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EX-32.1 - EX-32.1 - MITEK SYSTEMS INCmitk-ex321_8.htm
EX-31.1 - EX-31.1 - MITEK SYSTEMS INCmitk-ex311_7.htm
EX-10.1 - EX-10.1 - MITEK SYSTEMS INCmitk-ex101_186.htm
EX-10.2 - EX-10.2 - MITEK SYSTEMS INCmitk-ex102_187.htm
EX-31.2 - EX-31.2 - MITEK SYSTEMS INCmitk-ex312_6.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

£

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 001-35231

 

MITEK SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

87-0418827

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

8911 Balboa Avenue

San Diego, California

 

92123

(Address of Principal Executive Offices)

 

(Zip Code)

(858) 309-1700

(Registrant’s Telephone Number, Including Area Code)

 

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 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. (Check one):

 

Large Accelerated Filer

 

¨

 

 

 

Accelerated Filer

 

x

 

 

 

 

 

 

 

 

 

 

Non-Accelerated Filer

 

¨

 

(Do not check if a smaller reporting company)

 

Smaller Reporting Company

 

¨

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

There were 32,214,857 shares of the registrant’s common stock outstanding as of April 28, 2016.

 

 

 

 

 

 


0MITEK SYSTEMS, INC.

FORM 10-Q

For The Quarterly Period Ended March 31, 2016

INDEX

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2016 (Unaudited) and September 30, 2015

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations and Other Comprehensive Income (Unaudited) for the Three and Six Months Ended March 31, 2016 and March 31, 2015

 

2

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2016 and March 31, 2015

 

3

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

4

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

25

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

26

 

 

 

 

 

Item 1A.

 

Risk Factors

 

26

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

26

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

26

 

 

 

 

 

Item 5.

 

Other Information

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

27

 

 

 

 

 

Signatures

 

28

 

 

 

 


 

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MITEK SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands except share data)

 

 

 

March 31,

2016

(Unaudited)

 

 

September 30,

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,226

 

 

$

2,753

 

Short-term investments

 

 

14,935

 

 

 

23,921

 

Accounts receivable, net

 

 

2,492

 

 

 

3,937

 

Other current assets

 

 

1,099

 

 

 

798

 

Total current assets

 

 

31,752

 

 

 

31,409

 

Long-term investments

 

 

3,753

 

 

 

-

 

Property and equipment, net

 

 

867

 

 

 

975

 

Intangible assets, net

 

 

3,025

 

 

 

3,397

 

Goodwill

 

 

2,806

 

 

 

2,873

 

Other non-current assets

 

 

92

 

 

 

92

 

Total assets

 

$

42,295

 

 

$

38,746

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,608

 

 

$

1,538

 

Accrued payroll and related taxes

 

 

1,950

 

 

 

2,061

 

Deferred revenue, current portion

 

 

3,770

 

 

 

3,516

 

Other current liabilities

 

 

361

 

 

 

289

 

Total current liabilities

 

 

7,689

 

 

 

7,404

 

Deferred revenue, non-current portion

 

 

175

 

 

 

222

 

Other non-current liabilities

 

 

786

 

 

 

687

 

Total liabilities

 

 

8,650

 

 

 

8,313

 

Stockholders’ equity:  

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued and

   outstanding

 

 

-

 

 

 

-

 

Common stock, $0.001 par value, 60,000,000 shares authorized, 32,214,855 and

   31,721,114 issued and outstanding, as of March 31, 2016 and September 30, 2015, respectively

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

66,979

 

 

 

63,905

 

Accumulated other comprehensive loss

 

 

(125

)

 

 

(3

)

Accumulated deficit

 

 

(33,241

)

 

 

(33,501

)

Total stockholders’ equity

 

 

33,645

 

 

 

30,433

 

Total liabilities and stockholders’ equity

 

$

42,295

 

 

$

38,746

 

 

The accompanying notes form an integral part of these consolidated financial statements.

