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 Part I, 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, 2020, filed with the U.S.
Securities and Exchange Commission ("SEC") on December 7, 2020, as amended by
Amendment No. 1 to the Annual Report on Form 10-K/A (together, the "Form 10-K"),
filed with the SEC on December 11, 2020. 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 are currently
serving more than 7,500 financial services organizations and leading marketplace
and financial technology ("fintech") brands across the globe. Our solutions are
embedded in native mobile apps and browsers to facilitate better online user
experiences, fraud detection and reduction, and compliant transactions.
Mitek's Mobile Deposit® solution is used today by millions of consumers in the
United States ("U.S.") and Canada for mobile check deposit. Mobile Deposit®
enables individuals and businesses to remotely deposit checks using their
camera-equipped smartphone or tablet. Our Mobile Deposit® solution is embedded
within the financial institutions' digital banking apps used by consumers and
has now processed approximately five billion check deposits. Mitek began selling
Mobile Deposit® in early 2008 and received its first patent for this product in
August 2010.
Mitek's Mobile Verify® verifies a user's identity online enabling organizations
to build safer digital communities. Scanning an identity document helps enable
an enterprise to verify the identity of the person with whom they are conducting
business, to comply with growing governmental Anti-Money Laundering and Know
Your Customer regulatory requirements, and to improve the overall customer
experience for digital onboarding. To be sure the person submitting the identity
document is who they say they are, Mitek's Mobile Verify Face Comparison
provides an additional layer of online verification and compares the face on the
submitted identity document with the live selfie photo of the user.
The combination of identity document capture and data extraction process enables
the organization to prefill the end user's application, with far fewer key
strokes, thus reducing keying errors, and improving both operational efficiency
and the customer experience. Today, the financial services verticals (banks,
credit unions, lenders, payments processors, card issuers, fintech companies,
etc.) represent the greatest percentage of use of our solutions, but there is
accelerated adoption by marketplaces, sharing economy, and hospitality sectors.
Mitek uses artificial intelligence and machine learning to constantly improve
the product performance of Mobile Verify® such as speed and accuracy of
approvals of identification documents. The core of our user experience is driven
by Mitek MiSnap™, the leading image capture technology, which is incorporated
across our product lines. It provides a simple, intuitive, and superior
user-experience, making digital transactions faster, more accurate, and easier
for the consumer. Mobile Fill® automates application prefill of any form with
user data by simply snapping a picture of the driver's license or other similar
user identity document.
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CheckReader™ enables financial institutions to automatically extract data from a
check image received across any deposit channel-branch, ATM, remote deposit
capture, and mobile. Through the automatic recognition of all fields on checks,
whether handwritten or machine print, CheckReader™ speeds the time to deposit
for financial institutions and enables them to comply with check clearing
regulations.
In May 2021 (as more fully described below in Note 3) Mitek acquired ID R&D,
Inc. ("ID R&D"), an award-winning provider of artificial intelligence (AI)-based
voice and face biometrics and liveness detection. The ID R&D Acquisition (as
defined below) will simplify and secure the entire transaction lifecycle for
both businesses and consumers. Businesses and financial institutions will have
access to one authentication solution to deploy throughout the complete
transaction cycle, and can provide consumers with a simple, intuitive approach
to fighting fraud.
We market and sell our products and services worldwide through internal, direct
sales teams located in the U.S., Europe, and Latin America as well as through
channel partners. Our partner sales strategy includes channel partners who are
financial services technology providers and identity verification providers.
These partners integrate our products into their solutions to meet the needs of
their customers.
Third Quarter Fiscal 2021 Highlights
•Revenue for the three months ended June 30, 2021 was $31.8 million, an increase
of 25% compared to revenue of $25.4 million in the three months ended June 30,
2020.
•Net income was $3.0 million, or $0.07 per diluted share, during the three
months ended June 30, 2021, compared to net income of $1.3 million, or $0.03 per
share, during the three months ended June 30, 2020.
•Cash provided by operating activities was $9.0 million for the nine months
ended June 30, 2021, compared to $17.4 million for the nine months ended June
30, 2020.
•We added new patents to our portfolio during the third quarter of fiscal 2021
bringing our total number of issued patents to 73 as of June 30, 2021. In
addition, we have 15 domestic and international patent applications pending as
of June 30, 2021.
