This Quarterly Report on Form 10-Q (this "Form 10-Q"), contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or they prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in Part I, Item 2-"Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A-"Risk Factors," but appear throughout this Form 10-Q. Forward -looking statements may include, but are not limited to, statements relating to our outlook or expectations for earnings, revenues, expenses, asset quality, volatility of our common stock, financial condition or other future financial or business performance, strategies, expectations, or business prospects, the duration and impact of the novel COVID-19 pandemic on our business, our customers, and markets generally, or the impact of legal, regulatory, or supervisory matters on our business, results of operations, or financial condition. Forward-looking statements can be identified by the use of words such as "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target", "will," "would," "could," "can," "may", or similar expressions. Forward-looking statements reflect our judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A-"Risk Factors" in this Form 10-Q and in our other filings with theU.S. Securities and Exchange Commission (the "SEC"), including our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 , filed with theU.S. Securities and Exchange Commission ("SEC") onDecember 7, 2020 , as amended by Amendment No. 1 to the Annual Report on Form 10-K/A (together, the "Form 10-K"), filed with theSEC onDecember 11, 2020 . Additionally, there may be other factors that could preclude us from realizing the predictions made in the forward-looking statements. We operate in a continually changing business environment and new factors emerge from time to time. We cannot predict such factors or assess the impact, if any, of such factors on our financial position or results of operations. All forward-looking statements included in this Form 10-Q speak only as of the date of this Form 10-Q and you are cautioned not to place undue reliance on any such forward-looking statements. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. In this Form 10-Q, unless the context indicates otherwise, the terms "Mitek," "the Company," "we," "us," and "our" refer toMitek Systems, Inc. , aDelaware corporation and its subsidiaries. Overview Mitek is a leading innovator of mobile image capture and digital identity verification solutions. We are a software development company with expertise in computer vision, artificial intelligence, and machine learning. We are currently serving more than 7,500 financial services organizations and leading marketplace and financial technology ("fintech") brands across the globe. Our solutions are embedded in native mobile apps and browsers to facilitate better online user experiences, fraud detection and reduction, and compliant transactions. Mitek's Mobile Deposit® solution is used today by millions of consumers inthe United States ("U.S.") andCanada for mobile check deposit. Mobile Deposit® enables individuals and businesses to remotely deposit checks using their camera-equipped smartphone or tablet. Our Mobile Deposit® solution is embedded within the financial institutions' digital banking apps used by consumers and has now processed approximately five billion check deposits. Mitek began selling Mobile Deposit® in early 2008 and received its first patent for this product inAugust 2010 . Mitek's Mobile Verify® verifies a user's identity online enabling organizations to build safer digital communities. Scanning an identity document helps enable an enterprise to verify the identity of the person with whom they are conducting business, to comply with growing governmental Anti-Money Laundering and Know Your Customer regulatory requirements, and to improve the overall customer experience for digital onboarding. To be sure the person submitting the identity document iswho they say they are, Mitek's Mobile Verify Face Comparison provides an additional layer of online verification and compares the face on the submitted identity document with the live selfie photo of the user. The combination of identity document capture and data extraction process enables the organization to prefill the end user's application, with far fewer key strokes, thus reducing keying errors, and improving both operational efficiency and the customer experience. Today, the financial services verticals (banks, credit unions, lenders, payments processors, card issuers, fintech companies, etc.) represent the greatest percentage of use of our solutions, but there is accelerated adoption by marketplaces, sharing economy, and hospitality sectors. Mitek uses artificial intelligence and machine learning to constantly improve the product performance of Mobile Verify® such as speed and accuracy of approvals of identification documents. The core of our user experience is driven by Mitek MiSnap™, the leading image capture technology, which is incorporated across our product lines. It provides a simple, intuitive, and superior user-experience, making digital transactions faster, more accurate, and easier for the consumer. Mobile Fill® automates application prefill of any form with user data by simply snapping a picture of the driver's license or other similar user identity document. 