10-Q 1 a10-9341_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 


 

Form 10-Q

 


 

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

 

For the Quarterly Period Ended March 31, 2010

 

OR

 

o         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 001-34137

 


 

 

ActivIdentity Corporation

(Exact name of Registrant as specified in its charter)

 

Delaware

 

45-0485038

(State or other jurisdiction of

 

(I.R.S. employer identification no.)

incorporation or organization)

 

 

 

 

 

6623 Dumbarton Circle, Fremont, CA

 

94555

(Address of principal executive offices)

 

(Zip Code)

 

(510) 574-0100

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a 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 o  No x

 

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of April 30, 2010 was 48,082,422.

 

 

 



Table of Contents

 

ACTIVIDENTITY CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED MARCH 31, 2010

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3

 

CONDENSED CONSOLIDATED BALANCE SHEETS

3

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

4

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

5

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

21

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

35

ITEM 4.

CONTROLS AND PROCEDURES

36

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

37

ITEM 1A.

RISK FACTORS

37

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

48

ITEM 6.

EXHIBITS

48

 

SIGNATURES

49

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

ACTIVIDENTITY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

 

 

March 31,

 

September 30,

 

 

 

2010

 

2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

65,588

 

$

75,624

 

Marketable securities

 

12,873

 

3,100

 

Accounts receivable, net

 

14,540

 

13,983

 

Inventory

 

698

 

701

 

Prepaid and other current assets

 

1,632

 

556

 

Total current assets

 

95,331

 

93,964

 

Restricted cash

 

1,839

 

1,746

 

Investments

 

 

11,752

 

Property and equipment, net

 

2,041

 

2,353

 

Intangible assets, net

 

10,223

 

1,842

 

Goodwill

 

9,416

 

 

Other long-term assets

 

727

 

2,920

 

Total assets

 

$

119,577

 

$

114,577

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,178

 

$

1,853

 

Accrued compensation and related benefits

 

5,022

 

5,507

 

Accrued and other current liabilities

 

3,359

 

4,135

 

Current portion of deferred revenue

 

11,481

 

12,574

 

Total current liabilities

 

22,040

 

24,069

 

Other long-term liabilities

 

3,783

 

2,261

 

Total liabilities

 

25,823

 

26,330

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value: 10,000,000 shares authorized, none issued and outstanding

 

 

 

Common stock, $0.001 par value: 75,000,000 shares authorized, 48,082,422 and 45,866,110 issued and outstanding as of March 31, 2010 and September 30, 2009, respectively

 

46

 

46

 

Additional paid-in capital

 

436,380

 

429,105

 

Accumulated deficit

 

(332,911

)

(328,599

)

Accumulated other comprehensive loss

 

(10,068

)

(12,616

)

Total ActivIdentity stockholder’s equity

 

93,447

 

87,936

 

Non-controlling interest

 

307

 

311

 

Total stockholders’ equity

 

93,754

 

88,247

 

Total liabilities and stockholders’ equity

 

$

119,577

 

$

114,577

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ACTIVIDENTITY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenue:

 

 

 

 

 

 

 

 

 

Software

 

$

6,055

 

$

6,207

 

$

11,184

 

$

11,517

 

Hardware

 

2,593

 

4,148

 

6,701

 

8,951

 

Service

 

5,586

 

5,775

 

11,011

 

11,963

 

Total revenue

 

14,234

 

16,130

 

28,896

 

32,431

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Software

 

394

 

1,142

 

846

 

2,181

 

Hardware

 

1,352

 

2,138

 

3,474

 

4,559

 

Service

 

2,160

 

1,891

 

4,209

 

3,983

 

Amortization of developed technology and patents

 

263

 

593

 

446

 

1,186

 

Total cost of revenue

 

4,169

 

5,764

 

8,975

 

11,909

 

Gross profit

 

10,065

 

10,366

 

19,921

 

20,522

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

4,401

 

5,294

 

8,834

 

10,304

 

Research and development

 

4,105

 

3,505

 

8,184

 

8,292

 

General and administration

 

4,615

 

3,204

 

8,778

 

6,631

 

Restructuring expense (net of recoveries)

 

(356

)

 

(356

)

 

Amortization of other intangible assets

 

311

 

41

 

363

 

82

 

Total operating expenses

 

13,076

 

12,044

 

25,803

 

25,309

 

Loss from operations

 

(3,011

)

(1,678

)

(5,882

)

(4,787

)

Other income (expense), net

 

(962

)

(475

)

1,712

 

(1,981

)

Loss before income tax and non-controlling interest

 

(3,973

)

(2,153

)

(4,170

)

(6,768

)

Income tax expense

 

47

 

624

 

149

 

653

 

Net loss

 

(4,020

)

(2,777

)

(4,319

)

(7,421

)

Less: net loss attributable to non-controlling interest

 

7

 

5

 

8

 

104

 

Net loss attributable to ActivIdentity stockholders

 

$

(4,013

)

$

(2,772

)

$

(4,311

)

$

(7,317

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.08

)

$

(0.06

)

$

(0.09

)

$

(0.16

)

Shares used to compute basic and diluted net loss per share

 

47,639

 

45,798

 

46,743

 

45,792

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ACTIVIDENTITY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(4,311

)

$

(7,317

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Gain on sale of investments

 

(2,382

)

 

Stock-based compensation expense

 

1,953

 

1,631

 

Unrealized foreign exchange gain

 

716

 

2,831

 

Depreciation and amortization of fixed assets

 

550

 

691

 

Impairment of marketable securities

 

507

 

 

Amortization of developed technology and patents

 

446

 

1,186

 

Amortization of other intangible assets

 

363

 

82

 

Non-controlling interest in ActivIdentity Europe S.A.

 

(8

)

(104

)

Loss on disposal of property and equipment

 

 

59

 

Changes in assets and liabilities, net of assets acquired and liabilities assumed in a business combination:

 

 

 

 

 

Accounts receivable

 

(165

)

(1,472

)

Inventories

 

(115

)

611

 

Prepaid and other current assets

 

1,061

 

(2,453

)

Accounts payable

 

206

 

(140

)

Accrued compensation and related benefits

 

(557

)

292

 

Accrued and other liabilities

 

(1,395

)

637

 

Deferred revenue

 

607

 

2,663

 

Long-term income taxes receivable

 

 

2,693

 

Net cash provided by (used in) operating activities

 

(2,524

)

1,890

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition, net of cash acquired

 

(12,751

)

 

Proceeds from sales of investments

 

5,586

 

 

Purchases of property and equipment

 

(272

)

(108

)

Other long-term assets

 

80

 

(1

)

Proceeds from sales and maturities of marketable securities

 

 

6,125

 

Restricted cash

 

 

(1,340

)

Net cash provided by (used in) investing activities

 

(7,357

)

4,676

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(155

)

(254

)

Net increase (decrease) in cash and cash equivalents

 

(10,036

)

6,312

 

Cash and cash equivalents, beginning of period

 

75,624

 

70,173

 

Cash and cash equivalents, end of period

 

$

65,588

 

$

76,485

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 


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ACTIVIDENTITY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

(Unaudited)

 

1. Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of ActivIdentity Corporation (the “Company”, “we”, or “us”) and its subsidiaries. The Company has subsidiaries in Asia, Australia, Canada, Europe and the United States.

