Mitek Systems(MITK) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for the reporting period Item 1. Financial Statements This section presents Mitek Systems' unaudited consolidated financial statements and detailed notes for the reporting periods Consolidated Balance Sheets This statement presents the company's financial position, including assets, liabilities, and equity, at specific points in time Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | March 31, 2020 | September 30, 2019 | Change ($) | Change (%) | | :-------------------------- | :------------- | :----------------- | :--------- | :--------- | | Total current assets | $55,447 | $54,130 | $1,317 | 2.4% | | Total assets | $147,978 | $135,897 | $12,081 | 8.9% | | Total current liabilities | $20,408 | $20,048 | $360 | 1.8% | | Total liabilities | $34,070 | $28,564 | $5,506 | 19.3% | | Total stockholders' equity | $113,908 | $107,333 | $6,575 | 6.1% | - Cash and cash equivalents increased slightly from $16,748 thousand at September 30, 2019, to $16,928 thousand at March 31, 2020[11] - Long-term investments saw a significant increase from $1,552 thousand to $6,546 thousand[11] Consolidated Statements of Operations and Other Comprehensive Income (Loss) This statement details the company's revenues, expenses, and net income or loss over specific periods Consolidated Statements of Operations Highlights (Amounts in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Six Months Ended March 31, 2020 | Six Months Ended March 31, 2019 | | :---------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Total revenue | $23,192 | $19,983 | $45,259 | $37,666 | | Operating income (loss) | $1,064 | $(1,650) | $1,362 | $(6,210) | | Net income (loss) | $908 | $(716) | $1,468 | $(3,907) | | Net income (loss) per share—basic | $0.02 | $(0.02) | $0.04 | $(0.10) | | Net income (loss) per share—diluted | $0.02 | $(0.02) | $0.03 | $(0.10) | - Total revenue increased by 16% for the three months ended March 31, 2020, and by 20% for the six months ended March 31, 2020, compared to the respective prior periods[13] - The company reported a net income of $908 thousand for the three months ended March 31, 2020, a significant improvement from a net loss of $716 thousand in the prior year period[13] Consolidated Statements of Stockholders' Equity This statement outlines changes in the company's equity accounts, including net income, stock-based compensation, and repurchases Stockholders' Equity Changes (Amounts in thousands) | Metric | March 31, 2020 (3 Months) | March 31, 2019 (3 Months) | March 31, 2020 (6 Months) | March 31, 2019 (6 Months) | | :----------------------------------- | :------------------------ | :------------------------ | :------------------------ | :------------------------ | | Balance, beginning of period | $111,524 | $95,568 | $107,333 | $95,394 | | Net income (loss) | $908 | $(716) | $1,468 | $(3,907) | | Stock-based compensation expense | $2,308 | $2,353 | $4,611 | $5,023 | | Repurchases and retirements of common stock | $(1,002) | — | $(1,002) | — | | Balance, end of period | $113,908 | $98,069 | $113,908 | $98,069 | - Total stockholders' equity increased to $113,908 thousand as of March 31, 2020, from $107,333 thousand at September 30, 2019[15][18] - The company repurchased and retired $1,002 thousand of common stock during the six months ended March 31, 2020[15][18] Consolidated Statements of Cash Flows This statement reports the cash generated and used by operating, investing, and financing activities Consolidated Cash Flow Highlights (Amounts in thousands) | Activity | Six Months Ended March 31, 2020 | Six Months Ended March 31, 2019 | | :------------------------ | :------------------------------ | :------------------------------ | | Operating activities | $8,369 | $6,620 | | Investing activities | $(7,835) | $1,945 | | Financing activities | $(325) | $1,368 | | Net increase in cash | $180 | $9,717 | | Cash and cash equivalents at end of period | $16,928 | $18,745 | - Net cash provided by operating activities increased to $8,369 thousand for the six months ended March 31, 2020, from $6,620 thousand in the prior year[21] - Net cash used in investing activities was $7,835 thousand, primarily due to purchases of investments, a shift from net cash provided in the prior year[21] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements 1. Nature of Operations and Summary of Significant Accounting Policies This note describes the company's business, products, and key accounting principles applied in financial reporting - Mitek Systems, Inc. is a software development company specializing in mobile image capture and digital identity verification