You should read this discussion together with the financial statements, related notes and other financial information included in this Form 10-K. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Item 1A-"Risk Factors" and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below. Please see "Important Note About Forward-Looking Statements" at the beginning of this Form 10-K. Overview Mitek is a leading innovator of mobile image capture and digital identity verification solutions. We are a software development company with expertise in computer vision, artificial intelligence, and machine learning. We are currently serving more than 6,500 financial services organizations and leading marketplace and financial technology ("fintech") brands across the globe. Our solutions are embedded in native mobile apps and browsers to facilitate better online user experiences, fraud detection and reduction, and compliant transactions. Mitek's Mobile Deposit® solution is used today by millions of consumers inthe United States ("U.S.") andCanada for mobile check deposit. Mobile Deposit® enables individuals and businesses to remotely deposit checks using their camera-equipped smartphone or tablet. Our Mobile Deposit® solution is embedded within the financial institutions' digital banking apps used by consumers and has now processed over three billion check deposits. Mitek began selling Mobile Deposit® in early 2008 and received its first patent issued for this product inAugust 2010 . Mitek's Mobile Verify® verifies a user's identity online enabling organizations to build safer digital communities. Scanning an identity document helps enable an enterprise to verify the identify of the person with whom they are conducting business, comply with growing governmental Anti-Money Laundering ("AML") and Know Your Customer ("KYC") regulatory requirements, and to improve the overall customer experience for digital onboarding. To be sure the person submitting the identity document is who they say they are, Mitek's Mobile Verify Face Comparison provides an additional layer of online verification and compares the face on the submitted identity document with the live selfie photo of the user. The combination of identity document capture and data extraction process enables the organization to prefill the end user's application, with far fewer key strokes, thus reducing keying errors, and improving both operational efficiency and the customer experience. Today, the financial services verticals (banks, credit unions, lenders, payments processors, card issuers, fintech companies, etc.) represent the greatest percentage of use of our solutions, but there is accelerated adoption by marketplaces, sharing economy, and hospitality sectors. Mitek uses artificial intelligence and machine learning to constantly improve the product performance of Mobile Verify® such as speed and accuracy of approvals of identification documents. The core of our user experience is driven by Mitek MiSnap™, the leading image capture technology, which is incorporated across our product lines. It provides a simple, intuitive, and superior user-experience, making digital transactions faster, more accurate, and easier for the consumer. Mobile Fill® automates application prefill of any form with user data by simply snapping a picture of the driver's license or other similar user identity document. CheckReader™ enables financial institutions to automatically extract data from a check image received across any deposit channel - branch, ATM, RDC, and mobile. Through the automatic recognition of all fields on checks, whether handwritten or machine print, CheckReader™ speeds the time to deposit for banks and customers and helps enable financial institutions to comply with check clearing regulations. We market and sell our products and services worldwide through internal, direct sales teams located in theU.S. ,Europe , andLatin America as well as through channel partners. Our partner sales strategy includes channel partners who are financial services technology providers and identity verification providers. These partners integrate our products into their solutions to meet the needs of their customers. Fiscal Year 2019 Highlights •Revenues for the fiscal year endedSeptember 30, 2019 were$84.6 million , an increase of 33% compared to revenues of$63.6 million for the fiscal year endedSeptember 30, 2018 . •Net loss was$0.7 million , or$0.02 per share, for the fiscal year endedSeptember 30, 2019 , compared to a net loss of$11.8 million , or$0.33 per share, for the fiscal year endedSeptember 30, 2018 . •Cash provided by operating activities was$14.3 million for the fiscal year endedSeptember 30, 2019 , compared to$5.6 million for the fiscal year endedSeptember 30, 2018 . •During fiscal 2019 the total number of financial institutions licensing our technology exceeded 6,500. All of the top 10 U.S. retail banks, and nearly all of the top 50 U.S. retail banks utilize our technology. 23 -------------------------------------------------------------------------------- •We added new patents to our portfolio during fiscal year 2019, bringing our total number of issued patents to 57 as ofSeptember 30, 2019 . In addition, we have 25 patent applications as ofSeptember 30, 2019 . Acquisition of A2iA Group II, S.A.S. OnMay 23, 2018 , Mitek acquired all of the issued and outstanding shares of A2iA Group II, S.A.S. ("A2iA"), a simplified joint stock company formed under the laws ofFrance , pursuant to a share purchase agreement, by and among Mitek, each of the holders of outstanding shares ofA2iA and Andera Partners , S.C.A., as representative of the sellers (the "A2iA Acquisition"). A2iA is a software development organization focused on delivering specialized and highly intelligent data extraction tools that enable customers to optimize their data capture, document processing, and workflow automation capabilities. Upon completion of the A2iA Acquisition, A2iA became a direct wholly owned subsidiary of Mitek. As consideration for the A2iA Acquisition, we (i) made a cash payment of$26.8 million , net of cash acquired; (ii) issued 2,514,588 shares, or$21.9 million , of Mitek's common stock, par value$0.001 per share ("Common Stock"); and (iii) incurred liabilities of$0.2 million . The A2iA Acquisition extends our global leadership position in both mobile check deposit and digital identity verification and combines the two market leaders in document recognition and processing. Acquisition ofICAR Vision Systems, S.L . OnOctober 16, 2017 ,Mitek Holding B.V. , a company incorporated under the laws ofThe Netherlands and our wholly owned subsidiary ("Mitek Holding B.V. "), acquired all of the issued and outstanding shares ofICAR Vision Systems, S.L . ("ICAR") and each of its subsidiaries (the "ICAR Acquisition"), pursuant to a Share Purchase Agreement (the "ICAR Purchase Agreement"), by and among, Mitek,Mitek Holding B.V. , and each of the shareholders of ICAR (the "ICAR Sellers"). ICAR is a technology provider of identity fraud proofing and document management solutions for web, desktop, and mobile platforms. Upon completion of the ICAR Acquisition, ICAR became a direct wholly owned subsidiary ofMitek Holding B.V. and our indirect wholly owned subsidiary. Under the terms of the ICAR Purchase Agreement,Mitek Holding B.V. agreed to purchase all of the outstanding shares of ICAR for an aggregate purchase price of up to$13.9 million , net of cash acquired. On closing,$3.0 million was paid in cash, net of cash acquired and$5.6 million in shares of Common Stock, or 584,291 shares, were issued to the ICAR Sellers. The ICAR Purchase Agreement also provides for additional payments of up to approximately$5.3 million upon the achievement of certain financial milestones during fiscal 2018 and fiscal 2019. ICAR is a leading provider of consumer identity verification solutions inSpain andLatin America . The ICAR Acquisition strengthens our position as a global digital identity verification powerhouse in the consumer identity and access management solutions market. Market Opportunities, Challenges, & Risks We believe that financial institutions, fintechs, and other companies see our patented solutions as a way to provide a superior digital customer experience to meet growing consumers demands of trust and convenience online and, at the same time, assist them in meeting regulatory requirements. The value of digital transformation to our customers is a possible increase in top line revenue and a reduction in the cost of sales and service. As the use of new technology increases, so does associated fraud and cyber-attacks. The negative outcomes of fraud encompass financial losses, brand damage, and loss of loyal customers. We predict growth in both our deposits and identity verification products based on current trends in payments, online lending, more stringent regulations, growing usage of sharing apps and online marketplaces, and the ever-increasing demand for digital services. Factors adversely affecting the pricing of, or demand for, our digital solutions, such as competition from other products or technologies, any decline in the demand for digital transactions, or negative publicity or obsolescence of the software environments in which our products operate, could result in lower revenues or gross margins. Further, because substantially all of our revenues are from a few types of technology, our product concentration may make us especially vulnerable to market demand and competition from other technologies, which could reduce our revenues. The sales cycle for our software and services can be lengthy and the implementation cycles for our software and services by our channel partners and customers can also be lengthy, often as long as six months and sometimes longer for larger customers. If implementation of our products by our channel partners and customers is delayed or otherwise not completed, our business, financial condition, and results of operations may be adversely affected. Revenues related to most of our on-premise licenses for mobile products are required to be recognized up front upon satisfaction of all applicable revenue recognition criteria. Revenue related to our SaaS products is recognized ratably over the life of the contract or as transactions are used depending on the contract criteria. The recognition of future revenues from these licenses is dependent upon a number of factors, including, but not limited to, the term of our license agreements, the timing of implementation of our products by our channel partners and customers, and the timing of any re-orders of additional licenses and/or license renewals by our channel partners and customers. During each of the last few years, sales of licenses to one or more channel partners have comprised a significant part of our revenue each year. This is attributable to the timing of renewals or purchases of licenses and does not represent a dependence on any single channel partner. If we were to lose a channel partner relationship, we do not believe such a loss would adversely affect our 24 -------------------------------------------------------------------------------- operations because either we or another channel partner could sell our products to the end-users that had purchased products from the channel partner we lost. However, in that case, we or another channel partner must establish a relationship with the end-users, which could take time to develop, if it develops at all. We have a growing number of competitors in the mobile image capture and identity verification industry, many of which have greater financial, technical, marketing, and other resources. However, we believe our patented mobile image capture and identity verification technology, our growing portfolio of products and geographic coverage for the financial services industry, and our market expertise gives us a distinct competitive advantage. To remain competitive, we must continue to offer products that are attractive to the consumer as well as being secure, accurate, and convenient. To help us remain competitive, we intend to further strengthen performance of our portfolio of products through research and development as well as partnering with other technology providers. Results of Operations Comparison of the Years EndedSeptember 30, 2019 and 2018 The following table summarizes certain aspects of our results of operations for the fiscal year endedSeptember 30, 2019 compared to the fiscal year endedSeptember 30, 2018 (in thousands, except percentages):
