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MITK > SEC Filings for MITK > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for MITEK SYSTEMS INC

Form 10-Q for MITEK SYSTEMS INC


8-Aug-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.


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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 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 June 30, 2014, we have been granted 20 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 June 30, 2014, 2,571 financial institutions have signed agreements to deploy Mobile Deposit® and 2,143 of these financial institutions have deployed Mobile Deposit® to their customers, including all of the top ten, and nearly all of the top 50, U.S. retail banks, as ranked by SNL Financial for the first quarter of calendar year 2014. 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.


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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 June 30, 2014, we executed agreements indirectly through channel partners or directly with customers covering 2,571 Mobile Deposit® customers, 2,143 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 June 30, 2014 and 2013

The following table summarizes certain aspects of our results of operations for
the three months ended June 30, 2014 and 2013 (in thousands, except
percentages):



                                           June 30,          June 30,
                                             2014              2013            Change $         Change %
Revenue
Software                                  $    3,177        $    2,694        $      483               18 %
Maintenance and professional services          1,483             1,188               295               25 %

Total revenue                             $    4,660        $    3,882        $      778               20 %

Cost of revenue                           $      608        $      469        $      139               30 %
% of revenue                                      13 %              12 %

Selling and marketing                     $    1,810        $    1,462        $      348               24 %
% of revenue                                      39 %              38 %

Research and development                  $    1,590        $    1,976        $     (386 )            -20 %
% of revenue                                      34 %              51 %

General and administrative                $    2,303        $    2,032        $      271               13 %
% of revenue                                      49 %              52 %

Other income (expense), net               $       18        $        6        $       12              200 %
% of revenue                                       0 %               0 %


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Revenue

Total revenue increased $777,697, or 20%, to $4,659,724 in the three months ended June 30, 2014 compared to $3,882,027 in the three months ended June 30, 2013. The increase was primarily due to an increase in sales of software licenses of $482,466, or 18%, to $3,176,686 in the three months ended June 30, 2014 compared to $2,694,220 in the three months ended June 30, 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 June 30, 2014 compared to the three months ended June 30, 2013. Maintenance and professional services revenue increased $295,231, or 25%, to $1,483,038 in the three months ended June 30, 2014 compared to $1,187,807 in the three months ended June 30, 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 $138,141, or 29%, to $607,586 in the three months ended June 30, 2014 compared to $469,445 in the three months ended June 30, 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 increased to 13% in the three months ended June 30, 2014 compared to 12% in the three months ended June 30, 2013 primarily due to a relatively higher 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 $348,187, or 24%, to $1,810,084 in the three months ended June 30, 2014 compared to $1,461,897 in the three months ended June 30, 2013. The increase is primarily due to 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, selling and marketing expenses increased to 39% in the three months ended June 30, 2014 compared to 38% in the three months ended June 30, 2013, primarily due to higher personnel-related costs.

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 $386,499, or 20%, to $1,589,521 in the three months ended June 30, 2014 compared to $1,976,020 in the three months ended June 30, 2013. The decrease is primarily due to a decrease in outside contract services and decreased recruitment costs. As a percentage of revenue, research and development expenses decreased to 34% in the three months ended June 30, 2014 compared to 51% in the three months ended June 30, 2013, primarily due to decreased outside contract services.

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 $270,657, or 13%, to $2,302,973 in the three months ended June 30, 2014 compared to $2,032,316 in the three months ended June 30, 2013. The increase is primarily due to an increase in legal fees related to intellectual property litigation and higher personnel-related costs, including stock-based and other incentive compensation expense. As a percentage of revenue, general and administrative expenses decreased to 49% in the three months ended June 30, 2014 compared to 52% in the three months ended June 30, 2013, primarily due to the increase in revenue.

Other Income (Expense), Net

Other income (expense), net increased $12,342, or 221%, to $17,934 for the three months ended June 30, 2014 compared to $5,592 for the three months ended June 30, 2013, primarily due to an increase in returns on our investment portfolio.


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Comparison of the Nine Months Ended June 30, 2014 and 2013

The following table summarizes certain aspects of our results of operations for
the nine months ended June 30, 2014 and 2013 (in thousands, except percentages):



                                            June 30,         June 30,
                                              2014             2013            Change $         Change %
Revenue
Software                                    $   9,469        $   7,440        $    2,029               27 %
Maintenance and professional services           4,138            2,976             1,162               39 %

Total revenue                               $  13,606        $  10,416        $    3,190               31 %

Cost of revenue                             $   1,627        $   1,227        $      400               33 %
% of revenue                                       12 %             12 %

Selling and marketing                       $   5,608        $   4,143        $    1,465               35 %
% of revenue                                       41 %             40 %

Research and development                    $   4,746        $   5,020        $     (274 )             -5 %
% of revenue                                       35 %             48 %

General and administrative                  $   6,968        $   5,849        $    1,119               19 %
% of revenue                                       51 %             56 %

Other income (expense), net                 $      51        $      19        $       32              168 %
% of revenue                                        0 %              0 %

Revenue

Total revenue increased $3,190,432, or 31%, to $13,606,386 in the nine months ended June 30, 2014 compared to $10,415,954 in the nine months ended June 30, 2013. The increase was primarily due to an increase in sales of software licenses of $2,028,859, or 27%, to $9,468,663 in the nine months ended June 30, 2014 compared to $7,439,804 in the nine months ended June 30, 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 nine months ended June 30, 2014 compared to the nine months ended June 30, 2013. Maintenance and professional services revenue increased $1,161,573, or 39%, to $4,137,723 in the nine months ended June 30, 2014 compared to $2,976,150 in the nine months ended June 30, 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 $400,965, or 33%, to $1,627,497 in the nine months ended June 30, 2014 compared to $1,226,532 in the nine months ended June 30, 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 was 12% in both the nine months ended June 30, 2014 and the nine months ended June 30, 2013.

Selling and Marketing Expenses

Selling and marketing expenses increased $1,464,213, or 35%, to $5,607,559 in the nine months ended June 30, 2014 compared to $4,143,346 in the nine months ended June 30, 2013. The increase is primarily due to 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, selling and marketing expenses increased to 41% in the nine months ended June 30, 2014 compared to 40% in the nine months ended June 30, 2013, primarily due higher personnel-related costs.

Research and Development Expenses

Research and development expenses decreased $274,404, or 5%, to $4,745,723 in the nine months ended June 30, 2014 compared to $5,020,127 in the nine months ended June 30, 2013. The decrease is primarily due to a decrease in outside contract services and decreased recruitment costs. As a percentage of revenue, research and development expenses decreased to 35% in the nine months ended June 30, 2014 compared to 48% in the nine months ended June 30, 2013, primarily due to decreased outside contract services.


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General and Administrative Expenses

General and administrative expenses increased $1,119,367, or 19%, to $6,968,419 in the nine months ended June 30, 2014 compared to $5,849,052 in the nine months ended June 30, 2013. The increase is primarily due to an increase in legal fees related to intellectual property litigation. As a percentage of revenue, general and administrative expenses decreased to 51% in the nine months ended June 30, 2014 compared to 56% in the nine months ended June 30, 2013, primarily due to the increase in legal fees.

Other Income (Expense), Net

Other income (expense), net increased $32,192, or 170%, to $51,119 for the nine months ended June 30, 2014 compared to $18,927 for the nine months ended June 30, 2013, primarily due to an increase in returns on our investment portfolio.

Liquidity and Capital Resources

On June 30, 2014, we had $26,356,391 in cash and cash equivalents and investments compared to $29,025,328 on September 30, 2013, a decrease of $2,668,937, or 9%. The decrease in cash and cash equivalents and investments was primarily due to cash used in operating activities.

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities during the nine months ended June 30, 2014 was $2,307,882 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 $334,776, primarily due to increases in accounts receivable and deferred revenue. The primary non-cash adjustments to operating activities were stock-based compensation expense, depreciation and amortization, and accretion and amortization on debt securities totaling $2,667,969, $355,320, and $300,724, respectively.

Net cash provided by operating activities during the nine months ended June 30, 2013 was $1,623,815. 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 $2,045,767, $209,257, and $154,010, respectively. Cash provided by operating activities also increased due to increases in accounts payable of $1,624,875, other liabilities of $1,476,228 and deferred revenue of $1,053,998, all associated with the growth of our business.

Net Cash (Used In) Provided by Investing Activities

Net cash used in investing activities was $11,890,300 during the nine months ended June 30, 2014, which consisted of $20,691,725 related to the purchase of investments and $132,199 related to the purchase of property and equipment, partially offset by cash provided by the sales and maturities of investments of $8,933,624.

Net cash provided by investing activities was $3,364 during the nine months ended June 30, 2013, which consisted of $5,340,734 related to the sales and maturities of investments, partially offset by purchases of investments of $4,059,036 and $1,278,334 related to the purchase of property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $44,852 during the nine months ended June 30, 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 $13,982.

Net cash provided by financing activities was $14,616,363 during the nine months ended June 30, 2013, which included net proceeds of $13,877,447 from the public offering of shares of our common stock that closed on June 28, 2013, including the exercise of the overallotment option, and net proceeds of $751,440 from the exercise of stock options, partially offset by principal payments on capital lease obligations of $12,524.

Other Liquidity Matters

On June 30, 2014, we had investments of $17,215,265, 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 June 30, 2014, we had $15,591,569 of our available-for-sale securities classified as current and $1,623,696 were classified as long-term. At September 30, 2013, all of our available-for-sale securities were classified as current.


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We had working capital of $21,128,447 at June 30, 2014 compared to $25,363,197 at September 30, 2013.

Based on our current operating plan, we believe the current cash balance 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 accounting principles generally accepted in the U.S. ("GAAP"). Preparing financial statements requires management to make estimates and assumptions that . . .

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