Mitek Systems(MITK) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements, management's analysis, and disclosures on market risk and internal controls ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements for the period ended June 30, 2019, and accompanying notes Consolidated Balance Sheets This section details the company's assets, liabilities, and stockholders' equity at the end of the reporting periods Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | June 30, 2019 (Unaudited) | September 30, 2018 | | :-------------------------- | :------------------------ | :------------------- | | Total assets | $135,870 | $127,150 | | Total liabilities | $32,546 | $31,756 | | Total stockholders' equity | $103,324 | $95,394 | | Cash and cash equivalents | $16,092 | $9,028 | | Short-term investments | $11,892 | $8,448 | | Accounts receivable, net | $14,566 | $16,821 | | Total current assets | $47,481 | $37,628 | | Total current liabilities | $21,994 | $20,407 | Consolidated Statements of Operations and Other Comprehensive Income (Loss) This section presents the company's revenues, expenses, and net loss for the reported three and nine-month periods Consolidated Statements of Operations Highlights (Amounts in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Nine Months Ended June 30, 2019 | Nine Months Ended June 30, 2018 | | :----------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Total revenue | $21,906 | $16,109 | $59,572 | $42,522 | | Operating loss | $(2,909) | $(2,863) | $(9,119) | $(6,440) | | Net loss | $(99) | $(2,784) | $(4,006) | $(9,680) | | Net loss per share—basic and diluted | $(0.00) | $(0.08) | $(0.10) | $(0.28) | Consolidated Statements of Stockholders' Equity This section outlines the changes in the company's equity accounts during the reported periods Consolidated Stockholders' Equity Highlights (Amounts in thousands) | Metric | June 30, 2019 | September 30, 2018 | | :-------------------------- | :------------ | :----------------- | | Common Stock | $40 | $38 | | Additional paid-in capital | $129,145 | $116,944 | | Accumulated deficit | $(24,088) | $(21,002) | | Total stockholders' equity | $103,324 | $95,394 | Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities Consolidated Cash Flow Highlights (Amounts in thousands) | Metric | Nine Months Ended June 30, 2019 | Nine Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $7,888 | $4,372 | | Net cash used in investing activities | $(4,320) | $(8,242) | | Net cash provided by financing activities | $3,632 | $246 | | Net increase (decrease) in cash and cash equivalents | $7,064 | $(3,655) | | Cash and cash equivalents at end of period | $16,092 | $8,634 | Notes to Consolidated Financial Statements This section provides detailed disclosures and explanations of the company's significant accounting policies and financial statement items 1. Nature of Operations and Summary of Significant Accounting Policies This note describes the company's business, basis of presentation, and key accounting policies - Mitek Systems, Inc is a software development company specializing in mobile capture and digital identity verification solutions, leveraging artificial intelligence and machine learning[25] - Key products include Mobile Deposit®, Mobile Verify®, MiSnap™, Mobile Fill®, CheckReader™, and ID_CLOUD™[26][27][29][30][31][32] - The company markets its products worldwide through direct sales and channel partners, holding 51 patents and 19 pending patent applications as of June 30, 2019[33][34] - The company adopted ASC 606 on October 1, 2018, using the modified retrospective method, resulting in a $920 thousand adjustment to accumulated deficit[67][73] 2. Revenue Recognition This note details the company's revenue recognition policies and disaggregates revenue by product category - Revenue is disaggregated into 'Deposits' and 'Identity verification' categories, further broken down by software/hardware and services/other[91] Disaggregated Revenue by Major Product Category (Amounts in thousands) | Major Product Category | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Nine Months Ended June 30, 2019 | Nine Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Deposits software and hardware | $10,521 | $8,498 | $28,786 | $20,379 | | Deposits services and other | $4,528 | $2,171 | $11,041 | $6,002 | | Deposits revenue | $15,049 | $10,669 | $39,827 | $26,381 | | Identity verification software and hardware | $1,367 | $1,960 | $3,682 | $6,058 | | Identity verification services and other | $5,490 | $3,480 | $16,063 | $10,083 | | Identity verification revenue | $6,857 | $5,440 | $19,745 | $16,141 | | Total revenue | $21,906 | $16,109 | $59,572 | $42,522 | - Contract assets increased to $2.11 million and contract liabilities increased to $6.998 million at June 30, 2019[92] - Capitalized sales commissions increased from $1.0 million to $1.6 million at June 30, 2019, with $0.4 million amortized during the nine-month period[93][94] 3. Business Combinations This note provides details on the acquisitions of A2iA Group II, S.A.S. and ICAR Vision Systems, S.L - On May 23, 2018, Mitek acquired A2iA for $26.8 million cash and 2,514,588 shares of common stock to extend its leadership in mobile deposit and identity verification[95][96] - On October 16, 2017, Mitek acquired ICAR for $3.0 million cash and 584,291 shares of common stock, with up to $5.3 million in potential earnouts[99][101][102] Estimated Fair Values of Acquired Assets and Liabilities (Amounts in thousands) | Metric | A2iA | ICAR | Total | | :-------------------------- | :----- | :----- | :------ | | Current assets | $3,929 | $2,036 | $5,965 | | Property, plant, and equipment | $307 | $83 | $390 | | Intangible assets | $28,610| $6,407 | $35,017 | | Goodwill | $24,991| $6,936 | $31,927 | | Other non-current assets | $1,177 | $87 | $1,264 | | Current liabilities | $(2,688)| $(1,652)| $(4,340) | | Deferred income tax liabilities | $(7,503)| $(1,602)| $(9,105) | | Other non-current liabilities | $(7) | $(828) | $(835) | | Net assets acquired | $48,816| $11,467| $60,283| Estimated Fair Values and Useful Lives of Intangible Assets Acquired (Amounts in thousands, except for years) | Intangible Asset | Amortization Period | Amount Assigned (A2iA) | Amount Assigned (ICAR) | | :----------------------- | :------------------ | :--------------------- | :--------------------- | | Completed technologies | 5.0 - 7.0 years | $13,015 | $4,956 | | Customer relationships | 2.0 - 5.0 years | $15,360 | $1,298 | | Trade names | 3.0 - 5.0 years | $235 | $153 | | Total | | $28,610 | $6,407 | 4. Restructuring This note describes the strategic restructuring of A2iA's Paris operations - In June 2019, Mitek initiated a restructuring of A2iA's Paris operations, incurring $3.2 million in costs to streamline the organization[110] 5. Investments This note details the company's available-for-sale securities and fair value measurements Available-for-Sale Securities (Amounts in thousands) | Security Type | June 30, 2019 Fair Market Value | September 30, 2018 Fair Market Value | | :-------------------------- | :------------------------------ | :--------------------------------- | | U.S. Treasury, short-term | $4,228 | $3,683 | | Corporate debt securities, short-term | $7,664 | $4,765 | | Total | $11,892 | $8,448 | - All investments are classified as available-for-sale debt securities with maturities of less than one year[112] Fair Value Hierarchy of Investments and Contingent Consideration (Amounts in thousands) | Category | June 30, 2019 Balance | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :-------------------- | :------ | :------ | :------ | | Assets: | | | | | | Short-term investments | $11,892 | $4,228 | $7,664 | $— | | Liabilities: | | | | | | Acquisition-related contingent consideration | $1,180 | $— | $— | $1,180 | - Acquisition-related contingent consideration (Level 3) decreased from $3.051 million to $1.180 million due to payments of $1.818 million[115] 6. Goodwill and Intangible Assets This note outlines the changes in goodwill and the composition of intangible assets - Goodwill balance decreased from $34.407 million to $33.925 million at June 30, 2019, primarily due to foreign currency effects[116] Intangible Assets, Net (Amounts in thousands) | Intangible Asset | June 30, 2019 Net | September 30, 2018 Net | | :----------------------- | :---------------- | :--------------------- | | Completed technologies | $14,580 | $17,271 | | Customer relationships | $12,214 | $15,277 | | Trade names | $286 | $399 | | Total intangible assets| $27,080 | $32,947 | - Amortization expense for acquired intangible assets was $1.8 million for Q3 2019 and $5.3 million for YTD Q3 2019[117] Estimated Future Amortization Expense for Intangible Assets (Amounts in thousands) | Fiscal Year | Estimated Future Amortization Expense | | :---------- | :------------------------------------ | | 2019 (remaining) | $1,775 | | 2020 | $6,486 | | 2021 | $6,216 | | 2022 | $5,815 | | 2023 | $3,816 | | 2024 | $1,806 | | Thereafter | $1,166 | | Total | $27,080 | 7. Stockholders' Equity This note provides details on stock-based compensation, equity plans, and the Rights Agreement Stock-Based Compensation Expense (Amounts in thousands) | Category | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Nine Months Ended June 30, 2019 | Nine Months Ended June 30, 2018 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Cost of revenue | $55 | $25 | $155 | $54 | | Selling and marketing | $705 | $596 | $2,242 | $1,977 | | Research and development | $437 | $482 | $1,438 | $1,298 | | General and administrative | $1,071 | $877 | $3,456 | $2,598 | | Total stock-based compensation expense | $2,268 | $1,980 | $7,291 | $5,927 | - As of June 30, 2019, the company had $18.8 million of unrecognized compensation expense related to stock awards, expected to be recognized over approximately 2.5 years[120] - The 2012 Incentive Plan had various stock options and RSUs outstanding, with 757,135 shares reserved for future grants[121] - The Employee Stock Purchase Plan (ESPP) had 871,658 shares reserved for future purchases as of June 30, 2019[122][123] - A Rights Agreement was adopted to protect net operating loss carryforwards by deterring stock accumulations of more than 4.9%[133][137] 8. Income Taxes This note explains the components of the company's income tax benefit and effective tax rate - For the nine months ended June 30, 2019, the company recorded an income tax benefit of $4.9 million, resulting in an effective tax rate of 55%[139][140] - The effective tax rate for the current fiscal year was a blended rate of 22.5% due to transitional tax rate rules[140] 9. Commitments and Contingencies This note discloses legal proceedings, indemnification requests, and credit facilities - ICAR is facing a claim of €0.8 million (or $0.9 million) for an alleged breach of a services agreement[141][142] - Mitek has received indemnification requests related to patent infringement lawsuits filed by Lupercal, LLC against its customers[143] - The company is monitoring patent infringement lawsuits filed by USAA against Wells Fargo due to potential industry impact[144][145] - Mitek incurred $0.3 million in legal fees for third-party claims against customers during the nine months ended June 30, 2019[146] - The company has a $10.0 million secured revolving credit facility with Silicon Valley Bank, with no borrowings outstanding[149][205] 10. Revenue and Vendor Concentrations This note discusses significant customer revenue concentrations and international sales - For the nine months ended June 30, 2019, one customer accounted for 18% of total revenue[150] - International sales constituted approximately 33% of total revenue for the nine months ended June 30, 2019, up from 25% in the prior year[154] - The company does not believe it is substantially dependent on any single channel partner or vendor[153][155] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance, condition, and operational results Overview This section provides a high-level summary of the company's business and key product offerings - Mitek is a leading innovator in mobile capture and digital identity verification, serving over 6,600 financial services and fintech organizations globally[160] - Key products include Mobile Deposit®, Mobile Verify®, MiSnap™, Mobile Fill®, CheckReader™, and ID_CLOUD™[161][162][163][164][165][166][167] Third Quarter Fiscal 2019 Highlights This section summarizes the key financial and operational achievements for the third quarter of fiscal 2019 - Revenue for the three months ended June 30, 2019, increased 36% to $21.9 million, compared to $16.1 million in the prior year[171] - Net loss was $0.1 million ($0.00 per share) for the three months ended June 30, 2019, significantly reduced from $2.8 million ($0.08 per share) in the prior year[171] - Cash provided by operating activities for the nine months ended June 30, 2019, was $7.9 million, up from $4.4 million in the prior year[171] - The company added new patents, bringing the total to 51 issued patents and 19 pending applications as of June 30, 2019[171] Restructuring This section discusses the strategic restructuring of the acquired A2iA operations - Following the A2iA acquisition, Mitek initiated a strategic restructuring of A2iA's Paris