Stockholders' Equity

6 Months Ended

Mar. 31, 2019

STOCKHOLDERS’ EQUITY

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense related to RSUs, stock options, and ESPP shares, which was allocated as follows (amounts shown in thousands):


	Three Months Ended March 31,						Six Months Ended March 31,
	2019		2018		2019		2018
Cost of revenue	$	56	$	22	$	100	$	40
Selling and marketing	746		729		1,537		1,370
Research and development	567		449		1,001		816
General and administrative	984		858		2,385		1,721
Stock-based compensation expense included in expenses	$	2,353	$	2,058	$	5,023	$	3,947

The fair value calculations for stock-based compensation awards to employees for the six months ended March 31, 2019 and 2018 were based on the following assumptions:


	Six Months Ended March 31, 2019	Six Months Ended March 31, 2018
Risk-free interest rate	2.88% – 3.08%	2.04%
Expected life (years)	5.46	5.15
Expected volatility	57%	60%
Expected dividends	None	None

The expected life of options granted is derived using assumed exercise rates based on historical exercise patterns and vesting terms, and represents the period of time that options granted are expected to be outstanding. Expected stock price

volatility is based upon implied volatility and other factors, including historical volatility. After assessing all available information on either historical volatility, or implied volatility, or both, the Company concluded that a combination of both historical and implied volatility provides the best estimate of expected volatility.

As of March 31, 2019, the Company had $21.7 million of unrecognized compensation expense related to outstanding stock options and RSUs expected to be recognized over a weighted-average period of approximately 2.7 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. The total number of shares of Common Stock reserved for issuance under the 2012 Plan is 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 March 31, 2019, (i) stock options to purchase 1,676,413 shares of Common Stock, 2,220,193 RSUs and 1,728,569 Senior Executive Performance RSUs were outstanding under the 2012 Plan, and 676,415 shares of Common Stock were reserved for future grants under the 2012 Plan and (ii) stock options to purchase an aggregate of 541,527 shares of Common Stock were outstanding under the Prior Plans.

Employee Stock Purchase Plan

In January 2018, the Board adopted the ESPP. On March 7, 2018, the Company’s stockholders approved the ESPP. The total number of shares of Common Stock reserved for issuance thereunder is 1,000,000 shares. As of March 31, 2019, (i) 128,342 shares were outstanding under the ESPP and (ii) 871,658 shares of Common Stock were reserved for future purchases under the ESPP. The Company commenced the initial offering period on April 2, 2018.

The ESPP enables eligible employees to purchase shares of Common Stock at a discount from the market price through payroll deductions, subject to limitations. Eligible employees may elect to participate in the ESPP only during an open enrollment period. The offering period immediately follows the open enrollment window, at which time ESPP contributions are withheld from the participant's regular paycheck. The ESPP provides for a 15% discount on the market value of the stock at the lower of the grant date price (first day of the offering period) and the purchase date price (last day of the offering period). The Company recognized $0.1 million and $0.2 million in stock-based compensation expense related to the ESPP in the three and six months ended March 31, 2019, respectively.

Director Restricted Stock Unit Plan

In January 2011, the Board adopted the Mitek Systems, Inc. Director Restricted Stock Unit Plan, as amended and restated (the “Director Plan”). On March 10, 2017, the Company’s stockholders approved an amendment to the Director Plan. The total number of shares of Common Stock reserved for issuance thereunder is 1,500,000 shares. As of March 31, 2019, (i) 366,870 RSUs were outstanding under the Director Plan and (ii) 391,701 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 equity plans during the six months ended March 31, 2019:


	Number of Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in Years)
Outstanding at September 30, 2018	2,806,364	$	4.75	4.6
Granted	364,368	$	9.50
Exercised	(637,051)	$	3.38
Canceled	(143,562)	$	6.62
Outstanding at March 31, 2019	2,390,119	$	5.73	5.3

The Company recognized $0.2 million and $0.3 million in stock-based compensation expense related to outstanding stock options in the three months ended March 31, 2019 and 2018, respectively. The Company recognized $0.4 million and $0.6 million in stock-based compensation expense related to outstanding stock options in the six months ended March 31, 2019

and 2018, respectively. As of March 31, 2019, the Company had $2.1 million of unrecognized compensation expense related to outstanding stock options expected to be recognized over a weighted-average period of approximately 3.3 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 six months ended March 31, 2019 and 2018 was $4.8 million and $0.5 million, respectively. The per-share weighted-average fair value of options granted during the six months ended March 31, 2019 was $9.50. The aggregate intrinsic value of options outstanding as of March 31, 2019 and September 30, 2018, was $15.6 million and $8.7 million, respectively.

