MITEK SYSTEMS INC

Previous wording

Mitek markets and sells its products and services worldwide through internal, direct sales teams located in the U.S., Europe, and Latin America as well as through channel partners. Our partner sales strategy includes channel partners who are financial services technology providers and identity verification providers. These partners integrate our products into their solutions to meet the needs of their customers, typically provisioning Mitek’s services through their respective platforms.

Current wording

Mitek Systems, Inc. (“Mitek,” the “Company,” “we,” “us,” and “our”) is a provider of mobile image capture and digital identity verification solutions. We are a software development company with expertise in artificial intelligence and machine learning. We currently serve more than 7,900 financial services organizations and financial technology (“fintech”) brands around the globe. Mitek markets and sells its products and services worldwide through internal, direct sales teams located in the U.S., Europe, and Latin America as well as through channel partners. Our partner sales strategy includes channel partners who are financial services technology providers and identity verification providers. These partners integrate our products into their solutions to meet the needs of their customers, typically provisioning Mitek services through their respective platforms.

Previous wording

•Revenue for the three months ended December 31, 2023 was $36.9 million, a decrease of 19% compared to revenue of $45.7 million in the three months ended December 31, 2022.

Current wording

•Revenue for the three months ended March 31, 2024 was $47.0 million, an increase of 2% compared to revenue of $46.1 million in the three months ended March 31, 2023.

Previous wording

•Net loss was $5.8 million, or negative $0.13 per diluted share, during the three months ended December 31, 2023, compared to net income of $4.7 million, or $0.10 per diluted share, during the three months ended December 31, 2022.

Current wording

•Net income was $0.3 million, or $0.01 per diluted share, during the three months ended March 31, 2024, compared to net income of $5.2 million, or $0.11 per diluted share, during the three months ended March 31, 2023.

Previous wording

•Cash used in operating activities was $9.5 million for the three months ended December 31, 2023, compared to cash provided by operating activities of $5.3 million for the three months ended December 31, 2022.

Current wording

•Cash used in operating activities was $2.4 million for the six months ended March 31, 2024, compared to cash provided by operating activities of $11.6 million for the six months ended March 31, 2023.

Previous wording

•We added new patents to our portfolio during the first quarter of fiscal 2024 bringing our total number of issued patents to 98 as of December 31, 2023. In addition, we have 13 domestic and international patent applications pending as of December 31, 2023.

Current wording

•We had 98 issued patents as of March 31, 2024. In addition, we have 13 domestic and international patent applications pending as of March 31, 2024.

Previous wording

Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third party products embedded in our products. Cost of revenue increased $0.4 million, or 9%, to $5.5 million in the three months ended December 31, 2023 compared to $5.1 million in the three months ended December 31, 2022. As a percentage of revenue, cost of revenue increased to 15% in the three months ended December 31, 2023 from 11% in the three months ended December 31, 2022. The increase in cost of revenue is primarily due to an increase in transactional SaaS revenue during the three months ended December 31, 2023 compared to the same period in 2022.

Current wording

Cost of revenue includes personnel costs related to billable services and software support, direct costs associated with our hardware products, hosting costs, and the costs of royalties for third party products embedded in our products. Cost of revenue increased $0.3 million, or 5%, to $6.2 million in the three months ended March 31, 2024 compared to $5.9 million in the three months ended March 31, 2023. The increase in cost of revenue is primarily due to an increase in transactional SaaS revenue during the three months ended March 31, 2024 compared to the same period in 2023.

Previous wording

Selling and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with sales and marketing personnel. Selling and marketing expenses also include non-billable costs of professional services personnel, advertising expenses, product promotion costs, trade shows, and other brand awareness programs. Selling and marketing expenses increased $0.4 million, or 4%, to $9.9 million in the three months ended December 31, 2023 compared to $9.5 million in the three months ended December 31, 2022. The increase in selling and marketing expense is primarily due to higher personnel-related and other costs of $0.7 million, partially offset by lower marketing and other costs of $0.3 million in the three months ended December 31, 2023 compared to the same period in 2022.