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 Mitek Systems, Inc. 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
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 fiscal
2022 and fiscal 2023.
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
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ratably over the life of the contract or as transactions are used depending on
the contract criteria. The recognition of future revenues from these licenses is
dependent upon a number of factors, including, but not limited to, the term of
our license agreements, the timing of implementation of our products by our
channel partners and customers, and the timing of any re-orders of additional
licenses and/or license renewals by our channel partners and customers.
During each of the last few years, sales of licenses to one or more channel
partners have comprised a significant part of our revenue each year. This is
attributable to the timing of renewals or purchases of licenses and does not
represent a dependence on any single channel partner. If we were to lose a
channel partner relationship, we do not believe such a loss would adversely
affect our operations because either we or another channel partner could sell
our products to the end-users that had purchased products from the channel
partner we lost. However, in that case, we or another channel partner must
establish a relationship with the end-users, which could take time to develop,
if it develops at all.
We have a growing number of competitors in the mobile image capture and identity
verification industry, many of which have greater financial, technical,
marketing, and other resources. However, we believe our patented mobile image
capture and identity verification technology, our growing portfolio of products
and geographic coverage for the financial services industry, and our market
expertise gives us a distinct competitive advantage. To remain competitive, we
must continue to offer products that are attractive to the consumer as well as
being secure, accurate, and convenient. To help us remain competitive, we intend
to further strengthen performance of our portfolio of products through research
and development as well as partnering with other technology providers.
In the second quarter of fiscal 2020, concerns related to the spread of COVID-19
began to create global business disruptions as well as disruptions in our
operations and to create potential negative impacts on our revenues and other
financial results. COVID-19 was declared a pandemic by the World Health
Organization on March 11, 2020. In an effort to contain COVID-19 or slow its
spread, governments around the world have enacted various measures, including
orders to close all businesses not deemed "essential," isolate residents to
their homes or places of residence, and practice social distancing when engaging
in essential activities. We anticipate that these actions and the global health
crisis caused by COVID-19 will negatively impact business activity across the
globe. The extent to which COVID-19 will impact our business, operations, and
financial results is uncertain and difficult to predict and depends on numerous
evolving factors including the duration and severity of the outbreak. See Item
1A: "Risk Factors" for additional details.
In an effort to protect the health and safety of our employees, our workforce
has transitioned to working remotely and employee travel, including to our
international subsidiaries, has been severely curtailed. It is not clear what
the potential effects of any such alterations or modifications may have on our
business, including the effects on our customers or vendors, or on our financial
results. We will continue to actively monitor the situation and may take further
actions that alter our business operations as may be required by federal, state,
local, or foreign authorities, or that we determine are in the best interests of
our employees, customers, partners, and stockholders.
We anticipate in certain circumstances that the current stay-at-home orders and
impact of the COVID-19 pandemic may accelerate the adoption of digital
technologies and create future opportunities and uses for our products. The
ultimate extent of the impact of the COVID-19 pandemic on our operational and
financial performance, including our long term revenue growth and profitability,
depends on certain developments, including the duration of the pandemic and any
resurgences, the severity of the disease, responsive actions taken by public
health officials, the development, distribution and public acceptance of
treatments and vaccines, the impacts on our customers' and our sales cycles, our
ability to generate new business leads, the impacts on our customers', employee
and industry events, and the effects on our vendors, all of which are uncertain
and currently cannot be predicted with any degree of certainty. As a result, the
extent to which the COVID-19 pandemic will continue to impact our financial
condition or results of operations is uncertain. Because of our IT
infrastructure and the nature of our business, our employees have generally been
able to work remotely and productively, but future productivity and the effects
of COVID-19 on our operations is unknown at this time. We continue to seek new
and innovative opportunities to serve our customers' needs.
Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
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The following table summarizes certain aspects of our results of operations for the three months ended June 30, 2021 and 2020 (amounts in thousands, except percentages):

Three Months Ended June 30,


                                                                             Percentage of Total Revenue                  Increase (Decrease)
                                       2021              2020                 2021                  2020                  $                   %
Revenue
Software and hardware              $  16,973          $ 13,212                      53  %               52  %       $     3,761                28  %
Services and other                    14,805            12,201                      47  %               48  %             2,604                21  %
Total revenue                      $  31,778          $ 25,413                     100  %              100  %       $     6,365                25  %
Cost of revenue                        3,410             3,496                      11  %               14  %               (86)               (2) %
Selling and marketing                  8,133             7,011                      26  %               28  %             1,122                16  %
Research and development               6,946             5,891                      22  %               23  %             1,055                18  %
General and administrative             5,633             5,884                      18  %               23  %              (251)               (4) %
Acquisition-related costs and
expenses                               2,224             1,697                       7  %                7  %               527                31  %
Restructuring costs                        -                 -                       -  %                -  %                 -                 -  %
Interest expense                       2,223                 -                       7  %                -  %             2,223               100  %
Other income, net                         80               145                       -  %                1  %               (65)              (45) %
Income tax provision                    (304)             (231)                     (1) %               (1) %               (73)              (32) %
Net income                         $   2,985          $  1,348                       9  %                5  %       $     1,637               121  %


Revenue
Total revenue increased $6.4 million, or 25%, to $31.8 million in the three
months ended June 30, 2021 compared to $25.4 million in the three months ended
June 30, 2020. Software and hardware revenue increased $3.8 million, or 28%, to
$17.0 million in the three months ended June 30, 2021 compared to $13.2 million
in the three months ended June 30, 2020. This increase is primarily due to an
increase in sales of our Mobile Deposit® software product. This increase was
partially offset by a decline in revenue from our CheckReader™ and ID_CLOUD™
software products. Services and other revenue increased $2.6 million, or 21%, to
$14.8 million in the three months ended June 30, 2021 compared to $12.2 million
in the three months ended June 30, 2020. This increase is primarily due to
continued growth in Mobile Verify® transactional SaaS revenue of $2.3 million,
or 33%, in the three months ended June 30, 2021 compared to the same period in
2020, as well as an increase in Mobile Deposit® transactional SaaS revenue.
Cost of Revenue
Cost of revenue includes personnel costs related to billable services and
software support, direct costs associated with our hardware products, hosting
costs, and the costs of royalties for third party products embedded in our
products. Cost of revenue decreased $0.1 million, or 2%, to $3.4 million in the
three months ended June 30, 2021 compared to $3.5 million in the three months
ended June 30, 2020. As a percentage of revenue, cost of revenue decreased to
11% in the three months ended June 30, 2021 from 14% in the three months ended
June 30, 2020. The decrease is primarily due to lower costs associated with the
sale of ICAR hardware products driven by lower sales, partially offset by an
increase in variable personnel and hosting costs associated with a higher volume
of Mobile Verify™ transactions processed during the three months ended June 30,
2021 compared to the same period in 2020.
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 $1.1 million, or 16%, to $8.1 million in the three
months ended June 30, 2021 compared to $7.0 million in the three months ended
June 30, 2020. As a percentage of revenue, selling and marketing expenses
decreased to 26% in the three months ended June 30, 2021 from 28% in the three
months ended June 30, 2020. The increase in selling and marketing expense is due
to higher personnel-related costs resulting from our increased headcount costs
of $1.1 million in the three months ended June 30, 2021 compared to the same
period in 2020.
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
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development expenses increased $1.0 million, or 18%, to $6.9 million in the
three months ended June 30, 2021 compared to $5.9 million in the three months
ended June 30, 2020. As a percentage of revenue, research and development
expenses decreased to 22% in the three months ended June 30, 2021 from 23% in
the three months ended June 30, 2020. The increase in research and development
expenses is primarily due to higher personnel-related costs resulting from our
increased headcount, increased expenses as a result of the ID R&D Acquisition as
well as variable third-party engineering costs in the three months ended June
30, 2021 compared to the same period in 2020.
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 decreased $0.3 million, or 4%, to $5.6 million in the
three months ended June 30, 2021 compared to $5.9 million in the three months
ended June 30, 2020. As a percentage of revenue, general and administrative
expenses decreased to 18% in the three months ended June 30, 2021 from 23% in
the three months ended June 30, 2020. The decrease in general and administrative
expenses is primarily due to lower intellectual property litigation related
costs of $0.9 million. The overall decrease in general and administrative
expense was partially offset by higher executive transition costs of $0.4
million and higher personnel-related costs of $0.2 million resulting from our
increased headcount during the three months ended June 30, 2021 compared to the
same period in 2020.
