Mitek Systems, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended December 31, 2023, compared with the three months ended December 31, 2022. Mitek provides mobile check-deposit, identity-verification and authentication software and services. The report was signed April 15, 2024.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter |
|---|---|---|
| Total revenue | $36.9 million | $45.7 million |
| Software and hardware revenue | $16.0 million | $26.4 million |
| Services and other revenue | $20.9 million | $19.3 million |
| Operating income (loss) | $(6.9) million | $8.4 million |
| Net income (loss) | $(5.8) million; $(0.13) per diluted share | $4.7 million; $0.10 per diluted share |
| Cash from (used in) operating activities | $(9.5) million | $5.3 million |
| Cash and cash equivalents | $64.5 million | $58.9 million at September 30, 2023 |
| Short-term investments | $59.4 million | $74.7 million at September 30, 2023 |
| Convertible notes | $155.3 million principal; $137.5 million carrying value | $155.3 million principal; $135.5 million carrying value at September 30, 2023 |
Revenue declined 19% year over year. Software and hardware revenue fell 39%, while services and other revenue rose 8%. Gross margin, calculated from reported revenue and cost of revenue, was approximately 85.0%, compared with 88.9% a year earlier. Operating margin was approximately negative 18.7%, compared with positive 18.3%. The company reported $146.4 million of working capital at quarter-end and stated that cash and expected operating cash generation should meet working-capital needs for at least the next 12 months.
Changes and drivers
- The largest revenue decline reflected a prior-year multiyear Mobile Deposit contract whose full-term license revenue was recognized upfront in Q1 FY2023 and did not recur, alongside lower sales of legacy identity-verification software and hardware. Increased ID R&D biometrics sales partly offset the decline.
- Deposit revenue decreased to $21.1 million from $30.3 million; identity-verification revenue increased to $15.8 million from $15.4 million.
- General and administrative expense rose 83% to $15.5 million. Management attributed the increase primarily to higher audit, accounting and tax fees, third-party and professional fees, legal expenses, and personnel-related costs.
- Research and development expense increased 16% to $8.9 million. Restructuring costs declined to $48,000 from $1.8 million as the earlier restructuring plan was largely completed.
- Other income rose to $1.6 million, primarily reflecting higher interest income and foreign-currency transaction gains. The company recorded a $1.7 million income-tax benefit, versus a $1.8 million provision in the prior-year quarter.
Liquidity, debt and notable items
- Cash, cash equivalents and investments totaled $123.9 million at December 31, 2023, down from $134.9 million at September 30, 2023. Operating cash use and a $4.6 million cash payment for ID R&D acquisition-related contingent consideration were notable cash-flow items; the company also issued $3.5 million of common stock to settle part of that consideration.
- The 0.75% senior convertible notes mature February 1, 2026. The quarter’s $2.3 million interest expense included $2.0 million of amortization of debt discount and issuance costs. The company disclosed that it had been out of compliance with note indenture reporting covenants after missing filing deadlines; additional special interest accrued during the noncompliance period. It stated that it was back in compliance when this Form 10-Q was filed.
- After quarter-end, on February 13, 2024, Mitek entered a secured revolving credit facility with Silicon Valley Bank for up to $35 million, with an additional $15 million available at the bank’s discretion. The filing does not state that any amount had been drawn. The facility has variable-rate borrowing costs, fees, covenants and a maturity feature linked to the 2026 notes.
- Two customers accounted for 16% and 10% of quarterly revenue, respectively, compared with 29% and 13% in the prior-year quarter. The filing does not identify those customers in the provided text.
Outlook, risks and controls
- Management sees potential demand growth in digital financial services, deposits and identity verification, but provides no numerical revenue or earnings guidance in the provided filing text. It cautions that competition, pricing, fraud and cyber risks, lengthy sales and implementation cycles, and reliance on a limited range of technologies could adversely affect results.
- Disclosure controls and procedures were deemed ineffective as of December 31, 2023 because previously reported material weaknesses remained. Weaknesses included controls over tax accounting, financial close and reconciliations, business combinations, revenue recognition, risk assessment, IT controls, information accuracy, and evidence and monitoring of controls. Remediation was in progress and not yet complete.
- Legal matters include an appealed Spanish judgment against ICAR of approximately €0.8 million plus interest and legal fees, with indemnification provisions described in the acquisition agreement. Mitek also disclosed potential customer indemnification demands connected to patent disputes; it stated it did not believe it was obligated to indemnify customers in the matters discussed, but noted potential costs if that position is not upheld. The filing also describes ongoing collection/fraud-conveyance litigation related to UrbanFT.
- Management reported no material changes to risk factors from the 2023 Annual Report. It stated that inflation had not materially affected results during the periods presented.
Investor verification priorities
- Assess whether the unusually high prior-year upfront Mobile Deposit license revenue is a meaningful comparison base, and whether services growth can offset continued weakness in software and hardware sales.
- Review the causes, cash impact and persistence of the operating loss, negative operating cash flow, and elevated audit, legal and other general and administrative expenses.
- Confirm the status and effectiveness of remediation for the material weaknesses, and monitor timely SEC reporting and related debt-covenant compliance.
- Check the amount, terms and use of any borrowings under the new secured revolving facility, including its covenants and maturity interaction with the 2026 notes.
- Monitor customer concentration, patent-related indemnification exposure, and the outcome of the ICAR appeal and UrbanFT proceedings.