Twelve Months Ended
Percentage of Total Revenue Increase
(Decrease) 2019 2018 2019 2018 $ % Revenue Software and hardware$ 46,845 $ 40,698 55 % 64 % 6,147 15 % Service and other 37,745 22,861 45 % 36 % 14,884 65 % Total revenue$ 84,590 $ 63,559 100 % 100 % 21,031 33 % Cost of revenue 12,266 8,686 15 % 14 % 3,580 41 % Selling and marketing 27,405 21,700 32 % 34 % 5,705 26 % Research and development 19,018 15,673 22 % 25 % 3,345 21 % General and administrative 19,861 17,067 23 % 27 % 2,794 16 % Acquisition-related costs and expenses 7,563 8,239 9 % 13 % (676) (8) % Restructuring costs 3,067 - 4 % - % 3,067 100 % Other income (expense), net 602 (935) 1 % (1) % 1,537 164 % Income tax benefit (provision) 3,264 (3,066) 4 % (5) % 6,330 206 % Revenue Total revenue increased$21.0 million , or 33%, to$84.6 million in 2019 compared to$63.6 million in 2018. Software and hardware revenue increased$6.1 million , or 15%, to$46.8 million in 2019 compared to$40.7 million in 2018. This increase is primarily due to an increase from the sale of A2iA products in 2019 compared to 2018, as well as an increase in sales of our Mobile Deposit® software products, partially offset by declining software revenue from our legacy on-premise identity products which are being phased out. Service and other revenue increased$14.9 million , or 65%, to$37.7 million in 2019 compared to$22.9 million in 2018. This increase is primarily due to strong growth in transaction SaaS revenue of$8.3 million , or 63%, in 2019 compared to 2018 and maintenance associated with the sale of our A2iA and Mobile Deposit® products. Cost of Revenue Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third party products embedded in our products. Cost of revenue increased$3.6 million , or 41%, to$12.3 million in 2019 compared to$8.7 million in 2018. As a percentage of revenue, cost of revenue increased to 15% in 2019 from 14% in 2018. The increase in cost of revenue is primarily due to an increase in variable personnel, hosting, and royalty costs associated with a higher volume of Mobile Verify™ transactions processed during 2019 compared to 2018, additional costs associated with the sale of ICAR hardware products, and additional labor costs associated with the delivery of A2iA maintenance. Selling and Marketing Expenses Selling and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with sales, marketing, and product management personnel. Selling and marketing expenses also include non-billable costs of professional services personnel, advertising expenses, product promotion costs, trade shows, and other brand awareness 25 -------------------------------------------------------------------------------- programs. Selling and marketing expenses increased$5.7 million , or 26%, to$27.4 million in 2019 compared to$21.7 million in 2018. As a percentage of revenue, selling and marketing expenses decreased to 32% in 2019 from 34% in 2018. The increase in sales and marketing expense is primarily due to higher personnel-related costs of$2.6 million resulting from our increased headcount in 2019 compared to 2018, additional sales and marketing expenses associated with the A2iA Acquisition of$2.4 million , and higher product promotion costs of$0.7 million in 2019. Research and Development Expenses Research and development expenses include payroll, employee benefits, stock-based compensation, third party contractor expenses, and other headcount-related costs associated with software engineering and mobile image capture science. Research and development expenses increased$3.3 million , or 21%, to$19.0 million in 2019 compared to$15.7 million in 2018. As a percentage of revenue, research and development expenses decreased to 22% in 2019 from 25% in 2018. The increase in research and development expenses is primarily due to additional research and development costs associated with the A2iA Acquisition of$2.3 million and higher personnel-related costs of$0.9 million resulting from our increased headcount in 2019 compared to 2018. General and Administrative Expenses General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration and information technology functions, as well as third party legal, accounting, and other administrative costs. General and administrative expenses increased$2.8 million , or 16%, to$19.9 million in 2019 compared to$17.1 million in 2018. As a percentage of revenue, general and administrative expenses decreased to 23% in 2019 from 27% in 2018. The increase in general and administrative expenses is primarily due to additional general and administrative costs associated with the A2iA Acquisition of$1.8 million , higher personnel-related costs of$1.5 million resulting from our increased headcount in 2019 compared to 2018, third party costs associated with our strategic process of$1.2 million , and higher litigation costs of$0.8 million in 2019 compared to 2018, partially offset by a decrease in executive transition costs of$1.5 million in 2019 compared to 2018 and a$1.0 million insurance settlement received in 2019. Acquisition-Related Costs and Expenses Acquisition-related costs and expenses include amortization of intangible assets, expenses recorded due to changes in the fair value of contingent consideration, stock-based compensation, and other costs associated with acquisitions. Acquisition-related costs and expenses decreased$0.7 million , or 8%, to$7.6 million in 2019 compared to$8.2 million in 2018. As a percentage of revenue, acquisition-related costs and expenses decreased to 9% in 2019 from 13% in 2018. The decrease in acquisition-related costs and expenses is primarily due to a decrease in expenses associated with changes in the fair value of acquisition-related contingent consideration of$1.6 million in 2019 compared to 2018,$1.1 million of legal and other integration costs associated with the ICAR and A2iA Acquisitions which both occurred in 2018, and$1.0 million of executive separation costs associated with the A2iA Acquisition which was incurred in 2018. These decreases are partially offset by an increase expense related to the amortization of intangible assets associated