UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(RULE 14a-101)

INFORMATION REQUIRED IN

PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  ☒

Filed by a party other than the Registrant  ☐

Check the appropriate box:

 

 

MITEK SYSTEMS, INC.

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

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MITEK SYSTEMS, INC.

600 B STREET, SUITE 100

SAN DIEGO, CALIFORNIA 92101

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD MARCH 1, 2017

TO THE STOCKHOLDERS OF MITEK SYSTEMS, INC.

The annual meeting of stockholders of Mitek Systems, Inc. will be held at 9:00 a.m., local time, on Wednesday, March 1, 2017, at our executive offices located at 600 B Street, Suite 100, San Diego, California 92101, for the following purposes:

These items of business are more fully described in the Proxy Statement accompanying this notice.

Our Board of Directors has fixed the close of business on January 13, 2017 as the record date for the determination of stockholders entitled to notice of and to vote at the annual meeting and all adjournments or postponements thereof. A list of these stockholders will be open to examination by any stockholder at the annual meeting and for ten days prior thereto during normal business hours at our executive offices located at 600 B Street, Suite 100, San Diego, California 92101. Enclosed for your convenience is a proxy card which may be used to vote your shares at the annual meeting. The proxy materials, including a proxy card and our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, are available online at www.proxydocs.com/MITK.

You are invited to attend the annual meeting in person. Even if you expect to attend the annual meeting, it is important that you complete, sign, date and return the enclosed proxy card as promptly as possible in the enclosed return envelope (which is postage prepaid if mailed in the United States) in order to ensure that your shares are represented at the annual meeting. Even if you have voted by proxy, you may still revoke such proxy and vote in person if you attend the annual meeting. However, please note that if your shares are held of record by a broker, bank or other agent and you wish to vote at the annual meeting, you must obtain a proxy card issued in your name from such record holder.

 

 

 

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TABLE OF CONTENTS

 

 

 

 

 

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MITEK SYSTEMS, INC.

600 B STREET, SUITE 100

SAN DIEGO, CALIFORNIA 92101

 

PROXY STATEMENT

FOR THE 2017 ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MARCH 1, 2017

QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING

Why am I receiving these materials?

We sent you this proxy statement (the “Proxy Statement”) and the enclosed proxy card because the Board of Directors (the “Board”) of Mitek Systems, Inc. (sometimes referred to as “we”, “us”, “our”, “Mitek” or the “Company”) is soliciting your proxy to vote at our 2017 annual meeting of stockholders, or any adjournment or postponement thereof (the “Annual Meeting”). You are invited to attend the Annual Meeting and we request that you vote on the proposals described in this Proxy Statement. However, you do not need to attend the Annual Meeting to vote your shares. Instead, you may simply complete, sign, date and return the enclosed proxy card or submit your proxy through the Internet or by telephone according to the instructions contained in the enclosed proxy card.

We intend to mail this Proxy Statement and the accompanying materials to all stockholders of record entitled to vote at the Annual Meeting on or about February 3, 2017.

When and where will the Annual Meeting be held?

The Annual Meeting will be held at 9:00 a.m., local time, on Wednesday, March 1, 2017, at our principal executive offices located at 600 B Street, Suite 100, San Diego, California 92101.

Who can vote at the Annual Meeting and how many votes do I have?

Only stockholders of record at the close of business on January 13, 2017 will be entitled to vote at the Annual Meeting. At the close of business on this record date, there were 33,274,299 shares of common stock outstanding and entitled to vote. With respect to each proposal to be voted upon at the Annual Meeting, you are entitled to one vote for each share of common stock held as of the record date.

Stockholder of Record: Shares Registered in Your Name

If at the close of business on January 13, 2017, your shares of common stock were registered directly in your name with our transfer agent, Computershare, then you are the stockholder of record of these shares. As a stockholder of record, you may vote either in person at the Annual Meeting or by proxy. Whether or not you plan to attend the Annual Meeting, we urge you to complete, sign, date and return the enclosed proxy card or submit your proxy through the Internet or by telephone by following the instructions provided in the enclosed proxy card to ensure that your vote is counted.

Beneficial Owner: Shares Registered in the Name of Your Broker, Bank or Other Agent

If at the close of business on January 13, 2017 your shares of common stock were held, not in your name, but rather in an account at a brokerage firm, bank or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As the beneficial owner, you have the right to direct your broker, bank or other agent regarding how to vote the shares in your account. Certain of these institutions offer the ability to direct your agent how to vote through the Internet or by telephone. You are also invited to attend the Annual Meeting. However, because you are not the stockholder of record, you may not vote your shares in person at the Annual Meeting unless you request and obtain a valid proxy card issued in your name from your broker, bank or other agent in whose name the shares are registered prior to the Annual Meeting.

 

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What am I voting on?

There are six matters scheduled for a vote at the Annual Meeting:

Will there be any other items of business on the agenda?

Other than the election of directors, the approval of the 2012 Plan Amendment and Restatement, the approval of the Director Plan Amendment, the ratification of the selection of Mayer Hoffman as our independent registered public accounting firm, the advisory vote on the compensation of our named executive officers and the advisory vote on the frequency of the advisory vote on the compensation of our named executive officers, the Board knows of no other matters to be presented at the Annual Meeting.  If any other matter should be presented at the Annual Meeting upon which a vote may properly be taken, shares represented by all proxies received by the Board will be voted with respect to such matter in accordance with the judgment of the persons named as attorneys-in-fact in the proxies.

What is the Board’s voting recommendation?

The Board recommends that you vote your shares:

 

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How do I vote?

With respect to the election of directors, you may either vote “for” any or all of the nominees proposed by the Board or you may “withhold” your vote for any or all of the nominees.  For the approval of the 2012 Plan Amendment and Restatement, approval of the Director Plan Amendment, ratification of selection of our independent registered public accounting firm and approval, on an advisory (non-binding) basis, of the compensation paid to our named executive officers, you may vote “for” or “against” or abstain from voting.  For approval, on an advisory (non-binding) basis, of the frequency of the advisory stockholder vote on the compensation of our named executive officers, you may vote “every year,” “every two years,” “every three years” or abstain from voting.  The procedures for voting are described below, based upon the form of ownership of your shares.

Stockholder of Record: Shares Registered in Your Name

If you do not wish to vote in person or you will not be attending the Annual Meeting, you may vote by proxy. You may vote by proxy using the enclosed proxy card, vote by proxy through the Internet or vote by proxy over the telephone. The procedures for voting by proxy are as follows:

If you vote by proxy, your vote must be received by 11:59 p.m. Eastern Standard Time on Tuesday, February 28, 2017, to be counted. If you are a stockholder of record and attend the Annual Meeting in person, you may vote in person at the Annual Meeting. We will give you a ballot when you arrive and any previous proxy that you submitted, whether by mail, Internet or telephone, will be superseded by the vote that you cast in person at the Annual Meeting. If you have any questions regarding how to submit your proxy or vote your shares at the Annual Meeting, please call our Corporate Secretary at (619) 269-6800.

We provide Internet and telephone proxy voting with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your Internet and telephone access, such as usage charges from Internet access providers and telephone companies.

Beneficial Owner: Shares Registered in the Name of Your Broker, Bank or Other Agent

If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from the Company. To ensure that your vote is counted, simply complete, sign, date and mail the proxy card or, if provided by your agent, follow the instructions for submitting your proxy through the Internet or by telephone. To vote in person at the Annual Meeting, you must obtain a proxy card issued in your name from your broker, bank or other agent in whose name the shares are registered prior to the Annual Meeting. Follow the instructions from your broker, bank or other agent included with these proxy materials or contact your broker, bank or other agent to request a proxy card.

Who is paying for this proxy solicitation?

We will pay the expenses of soliciting proxies for the Annual Meeting, including the cost of preparing, assembling and mailing the proxy materials. The Company has engaged Georgeson LLC, an independent proxy solicitation firm, to assist with the solicitation of proxies. Georgeson LLC will be paid approximately $25,000 and will be reimbursed for its reasonable out-of-pocket expenses for these and other advisory services in connection with the Annual Meeting.  Proxies may also be solicited in person or by telephone, facsimile, electronic mail, or other electronic medium by Georgeson LLC or, without additional compensation, by certain of the Company’s directors, officers and employees.  We may request that any person holding stock in their name for the benefit of others, such as a broker, bank or other agent, forward the proxy materials to such beneficial owners and request authority to execute the proxy. We will reimburse any such broker, bank or other agent for their expenses in connection therewith.

What does it mean if I receive more than one proxy card?

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign, date and return each proxy card to ensure that all of your shares are voted.

 

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Can I change my vote after submitting my proxy?

Yes. You may change your vote with respect to any proposal by revoking your proxy at any time prior to the commencement of voting with respect to such proposal at the Annual Meeting. If you are a stockholder of record, you may revoke your proxy in any one of three ways:

If your shares are held of record by a broker, bank or other agent, you must contact such record holder to revoke any prior voting instructions or obtain a proxy card issued in your name from such record holder in order to vote in person at the Annual Meeting. Following the commencement of voting with respect to a proposal, you may not revoke your proxy or otherwise change your vote with respect to such proposal.

Votes will be counted by the inspector of elections appointed for the Annual Meeting.

How are my shares voted if I give no specific instruction?

We must vote your shares as you have instructed. If there is a matter on which a stockholder of record has given no specific instruction but has authorized us generally to vote the shares, they will be voted as follows:

This general authorization would exist, for example, if a stockholder of record merely signs, dates and returns the proxy card but does not indicate how its shares are to be voted on one or more proposals. If other matters properly come before the Annual Meeting, or any adjournment or postponement thereof, and you do not provide specific voting instructions, your shares will be voted as recommended by the Board.

If your shares are held of record by a broker, bank or other agent, see “What is a broker non-vote?” below regarding the ability of brokers, banks and other such holders of record to vote the uninstructed shares of their clients or other beneficial owners in their discretion and for an explanation of broker non-votes.

What is a broker non-vote?

Under rules that govern brokers, banks and other agents that are record holders of company stock held in brokerage accounts for their clients who beneficially own the shares, such record holders who do not receive voting instructions from their clients have the discretion to vote uninstructed shares on certain matters (“discretionary matters”), but do not have discretion to vote uninstructed shares as to certain other matters (“non-discretionary matters”). Accordingly, a broker may submit a proxy card on behalf of a beneficial owner from whom the broker has not received voting instructions that casts a vote with regard to discretionary matters but expressly states that the broker is not voting as to non-discretionary matters. The broker’s inability to vote on non-discretionary matters with respect to which the broker has not received voting instructions from the beneficial owner is referred to as a “broker non-vote.”

 

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What are the voting requirements that apply to the proposals discussed in this Proxy Statement?

The election of directors contemplated by Proposal No. 1 will be decided by a plurality of the votes cast.  Accordingly, the seven director nominees receiving the highest number of votes will be elected.

The approval of the 2012 Plan Amendment and Restatement contemplated by Proposal No. 2, approval of the Director Plan Amendment contemplated by Proposal No. 3, ratification of the selection of Mayer Hoffman as our independent registered public accounting firm contemplated by Proposal No. 4 and approval, on an advisory (non-binding) basis, of the compensation of our named executive officers contemplated by Proposal No. 5 each requires the affirmative vote of the holders of a majority of the shares of common stock present and entitled to vote either in person or by proxy at the Annual Meeting.

The approval, on an advisory (non-binding) basis, of the frequency of the advisory stockholder vote on the compensation of our named executive officers contemplated by Proposal No. 6 will be decided by a plurality of the votes cast.  This means that the option for holding an advisory vote every one year, two years, or three years receiving the greatest number of votes will be considered the preferred frequency of the stockholders.

What is the effect of withhold authority votes, abstentions and broker non-votes?

Withhold Authority Votes: Shares subject to instructions to withhold authority to vote on the election of directors will not be voted. This will have no effect on Proposal No. 1—Election of Directors because, under plurality voting rules, the seven director nominees receiving the highest number of “for” votes will be elected.

Abstentions:  Under Delaware law (under which Mitek is incorporated), abstentions are counted as shares present and entitled to vote at the Annual Meeting.  Therefore, abstentions will have the same effect as a vote “against”, Proposal No. 2—Approval of the Amendment and Restatement of the Mitek Systems, Inc. 2012 Incentive Plan, Proposal No. 3—Approval of an Amendment to the Mitek Systems, Inc. Director Restricted Stock Unit Plan, Proposal No. 4—Ratification of the Selection of our Independent Registered Public Accounting Firm and Proposal No. 5—Approval, on an Advisory (Non-Binding) Basis, of the Compensation Paid to our Named Executive Officers.  However, abstentions will have no effect on Proposal No. 1—Election of Directors because under the plurality voting rules, the seven director nominees receiving the highest number of “for” votes will be elected.  Similarly, abstentions will have no effect on Proposal No. 6—Approval, on an Advisory (Non-Binding) Basis, of the Frequency of the Advisory Stockholder Vote on Compensation of our Named Executive Officers because, under plurality voting rules, the alternative receiving the highest number of “for” votes will be selected.

Broker Non-Votes:  As a result of a change in the rules related to discretionary voting and broker non-votes, brokers, banks and other agents are no longer permitted to vote the uninstructed shares of their clients on a discretionary basis in the election of directors.  Because broker non-votes are not considered under Delaware law to be entitled to vote at the Annual Meeting with respect to “non-discretionary” matters, they will have no effect on the outcome of the vote on Proposal No. 1—Election of Directors.  Proposal No. 2—Approval of the Amendment and Restatement of the Mitek Systems, Inc. 2012 Incentive Plan, Proposal No. 3—Approval of an Amendment to the Mitek Systems, Inc. Director Restricted Stock Unit Plan, Proposal No. 5—Approval, on an Advisory (Non-Binding) Basis, of the Compensation Paid to our Named Executive Officers, and Proposal No. 6—Approval, on an Advisory (Non-Binding) Basis, of the Frequency of the Advisory Stockholder Vote on Compensation of our Named Executive Officers are considered “non-discretionary” matters on which your broker, bank or other agent will not be able to vote on your behalf if it does not receive instructions from you and, therefore, there may be broker non-votes on Proposal Nos. 2, 3, 5 and 6.  If you hold your shares in street name and you do not instruct your broker, bank or other agent how to vote your shares on Proposal Nos. 1, 2, 3, 5 and 6, no votes will be cast on your behalf on these proposals.  Therefore, it is important that you indicate your vote on these proposals if you want your vote to be counted.  Proposal No. 4—Ratification of the Selection of our Independent Registered Public Accounting Firm is considered a routine or “discretionary” matter on which your broker, bank or other agent will be able to vote on your behalf even if it does not receive instructions from you and, therefore, no broker non-votes are expected to exist in connection with Proposal No. 4.

What is the quorum requirement?

A quorum of stockholders is necessary to hold a valid meeting.  A quorum will be present if at least a majority of the shares of our common stock outstanding on the record date are present either in person or by proxy at the Annual Meeting.  At the close of business on January 13, 2017, the record date for the Annual Meeting, there were 33,274,299 shares of common stock outstanding.  Thus, a total of 33,274,299 shares are entitled to vote at the Annual Meeting and holders of common stock representing at least 16,637,150 votes must be represented at the Annual Meeting either in person or by proxy to have a quorum.

 

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Your shares will be counted towards the quorum only if you submit a valid proxy (or if one is submitted on your behalf by your broker, bank or other agent) or if you vote in person at the Annual Meeting.  Votes withheld from a director nominee and abstentions will be counted as present for purposes of establishing the required quorum.  Broker non-votes will be counted as present for purposes of establishing the required quorum.  If there is no quorum, the chairman of the meeting or a majority of the shares present in person or by proxy at the Annual Meeting may adjourn the Annual Meeting to another date.

I have also received a copy of the Company’s Annual Report on Form 10-K. Is that a part of the proxy materials?