Current wording

Selling and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with sales and marketing personnel. Selling and marketing expenses also include non-billable costs of professional services personnel, advertising expenses, product promotion costs, trade shows, and other brand awareness programs. Selling and marketing expenses increased $1.4 million, or 15%, to $11.0 million in the three months ended March 31, 2024 compared to $9.6 million in the three months ended March 31, 2023. The increase in selling and marketing expense is primarily due to higher personnel-related costs due to increased headcount, increased commissions due to increased sales and higher product promotion costs, partially offset by lower other costs in the three months ended March 31, 2024 compared to the same period in 2023.

Previous wording

General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration, and information technology functions, as well as third party legal, accounting, and other administrative costs. General and administrative expenses increased $7.1 million, or 83%, to $15.5 million in the three months ended December 31, 2023 compared to $8.5 million in the three months ended December 31, 2022. The increase in general and administrative expenses is primarily due to higher audit, accounting and tax fees of $2.1 million, third-party and professional fees of $1.8 million, higher legal expenses of $1.7 million, higher personnel-related and other costs of $1.5 million, during the three months ended December 31, 2023 compared to the same period in 2022.

Current wording

General and administrative expenses include payroll, employee benefits, stock-based compensation, and other headcount-related costs associated with finance, legal, administration, and information technology functions, as well as third party legal, accounting, and other administrative costs. General and administrative expenses increased $4.8 million, or 49%, to $14.9 million in the three months ended March 31, 2024 compared to $10.1 million in the three months ended March 31, 2023. The increase in general and administrative expenses is primarily due to higher audit, accounting and tax fees, higher personnel-related costs, an increase in the allowance for uncollectible receivables, and higher other costs, during the three months ended March 31, 2024 compared to the same period in 2023.

Previous wording

Amortization and acquisition-related costs include amortization of intangible assets, adjustments recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs decreased $0.8 million, or 17%, to $4.0 million in the three months ended December 31, 2023 compared to $4.8 million in the three months ended December 31, 2022. The decrease in amortization and acquisition-related costs is primarily due to a decrease in amortization expense of intangible assets from previous acquisitions that had been fully amortized of $0.6 million and a smaller increase in the fair value of acquisition-related contingent consideration associated with the ID R&D acquisition of $0.2 million relative to the same period in 2022, during the three months ended December 31, 2023 compared to the same period in 2022.

Current wording

Amortization and acquisition-related costs include amortization of intangible assets, adjustments recorded due to changes in the fair value of contingent consideration, and other costs associated with acquisitions. Amortization and acquisition-related costs decreased $0.5 million, or 10%, to $3.8 million in the three months ended March 31, 2024 compared to $4.3 million in the three months ended March 31, 2023. The decrease in amortization and acquisition-related costs is primarily due to a decrease in amortization expense of intangible assets from previous acquisitions that had been fully amortized during the three months ended March 31, 2024 compared to the same period in 2023.

Previous wording

Interest expense includes the amortization of debt discount and issuance costs and coupon interest accrued on our 0.75% convertible senior notes due 2026 (the “2026 Notes”). Interest expense was $2.3 million for the three months ended December 31, 2023 and consisted of $2.0 million of amortization of debt discount and issuance costs and $0.3 million of interest incurred. Interest expense was $2.1 million for the three months ended December 31, 2022 and consisted of $1.8 million of amortization of debt discount and issuance costs and $0.3 million of interest incurred.

Current wording

Interest expense includes the amortization of debt discount and issuance costs and coupon interest accrued on our 0.75% convertible senior notes due 2026 (the “2026 Notes”). Interest expense was $2.3 million for the three months ended March 31, 2024 and consisted of $2.0 million of amortization of debt discount and issuance costs and $0.3 million of interest incurred. Interest expense was $2.2 million for the three months ended March 31, 2023 and consisted of $1.9 million of amortization of debt discount and issuance costs and $0.3 million of interest incurred.

