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Why Mitek Systems Stock Plummeted Today

By Evan Niu, CFA - Feb 2, 2021 at 11:46AM

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The digital identity specialist announces a convertible note offering.

What happened

Shares of Mitek Systems (MITK -2.45%) have plummeted today, down by 12% as of 11 a.m. EST, after the company announced a proposed private offering of convertible senior notes. The company is looking to raise $125 million in fresh capital.

So what

Mitek is offering $125 million in convertible senior notes that will come due in 2026. The deal is a private offering to qualified institutional investors and is not open to public investors. The tech company, which provides digital identity solutions designed to combat fraud, will also grant the investors an option buy an additional $18.75 million of the paper.

Red stock chart going down

Image source: Getty Images.

The offering has not yet priced, so key details such as the interest rate, conversion ratio, and initial conversion price, have not been finalized. The company has concurrently entered into private negotiated hedge transactions and warrant transactions designed to mitigate potential dilution associated with conversions.

Now what

Companies that issue convertible notes typically see their stock decline in connection with the offerings since many of the institutional investors are often utilizing a convertible arbitrage strategy. That entails going long the convertible bond while simultaneously shorting the stock. Selling pressure is created in the short term as those investors establish positions.

Mitek reported fiscal first-quarter results last week, which showed that the company finished 2020 with $72.6 million in cash after generating operating cash flow of $8.7 million. The company will use some of the proceeds to cover the hedge transactions, with the rest being used for general corporate purposes.

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