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| MITK > SEC Filings for MITK > Form 10-Q on 15-May-2012 | All Recent SEC Filings |
15-May-2012
Quarterly Report
This Form 10-Q, contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in Part I, Item 2-"Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A-"Risk Factors," but appear throughout this Form 10-Q. Forward-looking statements may include, but are not limited to, statements relating to our outlook or expectations for earnings, revenues, expenses, asset quality, volatility of our common stock, financial condition or other future financial or business performance, strategies, expectations, or business prospects, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition.
Forward-looking statements can be identified by the use of words such as "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions. Forward-looking statements reflect our judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Form 10-Q and in our other SEC filings, including the Form 10-K. Additionally, there may be other factors that could preclude us from realizing the predictions made in the forward-looking statements. We operate in a continually changing business environment and new factors emerge from time to time. We cannot predict such factors or assess the impact, if any, of such factors on our financial position or results of operations. All forward-looking statements included in this Form 10-Q speak only as of the date of this Form 10-Q and you are cautioned not to place undue reliance on any such forward-looking statements. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
Overview
Mitek Systems, Inc. is engaged in the development, sale and service of its proprietary software solutions related to mobile imaging solutions and intelligent character recognition software.
We have historically provided financial institutions with advanced imaging and analytics software to authenticate and extract data from imaged checks and other documents. Currently, we are applying our patented technology in image correction and intelligent data extraction to enter the market for mobile financial and business applications. Our technology for extracting data from any photo taken using camera-equipped smartphones and tablets enables the development of consumer friendly applications that use the camera as a keyboard to enter data and complete transactions. Users take a picture of the document and our products do the rest-correcting image distortion, extracting relevant data, routing images to their desired location and processing transactions through users' financial institutions.
We have developed and deployed Mobile Deposit®, a software application that allows users to remotely deposit a check using their camera-equipped smartphone or tablet, Mobile Imaging Platform™, an application that allows users to capture, extract and route information contained in documents, including Mobile Photo Quoting™, an application that allows a user to request and receive an insurance quote using their camera-equipped smartphone, Mobile Receipt™, a receipt archival and expense report application and Mobile Phax®, a mobile document faxing application using our proprietary technology. As of March 31, 2012, 315 financial institutions, including 8 of the top 10 banks, have signed agreements to deploy Mobile Deposit®, 87 of whom have completed implementation of and launched Mobile Deposit® to their customers. As of May 11, 2012, the number of financial institutions that have signed agreements to deploy Mobile Deposit® increased to 333 and 109 of those have completed implementation of and launched the product. Other mobile applications under development include Mobile Photo Bill Pay™, a mobile bill paying application that allows users to pay their bills using their camera-equipped smartphone or tablet, Mobile Balance Transfer ™, a credit card shopping application that allows a user to transfer an existing balance by capturing an image of their current statement and Mobile ACH Enrollment™, an application that enables consumers to enroll their checking accounts as funding sources for mobile payments by taking photos of blank checks with their camera-equipped smartphone or tablet. Our mobile applications support all major smartphone operating systems, including the iPhone ®, Android® and Blackberry®.
We market and sell our mobile solutions through channel partners or directly to enterprise customers and end-users that typically purchase term licenses based on the number of transactions or subscribers that use our mobile applications. Our mobile solutions are often embedded in other mobile banking or enterprise applications developed by banks or their partners and marketed
under their own proprietary brands. During the past year, we began developing new solutions for the insurance market and leveraged our platform to create custom mobile imaging solutions. All of our mobile imaging solutions use our proprietary technology to capture and read data from photos of documents taken using camera-equipped smartphones or tablets.
Market Opportunities, Challenges and Risks
The increase in the acceptance of mobile banking by financial institutions and their customers has helped drive our recent growth. In the past year, we experienced a significant increase in the number of financial institutions that have integrated and launched our mobile applications, particularly our Mobile Deposit® application, as part of their offering of mobile banking choices for their customers. We believe that financial institutions see our patented solutions as a way to provide an enhanced retail customer experience in mobile banking.
To sustain our growth in 2012 and beyond, we must continue to offer mobile applications that address a growing market for mobile banking and mobile imaging solutions sold into other vertical markets. Factors adversely affecting the pricing of or demand for our mobile applications, such as competition from other products or technologies, any decline in the demand for mobile applications, or negative publicity or obsolescence of the software environments in which our products operate, could result in lower revenues or gross margins. Further, because most of our revenues are from a single type of technology, our product concentration may make us especially vulnerable to market demand and competition from other technologies, which could reduce our revenues.
