MITK

MITEK SYSTEMS INC - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Mitek Systems, Inc. develops and markets intelligent character recognition and document capture products, primarily for the financial services sector. The company has recently expanded into mobile business applications, including mobile check deposit and receipt archival solutions branded as "Oomph."

Key Financial Metrics

Margins: Gross margin for the three months ended March 31, 2010, was approximately 88% (Cost of Sales was 12% of revenue). For the six-month period, the gross margin was approximately 80% (Cost of Sales was 20% of revenue).

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 71% year-over-year for the quarter (from $888k to $1.52M) and 41% for the six-month period (from $1.90M to $2.68M). This was driven primarily by a one-time $524,000 software license sale to an existing key customer.
• Profitability: The company reported a net income of $6,973 for the quarter, a significant improvement from a net loss of $239,911 in the same period last year. However, the six-month period still resulted in a net loss of $215,973, compared to $908,027 in the prior year.
• Expense Trends: Selling and marketing expenses decreased 28% year-over-year for the six-month period due to workforce reductions implemented in January 2009. Conversely, General and Administrative expenses increased 38% for the quarter, largely due to higher stock-based compensation.
• Debt Financing: In December 2009, the company issued $1.0 million in 5% senior secured convertible debentures, resulting in net proceeds of approximately $922,000. This significantly improved liquidity, increasing cash balances by 110% compared to the prior fiscal year-end.

Guidance, Outlook, and Risks

Going Concern: Management has raised substantial doubt about 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 intends to seek additional debt or equity financing. If funds are not available, the company may be forced to curtail operations or liquidate assets. There is no specific numerical guidance provided for future quarters.

Risks and Contingencies:

• Liquidity Risk: Dependence on future financing to meet operating requirements.
• Customer Concentration: For the six months ended March 31, 2010, 44% of total sales came from just three customers (each exceeding 10% of total sales).
• Convertible Debt: The company has $1.0 million principal in convertible debentures due in December 2011, with a conversion price of $0.75 per share. This debt includes a beneficial conversion feature and warrants, creating potential dilution.
• Stock Volatility: The company notes its stock price has been highly volatile, ranging from $0.60 to $1.04 in the first six months of fiscal 2010.

Key Facts for Investor Verification

• One-Time Revenue Impact: Verify the sustainability of revenue growth, as a significant portion ($524,000) of the recent increase was a one-time license sale.
• Capital Needs: Confirm the company's ability to secure additional financing given the "substantial doubt" regarding going concern status.
• Debt Terms: Review the terms of the $1.0 million convertible debenture, specifically the conversion price ($0.75) and the potential for forced conversion if stock price targets are met.
• Customer Concentration: Assess the risk associated with 44% of six-month revenue coming from only three customers.
• Stock-Based Compensation: Note the significant increase in stock-based compensation expense ($216,684 for six months), which impacts net loss but is a non-cash charge.