MITK 10-Q
Mitek Systems Inc (MITK)
10-Q
2022-10-28
For: 2022-06-30
View Original
Added on
April 08, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended June 30, 2022
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission File Number 001-35231
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(619 ) 269-6800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
The | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 44,680,429 shares of the registrant’s common stock outstanding as of September 30, 2022.
MITEK SYSTEMS, INC.
FORM 10-Q
For The Quarterly Period Ended June 30, 2022
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MITEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
| June 30, 2022 (Unaudited) | September 30, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Contract assets | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term investments | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred income tax assets | |||||||||||
| Convertible senior notes hedge | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued payroll and related taxes | |||||||||||
Accrued liabilities(1) | |||||||||||
| Deferred revenue, current portion | |||||||||||
| Lease liabilities, current portion | |||||||||||
| Acquisition-related contingent consideration | |||||||||||
| Restructuring accrual | |||||||||||
Income taxes payable(1) | |||||||||||
Other current liabilities(1) | |||||||||||
| Total current liabilities | |||||||||||
| Convertible senior notes | |||||||||||
| Embedded conversion derivative | |||||||||||
| Deferred revenue, non-current portion | |||||||||||
| Lease liabilities, non-current portion | |||||||||||
| Deferred income tax liabilities, non current portion | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
Treasury stock, at cost, | ( | ||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
(1) September 30, 2021 consolidated balance sheet reflects reclassifications to conform to the current year presentation.
See accompanying notes to consolidated financial statements.
1
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(amounts in thousands except per share data)
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Software and hardware | $ | $ | $ | $ | |||||||||||||||||||
| Services and other | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||
| Cost of revenue—software and hardware | |||||||||||||||||||||||
| Cost of revenue—services and other | |||||||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Amortization and acquisition-related costs | |||||||||||||||||||||||
| Restructuring costs | |||||||||||||||||||||||
| Total operating costs and expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax benefit (provision) | ( | ( | |||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share—basic | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share—diluted | $ | $ | $ | $ | |||||||||||||||||||
Shares used in calculating net income per share—basic | |||||||||||||||||||||||
Shares used in calculating net income per share—diluted | |||||||||||||||||||||||
| Comprehensive income (loss) | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||||||||||||||
| Unrealized gain (loss) on investments | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
See accompanying notes to consolidated financial statements.
2
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(amounts in thousands)
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Components of other comprehensive loss: | |||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Change in unrealized gain (loss) on investments | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||||||||
| Acquisition-related shares issued | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Components of other comprehensive income: | |||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | |||||||||||||||||||||||||||||||
| Change in unrealized gain (loss) on investments | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
3
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CONTINUED
(Unaudited)
(amounts in thousands)
| Nine Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchases and retirements of common stock | ( | ( | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Components of other comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||
| Change in unrealized gain (loss) on investments | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Nine Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Acquisition-related shares issued | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Sale of convertible senior notes warrants | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Components of other comprehensive income: | |||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | |||||||||||||||||||||||||||||||
| Change in unrealized gain (loss) on investments | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
4
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
| Nine Months Ended June 30, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Operating activities: | |||||||||||||||||
| Net income | $ | $ | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Amortization of investment premiums & other | |||||||||||||||||
| Accretion and amortization on debt securities | |||||||||||||||||
| Net changes in estimated fair value of acquisition-related contingent consideration | ( | ||||||||||||||||
| Deferred taxes | ( | ( | |||||||||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||||||||
| Accounts receivable | ( | ( | |||||||||||||||
| Contract assets | ( | ||||||||||||||||
| Other assets | ( | ( | |||||||||||||||
| Accounts payable | ( | ||||||||||||||||
| Accrued payroll and related taxes | ( | ||||||||||||||||
| Deferred revenue | |||||||||||||||||
| Restructuring accrual | |||||||||||||||||
| Other liabilities | |||||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Investing activities: | |||||||||||||||||
| Purchases of investments | ( | ( | |||||||||||||||
| Sales and maturities of investments | |||||||||||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||||||||
| Purchases of property and equipment | ( | ( | |||||||||||||||
| Net cash used in investing activities | ( | ( | |||||||||||||||
| Financing activities: | |||||||||||||||||
| Proceeds from the issuance of convertible senior notes | |||||||||||||||||
| Payment for convertible senior notes issuance costs | ( | ||||||||||||||||
| Purchase of 2026 convertible senior notes hedge | ( | ||||||||||||||||
| Proceeds from issuance of convertible senior notes warrants | |||||||||||||||||
| Proceeds from the issuance of equity plan common stock | |||||||||||||||||
| Repurchases and retirements of common stock | ( | ||||||||||||||||
| Payment of acquisition-related contingent consideration | ( | ( | |||||||||||||||
| Loans made to non-executive employees | ( | ||||||||||||||||
| Proceeds from other borrowings | |||||||||||||||||
| Principal payments on other borrowings | ( | ( | |||||||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||||||||
| Foreign currency effect on cash and cash equivalents | ( | ||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||||||||
| Issuance of common stock for acquisition-related contingent consideration | $ | $ | |||||||||||||||
| Cash paid for interest | $ | $ | |||||||||||||||
| Cash paid for income taxes | $ | $ | |||||||||||||||
| Supplemental disclosures of non-cash investing and financing activities: | |||||||||||||||||
| Reclassification of convertible senior notes hedge and embedded conversion derivative to additional paid-in capital | $ | $ | |||||||||||||||
| Unrealized holding loss on available for sale investments | $ | ( | $ | ( | |||||||||||||
See accompanying notes to consolidated financial statements.
5
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Mitek Systems, Inc. (“Mitek” or the “Company”) is a leading innovator of mobile image capture and digital identity verification solutions. Our solutions are embedded in native mobile apps and web browsers to facilitate digital consumer experiences. Mitek’s identity verification and authentication technologies and services make it possible for banks, financial services organizations and the world’s leading marketplace and sharing platforms to verify an individual’s identity during digital transactions, allowing them to reduce risk and meet regulatory requirements. Our advanced mobile deposit system enables secure, fast and convenient deposit services. Thousands of organizations use Mitek solutions to optimize the security of mobile check deposits, new account openings and more.
To ensure a high level of security against evolving digital fraud threats, in May 2021, Mitek acquired ID R&D, Inc. (“ID R&D”), an award-winning provider of artificial intelligence-based voice and face biometrics and liveness detection. With a strong research and development team, ID R&D consistently delivers innovative, best-in-class biometric capabilities that raise the bar on usability and performance. In March 2022, Mitek acquired HooYu Ltd. (“HooYu”), a leading KYC technology provider in the United Kingdom. The acquisition helps to ensure businesses know the true identity of their customers by linking biometric verification with real-time bureau and sanction database checks.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company as of June 30, 2022 have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, they do not include all information and footnote disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). The Company believes the footnotes and other disclosures made in the financial statements are adequate for a fair presentation of the results of the interim periods presented. The financial statements include all adjustments (solely of a normal recurring nature) which are, in the opinion of management, necessary to make the information presented not misleading. You should read these financial statements and the accompanying notes in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the U.S. Securities and Exchange Commission (“SEC”) on December 13, 2021.
Results for the nine months ended June 30, 2022 are not necessarily indicative of results for any other interim period or for a full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, deferred taxes, and related disclosure of contingent assets and
6
Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”). ASC 606 outlines a single comprehensive model to be used in accounting for revenue arising from contracts with customers. The core principle, involving a five-step process, of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company generates revenue primarily from the delivery of licenses and related services to customers (for both on-premise and software as a service (“SaaS”) products), as well as the delivery of hardware and professional services. Revenue is measured based on consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer which may be at a point in time or over time.
Contract Assets and Liabilities
The Company recognizes revenue when control of the license 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 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.
Net Income Per Share
The Company calculates net income per share in accordance with FASB ASC Topic 260, Earnings per Share. Basic net income per share is based on the weighted-average number of common shares outstanding during the period. Diluted net income per share also gives effect to all potentially dilutive securities outstanding during the period, such as restricted stock units (“RSUs”), stock options, and shares issued under the Company’s Employee Stock Purchase Plan (“ESPP”), and convertible senior notes and warrants, if dilutive. In a period with a net loss position, potentially dilutive securities are not included in the computation of diluted net loss per share because to do so would be antidilutive, and the number of shares used to calculate basic and diluted net loss per share is the same.
7
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| RSUs | |||||||||||||||||||||||
| ESPP common stock equivalents | |||||||||||||||||||||||
| Performance options | |||||||||||||||||||||||
| Performance RSUs | |||||||||||||||||||||||
| Convertible senior notes | |||||||||||||||||||||||
| Warrants | |||||||||||||||||||||||
| Total potentially dilutive common shares outstanding | |||||||||||||||||||||||
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares outstanding—basic | |||||||||||||||||||||||
| Common stock equivalents | |||||||||||||||||||||||
| Weighted-average shares outstanding—diluted | |||||||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Investments
Investments consist of corporate notes and bonds, commercial paper, U.S. Treasury securities, and asset-backed securities. The Company classifies investments as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. All investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive loss, a component of stockholders’ equity. The Company evaluates its investments to assess whether those with unrealized loss positions are other-than-temporarily impaired. Impairments are considered to be other-than-temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before the recovery of its cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in other income (expense), net in the consolidated statements of operations and comprehensive income (loss). No
All investments whose maturity or sale is expected within one year are classified as “current” on the consolidated balance sheets. All other securities are classified as “long-term” on the consolidated balance sheets.
Convertible Senior Notes Hedge and Embedded Conversion Derivative
In February 2021, the Company issued $155.3 million aggregate principal amount of 0.75 % convertible notes due 2026 (the “2026 Notes”). Concurrently with the issuance of the 2026 Notes, the Company entered into privately-negotiated convertible senior note hedge (the “Notes Hedge”) and warrant transactions (the “Warrant Transactions”) which, in combination, are intended to reduce the potential dilution from the conversion of the 2026 Notes. Prior to the Company increasing the number of authorized shares of its common stock, par value $0.001 per share (“Common Stock”), the Company could not elect to issue shares of its Common Stock upon settlement of the 2026 Notes due to insufficient authorized share capital. As a result, the embedded conversion option (the “embedded conversion derivative”) was accounted for as a derivative liability and the Notes Hedge as a derivative asset with the resulting gain (or loss) reported in other income, net, in the consolidated statement of operations to the extent the valuation changed from the date of issuance of the 2026 Notes. The Company increased its authorized shares of Common Stock in the second quarter of fiscal 2022 and as such can issue shares of its Common Stock upon settlement of the 2026 Notes. As a result, the embedded conversion option (the “embedded conversion derivative”) and the Notes Hedge are now recorded in additional paid-in-capital in the consolidated balance sheet and are not remeasured as long as they continue to meet the conditions for equity classification. The Warrant Transactions were recorded in additional paid-in-capital in the consolidated balance sheet and are not remeasured as long as
8
Goodwill and Purchased Intangible Assets
The Company’s goodwill and intangible assets resulted from prior acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually or as circumstances indicate that their value may no longer be recoverable. In accordance with ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”), the Company reviews its goodwill and indefinite-lived intangible assets for impairment at least annually in its fiscal fourth quarter and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of its reporting unit and/or its indefinite-lived intangible asset below their respective carrying values. Examples of such events or circumstances include: a significant adverse change in legal factors or in the business climate, a significant decline in the Company’s stock price, a significant decline in the Company’s 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. No such events or circumstances have occurred since the last impairment assessment was performed.
The Company’s goodwill is considered to be impaired if management determines that the carrying value of the reporting unit to which the goodwill has been assigned exceeds management’s estimate of its fair value. Based on the guidance provided by ASC 350 and ASC Topic 280, Segment Reporting, management has determined that the Company operates in one segment and consists of one reporting unit given the similarities in economic characteristics between its operations and the common nature of its products, services and customers. Because the Company has only one reporting unit, and because the Company is publicly traded, the Company determines the fair value of the reporting unit based on the market price of its common stock as it believes this represents the best evidence of fair value. In the fourth quarter of the fiscal year ended September 30, 2021, management completed its annual goodwill impairment test and concluded that the Company’s goodwill was not impaired. The Company’s conclusion that goodwill was not impaired was based on a comparison of its net assets to its market capitalization. There was no
Because the Company determines the fair value of its reporting unit based on its market capitalization, the Company’s future reviews of goodwill for impairment may be impacted by changes in the price of the Common Stock. For example, a significant decline in the price of the Common Stock may cause the fair value of its goodwill to fall below its carrying value. Therefore, the Company cannot assure that when it completes its future reviews of goodwill for impairment a material impairment charge will not be recorded.
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Other Borrowings
The Company has certain loan agreements with Spanish government agencies which were assumed when the Company acquired ICAR Vision Systems, S.L. ("ICAR") in 2017. These agreements have repayment periods of to twelve years and bear no interest. As of June 30, 2022, $1.4 million was outstanding under these agreements and $0.1 million and $1.3 million is recorded in other current liabilities and other non-current liabilities, respectively, in the consolidated balance sheets. As of September 30, 2021, $0.8 million was outstanding under these agreements and approximately $0.1 million and $0.7 million is recorded in other current liabilities and other non-current liabilities, respectively, in the consolidated balance sheets.
Guarantees
In the ordinary course of business, the Company is not subject to potential obligations under guarantees that fall within the scope of FASB ASC Topic 460, Guarantees (“ASC 460”), except for standard indemnification and warranty provisions that are contained within many of the Company’s customer license and service agreements and certain supplier agreements, and give rise only to the disclosure requirements prescribed by ASC 460. Indemnification and warranty provisions contained within the Company’s customer license and service agreements and certain supplier agreements are generally consistent with those prevalent in the Company’s industry. The Company has not historically incurred significant obligations under customer indemnification or warranty provisions and does not expect to incur significant obligations in the future. Accordingly, the Company does not maintain accruals for potential customer indemnification or warranty-related obligations.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years.
Management evaluates the available evidence about future taxable income and other possible sources of realization of deferred tax assets. The valuation allowance reduces deferred tax assets to an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be realized. See Note 8. “Income Taxes” of the consolidated financial statements for additional details.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to income tax matters in income tax expense. See Note 8. “Income Taxes” of the consolidated financial statements for additional details.
Stock-Based Compensation
The Company issues RSUs, stock options, performance options, and performance RSUs as awards to its employees. Additionally, eligible employees may participate in the ESPP. Employee stock awards are measured at fair value on the date of grant and expense is recognized using the straight-line single-option method in accordance with FASB ASC Topic 718, Compensation—Stock Compensation. Forfeitures are recorded as they occur.
The Company assigns fair value to RSUs based on the closing stock price of its Common Stock on the date of grant.
The Company estimates the fair value of stock options and ESPP shares using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the expected life of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.
The Company estimates the fair value of performance options, senior executive performance restricted stock units, and similar awards using the Monte-Carlo simulation. The Monte-Carlo simulation requires subjective assumptions, including the Company’s valuation date stock price, the annual risk-free interest rate, expected volatility, the probability of reaching the stock performance targets, and a 20 -trading-day average stock price.
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Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and the payment terms and their effect on subsequent revenue recognized by the acquirer. ASU 2021-08 will improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination and improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. ASU 2021-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period. The Company early adopted the guidance in the second quarter of fiscal 2022 and it did not have a material impact on its consolidated financial statements.
In August 2020, the FASB issued Accounting Standards Update 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features through equity. Without an initial allocation of proceeds to the conversion option, the debt will likely have a lower discount, thereby resulting in less noncash interest expense through accretion. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for such exception. ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. ASU 2020-06 is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company adopted ASU 2020-06 in the first quarter of fiscal 2022, however, it had no impact to the financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. The Company prospectively adopted this ASU 2019-12 in the first quarter of fiscal 2022 and it did not have a material impact on its consolidated financial statements.