Previous wording

Other income, net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio, and foreign currency transactional gains or losses. Other income, net increased $1.3 million, or 389%, to $1.6 million net income in the three months ended December 31, 2023 compared to $0.3 million net income in the three months ended December 31, 2022. The increase was primarily due to higher interest income net of amortization of $0.9 million and higher foreign currency exchange transactional gains of $0.8 million, partially offset by an increase in other expenses of $0.3 million in the three months ended December 31, 2023 as compared to the same period in 2022.

Current wording

Other income, net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio, and foreign currency transactional gains or losses. Other income, net increased $0.7 million, or 162%, to $1.2 million net income in the three months ended March 31, 2024 compared to $0.5 million net income in the three months ended March 31, 2023. The increase was primarily due to higher interest income net of amortization, partially offset by foreign currency exchange transactional losses in the three months ended March 31, 2024 as compared to the same period in 2023.

Previous wording

Total revenue decreased $8.8 million, or 19%, to $36.9 million in the three months ended December 31, 2023 compared to $45.7 million in the three months ended December 31, 2022. Software and hardware revenue decreased $10.4 million, or 39%, to $16.0 million in the three months ended December 31, 2023 compared to $26.4 million in the three months ended December 31, 2022. This decrease is primarily due to an existing customer having entered into a significant multiyear Mobile Deposit® contract and the license revenue associated with the full contract term was recognized in the three months ended December 31, 2022, which did not recur, and a decrease in sales of our legacy identify verification software and hardware products in the three months ended December 31, 2023. These decreases were partially offset by an increase in sales of our ID R&D biometrics software products. Services and other revenue increased $1.6 million, or 8%, to $20.9 million in the three months ended December 31, 2023 compared to $19.3 million in the three months ended December 31, 2022. This increase is primarily due to higher maintenance and transactional SaaS revenue from our deposit products of $1.3 million and higher revenues from our identity verification products of $0.3 million in the three months ended December 31, 2023 compared to the same period in 2022.

Current wording

Total revenue decreased $7.9 million, or 9%, to $83.9 million in the six months ended March 31, 2024 compared to $91.8 million in the six months ended March 31, 2023. Software and hardware revenue decreased $10.7 million, or 21%, to $40.9 million in the six months ended March 31, 2024 compared to $51.6 million in the six months ended March 31, 2023. This decrease is primarily due to an existing customer having entered into a significant multiyear Mobile Deposit® contract and the license revenue associated with the full contract term was recognized in the six months ended March 31, 2023, which did not recur, and a decrease in sales of our legacy identify verification software and hardware products in the six months ended March 31, 2024. These decreases were partially offset by an increase in sales of our ID R&D biometrics software products. Services and other revenue increased $2.8 million, or 7%, to $43.0 million in the six months ended March 31, 2024 compared to $40.2 million in the six months ended March 31, 2023 primarily due to strong growth in transactional SaaS revenue from our identity verification and Mobile Deposit® products compared to the same period in 2023.

Previous wording

Research and development expenses include payroll, employee benefits, stock-based compensation, third party contractor expenses, and other headcount-related costs associated with software engineering and mobile capture science. Research and development expenses increased $1.2 million, or 16%, to $8.9 million in the three months ended December 31, 2023 compared to $7.7 million in the three months ended December 31, 2022. The increase in research and development expenses is primarily due to higher personnel-related and other costs of $1.6 million, partially offset by lower third-party contractor and other expenses of $0.4 million, in the three months ended December 31, 2023 compared to the same period in 2022.

Current wording

Research and development expenses include payroll, employee benefits, stock-based compensation, third party contractor expenses, and other headcount-related costs associated with software engineering and mobile capture science. Research and development expenses increased $3.6 million, or 24%, to $18.6 million in the six months ended March 31, 2024 compared to $15.0 million in the six months ended March 31, 2023. The increase in research and development expenses is primarily due to higher personnel-related costs and higher third-party contractor expenses, partially offset by lower other costs in the six months ended March 31, 2024 compared to the same period in 2023.

