Unassociated Document
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549

FORM 10-QSB

(Mark One)

x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2005 or

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 0-15235  

Mitek Systems, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
87-0418827
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)

8911 Balboa Ave., Suite B, San Diego, California
92123
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code (858) 503-7810 

14145 Danielson St., Suite B, Poway, CA 92064
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x  No o.

There were 15,681,345 shares outstanding of the registrant's Common Stock as of January 20, 2006.
 

MITEK SYSTEMS, INC.

FORM 10-QSB

For the Quarter Ended December 31, 2005

INDEX


Part 1. Financial Information

Item 1.
Financial Statements
Page
 
 
a)
Balance Sheet (unaudited)
  
   
As of December 31, 2005
1
       
 
b)
Statements of Operations
  
   
for the Three Months Ended December 31, 2005 and 2004 (Unaudited)
2
       
 
c)
Statements of Cash Flows
  
   
for the Three Months Ended December 31, 2005 and 2004 (Unaudited)
3
       
 
d)
Notes to Unaudited Financial Statements
4
       

Item 2.
Management’s Discussion and Analysis of Financial
  
 
Condition and Results of Operations
7
 
Item 4.
Controls and Procedures
10

Part II. Other Information

Item 1.
Legal Proceedings
10

Item 6.
Exhibits and Reports on Form 8-K
11

Signature
12


ITEM 1
FINANCIAL INFORMATION
 
MITEK SYSTEMS, INC
BALANCE SHEET
(Unaudited)

   
December 31,
  
   
2005
  
ASSETS
        
CURRENT ASSETS: 
        
Cash and cash equivalents 
  
$
1,762,829
  
Accounts receivable-net of allowances of $71,631 
    
892,449
 
Inventory, prepaid expenses and other current assets 
    
132,137
 
 Total current assets
    
2,787,415
 
         
PROPERTY AND EQUIPMENT-net 
    
108,877
 
OTHER ASSETS 
    
137,782
 
         
TOTAL ASSETS
  
$
3,034,074
  
         
LIABILITIES AND STOCKHOLDERS' EQUITY
        
         
CURRENT LIABILITIES: 
        
Accounts payable 
  
$
213,568
  
Accrued payroll, vacation and related taxes 
    
276,097
 
Deferred revenue 
    
311,445
 
Other accrued liabilities 
    
144,090
 
Current portion of Convertible Debt, net of unamortized 
        
financing costs of $130,000 
    
659,318
 
         
TOTAL LIABILITIES
    
1,604,518
 
         
         
STOCKHOLDERS' EQUITY: 
        
         
Common stock - $.001 par value; 40,000,000 shares authorized, 
        
15,556,345 issued and outstanding 
    
15,556
 
Additional paid-in capital 
    
13,526,564
 
Accumulated deficit 
    
(12,112,564
)
 Total stockholders' equity
    
1,429,556
 
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
$
3,034,074
  
 
See accompanying notes to financial statements

1

MITEK SYSTEMS, INC
STATEMENTS OF OPERATIONS
(Unaudited)

   
THREE MONTHS ENDED
  
   
December 31,
  
   
2005
  
2004
  
           
SALES
              
Software including $17,000 and $34,000 
  
$
785,583
  
$
818,938
  
to a related party, respectively
              
Professional Services, education and other including 
    
735,079
   
481,484
 
$350,000 and $25,000 to a related party, respectively
              
NET SALES
    
1,520,662
   
1,300,422
 
               
               
               
COSTS AND EXPENSES:
              
Cost of sales-Software 
    
40,073
   
81,199
 
Cost of sales-Professional Services, education and other 
    
369,738
   
102,119
 
Operations 
    
21,464
   
40,838
 
Selling and marketing 
    
398,557
   
579,880
 
Research and development 
    
326,675
   
370,028
 
General and administrative 
    
531,875
   
926,815
 
Total costs and expenses
    
1,688,382
   
2,100,879
 
               
OPERATING LOSS
    
(167,720
)
  
(800,457
)
               
OTHER INCOME (EXPENSE):
              
Interest expense 
    
(311,648
)
  
(133,660
)
Change in fair value of warrant liability 
    
0
   
(3,475
)
Interest and other income 
    
6,936
   
20,078
 
Total other income (expense) - net 
    
(304,712
)
  
(117,057
)
               
               
LOSS BEFORE INCOME TAXES
    
(472,432
)
  
(917,514
)
               
PROVISION FOR INCOME TAXES
    
0
    
0
  
               
NET LOSS
  
$
(472,432
)
$
(917,514
)
               
NET LOSS PER SHARE - BASIC AND DILUTED
  
$
(0.03
)
$
(0.08
)
               