Change in Significant Accounting Policy
The Company has consistently applied the accounting policies to all periods presented in its consolidated financial statements.
Recently Issued Accounting Pronouncements
No new accounting pronouncement issued or effective during the nine months ended June 30, 2022 had, or is expected to have, a material impact on the Company’s consolidated financial statements.
2. REVENUE RECOGNITION
Nature of Goods and Services
The following is a description of principal activities from which the Company generates its revenue. Contracts with customers are evaluated on a contract-by-contract basis as contracts may include multiple types of goods and services as described below.
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, the Company recognizes software license revenue upon delivery and after evidence of a contract exists. Hardware revenue is recognized at a point in time upon shipment and after evidence of a contract exists.
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Services and Other
Services and other revenue is generated from the sale of SaaS products and services, maintenance associated with the sale of on-premise software licenses and consulting and professional services. The Company recognizes services revenue over the period in which such services are performed. The Company’s SaaS offerings gives customers the option to be charged upon their incurred usage in arrears (“Pay as You Go”), or they may commit to a minimum spend over their contracted period. Revenue related to Pay as You Go contracts are recognized based on the customers’ actual usage. Revenue related to commitment contracts are recognized on a ratable basis over the contract period including an estimate of usage above the minimum commitment. Usage above minimum commitment is estimated by looking at usage in previous months and other factors and projecting out for the rest of the contract. The estimated usage-based revenues are constrained to the amount the Company expects to be entitled to receive in exchange for providing access to its platform. If professional services are deemed to be distinct, revenue is recognized as services are performed. If the up-front fee is not distinct, revenue is deferred until the date the customer commences use of the Company’s services, at which point it is recognized ratably over the life of the customer arrangement. The Company does not view the signing of the contract or the provision of initial setup services as discrete earnings events that are distinct.
Significant Judgments in Application of the Guidance
The Company uses the following methods, inputs, and assumptions in determining amounts of revenue to recognize:
Identification of Performance Obligations
For contracts that contain multiple performance obligations, which include combinations of software licenses, maintenance, and services, the Company accounts for individual goods or services as a separate performance obligation if they are distinct. The good or service is distinct if 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.
Determination of Transaction Price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. The Company includes any fixed charges within its contracts as part of the total transaction price. To the extent that variable consideration is not constrained, the Company includes an estimate of the variable amount, as appropriate, within the total transaction price and updates its assumptions over the duration of the contract. As a practical expedient, the Company does not adjust the transaction price for the effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less.
Assessment of Estimates of Variable Consideration
Many of the Company’s contracts with customers contain some component of variable consideration; however, variable consideration will only be included in the transaction price to the extent it is probable that a significant reversal of revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company 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 or due to uncertainty surrounding collectability.
Allocation of Transaction Price
The transaction price, including any discounts, is allocated between separate goods and services in a contract that contains multiple performance obligations based on their relative standalone selling prices. The standalone selling prices are based on the prices at which the Company separately sells each good or service. For items that are not sold separately, the Company estimates the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. In certain situations, primarily transactional SaaS revenue described above, the Company allocates variable consideration to a series of distinct goods or services within a contract. The Company allocates variable payments to one or more, but not all, of the distinct goods or services or to a series of distinct goods or services in a contract when (i) the variable payment relates specifically to the Company’s efforts to transfer the distinct good or service and (ii) the variable payment is for an amount that depicts the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to its customer.
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Disaggregation of Revenue
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Major product category | |||||||||||||||||||||||
| Deposits software and hardware | $ | $ | $ | $ | |||||||||||||||||||
| Deposits services and other | |||||||||||||||||||||||
| Deposits revenue | |||||||||||||||||||||||
| Identity verification software and hardware | |||||||||||||||||||||||
| Identity verification services and other | |||||||||||||||||||||||
| Identity verification revenue | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
| June 30, 2022 | September 30, 2021 | ||||||||||
| Contract assets, current | $ | $ | |||||||||
| Contract assets, non-current | |||||||||||
| Contract liabilities (deferred revenue), current | |||||||||||
| Contract liabilities (deferred revenue), non-current | |||||||||||
Contract Costs
3. BUSINESS COMBINATIONS
Acquisition of ID R&D, Inc.
On May 28, 2021 (the “Closing Date”), the Company completed the acquisition of ID R&D (the “ID R&D Acquisition”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated May 28, 2021, by and among the Company, ID R&D and Alexey Khitrov (the “Representative”). Upon completion of the ID R&D Acquisition, ID R&D became a direct wholly owned
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subsidiary of the Company. ID R&D is an award-winning provider of artificial intelligence-based voice and face biometrics and liveness detection.
As consideration for the ID R&D Acquisition, the Company agreed to pay an aggregate purchase price of up to $49.0 million. On the Closing Date, the equityholders of ID R&D received from the Company: (i) $13.0 million in cash, subject to adjustments for transaction expenses, escrow amounts, indebtedness and working capital adjustments (the “Initial Cash Payment”); and (ii) 867,226 shares or $13.9 million of Common Stock. In addition to the foregoing, the equityholders of ID R&D may become entitled to receive additional consideration from the Company upon achievement of certain milestones as follows (collectively, the “Earnout Payments”): subject to ID R&D’s achievement of target revenue for the period commencing on the Closing Date and ending on the one year anniversary thereof and the period commencing on the one year anniversary of the Closing Date and ending on the one year anniversary thereof (each such period, an “Earnout Period”): (i) an aggregate maximum amount of approximately $12.3 million with respect to the first Earnout Period and (ii) approximately $9.8 million with respect to the second Earnout Period, with 15 % of the first Earnout Period’s payment to be deposited (as additional funds) into an escrow fund described below. The Company will
make the Earnout Payments in the form of cash and shares of Common Stock as set forth in the Merger Agreement. The Company has granted the Representative an option to shift the Earnout Period(s) out by one year , pursuant to the terms of the Merger Agreement. Moreover, in the event actual revenue for an Earnout Period exceeds the target revenue for such period, the amount of such excess will be credited towards the achievement of the subsequent Earnout Period’s Earnout Payment. In May and June of 2022, the Company paid the first of the Earnout Payments of $9.5 million which consisted of $6.8 million paid in cash and $2.7 million in shares of Common Stock to the equityholders of ID R&D. As indicated above, 15 % of the Earnout Payment with respect to the first Earnout Period, will be deposited into the escrow fund.
The Company estimated the fair value of the consideration for the Earnout Periods to be $15.7 million on the Closing Date, which was determined using a discounted cash flow methodology based on financial forecasts determined by management that included assumptions about revenue growth and discount rates, and is included in level three of the fair value hierarchy. Each quarter the Company revises the estimated fair value of the consideration for the Earnout Periods and changes in the fair value are included in amortization and acquisition-related costs in the consolidated statements of operations and comprehensive income (loss). See Note 5. “Investments,” of the notes to consolidated financial statements for more information relating to the consideration for the Earnout Periods.
The Company incurred $0.6 million of expense in connection with the acquisition primarily related to legal fees, outside service costs, and travel expense, which are included in amortization and acquisition-related costs in the consolidated statements of operations and comprehensive income (loss).
On the Closing Date, the Company deposited a portion of the Initial Cash Payment and a number of shares of Common Stock having a collective value of approximately $4.0 million into an escrow fund to serve as collateral and partial security for working capital adjustments and certain indemnification rights of the Company. The escrow fund will be maintained for up to 24 months following the completion of the ID R&D Acquisition or until such earlier time as the escrow fund is exhausted. The Company used cash on hand for the Initial Cash Payment.
Acquisition of HooYu Ltd
On March 23, 2022, the Company completed the acquisition of HooYu Ltd (the “HooYu Acquisition”) pursuant to the Purchase Agreement (the “Purchase Agreement”) dated March 23, 2022, by and among the Company and certain persons identified in the Purchase Agreement (the “Sellers”). Pursuant to the Purchase Agreement, the Company, among other things, acquired 100 % of the outstanding share capital of HooYu Ltd (“HooYu”), a leading global customer onboarding platform designed to increase the integrity of KYC and maximize the success of customer onboarding. As consideration for the HooYu Acquisition, the Company paid aggregate consideration in the amount of $129.1 million in cash (the “Closing Consideration”), as such amount may be adjusted for transaction expenses and indebtedness. Pursuant to the Purchase Agreement, $1.6 million was withheld as a reduction to the Closing Consideration and is being retained by the Company for the final working capital adjustments and indemnification of certain tax matters under the Purchase Agreement.
The Company incurred $3.2 million of expense in connection with the acquisition primarily related to legal fees, outside service costs, foreign currency and realized losses on investments, and travel expense, which are included in amortization and acquisition-related costs in the consolidated statements of operations and comprehensive income (loss).
On March 23, 2022, the Company transferred an aggregate of $127.5 million to the Sellers and its third-party legal and investment advisors. The Company used cash on hand for the cash paid on March 23, 2022.
Acquisitions are accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Accordingly, the results of operations of ID R&D and HooYu have been included in the accompanying consolidated financial statements since the date of such acquisition. The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon the respective estimates of fair value as of the date of the ID R&D Acquisition and are based on assumptions that the Company’s management believes are reasonable. The Company is in the process of completing its valuation of the acquired deferred income taxes related to the HooYu Acquisition and will complete the evaluation once the fiscal
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2021 tax return has been completed. The final allocations of the purchase price to deferred income taxes may differ materially from the information presented in these unaudited consolidated financial statements.
| ID R&D | HooYu | |||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Property, plant, and equipment | ||||||||||||||
| Other current assets | ||||||||||||||
| Intangible assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Current liabilities | ( | ( | ||||||||||||
| Deferred revenue | ( | |||||||||||||
| Deferred income tax liabilities | ( | ( | ||||||||||||
| Net assets acquired | $ | $ | ||||||||||||
The goodwill recognized is due to market participant synergies and other factors and is no t expected to be deductible for income tax purposes. The Company estimated the fair value of identifiable acquisition-related intangible assets with definite lives primarily based on discounted cash flow projections that will arise from these assets. The Company exercised significant judgment with regard to assumptions used in the determination of fair value such as with respect to discount rates and the determination of the estimated useful lives of the intangible assets. The following table summarizes the estimated fair values and estimated useful lives of intangible assets with definite lives acquired from the ID R&D Acquisition and the HooYu Acquisition as of their respective closing dates ( amounts shown in thousands, except for years):
ID R&D
| Amortization Period | Amount assigned | ||||||||||
| Completed technologies | $ | ||||||||||
| Customer relationships | |||||||||||
| Trade name | |||||||||||
| Total intangible assets acquired | $ | ||||||||||
HooYu
| Amortization Period | Amount assigned | ||||||||||
| Completed technologies | $ | ||||||||||
| Customer relationships | |||||||||||
| Trade name | |||||||||||
| Covenants not to compete | $ | ||||||||||
| Total intangible assets acquired | $ | ||||||||||
| Three months ended June 30, | Nine months ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Pro forma revenue | $ | $ | $ | $ | |||||||||||||||||||
| Pro forma net income (loss) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
Revenue and net loss from HooYu included in the consolidated results of operations from the date of the HooYu acquisition through June 30, 2022 were $2.7 million and $0.8 million, respectively.
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In order to streamline the organization and focus resources going forward, the Company undertook a strategic restructuring in June 2022, which included a reduction in workforce. Restructuring costs consist of employee severance obligations and other related costs and are expected to be paid over the next twelve months. The following table summarizes changes in the restructuring accrual during the nine months ended June 30, 2022 (amounts shown in thousands):
Balance at September 30, 2021 | $ | ||||
| Costs incurred | |||||
Balance at June 30, 2022 | $ | ||||
5. INVESTMENTS
The following tables summarize investments by type of security as of June 30, 2022 and September 30, 2021 (amounts shown in thousands):
| June 30, 2022: | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| U.S. Treasury, short-term | $ | $ | $ | ( | $ | ||||||||||||||||||
| Foreign government and agency securities, short-term | ( | ||||||||||||||||||||||
| Corporate debt securities, short-term | ( | ||||||||||||||||||||||
| U.S. Treasury, long-term | ( | ||||||||||||||||||||||
| Corporate debt securities, long-term | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| September 30, 2021: | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| U.S. Treasury, short-term | $ | $ | $ | $ | |||||||||||||||||||
| Asset-backed securities, short-term | ( | ||||||||||||||||||||||
| Corporate debt securities, short-term | ( | ||||||||||||||||||||||
| U.S. Treasury, long-term | ( | ||||||||||||||||||||||
| Foreign government and agency securities, long-term | ( | ||||||||||||||||||||||
| Corporate debt securities, long-term | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
The cost of securities sold is based on the specific identification method. Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in other income (expense), net in the consolidated statements of operations and comprehensive income (loss).
The Company determines the appropriate designation of investments at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company’s investments are designated as available-for-sale debt securities. As of June 30, 2022 and September 30, 2021, the Company’s short-term investments have maturity dates of less than one year from the balance sheet date and the Company’s long-term investments have maturity dates of greater than one year from the balance sheet date. The contractual maturities of the available-for-sale securities held at June 30, 2022 are as follows: $49.5 million within one year and $19.5 million beyond one year to five years.
Available-for-sale marketable securities are carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of taxes, and are reported as a separate component of stockholders’ equity. Management reviews the fair value of the portfolio at least monthly and evaluates individual securities with fair value below amortized cost at the balance sheet date. For debt securities, in order to determine whether impairment is other-than-temporary, management must conclude whether the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis. If management intends to sell an impaired debt security or it is more likely than not that the Company will be required to sell the security prior to recovering its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. The amount of an other-than-temporary impairment on debt securities related to a credit loss, or securities that management intends to sell before recovery, is recognized in earnings. The amount of an other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of stockholders’ equity in comprehensive income. No no realized gains or losses during the three
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months ended June 30, 2022 and $0.3 million of realized losses during the nine months ended June 30, 2022, from the sale of available-for-sale securities. There were no
Fair Value Measurements and Disclosures
FASB ASC Topic 820, Fair Value Measurements (“ASC 820”) defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last, unobservable:
•Level 1—Quoted prices in active markets for identical assets or liabilities;
•Level 2—Inputs other than Level 1 inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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The following tables represent the fair value hierarchy of the Company’s investments, convertible senior notes hedge, acquisition-related contingent consideration, and embedded conversion derivative as of June 30, 2022 and September 30, 2021, respectively (amounts shown in thousands):
| June 30, 2022: | Balance | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | |||||||||||||||||||
| Foreign government and agency securities | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Total short-term investments at fair value | |||||||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| U.S. Treasury | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Total long-term investments at fair value | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||
| Acquisition-related contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
| Non-current liabilities: | |||||||||||||||||||||||
| Acquisition-related contingent consideration | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
| September 30, 2021: | Balance | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | |||||||||||||||||||
| Asset-backed securities, short-term | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Total short-term investments at fair value | |||||||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| U.S. Treasury | |||||||||||||||||||||||
| Foreign government and agency securities | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Total long-term investments at fair value | |||||||||||||||||||||||
| Convertible senior notes hedge | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||
| Acquisition-related contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
| Non-current liabilities: | |||||||||||||||||||||||
| Acquisition-related contingent consideration | |||||||||||||||||||||||
| Embedded conversion derivative | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
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•Level 1: Includes investments in U.S. Government and agency securities, which are valued based on recently executed transactions in the same or similar securities.
