Mitek Systems(MITK) - 2020 Q4 - Annual Report

Part I Business Mitek Systems specializes in mobile image capture and digital identity verification software, serving financial institutions globally with solutions for deposits and identity verification Overview Mitek specializes in mobile image capture and digital identity verification, serving over 7,500 financial institutions with key products like Mobile Deposit® and Mobile Verify® - Mitek is a software development company specializing in mobile image capture and digital identity verification, using computer vision, AI, and machine learning[19] - The company serves over 7,500 financial services organizations and leading fintech brands globally[19] - Key products include Mobile Deposit® for remote check deposits and Mobile Verify® for online identity verification, which helps organizations meet AML and KYC regulatory requirements[21][22] Product and Technology Overview Mitek operates as a single segment, developing and selling proprietary software for mobile image capture and identity verification, delivered via SDK and AI/ML platforms - The company operates as a single segment: development, sale, and service of proprietary software for mobile image capture and identity verification[26] - Mitek's technology is delivered via a software development kit (SDK) for mobile image capture and a software platform using AI and machine learning for data extraction and authentication[27] - Key products offered include Mobile Deposit®, Mobile Verify®, Mobile Fill®, Mobile Docs™, CheckReader™, XE™, and ID_CLOUD™[29][31][32][33][34][35][36] Sales, Marketing, and Revenue Revenue is primarily from software licenses and transaction fees, with Deposits products accounting for 67% and Identity Verification for 33% in FY2020 - Revenue is primarily derived from software licenses (on-premise and SaaS) and transaction fees for its product suite, sold through direct sales teams and channel partners[37] - In fiscal 2020, one customer accounted for 16% of total revenue ($15.8 million). This compares to two customers accounting for 17% and 10% in 2019, and 22% and 10% in 2018[39] Revenue Concentration and Mix (FY 2018-2020) | Metric | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Deposits Revenue | 67% | 67% | 65% | | Identity Verification Revenue | 33% | 33% | 35% | | International Sales Revenue | 24% | 31% | 27% | Intellectual Property Mitek protects its technology with 67 issued U.S. patents and 38 registered trademarks, with additional patent applications pending - As of September 30, 2020, Mitek holds 67 issued U.S. patents with expiration dates from 2026 to 2037[42] - The company has 20 additional domestic and international patent applications pending and holds 38 registered trademarks[42] Competition and Market The market is intensely competitive, with Mitek leveraging its patented technology and user experience, despite facing long sales cycles and product concentration risks - The market is intensely competitive, with competition from customer-developed solutions, alternative identity verification methods, and other mobile capture technologies[50] - Mitek believes its competitive advantages include its mobile auto image capture user experience, patented science, scalability, and adaptable software architecture[52] - The company faces challenges from long sales cycles (often six months or longer) and product concentration, making it vulnerable to market shifts and competition[45][46] Research and Development Mitek's R&D expenses increased to $22.9 million in FY2020, driven by a team of software engineers and scientists specializing in AI and computer vision - The R&D organization includes software engineers and scientists specializing in AI, computer vision, and user interface design[56][57] R&D Expenses (FY 2018-2020) | Fiscal Year | R&D Expense (in millions) | | :--- | :--- | | 2020 | $22.9 | | 2019 | $21.9 | | 2018 | $18.1 | Human Capital Resources As of September 30, 2020, Mitek had 360 employees globally, with a majority in sales, marketing, and services - As of September 30, 2020, the company had 360 employees, with 166 in the U.S. and 194 internationally[59] - The workforce is composed of 189 in sales/marketing/services, 127 in R&D/support, and 44 in executive/finance/administration[59] Risk Factors Mitek faces risks from technology dependence, market shifts, intense competition, significant intellectual property litigation, cybersecurity threats, acquisition integration challenges, and international operational complexities - The company derives substantially all revenue from a few technologies, making it vulnerable to market shifts, competition, or a decline in check usage[63][65] - Significant risk exists from patent infringement litigation. USAA has sued Wells Fargo and PNC Bank, whose systems use Mitek technology, resulting in large jury awards against Wells Fargo. Mitek has filed a declaratory judgment action against USAA to assert its products do not infringe[68][71][72] - The company faces risks related to integrating its acquisitions of ICAR and A2iA, including managing different business practices, integrating systems, and