1


 

MITEK SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME  

(Unaudited)

(amounts in thousands except for share data)

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

$

5,557

 

 

$

3,993

 

 

$

10,286

 

 

$

7,740

 

Services

 

 

2,965

 

 

 

1,679

 

 

 

5,640

 

 

 

3,322

 

Total revenue

 

 

8,522

 

 

 

5,672

 

 

 

15,926

 

 

 

11,062

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue-software

 

 

132

 

 

 

225

 

 

 

522

 

 

 

439

 

Cost of revenue-services

 

 

588

 

 

 

332

 

 

 

1,140

 

 

 

616

 

Selling and marketing

 

 

2,553

 

 

 

1,429

 

 

 

5,016

 

 

 

2,867

 

Research and development

 

 

1,814

 

 

 

1,388

 

 

 

3,520

 

 

 

2,543

 

General and administrative

 

 

2,263

 

 

 

1,812

 

 

 

4,355

 

 

 

3,977

 

Acquisition-related costs and expenses

 

 

541

 

 

 

-

 

 

 

1,084

 

 

 

-

 

Total operating costs and expenses

 

 

7,891

 

 

 

5,186

 

 

 

15,637

 

 

 

10,442

 

Operating income

 

 

631

 

 

 

486

 

 

 

289

 

 

 

620

 

Other income (expense), net

 

 

30

 

 

 

22

 

 

 

66

 

 

 

37

 

Income before income taxes

 

 

661

 

 

 

508

 

 

 

355

 

 

 

657

 

Income tax provision

 

 

79

 

 

 

-

 

 

 

95

 

 

 

3

 

Net income

 

$

582

 

 

$

508

 

 

$

260

 

 

$

654

 

Net income per share – basic

 

$

0.02

 

 

$

0.02

 

 

$

0.01

 

 

$

0.02

 

Net income per share – diluted

 

$

0.02

 

 

$

0.02

 

 

$

0.01

 

 

$

0.02

 

Shares used in calculating net income per share – basic

 

 

31,325,577

 

 

 

30,697,391

 

 

 

31,214,325

 

 

 

30,657,308

 

Shares used in calculating net income per share – diluted

 

 

33,133,920

 

 

 

31,321,259

 

 

 

32,625,526

 

 

 

31,241,374

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

582

 

 

$

508

 

 

$

260

 

 

$

654

 

Foreign currency translation adjustment

 

 

1

 

 

 

-

 

 

 

(129

)

 

 

-

 

Unrealized gain (loss) on investments

 

 

28

 

 

 

(4

)

 

 

7

 

 

 

(6

)

Other comprehensive income

 

$

611

 

 

$

504

 

 

$

138

 

 

$

648

 

 

The accompanying notes form an integral part of these consolidated financial statements.

 

 

2


 

MITEK SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

 

 

 

Six Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

260

 

 

$

654

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

2,161

 

 

 

1,685

 

Amortization of closing and earnout shares

 

 

779

 

 

 

-

 

Amortization of intangible assets

 

 

298

 

 

 

-

 

Depreciation and amortization

 

 

218

 

 

 

215

 

Accretion and amortization on debt securities

 

 

114

 

 

 

243

 

Provision for bad debt

 

 

-

 

 

 

10

 

Changes in assets and liabilities:

 

 

 

 

 

 

-

 

Accounts receivable

 

 

1,439

 

 

 

(37

)

Other assets

 

 

(242

)

 

 

(189

)

Accounts payable

 

 

69

 

 

 

(493

)

Accrued payroll and related taxes

 

 

(111

)

 

 

(239

)

Deferred revenue

 

 

260

 

 

 

733

 

Other liabilities

 

 

(56

)

 

 

(52

)

Net cash provided by operating activities

 

 

5,189

 

 

 

2,530

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(14,472

)

 

 

(17,969

)

Sales and maturities of investments

 

 

19,599

 

 

 

13,436

 

Purchases of property and equipment

 

 

(111

)

 

 

(23

)

Net cash provided by (used in) investing activities

 

 

5,016

 

 

 

(4,556

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options, net

 

 

313

 

 

 

9

 

Principal payments on capital lease obligations

 

 

(11

)

 

 

(10

)

Net cash provided by financing activities

 

 

302

 

 

 

(1

)

Foreign currency effect on cash and cash equivalents

 

 

(34

)

 

 

-

 

Net increase (decrease) in cash and cash equivalents

 

 

10,473

 

 

 

(2,027

)

Cash and cash equivalents at beginning of period

 

 

2,753

 

 

 

7,767

 

Cash and cash equivalents at end of period

 

$

13,226

 

 

$

5,740

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2

 

 

$

3

 

Cash paid for income taxes

 

$

74

 

 

$

2

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on available-for-sale investments

 

$

7

 

 

$

(6

)

 

The accompanying notes form an integral part of these consolidated financial statements 

 

 

3


 

MITEK SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

.