Our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 (the “Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on December 9, 2016, accompanies this Proxy Statement. This document constitutes our Annual Report to Stockholders and is being made available to all stockholders entitled to receive notice of and to vote at the Annual Meeting. Except as otherwise stated, the Form 10-K is not incorporated into, and is not part of, this Proxy Statement and should not be considered proxy solicitation material.

How can I find out the results of the voting at the Annual Meeting?

Voting results are expected to be announced at the Annual Meeting and will also be disclosed in a Current Report on Form 8-K (the “Current Report on Form 8-K”) that we will file with the SEC within four business days of the date of the Annual Meeting. In the event the results disclosed in the Current Report on Form 8-K are preliminary, we will subsequently amend the Current Report on Form 8-K to report the final voting results within four business days of the date that such results are known.  Following the Annual Meeting, the Board will determine, based on the outcome of the advisory stockholder vote on Proposal No. 6, how frequently to holder future advisory stockholder votes regarding the compensation of our named executive officers.  When such a determination is made, the Company will disclose the frequency with which it will hold advisory stockholder votes on executive compensation by amending the Current Report on Form 8-K disclosing the voting results of the Annual Meeting.

When are stockholder proposals due for next year’s annual meeting of stockholders?

Stockholders may submit proposals regarding matters appropriate for stockholder action for consideration at our next annual meeting of stockholders consistent with Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and our second amended and restated bylaws (the “Bylaws”). To be considered for inclusion in the proxy materials for our 2018 annual meeting of stockholders, a stockholder proposal, including a proposal for the nomination of directors, must be submitted in writing no later than October 1, 2017 to our Corporate Secretary at Mitek Systems, Inc., 600 B Street, Suite 100, San Diego, California 92101, Attn: Corporate Secretary. Pursuant to the terms of our Bylaws, stockholders wishing to submit proposals or director nominations, including those that are not to be included in our 2018 proxy statement and proxy, must provide timely notice in writing to our Secretary. To be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not later than the close of business on December 1, 2017, nor earlier than November 1, 2017, subject to certain exceptions. Stockholders are advised to review our Bylaws, which contain additional requirements with respect to advance notice of stockholder proposals and director nominations.

 

 

 

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PROPOSAL NO. 1

ELECTION OF DIRECTORS

Background

Pursuant to our Bylaws, the Board has fixed the number of authorized directors at eight. The seven director nominees receiving the highest number of votes at the Annual Meeting will be elected to the Board, to serve until our next annual meeting of stockholders and until their successors have been duly elected and qualified.

Unless authorization to do so is withheld, it is intended that the persons named in this Proxy Statement will vote for the election of the seven director nominees proposed by the Board. All incumbent directors have been recommended by the Nominating and Corporate Governance Committee of the Board (the “Nominating Committee”) as nominees for re-election to the Board. If any of the director nominees should become unavailable for election prior to the Annual Meeting, the proxy will be voted for a substitute nominee or nominees, if any, designated by the Board.

The following table includes the names and certain information about the nominees for director. All of the nominees named below have consented to being named herein and to serve on the Board, if elected.

 

 

James B. DeBello.  Mr. DeBello has served as a director since November 1994, as our President and Chief Executive Officer since May 2003 and as the Chairman of the Board since March 2016.  From January 2009 to September 2011, Mr. DeBello also served as our Chief Financial Officer and from January 2009 to February 2013, he also served as our Secretary, in each case in addition to his other positions.  Prior to joining Mitek, he was Chief Executive Officer of AsiaCorp Communications, Inc., a wireless data infrastructure and software company, from July 2001 to May 2003.  He was Venture Chief Executive Officer for IdeaEdge Ventures, Inc., a venture capital company, from June 2000 to June 2001.  From May 1999 to May 2000, he was President, Chief Operating Officer and a member of the board of directors of CollegeClub.com, an Internet company.  From November 1998 to April 1999, he was Chief Operating Officer of WirelessKnowledge, Inc., a joint venture company formed between Microsoft and Qualcomm, Inc.  From November 1996 to November 1998, Mr. DeBello held positions as Vice President, Assistant General Manager and General Manager of Qualcomm, Inc.’s Eudora Internet Software Division, and Vice President of Product Management of Qualcomm, Inc.’s Subscriber Equipment Division.  Mr. DeBello holds a B.A., magna cum laude, in Economics and History, from Harvard University and an MBA from Harvard Graduate School of Business, and he was a Rotary Scholar at the University of Singapore where he studied economics and Chinese.  Mr. DeBello has over 16 years of experience in various senior executive positions, including Chief Executive Officer, at other global technology companies.  As a director of the Company for approximately 22 years and in his role in the day-to-day operations of the Company as our President and Chief Executive Officer since 2003, Mr. DeBello has gained extensive knowledge of the industries in which we operate, allowing him to bring to the Board a broad understanding of the operational issues and strategic opportunities facing the Company.

William K. “Bill” Aulet.  Mr. Aulet has served as a director since January 2015.  Since 2009, he has served as the managing director in the Martin Trust Center for MIT Entrepreneurship at MIT.  From 2005 to 2009, Mr. Aulet was a Senior Lecturer and Entrepreneur in Residence at the MIT Sloan School of Management.  From 2003 to 2005, he served as Senior Vice President and Chief Financial Officer of Viisage Technology, a security technology company with a dual focus in the areas of drivers’ licenses and facial recognition.  From 1996 to 2002, he served as President and Director of SensAble Technologies, a provider of force-feedback haptic devices and touch-enabled 3D modeling software solutions.  Prior to joining SensAble, Mr. Aulet started his career at IBM as a Systems Engineer and then was rapidly promoted through various jobs where he gained training and experience in technical, marketing, sales, financial and international business operations and management.  His last job was the Finance and Planning Manager

 

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for the IBM New England Region.  Mr. Aulet holds a bachelor’s degree in engineering from Harvard University and a Masters in Management Science from the MIT Sloan School of Management.  Mr. Aulet is a member of the board of directors of XLhybrids, a private company based in Massachusetts.  Mr. Aulet is also a visiting Professor at University of Strathclyde (Scotland).  Mr. Aulet’s experience in technology entrepreneurship, and specifically his experience in document and facial recognition, makes him well qualified to serve on the Board. 

Vinton P. Cunningham.  Mr. Cunningham has served as a director since May 2005.  He served as Senior Vice President Finance of EdVision Corporation, a provider of curriculum development and assessment tools for the education community, from 1993 until his retirement in 2002.  Mr. Cunningham was Chief Operating Officer and Chief Financial Officer of Founders Club Golf Company, a golf equipment manufacturer, from 1990 to 1993.  He was Vice President Finance of Amcor Capital, Inc., a company that organized and managed real estate syndications, from 1985 to 1990.  Mr. Cunningham was Chief Financial Officer and Treasurer of Superior Farming Company, a wholly owned subsidiary of Superior Oil Company, a grower of various fruits, vegetables, nuts and cotton in California and Arizona, from 1981 to 1985.  Mr. Cunningham holds a B.S. in accounting from the University of Southern California.  The Board believes Mr. Cunningham’s financial background provides the Board with valuable financial and accounting expertise and makes him well suited to serve on the Audit Committee.  Having served as a director of the Company since 2005, Mr. Cunningham has a strong understanding of our business, operations and culture.

Kenneth D. Denman.  Mr. Denman has served as a director since December 2016. He previously served as President and Chief Executive Officer of Emotient, Inc., a leader in the facial expression measurement and sentient analysis space leveraging machine/deep learning technology, from October 2012 through January 2016, when the company was acquired by Apple Inc.  From November 2008 to September 2011, Mr. Denman served as Chief Executive Officer and a director of Openwave Systems, Inc. From December 2001 to November 2008, Mr. Denman served in various roles at iPass, Inc., a platform-based enterprise mobility services company, including as director, Chairman and President and Chief Executive Officer. From January 2000 to March 2001, Mr. Denman served as founder, President and Chief Executive Officer of AuraServ Communications Inc., a managed service provider of broadband voice and data applications. From August 1998 to May 2000, Mr. Denman served as Senior Vice President, National Markets Group of MediaOne, Inc., a broadband cable and communications company. From June 1996 to August 1998, Mr. Denman served as Chief Operating Officer, Wireless, at MediaOne International, a broadband and wireless company based in London.  Mr. Denman served as a member of the board of directors of United Online, Inc. from June 2015 to July 2016 and currently serves on the board of directors of ShoreTel, Inc.  Mr. Denman holds a B.S. in accounting from Central Washington University and an MBA in finance and international business from the University of Washington, where he also recently served as the Edward V. Fritzky Endowed Visiting Chair in Leadership. Mr. Denman is a member of the advisory board at the University of Washington’s Michael G. Foster School of Business.  Mr. Denman also serves on the board of directors of the University of Washington Foundation.  His background in the field of facial analytics and mobile computing, as well as his positions on the boards of directors of other companies, will provide him valuable experience on which he can draw while serving as a member of the Board.

James C. Hale.  Mr. Hale has served as a director since November 2014 and served as a member of our advisory board from September 2012 to November 2014.  In 1998, he co-founded FTV Capital, which manages over $2.7 billion in growth equity funds.  Mr. Hale served as managing partner of FTV Capital from 1998 through 2007.  Mr. Hale has three decades of management experience in private equity investing and commercial and investment banking and prior to founding FTV Capital, Mr. Hale served as Senior Managing Partner and Head of the Financial Services Group at Montgomery Securities from 1982 to 1998, and as a member of the corporate planning and development group at Bank of America from 1978 to 1982.  Mr. Hale currently serves on the boards of directors of Bank of Marin, ACI Worldwide, and Visual Edge Technology and was a member of the board of directors of the National Venture Capital Association, San Francisco Venture Capital Forum, Duke University Management Company, and the Investment Committee of University of California Berkeley Foundation.  In addition, Mr. Hale recently served as Chairman of the board of directors at Official Payments Holdings, Inc.  Mr. Hale holds a B.S. from the University of California at Berkeley, an MBA from Harvard Graduate School of Business and is a Certified Public Accountant.  The Board believes Mr. Hale’s experience in corporate development, specifically in the payments and technology industries, makes him well qualified to serve on the Board while his financial expertise makes him well suited to serve on the Audit Committee.  Having served as a member of the Company’s Advisory Board since 2012, Mr. Hale has a strong understanding of our technology and the industries in which we operate.

Bruce E. Hansen.  Mr. Hansen has served as a director since October 2012 and served as a member of our advisory board from October 2010 to October 2012.  In 2002, he co-founded ID Analytics Inc., a consumer risk management company, and served as its Chairman and Chief Executive Officer from its inception until it was acquired by LifeLock, Inc. in March 2012.  Prior to founding ID Analytics, he was President at HNC Software Inc., a global provider of analytic software solutions for financial services, telecommunications and healthcare firms, from 2000 to 2002.  Mr. Hansen’s previous experience also includes the role of Chief Executive Officer of the Center for Adaptive Systems Applications and executive roles at CitiCorp (now CitiGroup), Automatic Data Processing (ADP) and Chase Manhattan Bank (now JP Morgan Chase).  He currently serves as a member of the board of directors of Verisk Analytics, Performant Financial Corporation, Zyme Solutions, Inc. and the San Diego Venture Group.  Mr. Hansen holds a B.A. in economics from Harvard University and an M.B.A. from the University of Chicago.  As a proven leader with decades of

 

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analytics industry experience ranging from concept-stage companies to established financial services companies, Mr. Hansen brings to the Board a unique perspective, an expansive knowledge base and domain expertise in the fields of identity verification and big data systems.  The Board believes that Mr. Hansen’s experience as both a key executive and director will enable him to contribute to the Board with respect to both general governance matters and industry-specific operations.

Alex W. “Pete” Hart.  Mr. Hart has served as a director since February 2011.  In April 2012, he retired as Chairman of the SVB Financial Group and has worked as an independent consultant in the financial services industry since 1997.  He served as Chief Executive Officer of Advanta Corporation, a public diversified financial services company, from 1995 to 1997, where he had previously served as Executive Vice Chairman from 1994 to 1995.  Prior to joining Advanta, he was President and Chief Executive Officer of MasterCard International, a worldwide payment service provider, from 1988 to 1994.  Mr. Hart is currently a member of the board of directors of VeriFone Holdings, Inc., an electronics company, where he serves as the non-executive Chairman.  He is also a director of BrightVolt, previously known as Solicore, Inc., a privately held battery manufacturer.  In addition to SVB Financial, Mr. Hart has also previously served as a member of the board of directors of the following companies:  Global Payments, Inc., FICO, Inc., HNC Software Inc., Retek Inc., Shopping.com, Sanchez Computer Associates, US Encode, eHarmony.com and Sequal Technologies, Inc.  Mr. Hart holds a B.A. in social relations from Harvard University.  As an experienced leader in the financial services industry, Mr. Hart combines extensive general business expertise with a deep knowledge of the financial services and payments industry.  His experience on the boards of directors of other companies in the financial services industry further augments his range of knowledge, providing experience on which he can draw while serving as a member of the Board.

None of our directors or director nominees has any family relationships with any of our other directors or executive officers. There currently are no legal proceedings, and during the past 10 years there have been no legal proceedings, that are material to the evaluation of the ability or integrity of any of our directors or director nominees.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION TO THE BOARD OF THE DIRECTOR NOMINEES DISCUSSED IN THIS PROPOSAL NO. 1.

 

 

 

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PROPOSAL NO. 2

 

APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE

MITEK SYSTEMS, INC. 2012 INCENTIVE PLAN

General

On January 25, 2017, the Board unanimously approved the 2012 Plan Amendment and Restatement, subject to approval by our stockholders at the Annual Meeting, which amends and restates the Mitek Systems, Inc. 2012 Incentive Plan (the “2012 Plan” and as proposed to be amended and restated, the “Restated 2012 Plan”) to, among other things, (i) increase the number of shares of our common stock available for future grant under the plan by 3,500,000 shares (i.e., from 6,000,000 to 9,500,000); and (ii) designate 2,100,000 of such shares to be reserved for issuance pursuant to performance based Senior Executive Long Term Incentive Restricted Stock Units (“Senior Executive Performance RSUs”), which Senior Executive Performance RSUs will only vest if the Company meets a significant threshold level of stock price appreciation by the end of the performance period, and of which initial grants will be made to our Chief Executive Officer, James B. DeBello; our Chief Technology Officer, Stephen J. Ritter; and our Chief Financial Officer, Russell C. Clark in an aggregate of 1,300,000 Senior Executive Long Term Incentive RSUs.  The remaining 800,000 Senior Executive Performance RSUs will be available for the Board to grant to other members of the senior executive team until March 1, 2018.

Increase in Shares Available

The increase of 3,500,000 shares available for future grant under the 2012 Plan shall be comprised of (i) an aggregate of 2,100,000 Senior Executive Performance RSUs for grants to our senior executive officers (as described below) and (ii) 1,400,000 shares for grants to employees and other eligible participants thereunder.  In addition, that number of shares of our common stock that would otherwise return to the available pool of unissued shares reserved for awards under our 1999 Stock Option Plan, 2000 Stock Option Plan, 2002 Stock Option Plan, 2006 Stock Option Plan, and 2010 Stock Option Plan (collectively, the “Prior Stock Option Plans”) would, as currently contemplated by the 2012 Plan, also be reserved for issuance thereunder.  For the avoidance of doubt and as further described below, the 2,100,000 shares referenced herein are included in the aggregate of 9,500,000 shares proposed to be reserved for issuance under the Restated 2012 Plan and are not in addition to such aggregate number of shares that may be awarded under the Restated 2012 Plan.

Designation of Senior Executive Performance RSUs

If this Proposal No. 2 is approved by our stockholders, up to 2,100,000 of the additional 3,500,000 shares will be available for issuance only pursuant to Senior Executive Performance RSUs and the remaining 1,400,000 shares will be available for issuance under any type of equity award other than Senior Executive Performance RSUs.  Accordingly, the total number of shares available and reserved for issuance under the Restated 2012 Plan shall be reduced by that number of the 2,100,000 shares available for issuance pursuant to Senior Executive Performance RSUs that are (i) not issued pursuant to Senior Executive Performance RSUs prior to March 1, 2018; or (ii) do not vest on or prior to the end of the Performance Period (as defined below.)