 

The unaudited interim condensed consolidated balance sheet as of March 31, 2010, and statements of operations for the three and six months ended March 31, 2010 and 2009 and cash flows for the six months ended March 31, 2010 and 2009, have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. However, we believe that the disclosures are adequate to ensure the information presented is not misleading. These interim condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as amended.  In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) that management considers necessary for a fair presentation of the Company’s financial position, operating results, and cash flows for the interim periods presented. All inter-company accounts and transactions have been eliminated in consolidation. Operating results and cash flows for interim periods are not necessarily indicative of results to be expected for any subsequent interim period or for the entire fiscal year ending September 30, 2010.

 

The Company operates on a fiscal year ending September 30. For convenience in this quarterly report, the Company refers to the fiscal year ended September 30, 2009 as fiscal 2009 and fiscal year ending September 30, 2010 as fiscal 2010.

 

There have been no significant changes in the Company’s significant accounting policies from those that were disclosed in the Annual Report on Form 10-K for fiscal 2009.

 

On December 14, 2009, the Company completed the acquisition of CoreStreet, Ltd., a Delaware corporation (“CoreStreet”), through the merger of a wholly owned, indirect subsidiary of the Company with and into CoreStreet.  CoreStreet was a privately held company that provides Public Key Infrastructure (“PKI”) certification technology, distributed identity credential validation systems, and physical access control products.  Details of the consideration provided for the acquisition are set forth in Note 6 below.  The financial statements set forth in this Form 10-Q, specifically the statement of operations and statement of cash flows for the six months ended March 31, 2010, reflect the operations of CoreStreet from December 14, 2009 to March 31, 2010.

 

In accordance with Accounting Standards Codification Topic No. 855 “Subsequent Events” (ASC 855), the financial statements have been evaluated for subsequent events through the date the financial statements are issued. During this period the Company did not have any material recognizable or non-recognizable subsequent events.

 

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2. Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ from current estimates. Estimates are used for, but not limited to, the fair value of investments, the provision for doubtful accounts, obsolete and excess inventories, depreciation and amortization, valuation of intangible assets and goodwill, sales warranty reserve, income taxes, restructuring liability, valuation of stock-based compensation, and contingencies.

 

3. Recent Accounting Pronouncements

 

In October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13 (ASU 2009-13), “Revenue Arrangements with Multiple Deliverables” and Accounting Standard Update No. 2009-14 (ASU 2009-14), “Certain Revenue Arrangements That Include Software.” These ASUs revise and clarify accounting for arrangements with multiple deliverables, including how to separate deliverables into units of accounting determining the allocation of revenue to the units of accounting and the application of these provisions to tangible products containing software components. There are also expanded disclosures for significant judgments made in the application of these standards, if material. These pronouncements are effective for fiscal years beginning after June 15, 2010 and earlier application is permitted. The Company is evaluating the impact of applying this pronouncement to its consolidated financial statements, and intends to implement the pronouncement on October 1, 2010.

 

In January 2010, the FASB issued Accounting Standard Update No. 2010-06 (ASU 2010-06), “Improving Disclosures about Fair Value Measurements” to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company has implemented provisions of this update related to disclosure of valuation techniques in the second quarter of fiscal 2010 and noted no significant impact in its condensed consolidated financial statements. The Company intends to implement provisions related to additional disclosures in the Level 3 roll forward in the first fiscal quarter of 2012 and does not expect a significant impact on its consolidated financial statements.

 

4. Fair Value Hierarchy

 

The Company performs fair value measurements in accordance with Accounting Standards Codification Topic No. 820 “Fair Value Measurements and Disclosures” (ASC 820). ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are described below:

 

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Level 1

Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

 

 

Level 2

Valuations based on 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 data for substantially the full term of the assets or liabilities.

 

 

Level 3

Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

Most of the Company’s financial instruments are classified within Level 1 of the fair value hierarchy and measured using market approach. These instruments are valued using quoted market prices, or broker or dealer quotations. The types of instruments valued based on quoted market prices in active markets include cash, term deposits, money market funds, and U.S. Treasury securities which are classified within Level 1 of the fair value hierarchy.

 

Financial instruments valued based on quoted prices in markets that are not active include the auction rate securities (ARS) that the Company sold in April 2010. Refer to Note 19 of notes to condensed consolidated financial statements for details about the subsequent sale of these ARS. These instruments are classified within Level 2 of the fair value hierarchy at March 31, 2010. These instruments are valued using the quoted price in the inactive market which equates to the actual sale price of these securities.

 

Financial instruments valued based on unobservable inputs include some ARS held by the Company.  These instruments are classified within Level 3 of the fair value hierarchy and measured using income approach. The Company estimates the fair value of these ARS using a discounted cash flow model incorporating assumptions regarding expected cash flows, liquidity risk, default risk, recovery risk, and interest rate risk.

 

Financial assets measured at fair value on a recurring basis as of March 31, 2010, as presented on the Company’s condensed consolidated balance sheet, were as follows (in thousands):

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

Active Markets for

 

Other

 

Significant

 

 

 

 

 

Identical Assets

 

Observable

 

Unobservable

 

 

 

 

 

(Level 1)

 

Inputs (Level 2)

 

Inputs (Level 3)

 

Total

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

 

$

6,541

 

$

 

$

 

$

6,541

 

Money market funds / U.S. Treasuries

 

59,047

 

 

 

59,047

 

Total cash and cash equivalents

 

65,588

 

 

 

65,588

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

8,312

 

4,561

 

12,873

 

Total marketable securities

 

 

8,312

 

4,561

 

12,873

 

 

 

 

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

 

 

 

Restricted cash:

 

 

 

 

 

 

 

 

 

Term deposits

 

1,839

 

 

 

1,839

 

Total restricted cash

 

1,839

 

 

 

1,839

 

 

 

 

 

 

 

 

 

 

 

Total financial assets under ASC 820

 

$

67,427

 

$

8,312

 

$

4,561

 

$

80,300

 

 

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Financial assets measured at fair value on a recurring basis as of September 30, 2009, as presented on the Company’s condensed consolidated balance sheet, were as follows (in thousands):

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

Active Markets for

 

Other

 

Significant

 

 

 

 

 

Identical Assets

 

Observable

 

Unobservable

 

 

 

 

 

(Level 1)

 

Inputs (Level 2)

 

Inputs (Level 3)

 

Total

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

 

$

9,712

 

$

 

$

 

$

9,712

 

Money market funds / U.S. Treasuries

 

65,912

 

 

 

65,912

 

Total cash and cash equivalents

 

75,624

 

 

 

75,624

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

3,100

 

3,100

 

Total marketable securities

 

 

 

3,100

 

3,100

 

 

 

 

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

 

 

 

Restricted cash:

 

 

 

 

 

 

 

 

 

Term deposits

 

1,746

 

 

 

1,746

 

Total restricted cash

 

1,746

 

 

 

1,746

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

11,752

 

11,752

 

Total investments

 

 

 

11,752

 

11,752

 

 

 

 

 

 

 

 

 

 

 

Total financial assets under ASC 820

 

$

77,370

 

$

 

$

14,852

 

$

92,222

 

 

Changes in the Company’s Level 3 securities for the three months ended March 31, 2010 were as follows (in thousands):

 

 

 

Amount

 

Aggregate estimated fair value of Level 3 securities at December 31, 2009

 

$

11,742

 

Total realized and unrealized gain (loss):

 

 

 

Included in earnings*

 

(501

)

Included in other comprehensive loss

 

1,732

 

Settlements

 

(100

)

Transfers out of Level 3

 

(8,312

)

Aggregate estimated fair value of Level 3 securities at March 31, 2010

 

$

4,561

 

 

Changes in the Company’s Level 3 securities for the six months ended March 31, 2010 were as follows (in thousands):

 

 

 

Amount

 

Aggregate estimated fair value of Level 3 securities at September 30, 2009

 

$

14,852

 

Total realized and unrealized gain (loss):

 

 

 

Included in earnings*

 

1,875

 

Included in other comprehensive loss

 

1,732

 

Settlements

 

(5,586

)

Transfers out of Level 3

 

(8,312

)

Aggregate estimated fair value of Level 3 securities at March 31, 2010

 

$

4,561

 

 


* Realized gains (losses) and other than temporary impairment charges are included in the line item “Other income (expense), net” in the condensed consolidated statements of operations.

