STOCKHOLDERS’ EQUITY

Stock-Based Compensation Expense

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



	Three Months Ended March 31,				Six Months Ended March 31,
	2017		2016		2017		2016
Cost of revenue	$	47	$	10	$	87	$	10
Sales and marketing	360		287		674		530
Research and development	239		162		452		342
General and administrative	577		713		1,095		1,279
Stock-based compensation expense included in expenses	$	1,223	$	1,172	$	2,308	$	2,161

The fair value calculations for stock-based compensation awards to employees for the six months ended March 31, 2017 and 2016 were based on the following assumptions:



	Six Months Ended March 31, 2017	Six Months Ended March 31, 2016
Risk-free interest rate	1.68% – 1.92%	1.43% – 1.75%
Expected life (years)	5.32	5.90
Expected volatility	78%	83%
Expected dividends	None	None

The expected life of options granted is derived using assumed exercise rates based on historical exercise patterns and vesting terms, and represents the period of time that options granted are expected to be outstanding. Expected stock price volatility is based upon implied volatility and other factors, including historical volatility. After assessing all available information on either historical volatility, or implied volatility, or both, the Company concluded that a combination of both historical and implied volatility provides the best estimate of expected volatility.

As of March 31, 2017, the Company had $11.2 million of unrecognized compensation expense related to outstanding stock options and RSUs expected to be recognized over a weighted-average period of approximately 2.4 years.

2012 Incentive Plan

In January 2012, the Company’s board of directors (the “Board”) adopted the Mitek Systems, Inc. 2012 Incentive Plan (the “2012 Plan”), upon the recommendation of the compensation committee of the Board. On March 10, 2017, the Company’s stockholders approved the amendment and restatement of the 2012 Plan which increased the total number of shares of Common Stock reserved for issuance thereunder from 6,000,000 shares to 9,500,000 shares plus that number of shares of Common Stock that would otherwise return to the available pool of unissued shares reserved for awards under its 1999 Stock Option Plan, 2000 Stock Option Plan, 2002 Stock Option Plan, 2006 Stock Option Plan and 2010 Stock Option Plan (collectively, the “Prior Plans”). As of March 31, 2017, (i) stock options to purchase 1,981,654 shares of Common Stock, 1,812,730 RSUs and 1,300,000 Senior Executive Performance RSUs were outstanding under the 2012 Plan, and 3,421,185 shares of Common Stock were reserved for future grants under the 2012 Plan and (ii) stock options to purchase an aggregate of 1,098,728 shares of Common Stock were outstanding under the Prior Plans.

Director Restricted Stock Unit Plan

In January 2011, the Board adopted the Mitek Systems, Inc. Director Restricted Stock Unit Plan, as amended and restated (the “Director Plan”), reserving up to 1,000,000 shares of Common Stock for the issuance of RSUs that may be granted to both employee and non-employee members of the Board. On March 10, 2017, the Company's stockholders approved an amendment to the Director Plan which increased the total number of shares of Common Stock reserved for issuance thereunder from 1,000,000 shares to 1,500,000 shares and extended the term of the Director Plan from December 5, 2020 to December 31, 2022. As of March 31, 2017, (i) 543,385 RSUs were outstanding under the Director Plan and (ii) 531,786 shares of Common Stock were reserved for future grants under the Director Plan.

Stock Options

The following table summarizes stock option activity under the Company’s equity plans during the six months ended March 31, 2017:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in Years)
Outstanding, September 30, 2016	3,015,374		$	3.95	6.4
Granted	107,800		$	6.13
Exercised	(10,291	)	$	2.85
Canceled	(32,501	)	$	4.29
Outstanding, March 31, 2017	3,080,382		$	4.02	6.0

The Company recognized $0.2 million and $0.3 million in stock-based compensation expense related to outstanding stock options in the three months ended March 31, 2017 and 2016, respectively. The Company recognized $0.5 million and $0.8 million in stock-based compensation expense related to outstanding stock options in the six months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, the Company had $1.8 million of unrecognized compensation expense related to outstanding stock options expected to be recognized over a weighted-average period of approximately 1.9 years.

Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of the weighted-average exercise price, multiplied by the number of options outstanding and exercisable. The total intrinsic value of options exercised during the six months ended March 31, 2017 and 2016 was $32,000 and $0.3 million, respectively. The per-share weighted-average fair value of options granted during the six months ended March 31, 2017 was $3.98. The aggregate intrinsic value of options outstanding as of March 31, 2017 and 2016, was $10.0 million and $11.9 million, respectively.

Restricted Stock Units

The following table summarizes RSU activity under the Company’s equity plans during the six months ended March 31, 2017:



	Number of Shares		Weighted-Average Fair Market Value Per Share
Outstanding, September 30, 2016	2,046,169		$	4.90
Granted	917,785		$	5.77
Settled	(532,333	)	$	4.62
Canceled	(75,506	)	$	5.15
Outstanding, March 31, 2017	2,356,115		$	5.11

The cost of RSUs is determined using the fair value of Common Stock on the award date, and the compensation expense is recognized ratably over the vesting period. The Company recognized $0.9 million in stock-based compensation expense related to outstanding RSUs in each of the three months ended March 31, 2017 and 2016. The Company recognized $1.8 million and $1.4 million in stock-based compensation expense related to outstanding RSUs in the six months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, the Company had $9.4 million of unrecognized compensation expense related to outstanding RSUs expected to be recognized over a weighted-average period of approximately 2.9 years.

Senior Executive Performance RSUs

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

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

The Company estimated the fair value of the Senior Executive Performance RSUs using the Monte-Carlo simulation (using the Company’s valuation date stock price, the annual risk-free interest rate, expected volatility, the probability of reaching the performance targets and a 20 trading day average stock price). The Company has estimated the aggregate fair value of the Senior Executive Performance RSUs at $1.7 million and recognized $30,000 in stock-based compensation expense related to outstanding Senior Executive Performance RSUs for each of the three and six months ended March 31, 2017.

Closing Shares

In connection with the closing of the Acquisition, the Company issued to the Sellers 712,790 shares of Common Stock. Vesting of these shares is subject to the continued employment of the founders of IDchecker and occurs over a period of 27 months (the “Service Period”) from the date of issuance. The cost of the Closing Shares is determined using the fair value of Common Stock on the award date, and the stock-based compensation is recognized ratably over the vesting period. Stock-based compensation expense related to the Closing Shares is recorded within acquisition-related costs and expenses on the Consolidated Statements of Operations and Other Comprehensive Loss. The Company recognized $0.3 million in stock-based compensation expense related to the Closing Shares for each of the three months ended March 31, 2017 and 2016, and $0.6 million for each of the six months ended March 31, 2017 and 2016. As of March 31, 2017, the Company had $0.6 million of unrecognized compensation expense related to Closing Shares expected to be recognized over the remaining Service Period.

Earnout Shares

In addition to the Cash Payment and the issuance of Closing Shares, in each case at the closing of the Acquisition, the Company issued 137,306 Earnout Shares to the Sellers for achievement by IDchecker of certain revenue targets for the nine-month period ended September 30, 2015. Additionally, 55,297 Earnout Shares were earned by the Sellers for achievement by IDchecker of certain revenue targets for the twelve-month period ended September 30, 2016. Earnout Shares vest and will be eligible for resale such that 12.5% of the Earnout Shares will vest and be released for resale on the date that is six months following the date of issue and thereafter, the remaining 87.5% of the applicable Earnout Shares will vest and be released for resale in equal quarterly installments. Vesting of the Earnout Shares is subject to the continued employment of the founders of IDC NL through the date on which all Earnout Shares are fully vested.

The Company estimated the fair value of the Earnout Shares using the Monte-Carlo simulation (using the Company’s valuation date stock price, the annual risk-free interest rate, expected volatility, the probability of reaching the performance targets and a 10 trading day average stock price). This model will be updated and the respective fair value adjusted each reporting period based on the relevant facts and conditions at the reporting date. Stock-based compensation expense related to the Earnout Shares is recorded within acquisition-related costs and expenses on the Consolidated Statements of Operations and Other Comprehensive Loss. The Company recognized $74,000 in stock-based compensation expense related to the Earnout Shares for each of the three months ended March 31, 2017 and 2016, and $147,000 for each of the six months ended March 31, 2017 and 2016.