As part of the 2,100,000 shares reserved for Senior Executive Performance RSUs, the Company will make initial grants of an aggregate of 1,300,000 of such Senior Executive Performance RSUs to Messrs. DeBello, Ritter and Clark (the “Initial Grants”), as more fully described under “Senior Executive Long Term Incentive Awards” and “New Plan Benefits Table”.  The remaining 800,000 Senior Executive Performance RSUs will be available for the Board to grant to other members of the senior executive team until March 1, 2018.

Vesting of Senior Executive Performance RSUs

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 below), 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.

 

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The Senior Executive Performance RSUs will only vest 100% if (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 cancelled.  Upon cancellation, the shares subject to such Senior Executive Performance RSUs will not be returned to the Restated 2012 Plan and will not be available for issuance under other types of Awards.

Current Share Reserve and Board Rationale for the 2012 Plan Amendment and Restatement

As of December 31, 2016, (i) stock options to purchase 2,008,353 shares of our common stock and 1,892,136 restricted stock units (“RSUs”) were outstanding under the 2012 Plan; (ii) stock options to purchase an aggregate of 1,098,728 shares of our common stock were outstanding under the Prior Stock Option Plans; and (iii) 1,165,111 shares of our common stock were reserved for future grants under the 2012 Plan.

The 2012 Plan was adopted in January 2012 and subsequently amended in February 2014 and March 2016.  Since the most recent amendment, our revenue and employee headcount have significantly increased.  As a result, the number of employees participating in the 2012 Plan has significantly increased.  Based on our current rate of award grants, as well as our anticipated hiring of new employees, the Board believes that the existing share reserve will be exhausted within the next year.  Without the ability to provide equity compensation, we may be unable to attract and retain key employees, consultants or directors.

If this proposal is approved, we intend to continue to provide equity incentives to existing key employees and certain newly hired employees, consultants and directors and we expect to have sufficient shares available under the Restated 2012 Plan for the next two to three years.

The proposed increase of 3,500,000 shares was determined by comparing our past equity grants to directors, key employees and newly hired employees to our current hiring and retention plan, and planned grants to certain directors, key employees, and consultants as a retention tool, including the Initial Grants.

The Board believes that the increase in shares of our common stock available for issuance under the 2012 Plan is essential to permit our management to continue to provide long-term, equity-based incentives to present and future key employees, consultants and directors.  Further, the Board believes that earmarking 2,100,000 shares for grants of Senior Executive Performance RSUs to our senior executives is essential to providing long-term, equity-based incentives to present and future senior leadership in order to align the interests of our senior leadership with the interests of our stockholders and properly incentivize them to increase the value of the Company to our stockholders and to promote executive retention. Accordingly, the Board believes approval of the 2012 Plan Amendment and Restatement is in our best interest and the best interest of our stockholders, and recommends a vote “FOR” the approval of the 2012 Plan Amendment and Restatement.

Senior Executive Long Term Incentive Awards

The following summary sets forth the material features of the Senior Executive Performance RSUs, which are subject to the general terms of the Restated 2012 Plan as described below under “Summary of the Restated 2012 Plan.”  This summary is qualified in its entirety by the terms of the Restated 2012 Plan, which is attached to this Proxy Statement as Annex A.

General.  The Restated 2012 Plan provides that an aggregate of up to 2,100,000 Senior Executive Performance RSUs, may be granted to senior executives of the Company at any time prior to March 1, 2018.  The Restated 2012 Plan provides for an aggregate grant of 1,300,000 of such shares to be made to Messrs. DeBello, Ritter and Clark, as more fully described below under “New Plan Benefits Table.”  The remaining 800,000 Senior Executive Performance RSUs will be available for the Board to grant to other members of the senior executive team until March 1, 2018.

 

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The Senior Executive Performance RSUs are intended to align the long-term compensation of our senior executives with stockholder returns by conditioning the vesting of Senior Executive Performance RSUs on the achievement of certain benchmarks with respect to the fair market value of the Company’s stock.  Awards 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 below), 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 of the Company’s stock price during the Performance Period equaled or outperformed the percentage increase of the Russell 2000 Index over the same period.

Terms of Senior Executive Performance RSU Awards.  Senior Executive Performance RSUs will be evidenced by an award agreement that shall specify the maximum number of shares of common stock subject to such award. The award agreement will further specify a maximum value (in dollars) that may be awarded in connection with the vesting of Senior Executive Performance RSUs based on the fair market value of the common stock on vesting (as described below).  Senior Executive Performance RSUs will be issued for no cost and may be granted in consideration of the recipient’s past or future services performed for the Company. Senior Executive Performance RSUs shall be settled for shares of common stock on a one-for-one basis, unless settled for the cash equivalent in connection with a Change of Control. Participants have no voting rights with respect to Senior Executive Performance RSUs and shall not be entitled to receive amounts equivalent to cash, stock or other property dividends with respect to such Senior Executive Performance RSUs.  However, participants will have voting rights and dividend rights with respect to any shares of common stock that are issued in settlement of such Senior Executive Performance RSUs.

Vesting.  Senior Executive Performance RSUs vest only upon a significant appreciation in the stock price of the common stock of the Company.  No Senior Executive Performance RSUs vest (and thus no shares of common stock are issued) unless the fair market value of the Company’s common stock at the end of the Performance Period or upon a Change of Control during the Performance Period is equal to or exceeds $16.00 per share.  The fair market value of the Company’s common stock at the end of the Performance Period is determined based on the average closing price of the Company’s common stock as quoted on the principal exchange or system on which the common stock is then listed for the last 20 trading days of the Performance Period (the “Closing Fair Market Value”).  The fair market value of the Company’s common stock upon the Change of Control shall equal (i) the consideration to be received by stockholders of the Company with respect to a share of Company common stock upon such Change of Control or (ii) upon an asset sale, the consideration that would be distributable to stockholders of the Company with respect to each share of Company common stock if the Company distributed all of the consideration received in connection with the asset sale to the stockholders of the Company, less adjustments for debt, expenses and other amounts (each such amount, as determined by the Committee, the “Proceeds Per Share”).  To incentivize relative performance of the Company’s stock price, the Restated 2012 Plan provides for reduced vesting in the event the Company’s common stock price appreciation during the Performance Period underperforms against the Russell 2000 Index.

The chart below sets forth the percentage of maximum value of Senior Executive Performance RSUs that vest based on (i) the Closing Fair Market Value or Proceeds Per Share, as applicable, and (ii) the relative share price appreciation of the Company’s common stock as compared to the Russell 2000 Index as of the end of the Performance Period or Change of Control occurring during the Performance Period, as applicable. The number of Senior Executive Performance RSUs that vest is calculated by first determining the dollar value of the Senior Executive Performance RSUs, subject in each such case to the maximum dollar value to which the Performance RSU pertains, by reference to the chart below (by multiplying the maximum award by the applicable percentage), then dividing that amount by the Closing Fair Market Value or the Proceeds Per Share, as applicable (the resulting number of Senior Executive Performance RSUs being referred to as “Calculated RSUs”).  Senior Executive Performance RSUs are further subject to caps on the maximum number of shares of common stock with respect to such shares that can vest.  The percentage of maximum value of Senior Executive Performance RSUs that vest between Closing Fair Market Value or Proceeds Per Share of $16.00 and $20.00 will be determined based on straight line interpolation.

 

 

 

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Fifty percent of the Calculated RSUs determined at the end of the Performance Period convert into unrestricted shares (one share per RSU).  The remaining 50% of Calculated RSUs vest subject to the participant’s continued employment through the one-year anniversary of the end of the Performance Period (the “Deferred Vesting RSUs”); provided, however, that such Deferred Vesting RSUs shall fully vest upon a Qualifying Termination (as defined below) or upon a Change of Control during such one-year period.

One hundred percent of any Calculated RSUs that vest upon a Change of Control shall either (i) be converted into unrestricted shares of Company stock immediately prior to (but contingent upon) the consummation of a Change of Control or (ii) be cancelled in connection with the consummation of a Change of Control in exchange for a payment to the participant for each vested Senior Executive Performance RSU equal to the Proceeds Per Share.  Furthermore, in the event a Change of Control occurs prior to the end of the Performance Period but following a participant’s Qualifying Termination, then the number of Senior Executive Performance RSUs vested in connection with such participant’s Qualifying Termination shall be determined by multiplying (i) the number of Senior Executive Performance RSUs that would have been earned based on the Proceeds Per Share by (ii) a fraction, the numerator of which is the number of days in the Performance Period preceding the date of the Qualifying Termination and the denominator of which is the actual number of days in the Performance Period.

Termination of Service.  A participant who receives Senior Executive Performance RSUs and is subsequently terminated for Cause or resigns without Good Reason (as such terms are defined in the Restated 2012 Plan) shall, unless otherwise determined by the Committee, immediately forfeit all unearned and/or unpaid Senior Executive Performance RSUs, effective as of the date the participant engages in conduct giving rise to his or her termination for Cause or the date of his or her resignation without Good Reason.  If a participant who receives Senior Executive Performance RSUs is terminated by virtue of the participant’s death or disability, or if the participant’s employment is terminated by the Company without Cause, or if the participant resigns for Good Reason (each, a “Qualifying Termination”), then, provided the participant has completed at least one year of service after the commencement of the Performance Period, the participant will vest in a pro-rated number of Senior Executive Performance RSUs, determined by multiplying (i) the number of Senior Executive Performance RSUs that would have been earned based on actual performance as of the end of the Performance Period (as if the participant had remained employed through the one-year anniversary of the Performance Period) by (ii) a fraction, the numerator of which is the number of days in the Performance Period preceding the date of the Qualifying Termination and the denominator of which is the actual number of days in the Performance Period.  For the avoidance of doubt, if a participant receives Senior Executive Performance RSUs, but does not complete one year of continuous service after the commencement of the Performance Period, the participant will immediately forfeit all unvested Senior Executive Performance RSUs, except as provided above with respect to a Change of Control.  

Golden Parachute Tax Gross Up.  Section 4999 of the Code generally imposes a 20% excise tax on certain individuals who receive certain “excess parachute payments” contingent upon a change of control.  Section 280G of the Code denies the payor a deduction with respect to any excess parachute payments.  Payments contingent on a change of control must exceed three times the disqualified individual’s base amount before these rules are triggered.  Once triggered, the excess parachute payments generally are all amounts in excess of the disqualified individual’s “base amount”, as defined in Section 280G, (which generally is his or her average W-2 compensation for the five tax years preceding the change of control).  The foregoing does not purport to be a complete analysis of all potential tax consequences to the company or any participant.

Each of Messrs. DeBello and Clark is party to an Executive Change of Control Plan with the Company (as described elsewhere in this Proxy Statement) that provides for, among other things, a “gross up” of any Section 4999 excise taxes imposed on them.  The amount of the gross up is (i) the amount of any excise taxes, plus (ii) the amount needed to ensure that, after paying excise taxes and income taxes on the amount described in clause (i) and this clause (ii), the amount received by the executive is equal to the full change of control payment.  The gross up provision is intended to place Messrs. DeBello and Clark in the same after-tax position as if no excise taxes had been imposed on them.

Each award agreement relating to the issuance of Senior Executive Performance RSUs provides, among other things, that the grantee thereof, by executing such award agreement, agrees to waive the application of any other agreement to which such grantee is or may become a party that would require the Company to pay, with respect to payments arising under the Senior Executive Performance RSUs award agreement or the Restated 2012 Plan, (i) any excise tax by reason of the operation of Section 4999 of the Code or any interest, penalties or additional tax incurred by the participant with respect to such excise tax, and (ii) any federal and state income taxes arising from the payments made by the Company to the participant of such excise tax.  Accordingly, the Initial Grants to Messrs. DeBello and Clark will not be subject to a “gross up” of any Section 4999 excise taxes that may be imposed on them in connection with the Senior Executive Performance RSUs upon a change of control.

 

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New Plan Benefits Table

The following table sets forth information regarding the Senior Executive Performance RSUs, including the Initial Grants, which are subject to stockholder approval of the 2012 Plan Amendment and Restatement:

 

 

Summary of the Restated 2012 Plan

The following summary sets forth the primary features of the Restated 2012 Plan.  This summary is qualified in its entirety by the terms of the Restated 2012 Plan, which is attached to this Proxy Statement as Annex A.

General.  The Restated 2012 Plan authorizes the grant of stock options, stock appreciation rights (“SARs”), restricted stock, RSUs, Senior Executive Performance RSUs and cash awards (collectively referred to as “Awards”).  Stock options granted under the Restated 2012 Plan may be either options intended to constitute “incentive stock options,” as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified stock options, in each case as determined by the Committee (as defined below) in accordance with the terms of the Restated 2012 Plan.  Incentive stock options will be subject to a restriction such that to the extent the aggregate fair market value of shares of our common stock subject to stock options designated as incentive stock options and that become exercisable for the first time by a participant during any calendar year exceeds $100,000 (based on grant date valuation), the excess options will be treated as nonqualified stock options.

Purpose.  The purpose of the Restated 2012 Plan is to make available certain equity and other incentives to motivate selected employees, directors and consultants of the Company to put forth their best efforts toward the continued growth, profitability and success of the Company and to align the interests of such individuals with those of our stockholders.  Specifically, the Senior Executive Performance RSUs are designed to incentivize our senior executive officers to strive towards achieving exceptional stock price performance over a defined period of time.

Administration.  The authority to control and manage the operations and administration of the Restated 2012 Plan will be vested in a committee of two or more independent non-employee directors designated by the Board in accordance with the terms of the Restated 2012 Plan (the “Committee”).  To the extent not inconsistent with applicable laws or stock exchange rules, the Committee may delegate all or any portion of its authority under the Restated 2012 Plan to any one or more of its members or, with respect to Awards granted to participants who are not directors and officers subject to Section 16 of the Exchange Act, to one or more executive officers of the Company.  The Board also has the power to take action under the Restated 2012 Plan, provided that, at the time of taking such action, the Board is comprised of a majority of directors who meet the criteria set forth in the Restated 2012 Plan.

Subject to applicable laws and the terms of the Restated 2012 Plan, the Committee has the authority, in its sole discretion, to, among other things, select the employees, directors and consultants to whom Awards may be granted, determine the terms and conditions of Awards (including the vesting schedule, repurchase provisions, rights of first refusal and satisfaction of any performance criteria), approve forms of award agreements, interpret the terms of the Restated 2012 Plan and Awards, and subject to certain limitations set forth in the Restated 2012 Plan (including obtaining stockholder approval in certain circumstances), amend the terms of any outstanding Award granted under the Restated 2012 Plan.

 

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Eligibility.  The Restated 2012 Plan provides that Awards may be granted to our employees, directors and consultants (as such terms are defined in the Restated 2012 Plan), but that incentive stock options may be granted only to employees and Senior Executive Performance RSUs may be granted only to senior executive officers of the Company and only prior to March 1, 2018.  Other than as set forth above under “New Plan Benefits Table,” it is not possible to state at this time the precise type and extent of Awards that any particular executive officer, all current executive officers as a group, any particular nominee for director, all current directors who are not executive officers as a group or all non-executive officers as a group will be granted under the Restated 2012 Plan, since these matters will be determined by the Committee based on each participant’s level of responsibility, compensation and anticipated and actual contribution to our success.  As of December 31, 2016, approximately 127 people were eligible to participate in the Restated 2012 Plan.

Shares Reserved for Issuance.  If this Proposal No. 2 is approved at the Annual Meeting, the total number of shares of our common stock that will be reserved for issuance under the Restated 2012 Plan will be 9,500,000 shares (the “Initial Shares”), plus that number of shares of our common stock that would otherwise return to the available pool of unissued shares reserved for awards under the Prior Stock Option Plans as a result of forfeiture, cancellation or expiration of awards previously granted (ignoring the termination or expiration of such plans for the purpose of determining the number of shares available under the Restated 2012 Plan).  Of the Initial Shares, 2,100,000 will be allocated for issuance pursuant to Senior Executive Performance RSUs.