30 -------------------------------------------------------------------------------- CheckReader™ enables financial institutions to automatically extract data from a check image received across any deposit channel-branch, ATM, remote deposit capture, and mobile. Through the automatic recognition of all fields on checks, whether handwritten or machine print, CheckReader™ speeds the time to deposit for financial institutions and enables them to comply with check clearing regulations. InMay 2021 (as more fully described below in Note 3) Mitek acquiredID R&D, Inc. ("ID R&D"), an award-winning provider of artificial intelligence (AI)-based voice and face biometrics and liveness detection. The ID R&D Acquisition (as defined below) will simplify and secure the entire transaction lifecycle for both businesses and consumers. Businesses and financial institutions will have access to one authentication solution to deploy throughout the complete transaction cycle, and can provide consumers with a simple, intuitive approach to fighting fraud. We market and sell our products and services worldwide through internal, direct sales teams located in theU.S. ,Europe , andLatin America as well as through channel partners. Our partner sales strategy includes channel partnerswho are financial services technology providers and identity verification providers. These partners integrate our products into their solutions to meet the needs of their customers. Third Quarter Fiscal 2021 Highlights •Revenue for the three months endedJune 30, 2021 was$31.8 million , an increase of 25% compared to revenue of$25.4 million in the three months endedJune 30, 2020 . •Net income was$3.0 million , or$0.07 per diluted share, during the three months endedJune 30, 2021 , compared to net income of$1.3 million , or$0.03 per share, during the three months endedJune 30, 2020 . •Cash provided by operating activities was$9.0 million for the nine months endedJune 30, 2021 , compared to$17.4 million for the nine months endedJune 30, 2020 . •We added new patents to our portfolio during the third quarter of fiscal 2021 bringing our total number of issued patents to 73 as ofJune 30, 2021 . In addition, we have 15 domestic and international patent applications pending as ofJune 30, 2021 . Acquisition ofID R&D, Inc. OnMay 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") datedMay 28, 2021 , by and among the Company, ID R&D andAlexey Khitrov . Upon completion of the ID R&D Acquisition, ID R&D became a direct wholly owned subsidiary ofMitek Systems, Inc. ID R&D is an award-winning provider of artificial intelligence-based voice and face biometrics and liveness detection. Under the terms of the Merger Agreement, the Company agreed to pay an aggregate purchase price of up to$49.0 million . On the Closing Date, the equityholders of ID R&D received from the Company: (i)$13.0 million in cash, subject to adjustments for transaction expenses, escrow amounts, indebtedness and working capital adjustments and (ii) 867,226 shares (or$13.9 million ) of Common Stock. The terms of the Merger Agreement also provide for additional payments of up to approximately$22.1 million in a combination of cash and Common Stock upon the achievement of certain financial milestones during fiscal 2022 and fiscal 2023. Market Opportunities, Challenges & Risks We believe that financial institutions, fintechs, and other companies see our patented solutions as a way to provide a superior digital customer experience to meet growing consumer demand for trust and convenience online and, at the same time, assist them in meeting regulatory requirements. The value of digital transformation to our customers is a possible increase in top line revenue and a reduction in the cost of sales and services. As the use of new technology increases, so does associated fraud and cyber-attacks. The negative outcomes of fraud encompass financial losses, brand damage, and loss of loyal customers. We predict growth in both our deposits and identity verification products based on current trends in payments, online lending, more stringent regulations, growing usage of sharing apps and online marketplaces, and the ever-increasing demand for digital services. Factors adversely affecting the pricing of, or demand for, our digital solutions, such as competition from other products or technologies, any decline in the demand for digital transactions, or negative publicity or obsolescence of the software environments in which our products operate, could result in lower revenues or gross margins. Further, because substantially all of our revenues are from a few types of