 

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There was a transfer of some of the Company’s ARS from Level 3 to Level 2 of the fair value hierarchy during the three and six months ended March 31, 2010. As of March 31, 2010, these instruments are classified within Level 2 of the fair value hierarchy due to the availability of quoted prices in the inactive markets for these securities. Refer to Note 19 of notes to condensed consolidated financial statements for details about the subsequent sale of these ARS. These instruments are valued using the quoted price in the inactive market which equates to the actual sale price of these securities.

 

5. Marketable Securities and Investments

 

Marketable Securities: The Company held $12.9 million of ARS classified as marketable securities at March 31, 2010. These securities include interests in Collateralized Debt Obligations (CDO), closed-end mutual funds and a student loan agency. The Company has classified these securities as short-term and intends to sell these ARS within the next twelve month period. The original value of these securities was $27.5 million.

 

During the three and six months ended March 31, 2010, the Company recorded an other-than-temporary impairment charge of $0.5 million in other income (expense), net in the condensed consolidated statements of operations for securities previously held at par. In addition, while marking to market marketable securities at March 31, 2010, the Company recorded other comprehensive income of $1.7 million during the three and six months ended March 31, 2010. Refer to Note 19 of notes to the condensed consolidated financial statements regarding the sale of certain marketable securities after March 31, 2010.

 

During the six months ended March 31, 2010, the Company sold ARS with a carrying value of $3.1 million for proceeds of $5.5 million resulting in a gain of $2.4 million reported as other income in the condensed consolidated statements of operations. These investments were originally purchased at par for $8.5 million. During the six months ended March 31, 2010, ARS of $0.1 million were redeemed for full par value.

 

Investments (Long-term): The Company does not have any investments classified as long-term at March 31, 2010 as the Company has classified the entire portfolio of ARS as marketable securities. The Company held $11.8 million in certain ARS classified as investments at September 30, 2009. Contractual maturity for these investments ranges from 2025 to 2052.

 

The Company believes it has made reasonable judgments in its valuation of marketable securities. However, if the relevant assumptions, estimates, or the related analyses prove incorrect or, if due to additional information received in the future, management’s conclusions would change, the Company may be required to change the recorded value of the marketable securities

 

6. Business Combinations

 

The Company accounts for business combinations using the purchase method of accounting. Consideration includes the cash paid, value of common stock issued and warrants for common stock as measured on the acquisition date, less any cash acquired. The common stock and warrants were issued in a private placement.

 

On December 14, 2009, the company completed the acquisition of CoreStreet for consideration of $18.5 million, net of cash acquired.  Consideration consisted of (i) $12.1 million in cash, net of cash acquired, (ii) 2.2 million shares of the Company’s common stock (of which approximately 1.5 million shares are subject to an escrow to satisfy certain indemnification obligations of the stockholders of CoreStreet), (iii) warrants for 1.0 million shares of the Company’s common stock with a per share exercise price of $4.25 expiring December 31, 2011 with a fair value of $0.4 million, and (iv) warrants for 1.0 million shares of the Company’s common stock with a per share exercise price $5.00 expiring December 31, 2012 with a fair value of $0.4 million.  CoreStreet is a provider of Public Key Infrastructure (PKI) certification technology, distributed identity credential validation systems, and physical access control products. Their products are used primarily by Federal and State agencies in the United States.

 

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Table of Contents

 

The following table represents the purchase price allocation and summarizes the aggregate estimated fair values of the net assets acquired on December 14, 2009 (in thousands):

 

 

 

Purchase Price

 

 

 

Allocation

 

Cash

 

$

1,770

 

Current assets

 

965

 

Intangibles:

 

 

 

Customer relationships

 

6,620

 

Developed technology

 

2,530

 

Trade name

 

40

 

Non-current assets

 

16

 

Goodwill

 

9,416

 

Less liabilities assumed

 

(1,062

)

Total purchase price

 

$

20,295

 

 

The purchase price was allocated to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. The $9.4 million of goodwill was assigned to the Company’s single reporting unit and is not expected to be deductible for tax purposes. The acquisition is complementary to and we anticipate that it will strengthen our strong authentication and credential management product portfolio. The intangible assets are amortized on a straight line basis over their estimated useful life. Customer relationships represent the fair values of the underlying relationships and agreements with CoreStreet’s customers. Developed technology represents the fair values of CoreStreet products that have reached technological feasibility and are a part of CoreStreet’s product lines. Trade name represents the fair value of brand and name recognition associated with the marketing of CoreStreet’s products and services.

 

The results of the CoreStreet acquisition are included in the accompanying condensed consolidated financial statements from the date of the acquisition on December 14, 2009.

 

Summary of the purchase price consideration (in thousands):

 

 

 

Purchase Price

 

 

 

Consideration

 

Cash paid

 

$

14,521

 

Cash payments owed

 

22

(1)

Potential cash value for stock and warrants

 

430

(2)

Warrants for common stock

 

665

(3)

Common stock

 

4,657

(4)

Total purchase price

 

$

20,295

 

 


(1) Cash payments owed and recorded in “Accrued and other current liabilities” at March 31, 2010.

(2) Potential cash value of common stock and warrants for common stock to former CoreStreet stockholders who indicate that they are not accredited investors.

(3) Fair value of warrants issued to former CoreStreet stockholders who are accredited investors.

(4) Fair value of common stock issued to CoreStreet stockholders who are accredited investors. Common stock was valued at the closing price on the date of acquisition, December 14, 2009.

 

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Pro forma results

 

The unaudited financial information in the table below summarizes the combined results of operations of ActivIdentity and CoreStreet, on a pro forma basis, as though the companies had been combined as of the beginning of fiscal 2009. ActivIdentity’s results of operations for the three and six months ended March 31, 2010 include the results of CoreStreet since December 14, 2009, the date of acquisition. The unaudited pro forma financial information for the three and six months ended March 31, 2010 combines the results for ActivIdentity for the three and six months ended March 31, 2010, including CoreStreet subsequent to December 14, 2009 and the historical results for CoreStreet from October 1, 2009 to December 14, 2009. The pro forma financial information presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2009 (in thousands, except for per share amounts):

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Total revenue

 

$

14,234

 

$

17,439

 

$

29,957

 

$

35,628

 

Net loss attributable to ActivIdentity stockholders

 

(4,013

)

(3,301

)

(4,847

)

(7,836

)

Basic and diluted net loss per share

 

$

(0.08

)

$

(0.07

)

$

(0.10

)

$

(0.16

)

 

7.  Equity Compensation

 

Warrants

 

Warrant issued to service provider:  In August 2004, the Company issued a warrant to purchase 50,000 shares at an exercise price of $6.60 to a service provider. The warrant was fully vested and exercisable upon issuance and expires in August 2010. These warrants remain outstanding as of March 31, 2010.