The implementation cycles for our software and services by our channel partners and customers can be lengthy, often a minimum of three to six months and sometimes longer for larger customers and require significant investments. For example, as of March 31, 2012, we executed agreements indirectly through channel partners or directly with customers covering 315 Mobile Deposit® customers, 87 of whom have completed implementation and launched Mobile Deposit® to their customers. If implementation of our products by our channel partners and customers is delayed or otherwise not completed, our business, financial condition and results of operations may be adversely affected.
We derive revenue predominately from the sale of licenses to use the products covered by our patented technologies, such as our Mobile Deposit® application, and to a lesser extent by providing maintenance and professional services for the products we offer. The revenue we derive from the sale of licenses to use the products covered by our patented technologies is primarily derived from the sale to our channel partners of licenses to sell the applications we offer. Revenues related to most of our licenses for mobile products are required to be recognized up front upon satisfaction of all applicable revenue recognition criteria. The recognition of future revenues from these licenses is dependent upon a number of factors, including the timing of implementation of our products by our channel partners and customers and the timing of any re-orders of additional licenses and/or license renewals by our channel partners and customers.
During the last few quarters, sales of licenses to one or two channel partners have comprised a significant part of our revenue each quarter. This is attributable to the timing of when a particular channel partner renews or purchases a license from us and does not represent a dependence on any channel partner. If we were to lose a channel partner relationship, we do not believe such a loss would adversely affect our operations because either we or another channel partner could sell our products to the end-user that purchased from the channel partner we lost. However, in that case, we or other channel partners must establish a relationship with the end-user, which could take time to develop, if it develops at all.
We have numerous competitors in the mobile payments industry, many of which have greater financial, technical, marketing and other resources than we do. However, we believe our patented imaging and analytics technology, our growing portfolio of products for the financial services industry and our position as a pure play mobile-payments company provides us with a competitive advantage. To remain competitive, we must be able to continue to offer products that are attractive to the ultimate end-user and that are secure, accurate and convenient. We intend to continue to further strengthen our portfolio of products through research and development to help us remain competitive. We may have difficulty meeting changing market conditions and developing enhancements to our software applications on a timely basis in order to maintain our competitive advantage. Our continued growth will ultimately depend upon our ability to develop additional applications and attract strategic alliances to sell such technologies.
Results of Operations
Comparison of the Three Months Ended March 31, 2012 and 2011
Revenue
Total revenue decreased $1,676,620, or 58%, to $1,191,737 for the three months ended March 31, 2012 compared to $2,868,357 for the three months ended March 31, 2011. The decrease is primarily due to a decrease in sales of software licenses of $1,832,731, or 78%, to $505,448 for the three months ended March 31, 2012 compared to $2,338,179 for the three months ended March 31, 2011. The decrease in software license sales was driven primarily by a decrease in sales of our Mobile Deposit ® product. Sales of maintenance and professional services increased $156,111, or 29%, to $686,289 for the three months ended March 31, 2012 compared to $530,178 for the three months ended March 31, 2011 primarily due to an increase in maintenance contracts.
Cost of Revenue
Cost of revenue includes the costs of royalties for third party products embedded in our products, personnel costs related to software support and billable professional services engagements, amortization of capitalized software development costs, cost of reproduction of compact discs and other media devices, and shipping costs. Cost of revenue increased $53,663, or 21%, to $309,737 for the three months ended March 31, 2012 compared to $256,074 for the three months ended March 31, 2011. The increase is primarily due to an increase in personnel costs related to software support due to additional headcount and increased professional services activity on billable engagements. As a percentage of revenue, cost of revenue increased to 26% for the three months ended March 31, 2012 compared to 9% for the three months ended March 31, 2011, primarily due to the decrease revenue.
Selling and Marketing Expenses
Selling and marketing expenses include payroll, employee benefits and other headcount-related costs associated with sales and marketing personnel and advertising, promotions, trade shows, seminars and other programs. Selling and marketing expenses increased $147,141, or 26%, to $712,037 for the three months ended March 31, 2012 compared to $564,896 for the three months ended March 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expense, totaling approximately $85,000 related to an increase in headcount associated with the growth of our business, as well as higher travel and outside services expenses totaling approximately $45,000. As a percentage of revenue, selling and marketing expenses increased to 60% for the three months ended March 31, 2012 compared to 20% for the three months ended March 31, 2011.
Research and Development Expenses
Research and development expenses include payroll, employee benefits, third-party consultant expenses and other headcount-related costs associated with software engineering, research and development and product development and support. These costs are incurred to develop new products and to maintain and enhance existing products. We retain what we believe to be sufficient staff to sustain our existing product lines, including development of new, more feature-rich versions of our existing product, as we determine the marketplace demands. We also employ research personnel, whose efforts are instrumental in ensuring product paths from current technologies to anticipated future generations of products within our area of business.