•Level 2: Convertible Senior Notes and corporate debt securities. Corporate debt securities are valued using 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. On February 5, 2021, the Company issued the 2026 Notes as further described in Note 9. “Convertible Senior Notes.” Concurrently with the issuance of the 2026 Notes, the Company entered into the Notes Hedge and Warrant Transactions which in combination are intended to reduce the potential dilution from the conversion of the 2026 Notes. Initially, conversion of the 2026 Notes could only be settled in cash; however, following the increase in the Company’s authorized shares of Common Stock in the second quarter of fiscal 2022, which satisfied certain share reservation conditions, conversion of the 2026 Notes may be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock, at the Company’s election. The embedded conversion derivative associated with the 2026 Notes previously meet the criteria for an embedded derivative liability which required bifurcation and separate accounting. The Notes Hedge was previously classified as a derivative asset on the Company’s consolidated balance sheet. Following the increase in the Company’s authorized shares of Common Stock in the second quarter of fiscal 2022, the Notes Hedge and embedded conversion derivative were reclassified to additional paid-in capital as the equity classification criteria is met. Changes in the fair value of these derivatives prior to being classified in equity were reflected in Other income (expense), net, in the Company’s consolidated statement of operations and comprehensive income (loss).
The fair value of the Notes Hedge and the embedded conversion derivative were estimated using a Black-Scholes model. Based on the fair value hierarchy, the Company classified the Notes Hedge and the embedded conversion derivative as Level 2 as significant inputs are observable, either directly or indirectly. The significant inputs and assumptions used in the models to calculate the fair value of the derivatives include the Common Stock price, exercise price of the derivatives, risk-free interest rate, volatility, annual coupon rate and remaining contractual term.
| Balance at September 30, 2021 | $ | ||||
| Reduction of expense due to changes in fair value | ( | ||||
| Payment and issuance of stock as contingent consideration associated with the ID R&D acquisition | ( | ||||
| Balance at June 30, 2022 | $ | ||||
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company had a goodwill balance of $128.0 million at June 30, 2022, representing the excess of costs over fair value of assets of businesses acquired. Goodwill acquired in a business combination and determined to have an indefinite useful life is not amortized, but instead is tested for impairment at least annually in accordance with ASC 350. The following table summarizes changes in the balance of goodwill during the nine months ended June 30, 2022 (amounts shown in thousands):
| Balance at September 30, 2021 | $ | ||||
| Acquisition of HooYu | |||||
| Foreign currency effect on goodwill | ( | ||||
| Balance at June 30, 2022 | $ | ||||
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Intangible Assets
Intangible assets include the value assigned to purchased completed technology, customer relationships, trade names and covenants not to compete. The estimated useful lives for all of these intangible assets range from to seven years and they are amortized on a straight-line basis. Intangible assets as of June 30, 2022 and September 30, 2021, respectively, are summarized as follows (amounts shown in thousands, except for years):
| June 30, 2022: | Weighted Average Amortization Period | Cost | Accumulated Amortization | Net | |||||||||||||||||||
| Completed technologies | $ | $ | $ | ||||||||||||||||||||
| Customer relationships | |||||||||||||||||||||||
| Trade names | |||||||||||||||||||||||
| Covenants not to compete | |||||||||||||||||||||||
| Total intangible assets | $ | $ | $ | ||||||||||||||||||||
| September 30, 2021: | Weighted Average Amortization Period | Cost | Accumulated Amortization | Net | |||||||||||||||||||
| Completed technologies | $ | $ | $ | ||||||||||||||||||||
| Customer relationships | |||||||||||||||||||||||
| Trade names | |||||||||||||||||||||||
| Total intangible assets | $ | $ | $ | ||||||||||||||||||||
Amortization expense related to acquired intangible assets was $4.7 million and $1.9 million for the three months ended June 30, 2022 and 2021, respectively, and $9.2 million and $5.2 million during the nine months ended June 30, 2022 and 2021, respectively, and is recorded within amortization and acquisition-related costs on the consolidated statements of operations and comprehensive income (loss).
| Estimated Future Amortization Expense | |||||
| 2022—remaining | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
7. STOCKHOLDERS’ EQUITY
Stock-Based Compensation Expense
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
Stock-based compensation expense included in expenses | $ | $ | $ | $ | |||||||||||||||||||
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As of June 30, 2022, the Company had $32.6 million of unrecognized compensation expense related to outstanding stock options and RSUs expected to be recognized over a weighted-average period of approximately 2.5 years.
2020 Incentive Plan
In January 2020, the Company’s board of directors (the “Board”) adopted the Mitek Systems, Inc. 2020 Incentive Plan (the “2020 Plan”) upon the recommendation of the compensation committee of the Board. On March 4, 2020, the Company’s stockholders approved the 2020 Plan. The total number of shares of Common Stock reserved for issuance under the 2020 Plan is 4,500,000 shares plus such number of shares, not to exceed 107,903 , as remained available for issuance under the 2002 Stock Option Plan, 2006 Stock Option Plan, 2010 Stock Option Plan, and 2012 Incentive Plan (collectively, the “Prior Plans”) as of January 17, 2020, plus any shares underlying awards under the Prior Plans that are terminated, forfeited, cancelled, expire unexercised or are settled in cash after January 17, 2020. As of June 30, 2022, (i) 1,495,347 RSUs and 755,533 Performance RSUs were outstanding under the 2020 Plan, (ii) 1,406,785 shares of Common Stock were reserved for future grants under the 2020 Plan, and (iii) stock options to purchase an aggregate of 471,303 shares of Common Stock and 471,988 RSUs were outstanding under the Prior Plans.
Employee Stock Purchase Plan
In January 2018, the Board adopted the ESPP. On March 7, 2018, the Company’s stockholders approved the ESPP. The total number of shares of Common Stock reserved for issuance thereunder is 1,000,000 shares. As of June 30, 2022, (i) 549,849 shares have been issued to participants pursuant to the ESPP and (ii) 450,151 shares of Common Stock were reserved for future purchases under the ESPP. The Company commenced the initial offering period on April 2, 2018. Subsequent offering periods commence semi-annually in February and August each year.
The ESPP enables eligible employees to purchase shares of Common Stock at a discount from the market price through payroll deductions, subject to certain limitations. Eligible employees may elect to participate in the ESPP only during an open enrollment period. The offering period immediately follows the open enrollment window, at which time ESPP contributions are withheld from the participant's regular paycheck. The ESPP provides for a 15 0.1 0.4
Director Restricted Stock Unit Plan
In January 2011, the Board adopted the Mitek Systems, Inc. Director Restricted Stock Unit Plan, as amended and restated (the “Director Plan”). On March 10, 2017, the Company’s stockholders approved an amendment to the Director Plan to increase the number of shares of Common Stock available for future grants. The total number of shares of Common Stock reserved for issuance thereunder is 1,500,000 shares. As of June 30, 2022, (i) 259,513 RSUs were outstanding under the Director Plan and (ii) 144,412 shares of Common Stock were reserved for future grants under the Director Plan.
Stock Options
Number of Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
| Outstanding at September 30, 2021 | $ | $ | |||||||||||||||||||||
| Granted | $ | ||||||||||||||||||||||
| Exercised | ( | $ | |||||||||||||||||||||
| Canceled | $ | ||||||||||||||||||||||
| Outstanding at June 30, 2022 | $ | ||||||||||||||||||||||
| Vested and Expected to Vest at June 30, 2022 | $ | ||||||||||||||||||||||
| Exercisable at June 30, 2022 | $ | ||||||||||||||||||||||
The Company recognized $0.1 million and $0.2 million in stock-based compensation expense related to outstanding stock options during the three months ended June 30, 2022 and 2021, respectively. The Company recognized $0.4 million and $0.5 million in stock-based compensation expense related to outstanding stock options during the nine months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, the Company had $0.4 million of unrecognized compensation expense related to outstanding stock options expected to be recognized over a weighted-average period of approximately 0.5 years.
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Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of the weighted-average exercise price, multiplied by the number of options outstanding and exercisable. The total intrinsic value of options exercised during the nine months ended June 30, 2022 and 2021 was $0.3 million and $2.0 million, respectively. There were no
Restricted Stock Units
Number of Shares | Weighted-Average Fair Market Value Per Share | ||||||||||
| Outstanding at September 30, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Settled | ( | ||||||||||
| Canceled | ( | ||||||||||
| Outstanding at June 30, 2022 | |||||||||||
The cost of RSUs is determined using the fair value of Common Stock on the award date, and the compensation expense is recognized ratably over the vesting period. The Company recognized $2.5 million and $2.0 million in stock-based compensation expense related to outstanding RSUs in the three months ended June 30, 2022 and 2021, respectively. The Company recognized $7.1 million and $6.0 million in stock-based compensation expense related to outstanding RSUs during the nine months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, the Company had $24.0 million of unrecognized compensation expense related to outstanding RSUs expected to be recognized over a weighted-average period of approximately 2.6 years.
Performance Restricted Stock Units
Number of Shares | Weighted-Average Fair Market Value Per Share | ||||||||||
| Outstanding at September 30, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Settled | ( | ||||||||||
| Canceled | ( | ||||||||||
| Outstanding at June 30, 2022 | |||||||||||
The cost of Performance RSUs is determined using a Monte Carlo simulation to estimate the fair value on the award date, and the compensation expense is recognized ratably over the vesting period. The Company recognized $0.9 million and $0.3 million in stock-based compensation expense related to outstanding Performance RSUs in the three months ended June 30, 2022 and 2021, respectively. The Company recognized $2.1 million and $1.0 million in stock-based compensation expense related to outstanding Performance RSUs during the nine months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, the Company had $8.2 million of unrecognized compensation expense related to outstanding RSUs expected to be recognized over a weighted-average period of approximately 2.4 years.
Performance Options
On November 6, 2018, as an inducement grant pursuant to Nasdaq Listing Rule 5635(c)(4), the Company’s Chief Executive Officer was granted performance options (the “Performance Options”) to purchase up to 800,000 shares of Common Stock at an exercise price of $9.50 per share, the closing market price for a share of Common Stock on the date of the grant. During the fiscal year ended September 30, 2021, the performance conditions were achieved and in November 2021, the time vesting condition was met and the performance options vested in full. The Company did not recognize any stock-based compensation expense related to outstanding Performance Options in the three months ended June 30, 2022, and recognized $0.2 million in three months ended June 30, 2021. The Company recognized $0.1 million and $0.6 million in stock-based compensation expense related to outstanding Performance Options during the nine months ended June 30, 2022 and 2021, respectively.
Share Repurchase Program
On December 13, 2019, the Board authorized and approved a share repurchase program for up to $10 million of the currently outstanding shares of our Common Stock. The share repurchase program expired on December 16, 2020. Total purchases made under
22
the share repurchase program were $1.0 million or approximately 137,000 shares at an average price of $7.33 . The purchases under the share repurchase program were made through open market trades.
On June 15, 2021, the Board authorized and approved a share repurchase program for up to $15 million of the currently outstanding shares of our Common Stock. The share repurchase program expired on June 30, 2022. The timing, price and volume of repurchases were based on market conditions, relevant securities laws and other factors. The repurchases were made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions or pursuant to a share repurchase trading plan.
The Company made no purchases during the three months ended June 30, 2022. The Company made purchases of $14.8 million, or approximately 886,204 shares, during the nine months ended June 30, 2022 at an average price of $16.73 per share and subsequently retired the shares. The share repurchase plan was completed during the second quarter of fiscal 2022.
Rights Agreement
On October 23, 2018, the Company entered into the Section 382 Rights Agreement (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 the Company 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 (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.
On February 28, 2019, the Company entered into an Amendment No. 1 to the Rights Agreement for the purpose of (i) modifying the definitions of “Beneficial Owner,” “Beneficially Own,” and “Beneficial Ownership” under the Rights Agreement to more closely align such definitions to the actual and constructive ownership rules under Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”) or such similar provisions of the Tax Cuts and Jobs Act of 2017 and the rules and regulations promulgated thereunder, and (ii) adding an exemption request process for persons to seek an exemption from becoming an “Acquiring Person” under the Rights Agreement in the event such person wishes to acquire 4.9 % or more of the Common Stock then outstanding.
The Rights expired on October 22, 2021 and no Rights were redeemed or exchanged.
8. INCOME TAXES
The Company’s tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, management updates the estimate of the annual effective tax rate, and any changes in the annual effective tax rate are recorded in a cumulative adjustment in that quarter. The quarterly tax provision and quarterly estimate of the annual effective tax rate are subject to significant volatility due to several factors, including management’s ability to accurately predict the portion of income before income taxes in multiple jurisdictions, the tax effects of our stock-based compensation awards, and the effects of acquisitions and the integration of those acquisitions. The annual effective tax rate differs from the U.S. statutory rate primarily due to foreign and state taxes.
For the three and nine months ended June 30, 2022, the Company recorded an income tax benefit of $0.6 million and $0.5 million, respectively, which yielded an effective tax rate of negative 218 % and 11 %, respectively. For the three and nine months ended June 30, 2021, the Company recorded an income tax provision of $0.3 million and $0.2 million, respectively, which yielded an effective tax rate of 9 % and 3 %, respectively. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the nine months ended June 30, 2022 was primarily due to excess tax benefits resulting from the vesting of restricted stock and the exercise of stock options as well as the impact of foreign and state taxes, and the impact of federal and state research and development credits on its tax provision.
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2026 Notes: | June 30, 2022 | September 30, 2021 | ||||||
| Principal amount | $ | $ | ||||||
| Less: unamortized discount and issuance costs, net of amortization | ( | ( | ||||||
| Carrying amount | $ | $ | ||||||
2026 Notes embedded conversion derivative | $ | $ | ||||||
In February 2021, the Company issued $155.3 million aggregate principal amount of the 2026 Notes (including the Additional
Notes, as defined below). The 2026 Notes are senior unsecured obligations of the Company. The 2026 Notes were issued pursuant to an Indenture, dated February 5, 2021 (the “Indenture”), between the Company and UMB Bank, National Association, as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company after which the 2026 Notes become automatically due and payable. The Company is in compliance with these covenants as of June 30, 2022. The Company granted the initial purchasers of the 2026 Notes (collectively, the “Initial Purchasers”) a 13 -day option to purchase up to an additional $20.25 million aggregate principal amount of the 2026 Notes (the “Additional Notes”), which was exercised in full. The 2026 Notes were purchased in a transaction that was completed on February 5, 2021.
The 2026 Notes will mature on February 1, 2026, unless earlier redeemed, repurchased or converted. The 2026 Notes will bear interest from February 5, 2021 at a rate of 0.750 % per year payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2021. The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 1, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021, if the last reported sale price per share of Common Stock exceeds 130 % of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price per share of the Common Stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Common Stock. On or after August 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2026 Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash and, if applicable at the Company’s election, shares of the Common Stock, based on the applicable conversion rate(s); provided that the Company will be required to settle conversions solely in cash unless and until the Company reserves such amount of shares of the Common Stock for future issuance as required pursuant to the Indenture that governs the 2026 Notes. The conversion rate for the 2026 Notes will initially be 47.9731 shares of the Common Stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $20.85 per share of the Common Stock. The initial conversion price of the 2026 Notes represents a premium of approximately 37.5 % to the $15.16 per share last reported sale price of the Common Stock on February 2, 2021. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture.
The net proceeds from this offering were approximately $149.7 million, after deducting the Initial Purchasers’ discounts and commissions and the Company’s estimated offering expenses related to the offering. The Company used approximately $9.3 million of the net proceeds from the offering to pay the cost of the Notes Hedge (as defined below) (after such cost is partially offset by the proceeds from the Warrant Transactions described below). The Initial Purchasers exercised their option to purchase Additional Notes in full in February 2021and the Company used a portion of the net proceeds from the sale of such Additional Notes to enter into additional Notes Hedges (after such cost is partially offset by the proceeds from the additional Warrant Transactions) with the Option Counterparties (as defined below). The Company intends to use the remainder of the net proceeds from the offering for general corporate purposes, which may include working capital, capital expenditures, and potential acquisitions and strategic transactions.
As of June 30, 2022, the number of authorized and unissued shares of Common Stock that are not reserved for other purposes is sufficient to settle the 2026 Notes into equity. Accordingly, the Company may settle conversions of notes through payment or delivery, as the case may be, of cash, shares of Common Stock or a combination of cash and shares of Common Stock, at the Company’s election.