technology, our product concentration may make us especially vulnerable to market demand and competition from other technologies, which could reduce our revenues. The sales cycle for our software and services can be lengthy and the implementation cycles for our software and services by our channel partners and customers can also be lengthy, often as long as six months and sometimes longer for larger customers. If implementation of our products by our channel partners and customers is delayed or otherwise not completed, our business, financial condition, and results of operations may be adversely affected. Revenues related to most of our on-premise licenses for mobile products are required to be recognized up front upon satisfaction of all applicable revenue recognition criteria. Revenue related to our software as a service ("SaaS") products is recognized 31 -------------------------------------------------------------------------------- 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 theWorld Health Organization onMarch 11, 2020 . In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed "essential," isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. We anticipate that these actions and the global health crisis caused by COVID-19 will negatively impact business activity across the globe. The extent to which COVID-19 will impact our business, operations, and financial results is uncertain and difficult to predict and depends on numerous evolving factors including the duration and severity of the outbreak. See Item 1A: "Risk Factors" for additional details. In an effort to protect the health and safety of our employees, our workforce has transitioned to working remotely and employee travel, including to our international subsidiaries, has been severely curtailed. It is not clear what the potential effects of any such alterations or modifications may have on our business, including the effects on our customers or vendors, or on our financial results. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local, or foreign authorities, or that we determine are in the best interests of our employees, customers, partners, and stockholders. We anticipate in certain circumstances that the current stay-at-home orders and impact of the COVID-19 pandemic may accelerate the adoption of digital technologies and create future opportunities and uses for our products. The ultimate extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our long term revenue growth and profitability, depends on certain developments, including the duration of the pandemic and any resurgences, the severity of the disease, responsive actions taken by public health officials, the development, distribution and public acceptance of treatments and vaccines, the impacts on our customers' and our sales cycles, our ability to generate new business leads, the impacts on our customers', employee and industry events, and the effects on our vendors, all of which are uncertain and currently cannot be predicted with any degree of certainty. As a result, the extent to which the COVID-19 pandemic will continue to impact our financial condition or results of operations is uncertain. Because of our IT infrastructure and the nature of our business, our employees have generally been able to work remotely and productively, but future productivity and the effects of COVID-19 on our operations is unknown at this time. We continue to seek new and innovative opportunities to serve our customers' needs. Results of Operations Comparison of the Three Months EndedJune 30, 2021 and 2020 32 --------------------------------------------------------------------------------
The following table summarizes certain aspects of our results of operations for
the three months ended
Three Months Ended
Percentage of Total Revenue Increase (Decrease) 2021 2020 2021 2020 $ % Revenue Software and hardware$ 16,973 $ 13,212 53 % 52 %$ 3,761 28 % Services and other 14,805 12,201 47 % 48 % 2,604 21 % Total revenue$ 31,778 $ 25,413 100 % 100 %$ 6,365 25 % Cost of revenue 3,410 3,496 11 % 14 % (86) (2) % Selling and marketing 8,133 7,011 26 % 28 % 1,122 16 % Research and development 6,946 5,891 22 % 23 % 1,055 18 % General and administrative 5,633 5,884 18 % 23 % (251) (4) % Acquisition-related costs and expenses 2,224 1,697 7 % 7 % 527 31 % Restructuring costs - - - % - % - - % Interest expense 2,223 - 7 % - % 2,223 100 % Other income, net 80 145 - % 1 % (65) (45) % Income tax provision (304) (231) (1) % (1) % (73) (32) % Net income$ 2,985 $ 1,348 9 % 5 %$ 1,637 121 % Revenue Total revenue increased$6.4 million , or 25%, to$31.8 million in the three months endedJune 30, 2021 compared to$25.4 million in the three months endedJune 30, 2020 . Software and hardware revenue increased$3.8 million , or 28%, to$17.0 million in the three months endedJune 30, 2021 compared to$13.2 million in the three months endedJune 30, 2020 . This increase is primarily due to an increase in sales of our Mobile