Previous wording

Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were $48,000 in the three months ended December 31, 2023 compared to $1.8 million in the three months ended December 31, 2022. As the restructuring plan was initially implemented in June 2022, it was primarily completed during the 2022 calendar year and therefore restructuring costs decreased in the three months ended December 31, 2023 as compared to the three months ended December 31, 2022.

Current wording

Restructuring costs consist of employee severance obligations and other related costs. Restructuring costs were $0.6 million in the six months ended March 31, 2024 compared to $2.0 million in the same period in 2023. As the restructuring plan was initially implemented in June and November 2022, it was primarily completed during the 2022 calendar year and therefore restructuring costs decreased in the six months ended March 31, 2024 as compared to the same period in 2023.

Previous wording

For the three months ended December 31, 2023, we recorded an income tax benefit of $1.7 million which yielded an effective tax rate of 23%. For the three months ended December 31, 2022, we recorded an income tax provision of $1.8 million, or an effective tax rate of 28%. The difference between the U.S. federal statutory tax rate and our effective tax rate for the three months ended December 31, 2023 and 2022 was primarily due to a mix of worldwide income, the impact of non-deductible executive compensation as well as the impact of state taxes, and federal and state research and development credits on the tax provision.

Current wording

For the six months ended March 31, 2024, we recorded an income tax benefit of $2.4 million, which yielded an effective tax rate of 31%. For the six months ended March 31, 2023, we recorded an income tax provision of $3.7 million, which yielded an effective tax rate of 27%. The difference between the U.S. federal statutory tax rate and our effective tax rate for the six months ended March 31, 2024 and 2023 was primarily due to a mix of worldwide income, the impact of non-deductible executive compensation as well as the impact of state taxes, and federal, state and foreign research and development credits on its tax provision.

Previous wording

Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. Our additional sources of liquidity include available cash balances and proceeds from the issuance of the 2026 Notes (as defined below). On December 31, 2023, we had $123.9 million in cash and cash equivalents and investments compared to $134.9 million on September 30, 2023, a decrease of $11.0 million, or 8%. In summary, our cash flows from continuing operations were as follows (amounts in thousands):

Current wording

Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. Our additional sources of liquidity include available cash balances and proceeds from the issuance of the 2026 Notes (as defined below). On March 31, 2024, we had $130.3 million in cash and cash equivalents and investments compared to $134.9 million on September 30, 2023, a decrease of $4.6 million, or 5%. In summary, our cash flows from continuing operations were as follows (amounts in thousands):

Previous wording

Cash flows related to operating activities are dependent on net income, adjustments to net income and changes in working capital. Net cash used in operating activities during the three months ended December 31, 2023 was $9.5 million and resulted primarily from net loss of $5.8 million and net non-cash charges of $6.7 million, partially offset by unfavorable changes in operating assets and liabilities of $10.3 million. Net cash provided by operating activities during the three months ended December 31, 2022 was $5.3 million and resulted primarily from net income of $4.7 million and net non-cash charges of $6.0 million, partially offset by unfavorable changes in operating assets and liabilities of $5.5 million. The decrease in cash provided by operating activities of $14.7 million during the three months ended December 31, 2023 compared to three months ended December 31, 2022 was primarily due to our net loss and related decrease in income taxes payable and an increase in accounts receivable.

Current wording

Cash flows related to operating activities are dependent on net income, adjustments to net income and changes in working capital. Net cash used in operating activities during the six months ended March 31, 2024 was $2.4 million and resulted primarily from net loss of $5.5 million and unfavorable changes in operating assets and liabilities of $15.4 million, partially offset by net non-cash charges of $18.5 million. Net cash provided by operating activities during the six months ended March 31, 2023 was $11.6 million and resulted primarily from net income of $9.9 million and net non-cash charges of $13.0 million, partially offset by unfavorable changes in operating assets and liabilities of $11.4 million. The decrease in cash provided by operating activities of $14.0 million during the six months ended March 31, 2024 compared to six months ended March 31, 2023 was primarily due to our net loss and related decrease in income taxes payable and an increase in accounts receivable.