In accounting for the issuance of the 2026 Notes, the conversion option of the 2026 Notes was deemed an embedded derivative requiring bifurcation from the 2026 Notes (“host contract”) and separate accounting as an embedded derivative liability, as a result of the Company not having the necessary number of authorized but unissued shares of its Common Stock available to settle the conversion option of the 2026 Notes in shares. The proceeds from the 2026 Notes are first allocated to the embedded derivative liability and the remaining proceeds are then allocated to the host contract. On February 5, 2021, the fair value of the embedded derivative liability representing the conversion option was $33.2 million and the remaining $116.5 million was allocated to the host
24
contract. The difference between the principal amount of the 2026 Notes and the fair value of the host contract (the “debt discount”) is amortized to interest expense using the effective interest method over the term of the 2026 Notes.
In the second quarter of fiscal 2022, the stockholders of the Company approved an increase to the number of authorized shares of Common Stock, to an amount sufficient to settle the conversion of the 2026 Notes. As a result of the increase to the number of authorized shares of Common Stock, the Company reclassified the embedded conversion derivative to additional paid-in capital.
As of June 30, 2022, the embedded conversion derivative is included in additional paid-in capital in the consolidated balance sheets and will not be remeasured provided the requirements to qualify for the scope exception in ASC 815-10-15-74(a) - Derivatives and Hedging, continue to be met.
The following table presents the fair value and the change in fair value for the embedded conversion derivative (in thousands):
| Embedded conversion derivative | |||||
Fair value as of September 30, 2021 | $ | ||||
| Remeasurement to fair value on March 3, 2022 | ( | ||||
| Impact of increase of authorized shares of common stock on convertible senior notes hedge | ( | ||||
Fair value as of June 30, 2022 | $ | ||||
The remeasurement of the embedded conversion derivative to fair value on March 3, 2022 was offset by the remeasurement of the Notes Hedge. See details of the remeasurement of the Notes Hedge below.
Debt issuance costs for the issuance of the 2026 Notes were approximately $5.5 million, consisting of initial purchasers' discount and other issuance costs. In accounting for the transaction costs, the Company allocated the total amount incurred to the 2026 Notes. Transaction costs were recorded as debt issuance cost (presented as contra debt in the consolidated balance sheet) and are being amortized using the effective interest method to interest expense over the term of the 2026 Notes.
The following table presents the total amount of interest cost recognized relating to the 2026 Notes (in thousands):
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Contractual interest expense | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of debt discount and issuance costs | |||||||||||||||||||||||
| Total interest expense recognized | $ | $ | $ | $ | |||||||||||||||||||
The derived effective interest rate on the 2026 Notes host contract was determined to be 6.71 %, which remains unchanged from
the date of issuance. The remaining unamortized debt discount was $29.1 million as of June 30, 2022, and will be amortized over approximately 3.6 years.
Convertible Senior Notes Hedge and Warrants
In connection with the pricing of the 2026 Notes, the Company entered into the Notes Hedge with Bank of America, N.A., Jefferies International Limited and Goldman Sachs & Co. LLC (the “Option Counterparties”). The Notes Hedge provided the Company with the option to acquire, on a net settlement basis, approximately 7.4 million shares of Common Stock at a strike price of $20.85 , which is equal to the number of shares of Common Stock that notionally underlie and corresponds to the conversion price of the 2026 Notes. The Company also entered into Warrant Transactions with the Option Counterparties relating to the same number of shares of the Common Stock, subject to customary anti-dilution adjustments. The strike price of the Warrant Transactions is $26.53 per share, which represents a 75.0 % premium to the last reported sale price of the Common Stock on The NASDAQ Capital Market on February 2, 2021, and is subject to certain adjustments under the terms of the Warrant Transactions.
The Company was initially required to settle the Notes Hedge in cash, as they did not qualify for the scope exception for contracts involving an issuer’s own equity in ASC 815 and were accounted for as a derivative asset. Upon initial purchase, the Notes Hedge was recorded in our consolidated balance sheets in convertible senior notes hedge at $33.2 million. In the second quarter of fiscal 2022, the stockholders of the Company approved an increase to the number of authorized shares of Common Stock, to an amount sufficient to settle the conversion of the 2026 Notes. As a result of the increase to the number of authorized shares of Common Stock, the Company reclassified the Notes Hedge to additional paid-in capital.
As of June 30, 2022, the Notes Hedge is included in additional paid-in capital in the consolidated balance sheet and will not be remeasured provided the requirements to qualify for the scope exception in ASC 815-10-15-74(a) continue to be met and the Company had no t purchased any shares under the Notes Hedge.
As a result of the Warrant Transactions, the Company is required to recognize incremental dilution of earnings per share to the extent the average share price is over $26.53 for any fiscal quarter. During the three months ended June 30, 2022, there was no
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10. COMMITMENTS AND CONTINGENCIES
Leases
The Company’s principal executive offices, as well as its 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 Company’s other offices are located in Paris, France; Amsterdam, The Netherlands; New York, New York; Barcelona, Spain; London, United Kingdom; and St. Petersburg, Russia.
The Company’s leases have remaining terms of to eight years . Certain leases contain renewal options for varying periods, which are at the Company’s sole discretion. For leases where the Company is reasonably certain to exercise a renewal option, such option periods have been included in the determination of the Company’s right-of-use (“ROU”) assets and lease liabilities. As of June 30, 2022, the weighted-average remaining lease term for the Company’s operating leases was 4.9 years and the weighted-average discount rate was 3.2 %.
Lease liabilities expected to be paid within one year are recorded in current liabilities in the consolidated balance sheets. All other lease liabilities are recorded in non-current liabilities in the consolidated balance sheets. As of June 30, 2022, the Company had operating ROU assets of $5.5 million. As of June 30, 2022, total operating lease liabilities of $6.7 million were comprised of current lease liabilities of $1.9 million and non-current lease liabilities of $4.8 million. As of September 30, 2021, the Company had operating ROU assets of $7.1 million. As of September 30, 2021, total operating lease liabilities of $8.5 million were comprised of current lease liabilities of $1.9 million and non-current lease liabilities of $6.6 million.
The Company recognized $0.6 1.7 million and $1.6 million of operating lease costs in the nine months ended June 30, 2022 and 2021, respectively. Operating lease costs are included within cost of revenue, selling and marketing, research and development, and general and administrative expenses, dependent upon the nature and use of the ROU asset, in the Company’s consolidated statement of operations and comprehensive income (loss).
The Company paid $1.5 million in operating cash flows for operating leases in the nine months ended June 30, 2022.
| Operating leases | |||||
| 2022—remaining | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: amount representing interest | ( | ||||
| Present value of future lease payments | $ | ||||
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Legal Proceedings
Claim Against ICAR
On June 11, 2018, a claim was filed before Court of First Instance 5 (Juzgado de Primera Instancia) of Barcelona, Spain, the first instance court in the Spanish civil procedure system, against ICAR. The claim, also directed towards Mr. Xavier Codó Grasa, the former controlling shareholder of ICAR and its current General Manager at the time the claim was filed, was brought by the Spanish company Global Equity & Corporate Consulting, S.L. for an alleged breach by ICAR of a services agreement entered into in the context of the sale of all of the shares in ICAR to Mitek Holding B.V., a wholly owned subsidiary of the Company. ICAR responded to the claim on September 7, 2018. After several postponements as a consequence of the COVID-19 pandemic, on March 3, 2022 the trial was held. On June 7, 2022, the Court of First Instance 5 of Barcelona issued a judgment which fully upheld the claim and declared that Mr. Xavier Codó Grasa and ICAR had to pay the amount and damages claimed by Global Equity & Corporate Consulting, S.L. equal to €0.8 million (or $0.9 million), plus the interest accrued and the legal fees.
ICAR and Mr Xavier Codó Grasa submitted an appeal against this judgment on July 13, 2022. Global Equity & Corporate Consulting, S.L. filed an opposition to that appeal on September 2, 2022. The next procedural step will be the voting and issuing of the ruling on the appeal.
According to the terms of the sale and purchase agreement concerning the acquisition of the shares in ICAR, Mitek Holding B.V. is to be indemnified in respect of any damages suffered by ICAR and/or Mitek Holding B.V. in respect of this claim.
Third Party Claims Against Our Customers
The Company receives indemnification demands from end-user customers who received third party patentee offers to license patents and allegations of patent infringement. Some of the offers and allegations have resulted in ongoing litigation. The Company is not a party to any such litigation. License offers to and infringement allegations against the Company’s end-customers were made by Lighthouse Consulting Group, LLC; Lupercal, LLC; Pebble Tide, LLC; Dominion Harbor Group, LLC; and IP Edge, LLC, which appear to be non-practicing entities (“NPEs”)—often called “patent trolls”—and not the Company’s competitors. These NPEs may seek to extract settlements from our end-customers, resulting in new or renewed indemnification demands to the Company. At this time, the Company does not believe it is obligated to indemnify any customers or end-customers resulting from license offers or patent infringement allegations by the companies listed above. However, the Company could incur substantial costs if it is determined that it is required to indemnify any customers or end-customers in connection with these offers or allegations. Given the potential for impact to other customers and the industry, the Company is actively monitoring the offers, allegations and any resulting litigation.
On July 7, 2018, United Services Automobile Association (“USAA”) filed a lawsuit against Wells Fargo Bank, N.A. (“Wells Fargo”) in the Eastern District of Texas alleging that Wells Fargo’s remote deposit capture systems (which in part utilize technology provided by the Company to Wells Fargo through a partner) infringe four USAA owned patents related to mobile deposits (the “First Wells Lawsuit”). On August 17, 2018, USAA filed a second lawsuit (the “Second Wells Lawsuit” and together with the First Wells Lawsuit, the “Wells Lawsuits”) against Wells Fargo in the Eastern District of Texas asserting that an additional five patents owned by USAA were infringed by Wells Fargo’s remote deposit capture system. In neither lawsuit was the Company named in the Complaint as an infringer nor at any time did USAA allege specifically that the Company’s products by themselves infringed any of the asserted patents. Subsequently, on November 6, 2019, a jury in the First Wells Lawsuit found that Wells Fargo willfully infringed at least one of the Subject Patents (as defined below) and awarded USAA $200 million in damages. In the Second Wells Lawsuit, USAA dropped two of the patents from the litigation, and the judge in the case found that one of the remaining three patents was invalid. On January 10, 2020, a jury in the Second Wells Lawsuit found that Wells Fargo willfully infringed at least one of the patents at issue in that case and awarded USAA $102 million in damages. No Mitek product was accused of infringing either of the two patents in question in the Second Wells Lawsuit as the litigation involved broad banking processes and not the Company’s specific mobile deposit features. USAA and Wells Fargo subsequently reached a settlement, and on April 1, 2021 the Court granted the parties’ joint motion and stipulation of dismissal of the Wells Lawsuits with prejudice.
Wells Fargo filed petitions for Inter Partes Review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”) challenging the validity of the four patents in the First Wells Lawsuit. Three of those four petitions were instituted, while one (relating to U.S. Patent No. 9,818,090 (“the ‘090 Patent”)) was denied institution. On November 24, 2020 and January 26, 2021, the PTAB issued final written decisions determining that Wells Fargo had not demonstrated by a preponderance of the evidence that any claims of the U.S. Patent Nos. 8,977,571 (“the ’571 Patent”), 8,699,779 (“the ’779 Patent”), or ‘9,336,517 (“the ’517 Patent”) were unpatentable.
On September 30, 2020, USAA filed suit against PNC Bank (the “First PNC Lawsuit”) in the Eastern District of Texas alleging infringement of U.S. Patent Nos. 10,482,432 (“the ‘432 Patent”) and 10,621,559. These two patents are continuations of an asserted patent in the Second Wells Lawsuit and relate to similar subject matter. On October 19, 2020, PNC Bank’s integration partner, NCR Corporation, sent an indemnification demand to the Company requesting indemnification from all claims related to the First PNC Lawsuit. The complaint against PNC Bank does not claim that any Company product infringes any of the asserted patents. At this time, the Company does not believe it is obligated to indemnify NCR Corporation or end-users of NCR Corporation resulting from the patent infringement allegations by USAA. On December 4, 2020, USAA filed an amended complaint against PNC Bank also asserting two patents at issue in the First Wells Lawsuit—the ’779 Patent and the ’571 Patent. On February 2, 2021, NCR Corporation sent a
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second indemnification demand to the Company requesting indemnification of the claims described in the amended complaint. On March 31, 2021, USAA filed another suit against PNC Bank in the Eastern District of Texas alleging infringement of two patents from the Second Wells Lawsuit, U.S. Patent Nos. 10,013,605 (“the ‘605 Patent”) and 10,013,681 (“the ‘681 Patent”) (the “Second PNC Lawsuit”). On July 7, 2021, USAA filed a third lawsuit against PNC Bank (the “Third PNC Lawsuit” and together with the First PNC Lawsuit and the Second PNC Lawsuit, the “PNC Lawsuits”) asserting infringement of U.S. Patents 10,769,598; 10,402,638; and 9,224,136. A jury trial was held in May 2022 on the consolidated First PNC Lawsuit and Second PNC Lawsuit. The jury found that PNC willfully infringed at least one patent claim and awarded USAA $218 million in damages. The Court denied PNC Bank’s equitable defenses and entered a Final Judgment in the First PNC Lawsuit on August 19, 2022. The Court has not entered a Final Judgment in the Second PNC Lawsuit.
While neither the Wells Lawsuits nor the PNC Lawsuits name the Company as a defendant, given (among other factors) the Company’s prior history of litigation with USAA and the continued use of the Company’s products by its customers, on November 1, 2019, the Company filed a complaint in the U.S. District Court for the Northern District of California seeking declaratory judgment that its products do not infringe the ’779 Patent, the ’571 Patent, the ’517 Patent, and the ’090 Patent (collectively, the “Subject Patents”). On January 15, 2020, USAA filed motions requesting the dismissal of the declaratory judgement of the Subject Patents and transfer of the case to the Eastern District of Texas, both of which the Company opposed. On April 21, 2020, the Court in the Northern District of California transferred the Company’s declaratory judgement action to the Eastern District of Texas and did not rule on USAA’s motion to dismiss. On April 28, 2021, the Court in the Eastern District of Texas granted USAA’s motion to dismiss the Company’s declaratory judgment action on jurisdictional grounds. The Court’s ruling did not address the merits of the Company’s claim of non-infringement. The Company appealed the ruling on the motion to dismiss and the decision to transfer the declaratory judgment action from California to Texas to the U.S. Court of Appeals for the Federal Circuit. The Federal Circuit heard oral argument on the Company’s appeal on April 4, 2022 and on May 20 2022, issued an opinion vacating and remanding the district court’s order granting USAA’s motion to dismiss. On August 1, 2022, the parties submitted additional briefing to the district court in light of Federal Circuit’s opinion. The Company continues to believe that its products do not infringe the Subject Patents and will vigorously defend the right of its end-users to use its technology. In April, May, and June 2020, the Company filed petitions for IPR with the PTAB of the U.S. Patent & Trademark Office challenging the validity of the Subject Patents. On November 6 and 17, 2020, the PTAB decided to exercise its discretion and deny institution of the four petitions due to the alleged relationship between the Company and Wells Fargo, who previously filed petitions for IPR on the Subject Patents. The PTAB did not address the merits of the Company’s petitions or the prior art cited in those petitions. The Company continues to believe that the prior art cited in the petitions renders all the claims of the Subject Patents invalid. On each of December 6, 2020, December 17, 2020, and February 23, 2021, the Company filed requests for rehearing and Precedential Opinion Panel (“POP”) review of the four denied IPR petitions. The Patent Office denied the requests for rehearing and for POP review.