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Mitek Systems, Inc. (the “Company”) develops, markets and sells proprietary mobile capture and identity verification software solutions for enterprise customers.

The Company applies its patented technology in image capture, correction and intelligent data extraction in the mobile financial and business services markets. The Company’s technology allows users to remotely deposit checks, open accounts, get insurance quotes, pay bills as well as verify their identity by taking pictures of various documents with their camera-equipped smartphones and tablets instead of using the device’s keyboard. As of March 31, 2016, the Company has been granted 25 patents and it has an additional 18 patent applications pending.

The Mobile Verify™ products combine the Mitek MiSnap auto capture experience with a variety of advanced computer vision techniques to provide verification of ID documents.  Mobile Verify provides a check of authenticity of U.S. state-issued driver’s licenses and includes full global coverage. These products enable banks and other businesses to improve know your customer processes.  Mobile Fill™ enables the camera to serve as a keyboard. Using Mobile Fill, consumers can quickly pre-fill any form with personal data by simply snapping a picture of their driver license, credit card, or other document. The Company’s Mobile Deposit® product is software that allows users to remotely deposit a check using their camera-equipped smartphone or tablet. As of March 31, 2016, 5,007 financial institutions have signed agreements to deploy Mobile Deposit®. These include all of the top ten, and nearly all of the top 50 U.S. retail banks. The Company’s mobile imaging software solutions are available for iOS and Android operating systems.

 

The Company markets and sells the Mitek Mobile Identity Suite of mobile capture and identity verification software products directly to enterprise customers or through channel partners. These software solutions are embedded in mobile banking or enterprise applications developed by banks, insurance companies or their partners, and then marketed under their own proprietary brands.          

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company as of March 31, 2016 have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, they do not include all information and footnote disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). The Company believes the footnotes and other disclosures made in the financial statements are adequate for a fair presentation of the results of the interim periods presented. The financial statements include all adjustments (solely of a normal recurring nature) which are, in the opinion of management, necessary to make the information presented not misleading. You should read these financial statements and the accompanying notes in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015, filed with the U.S. Securities and Exchange Commission on December 7, 2015.

Results for the three and six months ended March 31, 2016 are not necessarily indicative of results for any other interim period or for a full fiscal year.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Foreign Currency

The Company’s foreign subsidiaries operate and sell the Company’s products and services in various countries and jurisdictions around the world. As a result, the Company is exposed to foreign currency exchange risks. For those subsidiaries whose functional currency is not the U.S. dollar, assets and liabilities are translated into U.S. dollar equivalents at the exchange rate in effect on the balance sheet date and revenues and expenses are translated into U.S. dollars using the average exchange rate over the period.  Resulting currency translation adjustments are recorded in accumulated other comprehensive income in the consolidated balance sheet.  The Company recorded net gains resulting from foreign exchange translation of $1,000 and zero for the three months and net losses of $0.1 million and zero for the six months ended March 31, 2016 and 2015, respectively.

4


 

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management reviews its estimates based upon currently available information. Actual results could differ materially from those estimates. These estimates include, but are not limited to, assessing the collectability of accounts receivable, estimation of the value of stock-based compensation awards, fair value of assets and liabilities acquired, impairment of goodwill, useful lives of intangible assets, vendor specific objective evidence (“VSOE”) of fair value related to revenue recognition and income taxes.

Goodwill and Purchased Intangible Assets

Goodwill resulted from the acquisition of IDchecker in fiscal year 2015. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually or as circumstances indicate that their value may no longer be recoverable. In accordance with ASC Topic 350, Intangibles—Goodwill and Other (“ASC Topic 350”), the Company reviews the goodwill and indefinite-lived intangible asset for impairment at least annually in the fiscal fourth quarter and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of the reporting unit and/or the indefinite-lived intangible asset below their respective carrying values. Examples of such events or circumstances include: a significant adverse change in legal factors or in the business climate, a significant decline in the stock price, a significant decline in projected revenue or cash flows, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, or the presence of other indicators that would indicate a reduction in the fair value of a reporting unit.

