MITEK SYSTEMS INC (MITK)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Item 1A—“Risk Factors” or in other parts of this report. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors.”

Overview

Mitek Systems, Inc. (“Mitek,” the “Company,” “we,” “us,” and “our”) is a pioneer in mobile image capture and a global provider of solutions in the fraud prevention, digital identity verification, and cybersecurity markets. Our products address the increasing sophistication of fraud in areas such as new account openings, digital account access, and payments. Utilizing artificial intelligence, computer vision, and proprietary biometrics, our enterprise-grade verification tools protect organizations from escalating check fraud, ongoing account opening fraud, and new cyber threats such as deepfakes and voice clones.

Mitek’s Mobile Check Deposit product is trusted by consumers for its convenience and accuracy verifying checks for deposit, facilitating approximately 1.2 billion transactions annually. This solution powers secure, fast, and convenient deposit services for many organizations, enhancing consumer experience.

We serve over 7,900 financial services organizations, financial technology (“fintech”) brands, telecommunications companies, and marketplace brands globally. Our verification and fraud detection technology is embedded directly within mobile and web applications, providing seamless verification at every touchpoint in the customer lifecycle. By equipping banks, marketplaces, and fintech platforms with these tools, we help reduce the costs associated with fraud, impersonation, Know Your Customer (“KYC”) and anti-money laundering (“AML”) compliance. Additionally, our solutions improve the customer experience, help to ensure regulatory compliance, and lower operational costs.

Expanding Expertise Through Strategic Acquisitions

To strengthen our portfolio and enhance security across all stages of the digital customer journey, in 2021 Mitek acquired ID R&D, Inc., a provider of AI-driven voice and face biometrics and liveness detection technologies. This acquisition significantly expanded Mitek’s capabilities for identity verification to include passive multimodal authentication needed for multiple touch points in the digital lifecycle of a consumer. Our acquisition of HooYu Ltd. in 2022 further bolstered our identity verification leadership through both KYC capabilities and rapid orchestration capabilities, linking biometrics with real-time data aggregation across credit bureaus, sanctions lists, and law enforcement databases. These strategic integrations enable Mitek to provide a comprehensive, single-source identity verification and fraud prevention solution that adapts to the sophisticated fraud landscape of today.

Addressing a Rapidly Evolving Cybersecurity and Fraud Landscape

With generative AI’s rise, the financial sector faces unprecedented challenges, as deepfake and voice cloning technologies create new risks. To meet these threats, Mitek’s identity verification solutions now integrate new forms of manipulation detection to counter advanced, AI-driven fraud tactics by detecting digital manipulation, including artifacts from deepfake engines and signs of visible tampering. We continue to innovate with automated and layered security features to effectively address emerging risks.

Global Reach and Trusted Partnerships

Mitek’s identity verification solutions are marketed and delivered worldwide through a blend of direct sales teams in the North America and Europe, and through channel partnerships with leading financial services and identity verification providers. These partners embed Mitek solutions into their platforms, amplifying our ability to meet the needs of their customers and helping establish Mitek as the trusted backbone for identity security across high-risk industries.

Vision and Differentiation

Driven by a vision of providing trust and convenience through every digital interaction, Mitek enables organizations to protect themselves and their customers amid a challenging and rapidly evolving fraud and cyber landscape. With recognized expertise and a broad portfolio, from mobile deposit capture to advanced AI-enabled identity verification and authentication, Mitek remains committed to leading the way in securing high-risk sectors from checks to deepfakes. Trusted by banks the world over, fintech platforms and telecommunication providers, Mitek combines proven experience with innovative technology to secure the future of digital transactions, empowering organizations to stay ahead of fraud and cyber threats.

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Fiscal Year 2024 Highlights

•Revenues for the twelve months ended September 30, 2024 were $172.1 million, a decrease of less than 1% compared to revenues of $172.6 million for the twelve months ended September 30, 2023.

•Net income was $3.3 million, or $0.07 per diluted share, for the twelve months ended September 30, 2024, compared to net income of $8.0 million, or $0.17 per diluted share, for the twelve months ended September 30, 2023.

•Cash provided by operating activities was $31.7 million for the twelve months ended September 30, 2024, compared to $31.6 million for the twelve months ended September 30, 2023.

•During fiscal 2024 the total number of financial institutions licensing our technology continued to exceed 7,900.

•We added new patents to our portfolio during fiscal year 2024, bringing our total number of issued patents to 107 as of September 30, 2024. In addition, we had 20 patent applications outstanding as of September 30, 2024.

Market Opportunities, Challenges, & Risks

See Item 1: “Business” for details regarding additional market opportunities, challenges and risks.

Results of Operations

Comparison of the Twelve Months Ended September 30, 2024 and 2023

The following table summarizes certain aspects of our results of operations for the twelve months ended September 30, 2024 compared to the twelve months ended September 30, 2023 (in thousands, except percentages):

Revenue

Total revenue decreased $0.5 million, or less than 1%, to $172.1 million in 2024 compared to $172.6 million in 2023. Software and hardware revenue decreased $6.5 million, or 7%, to $81.9 million in 2024 compared to $88.4 million in 2023. This decrease is primarily due to an existing customer having entered into a significant multiyear Mobile Deposit® contract and the license revenue associated with the full contract term was recognized in 2023, which did not recur. The decrease was, to a lesser extent, driven by a decline in sales of our legacy identify verification software and hardware products and ID R&D biometrics software products in 2024. Services and other revenue increased $6.0 million, or 7%, to $90.2 million in 2024 compared to $84.2 million in 2023, primarily due to strong growth in transactional SaaS revenue from our CheckReader™, Check Fraud Defender, MiVIP, and Mobile Deposit® products in 2024 compared to 2023.

Cost of Revenue

Cost of revenue includes personnel costs related to billable services, professional 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.

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Cost of revenue increased $1.4 million, or 6%, to $24.4 million in 2024 compared to $23.0 million in 2023. The increase in cost of revenue is primarily due to a related increase in transactional SaaS revenue, partially offset by a decrease in costs due to a decline in sales of our legacy identify verification software and hardware products in 2024 compared to 2023.

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 customer success 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 $0.2 million, or 1%, to $40.8 million in 2024 compared to $40.6 million in 2023. The increase in selling and marketing expense is primarily due to higher personnel-related costs due to increased headcount and higher product promotion costs, partially offset by lower other costs in 2024 compared to 2023.

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 and product management personnel. Research and development expenses increased $5.6 million, or 20%, to $34.6 million in 2024 compared to $29.0 million in 2023. The increase in research and development expenses is primarily due to higher personnel-related costs as a result of compensation cost of living adjustments for employees that the Company moved to Spain from its offices in Russia and higher third-party contractor expenses, partially offset by lower other costs in 2024 compared to 2023.

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 $9.7 million, or 22%, to $53.0 million in 2024 compared to $43.3 million in 2023. The increase was primarily due to higher audit and tax fees, higher personnel-related costs, higher executive transition costs, and higher legal costs, partially offset by a decrease in third-party and professional fees in 2024 compared to 2023.

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 decreased $3.7 million, or 20%, to $15.3 million in 2024 compared to $19.0 million in 2023. The decrease in amortization and acquisition-related costs is primarily due to a larger increase in the fair value of acquisition-related contingent consideration associated with the ID R&D acquisition in 2023 which was paid in the first fiscal quarter of 2024 and a decrease in amortization expense of intangible assets from previous acquisitions that had been fully amortized in 2024 compared to 2023.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were $1.8 million in 2024 and related to expenses incurred to relocate employees and a restructuring that occurred in the third quarter of fiscal 2024. Restructuring costs were $2.1 million in 2023 and related to a restructuring plan that was initially implemented in June and November 2022.

Interest Expense

Interest expense includes the amortization of debt discount and issuance costs and coupon and special interest accrued on our 0.75% convertible senior notes due 2026 (the “2026 Notes”). Interest expense was $9.3 million in 2024 and consisted of $8.1 million of amortization of debt discount and issuance costs and $1.2 million of interest incurred. Interest expense was $9.1 million in 2023 and consisted of $7.5 million of amortization of debt discount and issuance costs and $1.6 million of interest incurred. As we amortize the debt discount and issuance costs using the effective interest method, amortization expense increases over the term of the agreement.

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 $2.3 million, to net income of $6.1 million in 2024 compared to net income of $3.8 million in 2023 primarily due to higher interest income net of amortization and higher foreign currency exchange transactional gains. The increase was partially offset by a favorable outcome in a lawsuit we filed against Instacart that was settled and collected in 2023.

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Income Tax Benefit (Provision)

The income tax benefit for 2024 was $4.2 million which yielded an effective tax rate of 461% compared to an income tax provision of $2.3 million which yielded an effective tax rate of 22% in 2023. The income tax benefit for 2024 is primarily due to pre-tax losses in the current year, research and development tax credits generated during the year and the release of a valuation allowance in certain of the foreign jurisdictions. Our effective tax rate for fiscal year 2024 was higher than the U.S. federal statutory rate of 21% due to the impact of research and development credits and the release of valuation allowances in certain of the foreign jurisdictions.

Twelve Months Ended September 30, 2023 and 2022

For a discussion of the twelve months ended September 30, 2023 compared to the twelve months ended September 30, 2022, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the twelve months ended September 30, 2023, filed with the SEC on March 19,2024, which is available free of charge on the SEC’s website at https://www.sec.gov and on our website at investors.miteksystems.com, on the “Investors Site” page under “Annual Reports.”

Liquidity and Capital Resources

Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. Our current sources of liquidity include available cash balances, investments, our revolving credit line, and proceeds from the issuance of the 2026 Notes. On September 30, 2024, we had $141.8 million in cash and cash equivalents and investments compared to $134.9 million on September 30, 2023, an increase of $8.6 million, or 6%. The increase in cash and cash equivalents and investments is primarily due to cash flows from operations of $31.7 million partially offset by repurchases of our common stock, par value $0.001 per share (“Common Stock”) of $24.2 million.

In summary, our cash flows from continuing operations were as follows (dollars in thousands):

Cash Flows from Operating Activities

Cash flows related to operating activities are dependent on net income, non-cash adjustments to net income and changes in working capital. Net cash provided by operating activities during fiscal 2024 was $31.7 million and resulted primarily from net income of $3.3 million, net non-cash charges of $27.0 million, and unfavorable changes in operating assets and liabilities of $1.4 million. The increase in cash provided by operating activities during fiscal 2024 compared to fiscal 2023 of $0.1 million was primarily due to an increase in cash resulting from a decrease in contract assets and increase in deferred revenue, offset by lower cash provided by net income and net non-cash charges in fiscal 2024.

Net cash provided by operating activities during fiscal 2023 was $31.6 million and resulted primarily from net income of $8.0 million, net non-cash charges of $32.6 million, and unfavorable changes in operating assets and liabilities of $9.0 million. The increase in cash provided by operating activities during fiscal 2023 compared to fiscal 2022 was primarily due to an increase in cash from collection of receivables of $23.8 million year over year due to improvements in our collections process, and an increase in other liabilities of $1.7 million. These increases were partially offset by a decrease in deferred revenue in fiscal 2023.

Cash Flows from Investing Activities

Net cash provided by investing activities was $28.7 million during fiscal 2024, which consisted primarily of capital expenditures of $1.4 million, and net sales and maturities of investments of $30.2 million. The increase in cash provided by investing activities during fiscal 2024 compared to fiscal 2023 was primarily due to an increase in net sales and maturities of investments.

Net cash used in investing activities was $6.8 million during fiscal 2023, which consisted primarily of net cash paid in connection with the HooYu Acquisition of $0.3 million and capital expenditures of $1.0 million, and net purchases of investments of $5.5 million. The decrease in cash used in investing activities during fiscal 2023 compared to fiscal 2022 was primarily due to a decrease in net sales and maturities of investments of $131.0 million partially offset by a decrease in cash paid for acquisitions, net of cash acquired of $122.4 million, related to the HooYu Acquisition.