Acquisition-Related Costs and Expenses
Acquisition-related costs and expenses include amortization of intangible
assets, expenses recorded due to changes in the fair value of contingent
consideration, and other costs associated with acquisitions. Acquisition-related
costs and expenses increased $0.5 million, or 31%, to $2.2 million in the three
months ended June 30, 2021 compared to $1.7 million in the three months ended
June 30, 2020. As a percentage of revenue, acquisition-related costs and
expenses was consistent at 7% in each of the three months ended June 30, 2021
and 2020. The increase in acquisition-related costs and expenses is due to
expenses associated with the ID R&D Acquisition during the three months ended
June 30, 2021 compared to the same period in 2020.
Interest Expense
Interest expense includes the amortization of debt discount and issuance costs
and coupon interest incurred associated with our 0.75% convertible senior notes
due 2026 (the "2026 Notes"). 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. There
was no interest expense in the three months ended June 30, 2020.
Other Income, Net
Other income, net includes interest income net of amortization and net realized
gains or losses on our marketable securities portfolio, foreign currency
transactional gains or losses, and the change in fair value of our convertible
senior notes hedge and embedded conversion derivative. Other income, net was
consistent at $0.1 million in each of the three months ended June 30, 2021 and
2020.
Income Tax Provision
For the three months ended June 30, 2021, we recorded an income tax provision of
$0.3 million, which yielded an effective tax rate of 9%. For the three months
ended June 30, 2020, we recorded an income tax provision of $0.2 million, or an
effective tax rate of 15%. The difference between the U.S. federal statutory tax
rate and our effective tax rate for the three months ended June 30, 2021 and
2020 was primarily due to 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.
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Comparison of the Nine Months Ended June 30, 2021 and 2020 The following table summarizes certain aspects of our results of operations for the nine months ended June 30, 2021 and 2020 (amounts in thousands, except percentages):

Nine Months Ended June 30,


                                                                            Percentage of Total Revenue                  Increase (Decrease)
                                      2021              2020                 2021                  2020                  $                  %
Revenue
Software and hardware              $ 42,288          $ 36,180                      49  %               51  %       $    6,108                 17  %
Services and other                   44,238            34,492                      51  %               49  %            9,746                 28  %
Total revenue                      $ 86,526          $ 70,672                     100  %              100  %       $   15,854                 22  %
Cost of revenue                      11,340             9,615                      13  %               14  %            1,725                 18  %
Selling and marketing                24,048            20,345                      28  %               29  %            3,703                 18  %
Research and development             19,801            16,764                      23  %               24  %            3,037                 18  %
General and administrative           16,409            16,382                      19  %               23  %               27                  -  %
Acquisition-related costs and
expenses                              5,576             4,884                       6  %                7  %              692                 14  %
Restructuring costs                       -              (114)                      -  %                -  %              114               (100) %
Interest expense                         3,543                 -                    4  %                -  %            3,543                100  %
Other income, net                       549               480                       1  %                1  %               69                 14  %
Income tax provision                   (187)             (460)                      -  %               (1) %              273                 59  %
Net income                         $  6,171          $  2,816                       7  %                4  %       $    3,355                119  %


Revenue
Total revenue increased $15.9 million or 22%, to $86.5 million in the nine
months ended June 30, 2021 compared to $70.7 million in the nine months ended
June 30, 2020. Software and hardware revenue increased $6.1 million, or 17%, to
$42.3 million in the nine months ended June 30, 2021 compared to $36.2 million
in the nine months ended June 30, 2020 primarily due to an increase in sales of
our Mobile Deposit® software product and identity verification hardware
products. Services and other revenue increased $9.7 million, or 28%, to $44.2
million in the nine months ended June 30, 2021 compared to $34.5 million in the
nine months ended June 30, 2020 primarily due to strong growth in Mobile Verify®
transactional SaaS revenue of $8.3 million in the nine months ended June 30,
2021 compared to the same period in 2020, as well as an increase in maintenance
revenue associated with Mobile Deposit® software sales and hosted mobile deposit
transactional revenue.
