Mitek Systems(MITK) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Mitek Systems' unaudited Condensed Consolidated Financial Statements for March 31, 2023, include restated 2022 comparative data Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2023 (in thousands) | September 30, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $401,966 | $360,410 | | Total current assets | $160,203 | $129,096 | | Goodwill | $130,148 | $120,186 | | Total Liabilities | $198,936 | $190,093 | | Total current liabilities | $45,311 | $40,497 | | Convertible senior notes | $131,670 | $127,970 | | Total Stockholders' Equity | $203,030 | $170,317 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Mar 31, 2023 (in thousands) | Three Months Ended Mar 31, 2022 (Restated) (in thousands) | Six Months Ended Mar 31, 2023 (in thousands) | Six Months Ended Mar 31, 2022 (Restated) (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $46,123 | $33,510 | $91,826 | $65,982 | | Operating Income | $8,686 | $2,680 | $17,059 | $7,509 | | Net Income | $5,169 | $435 | $9,899 | $3,559 | | Net Income Per Share—Diluted | $0.11 | $0.01 | $0.22 | $0.08 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Six Months Ended Mar 31, 2023 (in thousands) | Six Months Ended Mar 31, 2022 (Restated) (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,561 | $9,686 | | Net cash provided by (used in) investing activities | $37,728 | $(1,743) | | Net cash provided by (used in) financing activities | $1,259 | $(13,736) | | Net increase (decrease) in cash | $50,988 | $(6,328) | | Cash and cash equivalents at end of period | $83,047 | $23,984 | Note 1. Nature of Operations and Summary of Significant Accounting Policies Mitek offers mobile image capture and digital identity verification, with restated March 2022 financials due to accounting errors - The company provides mobile image capture and digital identity verification solutions using AI and machine learning to over 7,800 financial services organizations and fintech brands globally[25] - Financials for the three and six months ended March 31, 2022, were restated due to errors in revenue recognition for multiyear licenses and SaaS products, capitalization of certain commissions, and accounting for the HooYu acquisition[28] Note 2. Revenue Recognition Revenue disaggregated: Deposits $59.0 million, Identity Verification $32.8 million for six months ended March 31, 2023 Disaggregation of Revenue by Major Product Category (in thousands) | Product Category | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 (Restated) | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 (Restated) | | :--- | :--- | :--- | :--- | :--- | | Deposits revenue | $28,760 | $21,228 | $59,041 | $40,279 | | Identity verification revenue | $17,363 | $12,282 | $32,785 | $25,703 | | Total revenue | $46,123 | $33,510 | $91,826 | $65,982 | - As of March 31, 2023, the company had current contract assets of $8.8 million and current contract liabilities (deferred revenue) of $12.0 million[51] Note 3. Business Combinations HooYu Ltd acquisition for $129.1 million in March 2022 contributed $6.0 million revenue and $7.8 million net loss in six months - The company completed the acquisition of HooYu Ltd on March 23, 2022, for $129.1 million to enhance its Know Your Customer (KYC) technology offerings[54] HooYu Acquisition - Fair Value of Assets Acquired and Liabilities Assumed (in thousands) | Account | Amount | | :--- | :--- | | Intangible assets | $73,100 | | Goodwill | $74,206 | | Other net assets | $(19,304) | | Net assets acquired | $127,902 | - For the six months ended March 31, 2023, HooYu contributed $6.0 million in revenue and a net loss of $7.8 million[57] Note 4. Restructuring June 2022 restructuring incurred $2.0 million additional costs and $2.9 million payments, resulting in zero accrual by March 31, 2023 Restructuring Accrual Activity (in thousands) | Description | Amount | | :--- | :--- | | Balance at September 30, 2022 | $901 | | Additional costs incurred | $1,986 | | Payments | $(2,942) | | Foreign currency effect | $55 | | Balance at March 31, 2023 | $0 | Note 5. Investments Available-for-sale securities decreased to $31.5 million by March 31, 2023, with contingent consideration liability at $6.1 million Investments by Security Type (Fair Market Value, in thousands) | Security Type | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | U.S. Treasury | $7,207 | $9,103 | | Commercial paper | $6,084 | $18,022 | | Corporate debt securities | $18,187 | $38,949 | | Foreign government and agency securities | $0 | $2,827 | | Total | $31,478 | $68,901 | - Acquisition-related contingent consideration, classified as a Level 3 liability, increased from $5.9 million at September 