Mitek Systems, Inc. — Fiscal 2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022. This comprehensive annual report includes audited annual statements and restated interim results for the quarters ended March 31 and June 30, 2022. The company filed the report on July 31, 2023.
Business context
Mitek develops mobile image-capture, check-deposit, and digital identity-verification software using artificial intelligence and machine learning. It reported one operating segment and served more than 7,800 financial-services organizations and other brands. Fiscal 2022 included HooYu, a UK KYC platform acquired in March 2022; Mitek also acquired ID R&D in May 2021.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $143.9 million | $119.8 million |
| Operating income | $11.3 million | $13.3 million |
| Net income | $3.0 million | $8.0 million |
| Diluted earnings per share | $0.07 | $0.18 |
| Cash from operating activities | $26.4 million | $37.3 million |
| Cash and cash equivalents | $32.1 million | $30.3 million |
| Investments | $68.9 million | $197.1 million |
- Revenue grew 20%; software and hardware revenue increased 21% to $72.5 million, and services and other revenue rose 20% to $71.4 million. Growth reflected Mobile Deposit, CheckReader and identity-verification products, SaaS transactions, and HooYu.
- Gross margin was approximately 86.1%, versus 87.9% in FY2021; operating margin was approximately 7.9%, versus 11.1%. Cost of revenue rose 38% to $20.0 million. Higher operating costs, acquisition-related amortization and expenses, restructuring, and interest expense contributed to lower earnings despite revenue growth.
- Working capital was $88.6 million, down from $164.8 million. Cash and investments totaled $101.0 million, down 56%, principally reflecting the HooYu acquisition. Management said available cash and expected operating cash flows should cover working-capital needs for at least 12 months from the financial statements’ filing date.
- Operating cash flow declined 29% to $26.4 million, primarily due to higher accounts receivable and unfavorable working-capital changes. FY2022 cash used in financing was $21.1 million, including $15.2 million of share repurchases and $7.7 million of acquisition-related contingent consideration payments.
- The company reported $155.3 million principal amount of 0.75% senior unsecured convertible notes due February 2026; carrying value at year-end was $128.0 million. The notes’ conversion price was approximately $20.85 per share. A $1.3 million balance of other borrowings was also disclosed.
- Identity verification generated $58.1 million of revenue and deposits generated $85.8 million. One customer accounted for 17% of annual revenue ($25.0 million); international sales were 27% of revenue.
Fiscal fourth-quarter results
For the quarter ended September 30, 2022, revenue was $38.8 million, operating income was $2.9 million, and net loss was $0.3 million, or $0.01 per diluted share. In Q4 FY2021, revenue was $33.3 million, operating income was $3.9 million, and net income was $1.8 million, or $0.04 per diluted share.
Material changes and unusual items
- Interim restatement: Previously issued Q2 and Q3 FY2022 financial statements were declared unreliable and restated in this 10-K. Errors involved term-license and SaaS revenue timing and measurement, HooYu acquisition accounting and lease recognition, capitalization of sales commissions, and classification of cloud-operation employee costs. Restated Q2 revenue was $33.5 million and net income $0.4 million; restated Q3 revenue was $39.2 million and net loss $0.2 million. Investors are instructed to rely on the restated information in this filing, not the earlier reports or communications.
- HooYu acquisition: Mitek paid aggregate consideration of $129.1 million. HooYu contributed $5.7 million revenue and a $2.0 million net loss from acquisition through year-end. The acquisition added $73.1 million of identifiable intangible assets and $74.2 million of goodwill.
- Restructuring: A June 2022 workforce reduction resulted in $1.8 million of restructuring costs; $0.9 million remained accrued at year-end.
- Foreign-currency and investment effects: Foreign-currency translation reduced other comprehensive income by $27.6 million. The company recorded a $0.3 million realized loss on sales of available-for-sale securities.
Outlook, risks, and contingencies
- Management expected FY2023 research and development expense to increase as it continued product-development efforts. The filing does not provide numerical revenue or earnings guidance.
- Management identified material weaknesses in internal control over financial reporting, and concluded disclosure controls and internal controls were ineffective at September 30, 2022. Weaknesses included revenue recognition, business-combination and tax accounting, close and reconciliation procedures, risk assessment, IT access and change controls, and documentation and monitoring. Remediation may extend beyond FY2023. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the FY2022 financial statements.
- The filing describes delayed SEC reports, resulting Nasdaq delisting proceedings, and loss of eligibility to file new short-form S-3 registration statements. The company’s notes also state that late filings triggered indenture covenant noncompliance and additional special interest on the 2026 notes.
- Patent disputes involving USAA and banks are a significant contingent risk. Mitek was not named as a defendant in the described Wells Fargo, PNC, or Truist cases, but received customer or partner indemnification demands; it stated it did not believe it was obligated to indemnify. The company’s declaratory-judgment action against USAA was dismissed again in February 2023 and appealed.
- Other disclosed litigation includes an Illinois biometric-privacy class action and Instacart’s cross-complaint against Mitek. Mitek obtained a $2.3 million judgment against UrbanFT, including attorney fees and costs; appeal timing remained relevant for part of the award.
- Additional risks include reliance on a limited set of technologies, competition and pricing pressure, long and variable sales cycles, check-use declines, customer and channel-partner concentration, cybersecurity and privacy regulation, acquisition integration, and foreign-exchange exposure.
Most important facts for investors to verify
- Review Note 15 for the complete effects of the Q2 and Q3 restatement, and use only the restated interim figures.
- Track remediation and any recurrence of material weaknesses, late filings, or additional restatements.
- Confirm the current status of Nasdaq listing proceedings, SEC filing eligibility, and any resulting debt-covenant or special-interest consequences.
- Assess cash generation, receivables, investment balances, acquisition integration, and the company’s capacity to service the 2026 notes.
- Monitor USAA-related indemnification demands and the BIPA and Instacart proceedings; the filing does not provide a clear quantified estimate of potential exposure for these matters.