIES AND PUBLIC CORRIDORS

 

Frequency   Service Description
     
Nightly   Dust sweep hard surfaced flooring.
     
Nightly   Wash tile flooring.
     
Nightly   Vacuum carpeting.
     
Nightly   Dust baseboards, trim, louvers, pictures, charts, graphs, doors etc. within reach.
     
Nightly   Remove dirt, finger marks, smudges, etc., from doors, door frames, walls switch plates, light switches, glass, push plates, handles, railings, molding, trim, pictures, etc.
     
Weekly   Do high dusting within normal reach.

 

MAIN ENTRANCE LOBBY

 

Frequency   Service Description
     
Nightly   Dust sweep and wash hard surfaces flooring.
     
Nightly   Floor mats are to be vacuumed.
     
Nightly   Vacuum carpeting.
     
Nightly   Dust baseboards, trim, louvers, molding, pictures, charts, planters, furnishings, guard stations and all other fixtures.
     
Nightly   Clean and rub down building directory, mail depository and all other decorative metal.
     
Nightly   Clean all entrance door glass.
     
Nightly   Empty and clean all waste receptacles and remove waste material to designated areas in the building.

 

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CLEANING SPECIFICATIONS

 

ELEVATORS

 

Frequency   Service Descriptions
     
Nightly   Floor In elevator cabs will be properly maintained.  If carpeted, vacuum and spot clean; if hard-surfaced, sweep and wash.
     
Nightly   Clean and polish doors, inside and outside.
     
Nightly   Clean elevator saddles, door tracks, etc., keeping them free from dirt and debris: polish regularly as needed.
     
Nightly   Hand clean and polish baseboards, trim, railings, etc.
     
Nightly   Keep walls, panels, etc. dean and free from fingermarks and smudges: polish as needed using appropriate wood or metal polish.

 

STAIRWAYS

 

Frequency   Service Descriptions
     
Nightly   Police stairwells and remove trash and debris.
     
Weekly   Sweep stairs and landing: dust handrails, stringers, newels and risers, etc.
     
Quarterly   Wash stairs and landings.

 

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CLEANING SPECIFICATIONS

 

LAVATORIES

 

Frequency   Service Descriptions
     
Nightly   Sweep and wash flooring with approved germicidal detergent solution.
     
Nightly   Wash and polish mirrors, shelves, bright work, etc.  Including flush meters, piping and toilet seat hinges.
     
Nightly   Wash both sides of toilet seats, wash basins, bowls, and urinals with approved germicidal detergent solution.
     
Nightly   Dust and wipe dears partitions, tile walls, dispensers, doors, receptacles, etc. with special attention to areas behind sinks and around urinals, etc., remove graffiti.
     
Nightly   Fill toilet tissue, soap, and towel and sanitary napkin dispensers to full capacity with supplies.
     
Nightly   Empty and clean towel and sanitary disposal receptacles and remove waste material and refuse to a designated area In the building using Janitor carriages.
     
Monthly   Wash partitions, tile walls and enamel painted surfaces with approved germicidal detergent solution.

 

 

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CLEANING SPECIFICATIONS

 

Frequency Service Description

 

Keep locker rooms, service closets, Janitor closets, etc. in neat and clean condition at all times.

 

Employees are to sign in and out for each shift works.

 

At the conclusion of all work assignments, lights are to be turned off, doors and windows closed and locked and premises left In neat and orderly condition.

 

Carpet Cleaning Program

 

Annually Rotary shampoo and extract all common area carpeting including cafeteria eating area, locker rooms, common entrances, common lobbies, common hallways, elevators, etc.

 

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EXHIBIT 7.4

 

RULES AND REGULATIONS

 

1. ALL TENANTS are to conduct their businesses in a manner that shall not unreasonably annoy, disrupt or otherwise interfere with the rights of other tenants in the building.

 

2. At no time and under no circumstances shall Landlord have any responsibility for the storage or removal of any “medical waste”, “infectious waste”, “hazardous medical waste”, “hazardous physical waste” as such terms may from time to time be defined in any municipal, state, or federal statutes, laws, ordinances, rules, or regulations or may apply to Tenant or to the premises demised to Tenant because of the business, profession or activity carried on in the demised premises by Tenant, Tenant’s servants, agents, employees, invites, or anyone claiming by, through or under Tenant.

 

3. The sidewalks, entrances, passages, elevators, lobbies, stairways, and halls must not be obstructed or used for any purpose other than ingress to and egress from any leased premises.

 

4. Emergency egress stairway doors may NOT be “propped-open” for any reason. These stairways are for egress only and the stairway doors may be locked from the stair-side to prevent unwanted intrusion into the building.

 

5. Tenant shall operate hvac equipment in a manner that is consistent with standards prescribed by building management. Tenant shall be responsible for any damage which may occur from improper operation such as leaving a thermostat at its lowest setpoint for an extended period of time causing a coil to freeze. Please check with building management to confirm proper operating procedures. There are to be NO supplemental heaters or heating elements within tenant spaces. Use of such devices presents a fire hazard.

 

6. High intensity or accent lighting (holiday lighting, candles, heat lamps, etc.) is NOT PERMITTED , as it presents fire hazards.

 

7. As required by local ordinances, Lessor shall, from time to time, test the building’s fire control and alarm systems. Lessee shall cooperate in familiarizing its employees with such fire alarm systems and shall make each of its employees aware of the fire exits within the Premises and shall cooperate with any fire drills, systems, test, inspections and/or repairs as may be required from time to time.

 

8. Building access, Loading Area access and transportation of materials, equipment, furniture, or supplies into and/or through the building must be scheduled, through the Management Office or Tenant Services Coordinator, to take place during non-business hours. (See “LOADING AREA RULES & REGULATIONS”, below)

 

9. Any equipment, computers, furniture, or items being removed from the building must be accompanied by a Property Removal Request (i.e., on tenant’s letterhead, with authorization evidenced by tenant’s Office Manager’s signature)

 

10. Each tenant must provide the Property Management Office with a key to access its suite(s). Each key will be kept, by the Property Manager, in a secure, locked, key box. Each time a suite is re-keyed, a new key must be provided to the Property Management Office. Whenever possible please notify Management Office prior to re-keying so building key systems can be maintained.

