Mitek Systems Inc: Form 10-Q for the period ended Mar 31, 2024

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 this 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, 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 the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the SEC on March 19, 2024 (“2023 Annual Report”). 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 to Mitek Systems, Inc., a Delaware corporation and its subsidiaries.

Overview

Mitek Systems, Inc. (“Mitek,” the “Company,” “we,” “us,” and “our”) is a provider 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 7,900 financial services organizations and financial technology (“fintech”) brands around the globe. Mitek markets and sells its products and services worldwide through internal, direct sales teams located in the U.S., Europe, and Latin America as well as through channel partners. Our partner sales strategy includes channel partners who are financial services technology providers and identity verification providers. These partners integrate our products into their solutions to meet the needs of their customers, typically provisioning Mitek services through their respective platforms.

Second Quarter Fiscal 2024 Highlights

• Revenue for the three months ended March 31, 2024 was $47.0 million, an increase of 2% compared to revenue of $46.1 million in the three months ended March 31, 2023.
• Net income was $0.3 million, or $0.01 per diluted share, during the three months ended March 31, 2024, compared to net income of $5.2 million, or $0.11 per diluted share, during the three months ended March 31, 2023.
• Cash used in operating activities was $2.4 million for the six months ended March 31, 2024, compared to cash provided by operating activities of $11.6 million for the six months ended March 31, 2023.
• We had 98 issued patents as of March 31, 2024. In addition, we have 13 domestic and international patent applications pending as of March 31, 2024.

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 demands of 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 service. As the use of new technology increases, so does associated fraud and cyber-attacks. The negative outcomes of fraud and cyber-attacks encompass financial losses, brand damage, and loss of loyal customers. We predict growth in our deposits business as a result of the increased consumer adoption of digital financial services provided to them by their banks and identity verification products based on current trends in payments, online lending, more stringent regulations, growing usage of sharing apps and online marketplaces, and the ever-increasing demand for digital services.

Factors adversely affecting the pricing of, or demand for, our digital solutions, such as competition from other products or technologies, any decline in the demand for digital transactions, or negative publicity or obsolescence of the software environments in which our products operate, could result in lower revenues or gross margins. Further, because substantially all of our revenues are from a few types of technology, our product concentration may make us especially vulnerable to market demand and competition from other technologies, which could reduce our revenues.

The sales cycle for our software and services can be lengthy and the implementation cycles for our software and services by our channel partners and customers can also be lengthy, often as long as six months and sometimes longer for larger customers. If implementation of our products by our channel partners and customers is delayed or otherwise not completed, our business, financial condition, and results of operations may be adversely affected.

Revenues related to most of our on premise licenses for mobile products are required to be recognized up front upon satisfaction of all applicable revenue recognition criteria. Revenue related to our software as a service (“SaaS”) products is recognized ratably over the life of the contract or as transactions are used depending on the contract criteria. The recognition of future revenues from these licenses is dependent upon a number of factors, including, but not limited to, the term of our license agreements, the timing of implementation of our products by our channel partners and customers, and the timing of any re-orders of additional licenses and/or license renewals by our channel partners and customers.

During each of the last few years, sales of licenses to one or more channel partners have comprised a significant part of our revenue each year. This is attributable to the timing of renewals or purchases of licenses and does not represent a dependence on any single channel partner. If we were to lose a channel partner relationship, we do not believe such a loss would adversely affect our operations because either we or another channel partner could sell our products to the end-users that had purchased products from the channel partner we lost. However, in that case, we or another channel partner must establish a relationship with the end-users, which could take time to develop, if it develops at all.

We have a growing number of competitors in the mobile image capture and identity verification industry, many of which have greater financial, technical, marketing, and other resources. However, we believe our patented mobile image capture and identity verification technology, our growing portfolio of products and geographic coverage for the financial services industry, and our market expertise gives us a distinct competitive advantage. To remain competitive, we must continue to offer products that are attractive to the consumer as well as being secure, accurate, and convenient. To help us remain competitive, we intend to further strengthen performance of our portfolio of products through research and development as well as partnering with other technology providers.