Deposit® software product. This increase was partially offset by a decline in revenue from our CheckReader™ and ID_CLOUD™ software products. Services and other revenue increased$2.6 million , or 21%, to$14.8 million in the three months endedJune 30, 2021 compared to$12.2 million in the three months endedJune 30, 2020 . This increase is primarily due to continued growth in Mobile Verify® transactional SaaS revenue of$2.3 million , or 33%, in the three months endedJune 30, 2021 compared to the same period in 2020, as well as an increase in Mobile Deposit® transactional SaaS revenue. Cost of Revenue Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third party products embedded in our products. Cost of revenue decreased$0.1 million , or 2%, to$3.4 million in the three months endedJune 30, 2021 compared to$3.5 million in the three months endedJune 30, 2020 . As a percentage of revenue, cost of revenue decreased to 11% in the three months endedJune 30, 2021 from 14% in the three months endedJune 30, 2020 . The decrease is primarily due to lower costs associated with the sale of ICAR hardware products driven by lower sales, partially offset by an increase in variable personnel and hosting costs associated with a higher volume of Mobile Verify™ transactions processed during the three months endedJune 30, 2021 compared to the same period in 2020. Selling and Marketing Expenses Selling and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with sales and marketing personnel. Selling and marketing expenses also include non-billable costs of professional services personnel, advertising expenses, product promotion costs, trade shows, and other brand awareness programs. Selling and marketing expenses increased$1.1 million , or 16%, to$8.1 million in the three months endedJune 30, 2021 compared to$7.0 million in the three months endedJune 30, 2020 . As a percentage of revenue, selling and marketing expenses decreased to 26% in the three months endedJune 30, 2021 from 28% in the three months endedJune 30, 2020 . The increase in selling and marketing expense is due to higher personnel-related costs resulting from our increased headcount costs of$1.1 million in the three months endedJune 30, 2021 compared to the same period in 2020. Research and Development Expenses Research and development expenses include payroll, employee benefits, stock-based compensation, third party contractor expenses, and other headcount-related costs associated with software engineering and mobile capture science. Research and 33 -------------------------------------------------------------------------------- development expenses increased$1.0 million , or 18%, to$6.9 million in the three months endedJune 30, 2021 compared to$5.9 million in the three months endedJune 30, 2020 . As a percentage of revenue, research and development expenses decreased to 22% in the three months endedJune 30, 2021 from 23% in the three months endedJune 30, 2020 . The increase in research and development expenses is primarily due to higher personnel-related costs resulting from our increased headcount, increased expenses as a result of the ID R&D Acquisition as well as variable third-party engineering costs in the three months endedJune 30, 2021 compared to the same period in 2020. General and Administrative Expenses General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration, and information technology functions, as well as third party legal, accounting, and other administrative costs. General and administrative expenses decreased$0.3 million , or 4%, to$5.6 million in the three months endedJune 30, 2021 compared to$5.9 million in the three months endedJune 30, 2020 . As a percentage of revenue, general and administrative expenses decreased to 18% in the three months endedJune 30, 2021 from 23% in the three months endedJune 30, 2020 . The decrease in general and administrative expenses is primarily due to lower intellectual property litigation related costs of$0.9 million . The overall decrease in general and administrative expense was partially offset by higher executive transition costs of$0.4 million and higher personnel-related costs of$0.2 million resulting from our increased headcount during the three months endedJune 30, 2021 compared to the same period in 2020. Acquisition-Related Costs and Expenses Acquisition-related costs and expenses include amortization of intangible assets, expenses recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Acquisition-related costs and expenses increased$0.5 million , or 31%, to$2.2 million in the three months endedJune 30, 2021 compared to$1.7 million in the three months endedJune 30, 2020 . As a percentage of revenue, acquisition-related costs and expenses was consistent at 7% in each of the three months endedJune 30, 2021 and 2020. The increase in acquisition-related costs and expenses is due to expenses associated with the ID R&D Acquisition during the three months endedJune 30, 2021 compared to the same