STOCKHOLDERS’ EQUITY

Stock-based Compensation

The Company applies the fair value recognition provisions of ASC 718. The fair value of stock options granted to employees and directors is calculated using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the expected life of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

The value of stock-based compensation is based on the single option valuation approach under ASC 718. It is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards is amortized using the straight-line method over the vesting period of the option.

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated average forfeiture rate for the fiscal year ended September 30, 2017 of 12% for all stock option grants was based on historical forfeiture experience.

ASC 718 requires the cash flows from tax benefits resulting from tax deductions in excess of the compensation cost recognized for options to be classified as financing cash flows. Due to the Company’s valuation allowance from losses in the previous years, there were no such tax benefits during the fiscal years ended September 30, 2017, 2016, and 2015.

The fair value calculations for stock-based compensation awards to employees for the fiscal years ended September 30, 2017, 2016, and 2015 were based on the following assumptions:



	2017	2016	2015
Risk-free interest rate	1.68% – 1.92%	1.43% – 1.66%	1.29% – 1.66%
Expected life (years)	5.25	5.90	5.30
Expected volatility	74%	83%	90%
Expected dividends	None	None	None

The following table summarizes stock-based compensation expense under ASC 718 for the fiscal years ended September 30, 2017, 2016, and 2015, which were allocated as follows (amounts shown in thousands):



	2017		2016		2015
Cost of revenue	$	52	$	39	$	30
Sales and marketing	1,577		1,099		713
Research and development	1,028		660		592
General and administrative	2,821		2,281		2,032
Stock-based compensation expense related to employee stock options included in expenses	$	5,478	$	4,079	$	3,367

As of September 30, 2017, the Company had $10.7 million of unrecognized compensation expense related to outstanding stock options and RSUs expected to be recognized over a weighted-average period of approximately 2.0 years.

2012 Incentive Plan

In January 2012, the Company’s board of directors (the “Board”) adopted the Mitek Systems, Inc. 2012 Incentive Plan (the “2012 Plan”), upon the recommendation of the compensation committee of the Board. On March 10, 2017, the Company’s stockholders approved the amendment and restatement of the 2012 Plan which increased the total number of shares of common stock reserved for issuance thereunder from 6,000,000 shares to 9,500,000 shares plus that number of shares of common stock that would otherwise return to the available pool of unissued shares reserved for awards under its 1999 Stock Option Plan, 2000 Stock Option Plan, 2002 Stock Option Plan, 2006 Stock Option Plan and 2010 Stock Option Plan (collectively, the “Prior Plans”). As of September 30, 2017, (i) stock options to purchase 1,769,138 shares of common stock, 1,803,165 RSUs, and 2,100,000 Senior Executive Performance RSUs were outstanding under the 2012 Plan, and 2,464,202 shares of common stock were reserved for future grants under the 2012 Plan and (ii) stock options to purchase an aggregate of 1,076,728 shares of common stock were outstanding under the Prior Plans.

Director Restricted Stock Unit Plan

In January 2011, the Board adopted the Mitek Systems, Inc. Director Restricted Stock Unit Plan, as amended and restated (the “Director Plan”), reserving up to 1,000,000 shares of common stock for the issuance of RSUs that may be granted to both employee and non-employee members of the Board. On March 10, 2017, the Company's stockholders approved an amendment to the Director Plan which increased the total number of shares of common stock reserved for issuance thereunder from 1,000,000 shares to 1,500,000 shares and extended the term of the Director Plan from December 5, 2020 to December 31, 2022. As of September 30, 2017, (i) 553,856 RSUs were outstanding under the Director Plan and (ii) 521,315 shares of common stock were reserved for future grants under the Director Plan.

