Mitek Systems, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended March 31, 2023. The report was signed September 29, 2023, and describes late SEC filings that led to covenant noncompliance. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Mitek develops mobile image capture, digital identity verification, and mobile deposit products using AI and machine learning. It reported serving more than 7,800 financial services organizations and marketplace and fintech brands. Results include HooYu, acquired in March 2022.
| Metric | Q2 FY2023 | Q2 FY2022, restated | Six months FY2023 | Six months FY2022, restated |
|---|---|---|---|---|
| Revenue | $46.1 | $33.5 | $91.8 | $66.0 |
| Operating income | $8.7 | $2.7 | $17.1 | $7.5 |
| Net income | $5.2 | $0.4 | $9.9 | $3.6 |
| Diluted EPS | $0.11 | $0.01 | $0.22 | $0.08 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $11.6 | $9.7 |
Revenue, margins, and material comparisons
- Q2 revenue grew 38% year over year: software and hardware rose 39% to $25.3 million; services and other rose 36% to $20.9 million. Six-month revenue increased 39%.
- Management attributed Q2 growth to higher Mobile Deposit, CheckReader and IDLive sales, HooYu-related SaaS revenue, and increased transactional SaaS and hosted mobile deposit revenue. Six-month software and hardware growth included a multiyear Mobile Deposit license whose full-term license revenue was recognized in Q1 FY2023.
- Calculated gross margin was approximately 87% for Q2 and 88% for the six-month period, compared with approximately 87% and 86%, respectively, in the restated prior periods. Cost of revenue was 13% of Q2 revenue, versus 13% a year earlier.
- General and administrative expense rose 66% in Q2 to $10.1 million and 54% for the six months to $18.5 million. The company cited higher professional, audit, legal, software/IT, and executive-transition costs. Six-month restructuring expense was $2.0 million.
- HooYu contributed $6.0 million of revenue and a $7.8 million net loss in the six months; its Q2 contribution was $3.2 million of revenue and a $3.7 million net loss.
Cash, liquidity, and debt
- At March 31, cash and cash equivalents were $83.0 million and investments were $31.5 million, totaling $114.5 million, up from $101.0 million at September 30, 2022. Working capital was $114.9 million.
- Six-month operating cash flow was $11.6 million. Investing activities provided $37.7 million, primarily from investment maturities and sales; financing activities provided $1.3 million. Cash increased by $51.0 million during the period.
- The 0.75% convertible senior notes mature February 1, 2026. Their principal was $155.3 million; carrying value was $131.7 million. Six-month interest expense was $4.3 million, including $3.7 million of debt discount and issuance-cost amortization.
- Management said available cash and expected operating cash generation should fund working capital needs for at least 12 months from the filing date. The filing also reports $5.5 million of operating lease liabilities and acquisition-related contingent consideration of $6.1 million, with a disclosed maximum contingent payout of $22.1 million.
Restatement, risks, and management commentary
- Prior-period restatement: FY2022 interim results were restated for errors involving license and SaaS revenue recognition, term-license cutoff, HooYu commissions and acquisition accounting, an omitted assumed lease, and classification of cloud-operation employee costs. Restated Q2 FY2022 revenue was $33.5 million and net income was $0.4 million; the filing says the errors were material to the affected prior interim periods.
- Current-period adjustments: The filing says it adjusted Q2 FY2023 results for an $0.8 million increase in services revenue and receivables related to SaaS overage estimates, plus a diluted-share-count typographical error. Adjusted Q2 net income was $5.2 million and diluted EPS $0.11, versus $4.4 million and $0.10 as previously furnished.
- Controls and filing compliance: Management concluded disclosure controls were not effective at March 31, 2023 because of material weaknesses, including issues in revenue review, business-combination accounting, tax, close and reconciliation processes, risk assessment, IT controls, and evidence of control performance. Remediation was in progress and not yet complete. The late annual and quarterly reports also caused noncompliance with certain convertible-note indenture covenants and additional special interest; the filing states further noncompliance related to the March 2023 and June 2023 quarterly reports.
- Legal matters: Mitek faces customer indemnification demands arising from USAA patent litigation against banks and partners, although Mitek says it does not believe it is obligated to indemnify them. It incurred $0.7 million of related legal fees in the six months. Other disclosed matters include an appealed Spanish court judgment involving ICAR, Mitek’s claims against Instacart and Instacart’s cross-claims, and a BIPA class action that was dismissed without prejudice in September 2023.
- Business risks and outlook: Management cited competition, product concentration, lengthy sales and implementation cycles, and dependence on timing of license purchases and renewals. It sees opportunity in digital banking and identity verification but gave no quantified revenue or earnings guidance in this filing. Management said inflation had not materially affected results through the period.
Investor verification priorities
- Review the prior-period restatement, current-period adjustments, and the status and effectiveness of remediation for the material weaknesses.
- Confirm the company’s subsequent SEC filing status, note-covenant compliance, and any special interest incurred or continuing.
- Assess the timing and sustainability of multiyear license revenue and SaaS overage estimates, including customer concentration and contract assets.
- Track whether elevated G&A, acquisition-related amortization, restructuring costs, and HooYu losses persist.
- Monitor customer indemnification demands, other litigation, and the valuation and potential payout of acquisition-related contingent consideration.