 

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No additional locks or bolts of any kind shall be placed upon any of the doors or windows by Tenant, nor shall any changes be made in existing locks or the mechanism thereof without the prior written consent of the Landlord, which shall not be unreasonably withheld. Tenant must, upon the termination of its tenancy, restore to Landlord all keys of stores, shops, booths, stands, offices and toilet rooms, either furnished to or otherwise procured by Tenant; and in the event of the loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof.

 

11. There are no animals/pets of any kind (leashed, caged, muzzled) allowed into the building, with exception for service animals.

 

12. To avoid damage to the building’s plumbing system or to prevent plumbing blockages, restroom trash receptacles (and NOT the toilets) are to be used for disposing of all paper towels, sanitary napkins, and objects foreign to toilet/plumbing systems. Damage resulting to any such fixtures or appliances from misuse by Tenant or its agents, employees, or invitees, shall be paid for by Tenant, and Landlord shall not in any case be responsible therefore.

 

13. Parking in Fire Lanes, except for medical and emergency vehicles is PROHIBITED BY LAW. All other vehicles are subject to being towed at the owner’s expense.

 

14. All plans for proposed improvements to a tenant’s demised premises and any contractor proposed by a tenant must be approved in advance by Davis Management Co. (See Construction Rules.)

 

15. No Tenant may display any type of advertisements that would alienate site visitors or customers from another tenant’s business.

 

16. Construction Rules and Regulations must be adhered to through the construction/improvement process (plan approval, permitting, insurance, delivery & construction scheduling, building access, alarm shut downs, inspections, and occupancy permit). See separate Construction Rules & Regulations.

 

17. No trash or debris can be stored within tenant areas that might result in rodent infestation. All food, fluid, or wet trash must be disposed of in the site trash compactor at the close of business each day. All trash and debris generated by Retail Tenants must be disposed of appropriately in the trash compactor.

 

18. No Lessee shall mark, paint, drill into, or in any way deface any part of the Demised Premises or the building of which they form a part. No boring, cutting, or stringing of wires shall be permitted, except with the prior written consent of the Lessor, and as the Lessor may direct.

 

19. No space in the building, except as provided in individual leases, shall be used for manufacturing, for the storage of merchandise, or for the sale of merchandise, goods, or property of any kind at auction.

 

20. Delivery carts, hand trucks and similar devices must be properly equipped with rubber tires and protective guards. Lessee shall be held strictly responsible for any damage to the Premises caused by Lessee’s vendors, suppliers, agents or delivery services.

 

21. No Lessee shall occupy or permit any portion of the Demised Premises to be occupied for the possession, storage, manufacture or sale of liquor, narcotics or drugs, or any other illegal substance of any kind.

 

22. Lessor shall have the right to prohibit any advertising by any Lessee which, in Lessor’s opinion, tends to impair the reputation of the building or its desirability as a building for offices, and upon written notice from Lessor, Lessee shall refrain from or discontinue such advertising. Lessee shall not use the name of the building or its owner in any advertising without the express prior written consent of the Lessor.

 

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23. No Lessee shall install or permit the installation or use of any machines dispensing goods for sale, including without limitation foods, beverages, cigarettes or cigars without first notifying Lessor.

 

24. Canvassing, soliciting and pedaling in the building are prohibited and each Lessee shall cooperate to prevent the same by notifying the Lessor. Lessor reserves the right to inspect any parcel or package being removed from the building by Lessee, its employees, representatives and business invitees.

 

25. The main entrance, lobbies, passages, corridors, elevators and stairways or any exterior portions of the Site shall not be encumbered or obstructed by Tenant, Tenant’s agents, servants, employees, licensees or visitors. The moving in and out of all safes, freight, furniture, or bulky matter of any description must take place during the hours which Landlord may determine from time to time. Landlord reserves the right to inspect all freight and bulky matter to be brought into the Building and to exclude from the Building all freight and bulky matter which violates any of these Rules and Regulations or the Lease of which these Rules and Regulations are part.

 

26. Except as otherwise expressly set forth in the Lease, no curtains, blinds, shades, screens, or signs other than those furnished by Landlord shall be attached to, hung in, or used in connection with any exterior window or suite entry door of the Premises without the prior written consent of the Landlord.

 

27. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of any merchandise or materials which require the use of elevators, stairways, lobby areas, or loading dock areas, shall be restricted to reasonable hours designed by Landlord. Such activity may be supervised by Landlord and performed in the reasonable manner stated by Landlord. Landlord may prohibit any article, equipment, or any other item from being brought into the Building that would violate this Lease. Tenant is to assume all risk for damage to articles moved and injury to any persons resulting from such activity. If any equipment, property, and/or personnel of Landlord or of any other tenant is damaged or injured as a result of or in connection with such activity, Tenant shall be solely liable for any and all damage or loss resulting therefrom.

 

28. Landlord shall have the power to prescribe the weight and position of safes and other heavy equipment or items, which in all cases shall not in the opinion of Landlord exceed acceptable floor loading and weight distribution requirements. All damage done to the Building by the installation, maintenance, operation, existence or removal of any property of Tenant shall be repaired at the expense of Tenant.

 

29. Common area corridor doors, when not in use, shall be kept closed.

 

30. No flammable, explosive, or dangerous fluid or substance shall be used or kept by Tenant in the Premises or Building, except for those substances as are typically found in similar premises used for general business office purposes and are being used by Tenant in accordance with all applicable laws, rules, and regulations. Tenant shall not, without Landlord’s prior consent, use, store, install, spill, remove, release or dispose of within or about the Premises or any other portion of the Property, any asbestos-containing materials or any solid, liquid or gaseous material now or hereafter considered toxic or hazardous materials under the provisions of any applicable environmental law which may now or hereafter be in effect. If Landlord does give written consent to Tenant pursuant to the foregoing sentence, Tenant shall comply with all applicable laws, rules and regulations pertaining to and governing such use by Tenant, and shall remain liable for all costs of cleanup or removal in connection therewith. Tenant shall supply building management with current Material Safety Data Sheets along with maximum quantities of materials stored on site.