Results of Operations

Comparison of the Three Months Ended March 31, 2024 and 2023

The following table summarizes certain aspects of our results of operations for the three months ended March 31, 2024 and 2023 (amounts in thousands, except percentages):

Revenue

Total revenue increased $0.9 million, or 2%, to $47.0 million in the three months ended March 31, 2024 compared to $46.1 million in the three months ended March 31, 2023. Software and hardware revenue decreased $0.4 million, or 1%, to $24.9 million in the three months ended March 31, 2024 compared to $25.3 million in the three months ended March 31, 2023. This decrease is primarily due to a decrease in sales of our legacy identify verification software and hardware products and CheckReader™ software product, partially offset by an increase in sales of our Mobile Deposit® software product in the three months ended March 31, 2024 compared to the same period in 2023. Services and other revenue increased $1.2 million, or 6%, to $22.1 million in the three months ended March 31, 2024 compared to $20.9 million in the three months ended March 31, 2023. This increase is primarily due to higher transactional SaaS revenue from our identity verification products in the three months ended March 31, 2024 compared to the same period in 2023.

Cost of Revenue

Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third party products embedded in our products. Cost of revenue increased $0.3 million, or 5%, to $6.2 million in the three months ended March 31, 2024 compared to $5.9 million in the three months ended March 31, 2023. The increase in cost of revenue is primarily due to an increase in transactional SaaS revenue during the three months ended March 31, 2024 compared to the same period in 2023.

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 $1.4 million, or 15%, to $11.0 million in the three months ended March 31, 2024 compared to $9.6 million in the three months ended March 31, 2023. The increase in selling and marketing expense is primarily due to higher personnel-related costs due to increased headcount, increased commissions due to increased sales and higher product promotion costs, partially offset by lower other costs in the three months ended March 31, 2024 compared to the same period in 2023.

Research and Development Expenses

Research and development expenses include payroll, employee benefits, stock-based compensation, third party contractor expenses, and other headcount-related costs associated with software engineering and mobile capture science. Research and development expenses increased $2.3 million, or 32%, to $9.7 million in the three months ended March 31, 2024 compared to $7.4 million in the three months ended March 31, 2023. The increase in research and development expenses is primarily due to higher personnel-related costs as a result of our increased headcount and higher third-party contractor expenses, in the three months ended March 31, 2024 compared to the same period in 2023.

General and Administrative Expenses

General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration, and information technology functions, as well as third party legal, accounting, and other administrative costs. General and administrative expenses increased $4.8 million, or 49%, to $14.9 million in the three months ended March 31, 2024 compared to $10.1 million in the three months ended March 31, 2023. The increase in general and administrative expenses is primarily due to higher audit, accounting and tax fees, higher personnel-related costs, an increase in the allowance for uncollectible receivables, and higher other costs, during the three months ended March 31, 2024 compared to the same period in 2023.

Amortization and acquisition-related costs

Amortization and acquisition-related costs include amortization of intangible assets, adjustments recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs decreased $0.5 million, or 10%, to $3.8 million in the three months ended March 31, 2024 compared to $4.3 million in the three months ended March 31, 2023. The decrease in amortization and acquisition-related costs is primarily due to a decrease in amortization expense of intangible assets from previous acquisitions that had been fully amortized during the three months ended March 31, 2024 compared to the same period in 2023.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were $0.5 million in the three months ended March 31, 2024 compared to $0.2 million in the three months ended March 31, 2023. The increase in restructuring costs was primarily due to expenses incurred to relocate employees during the three months ended March 31, 2024 compared to the same period in 2023.

Interest Expense

Interest expense includes the amortization of debt discount and issuance costs and coupon interest accrued on our 0.75% convertible senior notes due 2026 (the “2026 Notes”). Interest expense was $2.3 million for the three months ended March 31, 2024 and consisted of $2.0 million of amortization of debt discount and issuance costs and $0.3 million of interest incurred. Interest expense was $2.2 million for the three months ended March 31, 2023 and consisted of $1.9 million of amortization of debt discount and issuance costs and $0.3 million of interest incurred.

Other Income, Net

Other income, net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio, and foreign currency transactional gains or losses. Other income, net increased $0.7 million, or 162%, to $1.2 million net income in the three months ended March 31, 2024 compared to $0.5 million net income in the three months ended March 31, 2023. The increase was primarily due to higher interest income net of amortization, partially offset by foreign currency exchange transactional losses in the three months ended March 31, 2024 as compared to the same period in 2023.

Income Tax Benefit (Provision)

For the three months ended March 31, 2024, we recorded an income tax benefit of $0.7 million which yielded an effective tax rate of 168%. For the three months ended March 31, 2023, we recorded an income tax provision of $1.8 million, or an effective tax rate of 26%. The effective tax rate for the three months ended March 31, 2024 is not meaningful due to near break-even pre-tax income for the period, which results in any discrete tax adjustments significantly impacting the rate. The difference between the U.S. federal statutory tax rate and our effective tax rate for each of the three months ended March 31, 2024 and 2023 was primarily due to a mix of worldwide income, the impact of non-deductible executive compensation as well as the impact of state taxes, and federal, state and foreign research and development credits on its tax provision.

