Mitek Systems(MITK) - 2021 Q4 - Annual Report

PART I Business Overview Mitek is a leading innovator in mobile image capture and digital identity verification solutions, leveraging computer vision, AI, and machine learning to serve over 7,500 financial services and fintech organizations globally - Mitek serves over 7,500 financial services organizations and fintech brands globally with mobile image capture and digital identity verification solutions[18] - In May 2021, Mitek acquired ID R&D, an award-winning provider of AI-based voice and face biometrics and liveness detection, to enhance security against digital fraud threats[19][21] Product and Technology Overview Mitek's technology stack includes a software development kit for mobile image capture and a cloud software platform that uses AI and machine learning to classify and extract data for mobile check deposits and identity document authentication - Mitek's core technology utilizes patented algorithms for image quality analysis, repair, document identification, data extraction, and authentication of identity documents[24] Key Products Mitek's product portfolio includes Mobile Deposit® for remote check deposits, Mobile Verify® for identity verification, Mobile Fill® for automated form completion, MiSnap™ for quality image capture, CheckReader™ and Check Intelligence for check data extraction and fraud prevention, and ID_CLOUD™ for automated identity validation - Mobile Deposit® has processed over five billion check deposits and is used by millions in the U.S. and Canada[25] - Mobile Verify® combines image capture with document authentication and biometric face comparison to validate identity documents and match portraits with selfies[27] - CheckReader™ is deployed within eight of the top ten U.S.-based banks, 90% of French and Brazilian Banks, and 100% of United Kingdom banks[30] - IDLive® Face is the industry's first passive facial liveness detection product, critical for fraud prevention and iBeta Levels 1 and 2 Presentation Attack Detection (PAD) compliant[35] Sales and Marketing Mitek generates revenue primarily from the sale of software licenses (on-premise and transactional SaaS) and transaction fees, supplemented by maintenance and professional services - Revenue is predominantly derived from software licenses and transaction fees, with maintenance and professional services contributing to a lesser extent[39] Revenue Concentration by Customer (FY2019-2021) | Fiscal Year | Customer Revenue | % of Total Revenue | | :---------- | :--------------- | :----------------- | | 2021 | $20.2 million | 17% | | 2020 | $15.8 million | 16% | | 2019 | $22.8 million (from 2 customers) | 17% and 10% | Revenue Breakdown by Product Category (FY2019-2021) | Product Category | 2021 | 2020 | 2019 | | :--------------- | :--- | :--- | :--- | | Deposits revenue | 63% | 67% | 67% | | Identity verification revenue | 37% | 33% | 33% | | International sales | 26% | 24% | 31% | Intellectual Property Mitek protects its proprietary technology through a combination of 77 U.S. patents (expiring 2026-2037), 18 pending domestic and international patent applications, 38 registered trademarks, trade secrets, and non-disclosure agreements - As of September 30, 2021, Mitek holds 77 issued U.S. patents with expiration dates ranging from 2026 through 2037, and has 18 additional domestic and international patent applications[44] - The company also has 38 registered trademarks and relies on trade secret and copyright laws, as well as confidentiality agreements, to protect its intellectual property[43][44] Market Opportunities, Challenges, and Risks Mitek anticipates growth in its deposits and identity verification businesses driven by increasing consumer demand for digital financial services, stricter regulations, and the rise of online marketplaces - Mitek predicts growth in its deposits and identity verification products due to increased consumer adoption of digital financial services, more stringent regulations, and growing usage of sharing apps and online marketplaces[45] - Factors that could adversely affect revenue or gross margins include competition, decline in demand for digital transactions, negative publicity, or obsolescence of software environments[46] - The sales and implementation cycles for Mitek's software and services can be lengthy, often six months or longer, which could adversely affect business if delayed or not completed[47] Competition The market for Mitek's products is intensely competitive and rapidly changing, with competition from customer-developed solutions, alternative identity verification methods, and competing mobile remote deposit/identity authentication technologies - Mitek faces direct and indirect competition from customer-developed solutions, companies offering alternative identity verification methods, and those with competing mobile remote deposit capture or identity authentication technologies[51] - Primary competitive advantages include mobile auto image capture user experience, patented science, scalability, and architectural software design allowing for easy modification and upgrades[53] Research and Development Mitek's future success relies on continuous research and development to maintain and improve core technologies, enhance existing products, and develop new solutions Research and Development Expenses (FY2019-2021) | Fiscal Year | R&D Expenses (in millions) | | :---------- | :------------------------- | | 2021 | $28.0 | | 2020 | $22.9 | | 2019 | $21.9 | - R&D expenses increased by 23% in fiscal year 2021 compared to 2020, and are expected to increase further in fiscal year 2022[59] Human Capital Resources As of September 30, 2021, Mitek had 448 employees globally, with a significant portion dedicated to sales, marketing, professional services, and research and development Employee Breakdown as of September 30, 2021 | Category | Number of Employees | | :------- | :------------------ | | Total | 448 | | U.S. | 176 | | International | 272 | | Full-time | 435 | | Sales & Marketing, Professional Services, Document Review | 221 | | Research & Development and Support | 176 | | Executive, Finance, Network Admin, Other | 51 | Available Information Mitek Systems, Inc., incorporated in Delaware in 1986, is subject to SEC reporting requirements and files annual, quarterly, and current reports - Mitek Systems, Inc. is a Delaware corporation, subject to the reporting requirements of the Exchange Act, and files reports on Form 10-K, 10-Q, and 8-K[61] Risk Factors Mitek faces various risks, including business and operational risks such as reliance on a few core technologies, declining check usage, potential intellectual property infringement claims, intense competition, and challenges in integrating acquisitions - Substantially all revenue is derived from a few types of technologies, making the business vulnerable if these technologies do not maintain market acceptance[63] - The company is involved in ongoing patent infringement litigation, including lawsuits filed by USAA against its customers (Wells Fargo, PNC, BBVA), which could result in substantial costs if Mitek is obligated to indemnify customers[67][69][74][75] - Mitek identified a material weakness in its internal control over financial reporting related to the valuation of the contingent consideration liability from the ID R&D acquisition, which could impair its ability to produce timely and accurate financial statements[148][150] Risks Associated With Our Business and Operations Operational risks include dependence on a limited number of technologies, the declining use of checks, and the potential for costly intellectual property infringement litigation - The decline in check usage and the rise of alternatives like Zelle and Venmo could negatively impact Mitek's business[65] - Integration of acquired businesses (ICAR, A2iA, ID R&D) presents difficulties in managing complex systems, technology, workforces, and potential unknown liabilities, which could adversely affect financial results[93][94] - Defects or malfunctions in Mitek's complex and continually modified products could harm its reputation, sales, and profitability, potentially leading to liability[86] Risks Related to Investing in Our Common Stock Investing in Mitek's common stock carries risks such as potential volatility from the exploration of strategic alternatives, limited influence for other stockholders due to concentrated ownership, and possible stock price decline from future insider sales - Concentration of ownership among current and former directors and executive officers (approximately 3.4% as of Jan 22, **2