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 7,500 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 in the
United States ("U.S.") and Canada 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 four billion check deposits. Mitek began selling Mobile
Deposit® in early 2008 and received its first patent for this product in August
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, to comply with growing governmental Anti-Money Laundering and Know
Your Customer 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, remote deposit
capture, and mobile. Through the automatic recognition of all fields on checks,
whether handwritten or machine print, CheckReader™ speeds the time to deposit
for financial institutions and enables them to comply with check clearing
regulations.
We market and sell our products and services worldwide through internal, direct
sales teams located in the U.S., Europe, and Latin 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 2020 Highlights

•Revenues for the fiscal year ended September 30, 2020 were $101.3 million, an
increase of 20% compared to revenues of $84.6 million for the fiscal year ended
September 30, 2019.
•Net income was $7.8 million, or $0.18 per share, for the fiscal year ended
September 30, 2020, compared to a net loss of $0.7 million, or $0.02 per share,
for the fiscal year ended September 30, 2019.
•Cash provided by operating activities was $24.1 million for the fiscal year
ended September 30, 2020, compared to $14.3 million for the fiscal year ended
September 30, 2019.
•During fiscal 2020 the total number of financial institutions licensing our
technology exceeded 7,500. All of the top 10 U.S. retail banks, and nearly all
of the top 50 U.S. retail banks utilize our technology.
                                       24
--------------------------------------------------------------------------------

•We added new patents to our portfolio during fiscal year 2020, bringing our
total number of issued patents to 67 as of September 30, 2020. In addition, we
have 20 patent applications as of September 30, 2020.
Acquisition of A2iA Group II, S.A.S.
On May 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 of France, pursuant to a share purchase agreement, by and among Mitek, each
of the holders of outstanding shares of A2iA 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 of ICAR Vision Systems, S.L.
On October 16, 2017, Mitek Holding B.V., a company incorporated under the laws
of The Netherlands and our wholly owned subsidiary ("Mitek Holding B.V."),
acquired all of the issued and outstanding shares of ICAR 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 of Mitek 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. As of September 30, 2020, $4.6
million of the earnout consideration has been paid. The remaining portion of the
earnout consideration of $0.8 million will be paid out during the second quarter
of fiscal 2021. ICAR is a leading provider of consumer identity verification
solutions in Spain and Latin America. The ICAR Acquisition strengthens our
position as a global digital identity verification powerhouse in the consumer
identity and access management solutions market.
Restructuring
Subsequent to the acquisition of A2iA Group II, S.A.S. ("A2iA"), we evaluated
A2iA's operations and determined that the market for certain products was small
and lacking growth opportunity, were not core to our strategy, and were not
profitable for the Company. In order to streamline the organization and focus
resources going forward, we undertook a strategic restructuring of A2iA's Paris
operations in June 2019, which included, among other things, ceasing the sale of
certain A2iA products and offerings and a reduction in workforce. The
restructuring was completed during the fourth quarter of fiscal 2020.
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 consumer demand for 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 services. 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.
                                       25
--------------------------------------------------------------------------------

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 software as a service ("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 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.
In the second quarter of fiscal 2020, concerns related to the spread of COVID-19
began to create global business disruptions as well as disruptions in our
operations and to create potential negative impacts on our revenues and other
financial results. COVID-19 was declared a pandemic by the World Health
Organization on March 11, 2020. In an effort to contain COVID-19 or slow its
spread, governments around the world have enacted various measures, including
orders to close all businesses not deemed "essential," isolate residents to
their homes or places of residence, and practice social distancing when engaging
in essential activities. We anticipate that these actions and the global health
crisis caused by COVID-19 will negatively impact business activity across the
globe. The extent to which COVID-19 will impact our business, operations, and
financial results is uncertain and difficult to predict and depends on numerous
evolving factors including the duration and severity of the outbreak. See Item
1A: "Risk Factors" for additional details.
In an effort to protect the health and safety of our employees, our workforce
has transitioned to working remotely and employee travel, including to our
international subsidiaries, has been severely curtailed. It is not clear what
the potential effects of any such alterations or modifications may have on our
business, including the effects on our customers or vendors, or on our financial
results. We will continue to actively monitor the situation and may take further
actions that alter our business operations as may be required by federal, state,
local, or foreign authorities, or that we determine are in the best interests of
our employees, customers, partners, and stockholders.
We anticipate in certain circumstances that the current stay-at-home orders and
impact of the COVID-19 pandemic may accelerate the adoption of digital
technologies and create future opportunities and uses for our products. However,
we cannot predict what the overall impact of the COVID-19 pandemic will be on
our business or financial condition as business and consumer activity
decelerates across the globe. We continue to seek new and innovative
opportunities to serve our customers' needs.
                                       26
--------------------------------------------------------------------------------