Goodwill is considered to be impaired if the Company determines that the carrying value of the reporting unit to which the goodwill has been assigned exceeds management’s estimate of its fair value. Based on the guidance provided by ASC Topic 350 and ASC Topic 280, Segment Reporting, management has determined that the Company operates in one segment and consists of one reporting unit given the similarities in economic characteristics between operations and the common nature of the products, services and customers. As the Company has only one reporting unit, and because the Company is publicly traded, the Company determines the fair value of the reporting unit based on market capitalization as this represents the best evidence of fair value. In the fourth quarter of fiscal 2015, we completed the annual goodwill impairment test as of September 30, 2015 and concluded that goodwill was not impaired. The conclusion that goodwill was not impaired was based on a comparison of net assets as of September 30, 2015 to market capitalization.

Intangible assets are amortized over their useful lives. Each period, the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. The carrying amount of such assets is reduced to fair value if the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets.

 

Net Income Per Share

The Company calculates net income per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share. Basic net income per share is based on the weighted average number of common shares outstanding during the period. Diluted net income per share also gives effect to all potentially dilutive securities outstanding during the period, such as options and restricted stock units (“RSUs”), if dilutive. In a period with a net loss position, potentially dilutive securities are not included in the computation of diluted net loss because to do so would be antidilutive, and the number of shares used to calculate basic and diluted net loss is the same.

For the three and six months ended March 31, 2016 and 2015, the following potentially dilutive common shares were excluded from the calculation of net income per share, as they would have been antidilutive:

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock options

 

 

1,013,306

 

 

 

2,507,643

 

 

 

997,991

 

 

 

2,218,425

 

Restricted stock units

 

 

25,979

 

 

 

399,780

 

 

 

-

 

 

 

435,461

 

IDchecker closing shares

 

 

415,611

 

 

 

-

 

 

 

466,980

 

 

 

-

 

Total potentially dilutive common shares outstanding

 

 

1,454,896

 

 

 

2,907,423

 

 

 

1,464,971

 

 

 

2,653,886

 

 

5


 

The calculation of basic and diluted net income per share is as follows:

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

582

 

 

$

508

 

 

$

260

 

 

$

654

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

31,325,577

 

 

 

30,697,391

 

 

 

31,214,325

 

 

 

30,657,308

 

Diluted

 

 

33,133,920

 

 

 

31,321,259

 

 

 

32,625,526

 

 

 

31,241,374

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

 

$

0.02

 

 

$

0.01

 

 

$

0.02

 

Diluted

 

$

0.02

 

 

$

0.02

 

 

$

0.01

 

 

$

0.02

 

 

Revenue Recognition

Revenue from sales of software licenses sold through direct and indirect channels is recognized upon shipment of the related product, if the requirements of FASB ASC Topic 985-605, Software Revenue Recognition (“ASC 985-605”) are met, including evidence of an arrangement, delivery, fixed or determinable fee, collectability and VSOE of the fair value of the undelivered element. If the requirements of ASC 985-605 are not met at the date of shipment, revenue is not recognized until such elements are known or resolved. Revenue from customer support services, or maintenance revenue, includes post-contract support and the rights to unspecified upgrades and enhancements. VSOE of fair value for customer support services is determined by reference to the price the customer pays for such element when sold separately; that is, the renewal rate offered to customers. In those instances when objective and reliable evidence of fair value exists for the undelivered items but not for the delivered items, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of arrangement consideration allocated to the delivered items equals the total arrangement consideration less the aggregate fair value of the undelivered items. Revenue from post-contract customer support is recognized ratably over the term of the contract. Certain customers have agreements that provide for usage fees above fixed minimums.  Usage fees above fixed minimums are recognized as revenue when such amounts are reasonably estimable and billable. Revenue from professional services is recognized when such services are delivered. When a software sales arrangement requires professional services related to significant production, modification or customization of software, or when a customer considers professional services essential to the functionality of the software product, revenue is recognized based on predetermined milestone objectives required to complete the project, as those milestone objectives are deemed to be substantive in relation to the work performed. Any expected losses on contracts in progress are recorded in the period in which the losses become probable and reasonably estimable.