operations in June 2019 to streamline operations and reallocate resources[172] Market Opportunities, Challenges & Risks This section analyzes the market landscape, including growth drivers and potential headwinds - The company sees accelerated demand for digital identity verification driven by the growth of digital transactions and onboarding[173][174] - Mobile check deposit is a mainstream capability, and the company plans to leverage its solution to increase adoption of its identification products[175][176] - Challenges include declining check usage, competition from alternative payment technologies, and product concentration risk[177][228] Results of Operations This section provides a detailed comparison of operational results for the three and nine months ended June 30, 2019 and 2018 Comparison of the Three Months Ended June 30, 2019 and 2018 This subsection analyzes the financial performance for the third fiscal quarter Key Financials for Three Months Ended June 30 (Amounts in thousands, except percentages) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Total revenue | $21,906| $16,109| $5,797 | 36% | | Software and hardware revenue | $11,888| $10,458| $1,430 | 14% | | Service and other revenue | $10,018| $5,651 | $4,367 | 77% | | Cost of revenue | $3,168 | $2,678 | $490 | 18% | | Selling and marketing expenses | $6,935 | $5,740 | $1,195 | 21% | | Research and development expenses | $4,663 | $4,161 | $502 | 12% | | General and administrative expenses | $5,074 | $3,239 | $1,835 | 57% | | Acquisition-related costs and expenses | $1,761 | $3,154 | $(1,393) | (44)% | | Restructuring costs | $3,214 | $— | $3,214 | 100% | | Other income (expense), net | $98 | $(1,351)| $1,449 | 107% | | Income tax benefit | $2,712 | $1,430 | $1,282 | 90% | - Total revenue increased 36% YoY, driven by a 14% increase in software and hardware and a 77% increase in service and other revenue[179] - Cost of revenue increased 18% but decreased as a percentage of revenue from 17% to 14%[180] - Selling and marketing expenses rose 21% due to increased headcount and product promotion[181] - General and administrative expenses increased 57% due to higher personnel, A2iA-related expenses, and legal costs[182] - Acquisition-related costs decreased 44% due to lower executive separation and integration costs[183][184] - Restructuring costs of $3.2 million were incurred in Q3 2019 related to the A2iA Paris operations[185] - Other income improved significantly due to the absence of a $1.3 million foreign currency loss from the prior year[186] - Income tax benefit increased 90% due to excess tax benefits from stock options and R&D credits[187] Comparison of the Nine Months Ended June 30, 2019 and 2018 This subsection analyzes the financial performance for the first nine months of the fiscal year Key Financials for Nine Months Ended June 30 (Amounts in thousands, except percentages) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Total revenue | $59,572| $42,522| $17,050 | 40% | | Software and hardware revenue | $32,468| $26,437| $6,031 | 23% | | Service and other revenue | $27,104| $16,085| $11,019 | 69% | | Cost of revenue | $9,037 | $6,012 | $3,025 | 50% | | Selling and marketing expenses | $20,895| $15,863| $5,032 | 32% | | Research and development expenses | $14,441| $10,942| $3,499 | 32% | | General and administrative expenses | $15,743| $10,529| $5,214 | 50% | | Acquisition-related costs and expenses | $5,361 | $5,616 | $(255) | (5)% | | Restructuring costs | $3,214 | $— | $3,214 | 100% | | Other income, net | $252 | $(957) | $1,209 | 126% | | Income tax benefit (provision) | $4,861 | $(2,283)| $7,144 | 313% | - Total revenue increased 40% YoY, driven by 23% growth in software and hardware and 69% growth in service and other revenue[189] - Cost of revenue increased 50% due to higher transaction volume and A2iA-related costs[190] - Selling and marketing expenses rose 32% due to the A2iA acquisition and increased headcount[191] - Research and development expenses increased 32% due to the A2iA acquisition and increased R&D personnel[192] - General and administrative expenses increased 50% due to A2iA acquisition expenses, higher personnel costs, and litigation costs[193] - Acquisition-related costs decreased 5% due to lower integration costs and changes in contingent consideration fair value[194] - Restructuring costs of $3.2 million were incurred in YTD Q3 2019[195] - Other income improved