 

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31. Tenant shall not use or occupy the Premises in any manner or for any purpose which would injure the reputation or impair the present or future value of the Premises or the Building; without limiting the foregoing, Tenant shall not use or permit the Premises or any portion thereof to be used for lodging, sleeping or for any illegal purpose.

 

32. Tenant shall not take any action which would violate Landlord’s labor contracts affecting the Building or which would cause any work stoppage, picketing, labor disruption or dispute, or any interference with the business of Landlord or any other tenant or occupant of the Building or with the rights and privileges of any person lawfully in the Building. Tenant shall take any actions necessary to resolve any such work stoppage, picketing; labor disruption, dispute or interference and shall have pickets removed and, at the request of Landlord, immediately terminate at any time any construction work being performed in the Premises giving rise to such labor problems, until such time as Landlord shall have given its written consent for such work to resume. Notwithstanding the foregoing, Landlord acknowledges and agrees that Tenant, at its sole discretion, shall have the right to select the clients to whom it agrees to provide legal services and in no event shall Tenant be liable to Landlord or be required to terminate any such representation as a result of any work stoppage, picketing, labor disruption, dispute or interference that arises out of such representation.

 

33. Tenant shall not install, operate or maintain in the Premises or any other area of the Building, any electrical equipment which does not bear the U/L (Underwriters Laboratories) seal of approval (unless Tenant shall supply the Landlord with documentation evidencing the safety and capacity of such non U/L approved equipment), or which would overload the electrical system or any part thereof beyond its capacity for proper, efficient and safe operation as reasonably determined by Landlord, taking into consideration the overall electrical system and the present and future requirements therefore in the Building. Tenant shall not furnish any cooling or heating to the Premises, including, without limitation, the use of any electronic or gas heating devices, without Landlord’s prior written consent which shall not be unreasonably withheld.

 

34. All vendors to be contracted by the Tenant in advance must be approved in advance by building management and comply with insurance requirements if deemed appropriate by building management. (See insurance requirements, below.) Construction vendors must comply with Construction Rules, see attached. Contractor and contractor’s sub-contractors must check in with building management, 978-815-4722 or 617-875-5441 upon each daily arrival to the building.

 

35. For daily maintenance service calls, or general tenant requests, questions, or concerns please contact the Tenant Services Coordinator, Kate Somers, at: (781) 272-4212. Alternatively, tenants may use the web based service request system. Please contact building management for specific instructions and to receive a tenant specific password.

 

36. Tenants shall adhere to and familiarize their employees with building safety and evacuation plans as furnished and modified by the Property Manager. In the event of any building/site-related Emergency, please contact the Tenant Services Coordinator (781)-272-4212. or the Emergency line at (617)-451-1300 x265.

 

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37. The Contractor shall purchase from and maintain in a company lawfully authorized to do business in the Commonwealth of Massachusetts insurance for protection from claims under workers’ or workmen’s compensation acts and other employee benefit acts which are applicable, claims for damages because of bodily injury, including death, and from claims for damages, other than to the work itself, to property which may arise out of or result from the Contractors operations, whether such operations be by the Contractor or by a Subcontractor or anyone directly or indirectly employed by any of them. This insurance shall be of the types and within minimum limits or liability as follows: Worker’s Compensation $500,000, Comprehensive General Liability $1,000,000 per occurrence, $2,000,000 aggregate. Automobile liability insurance on any vehicle used by Contractor in the performance of the services specified herein with combined single limit coverage of not less than $1,000,000. Please contact Tenant services Coordinator 617-451-2660 for landlord additional insured entities which must be named on each certificate of insurance. Certificates of such insurance shall be filed with the Management Company prior to the commencement of the Work.

 

The tenant shall maintain insurance coverage as required in the lease. Please contact Tenant Services Coordinator (781)-272-4212 for landlord additional insured entities which must be named on each certificate of insurance.

 

38. Access to certain Electric Room and Janitors’ Closets may be restricted. During normal business hours, access to these areas may be arranged by contacting the Tenant Service Coordinator (see “Work Orders & Service Requests”, below). After hours access to these areas is available by prior arrangement. Please note: these rooms are not to be used for storage of any items, and any items found stored in these rooms will be disposed of at a cost to the responsible tenant.

 

39. Cleaning of office suites is performed strictly in accordance with requirements outlined in each respective lease. Cleaning of any restrooms, exam rooms, laboratories, kitchens, and/or food preparation areas within a tenant’s suite, unless provided for specifically within the terms of the lease, is outside of the Landlord’s cleaning obligations and will require a separate agreement between tenant and an independent cleaning contractor (or be performed by tenant, directly).

 

40. Tenants shall not store or keep flammable fluids or solvents in their leased premises unless permitted by their lease. Please see item #30.

 

41. 4-18 Crosby Drive garage parking is only for those tenants who have parking privileges in their lease. Additional garage or surface parking spaces may be available from time to time on a TAW basis. Please check with the management office for availability. Tenants and their visitors shall obey all parking regulations.

 

42. Bicycles and other vehicles are not permitted inside or to be parked on the walkways outside the Building. Bicycle parking is available at the bicycle racks and cage inside the garage.

 

43. Tenant shall carry out Tenant’s permitted maintenance repairs, alterations and improvements in the Premises only during reasonable times agreed to in advance by Landlord and in a manner which will not interfere with the rights of other tenants in the Building.

 

44. Lessee shall inform its employees and visitors of the laws and ordinances of the Town/City of Bedford relating to prohibition of smoking. No smoking will be allowed anywhere inside the building.

 

45. NO natural holiday decorations (trees, wreaths, evergreens decorations, etc.) are allowed within the building. All such items are categorized by the Bedford Fire Department as fire hazards.