Previous wording

Net cash provided by investing activities was $17.9 million during the three months ended December 31, 2023, which consisted primarily of net sales and maturities of investments of $18.1 million, partially offset by capital expenditures of $0.2 million. Net cash provided by investing activities was $18.6 million during the three months ended December 31, 2022, which consisted primarily of net sales and maturities of investments of $18.8 million partially offset by capital expenditures of $0.2 million. The decrease in cash provided by investing activities of $0.7 million during the three months ended December 31, 2023 compared to three months ended December 31, 2022 was primarily due to a decrease in net sales and maturities of investments.

Current wording

Net cash provided by investing activities was $27.4 million during the six months ended March 31, 2024, which consisted primarily of net sales and maturities of investments of $28.1 million, partially offset by capital expenditures of $0.7 million. Net cash provided by investing activities was $37.7 million during the six months ended March 31, 2023, which consisted primarily of net sales and maturities of investments of $38.1 million partially offset by capital expenditures of $0.4 million. The decrease in cash provided by investing activities of $10.3 million during the six months ended March 31, 2024 compared to six months ended March 31, 2023 was primarily due to a decrease in net sales and maturities of investments.

Previous wording

Net cash used in financing activities was $3.1 million during the three months ended December 31, 2023, primarily due to the payment of $4.6 million of acquisition-related contingent consideration, partially offset by $0.8 million of net proceeds from the issuance of equity plan Common Stock and $0.7 million of proceeds from other borrowings. Net cash provided by financing activities was $0.6 million during the three months ended December 31, 2022, primarily due to repurchases and retirements of our Common Stock. The decrease in cash provided by financing activities of $3.7 million during the three months ended December 31, 2023 compared to three months ended December 31, 2022 was primarily due to the payment of acquisition-related consideration partially offset by proceeds from other borrowings in the three months ended December 31, 2023.

Current wording

Net cash used in financing activities was $3.0 million during the six months ended March 31, 2024, primarily due to the payment of $4.6 million of acquisition-related contingent consideration, partially offset by $1.0 million of net proceeds from the issuance of Common Stock under our equity plans and $0.9 million of net proceeds from other borrowings. Net cash provided by financing activities was $1.3 million during the six months ended March 31, 2023, primarily due to proceeds from the issuance of equity plan Common Stock. The decrease in cash provided by financing activities of $4.3 million during the six months ended March 31, 2024 compared to six months ended March 31, 2023 was primarily due to the payment of acquisition-related consideration and revolving credit line issuance costs, partially offset by proceeds from other borrowings in the six months ended March 31, 2024.

Previous wording

(collectively, the “Initial Purchasers”) a 13-day option to purchase up to an additional $20.25 million aggregate principal amount of the 2026 Notes (the “Additional Notes”), which was exercised in full. The 2026 Notes were purchased in a transaction that was completed on February 5, 2021. As of January 13, 2024 (“Date of Noncompliance”), the Company was not in compliance with certain of the covenants in the Indenture as a result of the Company not timely filing its Form 10-K for the fiscal year ended September 30, 2023 (“Form 10-K”) with the SEC. As a result of not being in compliance, the 2026 Notes began to accrue additional special interest of 0.25% of the outstanding principal of the 2026 Notes for the 90 days after the Date of Noncompliance and 0.50% of the outstanding principal of the 2026 Notes for the 91st through 180th day after the Date of Noncompliance. The Company subsequently did not timely file its Form 10-Q for the quarter ended December 31, 2023 with the SEC. The Company filed its Form 10-K with the SEC on March 19, 2024. As of the filing of this Quarterly Report on Form 10-Q for the period ended December 31, 2023, the Company is in compliance with the covenants in the Indenture as all of its required annual and quarterly reports to date have been filed with the SEC.