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Cash Flows from Financing Activities

Net cash used in financing activities was $25.9 million during fiscal 2024, primarily due to repurchases and retirements of Common Stock of $24.2 million, the payment of $4.6 million of acquisition-related contingent consideration, and payment of revolving credit line issuance costs of $0.3 million, partially offset by $1.9 million of net proceeds from the issuance of Common Stock under our equity plans and $1.5 million of net proceeds from other borrowings. The decrease in cash used in financing activities during fiscal 2024 compared to fiscal 2023 was primarily due to the share repurchase program that was approved in May 2024 and the payment of acquisition-related contingent consideration.

Net cash provided by financing activities was $1.7 million during fiscal 2023, which primarily consisted of net proceeds from the issuance of Common Stock under the Mitek Systems, Inc. Amended and Restated 2020 Incentive Plan of $1.7 million. The increase in cash provided by financing activities during fiscal 2023 compared to fiscal 2022 was primarily due to the expiration of the share repurchase program in June 2022 of $15.2 million and the payment of acquisition-related consideration of $7.7 million in fiscal 2022.

0.75% Convertible Senior Notes due 2026

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 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. As of January 13, 2024 ("Date of Noncompliance"), the Company was not in compliance with certain of the covenants in the Indenture as a result of the Company not timely filing its Form 10-K for the fiscal year ended September 30, 2023 (“Form 10-K”) with the SEC. As a result of not being in compliance, the 2026 Notes began to accrue additional special interest of 0.25% of the outstanding principal of the 2026 Notes for the 90 days after the Date of Noncompliance and 0.50% of the outstanding principal of the 2026 Notes for the 91st through 180th day after the Date of Noncompliance. The Company subsequently did not timely file its Form 10-Q for the quarter ended December 31, 2023 (the “Q1 Form 10-Q”) with the SEC. The Company then filed its Form 10-K with the SEC on March 19, 2024 and its Q1 Form 10-Q with the SEC on April 15, 2024. As of September 30, 2024, the Company was in compliance with the covenants in 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 2026 Notes will mature on February 1, 2026, unless earlier redeemed, repurchased or converted. The 2026 Notes 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 ended 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

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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 sell 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 December 16, 2024, 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 10. “Convertible Senior Notes” of the notes to the consolidated financial statements included in this Form 10-K for more information relating to the Notes Hedge and Warrant Transactions.

Revolving Credit Line

On February 13, 2024, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (the “Bank”) that provides for a revolving line of credit whereby the Company may borrow up to $35.0 million (the “Revolving Line”) with an additional $15.0 million to be advanced under the Revolving Line at the sole discretion of the Bank. The Revolving Line is secured on a first priority basis by the Company’s assets. In connection with the Credit Agreement, the Company incurred issuance costs of $0.3 million which are amortized to interest expense using the straight-line method over the term of the Credit Agreement.

The Revolving Line terminates, and any outstanding principal amount of all advances made thereunder, and any accrued and unpaid interest thereon, become immediately due and payable on the earlier of (a) the three-year anniversary of the Closing Date and (b) the date that is within 90 days of the maturity date of the 2026 Notes if such notes are outstanding as of such date.

Borrowings under the Credit Agreement generally bear interest at a variable rate equal to (a) term SOFR plus a specified margin or (b) WSJ prime plus a specified margin, in each case which will be adjusted based on the Company’s net leverage ratio at the time of borrowing. The Company must also pay the Bank (i) a commitment fee of $87,500 and (ii) an “Unused Revolving Line Facility Fee” of 0.25% per annum of the average unused portion of the Revolving Line.

The Credit Agreement contains representations, warranties, and negative and affirmative covenants customary for transactions of this type. These include covenants limiting the ability of the Company, and any of their subsidiaries, subject to certain exceptions and baskets, to, among other things, (i) incur indebtedness, (ii) incur liens on their assets, (iii) enter into any merger or consolidation with, or acquire all or substantially all of the equity or property of, another person, (iv) dispose of any of their business or property, (v) make or permit any payment on subordinated debt, or (vi) pay any dividend, make any other distribution, or redeem any equity.

The Credit Agreement contains customary events of default and also provides that an event of default includes any default resulting in a right by third parties to accelerate maturity of indebtedness in excess of $0.5 million. If any event of default occurs and is not cured within applicable grace periods set forth in the Credit Agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated. In addition, the Company may be required to deposit cash with the Bank in an amount equal to 115% of any undrawn letters of credit denominated in a foreign currency.

The Credit Agreement requires the Company to maintain a net leverage ratio of no more than 2.25 to 1.00 and if the Company engages in a share repurchase program, the net leverage ratio may not exceed 2.00 to 1.00. As disclosed in Note 7, on May 13, 2024, the Board authorized and approved a share repurchase program for up to $50.0 million of the currently outstanding shares of Common Stock. As of September 30, 2024, the Company’s net leverage ratio was 1.80 to 1.00 and as such, the Company was in compliance with the net leverage ratio covenant of the Credit Agreement. There were no outstanding borrowings under the Credit Agreement as of September 30, 2024.

Other Borrowings

The Company has certain loan agreements with Spanish government agencies. These agreements have repayment periods of 5 to 12 years and bear no interest. As of September 30, 2024, $2.7 million was outstanding under these agreements and $0.3 million and $2.4 million is recorded in other current liabilities and other non-current liabilities, respectively, in the consolidated balance sheets. As of September 30, 2023, $1.2 million was outstanding under these agreements and $0.2 million and $1.1 million is recorded in other current liabilities and other non-current liabilities, respectively, in the consolidated balance sheets.

Share Repurchase Program

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On May 13, 2024, the Board authorized and approved a share repurchase program for up to $50 million of the currently outstanding shares of our Common Stock. The share repurchase program was effective as of May 16, 2024 and will expire on May 16, 2026. The timing, price and actual number of shares of Common Stock repurchased will depend on a variety of factors including price, market conditions and corporate and regulatory requirements. The repurchases may be made from time to time (i) through open market purchases, block trades, privately negotiated transactions, one or more trading plans adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or any combination of the foregoing, in each case in accordance with applicable laws, rules and regulations or (ii) in such other manner as will comply with the provisions of the Exchange Act. The share repurchase program does not require the Company to repurchase shares of its Common Stock and it may be discontinued, suspended or amended at any time.

The Company made purchases of $24.2 million, or approximately 2,247,504 shares, during the twelve months ended September 30, 2024 at an average price of $10.78 per share and subsequently retired the shares.

During the period beginning October 1, 2024 through the date of this filing, the Company made purchases of $3.3 million, or 363,378 shares at an average price of $9.05 per share.

Lease Obligations

Our principal executive offices are located in approximately 7,500 square feet of office space in San Diego, California and the term of the lease continues through August 13, 2031. The average annual base rent under this lease is approximately $0.3 million per year. In connection with this lease, we received tenant improvement allowances totaling approximately $0.1 million. These lease incentives are being amortized as a reduction of rent expense over the term of the lease.

Our other offices are located in Paris, France; Amsterdam, The Netherlands; New York, New York; Barcelona, Spain; Leeds, United Kingdom; and London, United Kingdom. Other than the lease for our office space in San Diego, California, we do not believe that the leases for our offices are material lease obligations.

Other Liquidity Matters

On September 30, 2024, we had investments of $48.3 million, designated as available-for-sale debt securities, which consisted of U.S. Treasury notes, asset-backed securities, foreign government and agency securities, and corporate issuances, carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of tax, and reported as a separate component of stockholders’ equity. All securities for which maturity or sale is expected within one year are classified as “current” on the consolidated balance sheets. All other securities are classified as “long-term” on the consolidated balance sheets. At September 30, 2024, we had $36.9 million of our available-for-sale securities classified as current and $11.4 million of our available-for-sale securities classified as long-term. At September 30, 2023, we had $74.7 million of our available-for-sale securities classified as current and $1.3 million of our available-for-sale securities classified as long-term.

We had working capital of $142.9 million at September 30, 2024 compared to $138.5 million at September 30, 2023. We do not have any other material cash requirements other than those related to leases as described in Note 12. “Leases” of the notes to the consolidated financial statements included in this Form 10-K. Based on our current operating plan, we believe the current cash and cash equivalent balance and cash expected to be generated from operations will be adequate to satisfy our working capital needs for at least the next twelve months from the date these consolidated financial statements are filed and the foreseeable future.

Critical Accounting Estimates

Our discussion and analysis of our financial conditions and results of operations are based on our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of the financial statements requires us to make estimates and judgements 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. 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. We believe the following critical accounting estimates affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We enter into contractual arrangements with integrators, resellers, and directly with our customers that may include licensing of our software products, product support and maintenance services, SaaS services, consulting services, or various combinations thereof, including the sale of such products or services separately. Our accounting policies regarding the recognition of revenue for these contractual arrangements are fully described in Note 2 of the accompanying notes to our consolidated financial statements included in this Form 10-K.

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Our SaaS offerings give customers the option to be charged upon their incurred usage in arrears (“Pay as You Go”) or to commit to a minimum spend over their contracted period, with the ability to purchase unlimited additional transactions above the minimum during the contract term. For contracts which include a minimum commitment, we are standing ready to provide as many transactions as desired by the customer during the contract term and revenue is 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 historical usage, expected volume, and other factors to project out for the remainder of the contract term. The estimated usage-based revenues are constrained to the amount we expect to be entitled to receive in exchange for providing access to our platform.

We include any fixed charges within our contracts as part of the total transaction price. To the extent that variable consideration is not constrained, we include an estimate of the variable amount, as appropriate, within the total transaction price and update our assumptions over the duration of the contract. We may constrain the estimated transaction price in the event of a high degree of uncertainty as to the final consideration amount owed because of an extended length of time over which the fees may be adjusted. The transaction price, including any discounts, is allocated between separate goods and services in a multi-element arrangement based on their relative standalone selling prices. For items that are not sold separately, we estimate the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount we expect to receive in exchange for the related good or service.

Fair Value of Equity Instruments

The valuation of certain items, including compensation expense related to equity awards granted, involves significant estimates based on underlying assumptions made by management. The valuation of stock options is based upon a Black-Scholes valuation model, which involves estimates of stock volatility, expected life of the instruments and other assumptions. The valuation of performance options, Senior Executive Long Term Incentive Restricted Stock Units, and similar awards are based upon the Monte-Carlo simulation, which involves estimates of our stock price, expected volatility, and the probability of reaching the performance targets.

Accounting for Income Taxes

We estimate income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences result in deferred tax assets and liabilities, which are reflected in our balance sheets. We then assess the likelihood that deferred tax assets will be realized. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. When a valuation allowance is established or increased, we record a corresponding tax expense in our statements of operations. We review the need for a valuation allowance each interim period to reflect uncertainties about whether we will be able to utilize deferred tax assets before they expire. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that has more than a 50% chance of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis. The evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits, and effective settlement of audit issues.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Item 1A—“Risk Factors” or in other parts of this report. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors.”

Overview

Mitek Systems, Inc. (“Mitek,” the “Company,” “we,” “us,” and “our”) 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 7,900 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 meet Know Your Customer (“KYC”) and Anti-Money Laundering (“AML”) regulatory compliance. The Company’s 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 numerous stages of the customer lifecycle, allowing them to reduce risk and meet regulatory requirements. The Company’s 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.

In May of 2021, Mitek acquired ID R&D, Inc. (“ID R&D” and such acquisition, the “ID R&D Acquisition”), an award-winning provider of AI-based voice and face biometrics and liveness detection. ID R&D delivers innovative, biometric capabilities that raise the bar on usability and performance. The ID R&D Acquisition helps simplify and secure the entire transaction lifecycle for both businesses and consumers, provides businesses and financial institutions with access to one authentication solution to deploy throughout the entire transaction cycle, and can provide consumers with a simple, intuitive approach to fighting fraud.

In March of 2022, Mitek acquired HooYu Ltd. (“HooYu”), a leading KYC technology provider in the United Kingdom. Such technology helps to ensure businesses know the true identity of their customers by linking biometric verification with real-time data aggregation across many different sources, including credit bureaus, international sanctions lists, local law-enforcement, and others.

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 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, typically provisioning Mitek services through their respective platforms.

