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EX-31.1 - EX-31.1 - MITEK SYSTEMS INCmitk-ex311_6.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended December 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.)

 

 

 

600 B Street, Suite 100

San Diego, California

 

92101

(Address of Principal Executive Offices)

 

(Zip Code)

(619) 269-6800

(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      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      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

 

 

 

 

 

 

 

 

 

 

 

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  

There were 33,274,297 shares of the registrant’s common stock outstanding as of January 27, 2017.

 

 

 

 

 

 


MITEK SYSTEMS, INC.

FORM 10-Q

For The Quarterly Period Ended December 31, 2016

INDEX

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

 

 

 

 

 

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

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited) for the Three Months Ended December 31, 2016 and December 31, 2015

 

2

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

4

 

 

 

 

 

Item 2.

 

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

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

22

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

23

 

 

 

 

 

Item 1A.

 

Risk Factors

 

23

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

23

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

23

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

23

 

 

 

 

 

Item 5.

 

Other Information

 

23

 

 

 

 

 

Item 6.

 

Exhibits

 

24

 

 

 

 

 

Signatures

 

25

 

 

 

 


 

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MITEK SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands except share data)

 

 

 

December 31,

2016

(Unaudited)

 

 

September 30,

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,215

 

 

$

9,010

 

Short-term investments

 

 

28,314

 

 

 

24,863

 

Accounts receivable, net

 

 

5,544

 

 

 

4,949

 

Other current assets

 

 

1,153

 

 

 

1,485

 

Total current assets

 

 

41,226

 

 

 

40,307

 

Long-term investments

 

 

 

 

 

1,952

 

Property and equipment, net

 

 

310

 

 

 

440

 

Intangible assets, net

 

 

2,467

 

 

 

2,783

 

Goodwill

 

 

2,683

 

 

 

2,863

 

Other non-current assets

 

 

 

 

 

40

 

Total assets

 

$

46,686

 

 

$

48,385

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,380

 

 

$

1,318

 

Accrued payroll and related taxes

 

 

1,570

 

 

 

3,263

 

Deferred revenue, current portion

 

 

2,794

 

 

 

3,391

 

Other current liabilities

 

 

316

 

 

 

355

 

Total current liabilities

 

 

6,060

 

 

 

8,327

 

Deferred revenue, non-current portion

 

 

79

 

 

 

259

 

Other non-current liabilities

 

 

611

 

 

 

314

 

Total liabilities

 

 

6,750

 

 

 

8,900

 

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, 33,274,297 and

   32,781,704 issued and outstanding, as of December 31, 2016 and September 30,

   2016, respectively

 

 

33

 

 

 

33

 

Additional paid-in capital

 

 

72,485

 

 

 

71,036

 

Accumulated other comprehensive loss

 

 

(433

)

 

 

(42

)

Accumulated deficit

 

 

(32,149

)

 

 

(31,542

)

Total stockholders’ equity

 

 

39,936

 

 

 

39,485

 

Total liabilities and stockholders’ equity

 

$

46,686

 

 

$

48,385

 

 

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

1


 

MITEK SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS  

(Unaudited)

(amounts in thousands except for share data)

 

 

 

Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

Revenue

 

 

 

 

 

 

 

 

Software

 

$

5,983

 

 

$

4,730

 

SaaS, maintenance and consulting

 

 

3,286

 

 

 

2,674

 

Total revenue

 

 

9,269

 

 

 

7,404

 

Operating costs and expenses

 

 

 

 

 

 

 

 

Cost of revenue-software

 

 

214

 

 

 

390

 

Cost of revenue-SaaS, maintenance and consulting

 

 

677

 

 

 

552

 

Selling and marketing

 

 

3,838

 

 

 

2,463

 

Research and development

 

 

2,451

 

 

 

1,707

 

General and administrative

 

 

2,243

 

 

 

2,091

 

Acquisition-related costs and expenses

 

 

518

 

 

 

543

 

Total operating costs and expenses

 

 

9,941

 

 

 

7,746

 