Any shares that are returned to the available pool of unissued shares from the Prior Stock Option Plans may only be used in connection with the Restated 2012 Plan to grant stock options.  With respect to any Senior Executive Performance RSUs that are canceled or forfeited, the shares subject to such Senior Executive Performance RSUs shall:  (i) if canceled or forfeited prior to March 1, 2018, be returned to the pool of unissued shares and be available for issuance pursuant to Senior Executive Performance RSUs at any time prior to March 1, 2018; or (ii) if canceled or forfeited after March 1, 2018, not be returned to the pool of unissued shares and shall reduce the total number of shares reserved for issuance under the Restated 2012 Plan.  The Restated 2012 Plan provides that the following shares of our common stock will not be returned to the Restated 2012 Plan or otherwise become available for issuance under the Restated 2012 Plan:  (i) shares of common stock tendered or withheld as full or partial payment of a stock option exercise price under the Restated 2012 Plan; (ii) shares of common stock withheld by the Company to satisfy any tax withholding obligations; and (iii) shares of common stock covered by the portion of any SAR that is exercised (whether or not such shares of common stock are actually issued to a participant upon exercise of the SAR).

Notwithstanding the foregoing, any shares of common stock covered by an Award (or portion of an Award) that is forfeited, canceled or expires (whether voluntarily or involuntarily) or issued (e.g., as substitution awards or inducement grants) in connection with an acquisition or merger shall be deemed not to have been issued from the Restated 2012 Plan for purposes of determining the maximum aggregate number of shares of common stock which may be issued under the Restated 2012 Plan.

Stock Options.  Stock options will be granted pursuant to award agreements and will vest at the rate specified therein.  The exercise price of each stock option may not be less than 100% of the fair market value of the common stock on the date such option is granted (or 110%, in the case of an incentive stock option granted to any employee who, at the time of such grant, owns stock representing more than 10% of the combined voting power of the Company or any parent or subsidiary thereof).  The exercise price is generally payable in cash, check, shares of common stock or payment through a broker-dealer sale and remittance procedure or a “net exercise” procedure.

Stock Appreciation Rights.  A stock appreciation right gives a participant the right to receive the appreciation in the fair market value of our common stock between the date of grant of such Award and the date of its exercise.  The base appreciation amount of each grant of SARs may not be less than 100% of the fair market value of the common stock on the date of grant.  SARs will be evidenced by an award agreement which shall specify the number of shares of common stock subject to such SARs and will vest and become exercisable at the times and on the terms established by the Committee.

Restricted Stock.  Awards of restricted stock will be evidenced by an award agreement which shall specify the number of shares of common stock subject to such Award and the period that must be satisfied before the restrictions pertaining to such grant of restricted stock will lapse and such stock will become vested.  A restricted stock award may be issued for nominal or no cost and may be granted in consideration of the recipient’s past or future services performed for the Company.  The Committee may grant restricted stock awards subject to conditions and the attainment of performance goals or may make such Awards subject to vesting conditions based on such service or performance criteria as the Committee specifies.

 

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Restricted Stock Units.  RSUs represent the right to receive shares of common stock at a future date.  Awards of RSUs will be evidenced by an award agreement which shall specify the number of shares of common stock subject to such Award.  RSUs may be issued for nominal or no cost and may be granted in consideration of the recipient’s past or future services performed for the Company.  We may settle RSUs for cash, shares of common stock or other securities, or a combination thereof, as determined by the Committee.  The Committee may grant RSUs subject to conditions and the attainment of performance goals or may make such Awards subject to vesting conditions based on such service or performance criteria as the Committee specifies.  Participants have no voting rights with respect to RSUs until shares of common stock are issued in settlement of such Awards.

Senior Executive Long Term Incentive Awards.  The Committee may grant Senior Executive Performance RSUs to senior executives of the Company, which are intended to align the long-term compensation of our senior executives with stockholder returns by conditioning the vesting of Senior Executive Performance RSUs on the achievement of certain benchmarks with respect to the fair market value of the Company’s stock, as more fully described above under the heading “Senior Executive Long Term Performance Incentive Awards”.

Senior Executive Plan Bonuses.  Under the Restated 2012 Plan, the Committee may authorize annual incentive compensation to a participant who is or may be a “covered employee” under Section 162(m) of the Code, payable upon achievement of specified management objectives determined by the Committee.  Senior executive plan bonuses will be evidenced in writing and will contain such terms and provisions as the Committee may determine.

Acquisitions and Other Transactions; Deferral of Award Payments; Separate Programs.  To the extent permitted by applicable laws, the Committee may issue Awards under the Restated 2012 Plan in settlement, assumption or substitution for outstanding awards or obligations to grant future awards in connection with the Company or a related entity engaging in an acquisition or merger (e.g., as currently permitted under Nasdaq Stock Market, LLC (“NASDAQ”) Listing Rule 5635(c)(3) and NASDAQ IM-5635-1) and may issue Awards under the Restated 2012 Plan as inducement awards (e.g., as currently permitted under NASDAQ Listing Rule 5635(c)(4) and NASDAQ IM-5635-1).  Such Awards would not count against the shares of common stock reserved under the Restated 2012 Plan.  To the extent permitted by applicable laws, the Committee may issue Awards under the Restated 2012 Plan in settlement, assumption or substitution for outstanding awards or obligations to grant future awards in connection with the Company or a related entity acquiring another entity, an interest in another entity or an additional interest in a related entity whether by merger, stock purchase, asset purchase or other form of transaction not described in the foregoing paragraph.  To the extent required by applicable laws, such Awards would count against the shares of common stock reserved under the Restated 2012 Plan.

The Restated 2012 Plan provides that the Committee may establish one or more programs under the Restated 2012 Plan to permit selected participants the opportunity to elect to defer receipt of the consideration payable upon exercise of an Award, satisfaction of performance criteria or other event that absent the election would entitle the participant to payment or receipt of shares of common stock or other consideration under the Award.  The Committee also may establish one or more separate programs under the Restated 2012 Plan for the purpose of issuing particular forms of Awards to one or more classes of participants on such terms and conditions as determined by the Committee from time to time.

Section 162(m) of the Code.  Section 162(m) limits a publicly held company to an annual deduction for federal income tax purposes of $1,000,000 for compensation paid to its “covered employees,” generally its chief executive officer and the three most highly compensated executive officers (other than the chief financial officer), determined at the end of each year.  However, performance-based compensation is excluded from this limitation.  The Restated 2012 Plan is designed to permit the Committee to grant Awards that are intended to qualify as performance-based compensation for purposes of satisfying the conditions of Section 162(m), such as the Senior Executive Performance RSUs.

To qualify as performance-based:  (i) the compensation must be paid solely on account of the attainment of one or more pre-established, objective performance goals; (ii) the performance goal under which compensation is paid must be established by a Committee comprising two or more directors who qualify as outside directors for purposes of the exception; (iii) the material terms under which the compensation is to be paid must be disclosed to and subsequently approved by the stockholders of the Company in a separate vote before payment is made; and (iv) the Committee must certify in writing before payment of the compensation is made that the performance goals and any other material terms were in fact satisfied.  

In the case of compensation attributable to stock options and SARs, the performance goal requirement (summarized above) is deemed satisfied, and the certification requirement (summarized above) is inapplicable, if:  (i) the grant or award is made by the Committee; (ii) the plan under which the stock option or SAR is granted states the maximum number of shares with respect to which stock options and SARs may be granted during a specified period to an employee; and (iii) under the terms of the stock option or SAR, the amount of compensation is based solely on an increase in the value of the stock after the date of grant.

 

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In order for restricted stock, RSUs (including Senior Executive Performance RSUs) and other Awards (e.g., cash) to qualify as performance-based compensation, the Committee must establish a performance goal with respect to such Award in writing not later than 90 days after the commencement of the period to which the performance goal relates and while the outcome of the performance goal is substantially uncertain.  In addition, the performance goal must be stated in terms of an objective formula or standard.  Performance goals may be described in terms of Company-wide objectives, objectives that are related to the performance of the individual participant, a related entity or a division, department or function within the Company or a related entity, or based upon the relative performance of other companies or upon comparisons of any of the indicators of performance relative to other companies.  Without limiting the generality of the foregoing, the management objectives applicable to any Award to a covered employee which is intended to be deductible as performance-based compensation under Section 162(m) will be based on specified levels of, or relative peer company, performance in any one or more of the following objectives, or any combination thereof, as determined by the Committee, in its sole discretion:  (i) appreciation in and/or maintenance of the price of the Shares or any other publicly-traded securities of the Company, (ii) earnings or loss per share, (iii) total stockholder return, (iv) operating margin, (v) gross margin, (vi) return on equity, (vii) return on assets or net assets, (viii) return on investment, (ix) operating income, (x) net operating income, (xi) pre-tax profit, (xii) cash flow or cash flow per share (before or after dividends), (xiii) revenue, (xiv) improvement in or attainment of expense levels or working capital levels, including cash, inventory and accounts receivable, (xv) earnings or losses (including earnings or losses before taxes, before interest and taxes, or before interest, taxes, depreciation, amortization, stock compensation, non-recurring charges and non-cash or other charges), (xvi) economic value added, (xvii) market share, (xviii) relative or absolute share price, (xix) pro forma net income, (xx) customer orders, (xxi) gross or net revenues, (xxii) revenue growth or product revenue growth, (xxiii) operating income (before or after taxes), (xxiv) pre- or after-tax income or loss (before or after allocation of corporate overhead and bonus), (xxv) net income or loss (before or after taxes), (xxvi) return on equity, (xxvii) attainment of strategic and operational initiatives, (xxviii) comparisons with various stock market indices, (xxix) implementation, completion or attainment of measurable objectives with respect to research, development, commercialization, products or projects, acquisitions and divestitures, (xxx) factoring transactions and recruiting and maintaining personnel, (xxxi) gross profits, (xxxii) economic value-added models or equivalent metrics, (xxxiii) reductions in costs, (xxxiv) sales or licenses of the Company’s assets, including its intellectual property, whether in a particular jurisdiction or territory or globally, or through partnering transactions, (xxxv) return on capital (including return on total capital or return on invested capital), (xxxvi) cash flow return on investment, (xxxvii) year- end cash, (xxxviii) cash margin, (xxxix) debt reduction, (xl) stockholders equity, (xli) operating efficiencies, (xlii) research and development achievements, (xliii) strategic partnerships or transactions (including in-licensing and out-licensing of intellectual property), (xliv) co-development, co-marketing, profit sharing, joint venture or other similar arrangements, (xlv) financial ratios, including those measuring liquidity, activity, profitability or leverage, (xlvi) cost of capital or assets under management, (xlvii) financing and other capital raising transactions (including sales of the Company’s equity or debt securities), (xlviii) factoring transactions, and (xlix) establishing relationships with commercial entities with respect to the marketing, distribution and sale of the Company’s products (including with group purchasing organizations, distributors and other vendors).  

Your vote to approve Proposal No. 2 will be deemed a vote to approve (i) the management objectives selected for vesting of Senior Executive Performance RSUs, as described under “Summary—Long Term Performance Incentive Awards” and (ii) the list of management objectives set forth in the preceding paragraph from which the Committee may select the performance metrics for future performance-based Awards issued under the Restated 2012 Plan, if any.

Limitations on Awards.  The maximum number of shares with respect to which a participant may be granted stock options, SARs, restricted stock and/or RSUs in any calendar year shall be equal to the Initial Shares less the 2,100,000 shares reserved for issuance under Senior Executive Performance RSUs.  The maximum number of shares with respect to which a participant may be granted Senior Executive Performance RSUs in the aggregate shall be equal to 750,000 shares. The foregoing limitations will be adjusted proportionately by the Committee in connection with any change in our capitalization due to a stock split, stock dividend or similar event affecting our common stock and such determination shall be final, binding and conclusive.  The maximum amount with respect to which (i) senior executive plan bonuses may be granted to a participant under a senior executive plan bonus award during a calendar year is $1,500,000; and (ii) awards of cash may be granted to any participant in any calendar year is $1,500,000.  The Company, however, may make other bonus or cash awards outside of the Restated 2012 Plan.

Term of Award.  The term of any Award granted under the Restated 2012 Plan may not be for more than 10 years (or five years in the case of an incentive stock option granted to any participant who owns stock representing more than 10% of the combined voting power of the Company or any parent or subsidiary thereof).

Transferability of Awards.  Unless otherwise provided in the Restated 2012 Plan or permitted by the Committee, Awards may not be pledged, assigned or otherwise transferred in any manner, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the participant only by the participant or by such participant’s beneficiaries in the event of the participant’s death.

 

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Dividend Equivalents.  Subject to the provisions of the Restated 2012 Plan and any award agreement, the recipient of an Award other than a stock option or SAR may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, amounts equivalent to cash, stock or other property dividends on shares of our common stock with respect to the number of shares covered by the Award, as determined by the Committee, in its sole discretion.

Termination of Service.  Unless otherwise provided in an award agreement, in the event of a participant’s death or termination of the participant’s status as an employee, director or consultant due to the participant’s disability, the participant’s beneficiary or the participant, as applicable, may exercise any vested Award at any time within the earlier to occur of:  (i) one year after the date of the participant’s death or disability; or (ii) the date on which such Award expires by its terms.  Except as otherwise provided in an individual award agreement, in the event of a participant’s Termination Without Cause (as defined in the Restated 2012 Plan), the participant may exercise any vested Award at any time within the earlier to occur of:  (i) 90 days after such termination; or (ii) the date on which such Award expires by its terms.  A participant who is terminated for Cause (as defined in the Restated 2012 Plan) shall, unless otherwise determined by the Committee, immediately forfeit, effective as of the date the participant engages in such conduct giving rise to his or her termination for Cause, all unexercised, unearned and/or unpaid Awards.

As more fully described above under “Senior Executive Long Term Performance Incentive Awards—Termination of Service,” a participant who receives Senior Executive Performance RSUs and is subsequently terminated for Cause or resigns without Good Reason shall, unless otherwise determined by the Committee, immediately forfeit all unearned and/or unpaid Senior Executive Performance RSUs.  If a participant who receives Senior Executive Performance RSUs is terminated by virtue of the participant’s death or disability, or if the participant experiences a Qualifying Termination following at least one year of continuous service after commencement of the Performance Period, then the participant will vest in a pro-rated number of Senior Executive Performance RSUs.  For the avoidance of doubt, if a participant receives a Senior Executive Performance RSUs, but does not complete one year of continuous service after the commencement of the Performance Period, the participant will immediately forfeit all unvested Senior Executive Performance RSUs, except as provided below with respect to a Change of Control.  

Adjustments Upon Change in Capitalization.  In the event there is a specified type of change in our capital structure not involving the receipt of consideration by us, such as a stock split, stock dividend, combination, recapitalization or reclassification, or any other transaction with respect to our common stock, including a merger, reorganization, liquidation or similar transaction, the number of shares reserved under the Restated 2012 Plan and the number of shares subject to and exercise price, if applicable, of all outstanding stock awards will be appropriately adjusted.

Change of Control.  Except with respect to Senior Executive Performance RSUs or as provided in an individual award agreement, upon the consummation of a Change of Control (as defined below), all outstanding Awards under the Restated 2012 Plan may be assumed or replaced by the acquiring company.  Any portions of Awards that have not been assumed, replaced or exercised in connection with a Change of Control will automatically become fully vested and exercisable and be released from any repurchase or forfeiture rights for all of the shares of common stock (or other consideration) represented by such Award (or portion thereof), immediately prior to the specified effective date of such Change of Control.  However, unless otherwise provided for by the Committee pursuant to the terms of the Restated 2012 Plan or as specified in an award agreement or other agreement between the participant and the Company, no cash Awards under any senior executive plan bonus or otherwise will be paid in connection with a Change of Control (as defined below).