Fiscal Year 2023 Highlights

•Revenues for the twelve months ended September 30, 2023 were $172.6 million, an increase of 19% compared to revenues of $144.8 million for the twelve months ended September 30, 2022.

•Net income was $8.0 million, or $0.17 per diluted share, for the twelve months ended September 30, 2023, compared to a net income of $3.7 million, or $0.08 per diluted share, for the twelve months ended September 30, 2022.

•Cash provided by operating activities was $31.6 million for the twelve months ended September 30, 2023, compared to $21.1 million for the twelve months ended September 30, 2022.

•During fiscal 2023 the total number of financial institutions licensing our technology continued to exceed 7,900.

•We added new patents to our portfolio during fiscal year 2023, bringing our total number of issued patents to 100 as of September 30, 2023. In addition, we had 20 patent applications outstanding as of September 30, 2023.

Acquisition of HooYu Ltd

On March 23, 2022, the Company completed the acquisition of HooYu (the “HooYu Acquisition”) pursuant to the Purchase Agreement (the “Purchase Agreement”) dated March 23, 2022, by and among the Company and certain selling parties identified in the Purchase Agreement. Pursuant to the Purchase Agreement, the Company, among other things, acquired 100% of the outstanding share capital of 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 (the “Closing Consideration”), as such amount may be adjusted for transaction expenses and indebtedness.

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Market Opportunities, Challenges, & Risks

See Item 1: “Business” for details regarding additional market opportunities, challenges and risks.

Results of Operations

Comparison of the Twelve Months Ended September 30, 2023 and 2022

The following table summarizes certain aspects of our results of operations for the twelve months ended September 30, 2023 compared to the twelve months ended September 30, 2022 (in thousands, except percentages):

Revenue

Total revenue increased $27.7 million, or 19%, to $172.6 million in 2023 compared to $144.8 million in 2022. Software and hardware revenue increased $15.4 million, or 21%, to $88.4 million in 2023 compared to $72.9 million in 2022. This increase is primarily due to an increase in sales of our Mobile Deposit® and IDLive® software products of $17.3 million. The increase in sales of our Mobile Deposit® product is primarily the result of an existing customer having entered into a significant multiyear Mobile Deposit® contract and the license revenue associated with the full contract term being recognized in the first quarter of fiscal 2023. The increase was partially offset by a decrease in revenue from our CheckReader™ and legacy identify verification software and hardware products of $1.8 million. Services and other revenue increased $12.3 million, or 17%, to $84.2 million in 2023 compared to $71.9 million in 2022. This increase is primarily due to strong growth in SaaS revenue as a result of the HooYu Acquisition, and to a lesser extent an increase in maintenance revenue associated with Mobile Deposit® software sales and transactional revenue in 2023 compared to 2022.

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 $2.9 million, or 15%, to $23.0 million in 2023 compared to $20.0 million in 2022. As a percentage of revenue, cost of revenue decreased to 13% in 2023 from 14% in 2022. The increase in cost of revenue is primarily due to an increase in variable personnel, hosting, and royalty costs associated with the HooYu Acquisition.

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 $1.7 million, or 4%, to $40.6 million in 2023 compared to $38.8 million in 2022. As a percentage of revenue, selling and marketing expenses decreased to 24% in 2023 from 27% in 2022. The increase in selling and marketing expense is primarily due to higher product promotion and other costs of $1.2 million, higher travel and related expenses of

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$0.4 million, and higher personnel-related costs of $0.1 million in 2023 compared to 2022.

Research and Development Expenses

Research and development expenses include payroll, employee benefits, stock-based compensation, third-party contractor expenses, and other headcount-related costs associated with software engineering and mobile image capture science. Research and development expenses decreased $1.2 million, or less than 1%, to $29.0 million in 2023 compared to $30.2 million in 2022. As a percentage of revenue, research and development expenses decreased to 17% in 2023 from 21% in 2022. The decrease in research and development expenses is primarily due to lower personnel-related costs of $2.2 million, partially offset by higher costs associated with third-party contractors of $0.6 million and higher travel and related expenses of $0.4 million in 2023 compared to 2022.

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 $16.7 million, or 63%, to $43.3 million in 2023 compared to $26.6 million in 2022. As a percentage of revenue, general and administrative expenses increased to 25% in 2023 from 18% in 2022. The increase in general and administrative expenses is primarily due to higher third-party and professional fees of $7.3 million, audit and accounting fees of $5.9 million, software and IT costs of $1.8 million, legal costs of $0.8 million, executive transition costs of $0.7 million, and allowance for uncollectible receivables of $0.4 million in 2023 compared to 2022. The overall increase in general and administrative expenses was partially offset by decreased personnel-related costs of $0.2 million in 2023 compared to 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 $3.8 million, or 26%, to $19.0 million in 2023 compared to $15.2 million in 2022. As a percentage of revenue, amortization and acquisition-related costs were consistent at 11% in 2023 and 2022. The increase in amortization and acquisition-related costs is primarily due to amortization of intangibles associated with the HooYu Acquisition of $5.3 million and an increase in the fair value of the contingent consideration liability associated with the ID R&D Acquisition of $3.4 million in 2023 compared to 2022. These increases were partially offset by a decrease in expenses associated with the HooYu Acquisition of $3.0 million and a decrease in amortization expense of intangibles related to previous acquisitions that were fully amortized of $1.9 million in 2023 compared to 2022.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. In order to streamline the organization and focus resources going forward, we undertook strategic restructurings in November and June of 2022, which included reductions in our workforce. Restructuring costs incurred in were $2.1 million and $1.8 million in 2023 and 2022, respectively.

Interest Expense

Interest expense includes the amortization of debt discount and issuance costs and coupon and special interest accrued on our 0.75% convertible senior notes due 2026 (the “2026 Notes”). Interest expense was $9.1 million in 2023 and consisted of $7.6 million of amortization of debt discount and issuance costs and $1.6 million of interest incurred. Interest expense was $8.2 million in 2022 and consisted of $7.0 million of amortization of debt discount and issuance costs and $1.2 million of 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 $4.2 million, to net income of $3.8 million in 2023 compared to net expense of $0.4 million in 2022, primarily due to higher interest income net of amortization of $2.5 million, a favorable outcome in the Instacart Lawsuit (as defined below) of $1.4 million, and higher realized gains on the sale of marketable securities of $0.3 million in 2023 compared to 2022.

Income Tax Benefit (Provision)

The income tax provision for 2023 was $2.3 million which yielded an effective tax rate of 22% compared to an income tax benefit of $0.1 million which yielded an effective tax rate of negative 3% in 2022. The income tax provision for 2023 is primarily due to our positive net income for the year. Our effective tax rate for fiscal year 2023 was higher than the U.S. federal statutory rate of 21% due to the impact of non deductible expenses and of foreign and state taxes on our tax provision.

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Results of Operations

Comparison of the Twelve Months Ended September 30, 2022 and 2021

The following table summarizes certain aspects of our results of operations for the twelve months ended September 30, 2022 compared to the twelve months ended September 30, 2021 (in thousands, except percentages):

Revenue

Total revenue increased $25.0 million, or 21%, to $144.8 million in 2022 compared to $119.8 million in 2021. Software and hardware revenue increased $12.9 million, or 21%, to $72.9 million in 2022 compared to $60.1 million in 2021. This increase is primarily due to an increase in sales of our Mobile Deposit®, CheckReader™, and IDLive® software products. The increase was partially offset by a decrease in revenue from our ID_CLOUD™ software and hardware products. Services and other revenue increased $12.1 million, or 20%, to $71.9 million in 2022 compared to $59.7 million in 2021. This increase is primarily due to strong growth in Mobile Verify® transactional SaaS revenue and SaaS revenue as a result of the HooYu Acquisition, as well as an increase in maintenance revenue associated with Mobile Deposit® software sales and hosted mobile deposit transactional revenue in 2022 compared to 2021.

Cost of Revenue

Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, and hosting costs. Cost of revenue increased $5.5 million, or 38%, to $20.0 million in 2022 compared to $14.5 million in 2021. 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 2022 compared to 2021 and the HooYu Acquisition. The increase was partially offset by decreased costs of our identity verification hardware products due to lower 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 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 $6.3 million, or 20%, to $38.8 million in 2022 compared to $32.5 million in 2021. As a percentage of revenue, selling and marketing expenses were consistent at 27% in 2022 and in 2021. The increase in selling and marketing expense is primarily due to higher personnel-related costs resulting from our increased headcount of $4.0 million, higher product promotion costs of $1.7 million, and higher travel and related expenses of $0.6 million in 2022 compared to 2021.

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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 image capture science. Research and development expenses increased $2.2 million, or 8%, to $30.2 million in 2022 compared to $28.0 million in 2021. As a percentage of revenue, research and development expenses decreased to 21% in 2022 from 23% in 2021. The increase in research and development expenses is primarily due to higher personnel-related costs resulting from our increased headcount of $3.6 million and higher travel and related expenses of $0.2 million, partially offset by lower third-party contractor and other expenses of $1.6 million in 2022 compared to 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 $4.1 million, or 18%, to $26.6 million in 2022 compared to $22.5 million in 2021. As a percentage of revenue, general and administrative expenses decreased to 18% in 2022 from 19% in 2021. The increase in general and administrative expenses is primarily due to higher third-party and professional fees of $2.1 million, higher personnel-related costs resulting from our increased headcount of $1.4 million, higher litigation expenses of $0.5 million, and higher travel and related expenses of $0.3 million in 2022 compared to 2021.

Amortization and Acquisition-Related Costs

Amortization and acquisition-related costs include amortization of intangible assets, expenses recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs increased $6.2 million, or 70%, to $15.2 million in 2022 compared to $9.0 million in 2021. As a percentage of revenue, amortization and acquisition-related costs increased to 11% in 2022 from 7% in 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 $7.1 million and expenses associated with the HooYu Acquisition of $2.9 million in 2022 compared to 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 $2.4 million compared to an increase in 2021, a decrease in amortization expense of intangibles related to previous acquisitions that were fully amortized of $1.0 million, and a decrease in acquisition-related expense from the ID R&D Acquisition of $0.3 million in 2022 compared to 2021.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. In order to streamline the organization and focus resources going forward, we undertook a strategic restructuring in June 2022, which included a reduction in our workforce. Restructuring costs incurred in 2022 were $1.8 million. There were no restructuring costs 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 $8.2 million in 2022 and consisted of $7.0 million of amortization of debt discount and issuance costs and $1.2 million of coupon interest incurred. Interest expense was $5.1 million in 2021 and consisted of $4.4 million of amortization of debt discount and issuance costs and $0.8 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, foreign currency transactional gains or losses, and the change in fair value of our convertible senior notes hedge and embedded conversion derivative. Other income (expense), net decreased $1.0 million, to net expense of $0.4 million in 2022 compared to net income of $0.7 million in 2021, primarily due to higher foreign currency exchange transaction losses, higher realized losses on the sale of marketable securities, partially offset by higher interest income net of amortization in 2022 compared to 2021.

Income Tax Benefit (Provision)

The income tax benefit for 2022 was $0.1 million which yielded an effective tax rate of negative 3% compared to an income tax provision of $0.8 million which yielded an effective tax rate of 9% in 2021. Our effective tax rate for fiscal year 2022 was lower than the U.S. federal statutory rate of 21% due to excess tax benefits resulting from the exercise of stock options and vesting of restricted stock awards, 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 our tax provision.

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Liquidity and Capital Resources

Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. Our current sources of liquidity include available cash balances and proceeds from the issuance of the 2026 Notes. On September 30, 2023, we had $134.9 million in cash and cash equivalents and investments compared to $101.0 million on September 30, 2022, an increase of $33.9 million, or 34%. The increase in cash and cash equivalents and investments is primarily due to cash flows from operations of $31.6 million and net proceeds from the issuance of our common stock, par value $0.001 per share (“Common Stock”) under the Mitek Systems, Inc. Amended and Restated 2020 Incentive Plan (the “2020 Plan”) of $1.7 million.

