MITK

Business Context and Reporting Period

Company: Mitek Systems, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Business Overview: Mitek develops and markets intelligent character recognition and document capture software, primarily for the financial services sector. The company recently expanded into mobile business applications (branded "Oomph"), including Mobile Deposit, which allows users to deposit checks via smartphone cameras. The company operates as a smaller reporting company with one operating segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by approximately 31% ($1.61 million) due to reduced sales of core products, driven by the economic downturn, consolidation of financial institutions, and a decline in back-office check processing. Revenue from a major related party (John Harland) dropped 97%.
• Increased Losses: Net loss increased by approximately 77% to $1.32 million. This was driven by the revenue decline and an increase in Research and Development (R&D) expenses.
• R&D Expenses: R&D expenses increased 5% to $1.90 million. This increase was primarily due to the expensing of approximately $284,000 in software development costs for the Mobile Capture application after its general release, which were capitalized in the prior period.
• Liquidity Deterioration: Cash balances decreased 48% to $674,000. The company moved from positive working capital of $919,000 in 2008 to negative working capital of $280,000 in 2009. The current ratio fell from 1.66 to 0.80.
• Cost Reductions: Selling and marketing expenses decreased 42% and General and Administrative expenses decreased 14%, largely due to a workforce reduction implemented in January 2009.

Guidance, Outlook, Risks, and Unusual Items

• Going Concern Warning: The independent auditors have issued a "going concern" opinion. The company has incurred recurring losses, negative cash flows from operations, and negative working capital. Management states that existing working capital may not be sufficient to fund operations through September 30, 2010, without additional financing.
• Recent Financing: On December 10, 2009 (subsequent to the period end), the company issued $1.0 million in 5% senior secured convertible debentures and warrants, netting approximately $930,000 in proceeds.
• Key Risks:
  • Dependence on a single technology type (character recognition).
  • Intense competition and potential price reductions.
  • Need for additional capital to fund operations; failure to secure financing could force curtailment of operations.
  • Concentration of revenue (16% from one customer in 2009).
• Management Commentary: Management implemented a workforce reduction to decrease operating expenses. They are actively seeking debt, equity, or equity-based financing to sustain operations.

Investor Verification Checklist

• Capital Adequacy: Verify the status of the December 2009 debenture issuance and whether additional financing has been secured to cover the projected cash shortfall through 2010.
• Mobile Product Adoption: Assess the revenue contribution and market acceptance of the new "Oomph" mobile applications (Mobile Deposit, Mobile Receipt) to determine if they can offset the decline in traditional check processing software sales.
• Customer Concentration: Monitor the stability of the single customer representing 16% of 2009 revenue and the related party (John Harland) whose revenue contribution collapsed.
• Debt Covenants: Review the terms of the new convertible debentures, specifically the conversion price ($0.75), interest rate (5%), and security interest on all company assets.
• Stock Volatility: Note that the stock trades on the OTC Bulletin Board and is subject to "penny stock" regulations, which may limit liquidity.