Results of Operations
Comparison of the Years Ended September 30, 2020 and 2019
The following table summarizes certain aspects of our results of operations for
the fiscal year ended September 30, 2020 compared to the fiscal year ended
September 30, 2019 (in thousands, except percentages):
                                                                                Twelve Months Ended September 30,
                                                                                Percentage of Total Revenue                     Increase (Decrease)
                                         2020               2019                 2020                  2019                    $                     %
Revenue
Software and hardware                $   54,152          $ 46,845                      53  %               55  %                 7,307                 16  %
Services and other                       47,158            37,745                      47  %               45  %                 9,413                 25  %
Total revenue                        $  101,310          $ 84,590                     100  %              100  %                16,720                 20  %
Cost of revenue                          13,192            12,266                      13  %               15  %                   926                  8  %
Selling and marketing(1)                 27,646            24,550                      27  %               29  %                 3,096                 13  %
Research and development(1)              22,859            21,873                      23  %               26  %                   986                  5  %
General and administrative               22,284            19,861                      22  %               23  %                 2,423                 12  %
Acquisition-related costs and
expenses                                  6,575             7,563                       6  %                9  %                  (988)               (13) %
Restructuring costs                        (114)            3,067                       -  %                4  %                (3,181)              (104) %
Other income, net                           541               602                       1  %                1  %                   (61)               (10) %
Income tax benefit (provision)           (1,595)            3,264                      (2) %                4  %                (4,859)

(149) %




(1) 2019 amount reflects reclassification to conform to the current year
presentation.
Revenue
Total revenue increased $16.7 million, or 20%, to $101.3 million in 2020
compared to $84.6 million in 2019. Software and hardware revenue increased $7.3
million, or 16%, to $54.2 million in 2020 compared to $46.8 million in 2019.
This increase is primarily due to an increase in sales of our Mobile Deposit®,
ID_CLOUD™, and CheckReader™ software products. The increase was partially offset
by declining software revenue from our legacy on-premise identity products which
are being phased out. Services and other revenue increased $9.4 million, or 25%,
to $47.2 million in 2020 compared to $37.7 million in 2019. This increase is
primarily due to strong growth in Mobile Verify® transactional SaaS revenue of
$7.7 million, or 36%, in 2020 compared to 2019, as well as an increase in
maintenance revenue associated with CheckReader™ and Mobile Deposit® software
sales.
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 $0.9 million, or 8%, to $13.2 million in
2020 compared to $12.3 million in 2019. As a percentage of revenue, cost of
revenue decreased to 13% in 2020 from 15% in 2019. The increase in cost of
revenue is primarily due to an increase in variable personnel, royalty, and
hosting costs associated with a higher volume of Mobile Verify® transactions
processed during 2020 compared to 2019.
Selling and Marketing Expenses
Selling and marketing expenses include payroll, employee benefits, stock-based
compensation, and other headcount-related costs associated with sales and
marketing 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 $3.1 million, or 13%, to $27.6 million in 2020
compared to $24.6 million in 2019. As a percentage of revenue, selling and
marketing expenses decreased to 27% in 2020 from 29% in 2019. The increase in
sales and marketing expense is primarily due to higher personnel-related costs
of $2.9 million resulting from our increased headcount in 2020 compared to 2019,
and higher product promotion costs of $0.8 million in 2020. Prior to fiscal
2020, the Company had included its product management costs in selling and
marketing expenses. Due to certain personnel and functional responsibility
changes in this function, the Company has reclassified these costs to research
and development expenses. To conform to the current period's presentation, prior
year's financials have been reclassified accordingly. The Company has determined
that this reclassification was not material to previously reported financial
statements. Product management costs were $3.0 million, $2.9 million, and $2.4
million in fiscal years 2020, 2019, and 2018, respectively.
                                       27
--------------------------------------------------------------------------------