In the case of a proposed Change of Control, the Committee may, prior to the occurrence of the Change of Control, declare that the outstanding stock options and SARs granted under the Restated 2012 Plan will accelerate and become exercisable in full and that all such stock options and SARs, whether or not exercisable prior to such acceleration, must be exercised within a specified period of time or they will terminate.  In the event of such declaration, each stock option and SAR granted under the Restated 2012 Plan, to the extent that it has not been exercised prior to the Change of Control, shall be canceled at the time of, or immediately prior to, the Change of Control, as provided in the declaration.  

Senior Executive Performance RSUs may vest, in whole or in part, upon a Change of Control, depending on the Proceeds Per Share generated by such Change of Control, as set forth above under “Senior Executive Long Term Performance Incentive Awards—Vesting.”

Under the Restated 2012 Plan, a “Change of Control” generally includes:

 

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Term of the Restated 2012 Plan; Amendment, Suspension or Termination of the Restated 2012 Plan.  The Restated 2012 Plan will continue in effect until the earliest to occur of:  (i) all shares of common stock subject to the Restated 2012 Plan have been distributed; (ii) all Awards have expired or terminated; (iii) termination pursuant to Section 18 of the Restated 2012 Plan; and (iv) 10 years.  The Board may at any time amend, suspend or terminate the Restated 2012 Plan; provided, however, that no amendment can be made without the approval of our stockholders to the extent such approval is required by applicable laws, or if such amendment would lessen the stockholder approval requirements set forth in the Restated 2012 Plan.

Anticipated U.S. Federal Income Tax Consequences

The following summary of the federal income tax consequences of the Restated 2012 Plan and the Awards to be granted thereunder is based upon federal income tax laws in effect on the date of this Proxy Statement, all of which are subject to change (possibly to retroactive effect) and to differing interpretations.  Any such change could affect the accuracy of the statements and conclusions set forth in this summary.  This summary does not purport to be complete, and does not discuss non-U.S., state or local tax consequences or additional guidance that is expected to be issued by the Treasury Department under the Code.

Nonqualified Stock Options.  The grant of a nonqualified stock option under the Restated 2012 Plan will not result in any federal income tax consequences to the optionholder or to us.  Upon exercise of a nonqualified stock option, the optionholder is subject to income taxes at the rate applicable to ordinary compensation income on the excess of the fair market value of the shares on the date of exercise over the option exercise price.  This income is subject to withholding for federal income and employment tax purposes.  We are entitled to an income tax deduction in the amount of the income recognized by the optionholder, subject to the possible limitations imposed by the $1,000,000 compensation limit imposed by Section 162(m) or if the compensation is an “excess parachute payment” within the meaning of Section 280G of the Code (“Section 280G”) and so long as we withhold the appropriate taxes with respect to such income (if required) and the optionholder’s total compensation is deemed an ordinary and necessary business expense.  Any gain or loss on the optionholder’s subsequent disposition of the shares of common stock will receive long- or short-term capital gain or loss treatment, depending on whether the shares are held for more than one year following exercise.  We do not receive a tax deduction for any such gain.

If a nonqualified stock option is amended, such option may be considered deferred compensation and subject to the rules of Section 409A of the Code (“Section 409A”), which provide, among other things, rules regarding the timing of payment of deferred compensation.  A stock option subject to Section 409A that fails to comply with the rules of Section 409A can result in the participant having acceleration of income recognition, an additional 20% tax obligation, plus penalties and interest.

Incentive Stock Options.  The grant of an incentive stock option under the Restated 2012 Plan will not result in any federal income tax consequences to the optionholder or to us.  An optionholder recognizes no federal taxable income upon exercising an incentive stock option (subject to the alternative minimum tax rules) and we receive no deduction at the time of exercise.  In the event of a disposition of stock acquired upon exercise of an incentive stock option, the tax consequences depend upon how long the optionholder has held the shares of common stock.  If the optionholder does not dispose of the shares within two years after the incentive stock option was granted, nor within one year after the incentive stock option was exercised, the optionholder will recognize a long-term capital gain (or loss) equal to the difference between the sale price of the shares and the exercise price.  We are not entitled to any deduction under these circumstances.

If the optionholder fails to satisfy either of the foregoing holding periods, he or she must recognize ordinary income in the year of the disposition (referred to as a “disqualifying disposition”).  The amount of such ordinary income generally is the lesser of (i) the excess (if any) of the amount realized on the disposition over the exercise price; or (ii) the excess of the fair market value of the shares on the date of exercise over the exercise price.  Any gain in excess of the amount taxed as ordinary income will be treated as a long or short-term capital gain, depending on whether the stock was held for more than one year.  We, in the year of the disqualifying disposition, are entitled to a deduction equal to the amount of ordinary income recognized by the optionholder, subject to the possible limitations imposed by the $1,000,000 compensation limit imposed by Section 162(m) or if the compensation is an “excess parachute payment” within the meaning of Section 280G and so long as the optionholder’s total compensation is deemed an ordinary and necessary business expense.

In the event an incentive stock option is amended, such option may be considered deferred compensation and subject to the rules of Section 409A.  A stock option subject to Section 409A which fails to comply with the rules of Section 409A can result in the participant having acceleration of income recognition, an additional 20% tax obligation, plus penalties and interest.  In addition, the amendment of an incentive stock option may convert the option from an incentive stock option to a nonqualified stock option.

 

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Restricted Stock.  A recipient of restricted stock will not recognize any taxable income for federal income tax purposes in the year of the award, provided that the shares of common stock are subject to restrictions (that is, the restricted stock is nontransferable and subject to a substantial risk of forfeiture).  However, the recipient may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the common stock on the date of the award, determined without regard to the restrictions, less any amount the recipient paid for the award.  If the recipient does not make such a Section 83(b) election, the fair market value of the common stock on the date the restrictions lapse will be treated as compensation income to the recipient and will be taxable in the year the restrictions lapse.  We are entitled to an income tax deduction in the amount of the income recognized by the recipient, subject to the possible limitations imposed by the $1,000,000 compensation limit imposed by Section 162(m) or if the compensation is an “excess parachute payment” within the meaning of Section 280G and so long as we withhold the appropriate taxes with respect to such income (if required) and the recipient’s total compensation is deemed an ordinary and necessary business expense.

Stock Appreciation Rights.  Recipients of SARs generally should not recognize income until the SAR is exercised.  Upon exercise, the recipient will normally recognize taxable ordinary income for federal income tax purposes equal to the amount of cash and the fair market value of the shares, if any, received upon such exercise.  Recipients who are employees will be subject to withholding for federal income and employment tax purposes with respect to income recognized upon exercise of a SAR.  Recipients will recognize gain upon the disposition of any shares received on exercise of a SAR equal to the excess of:  (i) the amount realized on such disposition; over (ii) the ordinary income recognized with respect to such shares under the principles set forth above.  That gain will be taxable as long- or short-term capital gain depending on whether the shares were held for more than one year.  We are entitled to an income tax deduction in the amount of the income recognized by the recipient upon exercise of the SARs, subject to the possible limitations imposed by the $1,000,000 compensation limit imposed by Section 162(m) or if the compensation is an “excess parachute payment” within the meaning of Section 280G and so long as we withhold the appropriate taxes with respect to such income (if required) and the recipient’s total compensation is deemed an ordinary and necessary business expense.

A SAR can be considered non-qualified deferred compensation that is subject to the rules of Section 409A.  A SAR subject to Section 409A that does not meet the requirements of Section 409A can result in the participant having acceleration of income recognition, an additional 20% tax obligation, plus penalties and interest.

Restricted Stock Units.  Recipients of RSUs (including Senior Executive Performance RSUs) generally should not recognize income until such units are converted into cash or shares of stock.  Upon conversion, the recipient will normally recognize taxable ordinary income for federal income tax purposes equal to the amount of the fair market value of the shares (or the amount of cash) received upon conversion.  Recipients who are employees will be subject to withholding for federal income and employment tax purposes with respect to income recognized upon conversion of the RSUs.  Participants will recognize gain upon the disposition of any shares received upon conversion of the RSUs equal to the excess of:  (i) the amount realized on such disposition; over (ii) the ordinary income recognized with respect to such shares under the principles set forth above.  That gain will be taxable as long- or short-term capital gain depending on whether the shares were held for more than one year.  We are entitled to an income tax deduction in the amount of the income recognized by the recipient upon conversion of the RSUs into cash or shares of stock, subject to the possible limitations imposed by the $1,000,000 compensation limit imposed by Section 162(m) or if the compensation is an “excess parachute payment” within the meaning of Section 280G and so long as we withhold the appropriate taxes with respect to such income (if required) and the recipient’s total compensation is deemed an ordinary and necessary business expense.

We do not believe that RSUs, including the Senior Executive Performance RSUs, will be considered non-qualified deferred compensation that is subject to the rules of Section 409A. A grant of RSUs that is, however, subject to Section 409A that does not meet the requirements of Section 409A can result in the participant having acceleration of income recognition, an additional 20% tax obligation, plus penalties and interest.

Interests of Certain Persons in the Restated 2012 Plan

If the 2012 Plan Amendment and Restatement is approved, our directors and named executive officers will be eligible to receive awards under the Restated 2012 Plan, including the Initial Grants, the maximum aggregate value of which is $26,000,000, to be awarded to Messrs. DeBello, Clark and Ritter.  In addition, the Restated 2012 Plan provides for indemnification of the Committee members to the fullest extent permitted by law with respect to determinations made in connection with the Restated 2012 Plan.  Accordingly, our directors and executive officers have a substantial interest in the approval of the 2012 Plan Amendment and Restatement.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THIS

PROPOSAL NO. 2 TO APPROVE THE 2012 PLAN AMENDMENT AND RESTATEMENT.

 

 

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PROPOSAL NO. 3

 

APPROVAL OF AN AMENDMENT TO THE MITEK SYSTEMS, INC.

DIRECTOR RESTRICTED STOCK UNIT PLAN

General

On January 25, 2017, the Board unanimously approved the Director Plan Amendment, subject to approval by our stockholders at the Annual Meeting, which amends the Mitek Systems, Inc. Director Restricted Stock Unit Plan (the “Director Plan”) to increase the total number of shares of our common stock reserved for issuance under the Director Plan by 500,000 (i.e., from 1,000,000 to 1,500,000); and extend the term of the Director Plan.

The current term of the Director Plan is set forth in Section 10(a) of the Director Plan, which states that the Director Plan shall terminate on the day before the 10th anniversary of the “Adoption Date,” which is defined in the Director Plan as December 6, 2010.  The Director Plan Amendment will amend and replace Section 10(a) of the Director Plan in its entirety as follows:

“(a)        Term of the Plan.  The Plan shall terminate on December 31, 2022 unless earlier terminated pursuant to this Section 10.  This Plan will not in any way affect outstanding awards that were issued under any other Company equity compensation plans.  For the avoidance of doubt, to the extent approval of the Company’s stockholders is not obtained within 12 months after the date the Plan, as amended, is adopted by the Board, the Plan shall continue in effect as if the Plan had not been amended.”

This modification will have the effect of extending the termination of the Director Plan from December 5, 2020 to December 31, 2022.

As of December 31, 2016, (i) RSUs convertible into 543,385 shares of our common stock were outstanding under the Director Plan; and (ii) 31,786 shares of our common stock were reserved for future grants under the Director Plan.

The Director Plan was adopted in February 2011 in order to help attract and retain the experienced directors required for our business to grow.  There is significant competition for directors with the skills required to oversee the products and services we offer.  If we cannot attract, motivate and retain qualified professionals, our business, financial condition and results of operations will suffer.  

In the six years since the Director Plan was adopted, we have granted our employee and non-employee directors RSUs on an annual basis in amounts consistent with grants made by our peer companies to their directors.  Based on our current rate of award grants, the Board believes that the existing share reserve will be exhausted within the next year.  Without the ability to provide equity compensation, we may be unable to attract and retain highly qualified directors.

If this Proposal No. 3 is approved, we intend to continue to provide equity incentives to our current and future directors.  If this proposal is approved, we expect to have sufficient shares available under the Director Plan for the next three to four years. The proposed increase of 500,000 shares was determined by comparing our past equity grants to our directors and planned grants to our current and future directors as a retention tool.

The Board believes that the increase in shares of our common stock available for issuance under the Director Plan is essential to permit us to continue to provide adequate equity-based incentives to present and future directors.  Accordingly, the Board believes approval of the Director Plan Amendment is in our best interest and the best interest of our stockholders, and recommends a vote “FOR” the approval of the Director Plan Amendment.

Summary of the Director Plan

The following summary sets forth the primary features of the Director Plan.  This summary is qualified in its entirety by the terms of the Director Plan, as proposed to be amended, which is attached to this Proxy Statement as Annex B.

General.  The Director Plan authorizes the grant of RSUs to our employee and non-employee directors.  

 

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Purpose.  The purpose of the Director Plan is to help promote the long-term success of the Company and the creation of stockholder value by:

Administration.  The Director Plan will be administered by the Board.  Subject to the terms of the Director Plan, the Board has the sole discretion, among other things, to:

The Board may also use the Director Plan to issue shares under other plans or subplans as may be deemed necessary or appropriate, such as to provide for participation by non-U.S. directors.  In addition, awards may be subject to any policy that we may implement on the recoupment of compensation (referred to as a clawback policy).  We will indemnify the members of the Board and their delegates to the maximum extent permitted by applicable law for actions taken or not taken with respect to the Director Plan.

Eligibility to Receive Awards. Only employee and non-employee directors are eligible to receive awards under the Director Plan.  The Board determines, in its discretion, the individuals who will be granted awards under the Director Plan.  It is not possible to state at this time the precise number of RSUs that any particular employee director, non-employee director or non-employee directors as a group will be granted under the Director Plan, as amended, since these matters will be determined by the Board based on each participant’s level of responsibility, compensation and anticipated and actual contribution to our success.  As of December 31, 2016, one employee director and six non-employee directors were eligible to participate in the Director Plan.

Shares Subject to the Director Plan. The maximum number of shares of common stock that can be issued under the Director Plan is 1,500,000.  The shares underlying forfeited or terminated awards will become available again for issuance under the Director Plan and shares that are utilized to pay an award’s purchase price, if any, or tax withholding obligations shall not count against the Director Plan’s share limit.

Restricted Stock Units.  RSUs issued under the Director Plan will be evidenced by a written agreement between the Company and the director to whom the award was granted and will recite the specific terms and conditions of the award. The Board will determine all of the terms and conditions of the RSUs awarded under the Director Plan, including the vesting period and the number of shares of common stock subject to each award.  Upon each vesting date, the participant will become entitled to receive a share of our common stock in exchange for each vested RSU on the settlement date.  The Board may determine that a RSU will vest only if the Company satisfies performance goals established by the Board.  Settlement of RSUs will generally occur within 30 days of vesting unless the participant has timely elected to defer such compensation or his or her written RSU agreement provides for settlement to occur on a later specified date.  For example, the written RSU agreement may provide for settlement to occur upon the termination of the participant’s service with the Company.

Limited Transferability of Awards. Awards granted under the Director Plan generally are not transferrable other than upon death, or pursuant to a court-approved domestic relations order.

Termination of Service Prior to Vesting. Generally, if a director’s service with the Company terminates, then all unvested RSUs will be surrendered to us without compensation.

 

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Adjustments Upon Changes in Capitalization.  In the event of a stock split, a combination, consolidation, spin-off, recapitalization, or any other similar transaction involving shares of our common stock prior to the settlement of a RSU award, then the number and kind of shares issued under the Director Plan and subject to each award, as well as the number and kind of shares available for issuance under the Director Plan, will each be equitably and proportionately adjusted by the Board.

Change of Control.  In the event that the Company is a party to a merger or other reorganization, outstanding awards granted under the Director Plan will be subject to the agreement of merger or reorganization. Such agreement may provide for (i) accelerated vesting of outstanding awards, (ii) the continuation of the outstanding awards, (iii) the assumption of the outstanding awards by the surviving entity, or (iv) the cancellation of outstanding awards with or without consideration, in all cases with or without consent of the director to whom the award was granted.  Except as otherwise provided in the award agreement, in the event of a change in control, all then-outstanding awards will vest and become exercisable as of immediately prior to the change in control.