30, 2022, to $6.1 million at March 31, 2023, due to changes in fair value[62] Note 6. Goodwill and Intangible Assets Goodwill increased to $130.1 million from foreign currency effects; net intangible assets decreased to $73.5 million due to amortization - The goodwill balance increased by $10.0 million during the six months ended March 31, 2023, primarily due to foreign currency effects[63] Intangible Assets, Net (in thousands) | Category | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Completed technologies | $63,160 | $63,496 | | Customer relationships | $5,130 | $6,927 | | Trade names | $4,789 | $4,914 | | Covenants not to compete | $371 | $419 | | Total intangible assets | $73,450 | $75,756 | Note 7. Stockholders' Equity Stock-based compensation expense was $5.1 million for six months ended March 31, 2023; $15 million share repurchase program completed in fiscal 2022 Stock-Based Compensation Expense (in thousands) | Expense Category | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Cost of revenue | $192 | $167 | | Selling and marketing | $1,538 | $2,078 | | Research and development | $1,453 | $1,804 | | General and administrative | $1,963 | $2,380 | | Total | $5,146 | $6,429 | - The company's share repurchase program was completed in the second quarter of fiscal 2022, with total purchases of $14.8 million during the six months ended March 31, 2022[77] Note 8. Income Taxes Income tax provision for six months ended March 31, 2023, was $3.7 million (27% effective rate), compared to -6% in 2022 Income Tax Provision and Effective Tax Rate | Period | Income Tax Provision/(Benefit) (in thousands) | Effective Tax Rate | | :--- | :--- | :--- | | Three Months Ended Mar 31, 2023 | $1,808 | 26% | | Six Months Ended Mar 31, 2023 | $3,700 | 27% | | Three Months Ended Mar 31, 2022 | $(20) | -5% | | Six Months Ended Mar 31, 2022 | $(200) | -6% | Note 9. Convertible Senior Notes Company holds $155.3 million in 0.75% convertible senior notes due 2026 but was non-compliant with covenants due to late SEC filings - The company was not in compliance with covenants for its 2026 Notes due to the failure to timely file its Form 10-K and Form 10-Q reports, resulting in the accrual of additional special interest[81] Carrying Value of 2026 Notes (in thousands) | Description | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Principal amount | $155,250 | $155,250 | | Less: unamortized discount and issuance costs | $(23,580) | $(27,280) | | Carrying amount | $131,670 | $127,970 | - In connection with the notes, the company entered into a Notes Hedge and Warrant Transactions to reduce potential dilution[91][92] Note 10. Commitments and Contingencies Legal proceedings include customer indemnification demands from USAA patent suits, an Instacart breach of contract lawsuit, and a dismissed BIPA class action - The company has received indemnification demands from customers like PNC Bank and Truist due to patent infringement lawsuits filed by USAA related to mobile deposit technology[99][102][108] - The company filed a lawsuit against Instacart for breach of contract, seeking over $2.0 million in damages, with Instacart filing a cross-complaint[115][118] - A putative class action lawsuit alleging violations of the Illinois Biometric Information Privacy Act (BIPA) was voluntarily dismissed by the plaintiffs on September 13, 2023[120][124] Note 11. Leases Operating ROU assets were $4.6 million and lease liabilities $5.5 million as of March 31, 2023, with a 4.6-year weighted-average term Maturities of Operating Lease Liabilities (in thousands) | Period | Amount | | :--- | :--- | | 2023 - remaining | $1,108 | | 2024 | $1,726 | | 2025 | $638 | | 2026 | $629 | | 2027 | $635 | | 2028 | $425 | | Thereafter | $591 | | Total lease payments | $5,752 | Note 12. Revenue Concentration Two customers each accounted for 15% of total revenue for six months ended March 31, 2023; international sales were 24% - For the six months ended March 31, 2023, two customers each accounted for 15% of the company's total revenue[130] - International sales accounted for approximately 24% of total revenue for the six months ended March 31, 2023, down from 29% in the prior year period[131] Note 13. Restatement of Previously Reported Financials Q2 2022 financials were restated due to material GAAP errors in revenue recognition, commission capitalization, and HooYu acquisition accounting - The restatement was required due to errors in revenue recognition on multiyear term licenses and SaaS, revenue cut-off, capitalization of commissions, and accounting for HooYu acquisition liabilities[135] Impact of Restatement on Q2 2022 Statement of Operations (in thousands) | Line Item | As Previously Reported | Total