Operating loss

 

 

(672

)

 

 

(342

)

Other income, net

 

 

65

 

 

 

36

 

Loss before income taxes

 

 

(607

)

 

 

(306

)

Income tax provision

 

 

 

 

 

(16

)

Net loss

 

$

(607

)

 

$

(322

)

Net loss per share – basic and diluted

 

$

(0.02

)

 

$

(0.01

)

Shares used in calculating net loss per share – basic and diluted

 

 

32,376,671

 

 

 

31,094,417

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(607

)

 

$

(322

)

Foreign currency translation adjustment

 

 

(370

)

 

 

(130

)

Unrealized loss on investments

 

 

(21

)

 

 

(20

)

Other comprehensive loss

 

$

(998

)

 

$

(472

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(607

)

 

$

(322

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

1,085

 

 

 

989

 

Amortization of closing and earnout shares

 

 

376

 

 

 

387

 

Amortization of intangible assets

 

 

144

 

 

 

149

 

Depreciation and amortization

 

 

170

 

 

 

109

 

Accretion and amortization on debt securities

 

 

9

 

 

 

44

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(631

)

 

 

(301

)

Other assets

 

 

364

 

 

 

55

 

Accounts payable

 

 

49

 

 

 

74

 

Accrued payroll and related taxes

 

 

(1,672

)

 

 

(826

)

Deferred revenue

 

 

(755

)

 

 

727

 

Other liabilities

 

 

239

 

 

 

(67

)

Net cash provided by (used in) operating activities

 

 

(1,229

)

 

 

1,018

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(5,330

)

 

 

(5,812

)

Sales and maturities of investments

 

 

3,800

 

 

 

6,395

 

Purchases of property and equipment

 

 

(45

)

 

 

(74

)

Net cash provided by (used in) investing activities

 

 

(1,575

)

 

 

509

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options, net

 

 

19

 

 

 

116

 

Principal payments on capital lease obligations

 

 

 

 

 

(6

)

Net cash provided by financing activities

 

 

19

 

 

 

110

 

Foreign currency effect on cash and cash equivalents

 

 

(10

)

 

 

(36

)

Net increase (decrease) in cash and cash equivalents

 

 

(2,795

)

 

 

1,601

 

Cash and cash equivalents at beginning of period

 

 

9,010

 

 

 

2,753

 

Cash and cash equivalents at end of period

 

$

6,215

 

 

$

4,354

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

1

 

Cash paid for income taxes

 

$

36

 

 

$

10

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unrealized holding loss on available-for-sale investments

 

$

(21

)

 

$

(20

)

 

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 and 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 January 23, 2017, the Company has been granted 28 patents and it has filed for 17 additional domestic and international patents.

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 December 31, 2016, over 5,500 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 December 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, 2016, filed with the U.S. Securities and Exchange Commission on December 9, 2016.

Results for the three months ended December 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 (loss) in the Consolidated Balance Sheets.  The Company recorded net losses resulting from foreign exchange translation of $370,000 and $130,000 for the three months ended December 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 (as defined below) 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other (“ASC 350”), the Company reviews the goodwill and indefinite-lived intangible asset for impairment at least annually in the fourth fiscal 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 350 and FASB 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 2016, we completed the annual goodwill impairment test as of September 30, 2016 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, 2016 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 such assets.

 

Net Income Per Share

The Company calculates net income per share in accordance with FASB 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 months ended December 31, 2016 and 2015, the following potentially dilutive common shares were excluded from the calculation of net loss per share, as they would have been antidilutive:

 

 

 

Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

Stock options

 

 

3,107,081

 

 

 

3,621,853

 

RSUs

 

 

2,435,521

 

 

 

1,769,588

 

IDchecker closing shares

 

 

464,132

 

 

 

652,904

 

IDchecker earnout shares

 

 

163,624

 

 

 

 

Total potentially dilutive common shares outstanding

 

 

6,170,358

 

 

 

6,044,345

 

 

5


 

The calculation of basic and diluted net loss per share is as follows (amounts in thousands, except share data):

 

 

 

Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

Net loss

 

$

(607

)

 

$

(322

)

Weighted-average common shares outstanding - basic and diluted

 

 

32,376,671

 

 

 

31,094,417

 

Net loss per share - basic and diluted

 

$

(0.02

)

 

$

(0.01

)

 

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, net in the Statements of Operations and Other Comprehensive Loss. No other-than-temporary impairment charges were recognized in the three months ended December 31, 2016 or 2015.