Restricted Stock Units

The following table summarizes RSU activity under the Company’s equity plans during the six months ended March 31, 2019:


	Number of Shares	Weighted-Average Fair Market Value Per Share
Outstanding at September 30, 2018	2,580,176	$	6.92
Granted	1,069,254	$	9.63
Settled	(682,214)	$	6.00
Canceled	(285,415)	$	6.97
Outstanding at March 31, 2019	2,681,801	$	8.25

The cost of RSUs is determined using the fair value of Common Stock on the award date, and the compensation expense is recognized ratably over the vesting period. The Company recognized $1.6 million and $1.4 million in stock-based compensation expense related to outstanding RSUs in the three months ended March 31, 2019 and 2018, respectively. The Company recognized $3.7 million and $2.6 million in stock-based compensation expense related to outstanding RSUs in the six months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the Company had $16.4 million of unrecognized compensation expense related to outstanding RSUs expected to be recognized over a weighted-average period of approximately 2.7 years.

Senior Executive Performance RSUs

There were 1,728,569 Senior Executive Performance RSUs outstanding as of March 31, 2019. The Company recognized $0.3 million and $0.4 million in stock-based compensation expense related to outstanding Senior Executive Performance RSUs in the three months ended March 31, 2019 and 2018, respectively. The Company recognized $0.5 million and $0.7 million in stock-based compensation expense related to outstanding Senior Executive Performance RSUs in the six months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the Company had $1.1 million of unrecognized compensation expense related to outstanding RSUs expected to be recognized over a weighted-average period of approximately 1.4 years.

Performance Options

On November 6, 2018, as an inducement grant pursuant to Nasdaq Listing Rule 5635(c)(4), the Company’s Chief Executive Officer was granted performance options (the “Performance Options”) to purchase up to 800,000 shares of the Common Stock at an exercise price of $9.50 per share, the closing market price for a share of the Common Stock on the date of the grant. As long as he remains employed by the Company, such Performance Options shall vest upon the closing market price of the Common Stock achieving certain predetermined levels and his serving as the Chief Executive Officer of the Company for at least 3.0 years. In the event of a change of control of the Company, all of the unvested Performance Options will vest if the per share price payable to the stockholders of the Company in connection with the Change of Control is an amount reaching those certain predetermined levels required for the Performance Options to otherwise vest. The Company recognized $0.2 million and $0.3 million in stock-based compensation expense related to outstanding Performance Options in the three and six months ended March 31, 2019, respectively. As of March 31, 2019, the Company had $2.1 million of unrecognized compensation expense related to outstanding Performance Options expected to be recognized over a weighted-average period of approximately 2.6 years.

Earnout Shares

On June 17, 2015, the Company completed the acquisition of ID Checker NL B.V., a company incorporated under the laws of The Netherlands (“IDC NL”), and ID Checker, Inc., a California corporation and wholly owned subsidiary of IDC NL (“IDC Inc.” and together with IDC NL, “ID Checker”). In connection with the acquisition of ID Checker, the Company issued 137,306 shares of Common Stock (the “Earnout Shares”) to the Sellers for achievement by ID Checker 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 ID Checker of certain revenue targets for the twelve-month period ended September 30, 2016. 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). In November 2017, a contingency triggered the immediate vesting of all Earnout Shares, resulting in an acceleration of all stock-based compensation related to the earnout shares. 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 (loss). The company did not recognize any stock-based compensation expense related to the Earnout Shares for the six months ended March 31, 2019. The Company recognized $0.4 million in stock-based compensation expense related to the Earnout Shares for the six months ended March 31, 2018.

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.

The Rights will expire on the earlier of (i) the close of business on October 22, 2021, (ii) the time at which the Rights are redeemed, and (iii) the time at which the Rights are exchanged.

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.