 

Warrants issued in connection with the CoreStreet acquisition: In December 2009, the Company issued warrants for 1.0 million shares of the Company’s common stock with a per share exercise price of $4.25, expiring December 31, 2011 and valued at $0.4 million, and warrants for 1.0 million shares of the Company’s common stock with a per share exercise price of $5.00, expiring December 31, 2012 and valued at $0.4 million in connection with the CoreStreet acquisition. These warrants were fully vested upon issuance and remain outstanding as of March 31, 2010.

 

Stock Option Plans

 

The Company has several stockholder approved stock option plans under which it grants or has granted options to purchase shares of its common stock to employees. These plans are described fully in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. As of March 31, 2010, the Company continues to grant stock options under the 2004 Equity Incentive Plan (2004 Plan). As of March 31, 2010, the Company had 1.5 million shares available for future grants under the Company’s 2004 Plan.

 

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Table of Contents

 

Stock option activity for the six months ended March 31, 2010 is as follows:

 

 

 

Number of

 

Weighted Average

 

Aggregate Intrinsic

 

 

 

Stock Options

 

Exercise Price

 

Value (in thousands)

 

Outstanding at September 30, 2009

 

10,036,770

 

$

3.51

 

$

1,977

 

Granted

 

1,957,500

 

2.34

 

 

 

Exercised

 

 

 

 

 

Cancelled/Expired/Forfeited

 

(422,663

)

4.20

 

 

 

Outstanding at March 31, 2010

 

11,571,607

 

3.28

 

4,546

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2010

 

5,080,954

 

$

4.38

 

$

1,030

 

 

The following table summarizes the ranges of the exercise prices of outstanding and exercisable options at March 31, 2010:

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

Contractual

 

Weighted Average

 

 

 

Weighted Average

 

Range of Exercise Prices

 

Number

 

Term (in Years)

 

Exercise Price

 

Number

 

Exercise Price

 

$1.45 - $3.00

 

7,910,939

 

5.66

 

$

2.27

 

1,782,584

 

$

2.26

 

$3.01 - $5.00

 

2,051,010

 

4.28

 

4.17

 

1,760,370

 

4.13

 

$5.01 - $7.00

 

705,158

 

4.17

 

6.18

 

683,500

 

6.21

 

$7.00 - $9.99

 

904,500

 

3.23

 

7.93

 

854,500

 

7.87

 

$1.45 - $9.99

 

11,571,607

 

5.14

 

$

3.28

 

5,080,954

 

$

4.38

 

 

Restricted Stock and Restricted Stock Units

 

The Company periodically grants awards of restricted stock which are issued but subject to vesting requirements, and restricted stock units which result in the issuance of shares without an exercise price only upon the satisfaction of vesting requirements. Vesting may be time-based, performance-based or a combination of the two.

 

Activity for the Company’s restricted stock and restricted stock units during the six months ended March 31, 2010 was as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant-Date

 

 

 

Number of Shares

 

Fair Value

 

Unvested at September 30, 2009

 

116,256

 

$

2.11

 

Granted

 

140,000

 

2.76

 

Vested

 

(57,501

)

2.39

 

Cancelled

 

 

 

Unvested at March 31, 2010

 

198,755

 

$

2.49

 

 

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Table of Contents

 

Stock Based Compensation

 

The following table summarizes stock-based compensation expense for the three and six months ended March 31, 2010 and 2009 related to employee stock options, warrants, restricted stock and restricted stock units included in condensed consolidated statements of operations in accordance with Accounting Standards Codification Topic No. 718 “Compensation - Stock Compensation” (ASC 718) (in thousands):

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Cost of revenue—hardware

 

$

6

 

$

5

 

$

12

 

$

11

 

Cost of revenue—service

 

41

 

33

 

75

 

83

 

Stock-based compensation expense included in cost of sales

 

47

 

38

 

87

 

94

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

220

 

176

 

419

 

456

 

Sales and marketing

 

116

 

164

 

243

 

317

 

General and administrative

 

732

 

362

 

1,204

 

764

 

Stock-based compensation expense included in operating expenses

 

1,068

 

702

 

1,866

 

1,537

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

$

1,115

 

$

740

 

$

1,953

 

$

1,631

 

 

The Company bases its weighted-average fair value of stock-based compensation to employees generally on the single option valuation approach. The Company amortizes the estimated fair value of stock-based compensation time-based awards using graded vesting schedule over the requisite service period of the awards.  The following table summarizes weighted average fair value and weighted average assumptions of stock-based awards granted during the three and six months ended March 31, 2010 and 2009:

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Weighted average fair value

 

$1.06

 

$0.94

 

$0.92

 

$0.70

 

Risk-free interest rate

 

1.90%

 

1.5% - 1.8%

 

2.3%

 

1.5% - 2.8%

 

Dividend yield

 

0%

 

0%

 

0%

 

0%

 

Estimated life in years

 

4.3

 

4.8 – 6.1

 

4.3

 

4.8 – 6.1

 

Volatility

 

54%

 

50%

 

45%

 

44%

 

Forfeiture rate

 

29%

 

18%

 

33%

 

31%

 

 

As of March 31, 2010, total unrecognized compensation costs related to non-vested stock options and restricted stock units was $3.4 million, which will be recognized as an expense over a weighted average vesting period of approximately 2 years.

 

8. Stock Repurchase Program; Treasury Shares

 

On February 18, 2010, the Company announced that its Board of Directors has approved a stock repurchase program, pursuant to which the Company may repurchase up to $10 million or approximately 8% of its outstanding shares of common stock in the open market from time to time over the next twelve months. All share repurchases subject to this program will be retired upon purchase completion. The Company’s Board of Directors has also authorized that purchases may be made under Rule 10b5-1 of the Securities Exchange Act of 1934. A Rule 10b5-1 plan allows ActivIdentity to repurchase its shares during periods when the Company would normally not be active in the market due to its own internal trading blackout periods. During the three and six months ended March 31, 2010, no repurchases of the Company’s common stock were made and the entire amount remains authorized for repurchase under the repurchase program.

 

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Table of Contents

 

9. Accounts Receivable and Customer Concentration

 

Accounts receivable from significant customers in excess of 10% of total account receivable as of March 31, 2010 and September 30, 2009 are summarized as follows:

 

 

 

March 31,

 

September 30,

 

 

 

2010

 

2009

 

Customer A

 

31

%

 

*

Customer B

 

 

*

20

%

Customer C

 

 

*

10

%

 


* Customer accounted for less than 10% of the accounts receivable.

 

Management believes that the receivable balances from these large customers are collectible based on the assessment of their creditworthiness, account aging and past collection experience. However, these customers represent a significant exposure if one or more of them were unable to pay.

 

Revenue from significant customers representing revenue in excess of 10% of total revenue for the respective periods is summarized as follows:

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Customer A

 

15

%

 

*

 

*

 

*

Customer D

 

11

%

 

*

11

%

 

*

Customer E

 

 

*

16

%

 

*

 

*

 


* Customer accounted for less than 10% of revenue.