Term of the Director Plan. If approved by stockholders, the Director Plan will continue in effect until December 31, 2022 or until earlier terminated by the Board.

Amendment and Termination of the Director Plan. The Board generally may amend or terminate the Director Plan at any time and for any reason, except that the Board must obtain stockholder approval in certain circumstances.

Anticipated U.S. Federal Income Tax Consequences

The following summary of the federal income tax consequences of the Director Plan and the RSUs to be granted thereunder is based upon federal income tax laws in effect on the date of this Proxy Statement, all of which are subject to change (possibly to retroactive effect) and to differing interpretations. Any such change could affect the accuracy of the statements and conclusions set forth in this summary. This summary does not purport to be complete, and does not discuss non-U.S., state or local tax consequences or additional guidance that is expected to be issued by the Treasury Department under the Code.

Restricted Stock Units. Recipients of RSUs generally should not recognize income until such units are converted into cash or shares of stock. Upon conversion, the recipient will normally recognize taxable ordinary income for federal income tax purposes equal to the amount of the fair market value of the shares (or the amount of cash) received upon conversion. Recipients will be subject to withholding for federal income and employment tax purposes with respect to income recognized upon conversion of the RSUs. Participants will recognize gain upon the disposition of any shares received upon conversion of the RSUs equal to the excess of: (i) the amount realized on such disposition; over (ii) the ordinary income recognized with respect to such shares under the principles set forth above. That gain will be taxable as long- or short-term capital gain depending on whether the shares were held for more than one year. We are entitled to an income tax deduction in the amount of the income recognized by the recipient upon conversion of the RSUs into cash or shares of stock, subject to the possible limitations imposed by the $1,000,000 compensation limit imposed by Section 162(m) or if the compensation is an “excess parachute payment” within the meaning of Section 280G and so long as we withhold the appropriate taxes with respect to such income (if required) and the recipient’s total compensation is deemed an ordinary and necessary business expense.

We do not believe that RSUs will be considered non-qualified deferred compensation that is subject to the rules of Section 409A. A grant of RSUs that is, however, subject to Section 409A that does not meet the requirements of Section 409A can result in the participant having acceleration of income recognition, an additional 20% tax obligation, plus penalties and interest.

Interests of Certain Persons in the Director Plan

If the Director Plan Amendment is approved, our directors will be eligible to receive awards under the Director Plan.  In addition, the Director Plan provides for indemnification of the Board members to the fullest extent permitted by law with respect to determinations made in connection with the Director Plan.  Accordingly, our directors have a substantial interest in the approval of the Director Plan Amendment.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THIS

PROPOSAL NO. 3 TO APPROVE THE DIRECTOR PLAN AMENDMENT.

 

 

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PROPOSAL NO. 4

RATIFICATION OF THE SELECTION OF OUR

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee has selected the firm of Mayer Hoffman, independent certified public accountants, to serve as our independent registered public accounting firm for the fiscal year ending September 30, 2017. Representatives of Mayer Hoffman are expected to be present at the Annual Meeting and will have the opportunity to make a statement and respond to appropriate questions. Mayer Hoffman leases substantially all its personnel, who work under the control of Mayer Hoffman shareholders, from wholly-owned subsidiaries of CBIZ, Inc., in an alternative practice structure. All of the hours expended on Mayer Hoffman’s engagement to audit our financial statements for the 2016 fiscal year were attributed to work performed by such leased personnel.

Neither our governing documents nor applicable laws require stockholder ratification of the selection of Mayer Hoffman as our independent registered public accounting firm. However, the Board is submitting the selection of Mayer Hoffman to our stockholders for ratification as a matter of good corporate governance. If our stockholders fail to ratify the selection of Mayer Hoffman, the Audit Committee will reconsider whether or not to retain Mayer Hoffman. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of different independent auditors at any time during the year if they determine that such a change would be in the best interests of the Company and our stockholders.

Independent Registered Public Accounting Firm Fee Information

The following table sets forth the aggregate fees billed by Mayer Hoffman for the services indicated for the fiscal years ended September 30, 2016 and 2015. All fees described below were approved by the Audit Committee.

 

 

Pre-Approval Policies

The Audit Committee has established policies and procedures by which it approves in advance any audit and permissible non-audit services to be provided by our independent registered public accounting firm. Under these policies and procedures, prior to the engagement of the independent registered public accounting firm for pre-approved services, requests or applications for the independent registered public accounting firm to provide services must be submitted to the Audit Committee and must include a detailed description of the services to be rendered. Our Chief Financial Officer and the independent registered public accounting firm must ensure that the independent registered public accounting firm is not engaged to perform the proposed services unless those services are within the list of services that have received the Audit Committee’s pre-approval, and must cause the Audit Committee to be informed in a timely manner of all services rendered by the independent registered public accounting firm and the related fees.

Each request or application must include:

 

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The Audit Committee also will not permit the independent registered public accounting firm to be engaged to provide any services to the extent that the SEC has prohibited the provision of those services by an independent registered public accounting firm, which generally include:

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL NO. 4 TO RATIFY THE SELECTION OF MAYER HOFFMAN TO SERVE AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2017.

 

 

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PROPOSAL NO. 5

APPROVAL, ON AN ADVISORY (NON-BINDING) BASIS, OF

THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

In accordance with the requirements of Section 14A of the Exchange Act and the related rules of the SEC, we are providing our stockholders the opportunity to vote on an advisory (non-binding) resolution, commonly known as a “say-on-pay” resolution, to approve the compensation of our named executive officers as described in this Proxy Statement in the section titled “Executive Compensation,” beginning on page 37, the compensation tables beginning on page 44 and any related narrative discussion contained in this Proxy Statement.  This proposal gives our stockholders the opportunity to express their views on the design and effectiveness of our executive compensation program.

Our executive compensation programs are designed to attract, retain and motivate talented, qualified executives, effectively manage and promote the success of our Company and reward performance.  To achieve this balance of objectives, the Board has adopted a compensation approach that includes a mix of short-term and long-term components, cash and equity elements and fixed and contingent payments in proportions that we believe will provide appropriate incentives to reward our senior executives and management team.  Under these programs, our executive officers are rewarded for the achievement of specific financial and strategic goals, which are expected to result in increased stockholder value.  We review our compensation plans and programs on an ongoing basis and periodically make adjustments taking into account competitive conditions and other factors.  Please read the section below entitled “Executive Compensation” for additional details about our executive compensation programs, including information regarding the 2016 fiscal year compensation of our named executive officers.

We believe that the compensation of our named executive officers for the 2016 fiscal year was appropriate and reasonable and that our compensation policies and procedures are sound and support the best interests of our company and our stockholders.  Additionally, we believe that our compensation policies and procedures are effective in aligning the executives’ long-term interests with those of our stockholders.

Accordingly, the following resolution will be submitted for a stockholder vote at the Annual Meeting:

“RESOLVED, that the stockholders of Mitek Systems, Inc. (the “Company”) approve, on an advisory and non-binding basis, the compensation of the Company’s named executive officers, as disclosed in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the SEC, including the Executive Compensation, compensation tables and narrative discussion in the Proxy Statement.”

This vote is not intended to address any specific element of compensation, but rather the overall compensation of our named executive officers and the compensation philosophy, policies and practices described in this Proxy Statement.  As an advisory vote, the outcome of the vote on this proposal is not binding upon us.  However, the Board, with input from the Compensation Committee, which is responsible for designing and administering our executive compensation programs, values the opinions expressed by our stockholders in their vote on this proposal and will consider the outcome of this vote when making future compensation decisions for our named executive officers.

Our most recent advisory stockholder vote on executive compensation was held at our 2014 annual meeting based upon our Board’s determination, taking into account the advisory vote of our stockholders held at our 2011 annual meeting, that such advisory votes should be held every three years.  At this time, we cannot determine the next annual meeting at which an advisory stockholder vote on the compensation paid to our named executive officers will be held because the timing of such an advisory stockholder vote is dependent upon the outcome of the advisory (non-binding) stockholder vote to be held at the Annual Meeting regarding the frequency of future advisory stockholder votes to approve the compensation of our named executive officers, as more fully described below in Proposal No. 6. The Board has recommended to the stockholders that an advisory vote on executive compensation be conducted every three years, and based upon the outcome of the advisory stockholder vote on Proposal No. 6, the Board will determine how frequently to hold an advisory vote to approve the compensation of our named executive officers.  When such a determination is made, the Company will disclose the frequency with which it will hold advisory stockholder votes on executive compensation by amending the Current Report on Form 8-K disclosing the results of the Annual Meeting.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL NO. 5 FOR THE APPROVAL, ON AN ADVISORY (NON-BINDING) BASIS, OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.

 

 

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PROPOSAL NO. 6

APPROVAL, ON AN ADVISORY (NON-BINDING) BASIS, OF THE FREQUENCY OF AN ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

Section 14A of the Exchange Act, added under the Dodd-Frank Act, also requires us to provide our stockholders with a separate advisory vote on the frequency of the advisory vote set forth in Proposal No. 5 above.  By voting on this Proposal No. 6, stockholders may indicate whether they would prefer an advisory vote to approve the named executive officers’ compensation annually, every two years, or every three years.  Stockholders also have the option to abstain from voting on this matter.

At our 2011 annual meeting of stockholders, we held our first advisory stockholder vote to approve the compensation of our named executive officers, and also held our first advisory stockholder vote on the frequency of future advisory stockholder votes to approve the compensation of our named executive officers.  In keeping with the recommendation of the Board, our stockholders expressed a preference that future advisory stockholder votes to approve the compensation of our named executive officers be held every three years, and the Board determined to hold an advisory stockholder vote to approve the compensation of our named executive officers every three years.

The Board and the Compensation Committee believe an advisory vote on executive compensation every three years is the best approach for the Company and our stockholders.  An advisory vote on executive compensation at every third annual meeting would provide stockholders an opportunity to make an informed and thoughtful vote based on close analysis of our compensation program.  It will encourage a long-term approach to evaluating our executive compensation program, consistent with our Company’s long-term philosophy on executive compensation.  Additionally, a vote every three years would allow us adequate time to compile meaningful input from stockholders on our compensation program and respond appropriately.  This may be challenging to do on an annual or biennial basis, and both we and our stockholders would benefit from having more time for a thoughtful and constructive dialogue on why particular pay practices are appropriate for us.  In contrast, focusing on executive compensation over an annual or biennial period would focus on short-term results rather than long-term value creation, which is inconsistent with our compensation philosophy and would detract from the long-term interests and goals of the Company.  Moreover, a short review cycle will not allow for a meaningful evaluation of our performance against our compensation practices, as any adjustment in pay practices would take time to implement and be reflected in our financial performance and in the price of our common stock.

Because this vote is advisory, it is not binding on the Board or the Company, and the Board may decide it is in the best interests of the Company and our stockholders to hold an advisory vote on executive compensation more or less frequently than the option approved by our stockholders.  However, the Board values the opinion of our stockholders and will take into account the outcome of the vote when considering the frequency of the advisory vote set forth in Proposal No. 6.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE OPTION OF ONCE EVERY THREE YEARS AS TO THE FREQUENCY OF THE ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.

 

 

 

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REPORT OF THE AUDIT COMMITTEE

The Audit Committee of our Board of Directors has furnished the following report to stockholders of the Company in accordance with rules adopted by the SEC.

As described in its charter, the Audit Committee meets with the independent auditors and our officers or other personnel responsible for our financial reports. The Audit Committee is responsible for reviewing the scope of the auditors’ examination of the Company and the audited results of the examination. The Audit Committee is also responsible for discussing with the auditors the scope, reasonableness and adequacy of internal accounting controls. The Audit Committee is not responsible for the planning or conduct of the audits or the determination that our financial statements are complete and accurate and in accordance with generally accepted accounting principles. Among other matters, the Audit Committee considers and selects a certified public accounting firm as our independent auditor. The Audit Committee held four meetings during the 2016 fiscal year.

In accordance with rules adopted by the SEC, the Audit Committee states that:

Based upon the review and discussions referred to above, the Audit Committee recommended to our Board of Directors that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, for filing with the SEC.

Audit Committee

James C. Hale

Vinton P. Cunningham

Bruce E. Hansen

This foregoing Audit Committee report is not “soliciting material,” is not deemed “filed” with the SEC and shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing of ours under the Securities Act of 1933, as amended, or under the Exchange Act, except to the extent we specifically incorporate this report by reference.

 

 

 

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INFORMATION REGARDING THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

General

This section describes key corporate governance guidelines and practices that we have adopted. Complete copies of the charters of the committees of the Board and our Code of Business Conduct and Ethics described below may be viewed on our Internet website at www.miteksystems.com under “Investors.” You may also request a copy of any of these documents free of charge by writing to our Corporate Secretary at Mitek Systems, Inc., 600 B Street, Suite 100, San Diego, California 92101, Attn: Corporate Secretary.

Director Independence

The Board is responsible for establishing corporate policies and for the overall performance of the Company, although it is not involved in day-to-day operations. As required under NASDAQ listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the company’s board of directors. The Board consults with our counsel to ensure that the Board’s determinations regarding the independence of our directors are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in applicable NASDAQ listing standards, as in effect from time to time. Consistent with these considerations, after review of all relevant transactions or relationships between each director (or former director, as applicable), or any of his or her family members, and the Company, our senior management and our independent auditors, the Board has determined that all of our directors other than Mr. DeBello are independent, in each case as defined in NASDAQ Listing Rule 5605(a)(2). In addition, the Board has determined that the members of the Audit Committee meet the additional independence criteria required for audit committee membership.

Meetings of the Board

The Board meets on a regular basis throughout the year to review significant developments affecting the Company and to act upon matters requiring its approval.  The Board also holds special meetings as required from time to time when important matters arise requiring Board action between scheduled meetings.  During the 2016 fiscal year, the Board met five times.  No director attended fewer than 75% of the aggregate number of meetings held by the Board during the 2016 fiscal year.

Executive Sessions

As required under applicable NASDAQ listing standards, our independent directors periodically meet in executive session at which only they are present.

Director Attendance at Annual Meetings

Although we do not have a formal policy regarding attendance by members of the Board at our annual meeting of stockholders, we encourage all of our directors to attend.  James B. DeBello, Alex W. “Pete” Hart, Vinton Cunningham and James C. Hale were the only directors from the director nominees discussed in Proposal No. 1 above that attended our 2016 annual meeting of stockholders.

Board Leadership Structure

Upon the retirement of our prior Chairman of the Board, Mr. Thornton, in March 2016, our Board reviewed its leadership structure and determined that, at the present time, combining the roles of Chairman and CEO, together with creation of a strong Lead Independent Director role, would provide the appropriate leadership for and oversight of the Company and facilitate effective functioning of both the Board and management.  Accordingly, at that time, the Board appointed Mr. DeBello as the Chairman of the Board.  Mr. DeBello has been with the Company for over 13 years and served on our Board for over 22 years and has a broad understanding of the operational issues and strategic opportunities facing the Company.  The Board believes that the Company and its stockholders currently are best served by having Mr. DeBello continue to serve as Chairman of the Board as well as Chief Executive Officer. By combining these positions, Mr. DeBello serves as a bridge between the Board and the operating organization and provides critical leadership for the strategic initiatives and challenges of the future.

In connection with Mr. DeBello’s appointment as Chairman, the Board also felt it was important to create a Lead Independent Director position to lead the Board’s independent directors to engagement and consensus and to ensure that such independent consensus is heard and implemented, and therefore the Board appointed Mr. Hansen as its Lead Independent Director.  As Lead Independent Director, Mr. Hansen, among other things, serves as a liaison between the Chairman of the Board and the independent directors and is responsible for approving information sent to the Board, meeting agendas for the Board and meeting schedules to ensure there is adequate time for discussion of all agenda items.  Mr. Hansen also has the authority to call meetings of the independent directors, and, if requested by a major stockholder, be available for consultation and direct communication.