 

46. A building directory will be maintained at the front of the building at the expense of the Lessor and the number of such listings shall be at the discretion of Lessor. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted, or affixed by any Lessee on any part of the outside or inside of the Demised Premises or building without the prior written consents of the Lessor. In the event of the violation of the foregoing by any Lessee, Lessor may remove same without any liability, and may charge the expense incurred by such removal to the Lessee or Lessees violating this rule. Standard directory tablets shall be inscribed painted or affixed for each Lessee, at Lessor’s one-time expense per tenant, and shall be provided in Lessor’s size, color and style.

 

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47. Normal Business Hours are Monday through Friday between the hours of 7:00 a.m. and 6:00 p.m., holidays excluded. During normal business hours the main lobby will be open and monitored by security.

 

48. Outside normal business hours the building will be locked. In order to gain access to the building, Tenants will be required to use their building access cards.

 

49. Access Cards may be requested from Kate Somers, Tenant Service Coordinator, in writing, on company letterhead, by fax or electronically, as follows:

 

  · By FAX: 617-451-3604
  · By E-Mail: ksomers@thedaviscompanies.com

 

Each request for an Access Card must be submitted by authorized tenant-representatives and must provide, at a minimum, the following information:

· The full name(s) of the individual(s) for whom access is being requested;
· The specific building/door(s) for which access is being requested;
· The make(s), model(s) and license plate(s) state and number for any vehicle(s) each applicant may park at the building;
· The full name and signature of the authorized individual requesting the Access Card(s).

 

50.   The building has a loading area which is available for tenant use.

 

a.           Operational Hours 7:00 a.m. through 5:00 p.m. Monday through Friday and 7:00 a.m. for deliveries and removals. Use of the loading dock outside these hours can be arranged at tenant cost for building personnel to open and secure the loading dock as necessary.

 

b.           Requests for Loading must be pre-scheduled, 48 hours in advance, through the Property Management Office. Use of the Loading Area for staging deliveries, which might conflict with other scheduled deliveries, will not be permitted.

 

c.           Any shipping, packing, staging, rigging, building protection materials generated as part of a delivery must be cleaned-up and removed by the delivery company or by the tenant responsible for receiving the delivery, otherwise such tenant will be charged with the associated disposal costs.

 

51. Handicapped Parking Spaces are for those who need them and have the appropriate license plates or vehicle identification. Any abuse of handicapped parking spaces may be reported directly to The Property Management Office.

 

52. Visitor parking is allowed only for visitors of specific tenants.

 

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CONSTRUCTION RULES

(Revised 5/20/14)

 

Section I

BUILDING STANDARDS

 

These guidelines provide the standards to be followed for any construction in the building. Also listed are the responsibilities of both the Contractor and the Tenant for construction of leased premises. Questions and comments are invited. Please address them to Landlord:

 

c/o The Davis Companies

Attn: Jason Biedrzycki

Senior Property Manager

125 High Street 21 st Floor

Boston, MA 02110

Or Contact

(617) 451-1300

Assistant Property Mgr. Ron Dorazio

617-875-5441

 

GENERAL

Contractor understands the building is occupied by tenants and will use best efforts to not interrupt the work of others or create an unpleasant situation for current occupants. Disruption of tenant’s production process will result in substantial claims against the contractor. Contractor shall not store supplies or equipment in public area or common areas and shall leave all public/common areas clean each night. Primary construction access shall be through the east entry.

 

In addition, contractor will clean common areas and driveway/pavement areas of any material that is tracked onto common areas and pavement from its operation and use best efforts to keep dust down. Contractor will coordinate its work within tenant spaces to minimize disruption and will seek property manager’s approval of methods for this work.

 

Contractor acknowledges and understands that he will be working around existing tenants and new tenant equipment, inventory and personnel and will take every precaution to prevent injury and/or claim.

 

Contractors must provide all of their own equipment, tools, phones, etc. Building equipment is not available to the contractors.

 

Contractor and Contractor’s sub-Contractors must check in with building management, Ron: 617-875-5441 or Doug: 617-592-0719 upon each daily arrival to the building.

 

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PLANS

All plans are subject to prior approval by building management. Contractor shall provide building management with copies of all construction plans as approved by the Town of Bedford along with copies of all as-built drawings.

 

BUSINESS HOURS

General Business Hours for the building are Monday through Friday 8AM to 5PM.

 

DISTURBANCE

Work shall be scheduled so as not to disturb surrounding tenants in any way. Knowingly offensive work such as coring, oil painting, polymix, sawing, or any operation which can cause noise or odor disturbances to other tenants shall be conducted during non-business hours.

 

Demolition shall be conducted during non-business hours only. Demolition debris is to be placed in hampers and covered during transport from the work area to the disposal area and removed from the premises during non-business hours only.

 

Common area work shall be conducted during non-business hours.

 

Contractor shall at all times minimize noise or activities which may be disturbing to residential neighbors , i.e. trucking activities, light testing, alarm testing, etc.

 

Radios are not allowed.

 

Smoking is not permitted anywhere inside the building.

 

ELEVATORS

Contractor shall not exceed elevator loading limits and will be held responsible for any repairs necessitated due to overloading.

 

At all times, building elevator pads must be used by construction personnel to protect the elevators. Building Management shall be notified 24 hours in advance of intended use of elevators for construction purposes. Extended use of the elevator for construction purposes shall not be allowed during business hours.

 

TRASH AND DEBRIS

Removal of trash and debris shall be conducted during non-business hours. Placement of dumpsters is to be arranged with building management. The building dumpsters are not available for construction use.

 

DELIVERIES

Delivery of any bulk stock or materials is to be scheduled with building management 24 hours in advance. In most cases, bulk stock deliveries will be permitted only during non-business hours.

Delivery vehicles which do not fit into the loading zone, i.e. tractor trailers, large flat beds, etc., are not permitted in the parking lot during business hours.

 

FIRE ALARM AND SPRINKLER

The building is sprinkler-ready in compliance with the Massachusetts State Building code. Alterations to the existing sprinkler system or changing of head placement requires Landlord approval. All work must comply with the State Building Code as required.

 

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The building(s) are equipped with multi-zone smoke detection and fire alarm systems. Capacity will be provided to our audible fire alarm system and connection points per floor for code required devices. The electrical contractor must coordinate final tie-in with the building alarm company and the Management Office. A 48-hour advance notice is required. The Tenant is responsible for any costs incurred, such as Fire Alarm/Sprinkler system impairments and any required site staff overtime.