Comparison of the Six Months Ended March 31, 2024 and 2023

The following table summarizes certain aspects of our results of operations for the six months ended March 31, 2024 and 2023 (amounts in thousands, except percentages):

Revenue

Total revenue decreased $7.9 million, or 9%, to $83.9 million in the six months ended March 31, 2024 compared to $91.8 million in the six months ended March 31, 2023. Software and hardware revenue decreased $10.7 million, or 21%, to $40.9 million in the six months ended March 31, 2024 compared to $51.6 million in the six months ended March 31, 2023. This decrease is primarily due to an existing customer having entered into a significant multiyear Mobile Deposit® contract and the license revenue associated with the full contract term was recognized in the six months ended March 31, 2023, which did not recur, and a decrease in sales of our legacy identify verification software and hardware products in the six months ended March 31, 2024. These decreases were partially offset by an increase in sales of our ID R&D biometrics software products. Services and other revenue increased $2.8 million, or 7%, to $43.0 million in the six months ended March 31, 2024 compared to $40.2 million in the six months ended March 31, 2023 primarily due to strong growth in transactional SaaS revenue from our identity verification and Mobile Deposit® products compared to the same period in 2023.

Cost of Revenue

Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third party products embedded in our products. Cost of revenue increased $0.7 million, or 7%, to $11.7 million in the six months ended March 31, 2024 compared to $11.0 million in the six months ended March 31, 2023. The increase in cost of revenue is primarily due to an increase in transactional SaaS revenue during the six months ended March 31, 2024 compared to the same period in 2023.

Selling and Marketing Expenses

Selling and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with sales, marketing, and product management personnel. Selling and marketing expenses also include non-billable costs of professional services personnel, advertising expenses, product promotion costs, trade shows, and other brand awareness programs. Selling and marketing expenses increased $1.8 million, or 9%, to $20.9 million in the six months ended March 31, 2024 compared to $19.1 million in the six months ended March 31, 2023. The increase in selling and marketing expense is primarily due to higher personnel-related costs due to increased headcount and higher product promotion costs, partially offset by lower other costs in the six months ended March 31, 2024 compared to the same period in 2023.

Research and Development Expenses

Research and development expenses include payroll, employee benefits, stock-based compensation, third party contractor expenses, and other headcount-related costs associated with software engineering and mobile capture science. Research and development expenses increased $3.6 million, or 24%, to $18.6 million in the six months ended March 31, 2024 compared to $15.0 million in the six months ended March 31, 2023. The increase in research and development expenses is primarily due to higher personnel-related costs and higher third-party contractor expenses, partially offset by lower other costs in the six months ended March 31, 2024 compared to the same period in 2023.

General and Administrative Expenses

General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration, and information technology functions, as well as third party legal, accounting, and other administrative costs. General and administrative expenses increased $12.0 million, or 64%, to $30.5 million in the six months ended March 31, 2024 compared to $18.5 million in the six months ended March 31, 2023. The increase was primarily due to higher audit, accounting and tax fees, higher personnel-related costs, higher legal costs, higher third-party and professional fees, an increase in the allowance for uncollectible receivables, and higher other costs during the six months ended March 31, 2024 compared to the same period in 2023.

Amortization and acquisition-related costs

Amortization and acquisition-related costs include amortization of intangible assets, adjustments recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs decreased $1.3 million, or 14%, to $7.8 million in the six months ended March 31, 2024 compared to $9.1 million in the six months ended March 31, 2023. The decrease in amortization and acquisition-related costs is primarily due to a decrease in amortization expense of intangible assets from previous acquisitions that had been fully amortized during the six months ended March 31, 2024 compared to the same period in 2023.

Restructuring Costs

Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were $0.6 million in the six months ended March 31, 2024 compared to $2.0 million in the same period in 2023. As the restructuring plan was initially implemented in June and November 2022, it was primarily completed during the 2022 calendar year and therefore restructuring costs decreased in the six months ended March 31, 2024 as compared to the same period in 2023.

