Mitek Systems, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended June 30, 2021. The filing was signed August 5, 2021. Mitek develops mobile image-capture, check-deposit, and digital identity-verification software. It reported serving more than 7,500 financial-services organizations and fintech and marketplace brands.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $31.8M | $25.4M | $86.5M | $70.7M |
| Operating income | $5.4M | $1.4M | $9.4M | $2.8M |
| Net income | $3.0M | $1.3M | $6.2M | $2.8M |
| Diluted EPS | $0.07 | $0.03 | $0.14 | $0.07 |
| Operating cash flow | Not clearly stated for the quarter | Not clearly stated for the quarter | $25.0M | $17.4M |
Q3 revenue rose 25%; software and hardware revenue increased 28% and services and other revenue increased 21%. Management attributed growth mainly to Mobile Deposit software and Mobile Verify transactional SaaS. Nine-month revenue rose 22%, led by 28% growth in services and other. Gross margin was approximately 89% in Q3 versus 86% a year earlier; operating margin was approximately 17% versus 6%. Nine-month net income increased 119% despite $3.5M of new interest expense on the convertible notes.
Nine-month operating cash flow was $25.0M. Investing activities used $147.4M, principally reflecting net investment purchases and the ID R&D acquisition; financing activities provided $142.8M, principally from the convertible-note issuance. Capital expenditures were $1.0M, implying approximate nine-month free cash flow of $24.1M (operating cash flow less capital expenditures).
Liquidity, debt, and material changes
- At June 30, 2021, cash and cash equivalents were $40.5M and investments were $174.9M, totaling $215.5M. Working capital was $167.6M. Management said cash and expected operating cash generation should meet working-capital needs for the next 12 months.
- In February 2021, Mitek issued $155.3M principal amount of 0.75% senior unsecured convertible notes due 2026, generating approximately $149.7M net proceeds before hedge and warrant effects. The notes’ carrying value was $119.6M after unamortized discount and issuance costs. The filing reports a 6.71% effective interest rate on the host debt.
- Because available authorized shares were insufficient to cover potential conversion shares, the conversion feature was recorded as a derivative liability; conversions must be settled solely in cash until share-reservation conditions are met. A related hedge and warrants were intended to reduce dilution, but warrants may create dilution above a $26.53 share price.
- In May, Mitek acquired ID R&D, a voice and face biometrics and liveness-detection provider. Consideration included $13.0M cash and 867,226 Mitek shares valued at $13.9M, plus potential milestone payments of up to approximately $22.1M. The purchase-price allocation was preliminary; acquired goodwill was $30.9M and acquired intangible assets were $14.2M.
- Total assets increased to $422.4M from $169.2M at September 30, 2020, reflecting the note financing, increased investments, and acquisition. Total liabilities rose to $233.9M from $36.9M, including the new convertible notes and contingent consideration.
Outlook, commentary, and risks
The filing provides no quantified revenue or earnings guidance. Management cited digital adoption, regulatory requirements, and demand for fraud prevention as growth drivers, and expected growth in deposits and identity-verification products. It also emphasized competition, product concentration, potentially lengthy sales and implementation cycles, channel-partner renewal timing, and uncertainty around COVID-19’s effects. COVID-related travel reductions lowered costs, while the duration and business impact remained uncertain.
Important contingencies include ongoing patent-related disputes and customer indemnification demands connected to USAA litigation involving banks and Mitek technology. Mitek said it did not believe it was obligated to indemnify customers in the identified matters, but substantial costs could arise if that view is not upheld. A separate €0.8M ($0.9M) claim against acquired ICAR is subject to an indemnity arrangement. The company also reported customer concentration: three customers represented 40% of Q3 revenue. Mitek stated disclosure controls were effective; the assessment of internal controls did not include newly acquired ID R&D.
Key facts for investors to verify
- Reconcile the MD&A highlight describing nine-month operating cash flow as $9.0M with the cash-flow statement and liquidity discussion, both of which report $25.0M; the filing does not clearly explain this apparent inconsistency.
- Track ID R&D milestone performance, final purchase-price allocation, integration costs, and the contribution of the acquisition to growth.
- Review the convertible notes’ cash-settlement requirement, authorization and share-reservation plans, derivative accounting, interest burden, and potential warrant dilution.
- Monitor customer concentration and renewal timing, along with the status and potential exposure of patent and indemnification matters.
- Assess whether reported growth and margins persist as personnel, R&D, and acquisition-related costs rise, and consider the filing’s lack of quantified forward guidance.