Stock Options

The following table summarizes stock option activity under the Company’s stock option plans during the fiscal years ended September 30, 2017, 2016, and 2015:



	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (in Years)
Outstanding, September 30, 2014	2,334,326		$	4.11	5.5
Granted	1,927,500		$	2.92
Exercised	(232,203	)	$	1.06
Cancelled	(381,918	)	$	3.85
Outstanding, September 30, 2015	3,647,705		$	3.70	7.2
Granted	98,500		$	4.51
Exercised	(661,663	)	$	2.67
Cancelled	(69,168	)	$	4.51
Outstanding, September 30, 2016	3,015,374		$	3.95	6.4
Granted	147,800		$	7.06
Exercised	(235,514	)	$	2.92
Cancelled	(81,794	)	$	3.59
Outstanding, September 30, 2017	2,845,866		$	4.21	5.4

The Company recognized $1.0 million, $1.3 million, and $2.2 million in stock-based compensation expense related to outstanding stock options in the fiscal years ended September 30, 2017, 2016, and 2015, respectively. As of September 30, 2017, the Company had $1.3 million of unrecognized compensation expense related to outstanding stock options expected to be recognized over a weighted average period of approximately 1.5 years.

Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of the weighted-average exercise price, multiplied by the number of options outstanding and exercisable. The total intrinsic value of options exercised during the fiscal years ended September 30, 2017, 2016, and 2015 was $1.4 million, $3.3 million, and $0.6 million, respectively. The per-share weighted average fair value of options granted during the fiscal years ended September 30, 2016 and 2015 was $4.28, $3.29, and $2.83, respectively. The aggregate intrinsic value of options outstanding as of September 30, 2017 and 2016, was $15.6 million and $14.2 million, respectively.

Restricted Stock Units

The following table summarizes RSU activity in the fiscal years ended September 30, 2017, 2016, and 2015:



	Number of shares		Weighted- average fair value per share
Outstanding at September 30, 2014	1,101,303		$	4.71
Granted	104,000		$	2.29
Settled	(255,041	)	$	2.96
Cancelled	(147,345	)	$	3.54
Outstanding at September 30, 2015	802,917		$	4.49
Granted	1,536,000		$	4.82
Settled	(261,621	)	$	4.77
Cancelled	(31,127	)	$	4.19
Outstanding at September 30, 2016	2,046,169		$	4.90
Granted	1,249,224		$	6.61
Settled	(707,174	)	$	4.81
Cancelled	(231,198	)	$	4.93
Outstanding at September 30, 2017	2,357,021		$	5.65

The cost of RSUs is determined using the fair value of the Company’s common stock on the award date, and the compensation expense is recognized ratably over the vesting period. The Company recognized $4.0 million, $2.7 million, and $1.2 million in stock-based compensation expense related to outstanding RSUs in the fiscal years ended September 30, 2017, 2016, and 2015, respectively. As of September 30, 2017, the Company had approximately $9.3 million of unrecognized compensation expense related to outstanding RSUs expected to be recognized over a weighted-average period of approximately 2.6 years.

Senior Executive Performance RSUs

In the year ended September 30, 2017, the Company granted 2,400,000 Senior Executive Long Term Incentive Restricted Stock Units ("Senior Executive Performance RSUs") under the 2012 Plan. 300,000 Senior Executive Performance RSUs granted to the Company's former Chief Financial Officer were canceled as a result of his resignation effective July 1, 2017. Senior Executive Performance RSUs are purely performance-based, and no Senior Executive Performance RSUs vest unless, as of the end of the performance period (March 1, 2017 through the date that is 25 trading days after the first filing of an Annual Report on Form 10-K or Quarterly Report on Form 10-Q by the Company following September 30, 2019 (the “Performance Period”)) or in connection with a Change of Control (as defined the in 2012 Plan), a significant threshold level of stock price appreciation (or the equivalent in connection with a Change of Control that takes the form of an asset sale) has been achieved by the Company. Furthermore, the number of Senior Executive Performance RSUs that ultimately vest at the end of the Performance Period depends on whether the percentage increase in the Company’s stock price during the Performance Period equaled or outperformed the percentage increase in the Russell 2000 Index over the same period.