significantly due to the absence of a $1.3 million foreign currency loss from the prior year[196] - Income tax shifted from a $2.3 million provision to a $4.9 million benefit, primarily due to net loss and stock option tax benefits[197] Liquidity and Capital Resources This section discusses the company's cash position, cash flows, and working capital - Cash and investments increased by $10.5 million (60%) to $28.0 million at June 30, 2019[198] - Net cash provided by operating activities was $7.9 million for the nine months ended June 30, 2019[199] - Net cash used in investing activities was $4.3 million, mainly for net purchases of investments and capital expenditures[201] - Net cash provided by financing activities was $3.6 million, primarily from equity plan proceeds[203] - Working capital increased to $25.5 million at June 30, 2019, from $17.2 million at September 30, 2018[211] - The company believes its current cash and operating cash flows are adequate for working capital needs for the next twelve months[211] Off Balance Sheet Arrangements This section discloses any off-balance sheet arrangements - The company had no off-balance sheet arrangements as of June 30, 2019[212] Changes in Critical Accounting Policies This section highlights significant changes to accounting policies - The company adopted ASC 606 (Revenue from Contracts with Customers) effective October 1, 2018, a significant change to its revenue recognition policy[214] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, specifically interest rate and foreign currency risk Interest Rates This subsection describes the company's exposure to interest rate fluctuations - The investment portfolio, totaling $11.9 million in marketable securities, has maturities between one and 12 months[215] - A hypothetical 100 basis point change in market interest rates would not materially impact the fair value of the investment portfolio[216] Foreign Currency Risk This subsection describes the company's exposure to foreign currency exchange rate fluctuations - Operations in France, the Netherlands, and Spain expose the company to fluctuations between the U.S. dollar, Euro, and British pound sterling[217] - Translation adjustments are reported in accumulated other comprehensive loss[38][217] ITEM 4. CONTROLS AND PROCEDURES This section details the company's disclosure controls, procedures, and changes in internal control over financial reporting Disclosure Controls and Procedures This subsection confirms the effectiveness of the company's disclosure controls - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[219] Changes in Internal Control over Financial Reporting This subsection discusses any changes to internal controls - The company is implementing a new ERP system but does not expect it to adversely affect internal control over financial reporting[220] Scope of Management's Report on Internal Control over Financial Reporting This subsection clarifies the scope of the internal control report regarding recent acquisitions - During the third fiscal quarter of 2019, the company completed the implementation of internal control over financial reporting for A2iA[221] PART II. OTHER INFORMATION This part includes information on legal proceedings, risk factors, and other required disclosures ITEM 1. LEGAL PROCEEDINGS This section refers to Note 9 for details on legal proceedings, indicating no material developments - No material developments in historical legal proceedings have occurred since September 30, 2018[224] ITEM 1A. RISK FACTORS This section outlines various risks that could materially and adversely affect the company's business and financial condition Risks Associated With Our Business and Operations This subsection details risks related to the company's business model, products, competition, and operational execution - Substantial revenue derived from a few technologies: Dependence on mobile imaging technology could adversely affect financial results if market acceptance fails - Decline in check usage and slowing mobile banking growth: The shift to check alternatives could negatively impact business - Intellectual property infringement claims: Costly litigation could arise, potentially requiring licenses, product redesigns, or discontinuation of sales - Inadequate intellectual property protection: Reliance on patents and trade secrets may not sufficiently protect technologies - Intense competition: Facing competitors