Current wording

In February 2021, the Company issued $155.3 million aggregate principal amount of the 2026 Notes (including the Additional Notes, as defined below). The 2026 Notes are senior unsecured obligations of the Company. The 2026 Notes were issued pursuant to an Indenture, dated February 5, 2021 (the “Indenture”), between the Company and UMB Bank, National Association, as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company after which the 2026 Notes become automatically due and payable. The Company granted the initial purchasers of the 2026 Notes (collectively, the “Initial Purchasers”) a 13-day option to purchase up to an additional $20.25 million aggregate principal amount of the 2026 Notes (the “Additional Notes”), which was exercised in full. The 2026 Notes were purchased in a transaction that was completed on February 5, 2021. As of January 13, 2024 (“Date of Noncompliance”), the Company was not in compliance with certain of the covenants in the Indenture as a result of the Company not timely filing its Form 10-K for the fiscal year ended September 30, 2023 (“Form 10-K”) with the SEC. As a result of not being in compliance, the 2026 Notes began to accrue additional special interest of 0.25% of the outstanding principal of the 2026 Notes for the 90 days after the Date of Noncompliance and 0.50% of the outstanding principal of the 2026 Notes for the 91st through 180th day after the Date of Noncompliance. The Company subsequently did not timely file its Form 10-Q for the quarter ended December 31, 2023 (the “Q1 Form 10-Q”) with the SEC. The Company filed its Form 10-K with the SEC on March 19, 2024 and its Q1 Form 10-Q with the SEC on April 15, 2024. As of March 31, 2024, the Company is in compliance with the covenants in the Indenture.

Previous wording

As of April 15, 2024, the 2026 Notes were not convertible, therefore, we had not purchased any shares under the Notes Hedge and the Warrant Transactions had not been exercised and remain outstanding. See Note 7. “Convertible Senior Notes,” of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information relating to the Notes Hedge and Warrant Transactions.

Current wording

As of May 10, 2024, the 2026 Notes were not convertible, therefore, we had not purchased any shares under the Notes Hedge and the Warrant Transactions had not been exercised and remain outstanding. See Note 7. “Debt” of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information relating to the Notes Hedge and Warrant Transactions.

Previous wording

All securities for which maturity or sale is expected within one year are classified as “current” on the condensed consolidated balance sheets. All other securities are classified as “long-term” on the condensed consolidated balance sheets. At December 31, 2023, we had $59.4 million of our available-for-sale securities classified as current and none of our available-for-sale securities classified as long-term. At September 30, 2023, we had $74.7 million of our available-for-sale securities classified as current and $1.3 million of our available-for-sale securities classified as long-term.

Current wording

At March 31, 2024, we had investments of $49.3 million, designated as available-for-sale debt securities, which consisted of commercial paper, corporate issuances, and asset-backed securities, carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of tax, and reported as a separate component of stockholders’ equity. All securities for which maturity or sale is expected within one year are classified as “current” on the condensed consolidated balance sheets. All other securities are classified as “long-term” on the condensed consolidated balance sheets. At March 31, 2024, we had $43.0 million of our available-for-sale securities classified as current and $6.3 million of our available-for-sale securities classified as long-term. At September 30, 2023, we had $74.7 million of our available-for-sale securities classified as current and $1.3 million of our available-for-sale securities classified as long-term.

Previous wording

We had working capital of $146.4 million at December 31, 2023 compared to $138.5 million at September 30, 2023. We do not have any other material cash requirements other than those related to leases as described in Note 8. “Commitments and Contingencies” of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. Based on our current operating plan, we believe the current cash and cash equivalents and cash expected to be generated from operations will be adequate to satisfy our working capital needs for at least the next twelve months from the date the financial statements are filed.

Current wording

We had working capital of $154.4 million at March 31, 2024 compared to $138.5 million at September 30, 2023. We do not have any other material cash requirements other than those related to leases as described in Note 8. “Commitments and Contingencies” of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. Based on our current operating plan, we believe the current cash and cash equivalents and cash expected to be generated from operations will be adequate to satisfy our working capital needs for at least the next twelve months from the date the financial statements are filed.