The Company provides hosting services that give customers access to software that resides on Company servers. The Company’s model typically includes an up-front fee and a monthly commitment from the customer that commences upon completion of the implementation through the remainder of the customer life. The up-front fee is the initial setup fee, or the implementation fee. The monthly commitment includes, but is not limited to, a fixed monthly fee or a transactional fee based on system usage that exceeds monthly minimums. If the up-front fee does not have standalone value, revenue is deferred until the date the customer commences use of the Company’s services, at which point the up-front fees are recognized ratably over the life of the customer arrangement. If the up-front fee has standalone value, revenue is deferred until the work has been performed. In determining whether professional services have standalone value, the Company considers the following factors for each customer arrangement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work.

Investments

Investments consist of corporate notes and bonds, and commercial paper. The Company classifies investments as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. All investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income, a component of stockholders’ equity. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered to be other-than-temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before the recovery of its cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in other income (expense), net in the Statements of Other Comprehensive Income. No other-than-temporary impairment charges were recognized in the three and six months ended March 31, 2016 or 2015.

All investments whose maturity or sale is expected within one year are classified as “current” on the balance sheet. All other securities are classified as “long-term” on the balance sheet.

6


 

Accounts Receivable and Allowance for Doubtful Accounts

 

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. The Company considers receivables past due based on the contractual payment terms. Allowances for doubtful accounts are established based on various factors, including credit profiles of the Company’s customers, contractual terms and conditions, historical payments, and current economic trends. The Company reviews its allowances by assessing individual accounts receivable over a specific aging and amount. Accounts receivable are written off on a case-by-case basis, net of any amounts that may be collected. The Company maintained an allowance for doubtful accounts of $12,300  and $12,900 as of March 31, 2016 and September 30, 2015, respectively.

Capitalized Software Development Costs

Costs incurred for the development of software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. Software development costs consist primarily of compensation of development personnel and related overhead incurred to develop new products and upgrade and enhance the Company’s current products, as well as fees paid to outside consultants. Capitalization of software development costs ceases and amortization of capitalized software development costs commences when the products are available for general release. For the three and six months ended March 31, 2016 and 2015, no software development costs were capitalized because the time period and costs incurred between technological feasibility and general release for all software product releases were not material or were not realizable.

Guarantees

In the ordinary course of business, the Company is not subject to potential obligations under guarantees that fall within the scope of FASB ASC Topic 460, Guarantees (“ASC 460”), except for standard indemnification and warranty provisions that are contained within many of the Company’s customer license and service agreements and certain supplier agreements, and give rise only to the disclosure requirements prescribed by ASC 460. Indemnification and warranty provisions contained within the Company’s customer license and service agreements and certain supplier agreements are generally consistent with those prevalent in the Company’s industry.  The Company has not previously incurred significant costs to settle claims or pay awards under these indemnification or warranty obligations. The Company accounts for these obligations in accordance with FASB ASC Topic 450, Contingencies (“ASC 450”), and records a liability for these obligations when a loss is probable and reasonably estimable. The Company has not recorded any liabilities for these obligations as of March 31, 2016 or September 30, 2015.

Fair Value of Equity Instruments

The fair value of equity instruments involves significant estimates based on underlying assumptions made by management. The fair value for purchase rights under the Company’s equity plans is measured at the grant date using a Black-Scholes valuation model, which involves estimates of stock volatility, expected life of the instruments and other assumptions, and using the closing price of the Company’s common stock on the grant date for RSUs. The fair value of stock-based awards is recognized as an expense over the respective terms of the awards.

Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax basis of such assets and liabilities. The Company maintains a valuation allowance against its deferred tax assets due to the uncertainty regarding the future realization of such assets, which is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Until such time as the Company can demonstrate that it will no longer incur losses, or if the Company is unable to generate sufficient future taxable income, it could be required to maintain the valuation allowance against its deferred tax assets.