solutions, leveraging computer vision, AI, and machine learning[23] - Key products include Mobile Deposit® (over 3 billion check deposits processed), Mobile Verify® (online identity verification with face comparison), MiSnap™ (image capture technology), and CheckReader™ (automated check data extraction)[24][25][26][27] - The company adopted ASC 842 (Leases) as of October 1, 2019, recognizing $8.2 million in lease liabilities and $6.8 million in right-of-use assets, with no material impact on income statements or cash flows[62] 2. Revenue Recognition This note details the company's policies and disaggregation of revenue from contracts with customers - Revenue is primarily generated from software and hardware sales (on-premise licenses, hardware scanners) and services and other (transactional SaaS, maintenance, professional services)[75][76] Revenue Disaggregation by Product Category (Amounts in thousands) | Major Product Category | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Six Months Ended March 31, 2020 | Six Months Ended March 31, 2019 | | :------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Deposits software and hardware | $10,317 | $9,215 | $20,600 | $18,265 | | Deposits services and other | $4,305 | $3,693 | $8,673 | $6,513 | | Deposits revenue | $14,622 | $12,908 | $29,273 | $24,778 | | Identity verification software and hardware | $1,136 | $1,370 | $2,368 | $2,315 | | Identity verification services and other | $7,434 | $5,705 | $13,618 | $10,573 | | Identity verification revenue | $8,570 | $7,075 | $15,986 | $12,888 | | Total revenue | $23,192 | $19,983 | $45,259 | $37,666 | - Contract assets (current and non-current) increased from $2,931 thousand at September 30, 2019, to $6,502 thousand at March 31, 2020, while deferred revenue (current and non-current) increased from $6,348 thousand to $9,973 thousand[83] 3. Restructuring This note explains the details and financial impact of the company's strategic restructuring activities - The company undertook a strategic restructuring of A2iA's Paris operations in June 2019, ceasing sales of certain unprofitable and non-core products and reducing workforce[86] Restructuring Accrual Changes (Amounts in thousands) | Metric | Amount | | :----------------------------------- | :----- | | Balance at September 30, 2019 | $1,526 | | Accrual reversed | $(114) | | Payments | $(1,098)| | Foreign currency effect | $19 | | Balance at March 31, 2020 | $333 | 4. Investments This note provides information on the company's investment portfolio, including fair value and classification Investment Portfolio Fair Value (Amounts in thousands) | Security Type | March 31, 2020 Fair Value | September 30, 2019 Fair Value | | :---------------------------- | :------------------------ | :---------------------------- | | U.S. Treasury, short-term | $6,311 | $4,242 | | Asset-backed securities, short-term | $1,659 | — | | Corporate debt securities, short-term | $6,170 | $12,260 | | Commercial paper, short-term | $4,878 | $8,386 | | U.S. Treasury, long-term | $1,023 | $1,101 | | Asset-backed securities, long-term | $3,080 | — | | Corporate debt securities, long-term | $2,443 | $451 | | Total Investments | $25,564 | $18,054 | - All investments are classified as available-for-sale debt securities, carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive loss[89][90] - The company uses a fair value hierarchy (Level 1, 2, 3) for its investments and acquisition-related contingent consideration[91][92][93][94] - Acquisition-related contingent consideration is valued using Level 3 unobservable inputs[91][92][93][94] 5. Goodwill and Intangible Assets This note details the balances and amortization of goodwill and other acquired intangible assets - Goodwill balance increased to $33,554 thousand at March 31, 2020, from $32,636 thousand at September 30, 2019, primarily due to other adjustments and foreign currency effects[95] Intangible Assets, Net (Amounts in thousands) | Intangible Asset | March 31, 2020 Net | September 30, 2019 Net | | :---------------------- | :----------------- | :--------------------- | | Completed technologies | $11,768 | $13,237 | | Customer relationships | $9,394 | $10,927 | | Trade names | $173 | $241 | | Total intangible assets | $21,335 | $24,405 | - Amortization expense for acquired intangible assets was $3.2 million for the six months ended March 31, 2020, a decrease from $3.5 million in the prior year, due to certain assets becoming fully amortized[96] 6. Stockholders' Equity This note describes the components of stockholders' equity, including stock-based compensation and share repurchase programs Stock-Based Compensation Expense (Amounts