Mitek Systems, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2022; filed May 6, 2022. Mitek develops mobile check-deposit and digital identity-verification solutions. Results include ID R&D, acquired in May 2021, and HooYu, acquired March 23, 2022; HooYu contributed only the final days of the quarter.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $34.7 million, up 21% from $28.8 million | $67.2 million, up 23% from $54.7 million |
| Operating income | $4.8 million vs. $2.4 million; margin about 13.9% vs. 8.3% | $9.7 million vs. $3.9 million |
| Net income | $1.9 million, or $0.04 diluted/share, vs. $1.0 million, or $0.02 | $5.0 million, or $0.11 diluted/share, vs. $3.2 million, or $0.07 |
| Operating cash flow | Not separately reported for the quarter | $9.7 million vs. $16.1 million |
- Quarterly software and hardware revenue rose 48% to $19.3 million, while services and other revenue fell 2% to $15.4 million. For the six-month period, the categories increased 37% and 10%, respectively. Management attributed software growth chiefly to Mobile Deposit and IDLive; six-month services growth included Mobile Verify and hosted deposit activity.
- Quarterly cost of revenue declined to $3.3 million from $3.8 million, lifting gross margin to approximately 90.5% from 86.8%. Research and development and acquisition-related expenses increased, including costs associated with acquisitions and higher staffing.
- At March 31, cash and cash equivalents were $24.0 million and investments were $69.4 million, totaling $93.4 million, down $134.0 million from September 30, 2021. Working capital was $55.0 million, versus $164.8 million.
- Six-month investing cash flow was a $1.7 million use, reflecting $126.6 million of acquisitions net of cash acquired, substantially offset by net investment sales and maturities. Financing cash flow was a $13.7 million use, mainly due to $14.8 million of share repurchases.
- The 2026 senior unsecured convertible notes had $155.3 million principal and a $124.4 million carrying amount, with 0.75% coupon interest and February 2026 maturity. The company may elect to settle conversions in cash, shares, or a combination after increasing authorized shares. Other borrowings were about $0.8 million.
Material changes, outlook and risks
- Mitek paid $129.1 million cash consideration for HooYu, a UK KYC/customer-onboarding provider. The acquisition added $75.7 million of goodwill and $73.1 million of identified intangibles in preliminary purchase accounting; the valuation was not final.
- Management gave no specific revenue or earnings guidance. It said cash on hand and expected operating cash generation should meet working-capital needs for at least 18 months from the filing date. Management cited growth opportunities in digital services and fraud prevention, while noting competition, lengthy sales and implementation cycles, and the possibility of fluctuating license renewals.
- Two customers accounted for 19% and 15% of quarterly revenue; customer concentration and the timing of channel-partner license renewals can make revenue uneven. International sales were approximately 26% of quarterly revenue.
- Risks include foreign-exchange exposure and the potential effects of Russia’s military action against Ukraine, including sanctions and operational disruption. The filing also describes continuing uncertainty from COVID-19.
- Legal matters include patent disputes involving customers and potential indemnification demands; Mitek said it did not believe it was obligated to indemnify the relevant customers. A separate ICAR claim sought €0.8 million plus interest. Mitek obtained a $1.7 million judgment against UrbanFT after quarter-end, but recorded no amount as of March 31 because the appeal period had not lapsed. Mitek’s lawsuit against Instacart sought more than $2.0 million and remained unresolved.
- Controls and accounting adjustment: Management concluded disclosure controls were ineffective at March 31 because a review control over deferred-tax inputs and assumptions did not operate effectively. A previously reported material weakness concerning ID R&D contingent-consideration valuation was reported remediated as of December 31, 2021, subject to year-end assessment. The filing also corrected a $5.9 million deferred-tax asset and additional-paid-in-capital overstatement related to the Notes Hedge reclassification; the adjusted balance sheet reports deferred-tax assets of $10.6 million and APIC of $207.5 million.
Important facts for investors to verify
- How much of revenue growth reflects underlying demand versus acquisition contributions, and whether services growth and software-license trends persist.
- HooYu’s integration, actual contribution to revenue and cash generation, and final purchase-price allocation and contingent consideration.
- Cash generation and liquidity after the acquisition and repurchases, including the effect of investment portfolio losses and customer-receivable movements.
- Convertible-note settlement and potential dilution, including the warrant threshold of $26.53 per share and the 2026 maturity.
- Remediation of the deferred-tax control weakness and the reported correction; monitor future filings for any further accounting or control developments.
- Developments in customer-related patent and indemnification matters, the ICAR claim, the UrbanFT judgment, and the Instacart litigation.