Comprehensive Income

Comprehensive income consists of net income, unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments. Included on the consolidated balance sheet at March 31, 2016 is an accumulated other comprehensive loss of $0.1 million, compared to $3,000 at September 30, 2015, related to the Company’s available-for-sale securities and foreign currency translation adjustments.

7


 

 

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition – Revenue from Contracts with Customers (“ASC 606”), which amends the guidance in former ASC 605, Revenue Recognition. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact of the provisions of ASC 606.

 

In September 2015, the FASB issued Accounting Standards Update “ASU” No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805)” (“ASU 2015-16”) which eliminates the requirement to restate prior period financial statements for measurement period adjustments. ASU 2015-16 requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard is effective for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. The Company does not believe the adoption of ASU 2015-16 will have a material impact on its consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”).  ASU 2016-01 is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. We are assessing the impact of adopting ASU 2016-01 on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning in its first quarter of 2020 and early adoption is permitted. The Company is currently evaluating the timing of its adoption and the impact of adopting the new lease standard on its consolidated financial statements.

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. ASU 2016-09 will be effective for the Company beginning in its first quarter of 2018. The Company is currently evaluating the impact of adopting the new stock compensation standard on its consolidated financial statements.

 

No other new accounting pronouncement issued or effective during the three months ended March 31, 2016 had, or is expected to have, a material impact on the Company’s consolidated financial statements.

 

 

2. BUSINESS COMBINATION

On June 17, 2015, the Company completed the acquisition (the “Acquisition”) of IDchecker NL B.V., a company incorporated under the laws of the Netherlands (“IDC NL”), and ID Checker, Inc., a California corporation and wholly owned subsidiary of IDC NL (“IDC Inc.” and together with IDC NL, “IDchecker”), pursuant to a Share Purchase Agreement (the “Share Purchase Agreement”) dated May 26, 2015, by and among the Company, IDC NL, ID Checker Holding B.V. (“Parent”), Stichting Administratiekantoor OPID (together with Parent, the “Sellers”), and the other individuals specified therein. Upon completion of the Acquisition, IDC NL and IDC Inc. became wholly owned subsidiaries of the Company and the transaction has been accounted for as an acquisition of a business. IDchecker is a provider of cloud-based identification document verification services.

The total consideration for the IDchecker acquisition was $5.6 million in cash, subject to adjustments for transaction expenses, indebtedness, and working capital adjustments, forgiveness of the outstanding balance of approximately $0.3 million on a promissory note issued by the Company to IDchecker, and approximately $2.7 million in shares of the Company’s common stock (the “Closing Shares”), par value $0.001 per share (“Common Stock”), or 712,790 shares, were issued to the Sellers. In January 2016, the Company issued 137,306 shares (the “Paid Earnout Shares”) for achievement of certain revenue and net income targets for the nine-month period ending on September 30, 2015.  In addition, the Company will issue to the Sellers up to an aggregate of $1.0 million in shares of Common Stock (together with the Paid Earnout Shares, the “Earnout Shares”) subject to the achievement of certain revenue and net

8


 

income targets by IDchecker twelve-month period ending on September 30, 2016 (“Earnout Period”). If the revenue or net income achieved by IDchecker during the Earnout Period is less than the applicable target but equal to or greater than 80% of such target, the Sellers will receive a prorated amount of Earnout Shares. Vesting of both the Closing Shares and Earnout Shares is subject to the continued employment of the founders of IDchecker and such shares are being accounted for as compensation for future services in accordance with FASB ASC 718, Compensation – Stock Compensation. For additional information regarding the Closing Shares and Earnout Shares, see Note 5 to these consolidated financial statements.

Upon the closing of the Acquisition, the Company deposited $1.8 million of the Cash Payment and 20% of the Closing Shares into an escrow fund to serve as collateral and partial security for working capital adjustments and certain indemnification rights. In January 2016, the Company also deposited 27,461 Earnout Shares into an escrow fund, and to the extent any future Earnout Shares are issued to the Sellers, 20% of such Earnout Shares will be placed in the escrow fund. The escrow fund will be maintained for up to 24 months following the last issuance of Earnout Shares or until such earlier time as the escrow fund is exhausted.