All investments whose 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.

 

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 $33,000 and $35,000 as of December 31, 2016 and September 30, 2016, 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 months ended December 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 December 31, 2016 or September 30, 2016.

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 Loss

Comprehensive loss consists of net loss, unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments. Included on the Consolidated Balance Sheets at December 31, 2016 is an accumulated other comprehensive loss of $433,000, compared to $42,000 at September 30, 2016, related to the Company’s available-for-sale securities and foreign currency translation adjustments.

7


 

Recently Adopted Accounting Pronouncements

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 had adopted the standard prospectively as of October 1, 2016. The adoption of ASU 2015-16 did not have a material impact on the results of operations, financial condition, or cash flows of the Company.

Recently Issued Accounting Pronouncements

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740) (“ASU 2016-16”), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact ASU 2016-16 will have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to use a Current Expected Credit Loss model which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The entity's estimate would consider relevant information about past events, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 31, 2019 with early adoption permitted for annual reporting periods beginning after December 31, 2018. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.

 

In March 2016, the FASB issued 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 fiscal 2018. The Company is currently evaluating the impact of adopting the new stock compensation standard on its 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 fiscal 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 May 2014, the FASB issued guidance codified in FASB ASC Topic 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.

 

No other new accounting pronouncement issued or effective during the three months ended December 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.

8


 

Pursuant to the terms of the Share Purchase Agreement, the Company acquired all of the issued and outstanding shares of IDC NL and IDC Inc. At the closing of the Acquisition, the Company paid a purchase price of $5.9 million, which consisted of (i) a cash payment to the Sellers of $5.6 million, subject to adjustments for transaction expenses, indebtedness, and working capital adjustments (the “Cash Payment”) and (ii) the forgiveness of the outstanding balance of approximately $0.3 million on a promissory note issued by the Company to Parent. 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 at the closing of the Acquisition. In January 2016, the Company issued 137,306 additional shares (the “Earnout Shares”), to the Sellers for achievement by IDchecker of certain revenue and net income targets for the nine-month period ended September 30, 2015. Additionally, 55,297 Earnout Shares were earned by the Sellers for achievement by IDchecker of certain revenue and net income targets for the twelve-month period ended September 30, 2016. 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 Topic 718, Compensation – Stock Compensation. For additional information regarding the Closing Shares and Earnout Shares, see Note 5 to the Company’s 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. Additionally, 11,059 Earnout Shares will be added to the escrow fund from the Earnout Shares earned for the twelve-month period ended September 30, 2016. The escrow fund will be maintained until January 2018 or until such earlier time as the escrow fund is exhausted.

 

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 (amounts shown in thousands):

 

 

 

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 as of June 17, 2015

 

$

2,873

 

Effect of movements in exchange rates as of December 31, 2016

 

 

(190

)

Goodwill as of December 31, 2016

 

$

2,683

 

 

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 with respect to discount rates and the determination of the estimated useful lives of the intangible assets, (see Note 4 to the Company’s consolidated financial statements). 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 in the Consolidated Balance Sheets at the acquisition date. 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 December 31, 2016 (amounts shown in thousands):

 

 

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Market

Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

12,904

 

 

$

1

 

 

$

(2

)

 

$

12,903

 

Corporate debt securities, short-term

 

 

15,427

 

 

 

 

 

 

(16

)

 

 

15,411

 

Total

 

$

28,331

 

 

$

1

 

 

$

(18

)

 

$

28,314

 

9


 

The following table summarizes investments by type of security as of September 30, 2016 (amounts shown in thousands):

 

 

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Market

Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

12,907

 

 

$

8

 

 

$

 

 

$

12,915

 

Corporate debt securities, short-term

 

 

11,949

 

 

 

2

 

 

 

(3

)

 

 

11,948

 

Corporate debt securities, long-term

 

 

1,954

 

 

 

1

 

 

 

(3

)

 

 

1,952

 

Total

 

$

26,810

 

 

$

11

 

 

$

(6

)

 

$

26,815

 

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 December 31, 2016 and September 30, 2016, 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 taxes, 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 months ended December 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 inputs 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.