period in 2020. Interest Expense Interest expense includes the amortization of debt discount and issuance costs and coupon interest incurred associated with our 0.75% convertible senior notes due 2026 (the "2026 Notes"). Interest expense was$2.2 million for the three months endedJune 30, 2021 and consisted of$1.9 million of amortization of debt discount and issuance costs and$0.3 million of coupon interest incurred. There was no interest expense in the three months endedJune 30, 2020 . Other Income, Net Other income, net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio, foreign currency transactional gains or losses, and the change in fair value of our convertible senior notes hedge and embedded conversion derivative. Other income, net was consistent at$0.1 million in each of the three months endedJune 30, 2021 and 2020. Income Tax Provision For the three months endedJune 30, 2021 , we recorded an income tax provision of$0.3 million , which yielded an effective tax rate of 9%. For the three months endedJune 30, 2020 , we recorded an income tax provision of$0.2 million , or an effective tax rate of 15%. The difference between theU.S. federal statutory tax rate and our effective tax rate for the three months endedJune 30, 2021 and 2020 was primarily due to the impact of foreign and state taxes, the impact of certain permanent items on its tax provision, and the impact of federal and state research and development credits on its tax provision. 34 --------------------------------------------------------------------------------
Comparison of the Nine Months Ended
Nine Months Ended
Percentage of Total Revenue Increase (Decrease) 2021 2020 2021 2020 $ % Revenue Software and hardware$ 42,288 $ 36,180 49 % 51 %$ 6,108 17 % Services and other 44,238 34,492 51 % 49 % 9,746 28 % Total revenue$ 86,526 $ 70,672 100 % 100 %$ 15,854 22 % Cost of revenue 11,340 9,615 13 % 14 % 1,725 18 % Selling and marketing 24,048 20,345 28 % 29 % 3,703 18 % Research and development 19,801 16,764 23 % 24 % 3,037 18 % General and administrative 16,409 16,382 19 % 23 % 27 - % Acquisition-related costs and expenses 5,576 4,884 6 % 7 % 692 14 % Restructuring costs - (114) - % - % 114 (100) % Interest expense 3,543 - 4 % - % 3,543 100 % Other income, net 549 480 1 % 1 % 69 14 % Income tax provision (187) (460) - % (1) % 273 59 % Net income$ 6,171 $ 2,816 7 % 4 %$ 3,355 119 % Revenue Total revenue increased$15.9 million or 22%, to$86.5 million in the nine months endedJune 30, 2021 compared to$70.7 million in the nine months endedJune 30, 2020 . Software and hardware revenue increased$6.1 million , or 17%, to$42.3 million in the nine months endedJune 30, 2021 compared to$36.2 million in the nine months endedJune 30, 2020 primarily due to an increase in sales of our Mobile Deposit® software product and identity verification hardware products. Services and other revenue increased$9.7 million , or 28%, to$44.2 million in the nine months endedJune 30, 2021 compared to$34.5 million in the nine months endedJune 30, 2020 primarily due to strong growth in Mobile Verify® transactional SaaS revenue of$8.3 million in the nine months endedJune 30, 2021 compared to the same period in 2020, as well as an increase in maintenance revenue associated with Mobile Deposit® software sales and hosted mobile deposit transactional revenue. Cost of Revenue Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third party products embedded in our products. Cost of revenue increased$1.7 million , or 18%, to$11.3 million in the nine months endedJune 30, 2021 compared to$9.6 million in the nine months endedJune 30, 2020 . As a percentage of revenue, cost of revenue decreased to 13% in the nine months endedJune 30, 2021 from 14% in the nine months endedJune 30, 2020 . The increase in cost of revenue is primarily due to an increase in variable personnel, hosting and royalty costs associated with a higher volume of Mobile Verify® transactions processed during the nine months endedJune 30, 2021 compared to the same period in 2020. Selling and Marketing Expenses Selling and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with sales, marketing, and product management personnel. Selling and marketing expenses also include non-billable costs of professional services personnel, advertising expenses, product promotion costs, trade shows, and other brand awareness programs. Selling and marketing expenses increased$3.7 million , or 18%, to$24.0 million in the nine months endedJune 30, 2021 compared to$20.3 million in the nine months endedJune 30, 2020 . As a percentage of revenue, selling and marketing expenses decreased to 28% in the nine months endedJune 30, 2021 from 29% in the nine months endedJune 30, 2020 . The increase in selling and marketing expense is primarily due to higher personnel-related costs resulting from our increased headcount of$4.1 million and higher product promotion costs of$0.4 million in the nine months endedJune 30, 2021 compared to the same period in 2020. The overall increase in selling and marketing expense was partially offset by a decrease in travel and related expenses of$0.8 million as a result of the COVID-19 pandemic. 