# MITEK SYSTEMS INC (MITK) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MITEK SYSTEMS INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/807863/000080786323000049/mitk-20220930.htm
Accession: 0000807863-23-000049
Filing date: 2023-07-31
Report date: 2022-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MITK/
All MD&A years: /company/MITK/mda/
Previous year: /company/MITK/mda/fy2021/ (FY 2021)
Next year: /company/MITK/mda/fy2023/ (FY 2023)

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):

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[[/GREPCENT_TABLE]]

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.

29

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):

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[[/GREPCENT_TABLE]]

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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[[/GREPCENT_TABLE]]

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

32

“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.