10


 

The following tables represent the fair value hierarchy of the Company’s investments and acquisition-related contingent consideration as of December 31, 2016 and September 30, 2016, respectively (amounts shown in thousands):

 

 

 

Balance

 

 

Quoted Prices in Active Markets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

12,903

 

 

$

12,903

 

 

$

 

 

$

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial

 

 

3,450

 

 

 

 

 

 

3,450

 

 

 

 

Industrial

 

 

5,176

 

 

 

 

 

 

5,176

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial

 

 

4,089

 

 

 

 

 

 

4,089

 

 

 

 

Industrial

 

 

2,696

 

 

 

 

 

 

2,696

 

 

 

 

Total short-term investments at fair value

 

$

28,314

 

 

$

12,903

 

 

$

15,411

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related contingent consideration

 

 

282

 

 

 

 

 

 

 

 

 

282

 

Total liabilities at fair value

 

$

282

 

 

$

 

 

$

 

 

$

282

 

 

 

 

 

Balance

 

 

Quoted Prices in Active Markets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

12,915

 

 

$

12,915

 

 

$

 

 

$

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial

 

 

3,963

 

 

 

 

 

 

3,963

 

 

 

 

Industrial

 

 

4,445

 

 

 

 

 

 

4,445

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial

 

 

2,843

 

 

 

 

 

 

2,843

 

 

 

 

Industrial

 

 

697

 

 

 

 

 

 

697

 

 

 

 

Total short-term investments at fair value

 

 

24,863

 

 

 

12,915

 

 

 

11,948

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial

 

 

502

 

 

 

 

 

 

502

 

 

 

 

Industrial

 

 

1,450

 

 

 

 

 

 

1,450

 

 

 

 

Total assets at fair value

 

$

26,815

 

 

$

12,915

 

 

$

13,900

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related contingent consideration

 

 

252

 

 

 

 

 

 

 

 

 

252

 

Total liabilities at fair value

 

$

252

 

 

$

 

 

$

 

 

$

252

 

The following table includes a summary of the contingent consideration measured at fair value using significant unobservable inputs (Level 3) during the three months ended December 31, 2016 (amounts shown in thousands):

 

Balance at September 30, 2016

$

252

 

Expenses recorded due to changes in fair value

 

73

 

Issuance of common stock

 

(43

)

Balance at December 31, 2016

$

282

 

 

 

 

 

 

 

11


 

4. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company had goodwill balances of $2.7 million and $2.9 million at December 31, 2016 and September 30, 2016, respectively, associated with the acquisition of IDchecker which occurred during fiscal year 2015. For information regarding the acquisition of IDchecker, see Note 2 to the Company’s consolidated unaudited financial statements. 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 ASC 350.

Intangible assets

Intangible assets include the value assigned to purchased 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 December 31, 2016 are summarized as follows (amounts shown in thousands, except for years):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Amortization Period

 

Cost

 

 

Accumulated Amortization

 

 

Net

 

Completed technologies

 

6 years

 

$

2,370

 

 

$

725

 

 

$

1,645

 

Customer relationships

 

6 years

 

 

970

 

 

 

297

 

 

 

673

 

Tradenames

 

5 years

 

 

230

 

 

 

81

 

 

 

149

 

Total intangible assets

 

 

 

$

3,570

 

 

$

1,103

 

 

$

2,467

 

 

Amortization expense related to acquired intangible assets was $144,000 and $149,000 for the three months ended December 31, 2016 and 2015, respectively, and is recorded within acquisition-related costs and expenses on the Consolidated Statements of Operations and Other Comprehensive Loss.