In summary, our cash flows from continuing operations were as follows (dollars in thousands):

Cash Flows from Operating Activities

Cash flows related to operating activities are dependent on net income, non-cash adjustments to net income and changes in working capital. Net cash provided by operating activities during fiscal 2023 was $31.6 million and resulted primarily from net income of $8.0 million, net non-cash charges of $32.6 million, and unfavorable changes in operating assets and liabilities of $9.0 million. The increase in cash provided by operating activities during fiscal 2023 compared to fiscal 2022 was primarily due to an increase in cash from collection of receivables of $23.3 million year over year due to improvements in our collections process, and an increase in other liabilities of $1.7 million. These increases were partially offset by a decrease in deferred revenue in fiscal 2023.

Net cash provided by operating activities during fiscal 2022 was $21.1 million and resulted primarily from net income of $3.7 million, net non-cash charges of $26.7 million, and unfavorable changes in operating assets and liabilities of $9.3 million. Net cash provided by operating activities during fiscal 2021 was $37.3 million and resulted primarily from net income of $8.0 million, net non-cash charges of $27.3 million, and favorable changes in operating assets and liabilities of $2.1 million. The decrease in cash provided by operating activities during fiscal 2022 compared to fiscal 2021 was primarily due to an increase in accounts receivable of $18.2 million, partially offset by a decrease in accrued payroll and related taxes of $1.4 million and increases in restructuring expenses of $1.0 million and the amortization of investment premiums and other of $0.4 million.

Cash Flows from Investing Activities

Net cash used in investing activities was $6.8 million during fiscal 2023, which consisted primarily of net cash paid in connection with the HooYu Acquisition of $0.3 million and capital expenditures of $1.0 million, and net purchases of investments of $5.5 million. The decrease in cash used in investing activities during fiscal 2023 compared to fiscal 2022 was primarily due to a decrease in net sales and maturities of investments of $131.0 million partially offset by a decrease in cash paid for acquisitions, net of cash acquired of $122.4 million, related to the HooYu Acquisition.

Net cash provided by investing activities was $1.7 million during fiscal 2022, which consisted primarily of net cash paid in connection with the HooYu Acquisition of $122.7 million and capital expenditures of $1.1 million, offset by net sales and maturities of investments of $125.5 million. Net cash used in investing activities was $170.5 million during fiscal 2021, which consisted primarily of net purchases of investments of $156.6 million, net cash paid in connection with the ID R&D Acquisition of $12.5 million, and capital expenditures of $1.4 million. The decrease in cash used in investing activities during fiscal 2022 compared to fiscal 2021 was primarily due to an increase in net sales and maturities of investments of $282.1 million partially offset by an increase in cash paid for acquisitions, net of cash acquired of $110.1 million.

Cash Flows from Financing Activities

Net cash provided by financing activities was $1.7 million during fiscal 2023, which primarily consisted of net proceeds from the issuance of Common Stock under the 2020 Plan of $1.7 million. The increase in cash provided by financing activities during fiscal 2023 compared to fiscal 2022 was primarily due to the expiration of the share repurchase program in June 2022 of $15.2 million and the payment of acquisition-related consideration of $7.7 million in fiscal 2022.

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Net cash used in financing activities was $21.1 million during fiscal 2022, which consisted of $15.2 million in repurchases and retirements of our Common Stock and $7.7 million in payments of acquisition-related contingent consideration, partially offset by net proceeds from the issuance of Common Stock under the 2020 Plan of $1.7 million. Net cash provided by financing activities was $143.7 million during fiscal 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 $4.0 million and net proceeds from other borrowings of $0.2 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 repurchases and retirements of Common Stock of $0.2 million. The increase in cash used in financing activities during fiscal 2022 compared to fiscal 2021 was primarily due to the net proceeds from the issuance of the 2026 Notes in fiscal 2021 of $149.7 million and repurchases and retirements of our Common Stock of $15.2 million during fiscal 2022.

0.75% Convertible Senior Notes due 2026

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 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. As of January 13, 2023 ("Date of Noncompliance"), the Company was not in compliance with certain of the covenants in the Indenture as a result of the Company not timely filing its Form 10-K for the fiscal year ended September 30, 2022 (“Form 10-K”) and the Form 10-Q for the quarter ended December 31, 2022 (“Q1 Form 10-Q”) with the SEC. As a result of not being in compliance, the 2026 Notes began to accrue additional special interest of 0.25% of the outstanding principal of the 2026 Notes for the 90 days after the Date of Noncompliance and 0.50% of the outstanding principal of the 2026 Notes for the 91st through 180th day after the Date of Noncompliance. The Company subsequently did not timely file its Form 10-Q for the quarter ended March 31, 2023 (“Q2 Form 10-Q”) and its Form 10-Q for the quarter ended June 30, 2023 (“Q3 Form 10-Q”). The Company then filed its Form 10-K with the SEC on July 31, 2023, its Q1 Form 10-Q with the SEC on September 6, 2023, and its Q2 Form 10-Q with the SEC on September 29, 2023. As a result, the Company was no longer required to accrue additional special interest. As of February 15, 2024, the Company was not in compliance with certain covenants in the Indenture as a result of not timely filing its Form 10-Q for the quarter ended December 31, 2023 with the SEC.

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 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

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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 March 19, 2024, 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 the consolidated financial statements included in this Form 10-K for more information relating to the Notes Hedge and Warrant Transactions.

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 was completed during the second quarter of fiscal 2022 and as such the Company made no purchase during the twelve months ended September 30, 2023. The Company made purchases of $14.8 million, or approximately 886,204 shares, during twelve months ended September 30, 2022 at an average price of $16.73 per share and subsequently retired the shares. The share repurchase program expired on June 30, 2022 and as such no purchases were made after this date. 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.

Lease Obligations

Our principal executive offices, as well as our research and development facility, are located in approximately 29,000 square feet of office space in San Diego, California and the term of the lease continues through June 30, 2024. The average annual base rent under this lease is approximately $1.2 million per year. In connection with this lease, we received tenant improvement allowances totaling approximately $1.0 million. These lease incentives are being amortized as a reduction of rent expense over the term of the lease.

Our other offices are located in Paris, France; Amsterdam, The Netherlands; New York, New York; Barcelona, Spain; and London, United Kingdom. Other than the lease for our office space in San Diego, California, we do not believe that the leases for our offices are material lease obligations.

Other Liquidity Matters

On September 30, 2023, we had investments of $76.0 million, designated as available-for-sale debt securities, which consisted of U.S. Treasury notes, asset-backed securities, foreign government and agency securities, and corporate issuances, carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of tax, and reported as a separate component of stockholders’ equity. All securities for which maturity or sale is expected within one year are classified as “current” on the consolidated balance sheets. All other securities are classified as “long-term” on the consolidated balance sheets. At September 30, 2023, we had $74.7 million of our available-for-sale securities classified as current and $1.3 million of our available-for-sale securities classified as long-term. At September 30, 2022, we had $58.3 million of our available-for-sale securities classified as current and $10.6 million of our available-for-sale securities classified as long-term.

We had working capital of $138.5 million at September 30, 2023 compared to $89.4 million at September 30, 2022. We do not have any other material cash requirements other than those related to leases as described in Note 10. “Commitments and Contingencies” of the notes to the consolidated financial statements included in this Form 10-K. Based on our current operating plan, we believe the current cash and cash equivalent balance and cash expected to be generated from operations will be adequate to satisfy our working capital needs for at least the next twelve months from the date these consolidated financial statements are filed.

Critical Accounting Estimates

Our discussion and analysis of our financial conditions and results of operations are based on our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of the financial statements requires us to make estimates and judgements 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

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on-going basis. 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. We believe the following critical accounting estimates affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We enter into contractual arrangements with integrators, resellers, and directly with our customers that may include licensing of our software products, product support and maintenance services, SaaS services, consulting services, or various combinations thereof, including the sale of such products or services separately. Our accounting policies regarding the recognition of revenue for these contractual arrangements are fully described in Note 2 of the accompanying notes to our consolidated financial statements included in this Form 10-K.

Our SaaS offerings give customers the option to be charged upon their incurred usage in arrears (“Pay as You Go”) or to commit to a minimum spend over their contracted period, with the ability to purchase unlimited additional transactions above the minimum during the contract term. For contracts which include a minimum commitment, we are standing ready to provide as many transactions as desired by the customer during the contract term and revenue is 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 historical usage, expected volume, and other factors to project out for the remainder of the contract term. The estimated usage-based revenues are constrained to the amount we expect to be entitled to receive in exchange for providing access to our platform.

We include any fixed charges within our contracts as part of the total transaction price. To the extent that variable consideration is not constrained, we include an estimate of the variable amount, as appropriate, within the total transaction price and update our assumptions over the duration of the contract. We may constrain the estimated transaction price in the event of a high degree of uncertainty as to the final consideration amount owed because of an extended length of time over which the fees may be adjusted. The transaction price, including any discounts, is allocated between separate goods and services in a multi-element arrangement based on their relative standalone selling prices. For items that are not sold separately, we estimate the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount we expect to receive in exchange for the related good or service.

Fair Value of Equity Instruments

The valuation of certain items, including compensation expense related to equity awards granted, involves significant estimates based on underlying assumptions made by management. The valuation of stock options is based upon a Black-Scholes valuation model, which involves estimates of stock volatility, expected life of the instruments and other assumptions. The valuation of performance options, Senior Executive Long Term Incentive Restricted Stock Units, and similar awards are based upon the Monte-Carlo simulation, which involves estimates of our stock price, expected volatility, and the probability of reaching the performance targets.

Accounting for Income Taxes

We estimate income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences result in deferred tax assets and liabilities, which are reflected in our balance sheets. We then assess the likelihood that deferred tax assets will be realized. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. When a valuation allowance is established or increased, we record a corresponding tax expense in our statements of operations. We review the need for a valuation allowance each interim period to reflect uncertainties about whether we will be able to utilize deferred tax assets before they expire. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that has more than a 50% chance of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis. The evaluations are based upon a number of factors, including

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changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits, and effective settlement of audit issues.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Item 1A—“Risk Factors” or in other parts of this report. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors.”

Overview

Mitek Systems, Inc. (“Mitek,” the “Company,” “we,” “us,” and “our”) is a leading innovator of mobile image capture and digital identity verification solutions. We are a software development company with expertise in artificial intelligence and machine learning. We currently serve more than 7,800 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 (“AML”) 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.

In May of 2021, Mitek acquired ID R&D, Inc. (“ID R&D” and such acquisition, the “ID R&D Acquisition”), an award-winning provider of AI-based voice and face biometrics and liveness detection. ID R&D delivers innovative, biometric capabilities that raise the bar on usability and performance. The ID R&D Acquisition helps simplify and secure the entire transaction lifecycle for both businesses and consumers. It provides businesses and financial institutions with access to one authentication solution to deploy throughout the entire transaction cycle, and can provide consumers with a simple, intuitive approach to fighting fraud.

In March of 2022, Mitek acquired HooYu Ltd. (“HooYu”), a leading KYC technology provider in the United Kingdom. Such technology helps to ensure businesses know the true identity of their customers by linking biometric verification with real-time data aggregation across many different sources, including credit bureaus, international sanctions lists, local law-enforcement, and others.

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 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, typically provisioning Mitek’s services through their respective platforms.

Fiscal Year 2022 Highlights

•Revenues for the twelve months ended September 30, 2022 were $143.9 million, an increase of 20% compared to revenues of $119.8 million for the twelve months ended September 30, 2021.

•Net income was $3.0 million, or $0.07 per diluted share, for the twelve months ended September 30, 2022, compared to a net income of $8.0 million, or $0.18 per diluted share, for the twelve months ended September 30, 2021.

•Cash provided by operating activities was $26.4 million for the twelve months ended September 30, 2022, compared to $37.3 million for the twelve months ended September 30, 2021.

•During fiscal 2022 the total number of financial institutions licensing our technology continued to exceed 7,800.

•We added new patents to our portfolio during fiscal year 2022, bringing our total number of issued patents to 80 as of September 30, 2022. In addition, we had 16 patent applications outstanding as of September 30, 2022.