 

A copy of the Contractor’s Certificate of Insurance and Sprinkler Permit must be in the Management Office prior to the start of any construction.

 

PARKING

All construction related vehicles shall be parked as directed by building management. Vehicles in violation are subject to tow at the vehicle owner's expense.

 

INSURANCE

The Contractor shall purchase from and maintain in a company lawfully authorized to do business in the Commonwealth of Massachusetts insurance for protection from claims under workers’ or workmen’s compensation acts and other employee benefit acts which are applicable, claims for damages because of bodily injury, including death, and from claims for damages, other than to the work itself, to property which may arise out of or result from the Contractors operations, whether such operations be by the Contractor or by a Subcontractor or anyone directly or indirectly employed by any of them.

 

Contractor agrees to carry, at Contractor's sole expense, the following insurance coverage:

 

A. Workers Compensation Insurance in the statutory amount and employer's liability coverage in an amount of at least Five Hundred Thousand Dollars ($500,000).

 

B. Automobile liability insurance on any vehicle used by Contractor in the performance of the services specified herein with combined single limit coverage of not less than One Million Dollars ($1,000,000).

 

C. Comprehensive general liability insurance with combined single limit coverage of not less than One Million Dollars ($1,000,000) per occurrence, $2,000,000 aggregate. Said coverage shall include provisions for blanket contractual liability, personal injury and broad form property damage.

 

D. All-Risk property insurance coverage for tools and equipment brought onto and/or used at the Property, the amount of which is equal to the replacement costs of all such tools and equipment.

 

The insurance described above shall be in the name of Contractor; provided, however, general liability policy shall name as additional insureds the following parties:

 

4-18 Crosby Drive, Bedford MA:

  Additional Insureds:  
  Santander Bank, N.A.  
  DIV Bedford, LLC  
  Davis Management Company, LLC  

 

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  Certificate Holder:  
  DIV Bedford, LLC  
  c/o The Davis Companies  
  125 High Street 21st floor  
  Boston, MA 02110  

  

Certificates of such insurance shall be filed with the Management Company prior to the commencement of the Work.

 

CLEANING

The construction contractor is responsible for doing his/her part to keep common areas clean at all times. Any extra cleaning that may be necessary due to construction contractor's negligence will be performed by building cleaners at construction contractor's expense.

 

SCHEDULING

Building management shall be kept informed of job schedule and changes.

 

HVAC

Construction contractor shall be responsible for the replacement of filters and the proper cleaning of all coils, drains, and pans on all HVAC equipment affected by construction. Ultra Services Inc 978-667-8800, the building HVAC contractor, shall be consulted on all planned HVAC modifications.

 

SUBCONTRACTORS

General Contractor represents that all subcontractors will perform in accordance with these building rules. The general contractor must provide building management with a contact list of all subcontractors with contact name, phone number, and pager number.

 

Section II

RULES FOR TENANT CONTRACTORS

 

The following additional rules have been established as an effective mechanism to enable contractors and Tenants to work freely with minimum conflict.

 

This is private property and access is by permission only. Permission to enter will be granted to each Tenant Contractor and its employees who are entering for the purpose of performing work in the building. Access for any other reason will not be permitted.

 

1. Each General Contractor or Contractor is required to submit a contact list including emergency contact numbers (pager/cell phone) of all sub contractors who will be working on site.

 

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2. FIRE IMPAIRMENT & HOT WORKS REQUIREMENTS:

All FIRE ALARM IMPAIRMENTS and/or ALARM DEACTIVATIONS must be coordinated through the Property Manager. The General Contractor is required to obtain a smoke detector bagging permit from the local Fire Department, or have the fire alarm plugged out on a daily basis. The costs for the alarm plug outs or bagging permit are the contractor’s responsibility. Any costs resulting from false alarms (Fire Department) will be the responsibility of the Tenant and the Tenant’s Contractor. The Tenant shall be responsible for managing the Contractor(s) who are performing its construction/renovations.

 

HOT WORKS requests and BURN PERMIT letter(s) need to be obtained and approved through the Property Management Office. All Fire Watches required by the Bedford Fire Department will be at the Tenant/Contractor’s cost.

 

3. Electrical power will originate from the tenant meter/panel located in the electrical rooms. Any temporary 120 volt service must originate from one of these locations and be removed as soon as the Tenant panel is installed. A prorated cost will be back charged to the Tenant for temporary electrical power provided for their construction use, which is supplied by base building meters/panels.

 

4. Contractors can only utilize the area designated by their contract for storage of materials and work. No materials are to be left in the common areas of the building including but not limited to hallways, elevator landings, stairways, janitor/storage closets, electrical closets, or any parking spaces (interior or exterior). Any material found in these locations without prior approval will become the sole property of the Management Company.

 

5. Water for construction and cleaning tools is available in the janitor closets. These closets are kept locked. These closets are not to be used for the disposal of paint or plaster.

 

6. Any fire alarm disconnects must be coordinated with the Management Office.

 

7. All contractor personnel and materials must enter the building through the Rear Entry and loading dock only. There is no transportation of materials, or tools, in the passenger elevators without protecting ALL SURFACES. Scheduling the use of an elevator during specified times: Non-business or Light Traffic Periods. Materials must be of a length or cut to a length that will not strike ceilings or wall surfaces, and any damage caused to any elevator surface will result in repair or replacement cost being the responsibility of that vendor and tenant. Contractors are not to use any alarmed side doors for egress exits. Rubber wheels will be required on all carts and dollies used.

 

8. It is the Contractor’s responsibility to discard all debris and trash into a container which the contractor or tenant supplies. There will be no disposal into building trash compactors or containers. Any additional cleaning of common areas which is generated by the contractor during construction/renovations will be billed back to the Tenant.

 

9. All phone and electrical wiring must be in conduit.

 

10. It is the responsibility of the Tenant and contractor to minimize the amount of debris/odor which emits from the space.