with greater resources could lead to price reductions or loss of market share - Need for continuous R&D: Failure to timely develop enhancements and new technologies could hinder competitiveness - Product defects or malfunctions: Errors in complex software could harm reputation, sales, and profitability - Forecasting difficulties: Historical order flow patterns make forecasting challenging, potentially leading to adverse operating results - New business/product risks: Entry into new lines of business or offering new products may expose the company to new risks - Adverse economic conditions: Economic downturns could reduce spending on IT solutions and impact revenue - Need for additional capital: Insufficient capital resources for long-term growth may necessitate raising funds through dilutive financings - Integration expenses for acquisitions: Challenges in integrating ICAR and A2iA could impact financial results and operational efficiency - Unsuccessful corporate strategy and restructuring: The restructuring of A2iA's Paris operations may not yield anticipated benefits - Volatility in operating results: Quarterly and annual results fluctuate significantly, leading to stock price volatility - Data security risks: Products may not provide absolute security, leading to potential breaches, litigation, and reputational harm - Inability to retain/recruit qualified personnel: Dependence on key management and technical personnel is a significant risk - Regulatory compliance: Changing legislation (e.g, FCPA, GDPR) could increase expenses and affect business practices - Foreign tax regulations: Uncertainty and changes in foreign tax regulations could reduce earnings - Fluctuations in foreign currency exchange and interest rates: Exposure to currency fluctuations can affect net revenues and income - Compliance with corporate governance changes: Evolving laws increase expenses and divert management attention Risks Related to Investing in Our Common Stock This subsection details risks associated with owning the company's common stock - Strategic alternatives exploration: Past or future exploration of strategic alternatives can create uncertainty and disrupt operations - Concentration of ownership: Directors and executive officers beneficially own approximately 8.2% of common stock, potentially limiting other stockholders' influence - Future sales by insiders: Resales of substantial shares by insiders could adversely impact the stock price - Future common stock sales: Potential issuance of shares could cause the market price to decline - Potential proxy contest: A proxy contest could lead to operational disruption and resource diversion - Anti-takeover provisions: Corporate documents and Delaware law could discourage or prevent a change in control - Indemnification of officers and directors: Provisions for indemnification may result in significant costs to the company - Section 382 Rights Agreement: This agreement deters accumulation of more than 4.9% of common stock, potentially delaying takeovers - Stock price volatility: The common stock price has been volatile, leading to potential investment value decline - No dividends: The company does not intend to pay dividends, meaning stockholders will only benefit from stock price appreciation ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section states that there were no unregistered sales of the company's equity securities during the quarter - No unregistered sales of equity securities occurred during the quarter ended June 30, 2019, that were not previously disclosed[295] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section indicates that there were no defaults upon senior securities - There were no defaults upon senior securities[296] ITEM 4. MINE SAFETY DISCLOSURES This section states that there are no mine safety disclosures - There are no mine safety disclosures[297] ITEM 5. OTHER INFORMATION This section indicates that there is no other information to disclose - There is no other information to disclose[298] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q - The exhibits include Share Purchase Agreements, Certificate of Incorporation, Bylaws, and certifications from the CEO and CFO[300] Signatures This section contains the signatures of the certifying officers - The report is signed by Scipio Maximus Carnecchia, Chief Executive Officer, and Jeffrey C Davison, Chief Financial Officer, on August 6, 2019[306][307]