Mitek Systems, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2011, Mitek’s fiscal third quarter; the filing was signed August 12, 2011. Mitek develops imaging and analytics software, with recent growth driven by mobile banking applications, particularly Mobile Deposit. The financial statements are unaudited.
Financial results and liquidity
| Metric | Three months ended June 30, 2011 | Prior-year quarter | Nine months ended June 30, 2011 | Prior-year period |
|---|---|---|---|---|
| Revenue | $2.954 million | $0.822 million | $7.226 million | $3.498 million |
| Operating income (loss) | $325,488 | $(555,329) | $479,670 | $(656,080) |
| Net income (loss) | $325,111 | $(646,564) | $94,323 | $(862,537) |
| Basic and diluted EPS | $0.01 | $(0.04) | $0.00 | $(0.05) |
| Operating cash flow | Not separately provided | Not separately provided | $326,933 | $(449,977) |
- Quarterly revenue increased 259%; software sales rose to $2.375 million from $370,464, principally due to Mobile Deposit. Maintenance and services revenue increased 28% to $578,869.
- Gross margin was approximately 85% for the quarter and 88% for the nine-month period, versus approximately 75% and 79%, respectively, in the prior-year periods. Operating margin was approximately 11% in the quarter; the prior-year quarter had an operating loss.
- Nine-month net income was modest despite positive operating income, reflecting $387,067 of interest and other expense, largely associated with convertible-debt discount accretion and the debt conversion.
- At June 30, cash and cash equivalents were $14.024 million and short-term investments were $2.411 million. Working capital was $17.616 million; the current ratio was 9.1. Total liabilities were $2.197 million and stockholders’ equity was $17.856 million.
- Cash increased by $12.719 million from September 30, 2010, primarily from equity financings. The company raised $15.0 million gross in a May private placement, with approximately $13.845 million net proceeds. Nine-month operating cash flow was positive, but accounts receivable growth used $1.856 million of cash.
- Convertible debentures were converted to common stock in December 2010; no convertible debt remained at June 30. The company had drawn $105,000 on a secured credit line with borrowing capacity up to $400,000, maturing January 31, 2013.
Changes, outlook, and risks
- Revenue and profitability improved materially year over year, led by Mobile Deposit license sales. Operating expenses also rose: for the quarter, selling and marketing increased 197%, research and development 50%, and general and administrative 71%.
- Three customers accounted for 70.5% of quarterly sales and 47.3% of nine-month sales. Management attributes period-to-period concentration partly to license purchase and renewal timing, but customer concentration and receivable collection remain relevant to monitor.
- A JPMorgan Chase Mobile Deposit agreement included extended payment terms and revenue deferral; after delivery of the specified products and services, Mitek recognized the previously deferred portion for which payment had come due.
- Management said available cash, the recent financing, and expected operating cash generation should meet working-capital needs for the next 12 months. No quantified revenue or earnings guidance was provided.
- Key risks include competition from larger companies, reliance on mobile applications and Mobile Deposit, changing demand and technology, volatile quarterly results, collection risk, and the possibility that profitability may not be sustained. The company reported an accumulated deficit of approximately $15.4 million and maintained a full valuation allowance against deferred tax assets.
- Management reported no legal proceedings believed likely to have a material adverse effect and no material change in internal controls. Subsequent to quarter-end, shares began trading on the Nasdaq Capital Market on July 14, 2011; the company said it would hire a CFO within 90 days of listing.
Important facts for investors to verify
- Whether the strong Mobile Deposit license sales and revenue growth recur, given license-renewal timing and customer concentration.
- Subsequent collections of receivables, particularly the $1.740 million due from customers representing more than 10% of revenue in the disclosed concentration table.
- Cash conversion and operating cash flow as receivables and operating expenses grow.
- The effect of equity issuance, option awards, and other potential share dilution; shares outstanding were 23,978,561 at June 30, 2011, versus 17,816,249 at September 30, 2010.
- Execution against management’s 12-month liquidity assessment, credit-line covenants, and the planned CFO appointment.