 

11. Fire stopping will be provided by general contractor for electrical, plumbing, etc.

 

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12. Appropriate temporary protection and donage must be in place prior to any placement of crane out riggers. All delivery trucks or cranes must be of approved weight.

 

Section III

TENANT FINISH PROCEDURE

 

CONSTRUCTION

The following is the suggested procedure as you prepare to complete the construction of a leased space:

 

1. Tours are available for architects/contractors to familiarize themselves with existing conditions. These are conducted with the Property Manager through an appointment with him, (617) 451-1300 or (617) 875-5441

 

2. Submit plans and specifications to the Management Office for verification. The plans and specification are to be in the following form:

 

A. Architectural Drawings
1. Floor plan indicating any proposed demolition
2. Floor plans indicating partition construction and location
3. Reflected ceiling plans indicating any suspended ceiling or other equipment
4. Interior elevation and exterior walls
5. All built-in equipment, casework, counters, shelving, etc.
6. All stairs and corridors adjacent to showrooms must be clearly delineated
7. All architectural drawings shall be stamped by a Massachusetts Registered Architect.

 

B. Electrical Drawings
1. Complete electrical drawings, floor plans and specifications
2. Complete schedules of panel board circulating and final load breakdown
3. Provisions for special electrical equipment (i.e., copiers, computers, telephone systems, etc.)
4. Properly stamped drawings by a Massachusetts Licensed Electrical Engineer

 

C. HVAC Drawings
1. Completed HVAC drawings and specifications
2. Proposed connection to building services
3. Cooling and heating load calculations, including equipment requiring special HVAC provisions (i.e., computer)
4. Property stamped drawings by a Massachusetts Licensed Mechanical Engineer

 

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D. Fire Protection Drawings
1. Drawings and specifications must show alarm speakers, pull stations, and sprinkler systems
2. Drawings must clearly delineate all changes the Tenant wishes to make to location, extent and number of heads and run outs
3. Insurance test certificates must be provided for any sprinkler work
4. Drawings shall include all requirements of local authorities including engineered hydraulic calculations as necessary.

 

It is suggested that the General Contractor set up an informal meeting with the local Inspectional Services Department for the property involved.

 

The Landlord will not serve as an interpreter of the Codes. The Tenant plans must comply with Code as interpreted/implemented by the State and local (city/town) requirements. All wood must comply with the fire retardant treatment prescribed in the Code.

 

The following must be furnished to the Property Manager prior to commencement of construction by your contractor:

 

1. Copy of Building Permit issued
2. Copy of completed stamped mechanical plans
3. Certificate of Insurance naming as additional insured: contact Property manager for listing of additional insureds
4. Copy of Contractor License
5. Schedule of work hours
6. Material safety date sheets for all products including but not limited to adhesives, cleaners, paints, oils and items related to HVAC equipment.
7. Sign off by the property manager is required before work commences.

 

Once the job is completed, the following is to be furnished to the Property Manager:

 

1. Copy of the Certificate of Occupancy
2. Completed “as built” drawings

 

BUILDING MANAGEMENT

Davis Management Co

Senior Property Manager: Jason Biedrzycki

Office: (617) 451-1300

Cell: (603) 320-7594

Assistant Property Manager: Ron Dorazio

Cell: (617) 875-5441

Chief Engineer: Doug Moulton

Cell: (617) 592-0719

Building Day porter: Jorge Ordonez

Cell: 617-981-3668

 

Tenant

Acknowledged by:    Date:    

 

Contractor

Acknowledged by:    Date:  

 

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EXHIBIT 8.8

 

SIGNAGE LOCATION

 

76  

 

  

EXHIBIT 14.1

 

FORM OF SNDA

 

SUBORDINATION, NON DISTURBANCE

 

AND ATTORNMENT AGREEMENT

 

This Subordination, Non Disturbance and Attornment Agreement made on ____________, 2015, by and among Landlord, Tenant and Lender, all as hereinafter defined;

 

WITNESSETH:

 

IN CONSIDERATION OF TEN AND NO/100 ($10.00) DOLLARS and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned Landlord, Tenant and Lender hereby covenant and agree as follows:

 

1.            For purposes of this agreement the following terms shall be defined as set forth below:

 

A.           Assignment of Leases: That certain Assignment of Lessor's Interest in Leases, Rents, and Profits affecting the Landlord's interest in the Lease to be executed by Landlord in favor of Lender and to be recorded in the _______________ Registry of Deeds (the “Registry”).

 

B.           Mortgage: That certain Mortgage and Security Agreement and Financing Statement to be executed by Landlord in favor of Lender, conveying Landlord's interest in the Property to Lender and to be recorded in the Registry (included in the term are all amendments, additions and substitutions thereof).

 

C.           Landlord: ________________________

 

D.           Lease: That certain Lease by and between Landlord and Tenant dated ______________ [INSERT LEASE DATE], affecting the Property.

 

E.           Property: All that tract or parcel of land lying and being in ____________ County, Massachusetts, as more particularly described on Exhibit “A” attached hereto and made a part hereof.

 

F.           Tenant: ________________________

 

G.           Lender: ________________________

 

2.          Tenant has subordinated and does hereby subordinate all of its rights in and to the Property and in and to the Lease (including any options to purchase) to the following: (i) the Mortgage; (ii) any, and all renewals, substitutions, extensions, modifications, replacements or amendments of the Mortgage; (iii) all loan documents executed in connection with the Mortgage including, without limitation, the Assignment of Leases; and (iv) all indebtedness secured by the Mortgage and all advances made pursuant thereto prior to or after the date hereof. Notwithstanding anything to the contrary contained herein or in the Lease, any interest of Tenant in any right of first refusal contained in the Lease shall not be binding upon Lender at a foreclosure sale of the Property, upon any purchaser at a foreclosure sale of the Property or upon a transfer of the Property by Lender by deed in lieu of foreclosure.

 

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3.          Tenant shall give written notice to Lender of any default of Landlord under the Lease (at the time it gives said notice to Landlord) and agrees that Lender shall have the time periods set forth in the Lease for cure to cure said Landlord default.