Adjustments | As Restated | | :--- | :--- | :--- | :--- | | Total revenue | $34,714 | $(1,204) | $33,510 | | Operating income | $3,504 | $(824) | $2,680 | | Net income | $1,013 | $(578) | $435 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 38% quarterly and 39% six-month revenue growth for March 31, 2023, driven by Mobile Deposit® and identity verification, including HooYu Overview Mitek leads in mobile image capture and digital identity verification, expanding capabilities via ID R&D and HooYu acquisitions - The company's growth strategy includes organic development and strategic acquisitions, such as ID R&D for AI-based biometrics and HooYu for KYC technology[155][156] Results of Operations Q2 2023 revenue increased 38% to $46.1 million and net income to $5.2 million; six-month revenue grew 39% to $91.8 million with 178% net income growth Comparison of Three Months Ended March 31, 2023 and 2022 (in thousands) | Metric | 2023 | 2022 (Restated) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $46,123 | $33,510 | $12,613 | 38% | | Operating Income | $8,686 | $2,680 | $6,006 | 224% | | Net Income | $5,169 | $435 | $4,734 | 1088% | - The 38% revenue increase in Q2 2023 was driven by a $7.1 million (39%) increase in software and hardware revenue and a $5.5 million (36%) increase in services and other revenue, the latter boosted by the HooYu acquisition[168] Comparison of Six Months Ended March 31, 2023 and 2022 (in thousands) | Metric | 2023 | 2022 (Restated) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $91,826 | $65,982 | $25,844 | 39% | | Operating Income | $17,059 | $7,509 | $9,550 | 127% | | Net Income | $9,899 | $3,559 | $6,340 | 178% | - The 54% increase in software and hardware revenue for the six-month period was primarily due to a significant multiyear Mobile Deposit® contract with an existing customer[180] Liquidity and Capital Resources Liquidity remains strong with $114.5 million in cash and investments at March 31, 2023, and $11.6 million cash from operations Summary of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 (Restated) | | :--- | :--- | :--- | | Cash provided by operating activities | $11,561 | $9,686 | | Cash provided by (used in) investing activities | $37,728 | $(1,743) | | Cash provided by (used in) financing activities | $1,259 | $(13,736) | - Working capital increased to $114.9 million at March 31, 2023, from $88.6 million at September 30, 2022[204] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risks are interest rate risk on investments and foreign currency risk from European operations, with no material inflation impact - The company's investment portfolio is subject to interest rate risk, but short maturities mitigate material impact from rate changes[209] - The company is exposed to foreign currency risk from its operations in France, the Netherlands, and Spain, primarily related to the Euro and British pound sterling[210] Item 4. Controls and Procedures Disclosure controls were ineffective as of March 31, 2023, due to material weaknesses in internal control over financial reporting; remediation is underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2023, due to multiple material weaknesses[213] - Material weaknesses were identified in controls related to business combination accounting, revenue recognition, risk assessment, IT general controls, contingent consideration valuation, and the financial statement close process[215][217] - A remediation plan is in process, which includes hiring additional accounting personnel, enhancing the risk assessment process, and designing and implementing improved process-level and IT controls[216] PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings information is incorporated by reference from Note 10 of the condensed consolidated financial statements - Information regarding legal proceedings is incorporated by reference from Note 10 of the notes to the condensed consolidated financial statements[219] Item 1A. Risk Factors No material changes to risk factors disclosed in the 2022 Annual Report on Form 10-K - There have been no material changes in the company's risk factors from those disclosed in the 2022 Annual Report on Form 10-K[220] Item 5. Other Information Q2 2023 revenue increased by $0.8 million due to revised variable consideration; new deadlines for 2024 stockholder proposals are announced - Adjustments were made to the second quarter of fiscal 2023 financial results, increasing services revenue by $0.8 million due to revisions in estimates of variable consideration for certain SaaS contracts[224] - Due to a postponed 2023 annual meeting, the company has set new deadlines for stockholder proposals for the 2024 annual meeting[227][228]