with the A2iA Acquisition of$3.0 million in 2019 compared to 2018. Restructuring Costs Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were$3.1 million in 2019 and related to the restructuring plan implemented inJune 2019 . Other Income (Expense), Net Other income (expense), net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio, foreign currency transactional gains or losses, and interest expense. Other income (expense), net increased$1.5 million , to a net income of$0.6 million in 2019 compared to a net expense of$0.9 million in 2018, primarily due to a$1.3 million foreign currency exchange remeasurement loss on the Euro for the acquisition of A2iA in 2018 as well as higher interest income earned on our cash balances in 2019 compared to 2018. Income Tax Benefit (Provision) The income tax benefit for 2019 was$3.3 million compared to an income tax provision of$3.1 million in 2018. The income tax benefit for 2019 is primarily due to changes in our deferred tax benefit of$3.2 million related to excess tax benefits from the exercise of stock options, as well as additional research and development credits associated with the provision to return true-up. The income tax provision for 2018 is primarily due to$4.9 million of tax expense related to the revaluation of ourU.S. deferred tax assets and liabilities as a result of the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Cuts and Jobs Act"). The impact of the Tax Cuts and Jobs Act reduced the Federal Corporate tax rate from 35% to 21%. This expense was partially offset by an income tax benefit related to our net loss before income taxes for the year (see Note 8 in the Consolidated Financial Statements). 26 -------------------------------------------------------------------------------- Results of Operations Comparison of the Years EndedSeptember 30, 2018 and 2017 The following table summarizes certain aspects of our results of operations for the fiscal year endedSeptember 30, 2018 compared to the fiscal year endedSeptember 30, 2017 (in thousands, except percentages):
Twelve Months Ended
Percentage of Total Revenue Increase
(Decrease) 2018 2017 2018 2017 $ % Revenue Software and hardware$ 40,698 $ 29,647 64 % 65 % 11,051 37 % Service and other 22,861 15,743 36 % 35 % 7,118 45 % Total revenue$ 63,559 $ 45,390 100 % 100 % 18,169 40 % Cost of revenue 8,686 4,041 14 % 9 % 4,645 115 % Selling and marketing 21,700 14,484 34 % 32 % 7,216 50 % Research and development 15,673 10,430 25 % 23 % 5,243 50 % General and administrative 17,067 11,310 27 % 25 % 5,757 51 % Acquisition-related costs and expenses 8,239 2,356 13 % 5 % 5,883 250 % Other income (expense), net (935) 402 (1) % 1 % (1,337) (333) % Income tax benefit (provision) (3,066) 10,921 (5) % 24 % (13,987) (128) % Revenue Total revenue increased$18.2 million , or 40%, to$63.6 million in 2018 compared to$45.4 million in 2017. The increase is due to an increase in sales of software and hardware of$11.1 million , or 37%, to$40.7 million in 2018 compared to$29.6 million in 2017. In addition, service and other revenue increased$7.1 million , or 45%, to$22.9 million in 2018 compared to$15.7 million in 2017. The increase in software and hardware revenue is made up of approximately$6.8 million generated from the sale of ICAR and A2iA products and an increase of$4.3 million in sales of our Mobile Deposit® software products. Service and other revenue primarily increased due to increases in Mobile Verify™ and ICAR SaaS revenue of$5.3 million , or 68%, in 2018 compared to 2017, as well as additional maintenance associated with the increase in our Mobile Deposit® software license revenue. Cost of Revenue Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third party products embedded in our products. Cost of revenue increased$4.6 million , or 115%, to$8.7 million in 2018 compared to$4.0 million in 2017. As a percentage of revenue, cost of revenue increased to 14% in 2018 from 9% in 2017. The increase in cost of revenue is primarily due to an increase in variable personnel, hosting, and royalty costs associated with a higher volume of Mobile Verify™ transactions processed during 2018 compared to 2017, as well as additional costs in 2018 associated with the sale of ICAR hardware products. Selling and Marketing Expenses Selling and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with sales, marketing, and product management personnel. Selling and marketing expenses also include non-billable costs of professional services personnel, advertising expenses, product promotion costs, trade shows, and other brand awareness programs. Selling and marketing expenses increased$7.2 million , or 50%, to$21.7 million in 2018 compared to$14.5 million in 2017. As a percentage of revenue, selling and marketing expenses increased to 34% in 2018 from 32% in 2017. The increase in sales and marketing expense is primarily due to higher personnel-related costs of$4.1 million resulting from our increased headcount in 2018 compared to 2017, as well as additional sales and marketing costs of$3.0 million associated with the A2iA Acquisition and ICAR Acquisition, both of which occurred during fiscal 2018. Research and Development Expenses Research and development expenses include payroll, employee benefits, stock-based compensation, third party contractor expenses and other headcount-related costs associated with software engineering and mobile image capture science. Research and development expenses increased$5.2 million , or 50%, to$15.7 million in 2018 compared to$10.4 million in 2017. As a percentage of revenue, research and development expenses increased to 25% in 2018 from 23% in 2017. The increase in research and development expenses is primarily due to higher personnel-related costs of$2.8 million resulting from our increased headcount in 2018 compared 27 -------------------------------------------------------------------------------- to 2017, as well as additional research and development costs of$2.5 million associated with the A2iA Acquisition and ICAR Acquisition, both of which occurred during fiscal 2018. General and Administrative Expenses General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration and information technology functions, as well as