Mitek Systems, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended September 30, 2012; it does not provide standalone fourth-quarter results. Mitek develops software for mobile image capture, correction and data extraction, including Mobile Deposit and ImageNet. Mobile Deposit was the principal product: 564 financial institutions had signed deployment agreements, and 205 had launched it to customers by fiscal year-end.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $9.09 million | $10.27 million |
| Software revenue | $6.39 million | $8.12 million |
| Maintenance and professional services revenue | $2.71 million | $2.14 million |
| Gross profit and gross margin | $7.83 million; approximately 86% | $9.09 million; approximately 89% |
| Operating income (loss) | $(7.88) million | $0.26 million |
| Net income (loss) | $(7.84) million | $(0.13) million |
| Net loss per share, basic and diluted | $(0.31) | $(0.01) |
| Operating cash flow | $(1.78) million | $0.32 million |
Revenue fell 11%, primarily because software license revenue declined 21%, reflecting fewer large licenses purchased by partners and customers. Maintenance and services revenue rose 26%. Operating expenses increased sharply: research and development rose 122% to $6.66 million, selling and marketing rose 43% to $3.45 million, and general and administrative rose 63% to $5.60 million. Stock-based compensation was $2.60 million, versus $1.27 million in FY2011.
At year-end, cash and cash equivalents were $6.70 million and investments were $7.91 million, totaling $14.61 million; working capital was $11.00 million. Total assets were $16.72 million and total liabilities $3.17 million. The company had no balance outstanding on its $400,000 credit facility. Management said available resources and expected operating cash generation should cover working capital and capital expenditure needs for at least 12 months, while acknowledging possible longer-term funding needs.
Material changes, outlook and risks
- Operating cash flow shifted from a $0.32 million inflow to a $1.78 million outflow, which management attributed mainly to hiring and investment in the business. Investing activities provided $2.11 million, largely reflecting investment sales and maturities; financing activities provided $0.72 million, mainly from option exercises.
- Management expected research and development expense to increase in FY2013 as product development efforts expanded. The filing gives no specific revenue, earnings or margin guidance.
- License revenue can be uneven because it depends on partner purchases, renewals and implementation timing; customer implementations commonly take three to six months or longer. Three customers represented 42% of FY2012 revenue, although management said this reflected purchase timing rather than reliance on one channel partner. International sales were 5% of revenue, down from 12%.
- Mitek and USAA were engaged in consolidated patent, licensing and related litigation. Mitek said it considered USAA’s claims without merit and did not expect a material adverse financial effect. Mitek also sued Top Image Systems and TIS America, alleging patent infringement and seeking damages and injunctive relief. Outcomes and potential costs remain uncertain.
- Other notable risks include continuing losses and accumulated deficit of $23.46 million; competition and dependence on mobile imaging technology; execution and market-acceptance risk for new products; stock-price volatility; and potential limits on use of tax-loss carryforwards after ownership changes. The company had reserved a full valuation allowance against deferred tax assets.
- The company extended its San Diego lease through June 30, 2019, with annual base rent of approximately $471,000 under the amended terms and annual increases of about 3%. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Mobile Deposit’s 564 signed institutions convert into deployments and recurring usage, and how that translates into license and support revenue.
- Progress in diversifying revenue beyond large, timing-sensitive software licenses and reducing customer concentration.
- Whether increased R&D and commercial spending produces revenue growth, improved margins and a path toward profitability, while tracking cash burn and funding needs.
- Developments, costs and potential business impacts of the USAA and Top Image Systems litigation.
- Liquidity runway, investment portfolio composition and maturity profile, credit-facility availability, and any ownership-change effects on tax attributes.