Research and development expenses increased $1,087,697, or 169%, to $1,730,679 for the three months ended March 31, 2012 compared to $642,982 for the three months ended March 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expense, totaling approximately $838,000 related to an increase in headcount associated with the growth of our business. As a percentage of revenue, research and development expenses increased to 145% for the three months ended March 31, 2012 compared to 22% for the three months ended March 31, 2011.
General and Administrative Expenses
General and administrative expenses include payroll, employee benefits and other headcount-related costs associated with finance, facilities, legal, accounting and other administrative fees. General and administrative expenses increased $465,760, or 56%, to $1,299,953 for the three months ended March 31, 2012 compared to $834,193 for the three months ended March 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expenses, totaling approximately $381,000 related to an increase in headcount associated with the growth of our business. As a percentage of revenue, general and administrative expenses increased to 109% for the three months ended March 31, 2012 compared to 29% for the three months ended March 31, 2011.
Other Income (Expense), Net
Interest and other expense, net was $62,638 for the three months ended March 31, 2012 compared to $169 for the three months ended March 31, 2011, an increase of $62,469 primarily due to an increase in amortization expense related to investment returns. Interest income was $72,114 for the three months ended March 31, 2012 compared to $696 for the three months ended March 31, 2011, an increase of $71,418 due to higher cash balances and related investment returns for the three months ended March 31, 2012.
Comparison of the Six Months Ended March 31, 2012 and 2011
Revenue
Total revenue increased $439,302, or 10%, to $4,711,221 for the six months ended March 31, 2012 compared to $4,271,919 for the six months ended March 31, 2011. Sales of software licenses increased $118,607 or 4% to $3,397,474 in the current six-month
period, compared to $3,278,867 in the same period of last fiscal year. Sales of maintenance and professional services increased $320,695, or 32%, to $1,313,747 for the six months ended March 31, 2012 compared to $993,052 for the six months ended March 31, 2011 primarily due to an increase in maintenance contracts and other professional services.
Cost of Revenue
Cost of revenue increased $148,232, or 32%, to $612,005 for the six months ended March 31, 2012 compared to $463,773 for the six months ended March 31, 2011. The increase is primarily due to an increase in personnel costs related to software support due to additional headcount and increased professional services activity on billable engagements. As a percentage of revenue, cost of revenue increased to 13% for the six months ended March 31, 2012 compared to 11% for the six months ended March 31, 2011 primarily due to a decrease in revenue in the three-month period ended March 31, 2012.
Selling and Marketing Expenses
Selling and marketing expenses increased $598,758, or 62%, to $1,562,966 for the six months ended March 31, 2012 compared to $964,208 for the six months ended March 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expense, totaling approximately $357,000 related to an increase in headcount associated with the growth of our business, as well as higher marketing program expenses totaling approximately $118,000. As a percentage of revenue, selling and marketing expenses increased to 33% for the six months ended March 31, 2012 compared to 23% for the six months ended March 31, 2011.
Research and Development Expenses
Research and development expenses increased $1,677,466, or 136%, to $2,909,785 for the six months ended March 31, 2012 compared to $1,232,319 for the six months ended March 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expense, totaling approximately $1,312,000 related to an increase in headcount associated with the growth of our business. As a percentage of revenue, research and development expenses increased to 62% for the six months ended March 31, 2012 compared to 29% for the six months ended March 31, 2011.
General and Administrative Expenses
General and administrative expenses increased $1,005,745, or 69%, to $2,463,182 for the six months ended March 31, 2012 compared to $1,457,437 for the six months ended March 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expenses, totaling approximately $649,000 related to an increase in headcount associated with the growth of our business, as well as higher legal fees totaling approximately $202,000. As a percentage of revenue, general and administrative expenses increased to 52% for the six months ended March 31, 2012 compared to 34% for the six months ended March 31, 2011.
Other Income (Expense), Net
Interest and other expense, net was $129,703 for the six months ended March 31, 2012 compared to $384,417 for the six months ended March 31, 2011, a decrease of $254,714, or 66%. During the six months ended March 31, 2011, we incurred expenses associated with the accretion of the discount on the convertible debentures issued in December 2009 and accrued interest on the principal amount of those convertible debentures, including the remaining unamortized discount of approximately $320,000 related to the beneficial conversion feature at the time of the conversion of the debentures in December 2010, which expenses were not present in the six months ended March 31, 2012. This decrease was partially offset by an increase in amortization expense related to investment returns in the six months ended March 31, 2012. Interest income was $146,138 for the six months ended March 31, 2012 compared to $1,939 for the six months ended March 31, 2011, an increase of $144,199 due to higher cash balances and related investment returns for the six months ended March 31, 2012.