Research and Development Expenses
Research and development expenses include payroll, employee benefits,
stock-based compensation, third-party contractor expenses, product management
and other headcount-related costs associated with software engineering and
mobile image capture science. Research and development expenses increased $1.0
million, or 5%, to $22.9 million in 2020 compared to $21.9 million in 2019. As a
percentage of revenue, research and development expenses decreased to 23% in
2020 from 26% in 2019. The increase in research and development expenses is
primarily due to higher personnel-related costs in 2020 compared to 2019.
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 $2.4 million, or 12%, to $22.3 million in 2020
compared to $19.9 million in 2019. As a percentage of revenue, general and
administrative expenses decreased to 22% in 2020 from 23% in 2019. The increase
in general and administrative expenses is primarily due to an increase in
intellectual property litigation costs of $2.3 million in 2020 compared to 2019,
a $1.0 million insurance settlement received in 2019 and a $0.4 million increase
in third-party outside service costs. This increase is partially offset by a
decrease in third-party costs associated with our strategic process of $1.2
million incurred in 2019, compared to $0 in 2020.
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 $1.0 million, or
13%, to $6.6 million in 2020 compared to $7.6 million in 2019. As a percentage
of revenue, acquisition-related costs and expenses decreased to 6% in 2020 from
9% in 2019. The decrease in acquisition-related costs and expenses is primarily
due to a decrease in the amortization of intangible assets of $0.6 million as
certain assets associated with the ICAR Acquisition became fully amortized
during 2020 and a decrease in the fair value of acquisition-related contingent
consideration of $0.3 million in 2020 as compared to 2019.
Restructuring Costs
Restructuring costs consist of employee severance obligations and other related
costs. Restructuring costs were negative $0.1 million in 2020 and are due to a
reversal of costs accrued for the restructuring plan implemented in June 2019.
Restructuring costs were $3.1 million in 2019 and related to the restructuring
plan implemented in June 2019.
Other Income, Net
Other income, 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, net decreased
$0.1 million, to a net income of $0.5 million in 2020 compared to a net income
of $0.6 million in 2019, primarily due to lower foreign currency exchange
transactional gains in 2020 compared to 2019.
Income Tax Benefit (Provision)
The income tax provision for 2020 was $1.6 million compared to an income tax
benefit of $3.3 million in 2019. The income tax provision for 2020 was primarily
due to our positive net income for the year. Our effective tax rate for fiscal
year 2020 was lower than the U.S. federal statutory rate of 21% due primarily to
the impact of federal and state research and development credits and the impact
of foreign and state taxes. The income tax benefit of $3.3 million in 2019 was
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.
                                       28
--------------------------------------------------------------------------------

Results of Operations
Comparison of the Years Ended September 30, 2019 and 2018
The following table summarizes certain aspects of our results of operations for
the fiscal year ended September 30, 2019 compared to the fiscal year ended
September 30, 2018 (in thousands, except percentages):

                                                                               Twelve Months Ended September 30,
                                                                               Percentage of Total Revenue                    Increase (Decrease)
                                         2019              2018                 2019                  2018                    $                     %
Revenue
Software and hardware                $  46,845          $ 40,698                      55  %               64  %                 6,147                15  %
Services 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(1)                24,550            19,254                      29  %               30  %                 5,296                28  %
Research and development(1)             21,873            18,118                      26  %               29  %                 3,755                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

%




(1) 2019 and 2018 amounts reflect reclassifications to conform to the current
year presentation.
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. Services 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
programs. Selling and marketing expenses increased $5.3 million, or 28%, to
$24.6 million in 2019 compared to $19.3 million in 2018. As a percentage of
revenue, selling and marketing expenses decreased to 29% in 2019 from 30% in
2018. The increase in sales and marketing expense is primarily due to higher
personnel-related costs of $2.4 million resulting from our increased headcount
in 2019 compared to 2018, additional sales and marketing expenses associated
with the A2iA Acquisition of $2.3 million, and higher product promotion costs of
$0.7 million in 2019.
                                       29
--------------------------------------------------------------------------------