Acquisition of HooYu Ltd

On March 23, 2022, the Company completed the acquisition of HooYu (the “HooYu Acquisition”) pursuant to the Purchase Agreement (the “Purchase Agreement”) dated March 23, 2022, by and among the Company and certain selling parties identified in the Purchase Agreement. Pursuant to the Purchase Agreement, the Company, among other things, acquired 100% of the outstanding share capital of 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 (the “Closing Consideration”), as such amount may be adjusted for transaction expenses and indebtedness.

Market Opportunities, Challenges, & Risks

See Item 1: “Business” for details regarding additional market opportunities, challenges and risks.

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Results of Operations

Comparison of the Twelve Months Ended September 30, 2022 and 2021

The following table summarizes certain aspects of our results of operations for the twelve months ended September 30, 2022 compared to the twelve months ended September 30, 2021 (in thousands, except percentages):

Revenue

Total revenue increased $24.1 million, or 20%, to $143.9 million in 2022 compared to $119.8 million in 2021. Software and hardware revenue increased $12.4 million, or 21%, to $72.5 million in 2022 compared to $60.1 million in 2021. This increase is primarily due to an increase in sales of our Mobile Deposit®, CheckReader™, and IDLive® software products. The increase was partially offset by a decrease in revenue from our ID_CLOUD™ software and hardware products. Services and other revenue increased $11.7 million, or 20%, to $71.4 million in 2022 compared to $59.7 million in 2021. This increase is primarily due to strong growth in Mobile Verify® transactional SaaS revenue and SaaS revenue as a result of the HooYu Acquisition, as well as an increase in maintenance revenue associated with Mobile Deposit® software sales and hosted mobile deposit transactional revenue in 2022 compared to 2021.

Cost of Revenue

Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, and hosting costs. Cost of revenue increased $5.5 million, or 38%, to $20.0 million in 2022 compared to $14.5 million in 2021. 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 2022 compared to 2021 and the HooYu Acquisition. The increase was partially offset by decreased costs of our identity verification hardware products due to lower 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 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 $6.3 million, or 20%, to $38.8 million in 2022 compared to $32.5 million in 2021. As a percentage of revenue, selling and marketing expenses were consistent at 27% in 2022 and in 2021. The increase in selling and marketing expense is primarily due to higher personnel-related costs resulting from our increased headcount of $4.0 million, higher product promotion costs of $1.7 million, and higher travel and related expenses of $0.6 million in 2022 compared to 2021.

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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 image capture science. Research and development expenses increased $2.2 million, or 8%, to $30.2 million in 2022 compared to $28.0 million in 2021. As a percentage of revenue, research and development expenses decreased to 21% in 2022 from 23% in 2021. The increase in research and development expenses is primarily due to higher personnel-related costs resulting from our increased headcount of $3.6 million and higher travel and related expenses of $0.2 million, partially offset by lower third-party contractor and other expenses of $1.7 million in 2022 compared to 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 $4.1 million, or 18%, to $26.6 million in 2022 compared to $22.5 million in 2021. As a percentage of revenue, general and administrative expenses decreased to 18% in 2022 from 19% in 2021. The increase in general and administrative expenses is primarily due to higher third-party and professional fees of $2.1 million, higher personnel-related costs resulting from our increased headcount of $1.4 million, higher litigation expenses of $0.5 million, and higher travel and related expenses of $0.3 million in 2022 compared to 2021. The overall increase in general and administrative expenses was partially offset by decreased intellectual property litigation costs of $2.2 million in 2022 compared to 2021.

Amortization and Acquisition-Related Costs

Amortization and acquisition-related costs include amortization of intangible assets, expenses recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs increased $6.2 million, or 70%, to $15.2 million in 2022 compared to $9.0 million in 2021. As a percentage of revenue, amortization and acquisition-related costs increased to 11% in 2022 from 7% in 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 $7.1 million and expenses associated with the HooYu Acquisition of $2.9 million in 2022 compared to 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 $2.4 million compared to an increase in 2021, a decrease in amortization expense of intangibles related to previous acquisitions that were fully amortized of $1.0 million, and a decrease in acquisition-related expense from the ID R&D Acquisition of $0.3 million in 2022 compared to 2021.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. In order to streamline the organization and focus resources going forward, we undertook a strategic restructuring in June 2022, which included a reduction in our workforce. Restructuring costs incurred in 2022 were $1.8 million. There were no restructuring costs in 2021.

Interest Expense

Interest expense includes the amortization of debt discount and issuance costs and coupon interest incurred associated with our 2026 Notes (as defined below). Interest expense was $8.2 million in 2022 and consisted of $7.0 million of amortization of debt discount and issuance costs and $1.2 million of coupon interest incurred. Interest expense was $5.1 million in 2021 and consisted of $4.4 million of amortization of debt discount and issuance costs and $0.8 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, foreign currency transactional gains or losses, and the change in fair value of our convertible senior notes hedge and embedded conversion derivative. Other income (expense), net decreased $1.0 million, to net expense of $0.4 million in 2022 compared to net income of $0.7 million in 2021, primarily due to higher foreign currency exchange transaction losses, higher realized losses on the sale of marketable securities, partially offset by higher interest income net of amortization in 2022 compared to 2021.

Income Tax Benefit (Provision)

The income tax benefit for 2022 was $0.3 million which yielded an effective tax rate of negative 11% compared to an income tax provision of $0.8 million which yielded an effective tax rate of 9% in 2021. The income tax benefit for 2022 is primarily due to our positive net income for the year. Our effective tax rate for fiscal year 2022 was lower than the U.S. federal statutory rate of 21% due to excess tax benefits resulting from the exercise of stock options and vesting of restricted stock awards, 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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Results of Operations

Comparison of the Twelve Months Ended September 30, 2021 and 2020

The following table summarizes certain aspects of our results of operations for the twelve months ended September 30, 2021 compared to the twelve months ended September 30, 2020 (in thousands, except percentages):

Revenue

Total revenue increased $18.5 million, or 18%, to $119.8 million in 2021 compared to $101.3 million in 2020. Software and hardware revenue increased $5.9 million, or 11%, to $60.1 million in 2021 compared to $54.2 million in 2020. This increase is primarily due to an increase in sales of our Mobile Deposit®, ID_CLOUD™, CheckReader™, and IDLive® Face software products. The increase was partially offset by a decrease in revenue from our identity verification hardware products. Services and other revenue increased $12.6 million, or 27%, to $59.7 million in 2021 compared to $47.2 million in 2020. This increase is primarily due to strong growth in Mobile Verify® transactional SaaS revenue of $10.1 million, or 36%, in 2021 compared to 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, and hosting costs. Cost of revenue increased $1.3 million, or 10%, to $14.5 million in 2021 compared to $13.2 million in 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 2021 compared to 2020. The increase was partially offset by decreased costs of our identity verification hardware products due to lower 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 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 $4.9 million, or 18%, to $32.5 million in 2021 compared to $27.6 million in 2020. As a percentage of revenue, selling and marketing expenses were consistent at 27% in 2021 and in 2020. The increase in sales and marketing expense is primarily due to higher personnel-related costs resulting from our increased headcount of $5.2 million and higher product promotion costs of $0.2 million in 2021 compared to 2020. The overall increase in selling and marketing expense was partially offset by a decrease in travel and related expenses of $0.5 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 image capture science. Research and development expenses increased $5.2 million, or 23%, to $28.0 million in 2021 compared to $22.9 million in 2020. As a percentage of revenue, research and development expenses were consistent at 23% in 2021 and in 2020. The increase in research and development expenses is primarily due to higher personnel-related costs and third-party contractor expenses in 2021 compared to 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 increased $0.2 million, or 1%, to $22.5 million in 2021 compared to $22.3 million in 2020. As a percentage of revenue, general and administrative expenses decreased to 19% in 2021 from 22% in 2020. The increase in general and administrative expenses is primarily due to higher personnel-related costs resulting from our increased headcount of $1.6 million, higher executive transition costs of $0.4 million, and higher third-party professional fees of $0.4 million in 2021 compared to 2020. The overall increase in general and administrative expenses was partially offset by decreased intellectual property litigation costs of $2.2 million in 2021 compared to 2020.

Amortization and Acquisition-Related Costs

Amortization and acquisition-related costs include amortization of intangible assets, expenses recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs increased $2.4 million, or 36%, to $9.0 million in 2021 compared to $6.6 million in 2020. As a percentage of revenue, amortization and acquisition-related costs increased to 7% in 2021 from 6% in 2020. The increase in amortization and acquisition-related costs is primarily due to expenses associated with the acquisition of ID R&D in 2021 as compared to 2020.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. There were no restructuring costs in 2021. Restructuring costs were negative $0.1 million in 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 $5.1 million in 2021 and consisted of $4.4 million of amortization of debt discount and issuance costs and $0.8 million of coupon interest incurred. There was no interest expense in 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 increased $0.1 million, to a net income of $0.7 million in 2021 compared to a net income of $0.5 million in 2020, primarily due to higher foreign currency exchange transactional gains in 2021 compared to 2020.

Income Tax Provision

The income tax provision for 2021 was $0.8 million compared to an income tax provision of $1.6 million in 2020. The income tax provision for 2021 is primarily due to our positive net income for the year. Our effective tax rate for fiscal year 2021 was lower than the U.S. federal statutory rate of 21% due to changes in our deferred tax benefit of $1.6 million related to excess tax benefits from the exercise of stock options and the vesting of restricted stock awards.

Liquidity and Capital Resources

Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. Our additional sources of liquidity include available cash balances and proceeds from the issuance of the 2026 Notes. On September 30, 2022, we had $101.0 million in cash and cash equivalents and investments compared to $227.4 million on September 30, 2021, a decrease of $126.5 million, or 56%. The decrease in cash and cash equivalents and investments is primarily due to acquisitions, net of cash acquired of $127.9 million, partially offset by net proceeds from the issuance of our common stock, par value $0.001 per share (“Common Stock”) under the Mitek Systems, Inc. 2020 Incentive Plan (the “2020 Plan”) of $1.7 million.

In summary, our cash flows from continuing operations were as follows (dollars in thousands):

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Cash Flows from Operating Activities

Cash flows related to operating activities are dependent on net income, adjustments to net income and changes in working capital. Net cash provided by operating activities during fiscal 2022 was $26.4 million and resulted primarily from net income of $3.0 million, net non-cash charges of $31.8 million, and unfavorable changes in operating assets and liabilities of $8.5 million. Net cash provided by operating activities during fiscal 2021 was $37.3 million and resulted primarily from net income of $8.0 million, net non-cash charges of $27.3 million, and favorable changes in operating assets and liabilities of $2.1 million. The decrease in cash provided by operating activities during fiscal 2022 compared to fiscal 2021 was primarily due to an increase in accounts receivable of $10.0 million and a decrease in the estimated fair value of acquisition-related contingent consideration of $2.4 million, partially offset by an increase in restructuring expenses of $1.0 million and the amortization of investment premiums and other of $0.4 million.

Net cash provided by operating activities during fiscal 2020 was $24.1 million and resulted primarily from net income of $7.8 million adjusted for net non-cash charges of $19.6 million partially offset by unfavorable changes in operating assets and liabilities of $3.3 million. The increase in cash provided by operating activities during fiscal 2021 compared to fiscal 2020 was primarily due to an increase in contract assets of $7.8 million, $4.4 million of accretion and amortization related to the 2026 Notes which were issued in fiscal 2021, and an increase in amortization of intangibles expense of $1.1 million due to the ID R&D Acquisition.

Cash Flows from Investing Activities

Net cash used in investing activities was $3.5 million during fiscal 2022, which consisted primarily of net cash paid in connection with the HooYu Acquisition of $127.9 million and capital expenditures of $1.1 million, partially offset by net sales and maturities of investments of $125.5 million. Net cash used in investing activities was $170.5 million during fiscal 2021, which consisted primarily of net purchases of investments of $156.6 million, net cash paid in connection with the ID R&D Acquisition of $12.5 million, and capital expenditures of $1.4 million. The decrease in cash used in investing activities during fiscal 2022 compared to fiscal 2021 was primarily due to an increase in net sales and maturities of investments of $282.1 million partially offset by an increase in cash paid for acquisitions, net of cash acquired of $115.4 million, related to the HooYu Acquisition.