Interest Expense

Interest expense includes the amortization of debt discount and issuance costs and coupon interest accrued on the 2026 Notes. Interest expense was $4.6 million for six months ended March 31, 2024 and consisted of $4.0 million of amortization of debt discount and issuance costs and $0.6 million of interest incurred. Interest expense was $4.3 million for six months ended March 31, 2023 and consisted of $3.7 million of amortization of debt discount and issuance costs and $0.6 million of interest incurred. As we amortize the debt discount and issuance costs using the effective interest method, amortization expense increases over the term of the agreement.

Other Income, Net

Other income, net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio and foreign currency transactional gains or losses. Other income, net increased $2.0 million, or 257%, to $2.8 million net income in the six months ended March 31, 2024 compared to $0.8 million net income in the six months ended March 31, 2023. The increase was primarily due to an increase in interest income net of amortization and higher foreign currency exchange transactional gains as compared to the same period in 2023.

Income Tax Benefit (Provision)

For the six months ended March 31, 2024, we recorded an income tax benefit of $2.4 million, which yielded an effective tax rate of 31%. For the six months ended March 31, 2023, we recorded an income tax provision of $3.7 million, which yielded an effective tax rate of 27%. The difference between the U.S. federal statutory tax rate and our effective tax rate for the six months ended March 31, 2024 and 2023 was primarily due to a mix of worldwide income, the impact of non-deductible executive compensation as well as the impact of state taxes, and federal, state and foreign research and development credits on its tax provision.

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 (as defined below). On March 31, 2024, we had $130.3 million in cash and cash equivalents and investments compared to $134.9 million on September 30, 2023, a decrease of $4.6 million, or 5%. In summary, our cash flows from continuing operations were as follows (amounts in thousands):

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 used in operating activities during the six months ended March 31, 2024 was $2.4 million and resulted primarily from net loss of $5.5 million and unfavorable changes in operating assets and liabilities of $15.4 million, partially offset by net non-cash charges of $18.5 million. Net cash provided by operating activities during the six months ended March 31, 2023 was $11.6 million and resulted primarily from net income of $9.9 million and net non-cash charges of $13.0 million, partially offset by unfavorable changes in operating assets and liabilities of $11.4 million. The decrease in cash provided by operating activities of $14.0 million during the six months ended March 31, 2024 compared to six months ended March 31, 2023 was primarily due to our net loss and related decrease in income taxes payable and an increase in accounts receivable.

Cash Flows from Investing Activities

Net cash provided by investing activities was $27.4 million during the six months ended March 31, 2024, which consisted primarily of net sales and maturities of investments of $28.1 million, partially offset by capital expenditures of $0.7 million. Net cash provided by investing activities was $37.7 million during the six months ended March 31, 2023, which consisted primarily of net sales and maturities of investments of $38.1 million partially offset by capital expenditures of $0.4 million. The decrease in cash provided by investing activities of $10.3 million during the six months ended March 31, 2024 compared to six months ended March 31, 2023 was primarily due to a decrease in net sales and maturities of investments.

Cash Flows from Financing Activities

Net cash used in financing activities was $3.0 million during the six months ended March 31, 2024, primarily due to the payment of $4.6 million of acquisition-related contingent consideration, partially offset by $1.0 million of net proceeds from the issuance of Common Stock under our equity plans and $0.9 million of net proceeds from other borrowings. Net cash provided by financing activities was $1.3 million during the six months ended March 31, 2023, primarily due to proceeds from the issuance of equity plan Common Stock. The decrease in cash provided by financing activities of $4.3 million during the six months ended March 31, 2024 compared to six months ended March 31, 2023 was primarily due to the payment of acquisition-related consideration and revolving credit line issuance costs, partially offset by proceeds from other borrowings in the six months ended March 31, 2024.

0.75% Convertible Senior Notes due 2026

In February 2021, the Company issued $155.3 million aggregate principal amount of the 2026 Notes (including the Additional Notes, as defined below). The 2026 Notes are senior unsecured obligations of the Company. The 2026 Notes were issued pursuant to an Indenture, dated February 5, 2021 (the “Indenture”), between the Company and UMB Bank, National Association, as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company after which the 2026 Notes become automatically due and payable. The Company granted the initial purchasers of the 2026 Notes (collectively, the “Initial Purchasers”) a 13-day option to purchase up to an additional $20.25 million aggregate principal amount of the 2026 Notes (the “Additional Notes”), which was exercised in full. The 2026 Notes were purchased in a transaction that was completed on February 5, 2021. As of January 13, 2024 (“Date of Noncompliance”), the Company was not in compliance with certain of the covenants in the Indenture as a result of the Company not timely filing its Form 10-K for the fiscal year ended September 30, 2023 (“Form 10-K”) with the SEC. As a result of not being in compliance, the 2026 Notes began to accrue additional special interest of 0.25% of the outstanding principal of the 2026 Notes for the 90 days after the Date of Noncompliance and 0.50% of the outstanding principal of the 2026 Notes for the 91st through 180th day after the Date of Noncompliance. The Company subsequently did not timely file its Form 10-Q for the quarter ended December 31, 2023 (the “Q1 Form 10-Q”) with the SEC. The Company filed its Form 10-K with the SEC on March 19, 2024 and its Q1 Form 10-Q with the SEC on April 15, 2024. As of March 31, 2024, the Company is in compliance with the covenants in the Indenture.

