Mitek Systems, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. Unless noted, figures are in U.S. dollars and millions. The filing also reports fiscal Q4 results; this is an annual report, not a standalone quarterly filing.
Business context
Mitek develops mobile image-capture, check-deposit, and digital identity-verification software using computer vision, AI, and machine learning. It serves more than 7,500 financial-services organizations and marketplace and fintech brands. Revenue comes primarily from software licenses, transactional SaaS, maintenance, and services. Deposits accounted for 63% of FY2021 revenue and identity verification 37%.
On May 28, 2021, Mitek acquired ID R&D, a provider of voice and face biometrics and liveness detection. The acquisition expands Mitek’s identity-authentication offerings.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $119.8 | $101.3 | +18% |
| Software and hardware revenue | $60.1 | $54.2 | +11% |
| Services and other revenue | $59.7 | $47.2 | +27% |
| Operating income | $13.3 | $8.9 | +50% |
| Net income | $8.0 | $7.8 | +2% |
| Diluted earnings per share | $0.18 | $0.18 | Flat |
| Cash from operations | $37.3 | $24.1 | +55% |
- Gross margin was approximately 87.9%, compared with 87.0% in FY2020; operating margin was approximately 11.1%, versus 8.8%. Net margin was approximately 6.7%, versus 7.7%.
- Services and other revenue growth was led by Mobile Verify transactional SaaS, up $10.1 million, or 36%. Software and hardware growth included Mobile Deposit, ID_CLOUD, and CheckReader.
- Operating expenses included $32.5 million selling and marketing, $28.0 million research and development, $22.5 million general and administrative, and $9.0 million acquisition-related costs. R&D expense rose 23%; management expects it to increase again in FY2022.
- Cash and cash equivalents were $30.3 million; investments were $197.1 million, for combined cash and investments of $227.4 million. Working capital was $164.8 million. Management expects available resources and operating cash flow to cover working-capital and capital needs for at least the next 12 months.
- Investing activities used $170.5 million, principally net investment purchases of $156.6 million and $12.5 million of net cash paid for ID R&D. Financing activities provided $143.7 million, mainly from the convertible-note issuance.
- Debt includes $155.3 million principal of 0.75% convertible senior notes due 2026; carrying value at year-end was $120.9 million, with a separately recognized $48.2 million embedded conversion derivative liability. The reported effective interest rate on the host debt was 6.71%, reflecting discount and issuance-cost amortization.
Material changes and unusual items
- Revenue increased 18%, with services and other growing faster than software and hardware. Net income rose only modestly as higher revenue was partly offset by increased selling, R&D, acquisition-related, and interest expenses.
- Mitek issued $155.3 million of convertible notes in February 2021, receiving approximately $149.7 million net proceeds before related hedge and warrant cash flows. It paid $33.2 million for a convertible-note hedge and received $23.9 million from warrant transactions. The initial conversion price is about $20.85 per share; warrants have a $26.53 strike price.
- ID R&D consideration was up to $49.0 million: $13.0 million cash and 867,226 shares valued at $13.9 million at closing, plus contingent payments of up to approximately $22.1 million tied to FY2022 and FY2023 milestones. The year-end estimated contingent consideration was $16.8 million.
- Fiscal Q4 revenue was $33.3 million and adjusted net income was $1.8 million ($0.04 diluted EPS). The company revised its previously furnished results after revaluing ID R&D contingent consideration: annual net income decreased from $8.4 million to $8.0 million, and Q4 net income from $2.2 million to $1.8 million. The adjustment increased acquisition-related expense by $0.4 million and contingent consideration by $0.8 million; no prior-period restatement was reported.
- One customer represented 17% of FY2021 revenue ($20.2 million), compared with 16% in FY2020. International sales were 26% of revenue, up from 24%.
- The board authorized a $15 million share-repurchase program in June 2021. Mitek repurchased $0.2 million during FY2021 and, from October 1 through December 10, 2021, repurchased $8.1 million of shares.
Outlook, risks, and contingencies
- Management sees potential demand growth in digital identity verification and deposits as digital transactions expand, but provided no quantified FY2022 revenue or earnings guidance. It expects FY2022 R&D expenses to rise from FY2021.
- Key business risks include intense competition, dependence on a limited set of technologies, declining check usage and maturing mobile banking adoption, long sales and implementation cycles, customer/channel timing, cybersecurity and privacy obligations, foreign-exchange exposure, and uncertainty around COVID-19 effects.
- Patent disputes involving USAA and Mitek customers remain a significant contingency. Mitek was not named as a defendant in the described Wells Fargo, PNC, or BBVA cases, and says it does not believe it must indemnify those customers or partners; however, demands and related proceedings could create costs. Mitek also reports a separate ongoing payment dispute with UrbanFT and a claim against ICAR seeking approximately €0.8 million plus interest.
- Management and the auditor identified a material weakness in controls over valuation of ID R&D contingent consideration. Mitek’s disclosure controls and internal control over financial reporting were ineffective as of September 30, 2021, and the auditor issued an adverse opinion on internal control. The auditor gave an unqualified opinion on the financial statements. Management described remediation efforts; effectiveness remains to be verified.
- The notes’ conversion settlement is currently required to be cash-only unless Mitek obtains stockholder approval to increase authorized shares and satisfies the share-reservation condition. Conversion, warrants, and future share issuance may affect cash needs and dilution.
Most important facts for investors to verify
- Whether the company remediates the contingent-consideration control weakness and sustains effective financial-reporting controls.
- Progress toward ID R&D integration, milestone performance, and potential contingent payments or share issuance.
- Trends in recurring/transactional SaaS revenue, deposit-related revenue, and customer concentration, including renewals and large-customer dependence.
- Cash deployment and the full economics of the 2026 notes, including cash settlement requirements, potential dilution, and warrant exposure above $26.53 per share.
- Developments in USAA-related patent proceedings and customer indemnification demands, as well as the status and potential recovery in the UrbanFT and ICAR matters.
- Whether FY2022 R&D spending increases as expected and whether it supports profitable growth; the filing provides no numerical revenue or earnings forecast.