potential unknown liabilities[90][91] - Cybersecurity threats pose a risk, as a breach could lead to liability, litigation, and reputational harm due to the sensitive financial and personal data processed by Mitek's systems[101][105] - International operations expose the company to risks including foreign currency fluctuations, compliance with laws like the FCPA and GDPR, and complex data transfer regulations between the EU and the U.S[107][108][112] - The COVID-19 pandemic could adversely impact business by disrupting customer operations, reducing technology spending, and affecting employee productivity, though the full extent remains uncertain[141][143] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[149] Properties Mitek's main office is a 29,000 sq ft leased facility in San Diego, with additional international offices in Paris, Amsterdam, New York, Barcelona, and London - The main office is in San Diego, California, under a lease through June 30, 2024, with an average annual base rent of approximately $1.2 million[150] - Other international and domestic offices are located in Paris (France), Amsterdam (The Netherlands), New York (New York), Barcelona (Spain), and London (United Kingdom)[151] Legal Proceedings Mitek faces a €0.8 million claim against a subsidiary, manages customer indemnification demands from USAA patent lawsuits, and incurred $3.2 million in legal fees in FY2020 - A claim for €0.8 million was filed against subsidiary ICAR in Spain, but the company expects to be indemnified for any damages[153][154] - The company is subject to indemnification demands from customers due to patent infringement lawsuits by USAA against Wells Fargo and PNC Bank concerning remote deposit capture technology[155][156][158] - Mitek filed a declaratory judgment action against USAA in November 2019, seeking a ruling that its products do not infringe USAA's patents. The company also filed petitions with the U.S. Patent & Trademark Office to challenge the validity of the patents in question[159][160] - Legal fees of $3.2 million were incurred in fiscal year 2020 related to third-party claims against customers[161] - Mitek filed a lawsuit against customer UrbanFT, Inc. to collect delinquent payments and obtain a declaratory judgment of non-infringement of UrbanFT's patents[162] Mine Safety Disclosures This item is not applicable to the company - None[164] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Mitek's common stock trades on NASDAQ under 'MITK', with 260 stockholders of record, and the company has never paid cash dividends, intending to retain earnings for operations - The company's common stock trades on the NASDAQ Capital Market under the ticker symbol "MITK"[166] - Mitek has never paid cash dividends and does not anticipate paying them in the foreseeable future, intending to retain earnings for business use[168] 5-Year Cumulative Total Return Comparison | Company/Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | MITK | $100.00 | $259.87 | $297.81 | $221.00 | $302.51 | $399.37 | | NASDAQ Composite | $100.00 | $114.97 | $140.60 | $174.16 | $173.14 | $241.71 | | NASDAQ-100 Tech Sector | $100.00 | $129.99 | $173.93 | $202.63 | $223.52 | $299.87 | Selected Financial Data Mitek's revenue grew consistently from $34.7 million in 2016 to $101.3 million in 2020, returning to profitability with $7.8 million net income in 2020 Selected Financial Data (in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $101,310 | $84,590 | $63,559 | $45,390 | $34,701 | | Operating income (loss) | $8,868 | $(4,590) | $(7,806) | $2,769 | $1,824 | | Net income (loss) | $7,814 | $(724) | $(11,807) | $14,092 | $1,959 | | Net income (loss) per share—diluted | $0.18 | $(0.02) | $(0.33) | $0.40 | $0.06 | | Total assets | $169,154 | $135,897 | $127,150 | $71,719 | $48,385 | | Stockholders' equity | $132,243 | $107,333 | $95,394 | $61,408 | $39,485 | Management's Discussion and Analysis of Financial Condition and Results of Operations Mitek's FY2020 revenue grew 20% to $101.3 million, achieving $7.8 million net income and $24.1 million operating cash flow, driven by digital transformation trends and strong liquidity Fiscal Year 2020 Highlights Mitek's FY2020 revenues increased 20% to $101.3 million, resulting in a net income of $7.8 million and operating cash flow of $24.1 million - Revenues for fiscal 2020 were $101.3 million, a 20% increase from $84.6 million in fiscal 2019[188] - Net income was $7.8 million ($0.18 per diluted share), a significant improvement from a net loss of $0.7 million ($0.02 per share) in fiscal 2019[188] - Cash provided by operating activities increased to $24.1 million, compared to $14.3 million in the prior year[188] Results of Operations In FY2020, total revenue grew 20% to $101.3 million, driven by Mobile Verify® SaaS and Mobile Deposit® sales, leading to an operating income of $8.9 million - The 25% increase in FY2020 Services and other revenue was primarily driven by a $7.7 million (36%) growth in Mobile Verify® transactional SaaS revenue[204] - Restructuring costs were a credit of $0.1 million in FY2020 due to a reversal of prior accruals, compared to a $3.1 