The net proceeds from this offering were approximately $149.7 million, after deducting the Initial Purchasers’ discounts and commissions and the Company’s estimated offering expenses related to the offering. The 2026 Notes will mature on February 1, 2026, unless earlier redeemed, repurchased or converted. The 2026 Notes bear interest from February 5, 2021 at a rate of 0.750% per year payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2021. The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 1, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter 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 a result of the Warrant Transactions, the Company is required to recognize incremental dilution of earnings per share to the extent the average share price is over $26.53 for any fiscal quarter.

As of May 10, 2024, the 2026 Notes were not convertible, therefore, we had not purchased any shares under the Notes Hedge and the Warrant Transactions had not been exercised and remain outstanding. See Note 7. “Debt” of the notes to condensed 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.

Revolving Credit Line

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

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

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

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

The Credit Agreement contains customary events of default and also provides that an event of default includes any default resulting in a right by third parties to accelerate maturity of indebtedness in excess of $500,000. If any event of default occurs and is not cured within applicable grace periods set forth in the Credit Agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated. In addition, the Company may be required to deposit cash with the Bank in an amount equal to 115% of any undrawn letters of credit denominated in a foreign currency.

As of March 31, 2024, the Company is in compliance with the covenants of the Credit Agreement and there were no outstanding borrowings.

Other Liquidity Matters

At March 31, 2024, we had investments of $49.3 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 for which maturity or sale is expected within one year are classified as “current” on the condensed consolidated balance sheets. All other securities are classified as “long-term” on the condensed consolidated balance sheets. At March 31, 2024, we had $43.0 million of our available-for-sale securities classified as current and $6.3 million of our available-for-sale securities classified as long-term. At September 30, 2023, we had $74.7 million of our available-for-sale securities classified as current and $1.3 million of our available-for-sale securities classified as long-term.

We had working capital of $154.4 million at March 31, 2024 compared to $138.5 million at September 30, 2023. We do not have any other material cash requirements other than those related to leases as described in Note 8. “Commitments and Contingencies” of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. 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 at least the next twelve months from the date the financial statements are filed.

Changes in Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of the condensed 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 condensed consolidated financial statements are described in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2023 Annual Report.

There have been no material changes to our critical accounting estimates from those disclosed in our 2023 Annual Report.

For a complete discussion of the Company’s quantitative and qualitative disclosures about market risks, see the section titled Quantitative and Qualitative Disclosures About Market Risks in our 2023 Annual Report. Except as described below, there has been no material change in this information as of March 31, 2024.

Interest Rates

The primary objective of our investment activities is to preserve principal while at the same time maximizing after-tax yields without significantly increasing risk. To achieve this objective, we maintain our investment portfolio of cash equivalents and marketable securities in a variety of securities, including corporate debt securities, commercial paper, certificates of deposit, and asset-backed securities. We have not used derivative financial instruments in our investment portfolio, and none of our investments are held for trading or speculative purposes. Short-term and long-term debt securities are generally classified as available-for-sale and consequently are recorded on the condensed consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of estimated tax. As of March 31, 2024, our marketable securities had remaining maturities between approximately one and 20 months and a fair market value of $49.3 million, representing 12% of our total assets.

The fair value of our cash equivalents and debt securities is subject to change as a result of changes in market interest rates and investment risk related to the issuers’ credit worthiness. We do not utilize financial contracts to manage our investment portfolio’s exposure to changes in market interest rates. A hypothetical 100 basis point increase or decrease in market interest rates would not have a material impact on the fair value of our cash equivalents and debt securities due to the relatively short maturities of these investments. While changes in market interest rates may affect the fair value of our investment portfolio, any gains or losses will not be recognized in our results of operations until the investment is sold or if the reduction in fair value was determined to be an other-than-temporary impairment.