third party legal, accounting, and other administrative costs. General and administrative expenses increased$5.8 million , or 51%, to$17.1 million in 2018 compared to$11.3 million in 2017. As a percentage of revenue, general and administrative expenses increased to 27% in 2018 from 25% in 2017. The increase in general and administrative expenses is primarily due to higher personnel-related costs of$2.9 million resulting from our increased headcount and an increase in executive transition costs of$1.7 million in 2018 compared to 2017, as well as additional general and administrative costs of$0.9 million associated with the A2iA Acquisition and ICAR Acquisition, both of which occurred during fiscal 2018. Acquisition-Related Costs and Expenses Acquisition-related costs and expenses include amortization of intangible assets, expenses recorded due to changes in the fair value of contingent consideration, stock-based compensation, and other costs associated with acquisitions. Acquisition-related costs and expenses increased$5.9 million , or 250%, to$8.2 million in 2018 compared to$2.4 million in 2017. As a percentage of revenue, acquisition-related costs and expenses increased to 13% in 2018 from 5% in 2017. The increase in acquisition-related costs and expenses is primarily due to$3.4 million in additional expense related the amortization of intangible assets and$0.9 million of additional legal and other integration costs related to the A2iA Acquisition and the ICAR Acquisition,$1.0 million of employee termination costs associated with the A2iA Acquisition, and an increase of$0.5 million in expense due to changes in the fair value of acquisition-related contingent consideration. Other Income (Expense), Net Other income (expense), net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio, foreign currency transactional gains or losses, and interest expense. Other income (expense), net decreased$1.3 million , to a net expense of$0.9 million in 2018 compared to a net income of$0.4 million in 2017, primarily due to a$1.3 million foreign currency exchange remeasurement loss on the Euro for the acquisition of A2iA. Income Tax Benefit (Provision) The income tax provision for 2018 was$3.1 million compared to an income tax benefit of$10.9 million in 2017. The income tax provision for 2018 is primarily due to$4.9 million of tax expense related to the revaluation of ourU.S. deferred tax assets and liabilities as a result of the enactment of the Tax Cuts and Jobs Act. The impact of the Tax Cuts and Jobs Act reduced the Federal Corporate tax rate from 35% to 21%. This expense was partially offset by an income tax benefit related to our net loss before income taxes for the year. The income tax benefit in 2017 primarily represents the reversal of our valuation allowance previously offsetting our deferred tax assets (see Note 6 in the Consolidated Financial Statements). Liquidity and Capital Resources OnSeptember 30, 2019 , we had$34.8 million in cash and cash equivalents and investments compared to$17.5 million onSeptember 30, 2018 , an increase of$17.3 million , or 99%. The increase in cash and cash equivalents and investments was primarily due to net cash provided by operating activities of$14.3 million and net proceeds from the issuance of equity plan Common Stock of$5.6 million , partially offset by capital expenditures of$1.1 million , payment of acquisition-related contingent consideration of$1.0 million , unfavorable changes in foreign currency effect on cash and cash equivalents of$0.4 million , and net payments on other borrowings of$0.2 million . Cash Flows from Operating Activities Net cash provided by operating activities during fiscal 2019 was$14.3 million and resulted primarily from a net loss of$0.7 million adjusted for net non-cash charges of$14.6 million and favorable changes in operating assets and liabilities of$0.4 million . The primary non-cash adjustments to operating activities were stock-based compensation expense, amortization of intangible assets, and depreciation and amortization totaling$9.6 million ,$7.0 million , and$1.4 million , respectively, which were partially offset by changes in deferred income taxes of$3.8 million . Net cash provided by operating activities during fiscal 2018 was$5.6 million and resulted primarily from a net loss of$11.8 million adjusted for non-cash charges of$19.3 million , partially offset by unfavorable changes in operating assets and liabilities of$1.9 million . The primary non-cash adjustments to operating activities were stock-based compensation expense, amortization of intangible assets, deferred income taxes, depreciation and amortization, and amortization of closing shares and earnout shares totaling$9.0 million ,$4.0 million ,$3.6 million ,$0.6 million , and$0.4 million , respectively. 28 -------------------------------------------------------------------------------- Cash Flows from Investing Activities Net cash used in investing activities was$10.5 million during fiscal 2019, which consisted primarily of net purchases of investments of$9.4 million and capital expenditures of$1.1 million . Net cash used in investing activities was$8.4 million during fiscal 2018, which consisted primarily of net cash paid in conjunction with the acquisitions of$29.7 million and capital expenditures of$4.3 million , partially offset by net sales and maturities of investments of$25.6 million . Cash Flows from Financing Activities Net cash provided by financing activities was$4.4 million during fiscal 2019, which consisted of proceeds from the issuance of equity plan Common Stock of$5.6 million , partially offset by a payment of acquisition-related contingent consideration of$1.0 million and net payments on other borrowings of$0.2 million . Net cash used in financing activities was$0.4 million during fiscal 2018, which consisted of a payment of acquisition-related contingent consideration of$1.3 million and principal payments on other borrowings of$0.3 million , partially offset by proceeds from the issuance of equity plan Common Stock of$1.1 million . Revolving Credit Facility OnMay 3, 2018 , the Company andID Checker, Inc. (together, the "Co-Borrowers") entered into a Loan and Security Agreement (the "Loan