35 -------------------------------------------------------------------------------- Research and Development Expenses Research and development expenses include payroll, employee benefits, stock-based compensation, third party contractor expenses, and other headcount-related costs associated with software engineering and mobile capture science. Research and development expenses increased$3.0 million , or 18%, to$19.8 million in the nine months endedJune 30, 2021 compared to$16.8 million in the nine months endedJune 30, 2020 . As a percentage of revenue, research and development expenses decreased to 23% in the nine months endedJune 30, 2021 from 24% in the nine months endedJune 30, 2020 . The increase in research and development expenses is primarily due to higher personnel-related costs resulting from our increased headcount, increased expenses as a result of the ID R&D Acquisition as well as variable third-party engineering costs in the nine months endedJune 30, 2021 compared to the same period in 2020. General and Administrative Expenses General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration, and information technology functions, as well as third party legal, accounting, and other administrative costs. General and administrative expenses were consistent at$16.4 million in each of the nine months endedJune 30, 2021 and 2020. As a percentage of revenue, general and administrative expenses decreased to 19% in the nine months endedJune 30, 2021 from 23% in the nine months endedJune 30, 2020 . Higher personnel-related costs resulting from our increased headcount of$0.9 million and higher executive transition costs of$0.4 million were partially offset by decreased intellectual property litigation costs of$1.3 million during the nine months endedJune 30, 2021 compared to the same period in 2020. Acquisition-Related Costs and Expenses Acquisition-related costs and expenses include amortization of intangible assets, expenses recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Acquisition-related costs and expenses increased$0.7 million , or 14%, to$5.6 million in the nine months endedJune 30, 2021 compared to$4.9 million in the nine months endedJune 30, 2020 . As a percentage of revenue, acquisition-related costs and expenses decreased to 6% in the nine months endedJune 30, 2021 from 7% in the nine months endedJune 30, 2020 . The increase in acquisition-related costs and expenses is primarily due to expenses associated with the acquisition of ID R&D during the nine months endedJune 30, 2021 compared to the same period in 2020. Restructuring Costs Restructuring costs consist of employee severance obligations and other related costs. There were no restructuring costs in the nine months endedJune 30, 2021 . Restructuring costs were negative$0.1 million in the nine months endedJune 30, 2020 due to a reversal of costs accrued for the restructuring plan implemented inJune 2019 . Interest Expense Interest expense includes the amortization of debt discount and issuance costs and coupon interest incurred associated with our 2026 Notes. Interest expense was$3.5 million for nine months endedJune 30, 2021 and consisted of$3.1 million of amortization of debt discount and issuance costs and$0.5 million of coupon interest incurred. There was no interest expense in the nine months endedJune 30, 2020 . Other Income, Net Other income, net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio, foreign currency transactional gains or losses, and the change in fair value of our convertible senior notes hedge and embedded conversion derivative. Other income, net was consistent at$0.5 million of income in the nine months endedJune 30, 2021 the same period in 2020. Income Tax Provision For the nine months endedJune 30, 2021 , we recorded an income tax provision of$0.2 million , which yielded an effective tax rate of 3%. For the nine months endedJune 30, 2020 , we recorded an income tax provision of$0.5 million , which yielded an effective tax rate of 14%. The difference between theU.S. federal statutory tax rate and our effective tax rate for the nine months endedJune 30, 2021 and 2020 was primarily due to excess tax benefits resulting from the exercise of stock options and vesting of restricted stock, the impact of foreign and state taxes, the impact of certain permanent items on its tax provision, and the impact of federal and state research and development credits on its tax provision. 