In September 2020, the Company filed an additional two petitions for IPR with the U.S. Patent & Trademark Office challenging the validity of the ‘681 Patent and the ‘605 Patent—two of the patents at issue in the Second Wells Lawsuit. In March 2021, the PTAB decided not to institute the two petitions.
On July 7, July 14, and July 21, 2021, PNC Bank filed six additional petitions for IPR with the U.S. Patent & Trademark Office challenging the validity of the ’779 Patent, the ’571 Patent, the ‘559 Patent, and the ‘432 Patent. On August 27, 2021, PNC filed two additional petitions for IPR challenging the validity of the ‘681 Patent and the ‘605 Patent. In October and November of 2021, PNC Bank filed four more petitions for IPR challenging the validity of the ‘638 Patent, the ‘136 Patent, and the ‘598 Patent. The Patent Office denied institution with respect to the petitions challenging the ‘432 Patent, the ‘605 Patent, the ‘681 Patent, and the ‘638 Patent, but instituted inter partes review on the petitions relating to the ‘779 Patent, the ‘571 Patent, the ‘559 Patent, and the ‘598 Patent—finding a reasonable likelihood that at least one challenged patent claim was invalid. Final decisions from the Patent Office regarding the validity of these patents are expected in early 2023.
On August 16, 2021, USAA filed suit against BBVA USA (“BBVA”) in the Eastern District of Texas alleging infringement of the same patents at issue in the PNC Lawsuits. While the Company’s IPR petitions were mentioned in the complaint, the Company was not named as a defendant or mentioned in connection with any alleged infringement. BBVA then sent the Company an indemnification demand on September 7, 2021. For the same reasons discussed above in connection with PNC, the Company does not believe it is obligated to indemnify BBVA.
On July 29, 2022, USAA filed another patent infringement lawsuit against Truist Bank (“Truist”) in the Eastern District of Texas. The lawsuit alleges infringement of the ’090 Patent, the ’432 Patent, and the U.S. Patent No. 11,182,753. The Company was not named as a defendant or mentioned in connection with any alleged infringement. On October 5, 2022, Truist’s integration partner, NCR Corporation, sent an indemnification demand to the Company requesting indemnification from all claims related to the lawsuit. For the same reasons discussed above in connection with the PNC Lawsuits, the Company does not believe it is obligated to indemnify NCR Corporation or end-users of NCR Corporation resulting from the patent infringement allegations by USAA. On October 7, 2022, Truist filed a motion to transfer venue to the Western District of North Carolina. The motion is still pending.
The Company incurred legal fees of $1.1 million in the nine months ended June 30, 2022 related to third party claims against our customers. Such fees are included in general and administrative expenses in the consolidated statement of operations and comprehensive income (loss).
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Claim Against UrbanFT, Inc.
On July 31, 2019, the Company filed a lawsuit against one of its customers, UrbanFT, Inc. (“UrbanFT”) in the United States District Court for the Southern District of California (case No. 19-CV-1432-CAB-DEB). UrbanFT was delinquent in payment and attempted to justify its non-payment by asserting that the Company is or may be infringing on purported UrbanFT patents. The Company filed such lawsuit to collect the delinquent payments and to obtain a declaratory judgment of non-infringement of five purported UrbanFT patents. UrbanFT filed an answer and later asserted infringement of two of the five patents-at-issue in the Company’s lawsuit against UrbanFT. The Company thereafter filed counterclaims seeking a declaration that the two
On December 18, 2020, the Company filed a new suit against UrbanFT in the Superior Court of the State of California, County of San Diego (case no. 37-2020-00046670-CU-BC-CTL) asserting claims for breach of contract, open book account, and monetary damages. UrbanFT filed an answer and did not assert any cross-claims. The Company filed a motion for summary judgment which was heard on April 15, 2022. The Court granted the Company’s motion and on June 2, 2022, entered a judgment in favor of the Company for $1.7 million in compensatory damages, plus costs, including attorney’s fees. The Company filed a motion for recovery of its attorneys’ fees of $0.9 million. The motion is set to be heard in January 2023. The time for UrbanFT to appeal the $1.7 million in compensatory damage judgment has expired. UrbanFT may appeal any attorneys’ fee or cost award.
Claim Against Maplebear, Inc (dba Instacart):
On December 13, 2021, Mitek filed a lawsuit against Mapleabear Inc., d/b/a Instacart (“Maplebear”), in California Superior Court – San Diego County (Case No, 37-2021-00052089-CU-BC-CTL). Mitek is alleging breach of contract, breach of the implied covenant, and requesting over $2.0 million in damages.
On August, 3, 2018 Maplebear entered into a Master Services Agreement (the “Master Services Agreement”) with Mitek agreeing to purchase a subscription to Mitek’s Mobile Verify Advanced service. On June 19, 2020, the parties entered into a second Order Form in connection with the Master Services Agreement. The Order Form has a term of June 18, 2020 to December 31, 2023 and calls for an annual commitment of $1.2 million. On September 23, 2021, Maplebear sent a letter to Mitek purporting to outline breaches under the Master Services Agreement. Mitek responded on November 11, 2021, refuting Maplebear’s claims and offering to engage in further discussions. Maplebear thereafter sent a Notice of Termination of the Master Services Agreement dated November 24, 2021.
The Parties participated in mediation on March 15, 2022. The mediation did not result in the resolution of the case and, following mediation, the Parties stipulated that Maplebear’s response to Mitek’s complaint would be due on April 27, 2022. In lieu of filing a response to the complaint, Maplebear elected to file a Motion to Transfer Venue, which Mitek opposed; the hearing for the Motion to Transfer is presently scheduled for October 28, 2022. The Court has not set any deadlines in the case and the Parties have agreed to stay discovery while the Motion to Transfer remains pending.
Biometric Information Privacy Act Claims
On December 16, 2021, the Company was sued in a putative class action in state court in Illinois alleging that the Company had violated the Illinois Biometric Information Privacy Act (“BIPA”) with respect to identity verification services that the Company provided to its customer HyreCar, Inc. for HyreCar’s customers in Illinois (the “BIPA Lawsuit”). Plaintiff claimed that the Company had not obtained the required consent to collect and use Plaintiff’s biometric information, and that Plaintiff and a class of similarly situated individuals therefore are entitled to statutory damages under BIPA.
The Company removed the BIPA Lawsuit to federal court, and on March 4, 2022 the Company filed (i) a Motion to Compel Arbitration based on HyreCar’s terms and conditions requiring HyreCar customers to arbitrate on an individual (non-class) basis (the “Arbitration Motion”); (ii) a Motion to Dismiss; and (iii) a Motion to Strike Class Allegations. On March 7, 2022, the Court struck the Motion to Dismiss and Motion to Strike Class Allegations without prejudice and set a briefing schedule on the Arbitration Motion. After the Arbitration Motion was fully briefed, on May 4, 2022 the Court denied the Arbitration Motion.
On May 10, 2022, the Company initiated an appeal. The appeal is fully briefed and the Court has set oral argument for December 2, 2022. A decision is likely in early 2023.
Other Legal Matters
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11. REVENUE CONCENTRATION
For the three months ended June 30, 2022, the Company derived revenue of $9.5 million from two customers, with such customers accounting for 14 % and 10 % of the Company’s total revenue, respectively. For the three months ended June 30, 2021, the Company derived revenue of $12.9 million from three customers, with such customers accounting for 16 %, 13 %, and 11 % of the Company’s total revenue, respectively. For the nine months ended June 30, 2022, the Company derived revenue of $16.9 million from one customer, with such customer accounting for 16 % of the Company’s total revenue. For the nine months ended June 30, 2021, the Company derived revenue of $23.7 million from two customers, with such customers accounting for 17 % and 10 % of the Company’s total revenue, respectively. The corresponding accounts receivable balances of customers from which revenues were in excess of 10% of total revenue were $4.8 million and $5.9 million at June 30, 2022 and 2021, respectively.
The Company’s revenue is derived primarily from sales by the Company to channel partners, including systems integrators and resellers, and end-users of licenses to sell products covered by the Company’s patented technologies. These contractual arrangements do not obligate the Company’s channel partners to order, purchase or distribute any fixed or minimum quantities of the Company’s products. In most cases, the channel partners purchase the license from the Company after they receive an order from an end-user. The channel partners receive orders from various individual end-users; therefore, the sale of a license to a channel partner may represent sales to multiple end-users. End-users can purchase the Company’s products through more than one channel partner.
Revenues can fluctuate based on the timing of license renewals by channel partners. When a channel partner purchases or renews a license, the Company receives a license fee in consideration for the grant of a license to sell the Company’s products and there are no future payment obligations related to such agreement; therefore, the license fee the Company receives with respect to a particular license renewal in one period does not have a correlation with revenue in future periods. During the last several quarters, sales of licenses to one or more channel partners have comprised a significant part of the Company’s revenue. This is attributable to the timing of renewals or purchases of licenses and does not represent a dependence on any single channel partner. The Company believes that it is not dependent upon any single channel partner, even those from which revenues were in excess of 10% of the Company’s total revenue in a specific reporting period, and that the loss or termination of the Company’s relationship with any such channel partner would not have a material adverse effect on the Company’s future operations because either the Company or another channel partner could sell the Company’s products to the end-user that had purchased from the channel partner the Company lost.
International sales accounted for approximately 29 % and 23 % of the Company’s total revenue in the three months ended June 30, 2022 and 2021, respectively. International sales accounted for approximately 29 % and 26 % of the Company’s total revenue in the nine months ended June 30, 2022 and 2021, respectively. From a geographic perspective, approximately 68 % and 24 % of the Company’s total long-term assets as of June 30, 2022 and September 30, 2021, respectively, are associated with the Company’s international subsidiaries. From a geographic perspective, approximately 17 % and 6 % of the Company’s total long-term assets excluding goodwill and other intangible assets as of June 30, 2022 and September 30, 2021, respectively, are associated with the Company’s international subsidiaries.
12. RELATED PARTY TRANSACTIONS
In the third quarter of fiscal 2022, the Company made loans to two non-executive employees totaling $1.0 million. Such loans were issued on the same terms as those prevailing at the time for comparable loans to unrelated persons and do not involve more than the normal risk of collectability. The loans made to the non-executive employees are due in the fourth quarter of fiscal 2022 and are included in other current assets in the consolidated balance sheets.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q (this “Form 10-Q”), contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or they prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in this Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A—“Risk Factors,” but appear throughout this Form 10-Q. Forward-looking statements may include, but are not limited to, statements relating to our outlook or expectations for earnings, revenues, expenses, asset quality, volatility of our common stock, financial condition or other future financial or business performance, strategies, expectations, or business prospects, the duration and impact of the novel COVID-19 pandemic on our business, our customers, and markets generally, or the impact of legal, regulatory, or supervisory matters on our business, results of operations, or financial condition.
Forward-looking statements can be identified by the use of words such as “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target”, “will,” “would,” “could,” “can,” “may”, or similar expressions. Forward-looking statements reflect our judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A—“Risk Factors” in this Form 10-Q and in our other filings with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the U.S. Securities and Exchange Commission (“SEC”) on December 13, 2021 (“2021 Annual Report”). Additionally, there may be other factors that could preclude us from realizing the predictions made in the forward-looking statements. We operate in a continually changing business environment and new factors emerge from time to time. We cannot predict such factors or assess the impact, if any, of such factors on our financial position or results of operations. All forward-looking statements included in this Form 10-Q speak only as of the date of this Form 10-Q and you are cautioned not to place undue reliance on any such forward-looking statements. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
In this Form 10-Q, unless the context indicates otherwise, the terms “Mitek,” “the Company,” “we,” “us,” and “our” refer to Mitek Systems, Inc., a Delaware corporation and its subsidiaries.
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 currently serve more than 7,500 financial services organizations and leading marketplace and financial technology (“fintech”) brands around the globe. Customers count on Mitek to deliver trusted and convenient online experiences, detect and reduce fraud, and document Know Your Customer (“KYC”) and anti-money laundering regulatory compliance. Our solutions are embedded in native mobile apps and web browsers to facilitate digital consumer experiences. Mitek’s identity verification and authentication technologies and services make it possible for banks, financial services organizations and the world’s leading marketplace and sharing platforms to verify an individual’s identity during digital transactions, allowing them to reduce risk and meet regulatory requirements. Our advanced mobile deposit system enables secure, fast and convenient deposit services. Thousands of organizations use Mitek solutions to optimize the security of mobile check deposits, new account openings and more.
To ensure a high level of security against evolving digital fraud threats, in May 2021, Mitek acquired ID R&D, Inc. (“ID R&D”), an award-winning provider of artificial intelligence-based voice and face biometrics and liveness detection. With one of the strongest research and development teams in the industry, ID R&D consistently delivers innovative, best-in-class biometric capabilities that raise the bar on usability and performance. In March 2022, Mitek acquired HooYu Ltd (“HooYu”), a leading KYC technology provider in the United Kingdom. The acquisition helps to ensure businesses know the true identity of their customers by linking biometric verification with real-time bureau and sanction database checks.
Mitek markets and sells its products and services worldwide through internal, direct sales teams located in the U.S., Europe, and Latin America as well as through 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.
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Third Quarter Fiscal 2022 Highlights
•Revenue for the three months ended June 30, 2022 was $39.3 million, an increase of 24% compared to revenue of $31.8 million in the three months ended June 30, 2021.
•Net income was $0.8 million, or $0.02 per diluted share, during the three months ended June 30, 2022, compared to net income of $3.0 million, or $0.07 per share, during the three months ended June 30, 2021.
•Cash provided by operating activities was $16.0 million for the nine months ended June 30, 2022, compared to $25.0 million for the nine months ended June 30, 2021.
•We added new patents to our portfolio during the third quarter of fiscal 2022 bringing our total number of issued patents to 82 as of June 30, 2022. In addition, we have 18 domestic and international patent applications pending as of June 30, 2022.
Acquisition of ID R&D, Inc.
On May 28, 2021 (the “Closing Date”), the Company completed the acquisition of ID R&D (the “ID R&D Acquisition”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated May 28, 2021, by and among the Company, ID R&D and Alexey Khitrov. Upon completion of the ID R&D Acquisition, ID R&D became a direct wholly owned subsidiary of the Company. ID R&D is an award-winning provider of artificial intelligence-based voice and face biometrics and liveness detection. Under the terms of the Merger Agreement, the Company agreed to pay an aggregate purchase price of up to $49.0 million. On the Closing Date, the equityholders of ID R&D received from the Company: (i) $13.0 million in cash, subject to adjustments for transaction expenses, escrow amounts, indebtedness and working capital adjustments and (ii) 867,226 shares (or $13.9 million) of its common stock, par value $0.001 per share (“Common Stock”). The terms of the Merger Agreement also provide for additional payments of up to approximately $22.1 million in a combination of cash and Common Stock upon the achievement of certain financial milestones during 2022 and 2023. In May and June of 2022, the Company paid the first of the Earnout Payments of $9.5 million which consisted of $6.8 million paid in cash and $2.7 million in shares of Common Stock to the equityholders of ID R&D.
Acquisition of HooYu Ltd
On March 23, 2022, the Company completed the acquisition of HooYu Ltd (the “HooYu Acquisition”) pursuant to the Purchase Agreement (the “Purchase Agreement”) dated March 23, 2022, by and among the Company and certain persons identified in the Purchase Agreement (the “Sellers”). Pursuant to the Purchase Agreement, the Company, among other things, acquired 100% of the outstanding share capital of HooYu Ltd, a leading global customer onboarding platform designed to increase the integrity of KYC and maximize the success of customer onboarding. As consideration for the HooYu Acquisition, the Company paid aggregate consideration in the amount of £97.8 million in cash (the “Closing Consideration”), as such amount may be adjusted for transaction expenses and indebtedness. Pursuant to the Purchase Agreement, £0.7 million was withheld as a reduction to the Closing Consideration and is being retained by the Company for the final working capital adjustments and indemnification of certain tax matters under the Purchase Agreement.
