Mitek Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2015; comparative results are for the three and nine months ended June 30, 2014. The filing was signed August 10, 2015. Mitek develops mobile image-capture and identity-authentication software. Its June 17 acquisition of IDchecker added cloud-based identity-document verification services; acquired results are included only from June 17 through June 30.
Financial performance
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Nine months ended June 30, 2015 | Nine months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $6.44 million | $4.66 million | $17.50 million | $13.61 million |
| Operating income (loss) | $309,413 | $(1.65) million | $929,781 | $(5.34) million |
| Net income (loss) | $916,961 | $(1.63) million | $1.57 million | $(5.29) million |
| Diluted EPS | $0.03 | $(0.05) | $0.05 | $(0.17) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $4.19 million | $(2.31) million |
Quarterly revenue rose 38% year over year, led by software revenue growth of 47%, primarily from Mobile Deposit; services revenue increased 19%. Nine-month revenue increased 29% (software +31%; services +23%). Gross margin was approximately 91% for the quarter and 91% for the nine-month period, compared with approximately 87% and 88%, respectively, in the prior-year periods. Operating expenses fell year over year in selling and marketing, research and development, and general and administrative costs, partly reflecting lower personnel-related and litigation costs. These improvements moved operating results into profit.
Quarterly and nine-month net income included a $634,930 discrete tax benefit related to acquisition accounting and a corresponding release of valuation allowance. The company maintains a full valuation allowance against net deferred tax assets; therefore, reported net income should be considered in light of this tax item. Acquisition-related costs were $736,172 for the quarter and $816,291 year to date.
Cash, liquidity and balance sheet
- At June 30, 2015, cash and cash equivalents were $2.73 million; short- and long-term investments totaled $21.99 million. Cash plus investments totaled $24.72 million, versus $26.11 million at September 30, 2014.
- Working capital was $20.82 million, compared with $21.48 million at September 30, 2014. Management said available cash and expected operating cash generation should meet working-capital needs for the next 12 months.
- Nine-month operating cash flow was $4.19 million, compared with cash used of $2.31 million in the prior-year period. Investing activities used $9.33 million, including $5.43 million for the acquisition, net of cash acquired; financing activities provided $109,014. Cash declined by $5.04 million during the period.
- Total assets were $36.94 million and total liabilities $8.78 million. The filing reports capital-lease principal payments of $15,612; it does not present a clear total debt balance.
Acquisition, outlook and risks
Mitek acquired IDchecker for stated closing consideration including a $5.6 million cash payment, forgiveness of an approximately $255,000 note, and 712,790 closing shares valued at approximately $2.745 million. Up to $2 million in additional shares may be issued if specified revenue and net-income targets are met. The acquisition added $2.88 million of goodwill and $3.57 million of identifiable intangible assets; purchase-price measurements remained provisional. IDchecker contributed $120,765 of revenue and $35,093 of earnings during the included post-acquisition period.
The filing gives no numerical revenue or earnings guidance. Management cited continued mobile-banking adoption and product development as growth opportunities, while warning that competition, product concentration, pricing or demand changes, and lengthy customer implementation cycles could adversely affect results. Revenue can fluctuate with the timing of channel-partner license purchases and renewals. Three customers represented 56% of quarterly revenue; two customers represented 38% of nine-month revenue.
RMII litigation alleges infringement of four mobile-imaging patents. The company said it would vigorously defend the claims and did not expect a material adverse effect. The trial was scheduled for April 3, 2017; inter partes review proceedings had been instituted for all four patents. Mitek accepted defense and indemnity demands from bank and distributor defendants. The company also disclosed Euro exposure following the acquisition. It reported effective disclosure controls, but its controls assessment did not include IDchecker.
Important facts for investors to verify
- How much of revenue growth reflects underlying license demand versus the timing of channel-partner purchases and renewals, and how concentrated are customer revenues?
- Whether IDchecker meets the earnout targets and how final purchase-price adjustments affect goodwill, acquired intangibles and future expenses.
- The sustainability of operating profitability and cash generation, excluding the discrete acquisition-related tax benefit and acquisition costs.
- Current status, potential exposure and defense costs for the RMII litigation and related indemnity obligations.
- Whether liquidity remains adequate as acquisition integration proceeds, including any debt or lease obligations not clearly quantified in the filing.