Mitek Systems, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2012; filed May 15, 2012. Mitek develops and sells mobile imaging and intelligent character recognition software, including Mobile Deposit. As of March 31, 315 financial institutions had signed Mobile Deposit deployment agreements and 87 had launched; by May 11, those figures were 333 and 109.
Financial performance and position
| Metric | Three months ended Mar. 31, 2012 | Three months ended Mar. 31, 2011 | Six months ended Mar. 31, 2012 | Six months ended Mar. 31, 2011 |
|---|---|---|---|---|
| Revenue | $1.192m | $2.868m | $4.711m | $4.272m |
| Software revenue | $0.505m | $2.338m | $3.397m | $3.279m |
| Maintenance and services revenue | $0.686m | $0.530m | $1.314m | $0.993m |
| Gross margin | 74% | 91% | 87% | 89% |
| Operating income (loss) | $(2.861)m | $0.570m | $(2.837)m | $0.154m |
| Net income (loss) | $(2.847)m | $0.570m | $(2.821)m | $(0.231)m |
| Basic and diluted EPS | $(0.11) | $0.03 basic; $0.02 diluted | $(0.11) | $(0.01) |
| Operating cash flow | Not presented quarterly | $0.842m | $0.105m |
At March 31, cash and cash equivalents were $6.222m and investments were $11.214m, for combined cash and investments of $17.436m. Working capital was $15.814m; total assets were $19.865m and total liabilities $2.926m. The company had no borrowings under its $0.4m credit facility and was in compliance with its liquidity covenant. Capital lease obligations included $95,388 of equipment acquired during the six-month period.
Changes versus prior comparable periods
- Quarterly revenue fell 58%, primarily because software license sales declined 78%; management attributed the decline mainly to lower Mobile Deposit sales. Maintenance and services revenue rose 29%.
- Six-month revenue grew 10%, with software sales up 4% and maintenance and services up 32%.
- Operating costs and expenses increased to $4.052m for the quarter from $2.298m, and to $7.548m for six months from $4.118m. Higher staffing and related compensation drove much of the increase in selling and marketing, R&D, and general and administrative costs.
- Six-month net loss widened to $2.821m from $0.231m. The prior-year period included convertible-debt-related interest expense; the current period benefited from higher interest income on cash and investments.
- Cash and investments increased by $1.176m from September 30, 2011. Operating cash flow was positive, aided by lower receivables, higher deferred revenue and payables, and noncash stock compensation.
Outlook, risks and unusual items
- Management said existing cash, investments and expected operating cash generation should meet working-capital needs for the next 12 months; it provided no specific revenue or earnings guidance.
- Management identified lengthy implementation cycles, dependence on continued demand for mobile applications, competition, and the need to develop new products as business risks. Revenue can fluctuate with channel-partner license purchases and renewals; four customers or channel partners contributed 21%, 16%, 13% and 10% of six-month revenue, respectively.
- USAA sued Mitek in March 2012 over patent and confidential-information issues and sought damages and injunctive relief. Mitek filed a separate patent-infringement and contract lawsuit in April. Mitek said it intended to defend and pursue its claims and did not expect the proceedings to have a material adverse effect; no loss estimate is provided.
- The company recorded $1.153m of stock-based compensation in the first six months and reported $10.408m of unrecognized compensation expense for options and restricted stock units. A new incentive plan reserved 2 million shares, in addition to eligible shares returning from prior plans.
- A 100% valuation allowance remained against deferred tax assets. Net operating loss carryforwards may be limited by ownership changes under Section 382.
Important facts for investors to verify
- Whether Mobile Deposit sales recover after the sharp quarterly license-revenue decline, and how deployment agreements convert into launched customers and revenue.
- How concentrated revenue remains among large customers and channel partners, and the timing of their license renewals.
- Whether rising operating expenses and stock-based compensation produce sustainable growth or continue to outpace revenue.
- Developments in the USAA litigation, including potential financial exposure, and the company’s ability to fund operations while remaining within its liquidity covenant.