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.
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
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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.
The COVID-19 pandemic created significant uncertainty in the U.S. and around the globe, resulting in both challenges and opportunities for our business. In response to this situation and in an effort to protect the health and safety of our employees, our workforce transitioned to working remotely and employee travel, including to our international subsidiaries, has been reduced. Because of our IT infrastructure and the nature of our business, our employees have generally been able to work remotely and productively. 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.
The impact of the COVID-19 pandemic accelerated the adoption of digital technologies and created opportunities and uses for our products and we continue to seek new and innovative opportunities to serve our customers’ needs. However, given the continuing uncertainties related to the long-term impacts of the COVID-19 pandemic, we cannot predict how it will continue to affect our operational and financial performance, including our long term revenue growth and profitability, the impact on our customers’ and our sales cycles, our ability to generate new business leads, the impact on our customers’, employee and industry events, and the effects on our vendors. As a result, the extent to which the COVID-19 pandemic will continue to impact our long-term financial condition or results of operations is uncertain.
Results of Operations
Comparison of the Three Months Ended June 30, 2022 and 2021
The following table summarizes certain aspects of our results of operations for the three months ended June 30, 2022 and 2021 (amounts in thousands, except percentages):
| Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| Percentage of Total Revenue | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Software and hardware | $ | 19,820 | $ | 16,973 | 50 | % | 53 | % | $ | 2,847 | 17 | % | |||||||||||||||||||||||
Services and other | 19,513 | 14,805 | 50 | % | 47 | % | 4,708 | 32 | % | ||||||||||||||||||||||||||
| Total revenue | $ | 39,333 | $ | 31,778 | 100 | % | 100 | % | $ | 7,555 | 24 | % | |||||||||||||||||||||||
| Cost of revenue | 4,581 | 3,410 | 12 | % | 11 | % | 1,171 | 34 | % | ||||||||||||||||||||||||||
| Selling and marketing | 11,216 | 8,133 | 29 | % | 26 | % | 3,083 | 38 | % | ||||||||||||||||||||||||||
| Research and development | 9,614 | 6,946 | 24 | % | 22 | % | 2,668 | 38 | % | ||||||||||||||||||||||||||
| General and administrative | 6,589 | 5,633 | 17 | % | 18 | % | 956 | 17 | % | ||||||||||||||||||||||||||
| Amortization and acquisition-related costs | 3,283 | 2,224 | 8 | % | 7 | % | 1,059 | 48 | % | ||||||||||||||||||||||||||
| Restructuring costs | 1,807 | — | 5 | % | — | % | 1,807 | 100 | % | ||||||||||||||||||||||||||
| Interest expense | 2,077 | 2,223 | 5 | % | 7 | % | (146) | (7) | % | ||||||||||||||||||||||||||
| Other income, net | 89 | 80 | — | % | — | % | 9 | 11 | % | ||||||||||||||||||||||||||
| Income tax benefit (provision) | 556 | (304) | 1 | % | (1) | % | 860 | (283) | % | ||||||||||||||||||||||||||
| Net income | $ | 811 | $ | 2,985 | 2 | % | 9 | % | $ | (2,174) | (73) | % | |||||||||||||||||||||||
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Revenue
Total revenue increased $7.6 million, or 24%, to $39.3 million in the three months ended June 30, 2022 compared to $31.8 million in the three months ended June 30, 2021. Software and hardware revenue increased $2.8 million, or 17%, to $19.8 million in the three months ended June 30, 2022 compared to $17.0 million in the three months ended June 30, 2021. This increase is primarily due to an increase in sales of our Mobile Deposit®, CheckReader™ and IDLive® software products of $2.8 million. Services and other revenue increased $4.7 million, or 32%, to $19.5 million in the three months ended June 30, 2022 compared to $14.8 million in the three months ended June 30, 2021. This increase is primarily due to higher Mobile Verify® transactional SaaS revenue of $2.1 million, or 25%, and SaaS revenue of $2.6 million as a result of the HooYu Acquisition in the three months ended June 30, 2022 compared to the same period in 2021.
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 $1.2 million, or 34%, to $4.6 million in the three months ended June 30, 2022 compared to $3.4 million in the three months ended June 30, 2021. As a percentage of revenue, cost of revenue increased to 12% in the three months ended June 30, 2022 from 11% in the three months ended June 30, 2021. The increase is primarily due to an increase in variable personnel, hosting and royalty costs as a result of the HooYu Acquisition and increased costs of our identity verification hardware products due to higher hardware revenues during the three months ended June 30, 2022 compared to the same period in 2021.
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 38%, to $11.2 million in the three months ended June 30, 2022 compared to $8.1 million in the three months ended June 30, 2021. As a percentage of revenue, selling and marketing expenses increased to 29% in the three months ended June 30, 2022 from 26% in the three months ended June 30, 2021. The increase in selling and marketing expense is primarily due to higher personnel-related costs resulting from our increased headcount of $2.0 million, higher product promotion and other costs of $0.8 million and higher travel and related expenses of $0.3 million in the three months ended June 30, 2022 compared to the same period in 2021.
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 capture science. Research and development expenses increased $2.7 million, or 38%, to $9.6 million in the three months ended June 30, 2022 compared to $6.9 million in the three months ended June 30, 2021. As a percentage of revenue, research and development expenses increased to 24% in the three months ended June 30, 2022 from 22% in the three months ended June 30, 2021. The increase in research and development expenses is primarily due to higher personnel-related costs from the ID R&D Acquisition and our increased headcount of $1.9 million, higher third-party contractor and other expenses of $0.7 million and higher travel and related expenses of $0.1 million in the three months ended June 30, 2022 compared to the same period in 2021.
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 $1.0 million, or 17%, to $6.6 million in the three months ended June 30, 2022 compared to $5.6 million in the three months ended June 30, 2021. As a percentage of revenue, general and administrative expenses decreased to 17% in the three months ended June 30, 2022 from 18% in the three months ended June 30, 2021. The increase in general and administrative expenses is primarily due higher personnel-related costs resulting from our increased headcount of $0.9 million and higher travel and related expenses of $0.1 million during the three months ended June 30, 2022.
Amortization and acquisition-related costs
Amortization and acquisition-related costs include amortization of intangible assets, adjustments recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs increased $1.1 million, or 48%, to $3.3 million in the three months ended June 30, 2022 compared to $2.2 million in the three months ended June 30, 2021. As a percentage of revenue, amortization and acquisition-related costs increased to 8% in the three months ended June 30, 2022 from 7% in the three months ended June 30, 2021. The increase in amortization and acquisition-related costs is primarily due to amortization of intangibles associated with the HooYu Acquisition and the ID R&D Acquisition of $3.1 million
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during the three months ended June 30, 2022 compared to the same period in 2021. These increases were partially offset by a decrease in the fair value of the contingent consideration liability associated with the ID R&D Acquisition of $1.4 million, a decrease in acquisition-related expense from the ID R&D Acquisition of $0.3 million and a decrease in amortization expense of intangibles related to previous acquisitions that were fully amortized of $0.3 million during the three months ended June 30, 2022 compared to the same period in 2021.
Restructuring Costs
Over the last three years we have been working towards a multi-horizon strategy that positions us as an identity category leader. We have has invested significantly in building and acquiring innovation, technology, and expertise. At the same time, the COVID-19 pandemic dramatically accelerated digital transformation and the requirements for identity solutions rapidly evolved into a more integrated identity technology stack. The HooYu Acquisition was therefore both timely and necessary but we determined that additional steps needed to be taken to evolve our organization and achieve profitability for our identity business. One of the outcomes of this was an initiative focused on aligning our resources and expense priorities consistent with the investment areas that best enable us to deliver against our identity strategy. Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were $1.8 million in the three months ended June 30, 2022 and relate to the restructuring plan implemented in June 2022. There were no restructuring costs in the same period in 2021.
Interest Expense
Interest expense includes the amortization of debt discount and issuance costs and coupon interest accrued on our 0.75% convertible senior notes due 2026 (the “2026 Notes”). Interest expense was $2.1 million for the three months ended June 30, 2022 and consisted of $1.8 million of amortization of debt discount and issuance costs and $0.3 million of coupon interest incurred. Interest expense was $2.2 million for the three months ended June 30, 2021 and consisted of $1.9 million of amortization of debt discount and issuance costs and $0.3 million of coupon interest incurred.
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, and foreign currency transactional gains or losses. Other income (expense), net increased $9,000, or 11%, to $89,000 net income in the three months ended June 30, 2022 compared to $80,000 net income in the three months ended June 30, 2021. The increase was primarily due to a decrease in realized losses on the sale of securities.
Income Tax Benefit (Provision)
For the three months ended June 30, 2022, we recorded an income tax benefit of $0.6 million which yielded an effective tax rate of 218%. For the three months ended June 30, 2021, we recorded an income tax provision of $0.3 million, or an effective tax rate of 9%. The difference between the U.S. federal statutory tax rate and our effective tax rate for the three months ended June 30, 2022 and 2021 was primarily due to excess tax benefits resulting from the vesting of restricted stock and the exercise of stock options as well as the impact of foreign and state taxes, and the impact of federal and state research and development credits on its tax provision.
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Comparison of the Nine Months Ended June 30, 2022 and 2021
The following table summarizes certain aspects of our results of operations for the nine months ended June 30, 2022 and 2021 (amounts in thousands, except percentages):
| Nine Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| Percentage of Total Revenue | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Software and hardware | $ | 54,545 | $ | 42,288 | 51 | % | 49 | % | $ | 12,257 | 29 | % | |||||||||||||||||||||||
Services and other | 51,975 | 44,238 | 49 | % | 51 | % | 7,737 | 17 | % | ||||||||||||||||||||||||||
| Total revenue | $ | 106,520 | $ | 86,526 | 100 | % | 100 | % | $ | 19,994 | 23 | % | |||||||||||||||||||||||
| Cost of revenue | 11,247 | 11,340 | 11 | % | 13 | % | (93) | (1) | % | ||||||||||||||||||||||||||
| Selling and marketing | 28,859 | 24,048 | 27 | % | 28 | % | 4,811 | 20 | % | ||||||||||||||||||||||||||
| Research and development | 25,457 | 19,801 | 24 | % | 23 | % | 5,656 | 29 | % | ||||||||||||||||||||||||||
| General and administrative | 18,626 | 16,409 | 17 | % | 19 | % | 2,217 | 14 | % | ||||||||||||||||||||||||||
| Amortization and acquisition-related costs | 9,947 | 5,576 | 9 | % | 6 | % | 4,371 | 78 | % | ||||||||||||||||||||||||||
| Restructuring costs | 1,807 | — | 2 | % | — | % | 1,807 | 100 | % | ||||||||||||||||||||||||||
| Interest expense | 6,125 | 3,543 | 6 | % | 4 | % | 2,582 | 73 | % | ||||||||||||||||||||||||||
| Other income (expense), net | (8) | 549 | — | % | 1 | % | (557) | (101) | % | ||||||||||||||||||||||||||
| Income tax benefit (provision) | 504 | (187) | — | % | — | % | 691 | (370) | % | ||||||||||||||||||||||||||
| Net income | $ | 4,948 | $ | 6,171 | 5 | % | 7 | % | $ | (1,223) | (20) | % | |||||||||||||||||||||||
Revenue
Total revenue increased $20.0 million, or 23%, to $106.5 million in the nine months ended June 30, 2022 compared to $86.5 million in the nine months ended June 30, 2021. Software and hardware revenue increased $12.3 million, or 29%, to $54.5 million in the nine months ended June 30, 2022 compared to $42.3 million in the nine months ended June 30, 2021 primarily due to an increase in sales of our Mobile Deposit®, CheckReader™ and IDLive® software products of $12.9 million. This increase was partially offset by a decline in revenue from our identity verification software and hardware products of $0.7 million. Services and other revenue increased $7.7 million, or 17%, to $52.0 million in the nine months ended June 30, 2022 compared to $44.2 million in the nine months ended June 30, 2021 primarily due to strong growth in Mobile Verify® transactional SaaS revenue of $3.8 million in the nine months ended June 30, 2022 compared to the same period in 2021, as well as an increase in maintenance revenue associated with Mobile Deposit® software sales and hosted mobile deposit transactional revenue and identity verification software sales of $1.0 million and an increase in SaaS revenue as a result of the HooYu Acquisition of $2.9 million.
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 decreased $0.1 million, or 1%, to $11.2 million in the nine months ended June 30, 2022 compared to $11.3 million in the nine months ended June 30, 2021. As a percentage of revenue, cost of revenue decreased to 11% in the nine months ended June 30, 2022 from 13% in the nine months ended June 30, 2021. The decrease in cost of revenue is primarily due to decreased costs of our identity verification hardware products as a result of lower hardware revenues during the nine months ended June 30, 2022 compared to the same period in 2021. The decrease is partially offset by an increase in variable personnel, hosting and royalty costs as a result of the HooYu Acquisition and increased costs of our identity verification hardware products due to higher hardware revenues.
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 $4.8 million, or 20%, to $28.9 million in the nine months ended June 30, 2022 compared to $24.0 million in the nine months ended June 30, 2021. As a percentage of revenue, selling and marketing expenses decreased to 27% in the nine months ended June 30, 2022 from 28% in the nine months ended June 30, 2021. The increase in selling and marketing expense is primarily due to higher personnel-related costs resulting from our increased headcount of $3.2 million,
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higher product promotion costs of $1.1 million and higher travel and related expenses of $0.5 million in the nine months ended June 30, 2022 compared to the same period in 2021.
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 capture science. Research and development expenses increased $5.7 million, or 29%, to $25.5 million in the nine months ended June 30, 2022 compared to $19.8 million in the nine months ended June 30, 2021. As a percentage of revenue, research and development expenses increased to 24% in the nine months ended June 30, 2022 from 23% in the nine months ended June 30, 2021. The increase in research and development expenses is primarily due to higher personnel-related costs resulting from our increased headcount of $3.8 million, higher third-party contractor and other expenses of $1.7 million and higher travel and related expenses of $0.2 million in the nine months ended June 30, 2022 compared to the same period in 2021.
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 $2.2 million, or 14%, to $18.6 million in the nine months ended June 30, 2022 compared to $16.4 million in the nine months ended June 30, 2021. As a percentage of revenue, general and administrative expenses decreased to 17% in the nine months ended June 30, 2022 from 19% in the nine months ended June 30, 2021. The increase was primarily due to higher personnel-related costs resulting from our increased headcount of $1.2 million, higher third-party and professional fees of $0.7 million, and higher travel and related expenses of $0.3 million during the nine months ended June 30, 2022 compared to the same period in 2021.
Amortization and acquisition-related costs
Amortization and acquisition-related costs include amortization of intangible assets, adjustments recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs increased $4.4 million, or 78%, to $9.9 million in the nine months ended June 30, 2022 compared to $5.6 million in the nine months ended June 30, 2021. As a percentage of revenue, amortization and acquisition-related costs increased to 9% in the nine months ended June 30, 2022 from 6% in the nine months ended June 30, 2021. The increase in amortization and acquisition-related costs is primarily due to amortization of intangibles associated with the HooYu Acquisition and the ID R&D Acquisition of $4.7 million and expenses associated with the HooYu Acquisition of $2.9 million during the nine months ended June 30, 2022 compared to the same period in 2021. These increases were partially offset by a decrease in the fair value of the contingent consideration liability associated with the ID R&D Acquisition of $2.2 million, a decrease in amortization expense of intangibles related to previous acquisitions that were fully amortized of $0.8 million and a decrease in acquisition-related expense from the ID R&D Acquisition of $0.2 million during the nine months ended June 30, 2022 compared to the same period in 2021.