The purchase price is subject to a post-closing adjustment in net working capital as provided in the Share Purchase Agreement.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as part of the Acquisition as of June 17, 2015:

 

 

 

June 17, 2015

 

Current assets

 

$

620

 

Property, plant and equipment

 

 

42

 

Intangible assets

 

 

3,570

 

Assets acquired

 

$

4,232

 

Current liabilities

 

$

(476

)

Other liabilities

 

 

(810

)

Liabilities assumed

 

$

(1,286

)

Fair value of net assets acquired

 

$

2,946

 

Total consideration paid

 

 

5,819

 

Goodwill before effect in exchange rates

 

$

2,873

 

Effect of movements in exchange rates

 

 

(67

)

Goodwill

 

$

2,806

 

 

The Company estimated the fair value of identifiable acquisition-related intangible assets primarily based on discounted cash flow projections that will arise from these assets. The Company exercised significant judgment with regard to assumptions used in the determination of fair value such as discount rates and the determination of the estimated useful lives of the intangible assets, see Note 4.  The excess of the purchase price over the fair value of the assets acquired and liabilities assumed was allocated to goodwill. Goodwill in the amount of $2.9 million was recorded.  The goodwill recognized is due to expected synergies and other factors and is not expected to be deductible for income tax purposes.

 

 

3. INVESTMENTS

The following table summarizes investments by type of security as of March 31, 2016:

 

 

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Market

Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities, short-term

 

$

10,479

 

 

$

2

 

 

$

(1

)

 

$

10,480

 

Corporate debt securities, long-term

 

 

753

 

 

 

-

 

 

 

(3

)

 

 

750

 

Government debt securities, short-term

 

 

4,458

 

 

 

-

 

 

 

(3

)

 

 

4,455

 

Government debt securities, long-term

 

 

3,003

 

 

 

1

 

 

 

(1

)

 

 

3,003

 

Total

 

$

18,693

 

 

$

3

 

 

$

(8

)

 

$

18,688

 

9


 

The following table summarizes investments by type of security as of September 30, 2015:

 

 

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Market

Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities, short-term

 

$

23,924

 

 

$

3

 

 

$

(6

)

 

$

23,921

 

Corporate debt securities, long-term

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

23,924

 

 

$

3

 

 

$

(6

)

 

$

23,921

 

The cost of securities sold is based on the specific identification method. Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in investment income.

The Company determines the appropriate designation of investments at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company’s investments are designated as available-for-sale debt securities. As of March 31, 2016 and September 30, 2015, the Company’s short-term investments have maturity dates of less than one year from the balance sheet date and the Company’s long-term investments have maturity dates of greater than one year from the balance sheet date.

Available-for-sale marketable securities are carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of tax, and reported as a separate component of stockholders’ equity. Management reviews the fair value of the portfolio at least monthly, and evaluates individual securities with fair value below amortized cost at the balance sheet date. For debt securities, in order to determine whether impairment is other than temporary, management must conclude whether the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis. If management intends to sell an impaired debt security or it is more likely than not that the Company will be required to sell the security prior to recovering its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. The amount of an other-than-temporary impairment on debt securities related to a credit loss, or securities that management intends to sell before recovery, is recognized in earnings. The amount of an other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of stockholders’ equity in other comprehensive income. No other-than-temporary impairment charges were recognized in the three and six months ended March 31, 2016 and 2015.

Fair Value Measurements and Disclosures

FASB ASC Topic 820, Fair Value Measurements (“ASC 820”) defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last, unobservable:

 

·

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 following table represents the fair value hierarchy of the Company’s investments and acquisition related contingent consideration:

 

10


 

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

March 31, 2016:

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

Industrial

 

$

5,478

 

 

$

-

 

Financial

 

 

2,805

 

 

 

-

 

Commercial paper

 

 

 

 

 

 

 

 

Financial

 

 

1,497

 

 

 

-

 

Industrial

 

 

700

 

 

 

-

 

Government debt securities

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

4,455

 

 

 

-

 

Long-term investments:

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

Industrial

 

 

750

 

 

 

-

 

Government debt securities

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

3,003

 

 

 

-

 

Total assets at fair value

 

$

18,688

 

 

