Mitek Systems, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2014; fiscal year ended September 30. Comparisons are with the corresponding 2013 periods unless otherwise noted. Unaudited financial statements.
Business context
Mitek develops and sells mobile-imaging software, including remote check deposit, bill payment, account opening, and related applications. Sales are made directly and through channel partners, with software license revenue sensitive to large orders and renewal timing. By March 31, 2,222 financial institutions had signed Mobile Deposit agreements and 1,759 had deployed it. The company reported 19 granted patents and 23 pending applications; it launched the Mitek Developers Network in February 2014.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $4.48 million, up 39% from $3.22 million | $8.95 million, up 37% from $6.53 million |
| Software revenue | $3.12 million, up 44% | $6.29 million, up 33% |
| Maintenance and professional services | $1.36 million, up 30% | $2.65 million, up 48% |
| Gross margin | Approximately 90%, versus 87% | Approximately 89%, versus 88% |
| Operating loss | $2.21 million, versus $2.40 million | $3.69 million, versus $3.77 million |
| Net loss | $2.19 million, or $0.07 per share, versus $2.39 million, or $0.09 | $3.66 million, or $0.12 per share, versus $3.75 million, or $0.14 |
Quarterly operating expenses rose 19% to $6.70 million; six-month expenses rose 23% to $12.64 million. For the quarter, selling and marketing increased 37%, while R&D was nearly flat and general and administrative expenses rose 24%. For the six months, selling and marketing rose 42%, R&D 4%, and general and administrative 22%. Management attributed much of the selling and marketing and R&D increases to personnel and growth-related hiring, and cited higher legal fees tied to intellectual-property litigation and patent prosecution as the main driver of higher G&A. Stock-based compensation was $1.75 million for the six months, versus $1.36 million.
Cash, liquidity, and capital
- At March 31, cash and cash equivalents were $7.92 million and short-term investments were $18.32 million, totaling $26.24 million, down 10% from $29.03 million at September 30, 2013. Working capital was $23.45 million, versus $25.36 million.
- Six-month operating cash flow was a use of $2.53 million, compared with $0.78 million provided in the prior-year period. Investing used $12.89 million, principally reflecting purchases of investments; financing provided $0.05 million. Cash and cash equivalents declined $15.37 million, in part as funds were shifted into investments.
- Available-for-sale investments were short-term corporate debt securities, commercial paper, and certificates of deposit; all were classified as Level 2 fair value measurements. Management said a hypothetical 100-basis-point interest-rate change would not materially affect fair value because maturities were short.
- No material borrowing balance is identified in the supplied filing text. The filing reports capital-lease principal payments of $9,208 for the six months. Total liabilities were $7.64 million, including current and non-current deferred revenue.
Management stated that cash and expected operating cash generation under its current plan should meet working-capital needs for the next 12 months.
Changes, outlook, and risks
- Growth was driven mainly by larger Mobile Deposit software-license purchases and renewal timing, along with more maintenance contracts and professional-services work. License revenue is often recognized upfront, so quarterly results may vary with orders and renewals; channel partners are not obligated to buy minimum quantities.
- One customer contributed 37% of quarterly revenue. Two customers contributed 35% and 11% of six-month revenue. The company reported that channel-partner sales can fluctuate, while stating that it did not believe it depended on any one channel partner.
- Management emphasized competition, product concentration in mobile imaging, lengthy customer implementation cycles (typically at least three to six months), and the need to keep products secure, accurate, convenient, and current. Delays, changing market demand, or competing technology could harm revenue or margins. No quantified revenue or earnings guidance is provided.
- The company continued litigation with USAA, which asserted claims including patent-related declaratory relief and other allegations; Mitek disputed the claims and said it intended to defend itself and pursue its claims. Mitek also pursued patent-infringement claims against Top Image Systems and TIS America. Management did not expect the described proceedings, individually or collectively, to materially affect financial condition or results; legal fees increased significantly.
- The company maintained a 100% valuation allowance against deferred tax assets due to its history of losses. It reported no material change in risk factors from its 2013 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether license growth and renewal timing are sustainable, and whether reported deployments translate into recurring usage and future revenue.
- Customer and channel-partner concentration, including the 37% quarterly customer share and the timing of large license transactions.
- Cash burn and liquidity trends, including operating cash flow and management’s 12-month liquidity assessment.
- Progress, costs, and potential outcomes of the USAA and Top Image Systems litigation and related patent activity.
- Potential dilution: 30,481,168 shares were outstanding at May 1, 2014; stock options and restricted stock units were excluded from diluted loss per share as antidilutive. The 2012 Incentive Plan’s available share pool was increased to 4 million shares.