million expense in FY2019 related to the A2iA Paris operations restructuring[210] - FY2019 revenue increased 33% over FY2018, primarily due to the inclusion of a full year of A2iA product sales and a 63% ($8.3 million) growth in transaction SaaS revenue[215] Comparison of Operations (FY 2020 vs. FY 2019, in millions) | Line Item | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $101.3 | $84.6 | $16.7 | 20% | | Software and hardware | $54.2 | $46.8 | $7.3 | 16% | | Services and other | $47.2 | $37.7 | $9.4 | 25% | | Cost of Revenue | $13.2 | $12.3 | $0.9 | 8% | | Operating Income (Loss) | $8.9 | $(4.6) | $13.5 | N/A | | Net Income (Loss) | $7.8 | $(0.7) | $8.5 | N/A | Liquidity and Capital Resources Mitek's liquidity significantly strengthened in FY2020, with cash and investments reaching $62.0 million, driven by $24.1 million in operating cash flow - Cash, cash equivalents, and investments increased by 78% to $62.0 million at September 30, 2020, from $34.8 million at September 30, 2019[224] - In December 2019, the Board authorized a $10.0 million share repurchase program. During fiscal 2020, the company repurchased approximately 137,000 shares for $1.0 million[236][237] - The company's $10.0 million secured revolving credit facility with Silicon Valley Bank matured on September 30, 2020, and was not renewed. There were no borrowings outstanding at maturity[231] Cash Flow Summary (FY 2020 vs. FY 2019, in millions) | Cash Flow Activity | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Net cash from Operating Activities | $24.1 | $14.3 | | Net cash used in Investing Activities | $(24.7) | $(10.5) | | Net cash from Financing Activities | $3.4 | $4.4 | Critical Accounting Policies Mitek's critical accounting policies involve significant judgment in revenue recognition, goodwill impairment, business combinations, and income tax accounting - Revenue is recognized under ASC 606, requiring judgment in identifying distinct performance obligations, determining transaction prices (including variable consideration), and allocating prices based on standalone selling prices[247][253][254] - Goodwill is tested for impairment annually by comparing the carrying value of the company's single reporting unit to its fair value, which is determined based on market capitalization[262][263] - Accounting for business combinations involves critical estimates for the fair value of acquired tangible and intangible assets (like technology and customer relationships) and liabilities assumed[266][267] - Accounting for income taxes requires significant judgment in determining the worldwide provision and assessing the realizability of deferred tax assets, for which a valuation allowance may be recorded[268] Quantitative and Qualitative Disclosures About Market Risk Mitek is exposed to market risks from interest rate fluctuations on its $42.0 million investment portfolio and foreign currency exchange rates, particularly the Euro and British pound sterling - The company's primary market risk is from interest rate changes affecting its $42.0 million portfolio of cash equivalents and marketable securities. Due to short maturities, this risk is considered not material[273][274] - Mitek is exposed to foreign currency risk from its operations in Europe, particularly from fluctuations in the Euro and British pound sterling against the U.S. dollar, which affects the translation of financial results[275] Financial Statements and Supplementary Data This section refers to the detailed financial statements and supplementary data which are included in Part IV, Item 15 of the Form 10-K - The company's financial statements and supplementary data are located in Part IV, Item 15 of the report[276] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[277] Controls and Procedures Management, including the CEO and CFO, concluded that Mitek's disclosure controls and internal control over financial reporting were effective as of September 30, 2020 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[278] - Management concluded that the company's internal control over financial reporting was effective as of September 30, 2020[280] - A new Enterprise Resource Planning (ERP) system was implemented in fiscal 2019, and related internal controls were updated without adverse effect[281] Other Information The company reports no other information for this item - None[283] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[286] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[287] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[288] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[289] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[290] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K, with financial statements beginning on page F-1 - The Financial Statements of Mitek Systems, Inc. and the Report of Independent Registered Public Accounting Firm are included starting on page F-1[293] - Financial statement schedules were omitted because the information is included in the financial statements or notes, or they are not applicable[294] Form 10-K Summary The company provides no summary for this item - None[298]