Agreement") withSilicon Valley Bank ("SVB"). Pursuant to the Loan Agreement, we arranged for a$10.0 million secured revolving credit facility (the "Revolver") with a floating per annum interest rate equal to the greater of theWall Street Journal prime rate, plus 0.25%, or 4.5%. The Co-Borrowers must maintain, at all times when any amounts are outstanding under the Revolver, either (i) minimum unrestricted cash at SVB and unused availability on the Revolver of at least$15.0 million and (ii) Adjusted Quick Ratio (as defined in the Loan Agreement) of 1.75:1.00. InMay 2019 , the Company and SVB entered into an amendment of the Loan Agreement to extend the maturity of the Revolver toSeptember 30, 2020 . There were no borrowings outstanding under the Revolver as ofSeptember 30, 2019 . Rights Agreement OnOctober 23, 2018 , we entered into the Rights Agreement and issued a dividend of one preferred share purchase right (a "Right") for each share of Common Stock payable onNovember 2, 2018 to the stockholders of record of such shares on that date. Each Right entitles the registered holder, under certain circumstances, to purchase from us one one-thousandth of a share of Series B Junior Preferred Stock, par value$0.001 per share (the "Preferred Shares"), of the Company, at a price of$35.00 per one one-thousandth of a Preferred Share represented by a Right (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement. The Rights are not exercisable until the Distribution Date (as defined in the Rights Agreement). Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. At any time prior to the time any Person becomes an Acquiring Person (as defined in the Rights Agreement), the Board may redeem the Rights in whole, but not in part, at a price of$0.0001 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The Rights will expire on the earlier of (i) the close of business onOctober 22, 2021 , (ii) the time at which the Rights are redeemed, and (iii) the time at which the Rights are exchanged. Other Liquidity Matters OnSeptember 30, 2019 , we had investments of$18.1 million , designated as available-for-sale debt securities, which consisted ofU.S. Treasury notes, commercial paper, and corporate issuances, 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. All securities for which maturity or sale is expected within one year are classified as "current" on the consolidated balance sheets. All other securities are classified as "long-term" on the consolidated balance sheets. AtSeptember 30, 2019 , we had$16.5 million of our available-for-sale securities classified as current and$1.6 million of our available-for-sale securities classified as long-term. AtSeptember 30, 2018 , we had$8.4 million of our available-for-sale securities classified as current. We had working capital of$34.1 million atSeptember 30, 2019 compared to$17.2 million atSeptember 30, 2018 . Based on our current operating plan, we believe the current cash balance and cash expected to be generated from operations will be adequate to satisfy our working capital needs for the next twelve months from the date the financial statements are filed. 29 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as defined in Item 304(a)(4)(ii) of Regulation S-K. Contractual Obligations The following table summarizes our contractual obligations as ofSeptember 30, 2019 (in thousands): Less than More than 1 year 1-3 years 3-5 years 5 years Total Operating lease obligations$ 1,699 $ 3,950 $ 2,707 $ 36 $ 8,392 Other borrowings 131 145 219 61 556 Total$ 1,830 $ 4,095 $ 2,926 $ 97 $ 8,948 Our principal executive offices, as well as our research and development facility, are located in approximately 29,000 square feet of office space inSan Diego, California and the term of the lease continues throughJune 30, 2024 . The average annual base rent under this lease is approximately$1.0 million per year. In connection with this lease, we received tenant improvement allowances totaling approximately$1.0 million . These lease incentives are being amortized as a reduction of rent expense over the term of the lease. Our other offices are located inParis, France ;Amsterdam, The Netherlands ;New York, New York ;Barcelona, Spain ; andLondon, United Kingdom . The term of theParis, France lease continues throughJuly 31, 2021 , with an annual base rent of approximately €0.4 million (or$0.4 million ). The term of theAmsterdam, The Netherlands lease continues throughDecember 31, 2022 , with an annual base rent of approximately €0.2 million (or$0.2 million ). The term of theNew York, New York lease continues throughNovember 30, 2024 , with an annual base rent of approximately$0.2 million . The term of theBarcelona, Spain lease continues throughMay 31, 2023 , with an annual base rent of approximately €0.1 million (or$0.1 million ). The term of theLondon, United Kingdom lease continues throughMay 31, 2020 , with an annual base rent of approximately £63,000 (or approximately$78,000 ). Other than the lease for our office space inSan Diego, California , we do not believe that the leases for our offices are material to the Company. We believe our existing properties are in good condition and are sufficient and suitable for the conduct of its business. Critical Accounting Policies Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in theU.S. ("GAAP"). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, stockholders' equity, revenue, and expenses and related disclosure of contingent assets and liabilities. Management regularly evaluates its estimates and assumptions. These estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, and form the basis for making management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Actual results could vary from those estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition We enter into contractual arrangements with integrators, resellers, and directly with our customers that may include licensing of our software products, product support and maintenance services, SaaS services, consulting services, or various combinations thereof, including the sale of such products or services separately. Our accounting policies regarding the recognition of revenue for these contractual arrangements are fully described in Note 2 to our consolidated financial statements included in this Form 10-K. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services over the term of the agreement. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized based on the following five step model in accordance with ASC 606, Revenue from Contracts with Customers: •Identification of the contract with a customer; •Identification of the performance obligations in the contract; •Determination of transaction price; •Allocation of the transaction price to the performance obligations in the contract; and •Recognition of revenue when, or as, we satisfy a performance obligation. 30 -------------------------------------------------------------------------------- Software and Hardware Software and hardware revenue is generated from on premise software license sales, as well as sales of hardware scanner boxes and on premise appliance products. For software license agreements that are distinct, we recognize software license revenue upon delivery and after evidence of a contract exists. Hardware revenue is recognized in the period that the hardware is shipped. Service and Other Service and other revenue is generated from the sale of transactional SaaS products and services, maintenance associated with the sale of software and hardware, and consulting and professional services. We recognize service and other revenue over the period in which such services are performed. Our model typically includes an up-front fee and a periodic 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 periodic commitment includes, but is not limited to, a fixed periodic fee and / or a transactional fee based on system usage that exceeds committed minimums. If the up-front fee is not distinct, revenue is deferred until the date the customer commences use of our services, at which point the up-front fee is recognized ratably over the life of the customer arrangement. We do not view the signing of the contract or the provision of initial setup services as discrete earnings events that are distinct. Significant Judgments We use the following methods, inputs, and assumptions in determining amounts of revenue to recognize. For multi-element arrangements, we account for individual goods or services as a separate performance obligation if they are distinct, the good or service is separately identifiable from other items in the arrangement, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. Determining whether goods or services are distinct performance obligations that should be accounted for separately may require significant judgment. The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring products or services to the customer. We include any fixed charges within our contracts as part of the total transaction price. To the extent that variable consideration is not constrained, we include an estimate of the variable amount, as appropriate, within the total transaction price and update our assumptions over the duration of the contract. We may constrain the estimated transaction price in the event of a high degree of uncertainty as to the final consideration amount owed because of an extended length of time over which the fees may be adjusted. The transaction price, including any discounts, is allocated between separate goods and services in a multi-element arrangement based on their relative standalone selling prices. For items that are not sold separately, we estimate the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount we expect to receive in exchange for the related good or service. Contract modifications occur when we and our customers agree to modify existing customer contracts to change the scope or price or both of the contract or when a customer terminates some, or all, of the existing services provided by us. When a contract modification occurs, it requires us to exercise judgment to determine if the modification should be accounted for as: (i) a separate contract, (ii) the termination of the original contract and creation of a new contract, or (iii) a cumulative catch up adjustment to the original contract. Further, contract modifications require the identification and evaluation of the performance obligations of the modified contract, including the allocation of revenue to the remaining performance obligations and the period of recognition for each identified performance obligation. Accounts Receivable We consistently monitor collections from our customers and maintain a provision for estimated credit losses that is based on historical experience and on specific customer collection issues. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our revenue recognition policy requires customers to be deemed creditworthy, our accounts receivable are based on customers whose payment is reasonably assured. Our accounts receivable are derived from sales to a wide variety of customers. We do not believe a change in liquidity of any one customer or our inability to collect from any one customer would have a material adverse impact on our financial position. Investments We determine the fair value of our assets and liabilities based on 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 maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value: 31 -------------------------------------------------------------------------------- •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. In using this fair value hierarchy, management may be required to make assumptions about pricing by market participants and assumptions about risk, specifically when using unobservable inputs to determine fair value. These assumptions are subjective in nature and may significantly affect our results of operations. Fair Value of Equity Instruments The valuation of certain items, including compensation expense related to equity awards granted, involves significant estimates based on underlying assumptions made by management. The valuation of stock options is based upon a Black-Scholes valuation model, which involves estimates of stock volatility, expected life of the instruments and other assumptions. The valuation of performance options, Senior Executive Long Term Incentive Restricted Stock Units, and