Mitek Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2022; nine-month results are for the period ended June 30, 2022. Filed October 28, 2022. Unless noted otherwise, amounts are in U.S. dollars.
Business context
Mitek provides mobile image-capture, check-deposit, and digital identity-verification solutions. Its fiscal 2022 results include HooYu, acquired in March 2022, and ID R&D, acquired in May 2021. The HooYu acquisition consideration was approximately $129.1 million in cash.
Financial performance
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $39.3 million | $31.8 million | $106.5 million | $86.5 million |
| Operating income | $2.2 million | $5.4 million | $10.6 million | $9.4 million |
| Net income | $0.8 million | $3.0 million | $4.9 million | $6.2 million |
| Diluted EPS | $0.02 | $0.07 | $0.11 | $0.14 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $16.0 million | $25.0 million |
- Quarterly revenue grew 24%; software and hardware revenue increased 17% and services and other revenue increased 32%. Identity-verification revenue rose to $17.4 million from $11.0 million, including HooYu contribution.
- Nine-month revenue grew 23%. Management attributed growth to mobile deposit products, Mobile Verify transactional SaaS, and HooYu.
- Approximate quarterly gross margin was 88.4%, versus 89.3% a year earlier; nine-month gross margin was 89.4%, versus 86.9%. Operating margin declined to 5.7% for the quarter from 17.1%; nine-month operating margin was 9.9%, versus 10.8%.
- Quarterly net income fell 73%, despite revenue growth, as operating expenses rose, including a new $1.8 million restructuring charge. Nine-month net income declined 20%.
- Cash, cash equivalents, and investments totaled $90.6 million at June 30, 2022, down $136.8 million from September 30, 2021. Working capital was $68.3 million, compared with $164.8 million.
- Cash from operations was $16.0 million for the nine months, down from $25.0 million. The company attributed the decrease in part to a $12.3 million use of cash from changes in operating assets and liabilities, including receivables.
- Convertible senior notes due 2026 had $155.3 million principal outstanding and a $126.2 million balance-sheet carrying amount. The notes bear 0.75% coupon interest; reported nine-month interest expense was $6.1 million, including non-cash debt discount and issuance-cost amortization.
Material changes and unusual items
- HooYu added $2.7 million of revenue and $0.8 million of net loss from acquisition through June 30, 2022. Goodwill increased to $128.0 million and net intangible assets to $85.7 million, primarily reflecting acquisitions.
- The company paid $9.5 million of ID R&D earnout consideration in May and June 2022, comprising $6.8 million cash and $2.7 million in shares. It also repurchased and retired $14.8 million of common stock during the nine-month period.
- Foreign-currency translation reduced comprehensive income by $16.7 million for the nine months. Accumulated other comprehensive loss was $17.9 million at June 30, 2022.
- The filing corrected HooYu acquisition accounting and related balance-sheet presentation. It states that the errors were material to the March 2022 quarter and that an amended second-quarter Form 10-Q was filed October 28, 2022. The corrections increased reported third-quarter net income to $0.8 million from the previously furnished net loss of $0.9 million; nine-month net income increased to $4.9 million from $4.2 million.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance is provided. Management said cash and cash equivalents and expected operating cash generation should meet working-capital needs for at least 18 months from the financial statements’ filing date.
- Management cited opportunities from digital adoption and demand for identity verification, while identifying competition, lengthy sales and implementation cycles, channel-partner renewal timing, and product concentration as risks.
- The company began a June 2022 restructuring, including workforce reductions, to align resources with its identity strategy and pursue profitability in that business. The $1.8 million accrual was expected to be paid over the following 12 months.
- Disclosure controls were deemed ineffective, and the company reported multiple material weaknesses in financial reporting: contingent-consideration valuation review, income-tax account review, financial-statement close and reconciliations, business-combination accounting, and revenue-recognition contract review. One weakness resulted in the second-quarter restatement. Remediation is underway, but timing is uncertain.
- Legal matters include a $218 million jury award against PNC in USAA patent litigation involving customers; Mitek was not a defendant and says it does not believe it must indemnify customers, but acknowledges potential costs if that position is not upheld. Other matters include a putative Illinois biometric-privacy class action, a disputed indemnification demand, and a $0.9 million Spanish judgment against an acquired subsidiary that is under appeal and subject to contractual indemnification rights. The filing does not quantify any probable loss for these matters.
- The company identified foreign-exchange exposure and possible business disruption from Russia-related sanctions and the war in Ukraine. Sales in the region were described as not significant, but the ultimate impact was uncertain.
Important facts for investors to verify
- Review the amended March 2022 quarterly filing and the accounting corrections described here; assess the implications of the restatement and ongoing control weaknesses.
- Track remediation of each material weakness and whether subsequent filings report effective controls or further corrections.
- Assess whether revenue growth, particularly in identity verification and acquired HooYu operations, translates into sustained profitability and operating cash flow.
- Monitor liquidity following the HooYu acquisition, the $155.3 million notes principal, earnout obligations, and future cash needs.
- Follow developments in the USAA-related customer litigation, BIPA action, and other claims, including any indemnification exposure or recorded accruals.
- Evaluate foreign-currency effects, the recoverability of acquired goodwill and intangibles, and the effects of restructuring and integration.