 

10. Balance Sheet Components

 

Accounts receivable, net consists of the following (in thousands):

 

 

 

March 31,

 

September 30,

 

 

 

2010

 

2009

 

Accounts receivable

 

$

14,708

 

$

14,244

 

Less allowance for doubtful accounts

 

(168

)

(261

)

Accounts receivable, net

 

$

14,540

 

$

13,983

 

 

Inventory consists of the following (in thousands):

 

 

 

March 31,

 

September 30,

 

 

 

2010

 

2009

 

Components

 

$

134

 

$

280

 

Finished goods

 

564

 

421

 

Total inventory

 

$

698

 

$

701

 

 

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Other long term liabilities consist of the following (in thousands):

 

 

 

March 31,

 

September 30,

 

 

 

2010

 

2009

 

Deferred revenue, net of current portion

 

$

2,907

 

$

1,240

 

Accrued restructuring liability, net of current portion

 

 

325

 

Long-term deferred rent

 

281

 

114

 

Other long-term liabilities

 

595

 

582

 

Total long-term liabilities

 

$

3,783

 

$

2,261

 

 

11. Intangible Assets, net

 

Intangible assets, net consist of the following (in thousands):

 

 

 

March 31,

 

September 30,

 

 

 

2010

 

2009

 

Gross Carrying Amount:

 

 

 

 

 

Developed technology

 

$

17,823

 

$

15,294

 

Customer relationships

 

8,648

 

2,028

 

Patents

 

3,999

 

3,999

 

Trade name

 

40

 

 

Intangible assets at cost

 

30,510

 

21,321

 

 

 

 

 

 

 

Accumulated Amortization:

 

 

 

 

 

Developed technology

 

(15,406

)

(15,294

)

Customer relationships

 

(2,379

)

(2,028

)

Patents

 

(2,490

)

(2,157

)

Trade name

 

(12

)

 

Total accumulated amortization

 

(20,287

)

(19,479

)

 

 

 

 

 

 

Intangible assets, net

 

$

10,223

 

$

1,842

 

 

Developed technology, customer relationships, patents and trade names are being amortized on a straight-line basis over their weighted average estimated economic or useful lives of 7 years, 10 years, 6 years and 1 year, respectively. The amortization expense for intangible assets was $0.6 million and $0.8 million for the three and six months ended March 31, 2010, respectively, as compared to $0.6 million and $1.3 million for the three and six months ended March 31, 2009, respectively. The intangible assets are reviewed for impairment in accordance with guidance given in Accounting Standards Codification Topic No. 360 “Property, plant and equipment” (ASC 360) whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.  Based on a review of events and circumstances at March 31, 2010, no indicators of impairment were identified. In assessing the recoverability of intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the intangible assets. It is reasonably possible that these estimates, or their related assumptions, may change in the future, in which case the Company may be required to record impairment charges for these assets. The Company will continue to evaluate the realizability of its intangible assets when events and changes in circumstances indicate that there may be a potential impairment.

 

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Table of Contents

 

Based on intangible assets recorded at March 31, 2010, and assuming no subsequent additions to, or impairment of, the underlying assets, the future estimated amortization expense of intangible assets, in the next five fiscal years, is as follows (in thousands):

 

Fiscal years ending September 30,

 

Total

 

2010 (6 months remaining)

 

$

1,148

 

2011

 

2,169

 

2012

 

1,883

 

2013

 

1,254

 

2014

 

994

 

2015

 

873

 

Thereafter

 

1,902

 

 

 

$

10,223

 

 

12. Goodwill

 

Goodwill of $9.4 million as of March 31, 2010, relates entirely to the Company’s acquisition of Corestreet in December 2009. The Company has accounted for goodwill in accordance with Accounting Standards Codification Topic No. 350 “Intangibles-Goodwill and Other” (ASC 350). Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Under ASC 350, goodwill and intangible assets with indefinite lives are not amortized; rather, they are tested for impairment on at least an annual basis or earlier if there are indicators of impairment. The first annual impairment analysis will be performed during the Company’s fourth fiscal quarter ended September 30, 2010.

 

13. Comprehensive Loss

 

Comprehensive loss is comprised of net loss, unrealized gain on the Company’s available for sale securities and foreign currency translation gain. Comprehensive loss for the three and six months ended March 31, 2010 and 2009 was as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(4,013

)

$

(2,772

)

$

(4,311

)

$

(7,317

)

Unrealized gain on marketable securities, net

 

1,728

 

 

1,728

 

152

 

Foreign currency translation gain

 

828

 

819

 

820

 

2,764

 

Total comprehensive loss

 

$

(1,457

)

$

(1,953

)

$

(1,763

)

$

(4,401

)

 

14. Other Income (expense)

 

Other income (expense) for the three and six months ended March 31, 2010 and 2009 was as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

$

180

 

$

370

 

$

381

 

$

1,180

 

Other non-operating income (expense), net

 

(1,142

)

(845

)

1,331

 

(3,161

)

Total other income (expense), net

 

$

(962

)

$

(475

)

$

1,712

 

$

(1,981

)

 

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Table of Contents

 

15.  Income Taxes

 

Income taxes are accounted for under the liability method in accordance with Accounting Standard Codification Topic No. 740 “Income Taxes” (ASC 740). Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

 

As of March 31, 2010, the Company continues to provide a full valuation allowance for substantially all of its net deferred tax assets since the Company does not believe that it is more likely than not that they will be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deductible and taxable temporary differences.  We consider, among other available information, historical earnings, scheduled reversals of temporary differences, projected future taxable income, prudent and feasible tax planning strategies and other matters in making this assessment.

 

The Company recorded income tax expense for the three and six months ended March 31, 2010 of $102,000 and $149,000, respectively. The income tax expense is primarily related to taxes payable in foreign jurisdictions.

 

The Company or its subsidiaries files income tax returns in the U.S. and California, as well as various other foreign and domestic jurisdictions. The Company recently concluded an examination from the French tax authority covering the fiscal 2005, 2006, and 2007 income tax returns that resulted in no significant tax adjustments.  The Company is currently under examination in Germany for the fiscal 2005, 2006 and 2007 income tax returns.  The Company is currently not the subject of any additional income tax examinations.  In general, the earliest open year subject to examination is the year ended September 30, 2005, although depending upon jurisdiction, earlier tax years may remain open subject to limitations.

 

16.  Net Loss per Share

 

Basic loss per share was computed using the net loss and weighted average number of common shares outstanding during the period. Due to the Company’s net loss for the three and six months ended March 31, 2010 and 2009, all of our outstanding securities consisting of stock options, restricted stock units, and warrants, to purchase 14.1 million and 11.1 million potential shares of common stock as of March 31, 2010 and 2009, respectively, were excluded from the diluted loss per share calculation because their inclusion would have been anti-dilutive but could potentially dilute basic earnings per share in the future.

 

17. Commitments and Contingencies

 

Operating leases

 

The Company has entered into various non-cancelable operating leases for office space with original terms upto ten years.

 

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Table of Contents

 

Future minimum lease payments under these leases are as follows (in thousands):

 

 

 

 

 

Less than

 

 

 

 

 

More than

 

 

 

Total

 

1 Year (1)

 

1 to 3 Years

 

3 to 5 Years

 

5 years

 

Operating leases

 

$

8,587

 

$

734

 

$

3,528

 

$

1,254

 

$

3,071

 

 


(1)       represents remaining six months of the 2010 fiscal year.

 

Operating lease obligations include management fees which cover common area maintenance charges. Office rent expense under operating leases was $0.3 million and $0.9 million, respectively, for the three and six months ended March 31, 2010 and $0.7 million and $1.4 million, respectively, for the three and six months ended March 31, 2009.

 

During the three months ended March 31, 2010, the Company entered into an amendment to the lease agreement for its office building in Fremont, California. The amendment extends the lease term to 10 years from the date of amendment, reduces the office space from 41,000 square feet to 29,000 square feet suspends the monthly cash portion of the rent payments for first eight months of the new term and significantly reduces the annual rent expense. The amendment also provides, that subject to a $1.2 million penalty, the Company may terminate the lease at any point after five years from the date of amendment

 

Contingencies

 

From time to time, the Company has been named as a defendant in legal actions arising from its normal business activities, which the Company believes will not have a material adverse effect on it or its business.