 

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The Board retains the flexibility to determine on a case-by-case basis whether the positions of Chief Executive Officer and Chairman of the Board should be combined or separated and whether an independent director should serve as Chairman.  This flexibility permits the Board to organize its functions and conduct its business in a manner it deems most effective and in the best interest of the Company and its stockholders in then prevailing circumstances.

Board’s Role in Risk Oversight

The Board is responsible for oversight of risks facing the Company, while our management is responsible for day-to-day management of risk.  The Board, as a whole, directly administers its risk oversight function.  In addition, the risk oversight function is also administered through the standing committees of the Board, which oversee risks inherent in their respective areas of responsibility, reporting to the Board regularly and involving the Board in their performance of risk oversight, as necessary.  For example, the Audit Committee oversees our financial exposure and financial reporting related risks and the Compensation Committee oversees risks related to our compensation programs and practices.  The Board, as a whole, directly oversees our strategic and business risk, including product development risk, through regular interactions with our management and, from time-to-time, input from independent advisors.  We believe the Board’s leadership structure supports its role in risk oversight, with our President and Chief Executive Officer, Chief Financial Officer and General Counsel responsible for assessing and managing risks facing the Company day-to-day and the members of our Board providing oversight of such risk management.

Information Regarding Board Committees

The Board has established standing Audit, Compensation, and Nominating and Corporate Governance Committees to devote attention to specific subjects and to assist it in the discharge of its responsibilities.  The three committees operate under written charters adopted by the Board, each of which is available on our Internet website at www.miteksystems.com under “Investors.” The following table sets forth the number of meetings held and actions taken by written consent during the 2016 fiscal year for each of the committees of the Board and current membership for each of the committees of the Board.  Each member of the committees of the Board during the 2016 fiscal year attended at least 75% of the meetings of each of the committees of the Board on which he served that were held during the period for which he was a committee member.

 

 

Audit Committee

We have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(a) of the Exchange Act.  The Audit Committee is responsible for overseeing our accounting and financial reporting processes and the audits of our financial statements, monitoring the integrity of our financial reporting process and systems of internal controls regarding finance, accounting and legal compliance, and reviewing the independence and performance of our independent registered public accountants.  The current members of the Audit Committee are Messrs. Hale, Cunningham and Hansen.  The Board has determined that Mr. Hale is an “audit committee financial expert” in accordance with applicable SEC rules.  Each of the members of the Audit Committee is an “independent” director within the meaning of the applicable NASDAQ listing standards, as well as applicable SEC rules and regulations.

 

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Compensation Committee

The Compensation Committee reviews executive compensation, establishes executive compensation levels, recommends employee compensation programs, administers our incentive plans, and monitors the Company’s compliance with applicable SEC rules and NASDAQ listing standards.  The current members of the Compensation Committee are Messrs. Aulet, Hale and Hart, each of whom is an “independent” director within the meaning of the applicable NASDAQ listing standards, as well as applicable SEC rules and regulations.

Nominating and Corporate Governance Committee

The Nominating Committee is responsible for reviewing and making recommendations to the Board regarding the composition and structure of the Board, establishing criteria for Board membership and corporate policies relating to the recruitment of Board members, and establishing, implementing and monitoring policies and processes regarding principles of corporate governance.  The current members of the Nominating Committee are Messrs. Aulet, Hart and Hansen, each of whom is an “independent” director within the meaning of the applicable NASDAQ listing standards, as well as applicable SEC rules and regulations.

Consideration of Director Nominees

Director Qualifications

When evaluating nominees for election as directors (including all persons recommended by stockholders to become nominees for election as directors), the Nominating Committee takes into account: (i) all factors the Committee considers appropriate, which may include career specialization, relevant technical skills or financial acumen, diversity of viewpoint and industry knowledge; and (ii) the following minimum qualifications:

The Nominating Committee retains the right to modify these criteria from time to time.

Stockholder Nominations

The Nominating Committee will consider director candidates recommended by our stockholders of record. The Nominating Committee does not intend to alter the manner in which it evaluates candidates, including the criteria set forth above, based on whether or not a candidate was recommended by a stockholder of record. Stockholders of record who wish to recommend individuals for consideration by the Nominating Committee to become nominees for election to the Board at an annual meeting of stockholders must do so by delivering a written recommendation and timely notice in accordance with our Bylaws to the Nominating and Corporate Governance Committee at Mitek Systems, Inc., 600 B Street, Suite 100, San Diego, California 92101, Attn: Corporate Secretary not later than the close of business on December 1, 2017 nor earlier than November 1, 2017; provided, however, that if the date of our next annual meeting is more than 30 days before or more than 60 days after the one-year anniversary of the Annual Meeting, notice by the stockholder to be timely must be so delivered, or mailed and received, not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the 90th day prior to such annual meeting or, if later, the 10th day following the day on which public disclosure of the date of such annual meeting was first made.

Each written recommendation must set forth, among other information:

 

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Director candidate nominations from stockholders must be provided in writing and must include the written consent of each proposed nominee to serve as a director if so elected. Stockholders are advised to review our Bylaws, which contain additional requirements with respect to director nominations. If a proposed director candidate is recommended by a stockholder in accordance with the procedural requirements discussed above and more fully set forth in our Bylaws, the Secretary will provide the foregoing information to the Nominating and Corporate Governance Committee.

Evaluating Nominees for Director

Our Nominating Committee considers director candidates that are suggested by members of the committee, other members of the Board, members of management, advisors and our stockholders who submit recommendations in accordance with the requirements set forth above. The Nominating Committee may, in the future, also retain a third-party search firm to identify candidates on terms and conditions acceptable to the Nominating Committee, but to date it has not paid a fee to any third party to assist in the process of identifying or evaluating director candidates. The Nominating Committee evaluates all nominees for director under the same approach whether they are recommended by stockholders or other sources.

The Nominating Committee reviews candidates for director nominees in the context of the current composition of the Board and committees of the Board, the operating requirements of the Company and the long-term interests of our stockholders. In conducting this assessment, the Nominating Committee considers the director nominee’s qualifications, diversity, age, skills and such other factors as it deems appropriate given the current needs of the Board, the committees of the Board and the Company, to maintain a balance of knowledge, experience, diversity and capability. In addition, the Nominating Committee seeks candidates with significant experience in the Company’s targeted markets. In the case of incumbent directors whose terms of office are set to expire, the Nominating Committee reviews such directors’ overall service to the Board, the committees of the Board and the Company during their respective terms, including the number of meetings attended, level of participation, quality of performance and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the Nominating Committee will also determine whether the nominee meets the minimum director qualifications set forth above, has at least the same level of education and experience as the Company’s then-current directors, and whether such nominee is independent for NASDAQ purposes, which determination will be based upon applicable NASDAQ listing standards and applicable SEC rules and regulations. Although we do not have a formal diversity policy, when considering diversity in evaluating director nominees, the Nominating Committee focuses on whether the nominees can contribute varied perspectives, skills, experiences and expertise to the Board.

The Nominating Committee will evaluate each proposed director’s candidacy, including proposed candidates recommended by security holders and recommend whether the Board should nominate such proposed director candidate for election by our stockholders.

 

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Stockholder Communications to the Board

Stockholders may contact an individual director, the Board as a group or a specified committee or group of directors, including the non-employee directors as a group, at the following address: Mitek Systems, Inc., 600 B Street, Suite 100, San Diego, California 92101, Attn: Board of Directors. We will receive and process communications before forwarding them to the addressee. Directors generally will not be forwarded stockholder communications that are primarily commercial in nature, relate to improper or irrelevant topics or request general information about the Company.

Certain Relationships and Related Party Transactions

Since October 1, 2014, we have not entered into any transactions or series of transactions, and we are not currently considering any proposed transaction or series of transactions, in which the amount involved in the transaction or series of transactions exceeds the lesser of $120,000, and in which any of our directors, executive officers or persons who we know beneficially held more than five percent of any class of our common stock, including their immediate family members, had or will have a direct or indirect material interest.

Procedures for Approving Related Party Transactions

Under its charter, the Audit Committee is charged with reviewing and approving all potential related party transactions. All such related party transactions are then required to be reported under applicable SEC rules. Other than as may be required by the Audit Committee’s charter, we have not adopted additional procedures for review of, or standards for approval of, related party transactions but instead review such transactions on a case-by-case basis.

Non-Employee Director Compensation

For the 2016 fiscal year, our non-employee directors were compensated on a retainer-based model.  We also reimburse our non-employee directors for their reasonable expenses incurred in attending Board and committee meetings.  Members of the Board who are also employees of the Company receive no compensation for their services as a director.

The following table sets forth summary information concerning compensation paid or accrued for services rendered to us in all capacities to the members of the Board for the fiscal year ended September 30, 2016:

 

 

 

 

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INFORMATION REGARDING OUR EXECUTIVE OFFICERS

The officers of the Company serve at the pleasure of the Board. The following table includes the names and certain information about our current executive officers:

 

 

Russell C. Clark. Mr. Clark has served as our Chief Financial Officer since October 2011 and as our Secretary since February 2013. Prior to joining Mitek, from July 2006 to June 2011, Mr. Clark served in various roles, most recently Senior Vice President, Finance, at Epicor Software Corporation, a leading global provider of enterprise business software solutions for midmarket-sized companies. While at Epicor, he provided financial leadership in connection with raising growth capital, consummating acquisitions, better aligning Epicor’s operating expenses with its revenues and executing the sale of Epicor to APAX Partners, a private equity firm. From August 2004 to June 2006, he served as Chief Accounting Officer at Peregrine Systems, Inc., a global provider of enterprise software for information technology service and asset management, where he provided financial leadership in connection with the successful turn-around of Peregrine and its sale to Hewlett-Packard Company. From August 2002 to August 2004, he served as Vice President, Finance and Corporate Controller of FICO (formerly Fair Isaac Corporation), a global provider of enterprise analytic software solutions and credit scores, where he was a key member of the team that consummated the merger of FICO and HNC Software Inc., a global provider of enterprise analytic software, and was responsible for integrating the operations of those companies following the merger, as well as playing a key role in other acquisitions. From January 2000 to August 2002, Mr. Clark served in various roles, including as Senior Vice President, Corporate Finance, at HNC Software. From August 1990 to January 2000, Mr. Clark began his career at PricewaterhouseCoopers LLP, where he most recently served as a senior manager in the technology industry group. Mr. Clark earned a bachelor’s degree in business administration with an emphasis in accounting with highest distinction from The University of Iowa and is a certified public accountant.

Michael E. Diamond.  Mr. Diamond has served as our General Manager—Payments since January 2016 and previously served as our Chief Revenue Officer from September 2013 to January 2016 and as our Senior Vice President, Sales and Business Development from June 2012 through September 2013.  Prior to joining Mitek, from March 2008 to June 2012, Mr. Diamond served as Senior Vice President, Business Development, at Obopay Corporation, a global mobile payments company.  From July 2004 to March 2008, he served as a Business Unit Executive at IBM Corporation.  From January 2001 to July 2004, Mr. Diamond served as Vice President, Business and Corporate Development, at Alphablox Corporation, a provider of software for web-based enterprise analytics, and was directly involved in shaping and driving Alphablox’s acquisition by IBM Corporation.  From November 1999 to January 2001, Mr. Diamond served in various roles, including Senior Vice President Business Development/General Manager, Latin America and Japan, at S1 Corporation, an online financial services provider.  From March 1996 to November 1999, Mr. Diamond served in various management roles, including as Director, Channel Sales, at Edify Corporation, a provider of interactive voice response and online financial services software.  Mr. Diamond earned a bachelor’s degree in business administration with an emphasis in international business from St. Norbert College.

Jason L. Gray.  Mr. Gray has served as our General Counsel and Administrative Officer since March 2016.  Prior to Joining Mitek, Mr. Gray had served as Senior Vice President, General Counsel and Corporate Secretary of Accelrys, Inc., a software solutions provider, from May of 2013 until June of 2014 when Accelrys was acquired by Dassault Systemes.  From November 2002 through May 2013, Mr. Gray served as Senior Vice President Strategic Development, General Counsel and Corporate Secretary at Mitchell International, Inc., a leading provider of property/casualty claims technology and solutions with over 30,000 customers. From November 1999 through November 2002, he served as Vice President, General Counsel and Corporate Secretary at NetRatings, Inc., helping to bring the media measurement and analysis company through a successful initial public offering. From August 1997 through November 1999, Mr. Gray served as a corporate securities attorney at Wilson Sonsini Goodrich & Rosati, the premier legal advisor to technology, life sciences and other growth enterprises worldwide. Mr. Gray started his legal career as an attorney with US Robotics Corporation from March 1996 through July 1997, which merged with 3Com Corporation. He founded Gradient Legal, Inc. in 2014 to provide legal advisory services to high-tech companies in the area of mergers and acquisitions, licensing, and litigation. He currently serves on the board of directors of Tensegrity, Inc. and OneLegacy and is a past board member of the San Diego Chapter of the Association of Corporate Counsel.

 

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Stephen Ritter.  Mr. Ritter has served as our Chief Technology Officer since February 2016. Prior to joining Mitek, from June 2014 to February 2016 Mr. Ritter served as Chief Technology Officer for deep learning startup Emotient, acquired by Apple January 3, 2016.  From September 2013 through June 2014, Mr. Ritter was Chief Technology Officer for cloud based genomics startup Cypher Genomics which was acquired by Human Longevity Incorporated.  Mr. Ritter served as Vice President Engineering for Websense, a web, data and email security company, from June 2011 through August 2013.  From April 2006 through June 2011, Mr. Ritter was Senior Director of Engineering for McAfee/Intel.  Mr. Ritter joined McAfee as a result of the acquisition of security startup Preventsys where he served as Vice President of Engineering from November 2000 through April of 2006.  From January 2000 through October of 2002 Mr. Ritter was Principal Architect for Medunite.  Prior to joining Medunite, Mr. Ritter served as Senior Professional Services Engineer for Persistence Software.  Persistence Software acquired Orbisys, where Mr. Ritter was Founder and Vice President of Engineering from January 1996 through January 1998.  Between 1993 and 1996 Mr. Ritter was a Software Engineer for Titan Corporation; prior to that from 1992 through 1993 Mr. Ritter was a Scientific Programmer at the Computational Neurobiology Lab at the Salk Institute.  Mr. Ritter received a B.S. in Cognitive Science with an emphasis in Computer Science from the University of California San Diego in 1992 and is an inventor on nine patents.

None of our executive officers has any family relationships with any of our other executive officers or directors. There currently are no legal proceedings, and during the past 10 years there have been no legal proceedings, that are material to the evaluation of the ability or integrity of any of our executive officers.

 

 

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The following discussion and analysis of compensation arrangements of our named executive officers for the fiscal year ended September 30, 2016 should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. The actual amounts and forms of compensation and the compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.

Company Highlights

Our financial and operational performance for the fiscal year ended September 30, 2016 reflected our continued efforts to increase our top-line performance and cash flows.  Our 2016 fiscal year highlights include:

Named Executive Officers

As required by SEC rules, this Compensation Discussion and Analysis discusses compensation decisions with respect to (i) our Chief Executive Officer, (ii) Chief Financial Officer, (iii) the three most highly compensated executive officers other than the Chief Executive Officer and the Chief Financial Officer who were serving as executive officers at the end of the 2016 fiscal year, and (iv) up to two additional individuals for whom disclosure would have been provided pursuant to the preceding clause (iii) but for the fact that the individual was not serving as an executive officer of the Company at the end of the 2016 fiscal year. We refer to these executive officers collectively in this Compensation Discussion and Analysis and the related compensation tables as the “named executive officers.” For the fiscal year ended September 30, 2016, the named executive officers were:

 

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Compensation Philosophy and Objectives

Our compensation philosophy is built upon the principles of pay for performance, shared ownership and alignment with the long-term interests of our stockholders. We believe that every aspect of our compensation programs, including the mix of short-term and long-term cash and equity payments, should enhance the Company’s ability to maximize stockholder value over time. Our specific objectives consistent with that philosophy are to:

To meet these objectives, the Compensation Committee has designed a compensation program that combines “fixed” forms of compensation, such as base salaries and certain other benefits, with “at-risk” forms of compensation, such as performance-based annual bonuses, based upon the achievement of corporate and individual goals established by the Compensation Committee, and long-term equity incentive awards, which reward increasing the long-term value of the Company. While our objectives guide the development of our compensation programs, we may alter our programs and practices according to the evolving needs of the Company, within the constraints of any agreements in place with individual employees.