Restructuring Costs
Over the last three years we have been working towards a multi-horizon strategy that positions us as an identity category leader. We have has invested significantly in building and acquiring innovation, technology, and expertise. At the same time, the COVID-19 pandemic dramatically accelerated digital transformation and the requirements for identity solutions rapidly evolved into a more integrated identity technology stack. The HooYu Acquisition was therefore both timely and necessary but we determined that additional steps needed to be taken to evolve our organization and achieve profitability for our identity business. One of the outcomes of this was an initiative focused on aligning our resources and expense priorities consistent with the investment areas that best enable us to deliver against our identity strategy. Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were $1.8 million in the nine months ended June 30, 2022 and relate to the restructuring plan implemented in June 2022. There were no restructuring costs in the same period in 2021.
Interest Expense
Interest expense includes the amortization of debt discount and issuance costs and coupon interest incurred associated with our 2026 Notes. Interest expense was $6.1 million for nine months ended June 30, 2022 and consisted of $5.2 million of amortization of debt discount and issuance costs and $0.9 million of coupon interest incurred. Interest expense was $3.5 million for nine months ended June 30, 2021 and consisted of $3.1 million of amortization of debt discount and issuance costs and $0.4 million of coupon interest incurred.
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 and foreign currency transactional gains or losses. Other income (expense), net decreased $0.6 million, or negative
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101%, to $8,000 net expense in the nine months ended June 30, 2022 compared to $0.5 million net income in the nine months ended June 30, 2021. The decrease was primarily due to higher realized losses on the sale of marketable securities, higher foreign currency exchange transactional losses and lower interest income net of amortization.
Income Tax Benefit (Provision)
For the nine months ended June 30, 2022, we recorded an income tax benefit of $0.5 million, which yielded an effective tax rate of 11%. For the nine months ended June 30, 2021, we recorded an income tax provision of $0.2 million, which yielded an effective tax rate of negative 3%. The difference between the U.S. federal statutory tax rate and our effective tax rate for the nine months ended June 30, 2022 and 2021 was primarily due to excess tax benefits resulting from the exercise of stock options and vesting of restricted stock, the impact of foreign and state taxes, the impact of certain permanent items on its tax provision, and the impact of federal and state research and development credits on its tax provision.
Liquidity and Capital Resources
On June 30, 2022, we had $90.6 million in cash and cash equivalents and investments compared to $227.4 million on September 30, 2021, a decrease of $136.8 million, or 60%. The decrease in cash and cash equivalents and investments is primarily due to acquisitions, net of cash acquired of $126.6 million, $6.8 million in payments of acquisition-related contingent consideration, and unfavorable foreign currency losses of $1.1 million.
Cash Flows from Operating Activities
Net cash provided by operating activities during the nine months ended June 30, 2022 was $16.0 million and resulted primarily from net income of $4.9 million and net non-cash charges of $23.6 million, partially offset by unfavorable changes in operating assets and liabilities of $12.5 million. The primary non-cash adjustments to operating activities were stock-based compensation expense, amortization of intangible assets, accretion and amortization on debt securities, amortization of investment premiums & other, and depreciation and amortization totaling $10.1 million, $9.2 million, $5.2 million, $1.3 million, and $1.1 million, respectively, which were partially offset by net changes in the estimated fair value of acquisition-related contingent consideration and a deferred tax benefit of $2.2 million and $1.1 million, respectively.
Net cash provided by operating activities during the nine months ended June 30, 2021 was $25.0 million and resulted primarily from net income of $6.2 million, net non-cash charges of $18.5 million, and favorable changes in operating assets and liabilities of $0.3 million. The primary non-cash adjustments to operating activities were stock-based compensation expense, amortization of intangible assets, accretion and amortization on debt securities & other, depreciation and amortization, and amortization of investment premiums and other totaling $8.6 million, $5.2 million, $3.1 million, $1.1 million, and $0.8 million, respectively, which were partially offset by a deferred tax benefit of $0.3 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $2.2 million during the nine months ended June 30, 2022, which consisted primarily of acquisitions, net of cash acquired of $126.6 million and capital expenditures of $0.9 million, partially offset by net sales and maturities of investments of $125.4 million.
Net cash used in investing activities was $147.4 million during the nine months ended June 30, 2021, which consisted primarily of net purchases of investments of $133.9 million, net cash paid in conjunction with the ID R&D Acquisition of $12.5 million, and capital expenditures of $1.0 million.
Cash Flows from Financing Activities
Net cash used in financing activities was $21.5 million during the nine months ended June 30, 2022, primarily due to $14.8 million in repurchases and retirements of our Common Stock, $6.8 million in payments of acquisition-related contingent consideration, and loans made to non-executive employees of $1.0 million, partially offset by net proceeds from the issuance of equity plan Common Stock of $1.2 million.
Net cash provided by financing activities was $142.8 million during the nine months ended June 30, 2021, which consisted of net proceeds from the issuance of the 2026 Notes of $149.7 million, proceeds from the issuance of equity plan Common Stock of $3.0 million, and proceeds from other borrowings of $0.3 million partially offset by net cash used for the call spreads on the sales and purchases of warrants and convertible senior notes hedge issued in connection with the 2026 Notes of $9.3 million, payment of acquisition-related contingent consideration of $0.8 million, and principal payments on other borrowings of $0.1 million.
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0.75% Convertible Senior Notes due 2026
In February 2021, the Company issued $155.3 million aggregate principal amount of the 2026 Notes. The 2026 Notes are senior unsecured obligations of the Company. The 2026 Notes were issued pursuant to an Indenture, dated February 5, 2021 (the “Indenture”), between the Company and UMB Bank, National Association, as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company after which the 2026 Notes become automatically due and payable.
The net proceeds from this offering were approximately $149.7 million, after deducting the Initial Purchasers’ discounts and commissions and the Company’s estimated offering expenses related to the offering. The 2026 Notes will mature on February 1, 2026, unless earlier redeemed, repurchased or converted. The 2026 Notes will bear interest from February 5, 2021 at a rate of 0.750% per year payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2021. The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 1, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021, if the last reported sale price per share of the Company’s Common Stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Common Stock on such trading day and the conversion rate on such trading day; and (3) upon the occurrence of certain corporate events or distributions on the Common Stock. On or after August 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of the 2026 Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash and, if applicable at the Company’s election, shares of Common Stock, based on the applicable conversion rate(s); provided that the Company will be required to settle conversions solely in cash unless and until the Company (i) receives stockholder approval to increase the number of authorized shares of the Common Stock and (ii) reserves such amount of shares of the Common Stock for future issuance as required pursuant to the indenture that will govern the 2026 Notes. The conversion rate for the 2026 Notes will initially be 47.9731 shares of the Common Stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $20.85 per share of the Common Stock. The initial conversion price of the 2026 Notes represents a premium of approximately 37.5% to the $15.16 per share last reported sale price of the Common Stock on February 2, 2021. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture. The impact of the convertible feature will be dilutive to our earnings per share when our average stock price for the period is greater than the conversion price.
In connection with the issuance of the 2026 Notes, we entered into transactions for convertible notes hedge (the “Notes Hedge”) and warrants (the “Warrant Transactions”). The Notes Hedge was entered into with Bank of America, N.A., Jefferies International Limited and Goldman Sachs & Co. LLC, and provided the Company with the option to acquire, on a net settlement basis, approximately 7.4 million shares of Common Stock at a strike price of $20.85, which is equal to the number of shares of Common Stock that notionally underlie and corresponds to the conversion price of the 2026 Notes. The cost of the Notes Hedge was $33.2 million. The Notes Hedge will expire on February 1, 2026, equal to the maturity date of the 2026 Notes. The Notes Hedge is expected to reduce the potential equity dilution upon conversion of the 2026 Notes if the daily volume-weighted average price per share of our Common Stock exceeds the strike price of the Notes Hedge.
In addition, the Warrant Transactions provided us with the ability to acquire up to 7.4 million shares of our Common Stock. The Warrant Transactions will expire ratably during the 80 trading days commencing on and including May 1, 2026 and may be settled in net shares of Common Stock or net cash at the Company’s election. We received $23.9 million in cash proceeds from the Warrant Transactions. As a result of the Warrant Transactions, the Company is required to recognize incremental dilution of earnings per share to the extent the average share price is over $26.53 for any fiscal quarter.
As of October 28, 2022, the 2026 Notes were not convertible, therefore, we had not purchased any shares under the Notes Hedge and the Warrant Transactions had not been exercised and remain outstanding. See Note 9. “Convertible Senior Notes,” of the notes to consolidated financial statements for more information relating to the Notes Hedge and Warrant Transactions.
Rights Agreement
On October 23, 2018, we entered into the Section 382 Rights Agreement (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
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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 (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.
On February 28, 2019, the Company entered into Amendment No. 1 to the Rights Agreement for the purpose of (i) modifying the definitions of “Beneficial Owner,” “Beneficially Own,” and “Beneficial Ownership” under the Rights Agreement to more closely align such definitions to the actual and constructive ownership rules under Section 382 of the Internal Revenue Code of 1986, as amended or such similar provisions of the Tax Cuts and Jobs Act of 2017 and the rules and regulations promulgated thereunder, and (ii) adding an exemption request process for persons to seek an exemption from becoming an “Acquiring Person” under the Rights Agreement in the event such person wishes to acquire 4.9% or more of the Common Stock then outstanding.
The Rights expired on October 22, 2021 and no Rights were redeemed or exchanged.
Share Repurchase Program
On June 15, 2021, the Board authorized and approved a share repurchase program for up to $15 million of the currently outstanding shares of our Common Stock. The share repurchase program expired on June 30, 2022. The timing, price and volume of repurchases were based on market conditions, relevant securities laws and other factors. The repurchases were made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions or pursuant to a share repurchase trading plan.
The Company made purchases of $14.8 million, or approximately 886,204 shares, during the nine months ended June 30, 2022 at an average price of 16.73 per share. The share repurchase plan was completed during the second quarter of fiscal 2022 and total purchases made under the share repurchase program were $15.0 million.
On December 13, 2019, the Board authorized and approved a share repurchase program for up to $10 million of the currently outstanding shares of our Common Stock. The share repurchase program expired on December 16, 2020. Total purchases made under the share repurchase program were $1.0 million or approximately 137,000 shares at an average price of $7.33. The purchases under the share repurchase program were made through open market trades.
Other Liquidity Matters
On June 30, 2022, we had investments of $69.1 million, designated as available-for-sale debt securities, which consisted of commercial paper, corporate issuances, and asset-backed securities, 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 whose maturity or sale is expected within one year are classified as “current” on the consolidated balance sheets. All other securities are classified as “long-term” on the consolidated balance sheets. At June 30, 2022, we had $49.5 million of our available-for-sale securities classified as current and $19.5 million of our available-for-sale securities classified as long-term. At September 30, 2021, we had $149.1 million of our available-for-sale securities classified as current and $48.1 million of our available-for-sale securities classified as long-term.
We had working capital of $68.3 million at June 30, 2022 compared to $164.8 million at September 30, 2021.
We do not have any other material cash requirements other than those related to leases as described in Note 10. “Commitments and Contingencies.” Based on our current operating plan, we believe the current cash and cash equivalents and cash expected to be generated from operations will be adequate to satisfy our working capital needs for at least the next eighteen months from the date the financial statements are filed.
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Changes in Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We review our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, income taxes and the valuation of goodwill, intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies and estimates used in the preparation of our consolidated financial statements are described in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2021 Annual Report.
There have been no material changes to our critical accounting policies and estimates from those disclosed in our 2021 Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For a complete discussion of the Company’s quantitative and qualitative disclosures about market risks, see the section titled Quantitative and Qualitative Disclosures About Market Risks in our 2021 Annual Report. Except as described below, there has been no material change in this information as of June 30, 2022.
Interest Rates
The primary objective of our investment activities is to preserve principal while at the same time maximizing after-tax yields without significantly increasing risk. To achieve this objective, we maintain our investment portfolio of cash equivalents and marketable securities in a variety of securities, including corporate debt securities, commercial paper, certificates of deposit, and asset-backed securities. We have not used derivative financial instruments in our investment portfolio, and none of our investments are held for trading or speculative purposes. Short-term and long-term debt securities are generally classified as available-for-sale and consequently are recorded on the consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated comprehensive income, net of estimated tax. As of June 30, 2022, our marketable securities had remaining maturities between approximately one and 28 months and a fair market value of $69.1 million, representing 18% of our total assets.
The fair value of our cash equivalents and debt securities is subject to change as a result of changes in market interest rates and investment risk related to the issuers’ credit worthiness. We do not utilize financial contracts to manage our investment portfolio’s exposure to changes in market interest rates. A hypothetical 100 basis point increase or decrease in market interest rates would not have a material impact on the fair value of our cash equivalents and debt securities due to the relatively short maturities of these investments. While changes in market interest rates may affect the fair value of our investment portfolio, any gains or losses will not be recognized in our results of operations until the investment is sold or if the reduction in fair value was determined to be an other-than-temporary impairment.
Foreign Currency Risk
As a result of past acquisitions, we have operations in the United Kingdom, France, the Netherlands, Russia, and Spain that are exposed to fluctuations in the foreign currency exchange rate between the U.S. dollar, the Euro, the Ruble and the British pound sterling. The functional currency of our French, Dutch, and Spanish operations is the Euro. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and British pound. Translation adjustments resulting from translating the functional currency financial statements into U.S. dollar equivalents are reported separately in the consolidated statements of operations and comprehensive income (loss).
The effect of a hypothetical 10% change in foreign exchange rates on monetary assets and liabilities at June 30, 2022 would results in a change of approximately $16.9 million to our results of operations. To date, foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our financial statements and have not historically.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). We recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as June 30, 2022 due to the material weaknesses discussed below.
Material Weaknesses in Internal Control Over Financial Reporting
In connection with the audit of our Company as of and for the year ended September 30, 2021, as previously reported, we identified a material weakness in the operating effectiveness of our internal control over financial reporting as a result of certain control deficiencies related to the precision of our review over the initial valuation and subsequent remeasurement of the contingent consideration liability recognized as part of the consideration transferred in the ID R&D Acquisition.
In response to this material weakness, we have enhanced the documentation of the control to include evidence of our review of the valuation provided by our third-party specialist. The evidence of our review includes corroborating inputs to the valuation, performing a recalculation of the valuation, and ensuring consistency with accounting principles generally accepted in the U.S. We are required to demonstrate the effectiveness of the new processes for a sufficient period of time; therefore, until the efforts to test the necessary control activities we identified, are fully completed, the material weakness continues to exist at June 30, 2022.
In connection with our interim review as of and for the period ended March 31, 2022, as previously reported, we identified a material weakness related to our controls over the review of US and foreign income tax accounts. We did not have sufficient internal technical resources, nor oversight of our third-party tax advisor, to appropriately identify and evaluate certain inputs and assumptions that effect the reported consolidated tax accounts. Our remediation efforts associated with this material weakness which will include increased oversight and review are ongoing and therefore, the material weakness continues to exist at June 30, 2022.
In connection with the preparation of our financial statements as of and for the period ended June 30, 2022, management identified the following additional material weaknesses in our internal control over financial reporting:
i.our controls related to the financial statement close process, specifically related to balance sheet account reconciliations and our review and preparation of the consolidation and financial statements, were not operating effectively to ensure the accuracy and completeness of certain amounts and disclosures;
ii.our controls related to the review of the accounting for business combinations, including accounting for transaction costs and deferred taxes are not designed effectively. This material weakness resulted in a restatement to the second quarter of fiscal 2022; and
iii.our controls related to revenue recognition, specifically over the accounting review of customer contracts, were not designed or operating effectively to ensure completeness and accuracy of revenue recorded.
In response to these material weaknesses, our management, with the oversight of the Audit Committee of our Board of Directors, has identified and begun to implement remediation steps to enhance our overall control environment. Our management is committed to remediating such material weaknesses through continuing training and hiring of personnel, improving the timeliness of our accounting close process, and continuing to enhance the design of our financial review controls.
