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MITK > SEC Filings for MITK > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for MITEK SYSTEMS INC

Form 10-Q for MITEK SYSTEMS INC


12-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q (this "Form 10-Q"), contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or they 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 discussed in Part II, Item 1A "Risk Factors" in this Form 10-Q and in our other filings with the U.S. Securities and Exchange Commission (the "SEC"), including our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the SEC on December 12, 2013 (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


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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.

In this Form 10-Q, unless the context indicates otherwise, the terms "Mitek," "the Company," "we," "us" and "our" refer to Mitek Systems, Inc., a Delaware corporation.

Overview

Mitek Systems, Inc. is a mobile solutions provider engaged in the development, sale and service of its proprietary software solutions related to mobile imaging.

We apply our patented technology in image capture, correction and intelligent data extraction in the mobile financial and business applications markets. Our technology allows users to remotely deposit checks, pay bills, transfer credit card balances, open accounts and get insurance quotes by taking pictures of various documents with their camera-equipped smartphones and tablets instead of using the device keyboard. Our products use advanced algorithms to correct image distortion, extract relevant data, route images to their desired location and process transactions through users' financial institutions. As of March 31, 2014, we have been granted 19 patents and have an additional 23 patent applications pending.

Our Mobile Deposit® product is software that allows users to remotely deposit a check using their camera-equipped smartphone or tablet. As of March 31, 2014, 2,222 financial institutions have signed agreements to deploy Mobile Deposit®, and 1,759 of these financial institutions have deployed Mobile Deposit® to their customers, including all of the top ten U.S. retail banks and more than two-thirds of the top 50 U.S. retail banks and payment processing companies, as ranked by SNL Financial for the fourth quarter of calendar year 2013. 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 bank account and any camera-equipped smartphone or tablet, Mobile Photo Payments™, a product that allows users to pay their bills directly to the biller using their camera-equipped smartphone or tablet, Mobile Balance Transfer™, a product that allows credit card issuers to provide an offer to users and transfer an existing credit card balance by capturing an image of the user's current credit card statement, Mobile Photo Account Opening™, a product that enables users to open a checking, savings or credit card account by capturing an image of the front and back of their driver's license 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 accessed by smartphones and tablets using iOS and Android operating systems. In February 2014, we launched the Mitek Developers Network. The program will extend use of our Mobile Imaging Platform™ to developers interested in creating new mobile applications using camera-equipped smartphones and tablets.

We market and sell our mobile imaging software solutions through channel partners or directly to enterprise customers 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 brands.

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 revenue. 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® product, 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 customer experience in mobile banking.

To sustain our growth in 2014 and beyond, we believe we must continue to offer imaging technology for 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, 2014, we executed agreements indirectly through channel partners or directly with customers covering 2,222 Mobile


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Deposit® customers, 1,759 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® product, 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, but not limited to, the type and term of our license agreements, 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 each of the last several quarters, sales of licenses to one or more channel partners have comprised a significant part of our revenue each quarter. This is attributable to the timing of renewals or purchases of licenses 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-users that purchased products from the channel partner we lost. However, in that case, we or another channel partner must establish a relationship with the end-users, 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 adapting to 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, 2014 and 2013

The following table summarizes certain aspects of our results of operations for
the three months ended March 31, 2014 and 2013 (in thousands, except
percentages):



                                           March 31,          March 31,
                                             2014               2013             Change $         Change %
Revenue
Software                                  $     3,122        $     2,175        $      947               44 %
Maintenance and professional services           1,362              1,049               313               30 %

Total revenue                             $     4,484        $     3,224        $    1,260               39 %

Cost of revenue                           $       449        $       417        $       32                8 %
% of revenue                                       10 %               13 %

Selling and marketing                     $     1,948        $     1,417        $      531               37 %
% of revenue                                       43 %               44 %

Research and development                  $     1,631        $     1,641        $      (10 )              0 %
% of revenue                                       36 %               51 %

General and administrative                $     2,668        $     2,148        $      520               24 %
% of revenue                                       60 %               67 %

Other income (expense), net               $        20        $         7        $       13              185 %
% of revenue                                        0 %                0 %


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Revenue

Total revenue increased $1,259,876, or 39%, to $4,484,138 in the three months ended March 31, 2014 compared to $3,224,262 in the three months ended March 31, 2013. The increase was primarily due to an increase in sales of software licenses of $947,236, or 44%, to $3,122,114 in the three months ended March 31, 2014 compared to $2,174,878 in the three months ended March 31, 2013. The increase in software license revenue primarily relates to increases in sales of our Mobile Deposit® product due to an increase in the number of large software licenses purchased by partners and customers and the timing of license renewals in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Maintenance and professional services revenue increased $312,640, or 30%, to $1,362,024 in the three months ended March 31, 2014 compared to $1,049,384 in the three months ended March 31, 2013 primarily due to the sale of additional software license arrangements, which typically include recurring maintenance contracts, as well as an increase in professional services engagements.