Process for Establishing Compensation

Role of the Compensation Committee and Executive Officers

The current members of the Compensation Committee are Messrs. Hart, Hale and Aulet.  Each of these individuals qualifies as (i) an “independent director” under the requirements of NASDAQ listing rules, (ii) a ”non-employee director” under Rule 16b-3 of the Exchange Act and (iii) an “outside director” under Section 162(m).  The Compensation Committee is responsible for monitoring the performance and compensation of our named executive officers, reviewing compensation plans and administering our incentive plans.

The Compensation Committee operates under a written charter and is responsible for annually reviewing and approving the amount and form of compensation of our CEO and making recommendations to the Board with respect to the amount and form of compensation of our other executive officers. The Compensation Committee considers recommendations from Mr. DeBello, our President and CEO, in determining executive compensation. Specifically, our CEO recommends base salary increases, equity award levels and the performance goals that are used in our annual bonus program and advises the Compensation Committee regarding the compensation program’s ability to attract, retain and motivate executive talent. The Compensation Committee has and exercises the ability to materially increase or decrease the compensation amounts recommended by our CEO. Our CEO is also involved in our executive compensation process by providing input on the performance targets for our annual bonus program, including the relative weight to be assigned to each performance target. Our Compensation Committee routinely meets in executive session, and our CEO is not permitted to attend during sessions of the Compensation Committee and sessions of the Board where decisions are made regarding his compensation. The Compensation Committee, by resolution passed by a majority of the committee, has the authority to designate one or more subcommittees, which subcommittee, to the extent not limited by applicable law or the NASDAQ listing standards, may have and exercise all the powers and authority of the Compensation Committee.

The Compensation Committee also considers the input of our compensation consultant, Barney & Barney LLC (the “Compensation Consultant”), a consulting firm selected by the Compensation Committee (see below under the heading “Role of the Compensation Consultant”). Although the Compensation Committee considers the input of our CEO and the Compensation Consultant, it is not bound by such recommendations, and the Compensation Committee’s determinations with respect to all executive compensation are submitted to the Board for final approval.

Role of the Compensation Consultant

In designing compensation programs and determining compensation levels for our named executive officers for the 2016 fiscal year, the Compensation Committee retained the services of the Compensation Consultant to formulate a report and make recommendations to the Compensation Committee regarding our compensation programs and executive compensation levels.  The Chairman of the Compensation Committee worked directly with the Compensation Consultant to determine the scope of the work needed to assist the Compensation Committee in its decision-making processes.  The Compensation Committee has assessed the independence of the Compensation Consultant and determined that no conflict of interest exists under the rules established by the SEC.  The Compensation Committee reviews the independence of its advisors annually.  In connection with its engagement, the Compensation Consultant provided the Compensation Committee with benchmark comparative data for our named executive officers with respect to base

 

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salaries, target and actual total cash compensation levels, long-term incentive values, and total direct compensation.  In making compensation decisions for the 2016 fiscal year, the Compensation Committee compared each element of total direct compensation against a peer group of 23 publicly traded companies in the technology industry, with an emphasis on application software, public payments, banking and mobile software applications against which the Compensation Committee believes we compete in the market for executive talent.  We collectively refer to this group as the “Compensation Peer Group.” The pay data for this group was analyzed by the Compensation Consultant using each company’s recent public filings.  This Compensation Peer Group was used, when available, for all executive officers, including our named executive officers.  We generally select companies with the following criteria for the Compensation Peer Group:  less than $200 million in annual revenues, less than 750 employees and between $100 million and $750 million in market capitalization.  The following is a list of the 23 companies comprising our Compensation Peer Group for the 2016 fiscal year:

 

 

The Compensation Committee used the peer group data provided by the Compensation Consultant to make the initial determination of the competitiveness of total direct compensation for each executive. Our Compensation Committee makes adjustments down or up from such market-based determination based on its comprehensive assessment of retention risk for each executive, based in part on input from our CEO with regard to the positions that report to him.

Components of Executive Compensation

The Company’s executive compensation program consists of the following elements:

Base Salary

We provide a base salary to our named executive officers and other employees to compensate them for services rendered on a day-to-day basis during the fiscal year. Base salary will typically be used to recognize the experience, skills, knowledge and responsibilities required of each named executive officer, and should reflect individual performance related to our overall financial performance as well as competitive practice. Salary reviews are typically performed annually in conjunction with performance reviews.

Generally, the initial base salaries of our executive officers are established through arm’s-length negotiation at the time the individual executive officer is hired, taking into account his or her qualifications, experience and prior salary level. Thereafter, the Compensation Committee reviews and recommends adjustments, as necessary or appropriate, to the base salaries of our executive officers to the Board on an annual basis.

The Compensation Committee typically targets named executive officers’ salaries at a level that is near the median of salaries of executives with similar roles at comparable companies. The Compensation Committee believes that the median for base salaries is the minimum cash compensation level that would allow us to attract and retain talented executives.

All employees’ base salaries are reviewed annually for possible merit increases taking into account the criteria referenced above, but merit increases are not automatic or guaranteed.

 

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In November 2015, based on the recommendation of the Compensation Committee, the Board approved a five percent increase in the base salary for Messrs. DeBello and Clark and a 7.7% increase in the base salary for Mr. Diamond for the 2016 fiscal year, consistent with market trends and practices. The following table sets forth information regarding base salaries approved by the Board for the 2016 fiscal year for our named executive officers:

 

 

 

Annual Bonus

Our annual bonus plan is one of the key components of the “at-risk” compensation we offer to our executives. We utilize our annual bonus plan to reward performance achievements with a time horizon of one year or less and such plan is intended to motivate and reward our executives for their contributions toward meeting longer-term corporate financial and strategic goals and to align the interests of such executives with those of our stockholders.

In developing our annual bonus plan, the Compensation Committee sets targets which it believes reflect the business conditions within our industry and are consistent with achieving our short- and long-term goals. The target achievement levels for our executives with respect to the applicable performance metrics are based on the Board-approved operating plan, which reflects the Company’s target performance for the upcoming fiscal year, and such targets are calibrated such that they are challenging enough to require strong and consistent effort by the executives in order to be achieved.

 In November 2015, the Board, based upon the recommendation of the Compensation Committee, approved the Company’s executive bonus program for the fiscal year ended September 30, 2016 (the “2016 Bonus Plan”). Pursuant to the terms of the 2016 Bonus Plan, certain of the Company’s executives were eligible to receive cash bonuses based upon the achievement of certain corporate and individual performance goals during the 2016 fiscal year.

The Compensation Committee reviewed each executive’s bonus target as a percentage of their base salary.  As part of this review, the bonus target for our CEO remained at 80% of his annualized salary, the bonus target for our CFO remained at 50% of his annualized salary and the bonus target for our CRO (now our GM) remained at 100% of his annualized salary.  For our CEO, the 2016 Bonus Plan provided that up to 75% of the bonus target would be based upon the Company’s revenue and non-GAAP net income performance and the remaining 25% of the bonus target would be based upon achievement of certain individual performance goals determined by our Board.  For our CFO the 2016 Bonus Plan provided that up to 75% of the bonus target would be based upon the Company’s revenue and non-GAAP net income performance and the remaining 25% of the bonus target would be based upon achievement of certain individual performance goals determined by our CEO.  The maximum bonus payable to each executive under the 2016 Bonus Plan was 150% of their respective bonus targets.  Our CTO and GC joined the Company mid-year, and thus were not participants in the 2016 Bonus Plan, but were awarded cash bonuses by the Board, based on the recommendations of the Compensation Committee, consistent with the targets and criteria set forth in the 2016 Bonus Plan, in each case pro-rated to reflect the portion of the year during which they served in their respective positions.

 

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In making its determination with respect to the achievement of performance objectives, the Compensation Committee considers our CEO’s recommendations with respect to the performance of his direct reports against their individual performance objectives.  Following the end of the 2016 fiscal year, the Compensation Committee assessed the Company’s performance against the corporate performance component and determined that the Company had achieved 110.3% of its revenue plan and 147.8% of its non-GAAP net income plan.  Accordingly, after taking into account the named executive officers’ performance against their respective individual performance goals, the Compensation Committee awarded the following annual bonus amounts, which amounts were paid in November 2016:

 

 

 

Equity-Based Incentives

Our long-term equity-based incentives are another key component of our “at-risk” compensation package and are intended to reward longer-term performance and to help align the interests of our executive officers with those of our stockholders. We believe that long-term performance is achieved through an ownership culture that rewards performance by our executive officers through the use of equity incentives.

Equity-based incentives are granted to our executive officers under the 2012 Plan. Stock options granted under the 2012 Plan generally vest as to 25% of the shares on the one-year anniversary of the date of grant and thereafter in equal monthly installments over a period of three years. RSUs granted under the 2012 Plan may be issued for nominal or no cost and may be granted in consideration of the recipient’s past or future services performed for the Company. RSUs generally vest in equal annual installments over a period of four years from the date of grant.

Typically, the size and form of the initial equity awards for our executive officers is established through arm’s-length negotiation at the time the individual executive officer is hired. In formulating these awards, the Compensation Committee considers, among other things, the prospective role and responsibility of the executive officer, the amount of equity-based compensation held by the executive officer at his or her former employer, the cash compensation received by the executive officer, the Compensation Committee’s sense of the competitive market for similar positions (based on input from the Compensation Consultant), and the need to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value. Thereafter, the Compensation Committee reviews the equity holdings of our executive officers annually and periodically recommends to the Board, based on input from the Compensation Consultant, the grant of equity awards in the form of stock options and/or RSUs to our executive officers to ensure that their overall equity position was consistent with our compensation objectives.

 

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On November 6, 2015, Messrs. DeBello, Clark and Diamond were granted annual equity incentive awards, based in part on the performance of the Company during the year ended September 30, 2015 and based on input from the Compensation Consultant.  Mr. Ritter and Mr. Gray joined the Company in February 2016 and April 2016, respectively, and were each granted equity incentive awards in connection with their initiation of employment.  The following table sets forth the number of equity awards granted.

 

 

Other Benefits

We maintain a 401(k) plan that allows participating employees to contribute a percentage of their salary, subject to Internal Revenue Service annual limits, on a pre-tax basis pursuant to a cash or deferred arrangement under Section 401(k) of the Code.  The Company did not make matching contributions to the plan for the fiscal year ended September 30, 2014.  The Company did make matching contributions to the plan for the fiscal year ended September 30, 2015 and intends to make matching contributions to the plan for the fiscal year ended September 30, 2016.

In addition, we provide health care, dental, vision and life insurance, employee assistance plans, long-term disability and accidental death and dismemberment benefits to all full-time employees, including our named executive officers. These benefits are available to all employees, subject to applicable laws. We believe these benefits are consistent with benefits of companies with which we compete for employees.

Severance and Change of Control Plans

The Compensation Committee provides our executives with severance and change of control protection when it determines that such protection is necessary to attract or retain an executive. Under the terms of their respective executive severance and change of control plans, each named executive officer is entitled to receive certain severance payments and benefits in the event that he is terminated without cause or resigns for good reason and/or is terminated in connection with a change of control of the Company, subject in all cases to certain conditions. The severance payments and benefits that are payable under these plans are further described below in the section entitled “Potential Payments Upon Termination or Change of Control.”

Executive Compensation for the 2017 Fiscal Year

Components of Executive Compensation

Base Salary.  Based on input from the Compensation Consultant, the Compensation Committee recommended and the Board approved increases in the base salaries for each of our named executive officers for the 2017 fiscal year ranging from 1.6% to 3.0% of their respective 2016 base salaries, consistent with market trends and practices.

 

 

Annual Bonus.  On November 16, 2016, the Board, based upon the recommendation of the Compensation Committee, approved the Company’s executive bonus program for the fiscal year ending September 30, 2017 (the “2017 Bonus Plan”).  Pursuant to the terms of the 2017 Bonus Plan, the Company’s CEO and CFO will be eligible to receive cash bonuses based upon the achievement of certain corporate and individual performance goals during the 2017 fiscal year.  The bonus targets under the 2017 Bonus Plan are consistent with the 2016 Bonus Plan, with our CEO having a bonus target equal to 80% of his annualized salary and our CFO having a bonus target equal to 50% of his annualized salary.  Up to 75% of the bonus target for both the CEO and CFO is based upon achievement of two financial metrics (revenue and non-GAAP net income) and the remaining 25% of the bonus target is based upon achievement of certain individual performance goals.  In addition, our GM will be eligible to receive a cash bonus equal to up to 100% of his annualized salary, with up to 87.5% of the bonus target based upon achievement of two financial metrics (revenue and non-GAAP net

 

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income) and the remaining 12.5% of the bonus target based upon achievement of certain individual performance goals.  The GM’s bonus will be paid quarterly.  The maximum bonus payable to each of the Company’s CEO, CFO and GM is 150% of their respective bonus targets.

Equity-Based Incentives.  On November 16, 2016, the Board, based upon the recommendation of the Compensation Committee, approved the following RSU grants for the fiscal year ending September 30, 2017:  Mr. DeBello—150,000 shares; Mr. Clark—60,000 shares; Mr. Diamond—30,000 shares; Mr. Gray—15,000 shares; and Mr. Ritter—100,000 shares.

Long-Term Equity Incentives.  Subject to obtaining the approval of our stockholders, our Board has approved the 2012 Plan Amendment and Restatement, which provides for the Initial Grants of Senior Executive Performance RSUs to be made under the 2012 Plan to Messrs. DeBello, Clark and Ritter.  If the 2012 Plan Amendment and Restatement is approved, other of our named executive officers may also receive Senior Executive Performance RSUs under the Restated 2012 Plan at any time prior to March 1, 2018.  Senior Executive Performance RSUs under the Restated 2012 Plan will vest based on achievement of certain stock price appreciation objectives set forth in the Restated 2012 Plan.  For more information, see “Proposal No. 2—Approval of the Amendment and Restatement of the Mitek Systems, Inc. 2012 Incentive Plan.”

Tax Considerations

Section 162(m) generally disallows a tax deduction for compensation in excess of $1.0 million paid to certain named executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We generally intend to structure the performance-based portion of our executive compensation, when feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, the Board may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.

Risks Related to Compensation Policies and Practices

The Compensation Committee has considered whether the Company’s overall compensation program for its employees creates incentives for employees to take excessive or unreasonable risks that could materially harm the Company. We believe that several features of our compensation policies for management employees appropriately mitigate such risks, including a mix of long- and short-term compensation incentives that we believe is properly weighted and the uniformity of compensation policies across the Company, which the Compensation Committee regards as setting an appropriate level of risk taking for the Company. We also believe the Company’s internal legal and financial controls appropriately mitigate the probability and potential impact of an individual employee committing the Company to a harmful long-term business transaction in exchange for short-term compensation benefits.

Hedging Prohibition

As part of our insider trading policy, without the prior approval of our CFO, our executives and directors are prohibited from short selling and buying or selling puts and calls on our securities, and from engaging in hedging, forward sale and other similar derivative transactions of our securities.

 

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Summary Compensation Table

The following table sets forth certain information regarding the compensation earned by each of our named executive officers during the fiscal years ended September 30, 2016, 2015 and 2014:

 

 

 

 

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Grants of Plan-Based Awards

The following table sets forth information regarding grants of plan-based awards to each of our named executive officers during the fiscal year ended September 30, 2016: