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| MITK > SEC Filings for MITK > Form 10-Q on 6-Feb-2013 | All Recent SEC Filings |
6-Feb-2013
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 apply our patented technology in image capture, correction and intelligent data extraction in the mobile financial and business applications market. Our technology for extracting data from any image taken using camera-equipped smartphones and tablets enables the development of consumer-friendly software products that use the camera as a simple mechanism to enter data and complete transactions. Users take a picture of the document and our products correct image distortion, extract relevant data, route images to their desired location and process transactions through users' financial institutions.
Our Mobile Deposit® product is software that allows users to remotely deposit a check using their camera-equipped smartphone or tablet. As of December 31, 2012, 708 financial institutions, including 32 of the top 50 U.S. retail banks and payment processing companies, have signed agreements to deploy Mobile Deposit®. Of the 708 financial institutions, 318 have deployed Mobile Deposit® to their customers. Other mobile imaging software solutions we offer include Mobile Photo Bill Pay™, a mobile bill payment product that allows users to pay their bills using their camera-equipped smartphone or tablet, Mobile Balance Transfer™, a product that allows credit card issuers to provide an offer to users and allows such users to transfer an existing credit card balance by capturing an image of the user's current credit card statement, Mobile Enrollment™, a product that enables users to enroll their checking account as a funding source for mobile payments by taking a photo of a blank check with their camera-equipped smartphone or tablet, and Mobile Photo Quoting™, a product that enables users to receive insurance quotes by using their camera-equipped smartphone or tablet to take a picture of their driver's license and insurance card. Our mobile imaging software solutions can be deployed on all major smartphone and tablet operating systems.
We market and sell our mobile imaging software solutions through channel partners or directly to enterprise customers and end-users that typically purchase licenses based on the number of transactions or subscribers that use our mobile software. Our mobile imaging software solutions are often embedded in other mobile banking or enterprise applications developed by banks, insurance companies or their partners, and marketed under their own proprietary brand.
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 2013 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 December 31, 2012, we executed agreements indirectly through channel partners or directly with customers covering 708 Mobile Deposit® customers, 318 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 such licenses 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 end-users. 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 December 31, 2012 and 2011
Revenue
Total revenue decreased $209,820, or 6%, to $3,309,664 for the three months ended December 31, 2012 compared to $3,519,484 for the three months ended December 31, 2011. The decrease is primarily due to a decrease in sales of software licenses of $321,320, or 11%, to $2,570,706 for the three months ended December 31, 2012 compared to $2,892,026 for the three months ended December 31, 2011. The decrease in software license revenue primarily relates to the timing of sales of our mobile imaging products as well as the deferral of revenues from certain current year licenses that are expected to be recognized in future periods. Sales of maintenance and professional services increased $111,500, or 18%, to $738,958 for the three months ended December 31, 2012 compared to $627,458 for the three months ended December 31, 2011 primarily due to an increase in maintenance agreements and revenue related thereto.
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 $37,727, or 12%, to $339,996 for the three months ended December 31, 2012 compared to $302,269 for the three months ended December 31, 2011. The increase is primarily due to a relatively higher mix of sales of products containing third-party software on which we pay royalties, partially offset by decreased professional services activity on billable engagements. As a percentage of revenue, cost of revenue increased to 10% for the three months ended December 31, 2012 compared to 9% for the three months ended December 31, 2011, primarily due to the decrease in revenue.
Selling and Marketing Expenses
Selling and marketing expenses include payroll, employee benefits and other headcount-related costs associated with sales and marketing personnel, non-billable time for professional services personnel and advertising, promotions, trade shows, seminars and other programs. Selling and marketing expenses increased $413,124 or 49%, to $1,264,052 for the three months ended December 31, 2012 compared to $850,928 for the three months ended December 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expense, related to an increase in headcount associated with establishing our direct sales force. As a percentage of revenue, selling and marketing expenses increased to 38% for the three months ended December 31, 2012 compared to 24% for the three months ended December 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 management 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 product management and support, as well as 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 $223,647, or 19%, to $1,402,753 for the three months ended December 31, 2012 compared to $1,179,106 for the three months ended December 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expense, related to an increase in headcount associated with the growth of our business, outside services and recruitment expenses. As a percentage of revenue, research and development expenses increased to 42% for the three months ended December 31, 2012 compared to 34% for the three months ended December 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 $505,701, or 43%, to $1,668,929 for the three months ended December 31, 2012 compared to $1,163,228 for the three months ended December 31, 2011. The increase is primarily due to increased personnel-related costs, including stock-based and other incentive compensation expenses, an increase in headcount associated with the growth of our business and increased legal expenses. As a percentage of revenue, general and administrative expenses increased to 50% for the three months ended December 31, 2012 compared to 33% for the three months ended December 31, 2011, primarily due to the increases in personnel-related costs and legal fees.