Cost of Revenue

Cost of revenue includes the costs of royalties for third party products embedded in our products and personnel costs related to software support and billable professional services engagements. Cost of revenue increased $32,122, or 8%, to $449,214 in the three months ended March 31, 2014 compared to $417,092 in the three months ended March 31, 2013. The increase in cost of revenue is primarily due to the increase in license and maintenance revenue. As a percentage of revenue, cost of revenue decreased to 10% in the three months ended March 31, 2014 compared to 13% in the three months ended March 31, 2013 primarily due to a relatively lower mix of sales of products containing third-party software on which we pay royalties.

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 $530,176, or 37%, to $1,947,573 in the three months ended March 31, 2014 compared to $1,417,397 in the three months ended March 31, 2013. As a percentage of revenue, selling and marketing expenses decreased to 43% in the three months ended March 31, 2014 compared to 44% in the three months ended March 31, 2013. The increase is primarily due to higher personnel-related costs, including stock-based and other incentive compensation expense, totaling $485,876, related to an increase in headcount associated with the growth of our business.

Research and Development Expenses

Research and development expenses include payroll, employee benefits, consultant expenses and other headcount-related costs associated with software engineering, mobile imaging science and product management. These costs are incurred to develop new software products and to maintain and enhance existing products. We retain what we believe to be sufficient staff to sustain our existing product lines and develop new, feature-rich products. We also employ research personnel, whose efforts are instrumental in ensuring product development from current technologies to anticipated future generations of products within our markets.

Research and development expenses decreased $10,725, or less than 1%, to $1,630,628 in the three months ended March 31, 2014 compared to $1,641,353 in the three months ended March 31, 2013. The decrease is primarily due to a decrease in outside contract services, partially offset by higher personnel-related costs, including stock-based and other incentive compensation expense related to an increase in headcount associated with the growth of our business. As a percentage of revenue, research and development expenses decreased to 36% in the three months ended March 31, 2014 compared to 51% in the three months ended March 31, 2013, primarily due to the increase in revenue.

General and Administrative Expenses

General and administrative expenses include payroll, employee benefits, and other headcount-related costs associated with finance, administration and information technology, as well as legal, accounting and other administrative fees. General and administrative expenses increased $520,440, or 24%, to $2,668,246 in the three months ended March 31, 2014 compared to $2,147,806 in the three months ended March 31, 2013. The increase is primarily due to an increase in legal fees of $462,110 related to intellectual property litigation and patent prosecution activity. As a percentage of revenue, general and administrative expenses decreased to 60% in the three months ended March 31, 2014 compared to 67% in the three months ended March 31, 2013, primarily due to the increase in revenue.

Other Income (Expense), Net

Other income (expense), net increased $12,765, or 185%, to $19,676 for the three months ended March 31, 2014 compared to $6,911 for the three months ended March 31, 2013, primarily due to an increase in returns on our investment portfolio.


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Comparison of the Six Months Ended March 31, 2014 and 2013

The following table summarizes certain aspects of our results of operations for
the six months ended March 31, 2014 and 2013 (in thousands, except percentages):



                                           March 31,          March 31,
                                             2014               2013             Change $        Change %
Revenue
Software                                  $     6,292        $     4,746        $    1,546              33 %
Maintenance and professional services           2,655              1,788               867              48 %

Total revenue                             $     8,947        $     6,534        $    2,413              37 %

Cost of revenue                           $     1,020        $       757        $      263              35 %
% of revenue                                       11 %               12 %

Selling and marketing                     $     3,797        $     2,681        $    1,116              42 %
% of revenue                                       42 %               41 %

Research and development                  $     3,156        $     3,044        $      112               4 %
% of revenue                                       35 %               47 %

General and administrative                $     4,665        $     3,817        $      848              22 %
% of revenue                                       52 %               58 %

Other income (expense), net               $        33        $        13        $       20             149 %
% of revenue                                        0 %                0 %

Revenue

Total revenue increased $2,412,735, or 37%, to $8,946,662 in the six months ended March 31, 2014 compared to $6,533,927 in the six months ended March 31, 2013. The increase was primarily due to an increase in sales of software licenses of $1,546,394, or 33%, to $6,291,978 in the six months ended March 31, 2014 compared to $4,745,584 in the six months ended March 31, 2013. The increase in software license revenue primarily relates to increases in sales of our Mobile Deposit® product due to an increase in the number of large software licenses purchased by partners and customers and the timing of license renewals in the six months ended March 31, 2014 compared to the six months ended March 31, 2013. Maintenance and professional services revenue increased $866,341, or 48%, to $2,654,684 in the six months ended March 31, 2014 compared to $1,788,343 in the six months ended March 31, 2013 primarily due to the sale of additional software license arrangements, which typically include recurring maintenance contracts, as well as an increase in billable professional services engagements.

Cost of Revenue

Cost of revenue increased $262,823, or 35%, to $1,019,911 in the six months ended March 31, 2014 compared to $757,088 in the six months ended March 31, 2013. The increase in cost of revenue is primarily due to the increase in revenue and increased professional services activity on billable engagements. As a percentage of revenue, cost of revenue decreased to 11% in the six months ended March 31, 2014 compared to 12% in the six months ended March 31, 2013 primarily due to a relatively lower mix of sales of products containing third-party software on which we pay royalties.

Selling and Marketing Expenses

Selling and marketing expenses increased $1,116,026, or 42%, to $3,797,475 in the six months ended March 31, 2014 compared to $2,681,449 in the six months ended March 31, 2013. As a percentage of revenue, selling and marketing expenses increased to 42% in the six months ended March 31, 2014 compared to 41% in the six months ended March 31, 2013. The increase is primarily due to higher personnel-related costs, including stock-based and other incentive compensation expense, totaling $1,031,006, related to an increase in headcount associated with the growth of our business, partially offset by a decrease in outside contract services of $33,474.

Research and Development Expenses

Research and development expenses increased $112,095, or 4%, to $3,156,202 in the six months ended March 31, 2014 compared to $3,044,107 in the six months ended March 31, 2013. The increase is primarily due to higher personnel-related costs,


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including stock-based and other incentive compensation expense, totaling $499,868, related to an increase in headcount associated with the growth of our business, partially offset by a decrease in outside contract services of $400,387. As a percentage of revenue, research and development expenses decreased to 35% in the six months ended March 31, 2014 compared to 47% in the six months ended March 31, 2013, primarily due to the increase in revenue.

General and Administrative Expenses

General and administrative expenses increased $848,710, or 22%, to $4,665,445 in the six months ended March 31, 2014 compared to $3,816,735 in the six months ended March 31, 2013. The increase is primarily due to an increase in legal fees of $731,883 related to intellectual property litigation and patent prosecution activity. As a percentage of revenue, general and administrative expenses decreased to 52% in the six months ended March 31, 2014 compared to 58% in the six months ended March 31, 2013, primarily due to the increase in revenue.

Other Income (Expense), Net

Other income (expense), net increased $19,850, or 149%, to $33,185 for the six months ended March 31, 2014 compared to $13,335 for the six months ended March 31, 2013, primarily due to an increase in returns on our investment portfolio.

Liquidity and Capital Resources

On March 31, 2014, we had $26,244,964 in cash and cash equivalents and investments compared to $29,025,328 on September 30, 2013, a decrease of $2,780,364, or 10%. The decrease in cash and cash equivalents and investments was primarily due to an increase in cash used in operating activities.

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities during the six months ended March 31, 2014 was $2,531,465 and resulted primarily from hiring additional personnel and making other investments associated with the growth of our business. In addition to the net loss, cash used in operating activities included a decrease in working capital balances of $1,043,224, primarily due to cash used to purchase available-for-sale marketable securities. The primary non-cash adjustments to operating activities were stock-based compensation expense, depreciation and amortization, and accretion and amortization on debt securities totaling $1,745,121, $236,518, and $195,937, respectively.

Net cash provided by operating activities during the six months ended March 31, 2013 was $781,942. Cash provided by operating activities increased due to non-cash adjustments to operating activities for stock-based compensation expense, depreciation and amortization, and accretion and amortization on debt securities totaling $1,360,133, $117,147, and $98,822, respectively. Cash provided by operating activities also increased due to increases in accounts payable of $1,064,144, other liabilities of $854,702 and deferred revenue of $804,912, partially offset by an increase in accounts receivable of $307,385, all associated with the growth of our business.

Net Cash (Used In) Provided by Investing Activities

Net cash used in investing activities was $12,892,094 during the six months ended March 31, 2014, which consisted of $17,651,627 related to the purchase of investments and $114,091 related to the purchase of property and equipment, partially offset by cash provided by the sales and maturities of investments of $4,873,624.

Net cash provided by investing activities was $1,769,987 during the six months ended March 31, 2013, which consisted of $3,935,734 related to the sales and maturities of investments, partially offset by purchases of investments of $1,417,086 and $748,661 related to the purchase of property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $49,626 during the six months ended March 31, 2014, which included net proceeds of $58,834 from the exercise of stock options and settlement of restricted stock units, partially offset by principal payments on capital lease obligations of $9,208.

Net cash provided by financing activities was $737,230 during the six months ended March 31, 2013, which included net proceeds of $745,485 from the exercise of stock options, partially offset by principal payments on capital lease obligations of $8,255.


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Other Liquidity Matters

On March 31, 2014, we had investments of $18,324,441, 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, 2014 and September 30, 2013, all of our available-for-sale securities were classified as current.

We had working capital of $23,454,886 at March 31, 2014 compared to $25,363,197 at September 30, 2013.

Based on our current operating plan, we believe the current cash balance and . . .

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