The estimated future amortization expense related to intangible assets for each of the five succeeding fiscal years is expected to be as follows (amounts shown in thousands):

 

 

 

Estimated Future Amortization Expense

 

2017 (remaining nine months)

 

$

422

 

2018

 

 

563

 

2019

 

 

563

 

2020

 

 

550

 

2021

 

 

369

 

Total

 

$

2,467

 

 

 

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 (amounts shown in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

Cost of revenue

 

$

40

 

 

$

18

 

Sales and marketing

 

 

314

 

 

 

225

 

Research and development

 

 

213

 

 

 

181

 

General and administrative

 

 

518

 

 

 

565

 

Stock-based compensation expense included in expenses

 

$

1,085

 

 

$

989

 

 

12


 

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

 

 

 

Three Months Ended

December 31, 2016

 

 

Three Months Ended

December 31, 2015

 

Risk-free interest rate

 

1.68% – 1.92%

 

 

1.57% – 1.75%

 

Expected life (years)

 

 

5.30

 

 

 

5.90

 

Expected volatility

 

 

78%

 

 

 

83%

 

Expected dividends

 

None

 

 

None

 

The expected life of options granted is derived using assumed exercise rates based on historical exercise patterns and vesting terms, and represents the period of time that options granted are expected to be outstanding. Expected stock price volatility is based upon implied volatility and other factors, including historical volatility. After assessing all available information on either historical volatility, or implied volatility, or both, the Company concluded that a combination of both historical and implied volatility provides the best estimate of expected volatility.

As of December 31, 2016, the Company had $12.6 million of unrecognized compensation expense related to outstanding stock options and RSUs expected to be recognized over a weighted-average period of approximately 2.6 years.

2012 Incentive Plan

In January 2012, the Company’s board of directors (the “Board”) adopted the Mitek Systems, Inc. 2012 Incentive Plan (the “2012 Plan”), upon the recommendation of the compensation committee of the Board. On March 2, 2016, the Company’s stockholders approved an amendment to the 2012 Plan that increased the total number of shares of Common Stock reserved for issuance thereunder from 4,000,000 shares to 6,000,000 shares plus that number of shares of Common Stock that would otherwise return to the available pool of unissued shares reserved for awards under its 1999 Stock Option Plan, 2000 Stock Option Plan, 2002 Stock Option Plan, 2006 Stock Option Plan and 2010 Stock Option Plan (collectively, the “Prior Plans”).  As of December 31, 2016, (i) stock options to purchase 2,008,353 shares of Common Stock and 1,892,136 RSUs were outstanding under the 2012 Plan, and 1,165,111 shares of Common Stock were reserved for future grants under the 2012 Plan and (ii) stock options to purchase an aggregate of 1,098,728 shares of Common Stock were outstanding under the Prior Plans.

Director Restricted Stock Unit Plan

In January 2011, the Board adopted the Mitek Systems, Inc. Director Restricted Stock Unit Plan, as amended and restated (the “Director Plan”), reserving up to 1,000,000 shares of Common Stock for the issuance of RSUs that may be granted to both employee and non-employee members of the Board. As of December 31, 2016, (i) 543,385 RSUs were outstanding under the Director Plan and (ii) 31,786 shares of Common Stock were reserved for future grants under the Director Plan.

Stock Options

The following table summarizes stock option activity under the Company’s equity plans during the three months ended December 31, 2016:

 

 

 

 

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise Price

 

 

Weighted-Average

Remaining

Contractual Term

(in Years)

 

Outstanding, September 30, 2016

 

 

3,015,374

 

 

$

3.95

 

 

 

6.4

 

Granted

 

 

101,800

 

 

$

6.10

 

 

 

 

 

Exercised

 

 

(5,760

)

 

$

3.02

 

 

 

 

 

Cancelled

 

 

(4,333

)

 

$

2.82

 

 

 

 

 

Outstanding, December 31, 2016

 

 

3,107,081

 

 

$

4.02

 

 

 

6.3

 

 

The Company recognized $0.2 million and $0.5 million in stock-based compensation expense related to outstanding stock options in the three months ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the Company had $2.1 million of unrecognized compensation expense related to outstanding stock options expected to be recognized over a weighted-average period of approximately 2.2 years.

Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of the weighted-average exercise price, multiplied by the number of options outstanding and exercisable. The total intrinsic

13


 

value of options exercised during the three months ended December 31, 2016 and 2015 was $18,000 and $105,000, respectively. The per-share weighted-average fair value of options granted during the three months ended December 31, 2016 was $3.96. The aggregate intrinsic value of options outstanding as of December 31, 2016 and 2015, was $8.8 million and $4.7 million, respectively.

Restricted Stock Units

The following table summarizes RSU activity under the Company’s equity plans during the three months ended December 31, 2016:

 

 

 

Number of

Shares

 

 

Weighted-Average

Fair Market Value

Per Share

 

Outstanding, September 30, 2016

 

 

2,046,169

 

 

$

4.90

 

Granted

 

 

891,185

 

 

$

5.77

 

Settled

 

 

(486,833

)

 

$

6.50

 

Cancelled

 

 

(15,000

)

 

$

5.59

 

Outstanding, December 31, 2016

 

 

2,435,521

 

 

$

5.27

 

 

The cost of RSUs is determined using the fair value of Common Stock on the award date, and the compensation expense is recognized ratably over the vesting period. The Company recognized $0.8 million and $0.5 million in stock-based compensation expense related to outstanding RSUs in the three months ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the Company had $10.5 million of unrecognized compensation expense related to outstanding RSUs expected to be recognized over a weighted-average period of approximately 3.1 years.

Closing Shares

In connection with the closing of the Acquisition, the Company issued to the Sellers 712,790 shares of Common Stock.  Vesting of these shares is subject to the continued employment of the founders of IDchecker and occurs over a period of 27 months (the “Service Period”) from the date of issuance.  The cost of the Closing Shares is determined using the fair value of Common Stock on the award date, and the stock-based compensation is recognized ratably over the vesting period. The Company recognized $0.3 million in stock-based compensation expense related to the Closing Shares for the three months ended December 31, 2016 and 2015, respectively, which is recorded within acquisition-related costs and expenses on the Consolidated Statements of Operations and Other Comprehensive Loss. As of December 31, 2016, the Company had $0.9 million of unrecognized compensation expense related to Closing Shares expected to be recognized over the remaining Service Period.

Earnout Shares

In addition to the Cash Payment and the issuance of Closing Shares, in each case at the closing of the Acquisition, the Company issued 137,306 Earnout Shares to the Sellers for achievement by IDchecker of certain revenue targets for the nine-month period ended September 30, 2015. Additionally, 55,297 Earnout Shares were earned by the Sellers for achievement by IDchecker of certain revenue targets for the twelve-month period ended September 30, 2016. Earnout Shares vest and will be eligible for resale such that 12.5% of the Earnout Shares will vest and be released for resale in July 2017 and thereafter, the remaining 87.5% of the applicable Earnout Shares will vest and be released for resale in equal quarterly installments. Vesting of the Earnout Shares is subject to the continued employment of the founders of IDC NL through January 2019.    

The Company calculated the fair value of the Earnout Shares using the Monte-Carlo simulation (using the Company’s valuation date stock price, the annual risk-free interest rate, expected volatility, the probability of reaching the performance targets and a 10 trading day average stock price). This model will be updated and the respective fair value adjusted each reporting period based on the relevant facts and conditions at the reporting date.  The Company recognized $73,000 and $84,000 in stock-based compensation expense related to the Earnout Shares for the three months ended December 31, 2016 and 2015, respectively, which is recorded within acquisition-related costs and expenses on the Consolidated Statements of Operations and Other Comprehensive Loss.

 

 

6. INCOME TAXES