36 -------------------------------------------------------------------------------- Liquidity and Capital Resources OnJune 30, 2021 , we had$215.5 million in cash and cash equivalents and investments compared to$62.0 million onSeptember 30, 2020 , an increase of$153.5 million , or 248%. The increase in cash and cash equivalents and investments is primarily due to net proceeds from the issuance of the 2026 Notes of$140.4 million (net of sale of warrants and purchase of convertible senior notes hedge), net cash provided by operating activities of$25.0 million , and proceeds from the issuance of our common stock, par value$0.001 ("Common Stock") under our equity plan of$3.0 million . These increases were partially offset by net cash paid in conjunction with the ID R&D Acquisition of$12.5 million , capital expenditures of$1.0 million and the payment of acquisition-related contingent consideration of$0.8 million . Cash Flows from Operating Activities Net cash provided by operating activities during the nine months endedJune 30, 2021 was$25.0 million and resulted primarily from net income of$6.2 million , net non-cash charges of$18.5 million , and favorable changes in operating assets and liabilities of$0.3 million . The primary non-cash adjustments to operating activities were stock-based compensation expense, amortization of intangible assets, accretion and amortization on debt securities & other, depreciation and amortization, and amortization of investment premiums and other totaling$8.6 million ,$5.2 million ,$3.1 million ,$1.1 million , and$0.8 million , respectively, which were partially offset by a deferred tax benefit of$0.3 million . Net cash provided by operating activities during the nine months endedJune 30, 2020 was$17.4 million and resulted primarily from net income of$2.8 million net of non-cash charges of$13.9 million , and favorable changes in operating assets and liabilities of$0.7 million . The primary non-cash adjustments to operating activities were stock-based compensation expense, amortization of intangible assets, depreciation and amortization, and deferred taxes totaling$7.1 million ,$4.8 million , and$1.1 million and$0.7 million , respectively. Cash Flows from Investing Activities Net cash used in investing activities was$147.4 million during the nine months endedJune 30, 2021 , which consisted primarily of net purchases of investments of$133.9 million , net cash paid in conjunction with the ID R&D Acquisition of$12.5 million , and capital expenditures of$1.0 million . Net cash used in investing activities was$15.5 million during the nine months endedJune 30, 2020 , which consisted primarily of net purchases of investments of$15.0 million and capital expenditures of$0.5 million . Cash Flows from Financing Activities Net cash provided by financing activities was$142.8 million during the nine months endedJune 30, 2021 , which consisted of net proceeds from the issuance of the 2026 Notes of$149.7 million , proceeds from the issuance of equity plan Common Stock of$3.0 million , and proceeds from other borrowings of$0.3 million partially offset by net cash used for the call spreads on the sales and purchases of warrants and convertible senior notes hedge issued in connection with the 2026 Notes of$9.3 million , payment of acquisition-related contingent consideration of$0.8 million , and principal payments on other borrowings of$0.1 million . Net cash provided by financing activities was$0.3 million during the nine months endedJune 30, 2020 , which consisted of net proceeds from the issuance of equity plan Common Stock of$1.6 million and proceeds from other borrowing of$0.2 million , partially offset by repurchases and retirements of Common Stock of$1.0 million , payment of acquisition-related contingent consideration of$0.5 million , and principal payments on other borrowings of$0.1 million . 0.75% Convertible Senior Notes due 2026 InFebruary 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, datedFebruary 5, 2021 (the "Indenture"), between the Company andUMB 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 onFebruary 1, 2026 , unless earlier redeemed, repurchased or converted. The 2026 Notes will bear interest fromFebruary 5, 2021 at a rate of 0.750% per year payable semiannually in arrears onFebruary 1 andAugust 1 of each year, beginning onAugust 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 precedingAugust 1, 2025 , only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending onJune 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 37 -------------------------------------------------------------------------------- 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 afterAugust 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 onFebruary 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 withBank of America, N.A .,Jefferies International Limited andGoldman 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 onFebruary 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 includingMay 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 ofAugust 5, 2021 , the 2026 Notes were not convertible, therefore, we had not purchased any shares under the Notes Hedge and the Warrant Transactions had not been exercised and remain outstanding. See Note 8. "Convertible Senior Notes," of the notes to consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information relating to the Notes Hedge and Warrant Transactions. Rights Agreement OnOctober 23, 2018 , we entered into the Section 382 Rights Agreement (the "Rights Agreement") and issued a dividend of one preferred share purchase right (a "Right") for each share of Common Stock payable onNovember 2, 2018 to the stockholders of record of such shares on that date. Each Right entitles the registered holder, under certain circumstances, to purchase from us one one-thousandth of a share of Series B Junior Preferred Stock, par value$0.001 per share (the "Preferred Shares"), of the Company, at a price of$35.00 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement. The Rights are not exercisable until the Distribution Date (as defined in the Rights Agreement). Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. At any time prior to the time any Person becomes an Acquiring Person (as defined in the Rights Agreement), the Board may redeem the Rights in whole, but not in part, at a price of$0.0001 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The Rights will expire on the earlier of (i) the close of business onOctober 22, 2021 , (ii) the time at which the Rights are redeemed, and (iii) the time at which the Rights are exchanged. Share Repurchase Program OnDecember 13, 2019 , the Board authorized and approved a share repurchase program for up to$10 million of the currently outstanding shares of our Common Stock. The share repurchase program expired onDecember 16, 2020 . Total purchases made under 38 -------------------------------------------------------------------------------- the share repurchase program were$1.0 million or approximately 137,000 shares at an average price of$7.33 . The purchases under the share repurchase program were made through open market trades. OnJune 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 onJune 30, 2022 . The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The repurchases may be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions or pursuant to a share repurchase trading plan. The program may be discontinued or amended at any time. No shares have been purchased under the share repurchase program as ofJune 30, 2021 . CARES Act OnMarch 27, 2020 ,President Trump signed into law the "Coronavirus Aid, Relief and Economic Security (CARES) Act." The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We continue to examine the impacts the CARES Act may have on our business. Other Liquidity Matters OnJune 30, 2021 , we had investments of$174.9 million , designated as available-for-sale debt securities, which consisted of commercial paper, corporate issuances, and asset-backed securities, carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of tax, and reported as a separate component of stockholders' equity. All securities whose maturity or sale is expected within one year are classified as "current" on the consolidated balance sheets. All other securities are classified as "long-term" on the consolidated balance sheets. AtJune 30, 2021 , we had$138.3 million of our available-for-sale securities classified as current and$36.6 million of our available-for-sale securities classified as long-term. AtSeptember 30, 2020 , we had$40.0 million of our available-for-sale securities classified as current and$2.0 million of our available-for-sale securities classified as long-term. We had working capital of$167.6 million atJune 30, 2021 compared to$59.8 million atSeptember 30, 2020 . Based on our current operating plan, we believe the current cash and cash equivalents and cash expected to be generated from operations will be adequate to satisfy our working capital needs for the next twelve months from the date the financial statements are filed. Off Balance Sheet Arrangements The Company had no off balance sheet arrangements as ofJune 30, 2021 . Changes in Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We review our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, income taxes and the valuation of goodwill, intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies and estimates used in the preparation of our consolidated financial statements are described in Item 7-"Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Form 10-K for the year endedSeptember 30, 2020 . InFebruary 2021 , the Company issued the 2026 Notes. Concurrently with the issuance of the 2026 Notes, the Company entered into the Notes Hedge and Warrant Transactions. See Convertible Senior Notes Hedge and Embedded Conversion Derivative in Note 1. "Nature of Operations and Summary of Significant Accounting Policies" for our new policy surrounding these items and Note 8. "Convertible Senior Notes" for additional information related to these transactions. Other than the aforementioned, there have been no other material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year endedSeptember 30, 2020 . 39
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