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 $3.8 million, or
21%, to $21.9 million in 2019 compared to $18.1 million in 2018. As a percentage
of revenue, research and development expenses decreased to 26% in 2019 from 29%
in 2018. The increase in research and development expenses is primarily due to
additional research and development costs associated with the A2iA Acquisition
of $2.5 million and higher personnel-related costs of $0.7 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 in June 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 our U.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).
Liquidity and Capital Resources
On September 30, 2020, we had $62.0 million in cash and cash equivalents and
investments compared to $34.8 million on September 30, 2019, an increase of
$27.2 million, or 78%. The increase in cash and cash equivalents and investments
was primarily due to net cash provided by operating activities of $24.1 million
and net proceeds from the issuance of Common Stock under our equity plan of $4.8
million, favorable foreign currency gains of $0.4 million, and proceeds from
other borrowings of $0.2 million, partially offset by repurchases and
retirements of Common Stock of $1.0 million, capital expenditures of $0.8
million, payment of acquisition-related contingent consideration of $0.5 million
and principal payments on other borrowings of $0.1 million.
                                       30
--------------------------------------------------------------------------------

Cash Flows from Operating Activities
Net cash provided by operating activities during fiscal 2020 was $24.1 million
and resulted primarily from net income of $7.8 million adjusted for net non-cash
charges of $19.6 million partially offset by unfavorable changes in operating
assets and liabilities of $3.3 million. The primary non-cash adjustments to
operating activities were stock-based compensation expense, amortization of
intangible assets, depreciation and amortization, and deferred taxes totaling
$9.6 million, $6.4 million, $1.5 million, and $1.9 million, respectively.
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.
Cash Flows from Investing Activities
Net cash used in investing activities was $24.7 million during fiscal 2020,
which consisted primarily of net purchases of investments of $23.9 million and
capital expenditures of $0.8 million.
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.
Cash Flows from Financing Activities
Net cash provided by financing activities was $3.4 million during fiscal 2020,
which consisted of proceeds from the issuance of equity plan Common Stock of
$4.8 million and net proceeds from other borrowings of $0.1 million, partially
offset by repurchases and retirements of Common Stock of $1.0 million and
payment of acquisition-related contingent consideration of $0.5 million.
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.
Revolving Credit Facility
On May 3, 2018, the Company and ID Checker, Inc. (together, the "Co-Borrowers")
entered into a Loan and Security Agreement (the "Loan Agreement") with Silicon
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 the Wall 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. In
May 2019, the Company and SVB entered into an amendment of the Loan Agreement to
extend the maturity of the Revolver to September 30, 2020, which was
subsequently not renewed. There were no borrowings outstanding under the
Revolver as of September 30, 2020.
Rights Agreement
On October 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 on November 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, 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 (each, 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 on October
22, 2021, (ii) the time at which the Rights are redeemed, and (iii) the time at
which the Rights are exchanged.
                                       31
--------------------------------------------------------------------------------

