Mitek Systems, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2013. The company develops and sells mobile imaging and intelligent character-recognition software, including Mobile Deposit, primarily to financial institutions through channel partners and direct enterprise sales.
Financial performance
| Metric | Three months ended March 31, 2013 | Prior-year quarter | Six months ended March 31, 2013 | Prior-year period |
|---|---|---|---|---|
| Revenue | $3.22 million | $1.19 million | $6.53 million | $4.71 million |
| Software revenue | $2.17 million | $0.51 million | $4.75 million | $3.40 million |
| Maintenance and services revenue | $1.05 million | $0.69 million | $1.79 million | $1.31 million |
| Gross profit and margin | $2.81 million; 87% | $0.88 million; 74% | $5.78 million; 88% | $4.10 million; 87% |
| Operating loss | $2.40 million | $2.86 million | $3.77 million | $2.84 million |
| Net loss | $2.39 million | $2.85 million | $3.75 million | $2.82 million |
| Net loss per share, basic and diluted | $0.09 | $0.11 | $0.14 | $0.11 |
Quarterly revenue rose 171%, with software-license revenue increasing 330%; management attributed the increase mainly to timing of mobile product sales and recognition of previously deferred license revenue. Six-month revenue increased 39%. Higher revenue improved gross margin, but expenses remained substantial: quarterly selling and marketing rose 99% and general and administrative rose 65%, including higher personnel, incentive compensation and legal costs. The quarterly loss narrowed year over year, while the six-month net loss widened.
Cash, liquidity and capital
- Cash and cash equivalents were $9.99 million at March 31, 2013; short- and long-term investments totaled $5.32 million. Cash plus investments was $15.31 million, versus $14.61 million at September 30, 2012.
- Working capital was $11.15 million, compared with $11.00 million at September 30, 2012. Total assets were $17.99 million and total liabilities $6.08 million.
- Operating cash flow was positive $0.78 million for the six months, versus $0.84 million in the prior-year period. Cash generation included noncash stock compensation and increases in accounts payable, other liabilities and deferred revenue.
- Investing activities provided $1.77 million, largely reflecting investment maturities and sales, partly offset by $0.75 million of property and equipment purchases. Financing activities provided $0.74 million, primarily from stock-option exercises.
- The $0.4 million bank credit facility expired January 31, 2013 with no borrowings outstanding. The filing reports no other material borrowings; capital-lease principal payments were $8,255 for the six months.
Business developments, outlook and risks
- By March 31, 889 financial institutions had signed Mobile Deposit agreements and 445 had launched the product. The company said customers included 35 of the top 50 U.S. retail banks and payment processors.
- Management said existing cash, short-term investments and expected operating cash generation should fund working-capital needs for the next 12 months. No specific revenue or earnings guidance was provided.
- Management linked growth to mobile banking adoption but highlighted competition, product concentration in mobile imaging, pricing and demand risks, and implementation cycles that commonly take three to six months or longer. License sales and renewals can make revenue timing volatile.
- Two customers represented 30% and 10% of quarterly revenue; two represented 25% and 15% of six-month revenue. Management noted channel-partner license timing as a source of fluctuations.
- Legal matters include USAA litigation involving patents, contract and other claims, and the company’s patent-infringement suit against Top Image Systems Ltd. The company said it did not expect USAA’s claims or ordinary-course matters to materially affect financial condition or results; the filing does not provide a clear quantified loss contingency.
- The company carried a full valuation allowance against deferred tax assets, citing sustained operating losses; tax-loss carryforwards began expiring in fiscal 2013. The lease amendment extends the San Diego office lease through June 30, 2019, with annual base rent of about $471,000 and a $210,000 standby letter of credit.
Investor verification priorities
- Verify whether the sharp quarterly license-revenue increase and deferred-revenue recognition are repeatable, and assess the timing of channel-partner renewals.
- Track implementation progress among the 444 signed Mobile Deposit customers not yet launched, and confirm conversion into recognized revenue.
- Monitor operating expenses, especially sales-force investment, legal fees and stock-based compensation, against revenue growth and cash generation.
- Assess customer concentration, litigation developments and any potential effect on cash, earnings or patent rights.
- Review liquidity and deferred-revenue trends, and the usability and expiry profile of tax-loss carryforwards.