The Senior Executive Performance RSUs will fully vest if the following market conditions are met: (i) the Company achieves a stock price of $20.00 per share or more at the end of the Performance Period, which is expected to end in January 2020; and (ii) the Company’s stock price growth during the Performance Period equaled or outperformed the stock price growth of the Russell 2000 Index. For stock prices between $16.00 per share and $20.00 per share, vesting will range (i) between 25% and 50% if the percentage increase in the Company’s stock price during the Performance Period was lower than the percentage increase of the Russell 2000 Index and (ii) between 50% and 100% if the percentage increase in the Company’s stock price during the Performance Period equaled or outperformed the percentage increase of the Russell 2000 Index, in each case, with higher vesting relating to increased stock prices, determined on the basis of a straight line interpolation. No Senior Executive Performance RSUs will vest if the Company’s stock price at the end of the Performance Period is below $16.00 per share and all unvested Senior Executive Performance RSUs shall be canceled. Upon cancellation, the shares subject to such Senior Executive Performance RSUs will not be returned to the 2012 Plan and will not be available for issuance under other types of Awards. Fifty percent of the Senior Executive Performance RSUs determined at the end of the Performance Period convert into unrestricted shares (one share per RSU). The remaining 50% of the Senior Executive Performance RSUs vest subject to the participants’ continued employment through the one-year anniversary of the end of the Performance Period; provided, however that such remaining Senior Executive Performance RSUs shall fully vest upon a qualifying termination or a change in control during such one-year period. Accordingly, the related stock-based compensation expense will be recognized over these respective vesting periods.

The Company estimated the fair value of the Senior Executive Performance RSUs on their grant date using the Monte-Carlo simulation (using the Company’s valuation date stock price, the annual risk-free interest rate, expected volatility, the probability of reaching the performance targets, and a 20-trading-day average stock price). The Company has estimated the aggregate fair value of the Senior Executive Performance RSUs at $4.2 million and recognized $0.4 million in stock-based compensation expense related to outstanding Senior Executive Performance RSUs during the fiscal year ended September 30, 2017.

Closing Shares

In connection with the closing of the IDC Acquisition in June 2015, the Company issued to the Sellers 712,790 shares of common stock. Vesting of these shares is subject to the continued employment of the founders of IDchecker and occurs over a period of 27 months (the “Service Period”) from the date of issuance. The cost of the Closing Shares is determined using the fair value of common stock on the award date, and the stock-based compensation is recognized ratably over the vesting period. Stock-based compensation expense related to the Closing Shares is recorded within acquisition-related costs and expenses on the Consolidated Statements of Operations and Other Comprehensive Income. The Company recognized $1.2 million, $1.2 million, and $0.3 million in stock-based compensation expense related to the Closing Shares for the fiscal years ended September 30, 2017, 2016, and 2015, respectively. As of September 30, 2017, the Company had no unrecognized compensation expense related to Closing Shares.

Earnout Shares

In addition to the Cash Payment and the issuance of Closing Shares, in each case at the closing of the IDC Acquisition, the Company issued 137,306 Earnout Shares to the Sellers for achievement by IDchecker of certain revenue targets for the nine-month period ended September 30, 2015. Additionally, 81,182 Earnout Shares were earned by the Sellers for achievement by IDchecker of certain revenue targets for the twelve-month period ended September 30, 2016. Earnout Shares vest and will be eligible for resale such that 12.5% of the Earnout Shares will vest and be released for resale on the date that is six months following the date of issue and thereafter, the remaining 87.5% of the applicable Earnout Shares will vest and be released for resale in equal quarterly installments. Vesting of the Earnout Shares is subject to the continued employment of the founders of IDchecker through the date on which all Earnout Shares are fully vested.

The Company estimated the fair value of the Earnout Shares using the Monte-Carlo simulation (using the Company’s valuation date stock price, the annual risk-free interest rate, expected volatility, the probability of reaching the performance targets and a 10 trading day average stock price). This model will be updated and the respective fair value adjusted each reporting period based on the relevant facts and conditions at the reporting date. Stock-based compensation expense related to the Earnout Shares is recorded within acquisition-related costs and expenses on the Consolidated Statements of Operations and Other Comprehensive Income. The Company recognized $412,000, $292,000, and $47,000 for the fiscal years ended September 30, 2017, 2016, and 2015, respectively.