MITK

Business Context and Reporting Period

Company: Mitek Systems, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Mitek develops and markets intelligent character recognition and document capture products, primarily for the financial services sector. Key products include the ImageNet Mobile Deposit application and "Oomph" mobile business applications for smartphones.

Key Financial Metrics

Margins: Gross margin for the three months ended June 30, 2010 was approximately 75% (Cost of Sales was 25% of sales). For the nine months ended June 30, 2010, gross margin was approximately 79% (Cost of Sales was 21% of sales).

Material Changes vs. Prior Period

• Revenue: Total sales for the three months ended June 30, 2010, decreased 10% to $822,490 from $914,738 in the prior year period, driven by a 12% decline in software license sales. However, for the nine-month period, sales increased 24% to $3.5 million, aided by a one-time $524,000 license sale and growth in Mobile Deposit software.
• Expenses: Operating expenses increased significantly in the quarter. Selling and marketing expenses rose 69% and General and Administrative (G&A) expenses rose 70% compared to the prior year quarter, largely due to increased headcount, stock-based compensation, and a one-time management performance bonus.
• Profitability: The net loss for the quarter widened to $646,564 from $85,677 in the prior year. However, the nine-month net loss improved to $862,537 from $993,704 in the prior year.
• Liquidity: Cash and cash equivalents increased 122% to $1.5 million from $674,000 at the end of the prior fiscal year. This improvement was driven by financing activities rather than operations.
• Debt: The company incurred $587,339 in net carrying value of convertible debt, a new liability not present in the prior year, resulting from a December 2009 private placement.

Guidance, Outlook, Risks, and Unusual Items

Going Concern Warning: Management has raised substantial doubt about the Company's ability to continue as a going concern. Despite recent financing, existing working capital may not be sufficient to fund operations for the next twelve months without additional capital or significant expenditure reductions.

Financing Activities:

• December 2009: Raised approximately $922,000 net from the issuance of 5% senior secured convertible debentures and warrants.
• June 2010: Sold 460,000 shares of common stock in a private placement for net proceeds of $345,000.

Unusual Items:

• One-Time Revenue: A $524,000 software license sale to a key customer in the second quarter of fiscal 2010 significantly boosted nine-month revenue figures.
• One-Time Expense: G&A expenses included a one-time management performance bonus.
• Interest Expense: Interest and other expenses increased to $91,782 for the quarter (from $1,337 prior year) due to accretion of discounts on the new convertible debt.

Risk Factors:

• History of losses and uncertainty regarding future profitability.
• Dependence on a limited number of customers (3 customers accounted for 40.2% of sales in the nine months ended June 30, 2010).
• Need for additional financing to sustain operations.
• Volatility of common stock price.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $1.5 million cash balance against the stated need for additional funding within 12 months.
• Debt Covenants: Review the terms of the $1 million convertible debentures, specifically the conversion price ($0.75), maturity date (Dec 2011), and covenants restricting dividends.
• Revenue Concentration: Assess the risk associated with the top 3 customers representing over 40% of nine-month sales.
• Stock-Based Compensation: Note the significant increase in stock-based compensation expense ($291,229 for nine months) and its impact on future dilution.
• Going Concern Status: Monitor subsequent filings for evidence of new financing or further cost-cutting measures to address the substantial doubt on continuation.