Net cash used in investing activities was $24.7 million during fiscal 2020, which consisted primarily of net purchases of investments of $23.9 million and capital expenditures of $0.8 million. The increase in cash used in investing activities during fiscal 2021 compared to fiscal 2020 was primarily due to an increase in net purchases of investments of $132.6 million and an increase in cash paid for acquisitions, net of cash acquired of $12.5 million related to the ID R&D Acquisition.

Cash Flows from Financing Activities

Net cash used in financing activities was $21.1 million during fiscal 2022, which consisted of $15.2 million in repurchases and retirements of our Common Stock and $7.7 million in payments of acquisition-related contingent consideration, partially offset by net proceeds from the issuance of Common Stock under the 2020 Plan of $1.7 million. Net cash provided by financing activities was $143.7 million during fiscal 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 $4.0 million and net proceeds from other borrowings of $0.2 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 repurchases and retirements of Common Stock of $0.2 million. The increase in cash used in financing activities during fiscal 2022 compared to fiscal 2021 was primarily due to the net proceeds from the issuance of the 2026 Notes in fiscal 2021 of $149.7 million and repurchases and retirements of our Common Stock of $15.2 million during fiscal 2022.

Net cash provided by financing activities was $3.4 million during fiscal 2020, which consisted of proceeds from the issuance of equity plan Common Stock of $4.8 million and net proceeds from other borrowings of $0.1 million, partially offset by repurchases and retirements of Common Stock of $1.0 million and payment of acquisition-related contingent consideration of $0.5 million. The increase in cash provided by financing activities during fiscal 2021 compared to fiscal 2020 was primarily due to the net proceeds from the issuance of the 2026 Notes in fiscal 2021 of $149.7 million, proceeds from the issuance of convertible senior notes warrants of $23.9 million, partially offset by the purchase of the convertible senior notes hedge of $33.2 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

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“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. As of January 13, 2023 ("Date of Noncompliance"), the Company was not in compliance with certain of the covenants in the Indenture as a result of the Company not timely filing reports with the SEC. As a result, the 2026 Notes began to accrue additional special interest of 0.25% per annum of the outstanding principal of the 2026 Notes for the 90 days after the Date of Noncompliance and 0.50% per annum of the outstanding principal of the 2026 Notes for the 91st through 180th day after the Date of Noncompliance.

The net proceeds from the 2026 Notes 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 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 of July 31, 2023, 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 of the accompanying notes to the consolidated financial statements included in this Form 10-K for more information relating to the Notes Hedge and Warrant Transactions.

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.

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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.

Share Repurchase Program

On June 15, 2021, the Board authorized and approved a share repurchase program for up to $15.0 million of the currently outstanding shares of our Common Stock. The share repurchase program expired on June 30, 2022. The Company made purchases of $0.2 million, or 10,555 shares, during fiscal 2021 at an average price of $17.99 per share. The Company made purchases of $14.8 million, or approximately 886,204 shares during fiscal 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.

Lease Obligations

Our principal executive offices, as well as our research and development facility, are located in approximately 29,000 square feet of office space in San Diego, California and the term of the lease continues through June 30, 2024. The average annual base rent under this lease is approximately $1.2 million per year. In connection with this lease, we received tenant improvement allowances totaling approximately $1.0 million. These lease incentives are being amortized as a reduction of rent expense over the term of the lease.

Our other offices are located in Paris, France; Amsterdam, The Netherlands; New York, New York; Barcelona, Spain; and London, United Kingdom. Other than the lease for our office space in San Diego, California, we do not believe that the leases for our offices are material lease obligations.

Other Liquidity Matters

On September 30, 2022, we had investments of $68.9 million, designated as available-for-sale debt securities, which consisted of U.S. Treasury notes, asset-backed securities, foreign government and agency securities, and corporate issuances, carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of tax, and reported as a separate component of stockholders’ equity. All securities for which maturity or sale is expected within one year are classified as “current” on the consolidated balance sheets. All other securities are classified as “long-term” on the consolidated balance sheets. At September 30, 2022, we had $58.3 million of our available-for-sale securities classified as current and $10.6 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 (current assets less current liabilities) of $88.6 million at September 30, 2022 compared to $164.8 million at September 30, 2021.

Based on our current operating plan, we believe the current cash and cash equivalent balance and cash expected to be generated from operations will be adequate to satisfy our working capital needs for the next twelve months from the date these consolidated financial statements are filed.

Critical Accounting Estimates

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, stockholders’ equity, revenue, and expenses and related disclosure of contingent assets and liabilities. Management regularly evaluates its estimates and assumptions. These estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, and form the basis for making management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are

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inherently uncertain. Actual results could vary from those estimates under different assumptions or conditions. We believe the following critical accounting estimates affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We enter into contractual arrangements with integrators, resellers, and directly with our customers that may include licensing of our software products, product support and maintenance services, SaaS services, consulting services, or various combinations thereof, including the sale of such products or services separately. Our accounting policies regarding the recognition of revenue for these contractual arrangements are fully described in Note 2 of the accompanying notes to our consolidated financial statements included in this Form 10-K.

Our SaaS offerings give customers the option to be charged upon their incurred usage in arrears (“Pay as You Go”) or to commit to a minimum spend over their contracted period, with the ability to purchase unlimited additional transactions above the minimum during the contract term. For contracts which include a minimum commitment, we are standing ready to provide as many transactions as desired by the customer during the contract term and revenue is 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 historical usage, expected volume, and other factors to project out for the remainder of the contract term. The estimated usage-based revenues are constrained to the amount we expect to be entitled to receive in exchange for providing access to our platform.

We include any fixed charges within our contracts as part of the total transaction price. To the extent that variable consideration is not constrained, we include an estimate of the variable amount, as appropriate, within the total transaction price and update our assumptions over the duration of the contract. We may constrain the estimated transaction price in the event of a high degree of uncertainty as to the final consideration amount owed because of an extended length of time over which the fees may be adjusted. The transaction price, including any discounts, is allocated between separate goods and services in a multi-element arrangement based on their relative standalone selling prices. For items that are not sold separately, we estimate the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount we expect to receive in exchange for the related good or service.

Convertible Senior Notes Hedge and Embedded Conversion Derivative

In February 2021, the Company issued $155.3 million aggregate principal amount of 0.750% 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. The Company could not elect to issue the 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”) is accounted for as a derivative liability and the Notes Hedge as a derivative asset and the resulting gain (or loss) was 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 Warrant Transactions were 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. See Note 9 of the accompanying notes to the consolidated financial statements included in this Form 10-K for additional information related to these transactions.

Investments

We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

•Level 1—Quoted prices in active markets for identical assets or liabilities;

•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In using this fair value hierarchy, management may be required to make assumptions about pricing by market participants and assumptions about risk, specifically when using unobservable inputs to determine fair value. These assumptions are subjective in nature and may significantly affect our results of operations.

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Fair Value of Equity Instruments

The valuation of certain items, including compensation expense related to equity awards granted, involves significant estimates based on underlying assumptions made by management. The valuation of stock options is based upon a Black-Scholes valuation model, which involves estimates of stock volatility, expected life of the instruments and other assumptions. The valuation of performance options, Senior Executive Long Term Incentive Restricted Stock Units, and similar awards are based upon the Monte-Carlo simulation, which involves estimates of our stock price, expected volatility, and the probability of reaching the performance targets.

Goodwill and Purchased Intangible Assets

Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually or as circumstances indicate that their value may no longer be recoverable. Our goodwill is considered to be impaired if we determine that the carrying value of the reporting unit to which the goodwill has been assigned exceeds management’s estimate of its fair value. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. We determine the fair value of the reporting unit based on the income approach which requires significant judgments to be made about the future cash flows of that reporting unit, discount rates, and growth rates. Our cash flow forecasts are based on assumptions that represent the highest and best use for our reporting units. In the fourth quarter of fiscal 2022, we completed our annual goodwill impairment test and concluded that our goodwill was not impaired.

Intangible assets with definite lives are amortized over their useful lives. Each period, we evaluate the estimated remaining useful life of our intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset group to the future undiscounted cash flows the asset is expected to generate. The carrying amount of such assets is reduced to fair value if the undiscounted cash flows used in the test for recoverability are less than the carrying amount of such assets. No impairment charge related to the impairment of intangible assets was recorded during the twelve months ended September 30, 2022, 2021, and 2020.

Business Combinations

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired, liabilities assumed, and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:

•future expected cash flows from license sales, software services contracts, professional services contracts, other customer contracts, and acquired developed technologies and patents;

•the acquired company’s trade name, trademark and existing customer relationships, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our offerings;

•uncertain tax positions and tax related valuation allowances assumed; and

•discount rates.

Accounting for Income Taxes

We estimate income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences result in deferred tax assets and liabilities, which are reflected in our balance sheets. We then assess the likelihood that deferred tax assets will be realized. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. When a valuation allowance is established or increased, we record a corresponding tax expense in our statements of operations. We review the need for a valuation allowance each interim period to reflect uncertainties about whether we will be able to utilize deferred tax assets before they expire. The valuation allowance analysis is based on estimates of taxable income for the jurisdictions in which we operate and the periods over which our deferred tax assets will be realizable.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that has more than a 50% chance of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis. The evaluations are based upon a number of factors, including

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changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits, and effective settlement of audit issues.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read this discussion together with the financial statements, related notes and other financial information included in this Form 10-K. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Item 1A—“Risk Factors” and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below. Please see “Important Note About Forward–Looking Statements” at the beginning of this Form 10-K.

Overview

Mitek is a leading innovator of mobile image capture and digital identity verification solutions. We are a software development company with expertise in computer vision, artificial intelligence, and machine learning. We 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 (“AML”) 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 of 2021, Mitek acquired ID R&D, an award-winning provider of AI-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.

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 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.

In May 2021 (as more fully described in Note 3 to the consolidated financial statements) 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 help 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.

Fiscal Year 2021 Highlights

•Revenues for the twelve months ended September 30, 2021 were $119.8 million, an increase of 18% compared to revenues of $101.3 million for the twelve months ended September 30, 2020.

•Net income was $8.0 million, or $0.18 per diluted share, for the twelve months ended September 30, 2021, compared to a net income of $7.8 million, or $0.18 per diluted share, for the twelve months ended September 30, 2020.

•Cash provided by operating activities was $37.3 million for the twelve months ended September 30, 2021, compared to $24.1 million for the twelve months ended September 30, 2020.

•During fiscal 2021 the total number of financial institutions licensing our technology continued to exceed 7,500. All of the top 10 U.S. retail banks, and nearly all of the top 50 U.S. retail banks utilize our technology.

•We added new patents to our portfolio during fiscal year 2021, bringing our total number of issued patents to 77 as of September 30, 2021. In addition, we have 18 patent applications as of September 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

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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 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 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

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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

Certain amounts included herein differ from amounts reported in our preliminary unaudited consolidated balance sheet and statement of operations included in our earnings release dated November 4, 2021. The differences arose from an increase in acquisition-related costs and expenses of $0.4 million dollars due to the revaluation of our acquisition-related contingent consideration liability that was recorded as part of the ID R&D Acquisition. We believe that these revised amounts are not materially different from those reported in the earnings release.

Comparison of the Twelve Months Ended September 30, 2021 and 2020

The following table summarizes certain aspects of our results of operations for the twelve months ended September 30, 2021 compared to the twelve months ended September 30, 2020 (in thousands, except percentages):

Revenue

Total revenue increased $18.5 million, or 18%, to $119.8 million in 2021 compared to $101.3 million in 2020. Software and hardware revenue increased $5.9 million, or 11%, to $60.1 million in 2021 compared to $54.2 million in 2020. This increase is primarily due to an increase in sales of our Mobile Deposit®, ID_CLOUD™, CheckReader™, and IDLive® Face software products. The increase was partially offset by a decrease in revenue from our identity verification hardware products. Services and other revenue increased $12.6 million, or 27%, to $59.7 million in 2021 compared to $47.2 million in 2020. This increase is primarily due to strong growth in Mobile Verify® transactional SaaS revenue of $10.1 million, or 36%, in 2021 compared to 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 $1.3 million, or 10%, to $14.5 million in 2021 compared to $13.2 million in 2020. As a percentage of revenue, cost of revenue decreased to 12% in 2021 from 13% in 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 2021 compared to 2020. The increase was partially offset by decreased costs of our identity verification hardware products due to lower hardware revenues.

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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 $4.9 million, or 18%, to $32.5 million in 2021 compared to $27.6 million in 2020. As a percentage of revenue, selling and marketing expenses were consistent at 27% in 2021 and in 2020. The increase in sales and marketing expense is primarily due to higher personnel-related costs resulting from our increased headcount of $5.2 million and higher product promotion costs of $0.2 million in 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 $0.5 million as a result of the COVID-19 pandemic.

Research and Development Expenses

Research and development expenses include payroll, employee benefits, stock-based compensation, third-party contractor expenses, and other headcount-related costs associated with software engineering and mobile image capture science. Research and development expenses increased $5.2 million, or 23%, to $28.0 million in 2021 compared to $22.9 million in 2020. As a percentage of revenue, research and development expenses were consistent at 23% in 2021 and in 2020. The increase in research and development expenses is primarily due to higher personnel-related costs and third-party contractor expenses in 2021 compared to 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 increased $0.2 million, or 1%, to $22.5 million in 2021 compared to $22.3 million in 2020. As a percentage of revenue, general and administrative expenses decreased to 19% in 2021 from 22% in 2020. The increase in general and administrative expenses is primarily due to higher personnel-related costs resulting from our increased headcount of $1.6 million, higher executive transition costs of $0.4 million, and higher third-party professional fees of $0.4 million in 2021 compared to 2020. The overall increase in general and administrative expenses was partially offset by decreased intellectual property litigation costs of $2.2 million in 2021 compared to 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 $2.4 million, or 36%, to $9.0 million in 2021 compared to $6.6 million in 2020. As a percentage of revenue, acquisition-related costs and expenses increased to 7% in 2021 from 6% in 2020. The increase in acquisition-related costs and expenses is primarily due to expenses associated with the acquisition of ID R&D in 2021 as compared to 2020.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. There were no restructuring costs in 2021. Restructuring costs were negative $0.1 million in 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 $5.1 million in 2021 and consisted of $4.4 million of amortization of debt discount and issuance costs and $0.8 million of coupon interest incurred. There was no interest expense in 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 increased $0.1 million, to a net income of $0.7 million in 2021 compared to a net income of $0.5 million in 2020, primarily due to higher foreign currency exchange transactional gains in 2021 compared to 2020.

Income Tax Provision

The income tax provision for 2021 was $0.8 million compared to an income tax provision of $1.6 million in 2020. The income tax provision for 2021 was primarily due to our positive net income for the year. Our effective tax rate for fiscal year 2021 was lower than the U.S. federal statutory rate of 21% due to changes in our deferred tax benefit of $1.6 million related to excess tax benefits from the exercise of stock options and the vesting of restricted stock awards.

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Results of Operations

Comparison of the Twelve Months Ended September 30, 2020 and 2019

The following table summarizes certain aspects of our results of operations for the twelve months ended September 30, 2020 compared to the twelve months ended September 30, 2019 (in thousands, except percentages):

(1) 2019 amounts reflect reclassifications to conform to the current year presentation.

Revenue

Total revenue increased $16.7 million, or 20%, to $101.3 million in 2020 compared to $84.6 million in 2019. Software and hardware revenue increased $7.3 million, or 16%, to $54.2 million in 2020 compared to $46.8 million in 2019. This increase is primarily due to an increase in sales of our Mobile Deposit®, ID_CLOUD™, and CheckReader™ software products. The increase was partially offset by declining software revenue from our legacy on-premise identity products which are being phased out. Services and other revenue increased $9.4 million, or 25%, to $47.2 million in 2020 compared to $37.7 million in 2019. This increase is primarily due to strong growth in Mobile Verify® transactional SaaS revenue of $7.7 million, or 36%, in 2020 compared to 2019, as well as an increase in maintenance revenue associated with CheckReader™ and Mobile Deposit® software sales.

Cost of Revenue

Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third-party products embedded in our products. Cost of revenue increased $0.9 million, or 8%, to $13.2 million in 2020 compared to $12.3 million in 2019. As a percentage of revenue, cost of revenue decreased to 13% in 2020 from 15% in 2019. The increase in cost of revenue is primarily due to an increase in variable personnel, royalty, and hosting costs associated with a higher volume of Mobile Verify® transactions processed during 2020 compared to 2019.

Selling and Marketing Expenses

Selling and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with sales and marketing personnel. Selling and marketing expenses also include non-billable costs of professional services personnel, advertising expenses, product promotion costs, trade shows, and other brand awareness programs. Selling and marketing expenses increased $3.1 million, or 13%, to $27.6 million in 2020 compared to $24.6 million in 2019. As a percentage of revenue, selling and marketing expenses decreased to 27% in 2020 from 29% in 2019. The increase in sales and marketing expense is primarily due to higher personnel-related costs of $2.9 million resulting from our increased headcount in 2020 compared to 2019, and higher product promotion costs of $0.8 million in 2020. Prior to fiscal 2020, the Company had included its product management costs in selling and marketing expenses. Due to certain personnel and functional responsibility changes in this function, the Company has reclassified these costs to research and development expenses. To conform to the current period’s presentation, prior year’s financials have been reclassified accordingly. The Company has determined that this reclassification was not material to previously reported financial statements. Product management costs were $3.0 million and $2.9 million in the twelve months ended 2020 and 2019, respectively.

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Research and Development Expenses

Research and development expenses include payroll, employee benefits, stock-based compensation, third-party contractor expenses, product management and other headcount-related costs associated with software engineering and mobile image capture science. Research and development expenses increased $1.0 million, or 5%, to $22.9 million in 2020 compared to $21.9 million in 2019. As a percentage of revenue, research and development expenses decreased to 23% in 2020 from 26% in 2019. The increase in research and development expenses is primarily due to higher personnel-related costs in 2020 compared to 2019.

General and Administrative Expenses

General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration and information technology functions, as well as third-party legal, accounting, and other administrative costs. General and administrative expenses increased $2.4 million, or 12%, to $22.3 million in 2020 compared to $19.9 million in 2019. As a percentage of revenue, general and administrative expenses decreased to 22% in 2020 from 23% in 2019. The increase in general and administrative expenses is primarily due to an increase in intellectual property litigation costs of $2.3 million in 2020 compared to 2019, a $1.0 million insurance settlement received in 2019 and a $0.4 million increase in third-party outside service costs. This increase is partially offset by a decrease in third-party costs associated with our strategic process of $1.2 million incurred in 2019, compared to $0 in 2020.

Acquisition-Related Costs and Expenses

Acquisition-related costs and expenses include amortization of intangible assets, expenses recorded due to changes in the fair value of contingent consideration, stock-based compensation, and other costs associated with acquisitions. Acquisition-related costs and expenses decreased $1.0 million, or 13%, to $6.6 million in 2020 compared to $7.6 million in 2019. As a percentage of revenue, acquisition-related costs and expenses decreased to 6% in 2020 from 9% in 2019. The decrease in acquisition-related costs and expenses is primarily due to a decrease in the amortization of intangible assets of $0.6 million as certain assets associated with the ICAR Acquisition became fully amortized during 2020 and a decrease in the fair value of acquisition-related contingent consideration of $0.3 million in 2020 as compared to 2019.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were negative $0.1 million in 2020 and are due to a reversal of costs accrued for the restructuring plan implemented in June 2019. Restructuring costs were $3.1 million in 2019 and related to the restructuring plan implemented in June 2019.

Other Income, Net

Other income, net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio, foreign currency transactional gains or losses, and interest expense. Other income, net decreased $0.1 million, to a net income of $0.5 million in 2020 compared to a net income of $0.6 million in 2019, primarily due to lower foreign currency exchange transactional gains in 2020 compared to 2019.

Income Tax Benefit (Provision)

The income tax provision for 2020 was $1.6 million compared to an income tax benefit of $3.3 million in 2019. The income tax provision for 2020 was primarily due to our positive net income for the year. Our effective tax rate for fiscal year 2020 was lower than the U.S. federal statutory rate of 21% due primarily to the impact of federal and state research and development credits and the impact of foreign and state taxes. The income tax benefit of $3.3 million in 2019 was primarily due to changes in our deferred tax benefit of $3.2 million related to excess tax benefits from the exercise of stock options, as well as additional research and development credits associated with the provision to return true-up.

Liquidity and Capital Resources

On September 30, 2021, we had $227.4 million in cash and cash equivalents and investments compared to $62.0 million on September 30, 2020, an increase of $165.4 million, or 267%. The increase in cash and cash equivalents and investments was primarily due to net proceeds from the issuance of the 2026 Notes of $140.5 million (net of sale of warrants and purchase of convertible senior notes hedge), net cash provided by operating activities of $37.3 million, and net proceeds from the issuance of Common Stock under our equity plan of $4.0 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 $1.4 million, the payment of acquisition-related contingent consideration of $0.8 million, unfavorable foreign currency losses of $0.2 million, repurchases and retirements of common stock of $0.2 million, and principal payments on other borrowings of $0.1 million.

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Cash Flows from Operating Activities

Net cash provided by operating activities during fiscal 2021 was $37.3 million and resulted primarily from net income of $8.0 million, net non-cash charges of $27.3 million, and favorable changes in operating assets and liabilities of $2.1 million. The primary non-cash adjustments to operating activities were stock-based compensation expense, amortization of intangible assets, accretion and amortization on debt securities, depreciation and amortization, amortization of investment premiums & other, net changes in estimated fair value of acquisition-related contingent consideration, and deferred taxes totaling $11.5 million, $7.5 million, $4.4 million, $1.4 million, $1.3 million, $1.1 million, and $0.1 million, respectively.

Net cash provided by operating activities during fiscal 2020 was $24.1 million and resulted primarily from net income of $7.8 million adjusted for net non-cash charges of $19.6 million partially offset by unfavorable changes in operating assets and liabilities of $3.3 million. The primary non-cash adjustments to operating activities were stock-based compensation expense, amortization of intangible assets, depreciation and amortization, and deferred taxes totaling $9.6 million, $6.4 million, $1.5 million, and $1.9 million, respectively.

Cash Flows from Investing Activities

Net cash used in investing activities was $170.5 million during fiscal 2021, which consisted primarily of net purchases of investments of $156.6 million, net cash paid in conjunction with the ID R&D Acquisition of $12.5 million, and capital expenditures of $1.4 million.

Net cash used in investing activities was $24.7 million during fiscal 2020, which consisted primarily of net purchases of investments of $23.9 million and capital expenditures of $0.8 million.

Cash Flows from Financing Activities

Net cash provided by financing activities was $143.7 million during fiscal 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 $4.0 million and net proceeds from other borrowings of $0.2 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 repurchases and retirements of Common Stock of $0.2 million.

Net cash provided by financing activities was $3.4 million during fiscal 2020, which consisted of proceeds from the issuance of equity plan Common Stock of $4.8 million and net proceeds from other borrowings of $0.1 million, partially offset by repurchases and retirements of Common Stock of $1.0 million and payment of acquisition-related contingent consideration of $0.5 million.

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

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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 December 10, 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 IV. of this Form 10-K for more information relating to the Notes Hedge and Warrant Transactions.

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.

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 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.

The Company made purchases of $0.2 million, or 10,555 shares, during fiscal 2021 at an average price of $17.99 per share.

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From the period October 1, 2021 through December 10, 2021, the Company made purchases of $8.1 million, or 474,213 shares at an average price of $17.09 per share.

On December 13, 2019, our Board of Directors authorized and approved a share repurchase program for up to $10.0 million of the currently outstanding shares of our Common Stock. The share repurchase program 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 per share. The purchases under the share repurchase program were made through open market trades.

CARES Act

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security (CARES) Act” (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine the impacts the CARES Act may have on our business.