Cost of Revenue
Cost of revenue includes personnel costs related to billable services and
software support, direct costs associated with our hardware products, hosting
costs, and the costs of royalties for third party products embedded in our
products. Cost of revenue increased $1.7 million, or 18%, to $11.3 million in
the nine months ended June 30, 2021 compared to $9.6 million in the nine months
ended June 30, 2020. As a percentage of revenue, cost of revenue decreased to
13% in the nine months ended June 30, 2021 from 14% in the nine months ended
June 30, 2020. The increase in cost of revenue is primarily due to an increase
in variable personnel, hosting and royalty costs associated with a higher volume
of Mobile Verify® transactions processed during the nine months ended June 30,
2021 compared to the same period in 2020.
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 $3.7 million, or 18%, to
$24.0 million in the nine months ended June 30, 2021 compared to $20.3 million
in the nine months ended June 30, 2020. As a percentage of revenue, selling and
marketing expenses decreased to 28% in the nine months ended June 30, 2021 from
29% in the nine months ended June 30, 2020. The increase in selling and
marketing expense is primarily due to higher personnel-related costs resulting
from our increased headcount of $4.1 million and higher product promotion costs
of $0.4 million in the nine months ended June 30, 2021 compared to the same
period in 2020. The overall increase in selling and marketing expense was
partially offset by a decrease in travel and related expenses of $0.8 million as
a result of the COVID-19 pandemic.
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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 $3.0 million, or 18%, to
$19.8 million in the nine months ended June 30, 2021 compared to $16.8 million
in the nine months ended June 30, 2020. As a percentage of revenue, research and
development expenses decreased to 23% in the nine months ended June 30, 2021
from 24% in the nine months ended June 30, 2020. The increase in research and
development expenses is primarily due to higher personnel-related costs
resulting from our increased headcount, increased expenses as a result of the ID
R&D Acquisition as well as variable third-party engineering costs in the nine
months ended June 30, 2021 compared to the same period in 2020.
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 were consistent at $16.4 million in each of the nine
months ended June 30, 2021 and 2020. As a percentage of revenue, general and
administrative expenses decreased to 19% in the nine months ended June 30, 2021
from 23% in the nine months ended June 30, 2020. Higher personnel-related costs
resulting from our increased headcount of $0.9 million and higher executive
transition costs of $0.4 million were partially offset by decreased intellectual
property litigation costs of $1.3 million during the nine months ended June 30,
2021 compared to the same period in 2020.
Acquisition-Related Costs and Expenses
Acquisition-related costs and expenses include amortization of intangible
assets, expenses recorded due to changes in the fair value of contingent
consideration, and other costs associated with acquisitions. Acquisition-related
costs and expenses increased $0.7 million, or 14%, to $5.6 million in the nine
months ended June 30, 2021 compared to $4.9 million in the nine months ended
June 30, 2020. As a percentage of revenue, acquisition-related costs and
expenses decreased to 6% in the nine months ended June 30, 2021 from 7% in the
nine months ended June 30, 2020. The increase in acquisition-related costs and
expenses is primarily due to expenses associated with the acquisition of ID R&D
during the nine months ended June 30, 2021 compared to the same period in 2020.
Restructuring Costs
Restructuring costs consist of employee severance obligations and other related
costs. There were no restructuring costs in the nine months ended June 30, 2021.
Restructuring costs were negative $0.1 million in the nine months ended June 30,
2020 due to a reversal of costs accrued for the restructuring plan implemented
in June 2019.
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 $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 $0.5 million of
coupon interest incurred. There was no interest expense in the nine months ended
June 30, 2020.
Other Income, Net
Other income, net includes interest income net of amortization and net realized
gains or losses on our marketable securities portfolio, foreign currency
transactional gains or losses, and the change in fair value of our convertible
senior notes hedge and embedded conversion derivative. Other income, net was
consistent at $0.5 million of income in the nine months ended June 30, 2021 the
same period in 2020.
Income Tax Provision
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 3%. For the nine months
ended June 30, 2020, we recorded an income tax provision of $0.5 million, which
yielded an effective tax rate of 14%. The difference between the U.S. federal
statutory tax rate and our effective tax rate for the nine months ended June 30,
2021 and 2020 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.