in thousands) | Expense Category | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Six Months Ended March 31, 2020 | Six Months Ended March 31, 2019 | | :------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Cost of revenue | $65 | $56 | $126 | $100 | | Selling and marketing | $703 | $746 | $1,371 | $1,537 | | Research and development | $571 | $567 | $1,149 | $1,001 | | General and administrative| $969 | $984 | $1,965 | $2,385 | | Total | $2,308 | $2,353 | $4,611 | $5,023 | - The company adopted the 2020 Incentive Plan, reserving 4.5 million shares plus certain shares from prior plans, and had 3,815,819 shares available for future grants as of March 31, 2020[101] - A share repurchase program for up to $10 million was authorized in December 2019, with $1.0 million (137,000 shares) repurchased by March 31, 2020[112][113] 7. Income Taxes This note presents the company's income tax provisions, effective tax rates, and deferred tax assets and liabilities Income Tax Benefit (Provision) and Effective Tax Rate (Amounts in thousands) | Metric | Six Months Ended March 31, 2020 | Six Months Ended March 31, 2019 | | :-------------------------- | :------------------------------ | :------------------------------ | | Income tax benefit (provision) | $(229) | $2,149 | | Effective tax rate | 13% | 35% | - The effective tax rate for the six months ended March 31, 2020, was 13%, compared to 35% in the prior year, primarily due to excess tax benefits from stock options/RSUs, foreign/state taxes, and R&D credits[120] 8. Commitments and Contingencies This note discloses the company's contractual obligations, lease commitments, and ongoing legal proceedings - Operating ROU assets were $6.0 million and total operating lease liabilities were $7.5 million as of March 31, 2020, with a weighted-average remaining lease term of 4.7 years[123] - The company is involved in legal proceedings, including a claim against ICAR for €0.8 million, third-party patent infringement claims against its customers (e.g., USAA vs. Wells Fargo), and a lawsuit against UrbanFT for delinquent payments and patent non-infringement[127][129][130][131][134] - A $10.0 million secured revolving credit facility with Silicon Valley Bank was in place, with no outstanding borrowings as of March 31, 2020[136] 9. Revenue Concentration This note identifies significant customer and geographic concentrations in the company's revenue streams - For the three months ended March 31, 2020, two customers accounted for $6.6 million (14%) of total revenue[137] - For the six months, two customers accounted for $11.8 million (16% and 11% respectively)[137] - International sales represented approximately 25% of total revenue for both the three and six months ended March 31, 2020, a decrease from 35% in the prior year periods[141] - The company believes it is not dependent on any single channel partner, as the loss of one would not materially affect operations due to the ability to sell products to end-users through other channels[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, market opportunities, challenges, and liquidity for the reporting periods Overview This section provides a high-level summary of the company's business, core solutions, and market position - Mitek is a leading innovator in mobile image capture and digital identity verification, serving over 7,000 financial services organizations and fintech brands globally[146] - The company's core solutions, Mobile Deposit® and Mobile Verify®, leverage computer vision, AI, and machine learning to enhance user experience, detect fraud, and ensure compliant transactions[146][147][148] Second Quarter Fiscal 2020 Highlights This section summarizes key financial and operational achievements for the second fiscal quarter of 2020 Q2 Fiscal 2020 Financial Highlights (Amounts in millions, except per share data) | Metric | Q2 FY2020 | Q2 FY2019 | | :----------------------------------- | :-------- | :-------- | | Revenue | $23.2 | $20.0 | | Net income (loss) | $0.9 | $(0.7) | | Net income (loss) per diluted share | $0.02 | $(0.02) | - Cash provided by operating activities increased to $8.4 million for the six months ended March 31, 2020, up from $6.6 million in the prior year[158] - The company expanded its patent portfolio to 63 issued patents and has 19 additional patent applications pending as of March 31, 2020[158] Restructuring This section discusses the strategic restructuring undertaken to streamline operations and focus resources - A strategic restructuring of A2iA's Paris operations was undertaken in June 2019 to streamline the organization and focus resources, involving ceasing sales of certain non-core and unprofitable products and a workforce reduction[153] Market Opportunities, Challenges & Risks This section outlines the company's growth drivers, competitive landscape, and potential business risks - The company anticipates growth in deposits and identity verification products driven by digital transformation, increasing consumer demand for online trust and convenience, and stricter regulatory requirements[154] - Key challenges include competition, potential declines in demand for digital transactions, lengthy sales and implementation cycles, and product concentration making the company vulnerable to market shifts[155][156] - The COVID-19 pandemic has created global business disruptions, transitioning the workforce to remote operations and potentially impacting revenues, though it may also accelerate digital technology adoption[161][162][163] Results of Operations This section provides a detailed analysis of the company's financial performance over the reporting periods Comparison of the Three Months Ended March 31, 2020 and 2019 This section compares the company's financial results for the three-month periods ended March 31, 2020 and 2019 Q2 Financial Performance (Amounts in thousands, except percentages) | Metric | 2020 ($) | 2019 ($) | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Total revenue | 23,192 | 19,983 | 3,209 | 16% | | Software and hardware revenue | 11,453 | 10,585 | 868 | 8% | | Services and other revenue | 11,739 | 9,398 | 2,341 | 25% | | Cost of revenue | 3,186 | 2,991 | 195 | 7% | | Selling and marketing expenses | 7,448 | 6,752 | 696 | 10% | | Research and development expenses | 4,819 | 5,290 | (471) | (9)% | | General and administrative expenses | 5,210 | 4,827 | 383 | 8% | | Acquisition-related costs and expenses | 1,579 | 1,773 | (194) | (11)% | | Restructuring costs | (114) | — | (114) | (100)% | | Net income (loss) | 908 | (716) | 1,624 | 227% | - Services and other revenue, driven by Mobile Verify® transactional SaaS, saw a 25% increase, contributing significantly to overall revenue growth[166] - Research and development expenses decreased by 9% due to lower costs resulting from the June 2019 restructuring plan[169] Comparison of the Six Months Ended March 31, 2020 and 2019 This section compares the company's financial results for the six-month periods ended March 31, 2020 and 2019 Six-Month Financial Performance (Amounts in thousands, except percentages) | Metric | 2020 ($) | 2019 ($) | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Total revenue | 45,259 | 37,666 | 7,593 | 20% | | Software and hardware revenue | 22,968 | 20,580 | 2,388 | 12% | | Services and other revenue | 22,291 | 17,086 | 5,205 | 30% | | Cost of revenue | 6,119 | 5,869 | 250 | 4% | | Selling and marketing expenses | 14,778 | 13,960 | 818 | 6% | | Research and development expenses | 9,429 | 9,778 | (349) | (4)% | | General and administrative expenses | 10,498 | 10,669 | (171) | (2)% | | Acquisition-related costs and expenses | 3,187 | 3,600 | (413) | (11)% | | Restructuring costs | (114) | — | (114) | (100)% | | Net income (loss) | 1,468 | (3,907) | 5,375 | 138% | - Total revenue increased by 20% to $45.3 million, driven by a 30% growth in services and other revenue, particularly from Mobile Verify® transactional SaaS[176] - Net income for the six months ended March 31, 2020, was $1.5 million, a significant improvement from a net loss of $3.9 million in the prior year[175] Liquidity and Capital Resources This section analyzes the company's ability to generate and manage cash, including its financial resources and obligations - Cash and cash equivalents and investments increased by $7.7 million (22%) to $42.5 million at March 31, 2020, from $34.8 million at September 30, 2019[187] - Net cash provided by operating activities was $8.4 million, while net cash used in investing activities was $7.8 million, primarily due to investment purchases[188][190] - The company had $19.0 million in current available-for-sale securities and $6.5 million in long-term available-for-sale securities as of March 31, 2020[201] Off Balance Sheet Arrangements This section confirms the absence of any material off-balance sheet arrangements - The company had no off-balance sheet arrangements as of March 31, 2020[203] Changes in Critical Accounting Policies This section discusses significant changes in the company's accounting policies and their financial impact - The primary change in critical accounting policies was the adoption of ASU 2016-02, Leases (Topic 842), effective October 1, 2019, which materially impacted the consolidated balance sheet by recognizing ROU assets and lease