Foreign Currency Risk

As a result of past acquisitions, we have operations in the United Kingdom, France, the Netherlands, and Spain that are exposed to fluctuations in the foreign currency exchange rate between the U.S. dollar, the Euro, and the British pound sterling. The functional currency of our French, Dutch, and Spanish operations is the Euro and the functional currency of our United Kingdom operations is the British pound sterling. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro. Translation adjustments resulting from translating the functional currency financial statements into U.S. dollar equivalents are reported separately in the condensed consolidated statements of operations and comprehensive income (loss).

Inflation

We do not believe that inflation had a material effect on our business, financial condition or results of operations during either of the three or six months ended March 31, 2024 or 2023. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). We recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as March 31, 2024 due to the previously reported material weaknesses at September 30, 2023, that continued to exist.

Notwithstanding the identified material weaknesses, management believes the condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows as of and for the periods presented, in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

Remediation of Previously Reported Material Weaknesses in Internal Control Over Financial Reporting

As previously reported in our 2023 Annual Report, the Company identified material weaknesses related to the following:

• Management did not design and maintain effective controls related to the precision of the Company’s review over the initial valuation and subsequent remeasurement of the contingent consideration liability recognized as part of the consideration transferred in the ID R&D Acquisition.
• Management did not have sufficient internal technical resources, or adequate oversight of the Company’s third-party tax advisor, to appropriately identify, evaluate, and review certain inputs and assumptions that affect the US, foreign, and consolidated tax accounts.
• Management did not maintain effective controls related to the financial statement close process to ensure the completeness and accuracy of certain amounts and disclosures, specifically related to balance sheet account reconciliations and the Company’s review and preparation of the consolidation and financial statements.
• Management did not design or maintain effective controls over the review of the accounting for business combinations, including accounting for transaction costs and deferred taxes.
• Management did not design and maintain effective controls to ensure proper revenue recognition, specifically related to the accounting review of customer contracts.
• Management did not perform sufficient risk assessment procedures in order to design and implement effective controls, including consideration of improper segregation of duties, for substantially all of the Company's financial statement areas.
• Management did not design or maintain effective information technology general controls over logical access and program change management for certain key information systems used in the financial reporting process.
• Management did not design or maintain controls to verify the completeness and accuracy of information used by control owners in the operation of controls across substantially all of the Company’s financial statement areas.
• Management did not maintain sufficient evidence of the operation of certain management review controls and activity level controls across substantially all of the Company's financial statement areas.
• Management did not perform timely and ongoing evaluations to ascertain whether components of internal control are present and functioning.

Remediation Plan for Existing Material Weaknesses in Internal Control over Financial Reporting

In order to address and resolve the material weaknesses, management, with oversight from the Company’s Audit Committee, has developed a detailed plan for remediation, which includes:

• Evaluating skill set gaps and hiring additional accounting, financial reporting, and compliance personnel (including internal and external resources), as needed, with relevant public company accounting and financial reporting experience to develop and implement additional policies, procedures, and controls;
• Providing ongoing training for key personnel responsible for internal control over financial reporting;
• Enhancing or designing and implementing a comprehensive and continuous risk assessment process that identifies and assesses risks of material misstatement across the entity and helps ensure that related internal controls are properly designed and in place to respond to those risks in the Company’s financial statements and financial reporting;
• Enhancing or designing and implementing controls over the completeness and accuracy of information used in financial reporting; and,
• Enhancing or designing and implementing process-level controls and effective general information technology controls relevant to all of the Company’s financial reporting processes.

The Company is committed to remediating the material weaknesses and is making progress in that effort. The actions the Company is taking are subject to ongoing senior management review, as well as oversight from the Company’s Audit Committee. When fully implemented and operational, the Company believes the measures described above will remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses and strengthen the Company’s internal control over financial reporting. These remediation efforts are in process as of the fiscal quarter ended March 31, 2024. The Company will not be able to fully remediate these material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time. The Company may also identify additional measures that may be required to remediate the material weaknesses in the Company’s internal control over financial reporting, necessitating further action.

Changes in Internal Control over Financial Reporting

The Company is in the process of implementing processes and procedures to remediate the material weaknesses noted above. There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A—“Risk Factors” in our 2023 Annual Report describes some of the risks and uncertainties associated with our business, which we strongly encourage you to review. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. There have been no material changes in our risk factors from those disclosed in our 2023 Annual Report.