Lease Obligations

Our principal executive offices, as well as our research and development facility, are located in approximately 29,000 square feet of office space in San Diego, California and the term of the lease continues through June 30, 2024. The average annual base rent under this lease is approximately $1.2 million per year. In connection with this lease, we received tenant improvement allowances totaling approximately $1.0 million. These lease incentives are being amortized as a reduction of rent expense over the term of the lease.

Our other offices are located in Paris, France; Amsterdam, The Netherlands; New York, New York; Barcelona, Spain; and London, United Kingdom. The term of the Paris, France lease continues through May 31, 2025, with an annual base rent of approximately €418 thousand (or $484 thousand). The term of the Amsterdam, The Netherlands lease continues through December 31, 2022, with an annual base rent of approximately €191 thousand (or $222 thousand). The term of the New York, New York lease continues through November 30, 2024, with an annual base rent of approximately $195 thousand. The term of the Barcelona, Spain lease continues through May 31, 2023, with an annual base rent of approximately €97 thousand (or $113 thousand). The term of the London, United Kingdom lease continues through May 31, 2022, with an annual base rent of approximately £112 thousand (or approximately $151 thousand).

Other than the lease for our office space in San Diego, California, we do not believe that the leases for our offices are material

to the Company. We believe our existing properties are in good condition and are sufficient and suitable for the conduct of its business.

Other Liquidity Matters

On September 30, 2021, we had investments of $197.1 million, designated as available-for-sale debt securities, which consisted of U.S. Treasury notes, asset-backed securities, foreign government and agency securities, and corporate issuances, carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of tax, and reported as a separate component of stockholders’ equity. All securities for which maturity or sale is expected within one year are classified as “current” on the consolidated balance sheets. All other securities are classified as “long-term” on the consolidated balance sheets. At September 30, 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. 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 $164.8 million at September 30, 2021 compared to $59.8 million at September 30, 2020.

Based on our current operating plan, we believe the current cash balance and cash expected to be generated from operations will be adequate to satisfy our working capital needs for the next twelve months from the date the financial statements are filed.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements as of September 30, 2021.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, stockholders’ equity, revenue, and expenses and related disclosure of contingent assets and liabilities. Management regularly evaluates its estimates and assumptions. These estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, and form the basis for making management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are

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inherently uncertain. Actual results could vary from those estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We enter into contractual arrangements with integrators, resellers, and directly with our customers that may include licensing of our software products, product support and maintenance services, SaaS services, consulting services, or various combinations thereof, including the sale of such products or services separately. Our accounting policies regarding the recognition of revenue for these contractual arrangements are fully described in Note 2 to our consolidated financial statements included in this Form 10-K.

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services over the term of the agreement. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized based on the following five step model in accordance with ASC 606, Revenue from Contracts with Customers:

•Identification of the contract with a customer;

•Identification of the performance obligations in the contract;

•Determination of transaction price;

•Allocation of the transaction price to the performance obligations in the contract; and

•Recognition of revenue when, or as, we satisfy a performance obligation.

Software and Hardware

Software and hardware revenue is generated from on premise software license sales, as well as sales of hardware scanner boxes and on premise appliance products. For software license agreements that are distinct, we recognize software license revenue upon delivery and after evidence of a contract exists. Hardware revenue is recognized in the period that the hardware is shipped.

Services and Other

Services and other revenue is generated from the sale of transactional SaaS products and services, maintenance associated with the sale of software and hardware, and consulting and professional services. We recognize services and other revenue over the period in which such services are performed. Our model typically includes an up-front fee and a periodic commitment from the customer that commences upon completion of the implementation through the remainder of the customer life. The up-front fee is the initial setup fee, or the implementation fee. The periodic commitment includes, but is not limited to, a fixed periodic fee and/or a transactional fee based on system usage that exceeds committed minimums. If the up-front fee is not distinct, revenue is deferred until the date the customer commences use of our services, at which point the up-front fee is recognized ratably over the life of the customer arrangement. We do not view the signing of the contract or the provision of initial setup services as discrete earnings events that are distinct.

Contract Assets and Liabilities

The Company recognizes revenue when control of the license or transactional SaaS service is transferred to the customer. The Company records a contract asset when the revenue is recognized prior to the date payments become due. Contract assets that are expected to be paid within one year are recorded in current assets on the consolidated balance sheets. All other contract assets are recorded in other non-current assets in the consolidated balance sheet. Contract liabilities consist of deferred revenue. When the performance obligation is expected to be fulfilled within one year, the deferred revenue is recorded in current liabilities in the consolidated balance sheet. When the performance obligation is expected to be fulfilled beyond one year, the deferred revenue is recorded in non-current liabilities in the consolidated balance sheet. The Company reports net contract asset or liability positions on a customer-by-customer basis at the end of each reporting period.

Contract Costs

The Company incurs incremental costs to obtain a contract, consisting primarily of sales commissions incurred only if a contract is obtained. When the commission rate for a customer renewal is not commensurate with the commission rate for a new contract, the commission is capitalized if expected to be recovered. Such costs are capitalized and amortized using a portfolio approach consistent with the pattern of transfer of the good or service to which the asset relates. Contract costs are recorded in other current and non-current assets in the consolidated balance sheets.

Significant Judgments

We use the following methods, inputs, and assumptions in determining amounts of revenue to recognize. For multi-element arrangements, we account for individual goods or services as a separate performance obligation if they are distinct, the good or service

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is separately identifiable from other items in the arrangement, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. Determining whether goods or services are distinct performance obligations that should be accounted for separately may require significant judgment.

The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring products or services to the customer. We include any fixed charges within our contracts as part of the total transaction price. To the extent that variable consideration is not constrained, we include an estimate of the variable amount, as appropriate, within the total transaction price and update our assumptions over the duration of the contract. We may constrain the estimated transaction price in the event of a high degree of uncertainty as to the final consideration amount owed because of an extended length of time over which the fees may be adjusted. The transaction price, including any discounts, is allocated between separate goods and services in a multi-element arrangement based on their relative standalone selling prices. For items that are not sold separately, we estimate the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount we expect to receive in exchange for the related good or service.

Contract modifications occur when we and our customers agree to modify existing customer contracts to change the scope or price or both of the contract or when a customer terminates some, or all, of the existing services provided by us. When a contract modification occurs, it requires us to exercise judgment to determine if the modification should be accounted for as: (i) a separate contract, (ii) the termination of the original contract and creation of a new contract, or (iii) a cumulative catch up adjustment to the original contract. Further, contract modifications require the identification and evaluation of the performance obligations of the modified contract, including the allocation of revenue to the remaining performance obligations and the period of recognition for each identified performance obligation.

Accounts Receivable

We consistently monitor collections from our customers and maintain a provision for estimated credit losses that is based on historical experience and on specific customer collection issues. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our revenue recognition policy requires customers to be deemed creditworthy, our accounts receivable are based on customers whose payment is reasonably assured. Our accounts receivable are derived from sales to a wide variety of customers. We do not believe a change in liquidity of any one customer or our inability to collect from any one customer would have a material adverse impact on our financial position.

Convertible Senior Notes Hedge and Embedded Conversion Derivative

In February 2021, the Company issued $155.3 million aggregate principal amount of 0.750% 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. The Company could not elect to issue the shares of its common stock, par value $0.001 per share (“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”) is accounted for as a derivative liability and the Notes Hedge as a derivative asset with the resulting gain (or loss) was 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 Warrant Transactions were 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. See Note 8. “Convertible Senior Notes” for additional information related to these transactions.

Investments

We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

•Level 1—Quoted prices in active markets for identical assets or liabilities;

•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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In using this fair value hierarchy, management may be required to make assumptions about pricing by market participants and assumptions about risk, specifically when using unobservable inputs to determine fair value. These assumptions are subjective in nature and may significantly affect our results of operations.

Fair Value of Equity Instruments

The valuation of certain items, including compensation expense related to equity awards granted, involves significant estimates based on underlying assumptions made by management. The valuation of stock options is based upon a Black-Scholes valuation model, which involves estimates of stock volatility, expected life of the instruments and other assumptions. The valuation of performance options, Senior Executive Long Term Incentive Restricted Stock Units, and similar awards are based upon the Monte-Carlo simulation, which involves estimates of our stock price, expected volatility, and the probability of reaching the performance targets.

Goodwill and Purchased Intangible Assets

Our goodwill resulted from prior acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortized, but intangible assets that are deemed to have definite lives are amortized over their useful lives, generally ranging from two to seven years. See Note 5 to our consolidated financial statements included in this Form 10-K for additional information regarding our goodwill and other intangible assets.

Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually or as circumstances indicate that their value may no longer be recoverable. In accordance with ASC Topic 350, Intangibles—Goodwill and Other (“ASC Topic 350”), we review our goodwill and indefinite-lived intangible asset for impairment at least annually in our fiscal fourth quarter and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of our reporting unit and/or our indefinite-lived intangible asset below their respective carrying values. Examples of such events or circumstances include, but are not limited to: a significant adverse change in legal factors or in the business climate, a significant decline in our stock price, a significant decline in our projected revenue or cash flows, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, or the presence of other indicators that would indicate a reduction in the fair value of a reporting unit.

Our goodwill is considered to be impaired if we determine that the carrying value of the reporting unit to which the goodwill has been assigned exceeds management’s estimate of its fair value. Based on the guidance provided by ASC Topic 350 and ASC Topic 280, Segment Reporting, (“ASC Topic 280”) management has determined that the Company operates in one segment and consists of one reporting unit. Because we have only one reporting unit, and because we are publicly traded, we determine the fair value of the reporting unit based on our market capitalization as we believe this represents the best evidence of fair value. In the fourth quarter of fiscal 2021, we completed our annual goodwill impairment test and concluded that our goodwill was not impaired. Our conclusion that goodwill was not impaired was based on a comparison of our net assets to our market capitalization.

Because we determine the fair value of our reporting unit based on our market capitalization, our future reviews of goodwill for impairment may be impacted by changes in the price of our Common Stock. For example, a significant decline in the price of our Common Stock may cause the fair value of our goodwill to fall below its carrying value. Therefore, we cannot assure you that when we complete our future reviews of goodwill for impairment a material impairment charge will not be recorded.

Intangible assets with definite lives are amortized over their useful lives. Each period, we evaluate the estimated remaining useful life of our intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. The carrying amount of such assets is reduced to fair value if the undiscounted cash flows used in the test for recoverability are less than the carrying amount of such assets. No impairment charge related to the impairment of intangible assets was recorded during the twelve months ended September 30, 2021, 2020, and 2019.

Business Combinations

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired, liabilities assumed, and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:

•future expected cash flows from license sales, software services contracts, professional services contracts, other customer contracts, and acquired developed technologies and patents;

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•the acquired company’s trade name, trademark and existing customer relationships, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our offerings;

•uncertain tax positions and tax related valuation allowances assumed; and

•discount rates.

Accounting for Income Taxes

We estimate income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences result in deferred tax assets and liabilities, which are reflected in our balance sheets. We then assess the likelihood that deferred tax assets will be realized. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. When a valuation allowance is established or increased, we record a corresponding tax expense in our statements of operations. We review the need for a valuation allowance each interim period to reflect uncertainties about whether we will be able to utilize deferred tax assets before they expire. The valuation allowance analysis is based on estimates of taxable income for the jurisdictions in which we operate and the periods over which our deferred tax assets will be realizable.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that has more than a 50% chance of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis. The evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits, and effective settlement of audit issues.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.

Capitalized Software Development Costs

Research and development costs are charged to expense as incurred. Costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are capitalized when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead. No such costs were capitalized during the twelve months ended September 30, 2021 and 2020 because the time period and cost incurred between technological feasibility and general release for all software product releases were not material.

Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no substantive plans to market such software at the time of development, are capitalized. Costs incurred during the preliminary planning and evaluation stage of the project and during post implementation operational stage are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. The Company defines the design, configuration, and coding process as the application development stage. The Company capitalized $0.8 million and $0.3 million of costs related to computer software developed for internal use during the twelve months ended September 30, 2021 and 2020, respectively. The Company recognized $0.3 million and $0.4 million of amortization expense from internal use software during the twelve months ended September 30, 2021 and 2020, respectively.