Mitek Systems, Inc. — Q1 FY2016 Form 10-Q
Business context and reporting period. The quarter ended December 31, 2015. Mitek develops mobile image-capture and identity-verification software for financial institutions and other enterprises. Results include IDchecker, acquired in June 2015; IDchecker contributed $1.04 million, or approximately 14%, of quarterly revenue.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $7.40 million | $5.39 million |
| Software revenue | $4.73 million | $3.75 million |
| Services revenue | $2.67 million | $1.64 million |
| Gross margin | Approximately 87.3% | Approximately 90.8% |
| Operating income (loss) | $(342,000) | $134,000 |
| Net income (loss) | $(322,000) | $146,000 |
| Diluted earnings (loss) per share | $(0.01) | $0.00 |
| Cash provided by operations | $1.02 million | $922,000 |
Revenue rose 37% year over year: software revenue increased 26%, primarily from Mobile Deposit, and services revenue increased 63%, primarily reflecting IDchecker. Cost of revenue rose faster than revenue, and operating expenses increased overall; higher selling and marketing and research and development spending, acquisition-related costs, and increased costs of revenue contributed to the operating loss. Acquisition-related expenses were $543,000. General and administrative expense declined 3%, primarily due to lower litigation expense.
At December 31, cash and cash equivalents were $4.35 million and investments were $23.25 million, for combined cash and investments of $27.60 million. Working capital was $23.14 million; current assets were $30.52 million and current liabilities $7.39 million. Total liabilities were $8.31 million. The filing reports capital-lease payments but does not provide a clear total debt balance. Operating cash flow was positive despite the net loss, supported in part by noncash compensation and acquisition-related amortization and by increased deferred revenue. Management said available cash and expected operating cash generation should meet working-capital needs for the next 12 months.
Material changes, outlook and risks
- Compared with the prior-year quarter, Mitek shifted from operating and net income to losses, while revenue grew substantially. Gross margin declined approximately 3.5 percentage points.
- The IDchecker acquisition expanded international identity-document verification capabilities. The company recorded $2.81 million of acquisition goodwill and $149,000 of acquired-intangible amortization in the quarter. The acquisition also involves contingent earnout shares; 137,306 shares were issued in January 2016 for an earlier performance period, and additional shares may be issued subject to targets through September 2016.
- No quantified revenue or earnings guidance is provided. Management’s stated liquidity outlook covers the next 12 months and is based on its current operating plan.
- Three customers generated approximately 51% of quarterly revenue (20%, 19%, and 12%); customer and channel-partner renewal timing can cause revenue fluctuations. International sales were approximately 10% of revenue, versus 2% in the prior-year quarter.
- RMII patent litigation remains stayed while Patent Office inter partes review proceedings are pending; trial had been scheduled for April 2017. Mitek is defending and providing indemnity to certain customer and distributor defendants. The company believes the claims lack merit and does not expect a material adverse effect, but litigation outcomes remain uncertain.
- Foreign-currency translation produced a $130,000 loss in the quarter following the acquisition of Dutch operations. Available-for-sale investments had a $20,000 unrealized loss; no other-than-temporary impairment was recorded. A 100-basis-point interest-rate change was not expected to materially affect investment fair value.
- The company maintains a 100% valuation allowance against net deferred tax assets, citing its history of operating losses. Management reported disclosure controls effective, but its internal-control assessment did not include IDchecker while integration continues.
Key facts for investors to verify
- Whether Mobile Deposit growth and IDchecker services revenue continue, and how much future growth is attributable to the acquisition.
- Whether expense growth moderates and gross margins recover after the quarter’s decline and operating loss.
- Customer concentration, renewal timing, and the sustainability of positive operating cash flow.
- Progress toward IDchecker earnout targets, potential share issuance and dilution, and integration of its internal controls.
- Developments in the RMII litigation and patent reviews, and any resulting indemnification exposure.
- Future realization of tax-loss carryforwards and any goodwill impairment risk; goodwill impairment testing depends partly on Mitek’s market capitalization.