 

On October 1, 2008, the Company filed a complaint in the Northern District of California, asserting U.S. Patent No. 6,575,360 against Intercede Group PLC and Intercede Ltd. (collectively, “Intercede”). On January 16, 2009, Intercede filed their answers, including counterclaims seeking declaratory judgment of non-infringement, invalidity, and unenforceability. On February 9, 2009, the Company filed a motion to dismiss Intercede’s counterclaims and to strike certain of Intercede’s defenses. On March 26, 2009, Intercede filed a First Amended Answer and Counterclaims, amending their previously-asserted defenses and counterclaims, and asserting additional counterclaims for monopolization, attempted monopolization, fraud, and unfair competition. On May 15, 2009, the Company filed a second motion to dismiss Intercede’s counterclaims for monopolization, attempted monopolization, fraud and unfair competition. On September 11, 2009, the Court granted in part and denied in part the Company’s motion to dismiss. On September 28, 2009, Intercede filed a Second Amended Answer and Counterclaims. On March 25, 2010, the Company and Intercede entered into a patent license agreement on mutually acceptable terms. This patent license agreement settles the patent infringement case brought by ActivIdentity before the U.S. District Court of Northern California, and a related case brought by Intercede in the United Kingdom High Court. Based on this agreement, all lawsuits over the “360 patents” (ActivIdentity U.S. patent 6,575,360 and ActivIdentity patent EP [UK] 0 981 803) were promptly dismissed, bringing an end to all patent infringement litigation between the two companies. No liability related to the Intercede litigation was recorded at March 31, 2010 or September 30, 2009 other than accrual for legal fees.

 

The Company enters into standard indemnification agreements with many of its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third-party to the extent any such claim alleges that an ActivIdentity product infringes a patent, copyright or trademark, or violates any other proprietary rights of that third-party. It is not possible to estimate the maximum potential amount of future payments the Company could be required to make under these indemnification agreements. To date, the Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. No liability for these indemnification agreements was recorded at March 31, 2010 or September 30, 2009.

 

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As permitted under Delaware law, the Company has agreements indemnifying its executive officers and directors for certain events and occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable. The Company maintains directors and officers’ liability insurance designed to enable it to recover a portion of any future amounts paid. No liability for these indemnification agreements was recorded at March 31, 2010 or September 30, 2009.

 

18. Segment Information

 

The Company operates in one segment, Digital Identity Solutions. Accordingly, the Company is disclosing geographic information only.

 

Geographic revenue information, as presented below, is determined by the customers’ receiving locations:

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenue:

 

 

 

 

 

 

 

 

 

United States

 

46

%

45

%

45

%

43

%

France

 

4

%

10

%

6

%

10

%

UK

 

23

%

10

%

18

%

9

%

Others

 

27

%

35

%

31

%

38

%

Total revenue

 

100

%

100

%

100

%

100

%

 

* Other countries individually accounted for less than 10% of the Company’s total net revenue for the periods presented.

 

Geographic long-lived assets information is presented below (in thousands):

 

 

 

March 31,

 

September 30,

 

 

 

2010

 

2009

 

Property and equipment, net

 

 

 

 

 

United States

 

$

1,354

 

$

1,549

 

France

 

634

 

782

 

Others

 

53

 

22

 

Total property and equipment, net

 

$

2,041

 

$

2,353

 

 

19. Subsequent Events

 

Sale of Auction Rate Securities

 

In April 2010, the Company liquidated ARS with a net book value of $6.6 million as of September 30, 2009 and original cost of $22.3 million for net proceeds of $8.3 million. The Company has marked to market these ARS to $8.3 million as at March 31, 2010 and recorded unrealized gain of $1.7 million in other comprehensive income in equity section of its balance sheet. The Company will recognize other income of $1.7 million in the third quarter as realized gain on the sale of marketable securities. These securities were classified as marketable securities at March 31, 2010 and investments at September 30, 2009. After the sale of these ARS, the company holds ARS with a carrying value of $4.6 million and original cost of $5.2 million. The remaining ARS are comprised of securities in closed-end mutual funds and a student loan agency.

 

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Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and similar expressions also identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding operating results, product development, marketing initiatives, business plans, integration of acquired companies and anticipated trends. The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties further discussed under Part II Item 1A “Risk Factors” below and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as amended.  We assume no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes included in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q. In this discussion, “we,” “us” and “our” refer to ActivIdentity Corporation.

 

OVERVIEW

 

ActivIdentity is a global leader providing solutions to confidently establish a person’s identity and secure transactions when interacting digitally through credential management and strong authentication platform. For more than two decades the Company’s experience has been leveraged by security-minded organizations in large scale deployments such as the U.S. Department of Defense, Nissan, and Saudi Aramco. The Company’s customers have issued over 100 million credentials, securing the holder’s digital identity. ActivIdentity solutions include a fully integrated platform that enables the organizations to issue, manage and use identity devices and credentials for secure access, secure communications and legally binding digital transactions.

 

On December 14, 2009, the Company completed the acquisition of CoreStreet. CoreStreet is a provider of Public Key Infrastructure (PKI) certification technology, distributed identity credential validation systems, and physical access control products. Their products are used primarily by Federal and State agencies in the United States.

 

ActivIdentity has a robust set of five product lines which provide the blocks for securing IT infrastructures and digital transactions to defend against security threats and identity fraud. These five product lines are (1) Credential Management (2) Strong Authentication (3) Security Clients (4) Authentication Devices and (5) Physical Access Control Software.

 

Credential Management

 

ActivIdentity Credential Management family of products enable organizations to securely deploy and manage smart cards and USB tokens containing a variety of credentials, including PKI certificates, one-time passwords, static passwords, biometrics, demographic data, and virtually any other application. The ActivIdentity ActivID™ Card Management System is a reliable, proven, and extensible solution that enables organizations to securely issue and manage digital credentials on devices, as well as securely update applications and credentials on devices after they have been issued to end users. For organizations deploying large quantities of smart cards, ActivIdentity bundles three add-on modules into its Advanced Edition of the ActivIdentity ActivID Card Management System.  ActivIdentity ActivID™ Batch Management System enables communication with a service bureau for personalization and encoding of smart cards in centralized high-volume card production environments. ActivIdentity ActivID™ Inventory and Logistics System enables advanced card stock management. ActivIdentity ActivID™ Key Management System enables complete life cycle management of the cryptographic keys that protect access to the content of the authentication device keys and the hardware security modules that hold those keys.

 

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Table of Contents

 

Together with its Security Client software, Strong Authentication platform, Authentication Device and Physical Access Control offering, ActivIdentity can provide organizations with a complete “Smart Employee ID Solution” that can be leveraged for both physical and logical access control. PIVMAN server software which when combined with the PIVMAN authentication handheld device allows authorized personnel the ability to control access to any site with confidence by quickly authenticating and validating the roles and identities of individuals wishing to enter an area. The PIVMAN System provides mobile authentication and validation for situations such as first responder identification, spot check security for special events, seaports and airports, and remote facility access control.  Credential Management products include the Identity List Publisher, PIV Management Station, PIVMAN Dashboard, PIVMAN for Lenel and PIVMAN Developer Bundle.