Other Income (Expense), Net
Interest and other expense, net was $43,693 for the three months ended December 31, 2012 compared to $67,065 for the three months ended December 31, 2011, an increase of $23,372 primarily due to a decrease in amortization expense related to our investment portfolio. Interest income was $50,117 for the three months ended December 31, 2012 compared to $74,024 for the three months ended December 31, 2011, a decrease of $23,907 due to a decrease in our investment portfolio.
Liquidity and Capital Resources
On December 31, 2012, we had $15,084,109 in cash and cash equivalents and short-term and long-term investments compared to $14,607,317 on September 30, 2012, an increase of $476,792. 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 three months ended December 31, 2012 was $796,026. 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 $656,534, $97,751, and $48,616, respectively. Cash provided by operating activities also increased due to increases in deferred revenue of $807,496, other liabilities of $485,802 and accounts payable of $443,948, partially offset by a decrease in accounts receivable of $524,141, all associated with the growth of our business.
Net cash provided by operating activities during the three months ended December 31, 2011 was $1,160,628. Cash provided by operating activities increased due to net income totaling $26,275 for the three months ended December 31, 2011 as well as non-cash adjustments to operating activities for stock-based compensation expense and depreciation and amortization totaling $501,697 and $59,997, respectively. Cash provided by operating activities also increased due to an increase of $359,464 in deferred revenue, an increase of $183,315 in accounts payable and an increase of $148,869 in accrued payroll and related taxes, all associated with the growth of our business. These changes in cash provided by operating activities were partially offset by an increase in accounts receivable of $113,364 associated with increased sales and the timing of customer billings and receipt of payments.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $2,061,657 during the three months ended December 31, 2012, which consisted of $2,685,734 related to the sales and maturities of investments, partially offset by purchases of investments of $308,956, and $315,121 related to the purchase of property and equipment.
Net cash used in investing activities was $262,572 during the three months ended December 31, 2011, which consisted of $219,268 related to the purchase of investments and $43,304 related to the purchase of property and equipment.
Net cash provided by financing activities
Net cash provided by financing activities was $33,177 during the three months ended December 31, 2012, which included net proceeds of $37,237 from the exercise of stock options partially offset by principal payments on capital lease obligations of $4,060.
Net cash provided by financing activities was $157,694 during the three months ended December 31, 2011, which included net proceeds of $161,130 from the exercise of stock options partially offset by principal payments on capital lease obligations of $3,436.
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 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 December 31, 2012. We had no amounts outstanding under this credit facility as of December 31, 2012.
Other Liquidity Matters
On December 31, 2012, we had investments of $5,491,159, 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 December 31, 2012, we had $4,663,159 of our available-for-sale securities classified as current and $828,000 classified as long-term. At September 30, 2012, we had $5,819,537 of our available-for-sale securities classified as current and $2,085,690 classified as long-term.
We had working capital of $11,789,129 at December 31, 2012 compared to $11,001,447 at September 30, 2012.
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;
• The fees are fixed or determinable;
• 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 the past. Since our revenue recognition policy requires customers to be deemed creditworthy, our accounts receivable are based on customers whose payment is reasonably assured. Our accounts receivable are derived from sales to a wide variety of customers. We do not believe a change in liquidity of any one customer or our inability to collect from any one customer would have a material adverse impact on our financial position.
Investments
We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:
• Level 1-Quoted prices in active markets for identical assets or liabilities;
• Level 2-Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
• Level 3-Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In using this fair value hierarchy, management may be required to make assumptions about pricing by market participants and assumptions about risk, specifically when using unobservable inputs to determine fair value. These assumptions are judgmental in nature and may significantly affect our results of operations.
Fair Value of Equity Instruments
The valuation of certain items, including valuation of warrants, the beneficial conversion feature related to convertible debt and compensation expense related to stock options granted, involve significant estimates based on underlying assumptions made by management. The valuation of warrants and stock options are based upon a Black-Scholes valuation model, which involve estimates of stock volatility, expected life of the instruments and other assumptions.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We maintain a valuation allowance against the deferred tax asset due to uncertainty regarding the future realization based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. Until such time as we can demonstrate that we will no longer incur losses or if we are unable to generate sufficient future taxable income, we could be required to maintain the valuation allowance against our deferred tax assets.
Software Development Costs
Research and development costs are charged to expense as incurred. However, the costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are capitalized when technological feasibility has been established. Software development costs consist primarily of compensation of development personnel, related overhead incurred to develop new products and . . .
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