$

-

 

Liabilities:

 

 

 

 

 

 

 

 

Acquisition-related contingent consideration

 

 

-

 

 

 

221

 

Total liabilities at fair value

 

$

-

 

 

$

221

 

 

 

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

September 30, 2015:

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

Financial

 

$

10,308

 

 

$

-

 

Industrial

 

 

9,665

 

 

 

-

 

Utility

 

 

1,802

 

 

 

-

 

Commercial paper

 

 

 

 

 

 

 

 

Industrial

 

 

1,448

 

 

 

-

 

Financial

 

 

698

 

 

 

-

 

Total assets at fair value

 

$

23,921

 

 

$

-

 

Liabilities:

 

 

 

 

 

 

 

 

Acquisition-related contingent consideration

 

 

-

 

 

 

47

 

Total liabilities at fair value

 

$

-

 

 

$

47

 

 

 

The following table includes a summary of the contingent consideration measured at fair value using significant unobservable inputs (Level 3) during the six months ended March 31, 2016:

 

Balance at September 30, 2015

$

47

 

Expenses recorded due to changes in fair value

 

174

 

Payments

 

-

 

Balance at March 31, 2016

$

221

 

 

 

 

 

 

 

11


 

4. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company has goodwill balances of $2.8 million and $2.9 million at March 31, 2016 and September 30, 2015, respectively, associated with the acquisition of IDchecker which occurred during fiscal year 2015. For information regarding the acquisition of IDchecker, see Note 2. Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill acquired in a business combination and determined to have an indefinite useful life is not amortized, but instead is tested for impairment at least annually in accordance with FASB ASC Topic 350, Intangibles – Goodwill and Other.

Intangible assets

Intangible assets include the value assigned to completed technology, customer relationships, and trade names. The estimated useful lives for all of these intangible assets, range from five to six years. Intangible assets as of March 31, 2016 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Amortization Period

 

Cost

 

 

Accumulated Amortization

 

 

Net

 

Completed technologies

 

6 years

 

$

2,316

 

 

$

304

 

 

$

2,012

 

Customer relationships

 

6 years

 

 

948

 

 

 

125

 

 

 

823

 

Tradenames

 

5 years

 

 

225

 

 

 

35

 

 

 

190

 

Total intangible assets

 

 

 

$

3,489

 

 

$

464

 

 

$

3,025

 

 

Amortization expense related to acquired intangible assets was $0.1 million and zero for the three months ended March 31, 2016 and 2015, respectively, and $0.3 million and zero for the six months ended March 31, 2016 and 2015, respectively, is recorded within Acquisition-related costs and expenses on the Consolidated Statement of Operations and Other Comprehensive Income.

The estimated future amortization expense related to intangible assets for each of the five succeeding fiscal years is expected to be as follows:

 

 

 

Estimated Future Amortization Expense

 

2016 (remaining six months)

 

$

292

 

2017

 

 

586

 

2018

 

 

586

 

2019

 

 

586

 

2020

 

 

573

 

Thereafter

 

 

402

 

Total

 

$

3,025

 

 

 

 

5. STOCKHOLDERS’ EQUITY

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense related to stock options and RSUs, which was allocated as follows:

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of Sales

 

$

10

 

 

$

-

 

 

$

10

 

 

$

-

 

Sales and marketing

 

 

287

 

 

 

192

 

 

 

530

 

 

 

367

 

Research and development

 

 

162

 

 

 

160

 

 

 

342

 

 

 

297

 

General and administrative

 

 

713

 

 

 

519

 

 

 

1,279

 

 

 

1,021

 

Stock-based compensation expense included in expenses

 

$

1,172

 

 

$

871

 

 

$

2,161

 

 

$

1,685

 

 

12


 

    The fair value calculations for stock-based compensation awards to employees for the six months ended March 31, 2016 and 2015 were based on the following assumptions:

 

 

 

Six Months Ended

March 31, 2016

 

 

Six Months Ended

March 31, 2015

 

Risk-free interest rate

 

1.43% – 1.75%

 

 

1.29% – 1.66%

 

Expected life (years)

 

 

5.90

 

 

 

5.25

 

Expected volatility

 

 

83%

 

 

 

98%