Business Context and Reporting Period
Company: Mitek Systems, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Mitek provides advanced imaging and analytics software to financial institutions, specializing in mobile applications such as Mobile Deposit®. The company sells non-exclusive term licenses to channel partners and end-users.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2011 | Six Months Ended Mar 31, 2011 |
|---|---|---|
| Total Revenue | $2,868,357 | $4,271,919 |
| Net Income (Loss) | $569,939 | $(230,788) |
| Operating Income (Loss) | $570,212 | $154,182 |
| Gross Margin | 91% | 89% |
| Cash and Cash Equivalents | $2,304,312 | $2,304,312 (Balance Sheet) |
| Working Capital | $2,976,606 | N/A |
| Total Debt | $105,000 (Line of Credit) | $105,000 (Line of Credit) |
| Stockholders' Equity | $3,244,262 | $3,244,262 |
Note: The company reported a net loss for the six-month period despite a net income for the quarter, primarily due to non-cash interest expense related to the conversion of convertible debt in the prior quarter.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 89% year-over-year for the quarter and 60% for the six-month period. This was driven by a 128% increase in software license sales, specifically the Mobile Deposit application.
- Expense Increases:
- Selling & Marketing: Increased 145% (quarter) and 143% (six months) due to higher headcount, commissions, and stock-based compensation.
- General & Administrative: Increased 67% (quarter) and 75% (six months), largely due to higher legal fees and public reporting costs.
- R&D: Increased 27% (quarter) and 21% (six months) due to increased personnel costs.
- Debt Conversion: In December 2010, the company converted approximately $1.06 million of convertible debentures into common stock. This resulted in a significant non-cash interest expense charge of approximately $320,000 in the six-month period, contributing to the net loss for the half-year.
- Liquidity: Cash and cash equivalents increased by 77% to $2.3 million, driven by a $750,000 private placement in October 2010 and proceeds from a line of credit.
Outlook, Risks, and Unusual Items
- Subsequent Financing: On May 6, 2011 (post-period), the company completed a private placement selling 2,857,143 shares at $5.25 per share for gross proceeds of $15 million. The company plans to file for listing on the NASDAQ Capital Market.
- Major Contract: An agreement with JP Morgan Chase for Mobile Deposit licensing includes extended payment terms; revenue is recognized upon delivery of products.
- Risks:
- Customer Concentration: One customer accounted for 49.9% of sales in the quarter ended March 31, 2011. However, management states this is due to timing of license renewals and does not indicate dependency.
- Profitability: Despite recent quarterly income, the company has a history of losses and an accumulated deficit of $15.7 million. Future profitability is not guaranteed.
- Competition: The mobile payments industry is competitive with larger, better-resourced competitors.
- Stock-Based Compensation: Significant non-cash expense ($529,584 for six months) related to stock options and restricted stock units.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of revenue growth given the high concentration (approx. 50%) from a single customer in the quarter.
- Cash Burn vs. Runway: Confirm the impact of the $15 million subsequent financing on the company's liquidity and ability to fund operations for the next 12+ months.
- Debt Obligations: Review the terms of the new $400,000 line of credit and compliance with financial covenants (minimum liquidity).
- Stock Dilution: Assess the impact of the recent $15 million equity raise and outstanding options/warrants on per-share value.
- Deferred Revenue: Monitor the recognition of the $1.56 million deferred revenue balance, particularly regarding the JP Morgan Chase contract.