Share Repurchase Program
On December 13, 2019, our Board of Directors authorized and approved a share
repurchase program for up to $10.0 million of the currently outstanding shares
of our Common Stock. The share repurchase program will expire December 16, 2020.
The purchases under the share repurchase program may be made from time to time
in the open market, through block trades, 10b5-1 trading plans, privately
negotiated transactions or otherwise, in each case, in accordance with
applicable laws, rules, and regulations. The timing and actual number of the
shares repurchased will depend on a variety of factors including price, market
conditions and corporate and regulatory requirements. We intend to fund the
share repurchases from cash on hand. The share repurchase program does not
commit us to repurchase shares of our Common Stock and it may be amended,
suspended, or discontinued at any time.
We made purchases of $1.0 million, or approximately 137,000 shares, during
fiscal 2020 at an average price of $7.33 per share.
CARES Act
On March 27, 2020, President Trump signed into law the "Coronavirus Aid, Relief
and Economic Security (CARES) Act." The CARES Act, among other things, includes
provisions relating to refundable payroll tax credits, deferment of employer
side social security payments, net operating loss carryback periods, alternative
minimum tax credit refunds, modifications to the net interest deduction
limitations and technical corrections to tax depreciation methods for qualified
improvement property. The Company continues to examine the impacts the CARES Act
may have on our business. For the year ended September 30, 2020, the CARES Act
has been considered for the income tax provision.
Other Liquidity Matters
On September 30, 2020, we had investments of $42.0 million, designated as
available-for-sale debt securities, which consisted of U.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. At
September 30, 2020, we had $40.0 million of our available-for-sale securities
classified as current and $2.0 million of our available-for-sale securities
classified as long-term. At September 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.
We had working capital of $59.8 million at September 30, 2020 compared to $34.1
million at September 30, 2019.
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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of September 30, 2020.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30,
2020 (in thousands):
                               Less than                                       More than
                                 1 year        1-3 years       3-5 years        5 years         Total
Operating lease obligations   $    2,243      $    3,348      $    1,189      $        -      $ 6,780
Other borrowings                      87             224             321              90          722
Total                         $    2,330      $    3,572      $    1,510      $       90      $ 7,502



Our principal executive offices, as well as our research and development
facility, are located in approximately 29,000 square feet of office space in San
Diego, California and the term of the lease continues through June 30, 2024. The
average annual base rent under this lease is approximately $1.2 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 in Paris, France; Amsterdam, The Netherlands; New
York, New York; Barcelona, Spain; and London, United Kingdom. The term of the
Paris, France lease continues through July 31, 2021, with an annual base rent of
approximately €0.4 million (or $0.4 million). The term of the Amsterdam, The
Netherlands lease continues through December 31, 2022, with an annual base rent
of approximately €0.3 million (or $0.3 million). The term of the New York, New
York lease continues through November 30, 2024, with an annual base rent of
approximately $0.2 million. The term of the Barcelona, Spain lease continues
through May 31, 2023, with an annual base rent of approximately €0.1 million (or
$0.1 million). The term of the London, United
                                       32
--------------------------------------------------------------------------------

Kingdom lease continues through February 28, 2021, with an annual base rent of
approximately £112,200 (or approximately $143,000).
Other than the lease for our office space in San 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 the U.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.
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.
Services and Other
Services 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 services 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.
Contract Assets and Liabilities
The Company recognizes revenue when control of the license or transactional SaaS
service is transferred to the customer. The Company records a contract asset
when the revenue is recognized prior to the date payments become due. Contract
assets that are expected to be paid within one year are recorded in current
assets on the consolidated balance sheets. All other contract assets are
recorded in other non-current assets in the consolidated balance sheet. Contract
liabilities consist of deferred revenue. When the performance obligation is
expected to be fulfilled within one year, the deferred revenue is recorded in
current liabilities in the consolidated balance sheet. When the performance
obligation is expected to be fulfilled beyond one year, the deferred revenue is
                                       33
--------------------------------------------------------------------------------

recorded in non-current liabilities in the consolidated balance sheet. The
Company reports net contract asset or liability positions on a
customer-by-customer basis at the end of each reporting period.
Contract Costs
The Company incurs incremental costs to obtain a contract, consisting primarily
of sales commissions incurred only if a contract is obtained. When the
commission rate for a customer renewal is not commensurate with the commission
rate for a new contract, the commission is capitalized if expected to be
recovered. Such costs are capitalized and amortized using a portfolio approach
consistent with the pattern of transfer of the good or service to which the
asset relates. Contract costs are recorded in other current and non-current
assets in the consolidated balance sheets.
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:
•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.
                                       34
--------------------------------------------------------------------------------

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. 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 2020, 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 ended September 30,
2020, 2019, and 2018.
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;
                                       35

--------------------------------------------------------------------------------



•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 ended
September 30, 2020 and 2019 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 $0.3 million and $0.2 million of
costs related to computer software developed for internal use during the years
ended September 30, 2020 and 2019, respectively. The Company recognized $0.4
million and $0.3 million of amortization expense from internal use software
during the years ended September 30, 2020 and 2019, respectively.

© Edgar Online, source Glimpses