 

4.          So long as Tenant is not in default under the Lease in the payment of rent or additional rent or in the performance of any of the terms, or conditions of the Lease, Lender covenants and agrees that possession of the demised premises under the Lease and the rights and privileges of Tenant under the Lease shall not be diminished or interfered with by the Lender in the exercise of any of its rights under the Mortgage.

 

5.          If Lender, its successors or assigns shall succeed to the interest of Landlord under the Lease in any manner, or if any other person or entity shall acquire Landlord's interest in the Property upon any foreclosure of the Mortgage (Lender, its successors or assigns, or such other person or entity, as the case may be, being hereinafter referred to as “Successor Landlord”), Tenant shall attorn to Successor Landlord upon such succession or foreclosure sale and shall recognize Successor Landlord as the landlord under the Lease, and the Lease shall remain in full force and effect and shall inure to the benefit of Successor Landlord as landlord thereunder. Such attornment shall be effective and self operative without the execution of any further instrument. Tenant agrees, however, to execute and deliver at any time and from time to time, upon the request of Successor Landlord, any instrument or certificate that may be necessary or appropriate to evidence such attornment. From and after any such attornment, Successor Landlord shall be bound to Tenant under all the terms, covenants and conditions of the Lease, except that Successor Landlord shall not (a) be liable for any act or omission of any prior landlord (including Landlord); or (b) be subject to any offset or defenses which Tenant might have against any prior landlord (including Landlord); or (c) be bound by any rent or additional rent which Tenant might have paid for more than sixty (60) days in advance to any prior landlord (including Landlord); or (d) be bound by any amendment or modification of the Lease made without the consent of Lender.

 

6.          The agreements herein contained shall bind and inure to the benefit of successors in interest of the parties hereto.

 

7.          This instrument shall be governed by the laws of the Commonwealth of Massachusetts.

 

[signature page follows]

 

78  

 

  

IN WITNESS WHEREOF, the undersigned Tenant has hereunto caused this instrument to be executed by its duly authorized corporate officials and its corporate seal to be affixed hereto as of the day and year first above written.

 

TENANT:  
   
   
By:    
     
By:      

 

COMMONWEALTH OF MASSACHUSETTS

 

______________________, ss.

 

On this ____ day of ____________, 2015, before me, the undersigned notary public, personally appeared ________________________ proved to me through satisfactory evidence of identification, which was ____________________________, to be the person whose name is signed on the preceding or attached document, and acknowledged to me that he signed it voluntarily for its stated purposes as said ___________________ of the _______________________.

 

 

_________________________, Notary Public

My commission expires:

 

Signature page to SNDA

 

79  

 

  

TENANT:  
   
   
By:    
     
By:    

 

COMMONWEALTH OF MASSACHUSETTS

 

______________________, ss.

 

On this ____ day of ____________, 2015, before me, the undersigned notary public, personally appeared ________________________ proved to me through satisfactory evidence of identification, which was ____________________________, to be the person whose name is signed on the preceding or attached document, and acknowledged to me that he signed it voluntarily for its stated purposes as said ____________________ of ________________________.

 

 

_________________________, Notary Public

My commission expires:

 

Signature page to SNDA

 

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EXHIBIT 14.4

 

FORM OF ESTOPPEL

 

Form of Tenant Estoppel Certificate

 

The undersigned ("Tenant") hereby certifies to _______________ and _______________ (collectively, the "Recipients"), as follows:

 

1.           Lease . Tenant is the current tenant under that certain Lease dated ________________________, 20___ (the "Original Lease") by and between ________________________________ ("Landlord") and Tenant, pursuant to which Tenant leases approximately __________ square feet (the "Premises") in the building located at ______________________________ (the "Building").

 

2.           No Modifications . The Original Lease has not been modified, changed, altered, supplemented, amended or terminated in any respect, except as indicated below (if none, please state "none"; the Original Lease, as modified, changed, altered, supplemented or amended as indicated below, is referred to collectively as the "Lease"):

 

 
 
 
_________________________________________________________________________.

 

3.           Copy . A true, correct and complete copy of the Lease is attached hereto.

 

4.           Validity . The Lease represents the valid and binding obligation of Tenant in accordance with its terms and is in full force and effect on the date hereof. The Lease represents the entire agreement and understanding between Landlord and Tenant with respect to the Premises, the Building and the land on which the Building is situated. Except as expressly set forth in the Lease, Tenant has no right under the Lease to terminate all or any portion of the Lease.

 

5.           No Concessions . Except as set forth in the Lease, Tenant is not entitled to, and has made no agreement with Landlord or its agents or employees concerning, free rent, partial rent, rebate of rent payments, credit or offset or reduction in rent, or any other type of rental concession including, without limitation, lease support payments, lease buy-outs, or assumption of any leasing or occupancy agreements of Tenant.

 

6.           Term . Except for __________________________________________, all conditions precedent to the commencement of the initial term of the Lease have been fully satisfied or waived. The initial term of the Lease began on _____________________, 20___. The termination date of the present term of the Lease, excluding unexercised renewal terms, is _______________, 20___, or, if the commencement date has not yet been set, _____ months after the commencement date. [IF TRUE: The commencement date has occurred and Tenant has accepted possession of and currently occupies the entire Premises. Tenant has not sublet all or any portion of the Premises to any sublessee, has not assigned, transferred, mortgaged, hypothecated or otherwise encumbered any of its rights or interests under the Lease and has not entered into any license or concession agreements with respect thereto, except for the following in accordance with the Lease: ________________________________________.

 

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7.           Options . Except as set forth in the Lease, Tenant has no outstanding options or rights to renew or extend the term of the Lease, or expansion options, or cancellation options, rights of first refusal, or rights of first offer to lease other space within the Building. Tenant has no outstanding options, rights of first refusal or rights of first offer to purchase the Premises or any part thereof or all or any part of the Building and/or the land on which the Building is situated.