 

Strong Authentication

 

ActivIdentity offers two distinct strong authentication platforms for organizations that are seeking to implement a cost-effective, flexible, and scalable solution. ActivIdentity 4TRESS™ AAA Server for Remote Access addresses the security risks associated with a mobile workforce accessing systems and data remotely. ActivIdentity 4TRESS™ Authentication Server offers support for many authentication methods (e.g., user name and password, knowledge-based authentication, one-time password, PKI certificates) and diverse audiences across a variety of service channels, making it the preferred versatile authentication platform for customer-facing transactions. PKI certificate validation products are deployed by public and private organizations around the world to validate the credentials of individuals as they interact with their secure IT applications, including secure logon, digitally signed email and secure forms. In doing so, users and administrators can have the highest level of trust in their secure communications and transactions. Company’s credential validation products also include the Validation Authority Server Validation Extensions, Pathbuilder and Responder Appliance.

 

Security Clients

 

ActivIdentity Security Clients protect against unauthorized access by providing easy-to-manage enterprise single sign-on capabilities, strong authentication, and an enforcement point for corporate security policy. Using the proven, market-leading ActivIdentity Security Clients, organizations not only can address regulatory requirements by replacing static passwords with two-factor authentication, but also eliminate the need for users to remember multiple static passwords.

 

Whether using ActivIdentity ActivClient™ to secure workstations with smart cards and smart USB tokens, ActivIdentity ActivClient™ for Common Access Card to do the same in the U.S. federal government, ActivIdentity SecureLogin™ Single Sign-On to provide comprehensive enterprise single sign-on and password management capabilities, or ActivIdentity™ Authentication Client to offer additional authentication, user, and management services. The Desktop Validation Client provides the means for applications to validate the status of a digital certificate when a client requests access to a secure resource or wants to execute a secure transaction.

 

Authentication Devices

 

ActivIdentity Authentication Devices range from Smart Cards, Smart Card Readers, Smart USB Tokens, OTP Tokens, DisplayCard Tokens, and Soft Tokens to Hardware Security Modules and Mobile Validation Devices. ActivIdentity Authentication Devices provide the flexibility to deploy any combination of devices to best meet an organization’s specific business needs, security requirements, and budget. The PIVMAN Client Software runs on multiple rugged handheld devices and personal computers. The PIVMAN handheld requires no connectivity and is an approved Department of Homeland Security credentialing system for emergency responders. It supports a wide range of card types and all the major U.S. government credential specifications.

 

Physical Access Products

 

Rounding out the ActivIdentity product portfolio, the Company provides technology for the convergence of IT and physical security. The Company provides developer kits to physical access control system (PACS) vendors to enable their products with Federal Information Processing Standards 201 (FIPS-201) functionality using the F5 Solution and low cost access control with Card-Connected™ technology.  This enables PACS manufacturers and their integrators to enable their products to meet government requirements for FIPS-201 compliance.  The Card-Connected Technology uses strong cryptography to extend central access control to standalone doors and mobile locks at a fraction of the cost.

 

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Table of Contents

 

SIGNIFICANT EVENTS

 

The following significant events occurred during the three months ended March 31, 2010:

 

Legal Expenses — During the three months ended March 31, 2010, the Company incurred $1.1 million in legal and related expenses in pursuit of an intellectual property infringement case. The case was settled in March 2010 upon mutual agreement of both parties involved whereby the Company issued a patent license to the other party on mutually acceptable terms. Refer to Note 17 of the notes to condensed consolidated financial statements in this Quarterly report on Form 10-Q for further details.

 

Amendment to the lease agreement — During the three months ended March 31, 2010, the Company entered into an amendment to the lease agreement for its office building in Fremont, California. The amendment extends the lease term to 10 years from the date of amendment, reduces the office space from 41,000 square feet to 29,000 square feet suspends the monthly cash portion of the rent payments for first eight months of the new term and significantly reduces the annual rent expense. The amendment also provides, that subject to a $1.2 million penalty, the Company may terminate the lease at any point after five years from the date of amendment

 

Severance expense —The Company recorded $0.4 million in severance expense, primarily through operating expenses, for the second quarter of fiscal 2010 as the Company continues to realign its business in accordance with its revised strategic initiatives.

 

Stock repurchase program During the second quarter of fiscal 2010, the Company announced that its Board of Directors approved a stock repurchase program, pursuant to which the Company may repurchase up to $10 million or approximately 8% of its outstanding shares of common stock in the open market from time to time over the next twelve months. No stock was repurchased under the program during the quarter. Refer to Note 8 of the notes to condensed consolidated financial statements in this Form 10-Q for further details.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

REVENUE

 

Revenue by Product Type:

 

Revenue by product type for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 was as follows (amounts in thousands):

 

 

 

Three Months Ended March 31,

 

$

 

%

 

 

 

2010

 

2009

 

Change

 

Change

 

Product Mix:

 

 

 

 

 

 

 

 

 

Software

 

$

6,055

 

$

6,207

 

$

(152

)

-2

%

Hardware

 

2,593

 

4,148

 

(1,555

)

-37

%

Service

 

5,586

 

5,775

 

(189

)

-3

%

Total revenue

 

$

14,234

 

$

16,130

 

$

(1,896

)

-12

%

 

 

 

 

 

 

 

 

 

 

Product Mix (as % of total revenue):

 

 

 

 

 

 

 

 

 

Software

 

43

%

38

%

 

 

 

 

Hardware

 

18

%

26

%

 

 

 

 

Service

 

39

%

36

%

 

 

 

 

 

 

100

%

100

%

 

 

 

 

 

Revenue by product type for six months ended March 31, 2010 as compared to six months ended March 31, 2009 was as follows (amounts in thousands):

 

 

 

Six Months Ended March 31,

 

$

 

%

 

 

 

2010

 

2009

 

Change

 

Change

 

Product Mix:

 

 

 

 

 

 

 

 

 

Software

 

$

11,184

 

$

11,517

 

$

(333

)

-3

%

Hardware

 

6,701

 

8,951

 

(2,250

)

-25

%

Service

 

11,011

 

11,963

 

(952

)

-8

%

Total revenue

 

$

28,896

 

$

32,431

 

$

(3,535

)

-11

%

 

 

 

 

 

 

 

 

 

 

Product Mix (as % of total revenue):

 

 

 

 

 

 

 

 

 

Software

 

39

%

35

%

 

 

 

 

Hardware

 

23

%

28

%

 

 

 

 

Service

 

38

%

37

%

 

 

 

 

 

 

100

%

100

%

 

 

 

 

 

Software revenue is comprised of software license revenue and professional services revenue essential to the functionality of our software. Software revenue declined slightly by $0.2 million (or 2%) and $0.3 million (or 3%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago.

 

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Table of Contents

 

Hardware revenue is comprised of tokens, readers, smart cards, and related equipment, generally to complement revenue of related software products. Hardware revenue decreased by $1.6 million (or 37%) and $2.3 million (or 25%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease was primarily driven by a decrease in our token sales in Asia Pacific and smart card and reader sales in EMEA and North America.

 

Service revenue is comprised of post-contract customer support and professional services not essential to the functionality of software, including installation, training and consulting. Service revenue decreased by $0.2 million (or 3%) and $1.0 million (or 8%) respectively during the three and six months ended March 31, 2010, compared to the same periods a year ago. The decrease in service revenue was primarily driven by a change in our licensing arrangement for our Single Sign-On product with one of our significant customers.