similar awards are based upon the Monte-Carlo simulation, which involves estimates of our stock price, expected volatility, and the probability of reaching the performance targets.Goodwill and Purchased Intangible Assets Our goodwill resulted from prior acquisitions.Goodwill and intangible assets with indefinite useful lives are not amortized, but intangible assets that are deemed to have definite lives are amortized over their useful lives, generally ranging from two to seven years. See Note 6 to our consolidated financial statements included in this Form 10-K for additional information regarding our goodwill and other intangible assets.Goodwill and intangible assets with indefinite useful lives 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"), we review our goodwill and indefinite-lived intangible asset for impairment at least annually in our fiscal fourth quarter and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of our reporting unit and/or our indefinite-lived intangible asset below their respective carrying values. Examples of such events or circumstances include, but are not limited to: a significant adverse change in legal factors or in the business climate, a significant decline in our stock price, a significant decline in our 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. Our goodwill is considered to be impaired if we determine 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, ("ASC Topic 280") management has determined that the Company operates in one segment and consists of one reporting unit given the similarities in economic characteristics between our operations and the common nature of our products, services, and customers. Because we have only one reporting unit, and because we are publicly traded, we determine the fair value of the reporting unit based on our market capitalization as we believe this represents the best evidence of fair value. In the fourth quarter of fiscal 2019, we completed our annual goodwill impairment test and concluded that our goodwill was not impaired. Our conclusion that goodwill was not impaired was based on a comparison of our net assets to our market capitalization. Because we determine the fair value of our reporting unit based on our market capitalization, our future reviews of goodwill for impairment may be impacted by changes in the price of our Common Stock. For example, a significant decline in the price of our Common Stock may cause the fair value of our goodwill to fall below its carrying value. Therefore, we cannot assure you that when we complete our future reviews of goodwill for impairment a material impairment charge will not be recorded. Intangible assets with definite lives are amortized over their useful lives. Each period, we evaluate the estimated remaining useful life of our 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 such assets. No impairment charge related to the impairment of intangible assets was recorded during the fiscal years endedSeptember 30, 2019 , 2018, and 2017. 32 -------------------------------------------------------------------------------- Business Combinations Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired, liabilities assumed, and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to: •future expected cash flows from license sales, software services contracts, professional services contracts, other customer contracts, and acquired developed technologies and patents; •the acquired company's trade name, trademark and existing customer relationships, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our offerings; •uncertain tax positions and tax related valuation allowances assumed; and •discount rates. Accounting for Income Taxes We estimate income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences result in deferred tax assets and liabilities, which are reflected in our balance sheets. We then assess the likelihood that deferred tax assets will be realized. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. When a valuation allowance is established or increased, we record a corresponding tax expense in our statements of operations. We review the need for a valuation allowance each interim period to reflect uncertainties about whether we will be able to utilize deferred tax assets before they expire. The valuation allowance analysis is based on estimates of taxable income for the jurisdictions in which we operate and the periods over which our deferred tax assets will be realizable. We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that has more than a 50% chance of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis. The evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits, and effective settlement of audit issues. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required. Capitalized Software Development Costs Research and development costs are charged to expense as incurred. Costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are capitalized when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead. No such costs were capitalized during the fiscal years endedSeptember 30, 2019 and 2018 because the time period and cost incurred between technological feasibility and general release for all software product releases were not material. Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no substantive plans to market such software at the time of development, are capitalized. Costs incurred during the preliminary planning and evaluation stage of the project and during post implementation operational stage are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. The Company defines the design, configuration, and coding process as the application development stage. The Company capitalized$0.2 million and$0.9 million of costs related to computer software developed for internal use during the years endedSeptember 30, 2019 and 2018, respectively. The Company recognized$0.3 million and$0.1 million of amortization expense from internal use software during the years endedSeptember 30, 2019 and 2018, respectively. The Company had no amortization expense from internal use software during the year endedSeptember 30, 2017 . 33
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