Business Context and Reporting Period
Company: MITEK SYSTEMS INC
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009
Business Overview: Mitek develops and markets intelligent character recognition and document capture products, primarily for the financial services sector. The company recently expanded into mobile business applications (branded "Oomph") for smartphones, including mobile check deposit and receipt archival solutions.
Key Financial Metrics
| Metric | Q1 2010 (Ended Dec 31, 2009) | Q1 2009 (Ended Dec 31, 2008) |
|---|---|---|
| Total Revenue | $1,159,011 | $1,011,448 |
| Net Loss | $(222,946) | $(668,115) |
| Operating Loss | $(198,337) | $(670,862) |
| Cash and Cash Equivalents | $1,089,725 | $868,698 |
| Net Cash Used in Operating Activities | $(506,613) | $(358,798) |
| Working Capital | $554,783 | $(280,446) |
| Long-Term Debt | $405,922 (Net Carrying Amount) | $0 |
| Accumulated Deficit | $(15,034,931) | $(14,811,985) |
Margins: Gross margin for the quarter was approximately 70% (Cost of Sales was 30% of revenue), a decrease from 81% in the prior year period due to a significant sale with lower margins.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 15% year-over-year, driven by a 36% increase in software license sales ($677k vs $497k). Maintenance and professional services revenue declined 6%.
- Expense Reduction: Significant cost-cutting measures implemented in January 2009 resulted in substantial decreases in operating expenses:
- Selling and Marketing expenses dropped 54% ($165k vs $361k).
- General and Administrative expenses dropped 37% ($333k vs $530k).
- Research and Development expenses dropped 12% ($506k vs $572k).
- Financing Activity: The company issued approximately $1.0 million in 5% senior secured convertible debentures in December 2009, resulting in net proceeds of approximately $922,000. This reversed the negative working capital position seen at the end of the prior fiscal year.
- Accounts Receivable: Increased 94% to $699,000, attributed to increased sales volume and timing of billings.
Outlook, Risks, and Management Commentary
Going Concern Warning: Management explicitly states that substantial doubt exists regarding the company's ability to continue as a going concern. Despite the recent financing, existing working capital may not be sufficient to fund operations for the next twelve months without additional funding or significant expenditure reductions.
Outlook: The company is focusing on the mobile capture market (ImageNet Mobile Deposit) and maintaining key resources to pursue new sales. Management has retained an investment banking firm to explore strategic alternatives.
Risks and Contingencies:
- Liquidity Risk: No credit facilities are currently in place. The company may be forced to curtail operations or liquidate assets if additional financing is not secured.
- Customer Concentration: Three customers accounted for 53% of total sales in the quarter.
- Debt Covenants: The new convertible debentures restrict the payment of cash dividends and are secured by all company assets.
- Stock Volatility: Common stock price has been highly volatile, ranging from $0.60 to $1.04 in the first three months of fiscal 2010.
Investor Verification Checklist
- Cash Burn Rate: Verify if the $922k financing proceeds are sufficient to cover the ~$507k quarterly operating cash burn for the next 12 months.
- Debt Terms: Review the specific conversion triggers and covenants of the $1.0M convertible debentures issued in December 2009.
- Customer Concentration: Assess the risk associated with 53% of revenue coming from just three customers.
- Accounts Receivable Aging: Investigate the 94% increase in receivables to ensure collectability is not impaired.
- Strategic Alternatives: Monitor for updates on the investment banking firm's search for strategic alternatives or additional capital.