 

8.           Rents . The obligation to pay rent began (or begins) on _______________, 20__. The current monthly base rent payable under the Leases is $_______________. The monthly base rental payment (excluding pass through charges) has been paid through the month of _______________, ____. Tenant is also obligated to pay its proportionate share of ad valorem taxes, insurance and operating expenses on the Building, to the extent provided in the Leases. Tenant's estimated share of ad valorem taxes, insurance and operating expenses on the Building has been paid by Tenant through _____________, ____. Except for payments of its estimated share of ad valorem taxes, insurance and operating expenses being paid in accordance with the Lease, no rent (excluding security deposits described in Paragraph 9 below) has been paid more than one (1) month in advance of its due date.

 

9.           Security Deposits . Tenant's security deposit, if any, which has been previously deposited with Landlord is $_______________ (if none, please state "none"). The security deposit ____ is, or ____ is not, represented by a letter of credit.

 

10.          No Default . No event has occurred and no condition exists that constitutes, or that with the giving of notice or the lapse of time or both, would constitute, a default by Landlord or, to the best knowledge of Tenant, Tenant under the Lease except __________. As of the date set forth below, to the best knowledge of Tenant, Tenant has no existing claims against Landlord or defenses to the enforcement of the Lease by Landlord and Tenant is not currently entitled to any rent abatements or offsets against the rents owing under the Lease except _____________.

 

11.          Allowances . All required allowances, contributions or payments (whether or not currently due and payable) by Landlord to Tenant on account of Tenant's tenant improvements have been received by Tenant and all of Tenant's tenant improvements have been completed in accordance with the terms of the Lease, except as indicated below (if none, please state "none"):

 

 
 
 
_________________________________________________________________________.

 

To the best knowledge of Tenant, Tenant's current use and operation of the Premises complies with all covenants and operating requirements in the Lease.

 

12.          No Bankruptcy Proceedings . No voluntary actions or, to Tenant's best knowledge, involuntary actions are pending against Tenant under the bankruptcy, insolvency, or reorganization laws of the United States or any state thereof.

 

13.          Environmental Matters . Tenant has received no notice by any governmental authority or person claiming a violation of, or requiring compliance with, any federal, state or local statute, ordinance, rule, regulation or other requirement of law, for environmental contamination at the Premises and no hazardous, toxic or polluting substances or wastes have been generated, treated, manufactured, stored, refined, used, handled, transported, released, spilled, disposed of or deposited on, in or under the Premises.

 

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14.          Address . The current address for notices to be sent to Tenant under the Lease is set forth below.

 

15.          Reliance . Tenant acknowledges that the Recipients have or will hereafter acquire an interest in the Landlord or the Property and/or loan money to the Landlord in connection with the Property, and that the Recipients are relying upon this Tenant's Estoppel Certificate in connection therewith. Tenant further acknowledges that this Tenant's Estoppel Certificate may be relied upon by, and inures to the benefit of, the Recipients and each of their respective partners, successors and assigns.

 

16.          Authority . The undersigned is duly authorized to execute this Tenant's Estoppel Certificate on behalf of Tenant.

 

17.          Accuracy . The information contained in this Tenant's Estoppel Certificate is true, correct and complete as of the date below written.

 

Executed as of the ___ day of _____, ____.

 

  TENANT:
   
  By:  
    Name:
    Title:

 

  Tenant's Current Address for Notices:
   
   
   

 

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EXHIBIT 18.1.1

 

ROFO SPACE

 

 

 

84  

 

 

 

EXHIBIT 21.1

 

SUBSIDIARIES OF THE REGISTRANT

 

    PLACE OF    
SUBSIDIARY   INCORPORATION   D/B/A NAME
         
Datawatch International Limited   England and Wales   Datawatch International Limited
         
Datawatch Pty Ltd.*   Australia   Datawatch Pty Ltd.
         
Datawatch GmbH*   Germany   Datawatch GmbH
         
Datawatch Analytics (Singapore) Pte Ltd. *   Singapore   Datawatch Analytics (Singapore) Pte Ltd.
         
Datawatch AB   Sweden   Panopticon Software AB
         

 

 

* All of the shares of capital stock of Datawatch Pty Ltd., Datawatch Europe Limited, Datawatch GmbH and Datawatch Analytics (Singapore) Pte Ltd. are owned by Datawatch International Limited.

 

 

 

 

EXHIBIT 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

We consent to the incorporation by reference in Registration Statements on Form S-8 (Nos. 333-180934, 333-134015, 333-134291, 333-104011, 333-84312, 333-57244, 333-34312, and 333-39627 and 333-195839) of Datawatch Corporation of our report dated November 10, 2016, relating to the consolidated financial statements of Datawatch Corporation, appearing in this Annual Report on Form 10-K of Datawatch Corporation for the year ending September 30, 2016.

 

/s/ RSM US LLP

 

RSM US LLP

Boston, Massachusetts
November 10, 2016

 

 

 

 

EXHIBIT 31.1

 

CERTIFICATIONS

 

I, Michael A. Morrison, certify that:

 

1. I have reviewed this annual report on Form 10-K of Datawatch Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 10, 2016

 

/s/ Michael A. Morrison

 

Michael A. Morrison

 

President, Chief Executive Officer and Director

 

 

 

 

EXHIBIT 31.2

 

CERTIFICATIONS

 

I, James L. Eliason, certify that:

 

1. I have reviewed this annual report on Form 10-K of Datawatch Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 10, 2016

 

/s/ James L. Eliason

 

James L. Eliason

 

Treasurer, Chief Financial Officer, Secretary and Vice President of Finance

 

 

 

 

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

 

18 U.S.C. SECTION 1350,

 

AS ADOPTED PURSUANT TO

 

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Datawatch Corporation (the “Company”) on Form 10-K for the period ending September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael A. Morrison, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 10, 2016

 

/s/ Michael A. Morrison

 

Michael A. Morrison

 

Chief Executive Officer

 

 

 

 

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO

 

18 U.S.C. SECTION 1350,

 

AS ADOPTED PURSUANT TO

 

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Datawatch Corporation (the “Company”) on Form 10-K for the period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James L. Eliason, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 10, 2016

 

/s/ James L. Eliason

 

James L. Eliason

 

Treasurer, Chief Financial Officer, Secretary and Vice President of Finance