 

Revenue by Geography:

 

Revenue by geography for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 was as follows (amounts in thousands):

 

 

 

Three Months Ended March 31,

 

$

 

%

 

 

 

2010

 

2009

 

Change

 

Change

 

Geographic Mix:

 

 

 

 

 

 

 

 

 

North America

 

$

7,144

 

$

7,371

 

$

(227

)

-3

%

EMEA

 

6,599

 

6,999

 

(400

)

-6

%

Asia Pacific

 

491

 

1,760

 

(1,269

)

-72

%

Total revenue

 

$

14,234

 

$

16,130

 

$

(1,896

)

-12

%

 

 

 

 

 

 

 

 

 

 

Geographic Mix (as % of total revenue):

 

 

 

 

 

 

 

 

 

North America

 

50

%

46

%

 

 

 

 

EMEA

 

47

%

43

%

 

 

 

 

Asia Pacific

 

3

%

11

%

 

 

 

 

 

 

100

%

100

%

 

 

 

 

 

Revenue by geography for the six months ended March 31, 2010 as compared to the six months ended March 31, 2009 was as follows (amounts in thousands):

 

 

 

Six Months Ended March 31,

 

$

 

%

 

 

 

2010

 

2009

 

Change

 

Change

 

Geographic Mix:

 

 

 

 

 

 

 

 

 

North America

 

$

14,291

 

$

14,758

 

$

(467

)

-3

%

EMEA

 

13,131

 

14,190

 

(1,059

)

-7

%

Asia Pacific

 

1,474

 

3,483

 

(2,009

)

-58

%

Total revenue

 

$

28,896

 

$

32,431

 

$

(3,535

)

-11

%

 

 

 

 

 

 

 

 

 

 

Geographic Mix (as % of total revenue):

 

 

 

 

 

 

 

 

 

North America

 

50

%

45

%

 

 

 

 

EMEA

 

45

%

44

%

 

 

 

 

Asia Pacific

 

5

%

11

%

 

 

 

 

 

 

100

%

100

%

 

 

 

 

 

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Table of Contents

 

North America revenue is primarily derived from deployments of our smart card-based software products, such as ActivClient™, the ActivIdentity ActivID™ Card Management System and ActivIdentity Secure Login™ Single Sign On, to various departments of the U.S. federal government and our enterprise customers. Revenue in North America declined slightly by $0.2 million (or 3%) and $0.5 million (or 3%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago.

 

Europe, the Middle East and Africa (EMEA) revenue is primarily derived from deployments of our strong authentication suite of products, such as ActivIdentity 4TRESS™ AAA Server for Remote Access and ActivIdentity 4TRESS™ Authentication Server, and authentication devices to various enterprise and financial customers. Revenue is also derived from deployments of our smart card-based software products to various government and enterprise customers. Revenue in EMEA decreased $0.4 million (or 6%) and $1.1 million (or 7%), respectively, during the three and six months ended March 31, 2010, compared to the same periods a year ago. The decrease was primarily the result of decreased spending by banking customers on our products.

 

Asia Pacific revenue is primarily derived from deployments of our strong authentication suite of products, authentication devices, and our smart card-based software products to various government, enterprise and financial customers. Revenue in Asia Pacific decreased by $1.3 million (or 72%) and $2.0 million (or 58%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease was driven primarily by a decrease in software customization revenue as a project related to the issuance of smart card driver’s licenses nears completion and a decrease in Token sales to the Asian banking sector.

 

COST OF REVENUE

 

Cost of revenue for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 was as follows (amounts in thousands):

 

 

 

Three Months Ended March 31,

 

$

 

%

 

 

 

2010

 

2009

 

Change

 

Change

 

Software

 

$

394

 

$

1,142

 

$

(748

)

-65

%

As a percentage of software revenue

 

7

%

18

%

 

 

 

 

Hardware

 

1,352

 

2,138

 

(786

)

-37

%

As a percentage of hardware revenue

 

52

%

52

%

 

 

 

 

Service

 

2,160

 

1,891

 

269

 

14

%

As a percentage of service revenue

 

39

%

33

%

 

 

 

 

Amortization of developed technology and patents

 

263

 

593

 

(330

)

-56

%

Total cost of revenue

 

$

4,169

 

$

5,764

 

$

(1,595

)

-28

%

 

Cost of revenue for the six months ended March 31, 2010 as compared to the six months ended March 31, 2009 was as follows (amounts in thousands):

 

 

 

Six Months Ended March 31,

 

$

 

%

 

 

 

2010

 

2009

 

Change

 

Change

 

Software

 

$

846

 

$

2,181

 

$

(1,335

)

-61

%

As a percentage of software revenue

 

8

%

19

%

 

 

 

 

Hardware

 

3,474

 

4,559

 

(1,085

)

-24

%

As a percentage of hardware revenue

 

52

%

51

%

 

 

 

 

Service

 

4,209

 

3,983

 

226

 

6

%

As a percentage of service revenue

 

38

%

33

%

 

 

 

 

Amortization of developed technology and patents

 

446

 

1,186

 

(740

)

-62

%

Total cost of revenue

 

$

8,975

 

$

11,909

 

$

(2,934

)

-25

%

 

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Table of Contents

 

Cost of software revenue includes the cost of professional services associated with customization essential to the functionality of software. The cost of software revenue decreased $0.7 million (or 65%) and $1.3 million (or 61%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease in software cost of revenue was primarily driven by decreased engineering service costs incurred on a large software customization project for the issuance of smart card driver’s licenses.

 

Cost of hardware revenue includes costs associated with the manufacturing and shipping of product, logistics, operations, warranty costs and charges related to excess and obsolete inventory. Cost of hardware revenue decreased $0.8 million (or 37%) and $1.1 million (or 24%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease in the cost of hardware revenue was primarily driven by a lower sales volume.

 

Cost of service revenue consists of personnel costs and expenses incurred in providing post-contract customer support and professional services not essential to software such as installation, training, and consulting. The cost of service revenue increased by $0.3 million (or 14%) and $0.2 million (or 6%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The increase was primarily the result of sustaining and support activities related to customer migrations to new versions of Single Sign On products and deploy large scale card management systems.

 

Amortization of developed technology and patents includes amortization of technology capitalized in our acquisitions and purchase of certain patents and related intellectual property from third parties. The amortization expense decreased $0.3 million (or 56%) and $0.7 million (or 62%) for the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease was the result of certain items becoming fully amortized and was consistent with the scheduled amortization of developed technology and patents.

 

OPERATING EXPENSES

 

A substantial proportion of our operating expenses are fixed. Accordingly, a small variation in the timing of revenue recognition can cause significant variations in operating results across periods.

 

Sales and marketing

 

Sales and marketing expenses and period-over-period changes were as follows (amounts in thousands):

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Sales and marketing

 

$

4,401

 

$

5,294

 

$

8,834

 

$

10,304

 

Percentage change from comparable prior period

 

-17

%

 

 

-14

%

 

 

As a percentage of net revenue

 

31

%

33

%

31

%

32

%

Headcount, end of period

 

76

 

81

 

 

 

 

 

 

Sales and marketing expenses consist primarily of salaries and other payroll expenses, stock-based compensation expense, sales commissions, travel, depreciation, allocations of facilities and information technology costs, and costs associated with marketing programs, promotions, and trade shows.

 

Sales and marketing expenses decreased $0.9 million (or 17%) and $1.5 million (or 14%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease in sales and marketing expenses was primarily due to reduced compensation and related expenses, specifically bonus and severance expense, partially offset by an increase in trade show expenses during the three and six months ended March 31, 2010 compared to the same periods a year ago.

 

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Research and development

 

Research and development expenses and period-over-period changes were as follows (amounts in thousands):