Mitek Systems, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. Mitek develops mobile image-capture, check-deposit, and digital identity-verification software, serving more than 6,100 financial institutions and other customers. Amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $63.6 million | $45.4 million |
| Gross profit / gross margin | $54.9 million / 86.3% | $41.3 million / 91.1% |
| Operating income (loss) / margin | ($7.8) million / (12.3%) | $2.8 million / 6.1% |
| Net income (loss) / diluted EPS | ($11.8) million / ($0.33) | $14.1 million / $0.40 |
| Cash from operating activities | $5.6 million | $10.4 million |
| Cash and investments at year-end | $17.5 million | $46.3 million |
| Working capital | $17.2 million | $41.3 million |
- Revenue grew 40%. Software and hardware revenue rose 37% to $40.7 million; SaaS, maintenance, and consulting revenue rose 45% to $22.9 million.
- Fiscal fourth-quarter revenue was $21.0 million and net loss was $2.1 million.
- Cash and investments declined $28.9 million, primarily reflecting acquisition payments, capital expenditures, and contingent-consideration payments. Investing activities used $8.4 million; financing activities used $0.4 million.
- Year-end total assets were $127.2 million, liabilities $31.8 million, and stockholders’ equity $95.4 million. Other borrowings were $0.8 million, largely interest-free loans assumed with ICAR. The $10 million revolving facility was undrawn at year-end.
Material changes and unusual items
- Operating results moved from profit to loss as expenses rose substantially, including selling and marketing ($21.7 million), R&D ($15.7 million), general and administrative ($17.1 million), and acquisition-related costs ($8.2 million). Cost of revenue increased to 13.7% of revenue from 8.9%, reducing gross margin.
- Acquisitions expanded the business: Mitek acquired ICAR in October 2017 and A2iA in May 2018. A2iA consideration included $26.8 million cash, net of cash acquired, and 2.5 million shares valued at $21.9 million. ICAR consideration included cash and shares, with additional milestone payments possible. Acquired businesses contributed $9.1 million of revenue and $5.3 million of net loss after their respective acquisition dates.
- The FY2018 tax provision was $3.1 million, including approximately $4.9 million expense from remeasuring deferred tax balances following U.S. tax reform. FY2017 net income included a $10.9 million tax benefit, principally from reversing a valuation allowance; this makes the year-over-year net-income comparison unusually affected by tax items.
- Other expense was $0.9 million, including a $1.3 million foreign-currency remeasurement loss related to the A2iA acquisition. Stock-based compensation was $9.0 million.
Outlook, risks, and contingencies
- Management expects FY2019 R&D expense to increase as product development continues. It provided no quantified revenue or earnings guidance in the supplied filing text. Management said current cash and expected operating cash flow should cover working-capital needs for the next 12 months.
- Key risks include intense competition, reliance on a concentrated set of technologies, fluctuating license-renewal timing and quarterly sales patterns, customer concentration, cybersecurity and privacy exposure, and execution and integration risks from acquisitions. Two customers represented 22% and 10% of FY2018 revenue, respectively; international sales were 27% of revenue.
- The $10 million revolving credit facility matures May 3, 2019. While amounts are outstanding, it requires specified minimum cash plus unused availability and an adjusted quick ratio; the filing reports no year-end borrowings under it.
- An ICAR-related Spanish claim seeks €0.8 million (approximately $0.9 million) plus interest. The company says it is entitled to indemnification under the acquisition agreement. Other ordinary-course legal matters were not expected to be material in aggregate.
- After fiscal year-end, Elliott Associates notified Mitek of its intent to nominate seven directors for the 2019 annual meeting. The company also adopted a Section 382 rights agreement intended to protect tax attributes; it may constrain acquisitions of more than 4.9% of common stock and requires stockholder approval to remain in effect beyond the 2019 meeting.
- Management and the auditor reported effective internal controls, but A2iA’s controls were excluded from the assessment while integration continues. Goodwill was not impaired in FY2018; future impairment could be affected by the share price and business outlook.
Important facts for investors to verify
- How much FY2018 revenue growth came from acquired businesses versus legacy products, and whether acquisition contributions and expected synergies are sustainable.
- Drivers of the sharp margin decline and whether operating expenses, acquisition costs, and integration spending moderate in FY2019.
- Cash conversion and liquidity after the $28.9 million reduction in cash and investments, including compliance with any credit-facility covenants if the revolver is drawn.
- Customer concentration, license-renewal timing, and the contribution and growth trajectory of SaaS and identity-verification revenue.
- Final A2iA purchase-price allocation, ICAR earnout payments, resolution of the Spanish claim, and the effect of the Section 382 rights agreement and proxy contest.
- The impact of adopting ASC 606 in FY2019; management estimated a $1.2–$2.0 million increase to retained earnings, before related tax effects as described in the filing.