Liquidity and Capital Resources
On March 31, 2012, we had $17,436,242 in cash and cash equivalents and short-term and long-term investments compared to $16,260,584 on September 30, 2011, an increase of $1,175,658. The increase in cash and cash equivalents and short-term and long-term investments was primarily due to an increase in cash provided by operating activities.
Net cash provided by operating activities
Net cash provided by operating activities during the six months ended March 31, 2012 was $842,353. Cash provided by operating activities increased due to non-cash adjustments to operating activities for stock-based compensation expense, accretion and amortization on debt securities, and depreciation and amortization totaling $1,152,884, $124,440, and $123,117, respectively. Cash provided by operating activities also increased due to a decrease in accounts receivable of $1,499,537, an increase in deferred revenue of $673,519 and an increase in accounts payable of $402,149, all associated with the growth of our business.
Net cash used in investing activities
Net cash used in investing activities was $810,908 during the six months ended March 31, 2012, which consisted of $8,158,866 related to the purchase of investments, partially offset by sales and maturities of investments of $7,435,005, and $87,047 related to the purchase of property and equipment.
Net cash provided by financing activities
Net cash provided by financing activities was $534,743 during the six months ended March 31, 2012, which included net proceeds of $541,917 from the exercise of stock options partially offset by principal payments on capital lease obligations of $7,174.
Credit Facility
In January 2011, we entered into a loan and security agreement with our primary operating bank. The loan agreement permits us to borrow, repay and re-borrow, from time to time until January 31, 2013, up to $400,000 subject to the terms and conditions of the agreement. Our obligations under the loan agreement are secured by a security interest in our equipment and other personal property. Interest on the credit facility accrues at an annual rate equal to one percentage point above the Prime Rate, fixed on the date of each advance. Interest on the outstanding amount under the loan agreement is payable monthly. The loan agreement contains customary covenants for credit facilities of this type, including limitations on the disposition of assets, mergers and reorganizations. We are also obligated to meet certain financial covenants under the loan agreement, including minimum liquidity, for which we were in compliance as of March 31, 2012. We had no amounts outstanding under this credit facility as of March 31, 2012.
Other Liquidity Matters
On March 31, 2012, we had investments of $11,214,338, designated as available-for-sale marketable securities, which consisted of commercial paper and corporate issuances, carried at fair value as determined by quoted market prices for identical or similar assets, with unrealized gains and losses, net of tax, and reported as a separate component of stockholders' equity. All securities whose maturity or sale is expected within one year are classified as "current" on the balance sheet. All other securities are classified as "long-term" on the balance sheet. At March 31, 2012, we had $10,395,561 of our available-for-sale securities classified as current and $818,777 classified as long-term. At September 30, 2011, we had $10,187,638 of our available-for-sale securities classified as current and $417,230 classified as long-term.
We had working capital of $15,813,674 at March 31, 2012 compared to $17,343,700 at September 30, 2011.
Based on our current operating plan, we believe the current cash and cash equivalents, short-term investments and cash expected to be generated from operations will be adequate to satisfy our working capital needs for the next 12 months.
Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, stockholders' equity, revenue, expenses and related disclosure of contingent assets and liabilities. Management regularly evaluates its estimates and assumptions. These estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, and form the basis for making management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Actual results could vary from those estimates under different assumptions or conditions. Our critical accounting policies include revenue recognition, allowance for accounts receivable, investments, fair value of equity instruments, accounting for income taxes and capitalized software development costs.
Revenue Recognition
We enter into contractual arrangements with integrators, resellers and end-users that may include licensing of our software products, product support and maintenance services, consulting services, or various combinations thereof, including the sale of such products or services separately. Our accounting policies regarding the recognition of revenue for these contractual arrangements is fully described in Note 1 to our financial statements included in this Form 10-Q.
We consider many factors when applying GAAP to revenue recognition. These factors include, but are not limited to, whether:
• Persuasive evidence of an arrangement exists;
• Delivery of the product or performance of the service has occurred;
• Collection of the contractual fee is probable; and
• Vendor-specific objective evidence of the fair value of undelivered elements or other appropriate method of revenue allocation exists.
Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for any particular contract with a customer. Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards. Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse effect on our future revenues and operating results.
Accounts Receivable
We constantly monitor collections from our customers and maintain a provision for estimated credit losses that is based on historical experience and on specific customer collection issues. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in . . .
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