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Liquidity and Capital Resources
On June 30, 2021, we had $215.5 million in cash and cash equivalents and
investments compared to $62.0 million on September 30, 2020, an increase of
$153.5 million, or 248%. The increase in cash and cash equivalents and
investments is primarily due to net proceeds from the issuance of the 2026 Notes
of $140.4 million (net of sale of warrants and purchase of convertible senior
notes hedge), net cash provided by operating activities of $25.0 million, and
proceeds from the issuance of our common stock, par value $0.001 ("Common
Stock") under our equity plan of $3.0 million. These increases were partially
offset by net cash paid in conjunction with the ID R&D Acquisition of $12.5
million, capital expenditures of $1.0 million and the payment of
acquisition-related contingent consideration of $0.8 million.
Cash Flows from Operating Activities
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.
Net cash provided by operating activities during the nine months ended June 30,
2020 was $17.4 million and resulted primarily from net income of $2.8 million
net of non-cash charges of $13.9 million, and favorable changes in operating
assets and liabilities of $0.7 million. The primary non-cash adjustments to
operating activities were stock-based compensation expense, amortization of
intangible assets, depreciation and amortization, and deferred taxes totaling
$7.1 million, $4.8 million, and $1.1 million and $0.7 million, respectively.
Cash Flows from Investing Activities
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.
Net cash used in investing activities was $15.5 million during the nine months
ended June 30, 2020, which consisted primarily of net purchases of investments
of $15.0 million and capital expenditures of $0.5 million.
Cash Flows from Financing Activities
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.
Net cash provided by financing activities was $0.3 million during the nine
months ended June 30, 2020, which consisted of net proceeds from the issuance of
equity plan Common Stock of $1.6 million and proceeds from other borrowing of
$0.2 million, partially offset by repurchases and retirements of Common Stock of
$1.0 million, payment of acquisition-related contingent consideration of $0.5
million, and principal payments on other borrowings of $0.1 million.
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
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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 August 5, 2021, 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 8. "Convertible Senior Notes,"
of the notes to consolidated financial statements included in Part I, Item 1 of
this Form 10-Q 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 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.
The Rights will expire on the earlier of (i) the close of business on October
22, 2021, (ii) the time at which the Rights are redeemed, and (iii) the time at
which the Rights are exchanged.
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
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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 will expire on June 30, 2022. The timing, price and
volume of repurchases will be based on market conditions, relevant securities
laws and other factors. The repurchases may be 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
program may be discontinued or amended at any time. No shares have been
purchased under the share repurchase program as of June 30, 2021.
CARES Act
On March 27, 2020, President Trump signed into law the "Coronavirus Aid, Relief
and Economic Security (CARES) Act." The CARES Act, among other things, includes
provisions relating to refundable payroll tax credits, deferment of employer
side social security payments, net operating loss carryback periods, alternative
minimum tax credit refunds, modifications to the net interest deduction
limitations and technical corrections to tax depreciation methods for qualified
improvement property. We continue to examine the impacts the CARES Act may have
on our business.
Other Liquidity Matters
On June 30, 2021, we had investments of $174.9 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, 2021, we had $138.3 million of our available-for-sale
securities classified as current and $36.6 million of our available-for-sale
securities classified as long-term. At September 30, 2020, we had $40.0 million
of our available-for-sale securities classified as current and $2.0 million of
our available-for-sale securities classified as long-term.
We had working capital of $167.6 million at June 30, 2021 compared to $59.8
million at September 30, 2020.
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 the next twelve months from the date
the financial statements are filed.
Off Balance Sheet Arrangements
The Company had no off balance sheet arrangements as of June 30, 2021.
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 the Form 10-K for the year ended September 30, 2020.
In February 2021, the Company issued the 2026 Notes. Concurrently with the
issuance of the 2026 Notes, the Company entered into the Notes Hedge and Warrant
Transactions. See Convertible Senior Notes Hedge and Embedded Conversion
Derivative in Note 1.
"Nature of Operations and Summary of Significant Accounting Policies" for our
new policy surrounding these items and Note 8. "Convertible Senior Notes" for
additional information related to these transactions. Other than the
aforementioned, there have been no other material changes to our critical
accounting policies and estimates from those disclosed in our Annual Report on
Form 10-K for the year ended September 30, 2020.

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