liabilities[204][205] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section describes the company's exposure to market risks, including interest rate and foreign currency fluctuations Interest Rates This section details the company's exposure to interest rate risk and its management of the investment portfolio - The company's investment portfolio, primarily cash equivalents and marketable debt securities, aims to preserve principal and maximize yields without significant risk, with no use of derivative financial instruments[206] - A hypothetical 100 basis point change in market interest rates would not materially impact the fair value of the investment portfolio due to the relatively short maturities of these investments[207] Foreign Currency Risk This section explains the company's exposure to foreign currency exchange rate fluctuations from international operations - Operations in France, the Netherlands, and Spain expose the company to foreign currency exchange rate fluctuations, particularly between the U.S. dollar and the Euro[208] - Translation adjustments from converting functional currency financial statements into U.S. dollars are reported in the consolidated statements of operations and other comprehensive income (loss)[208] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and internal control over financial reporting Disclosure Controls and Procedures This section confirms the effectiveness of the company's controls for timely and accurate financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, providing reasonable assurance for timely and accurate financial reporting[210] Changes in Internal Control over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting - There were no material changes in internal control over financial reporting during the quarter ended March 31, 2020[211] - Despite most employees working remotely due to COVID-19, the company has not experienced any material impact on its internal controls and continues to monitor the situation[211] PART II. OTHER INFORMATION This section includes additional information not covered in the financial statements, such as legal proceedings and risk factors Item 1. Legal Proceedings This section details legal proceedings referenced in the financial statement notes, confirming no material impact from ordinary course matters - Information regarding legal proceedings is detailed in Note 8 to the consolidated financial statements[214] - The company believes that the disposition of various claims and legal proceedings arising in the ordinary course of business will not have a material effect on its financial condition or results of operations[214] Item 1A. Risk Factors This section highlights key risk factors, including the potential adverse impacts of the COVID-19 pandemic on business operations and financial results - The COVID-19 pandemic is expected to directly and/or indirectly impact the company's business, operations, and financial results, with the full extent being uncertain and difficult to predict[216] - Governmental measures (e.g., stay-at-home orders, travel restrictions) and remote work transitions may delay sales, harm productivity, and negatively affect customer contracts and revenues[217] - The pandemic could disrupt global financial markets, reduce access to capital, and negatively affect liquidity and stock market stability, potentially leading to a recession or market correction[218] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no previously undisclosed unregistered sales of equity securities occurred during the quarter ended March 31, 2020 - No unregistered sales of the company's equity securities occurred during the quarter ended March 31, 2020, that were not previously disclosed[219] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[220] Item 4. Mine Safety Disclosures This section confirms the absence of any mine safety disclosures - There are no mine safety disclosures[222] Item 5. Other Information This section reports on any other material information not covered elsewhere in the report - There is no other information to report[223] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, corporate documents, and certifications - The exhibits include Share Purchase Agreements, Restated Certificate of Incorporation, Bylaws, Certificate of Designation of Series B Junior Participating Preferred Stock, and certifications from the CEO and CFO[224] Signatures This section contains the duly authorized signatures of the CEO and CFO, affirming the submission of the report - The report is signed by Scipio Maximus Carnecchia, Chief Executive Officer, and Jeffrey C. Davison, Chief Financial Officer, on May 7, 2020[228][229]