Although we intend to complete the remediation process as promptly as possible, we cannot at this time estimate how long it will take to remediate these material weaknesses. In addition, we may discover additional material weaknesses that require additional time and resources to remediate and we may decide to take additional measures to address the material weaknesses or modify the remediation steps described above. Until these material weaknesses are remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with GAAP.
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Changes in Internal Control over Financial Reporting
Other than the new material weaknesses identified and our ongoing remediation efforts described above, there has been no change in our internal control over financial reporting during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Although we intend to complete the remediation process as promptly as possible, we cannot at this time estimate how long it will take to remediate these material weaknesses. In addition, we may discover additional material weaknesses that require additional time and resources to remediate and we may decide to take additional measures to address the material weaknesses or modify the remediation steps described above. Until these material weaknesses are remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with GAAP.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information in Note 10 to the consolidated financial statements included in this Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A—“Risk Factors” in our 2021 Annual Report describes some of the risks and uncertainties associated with our business, which we strongly encourage you to review. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. There have been no material changes in our risk factors from those disclosed in our 2021 Annual Report, except as noted below.
We have identified material weaknesses in our internal control over financial reporting, and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.
In the course of preparing our financial statements for fiscal 2021, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness in the operating effectiveness of our internal control over financial reporting as a result of certain control deficiencies related to the precision of our review of the initial valuation and subsequent remeasurement of the contingent consideration liability recognized as part of the consideration transferred in the ID R&D Acquisition. In response to this material weakness, we have enhanced the documentation of the control to include evidence of our review of the valuation provided by our third-party specialist. The evidence of our review includes corroborating inputs to the valuation, performing a recalculation of the valuation, and ensuring consistency with accounting principles generally accepted in the U.S. We are required to demonstrate the effectiveness of the new processes for a sufficient period of time; therefore, until the efforts to test the necessary control activities we identified, are fully completed, the material weakness continues to exist at June 30, 2022.
In connection with our interim review as of and for the period ended March 31, 2022, as previously reported, we identified a material weakness related to our controls over the review of US and foreign income tax accounts. We did not have sufficient internal technical resources, nor oversight of our third-party tax advisor, to appropriately identify and evaluate certain inputs and assumptions that effect the reported consolidated tax accounts. Our remediation efforts associated with this material weakness which will include increased oversight and review are ongoing and therefore, the material weakness continues to exist at June 30, 2022.
In connection with the preparation of our financial statements as of and for the period ended June 30, 2022, we also identified the following additional material weaknesses in our control over financial reporting: (i) our controls related to the financial statement close process, specifically related to balance sheet account reconciliations and our review and preparation of the consolidation and financial statements, were not operating effectively to ensure the accuracy and completeness of certain amounts and disclosures; (ii) our controls related to the review of the accounting for business combinations, including accounting for transaction costs and deferred taxes, are not designed effectively. This material weakness resulted in a restatement to the second quarter of fiscal 2022; and (iii) our controls related to revenue recognition, specifically over the accounting review of customer contracts, were not designed or operating effectively to ensure completeness and accuracy of revenue recorded.
To address our material weakness, our management, with the oversight of the Audit Committee of our Board of Directors, has identified and begun to implement remediation steps to enhance our overall control environment. Our management is committed to remediating such material weaknesses through continuing training and hiring of personnel, improving the timeliness of our accounting close process, and continuing to enhance the design of our financial review controls. See Part I, Item 4 “Controls and Procedures” for additional information about these material weaknesses and our remediation efforts.
If we are unable to further implement and maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources. Furthermore, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to
44
remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods.
Any failure to implement and maintain effective internal control over financial reporting could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports that are filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ.
Russian military action against Ukraine could have a material adverse effect on our operations, results of operations, financial condition, liquidity and business outlook.
In February 2022, Russian forces launched significant military actions against Ukraine, and sustained conflict and disruption in the region is likely. We have employees in Russia and our sales in the region are not currently significant. The specific impact on our financial condition, results of operations and cash flows is not determinable as of the date hereof, but enhanced sanctions activity by the U.S. and other countries against officials, individuals, regions and industries in Russia, and subsequent responses from our customers and others may disrupt our relationship with our vendors, disrupt our delivery of services, cause us to shift all or portions of our work occurring in the region to other countries, and may restrict our ability to engage in certain projects in the region. Any such actions could have a material adverse effect on our operations, results of operations, financial condition, liquidity and business outlook.
Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.
There is an increasing focus from certain investors, employees, regulators and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance (“ESG”) factors. Some investors and investor advocacy groups may use these factors to guide investment strategies and, in some cases, investors may choose not to invest in our company if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance, and a variety of organizations currently measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized. Investors, particularly institutional investors, use these ratings to benchmark companies against their peers and if we are perceived as lagging with respect to ESG initiatives, certain investors may engage with us to improve ESG disclosures or performance and may also make voting decisions, or take other actions, to hold us and our board of directors accountable. In addition, the criteria by which our corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate.
We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards set by our investors, stockholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating from third-party rating services. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our common stock from consideration by certain investors who may elect to invest with our competition instead. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks. Any failure or perceived failure by us in this regard could have a material adverse effect on our reputation and on our business, share price, financial condition, or results of operations, including the sustainability of our business over time.
In addition, the SEC has announced proposed rules that, among other matters, will establish a framework for reporting of climate-related risks. To the extent the proposed rules impose additional reporting obligations, we could face increased costs. Separately, the SEC has also announced that it is scrutinizing existing climate-change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege our existing climate disclosures are misleading or deficient.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 25, 2022, the Company granted restricted stock units to one new employee for (i) 29,475 shares of the Company’s common stock, which shall vest over a four year period with 25% of the shares subject thereto vesting on each anniversary of the grant date, (ii) 29,475 shares of the Company’s common stock, which shall vest up to 33.33% of the shares subject thereto on each anniversary of the grant date, subject to the achievement of the annual performance criteria which is based on the percentage increase in value of the Company’s common stock as compared to the percentage increase in value of the Russell 2000 Index over the applicable annual performance period, and (iii) 9,824 shares of the Company’s common stock, which shall vest up to 33.33% of the shares subject thereto on each anniversary of the grant date if the annual performance criteria (which is based on the percentage increase in value of the Company’s common stock as compared to the percentage increase in value of the Russell 2000 Index) for the applicable performance period has been exceeded. The restricted stock units were an inducement grant made in accordance with Nasdaq Listing Rule 5635(c)(4) and Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The vesting of each grant is subject to the employee’s continued service with the Company through the applicable vesting date. The inducement grants are subject to the terms and conditions of award agreements covering the grants and the Company’s 2020 Incentive Plan. We intend to file a registration statement on a Form S-8 to register the common stock underlying these restricted stock units prior to the time at which such restricted stock units begin vesting.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
During the preparation of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 we made adjustments to our financial results in the third quarter of fiscal 2022 that consist of a $5.7 million decrease to other current liabilities, a $4.4 million increase to accrued liabilities and a $1.3 million increase to income taxes payable, a $1.3 million decrease to deferred income tax liabilities, and a $1.3 million decrease to other current assets. The adjustments were made to separately state accrued liabilities on the consolidated balance sheets as the amount was greater than 5% of total current liabilities. Additionally, we noted that certain aspects of our acquisition of HooYu Ltd. (the “HooYu Acquisition”) in March 2022 were improperly accounted for in the quarterly report on Form 10-Q for the quarter ended March 31, 2022. Specifically, we did not account for the representations and warranty insurance purchased in connection with the HooYu Acquisition, which should have been accrued for and fully expensed at the date of the HooYu Acquisition. In addition, we did not accrue for a payment of stamp duty tax related to the HooYu Acquisition, which was paid during the third fiscal quarter ended June 30, 2022. Lastly, we did not record deferred tax assets and deferred tax liabilities based on information available at the time of the HooYu Acquisition. We recognized $1.3 million of acquisition-related costs and expenses in the second quarter that had been previously recognized in the third quarter to match the period in which the related acquisition occurred. Additionally, we recognized a deferred tax asset related to the HooYu Acquisition of $1.0 million as part of the opening balance sheet related to the HooYu Acquisition.We have decided to correct these errors during the quarter ended March 31, 2022, concluding that these expenses, accruals and balance sheet reclassifications are material to the unaudited interim consolidated balance sheet and statement of operations and comprehensive income (loss) as of and for the quarter ended March 31, 2022 and on October 28, 2022, filed an amendment to our Form 10-Q for the quarter ended March 31, 2022 to correct such errors.
As a result of the items described above, certain of the GAAP financial results for the three and nine months ended June 30, 2022 furnished in Exhibit 99.1 to the Current Report on Form 8-K filed on July 28, 2022, differ from the financial results disclosed in this Quarterly Report on Form 10-Q. In addition, certain of the reported GAAP financial results for the three and nine months ended June 30, 2022 differ as a result of the items described above as follows (in thousands, except per share data and percentages):
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| Three Months Ended June 30, 2022 | Nine Months Ended June 30, 2022 | ||||||||||||||||||||||
| As Furnished | As Adjusted | As Furnished | As Adjusted | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Software and hardware | $ | 19,820 | $ | 19,820 | $ | 54,545 | $ | 54,545 | |||||||||||||||
| Services and other | 19,513 | 19,513 | 51,975 | 51,975 | |||||||||||||||||||
| Total revenue | 39,333 | 39,333 | 106,520 | 106,520 | |||||||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||
| Cost of revenue—software and hardware | 508 | 508 | 1,196 | 1,196 | |||||||||||||||||||
| Cost of revenue—services and other | 4,059 | 4,073 | 10,038 | 10,051 | |||||||||||||||||||
| Selling and marketing | 11,174 | 11,216 | 28,817 | 28,859 | |||||||||||||||||||
| Research and development | 9,411 | 9,614 | 25,253 | 25,457 | |||||||||||||||||||
| General and administrative | 6,667 | 6,589 | 18,704 | 18,626 | |||||||||||||||||||
| Acquisition-related costs and expenses | 4,492 | 3,283 | 9,827 | 9,947 | |||||||||||||||||||
| Restructuring costs | 1,807 | 1,807 | 1,807 | 1,807 | |||||||||||||||||||
| Total operating costs and expenses | 38,118 | 37,090 | 95,642 | 95,943 | |||||||||||||||||||
| Operating income | 1,215 | 2,243 | 10,878 | 10,577 | |||||||||||||||||||
| Interest expense | 2,077 | 2,077 | 6,125 | 6,125 | |||||||||||||||||||
| Other income, net | 49 | 89 | (48) | (8) | |||||||||||||||||||
| Income before income taxes | (813) | 255 | 4,705 | 4,444 | |||||||||||||||||||
| Income tax provision | (39) | 556 | (522) | 504 | |||||||||||||||||||
| Net income | $ | (852) | $ | 811 | $ | 4,183 | $ | 4,948 | |||||||||||||||
| Net income per share—basic | $ | (0.02) | $ | 0.02 | $ | 0.09 | $ | 0.11 | |||||||||||||||
| Net income per share—diluted | $ | (0.02) | $ | 0.02 | $ | 0.09 | $ | 0.11 | |||||||||||||||
Shares used in calculating net income per share—basic | 44,591 | 44,669 | 44,721 | 44,721 | |||||||||||||||||||
Shares used in calculating net income per share—diluted | 45,145 | 45,224 | 45,793 | 45,793 | |||||||||||||||||||
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| June 30, 2022 (Unaudited) | |||||||||||
| As Furnished | As Adjusted | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 21,522 | $ | 21,543 | |||||||
| Short-term investments | 49,531 | 49,531 | |||||||||
| Accounts receivable, net | 29,672 | 29,618 | |||||||||
| Contract assets | 5,125 | 5,125 | |||||||||
| Prepaid expenses | 3,453 | 3,078 | |||||||||
| Other current assets | 4,634 | 3,194 | |||||||||
| Total current assets | 113,937 | 112,089 | |||||||||
| Long-term investments | 19,534 | 19,534 | |||||||||
| Property and equipment, net | 3,723 | 3,802 | |||||||||
| Right-of-use assets | 5,503 | 5,484 | |||||||||
| Intangible assets, net | 85,743 | 85,743 | |||||||||
| Goodwill | 129,260 | 127,992 | |||||||||
| Deferred income tax assets | 11,963 | 12,993 | |||||||||
| Convertible senior notes hedge | — | — | |||||||||
| Other non-current assets | 5,342 | 6,959 | |||||||||
| Total assets | $ | 375,005 | $ | 374,596 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 4,200 | $ | 3,981 | |||||||
| Accrued payroll and related taxes | 10,173 | 10,276 | |||||||||
| Accrued liabilities | — | 4,432 | |||||||||
| Deferred revenue, current portion | 13,274 | 13,220 | |||||||||
| Lease liabilities, current portion | 1,908 | 1,902 | |||||||||
| Acquisition-related contingent consideration | 4,860 | 4,980 | |||||||||
| Restructuring accrual | 1,807 | 1,807 | |||||||||
| Income taxes payable | — | 1,332 | |||||||||
| Other current liabilities | 7,522 | 1,858 | |||||||||
| Total current liabilities | 43,744 | 43,788 | |||||||||
| Convertible senior notes | 126,157 | 126,157 | |||||||||
| Deferred revenue, non-current portion | 1,409 | 1,409 | |||||||||
| Lease liabilities, non-current portion | 4,789 | 4,776 | |||||||||
| Deferred income tax liabilities | 20,493 | 19,227 | |||||||||
| Other non-current liabilities | 2,011 | 1,923 | |||||||||
| Total liabilities | 198,603 | 197,280 | |||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued and outstanding | — | — | |||||||||
Common stock, $0.001 par value, 120,000,000 and 60,000,000 shares authorized, 44,396,263 and 44,168,745 issued and outstanding, as of June 30, 2022 and September 30, 2021, respectively | 44 | 44 | |||||||||
| Additional paid-in capital | 211,087 | 211,212 | |||||||||
| Accumulated other comprehensive loss | (17,880) | (17,856) | |||||||||
| Accumulated deficit | (16,849) | (16,084) | |||||||||
Treasury stock, at cost, no shares and 7,773 shares as of June 30, 2022 and September 30, 2021, respectively | — | — | |||||||||
| Total stockholders’ equity | 176,402 | 177,316 | |||||||||
| Total liabilities and stockholders’ equity | $ | 375,005 | $ | 374,596 | |||||||
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ITEM 6. EXHIBITS
| Exhibit No. | Description | Incorporated by Reference from Document | ||||||||||||
| 2.1** | (1) | |||||||||||||
| 3.1 | (2) | |||||||||||||
| 3.2 | (3) | |||||||||||||
| 3.3 | (4) | |||||||||||||
| 3.4 | (5) | |||||||||||||
| 10.2* | * | |||||||||||||
| 10.3* | * | |||||||||||||
| 31.1 | * | |||||||||||||
| 31.2 | * | |||||||||||||
| 32.1 | * | |||||||||||||
| 101.INS | Inline XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | * | ||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Linkbase Document. | * | ||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | * | ||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | * | ||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | * | ||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | * | ||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | * | ||||||||||||
| * | Filed herewith. | |||||||
| ** | Non-material schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC. | |||||||
| (1) | Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 23, 2022. | |||||||
| (2) | Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014, filed with the SEC on December 7, 2014. | |||||||
| (3) | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 10, 2014. | |||||||
| (4) | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 23, 2018. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| October 28, 2022 | MITEK SYSTEMS, INC. | ||||||||||
| By: | /s/ Scipio Maximus Carnecchia | ||||||||||
| Scipio Maximus Carnecchia | |||||||||||
Chief Executive Officer (Principal Executive Officer) | |||||||||||
| By: | /s/ Frank Teruel | ||||||||||
| Frank Teruel | |||||||||||
Chief Financial Officer (Principal Financial and Accounting Officer) | |||||||||||
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