               
WEIGHTED AVERAGE NUMBER OF
              
COMMON SHARES OUTSTANDING - BASIC AND DILUTED
    
15,018,703
   
11,389,481
 
 
See accompanying notes to financial statements
 
2
 
MITEK SYSTEMS, INC
STATEMENTS OF CASH FLOWS
(Unaudited)

   
THREE MONTHS ENDED
  
   
December 31,
  
   
2005
  
2004
  
OPERATING ACTIVITIES
              
Net loss
  
$
(472,432
)
$
(917,514
)
Adjustments to reconcile net loss to net cash 
              
used in operating activities: 
              
Depreciation and amortization
    
13,339
   
23,077
 
Provision for bad debts
    
0
   
24,000
 
Gain on disposal of property and equipment
    
(2,551
)
  
0
 
Change in fair value of warrant liability
    
0
   
3,476
 
Amortization of debt discount
    
288,085
   
86,771
 
Provision for sales returns & allowances
    
0
   
5,000
 
Fair value of stock options issued to non-employees
    
0
   
2,580
 
Gain on sale of equity investment
    
0
   
(16,159
)
Changes in assets and liabilities: 
              
Accounts receivable
    
(119,239
)
  
(406,791
)
Inventory, prepaid expenses, and other assets
    
40,998
   
(62,226
)
Other long term assets
    
0
   
(20,927
)
Accounts payable
    
6,632
   
73,284
 
Accrued payroll and related taxes
    
(75,008
)
  
(3,943
)
Deferred revenue
    
(116,062
)
  
(162,142
)
Other accrued liabilities
    
(156,251
)
  
82,990
 
Net cash used in operating activities 
    
(592,489
)
  
(1,288,524
)
               
INVESTING ACTIVITIES
              
Purchases of property and equipment 
    
(41,189
)
  
(13,235
)
Proceeds from sale of property and equipment 
    
4,150
   
569
 
Proceeds (advances) on related party note receivable-net 
    
0
   
150,000
 
Net cash provided by (used in) investing activities 
    
(37,039
)
  
137,334
 
               
FINANCING ACTIVITIES
              
Repayment of borrowings 
    
0
   
(90,909
)
Proceeds from exercise of stock options 
    
5,153
   
0
 
Net cash provided by (used in) financing activities 
    
5,153
   
(90,909
)
               
NET DECREASE IN CASH AND CASH EQUIVALENTS
    
(624,375
)
  
(1,242,099
)
               
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
2,387,204
   
2,607,173
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  
$
1,762,829
  
$
1,365,074
  
               
               
SUPPLEMENTAL DISCLOSURE OF
              
CASH FLOW INFORMATION
              
Cash paid for interest 
  
$
23,563
  
$
46,888
  
Cash paid for income taxes 
  
$
-
  
$
-
  
               
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
              
ACTIVITIES
              
Warrants issued in connection with settlement  
  
$
-
  
$
73,159
  
Conversion of debt to equity  
  
$
850,000
  
$
-
  
 
See accompanying notes to financial statements
 
3
 
MITEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

1.
Basis of Presentation

The accompanying unaudited financial statements of Mitek Systems, Inc. (the “Company”) have been prepared in accordance with the instructions to Form 10-QSB and, therefore, do not include all information and footnote disclosures that are otherwise required by Regulation S-B and that will normally be made in the Company's Annual Report on Form 10-KSB. The financial statements do, however, reflect all adjustments (solely of a normal recurring nature) which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented.

Results for the three months ended December 31, 2005 and 2004 are not necessarily indicative of results which may be reported for any other interim period or for the year as a whole.

2.
Accounting for Stock-Based Compensation

We account for stock-based compensation in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation.

Pro forma information regarding net loss and loss per share is required by SFAS No. 123, Accounting for Stock-based Compensation, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the dates of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the three months ended December 31, 2005 and 2004.

 
2005
  
2004
Risk free interest rates
4.43%
  
3.09%
Dividend yields
0%
  
0%
Volatility
79%
  
77%
Weighted average expected life
3 years
  
3 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.

Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. Our pro forma information is as follows (in thousands, except for net loss per share information):
 
   
Three months ended
December 31
  
   
2005
  
2004
  
Net income (loss) as reported
  
$
(472
)
$
(917
)
Net income (loss) pro forma
    
(574
)
  
(1,009
)
Net income (loss) per share as reported
    
(.03
)
  
(.09
)
Net income (loss) per share pro forma
    
(.04
)
  
(.09
)

3.
Issuance of Convertible Debt

On June 11, 2004, we secured a financing arrangement with Laurus Master Fund (“Laurus”). The financing consists of a $3 million Secured Note that bears interest at the rate of prime (as published in the Wall Street Journal), plus one percent (6.75% as of September 30, 2005) and has a term of three years (June 11, 2007). The Secured Note is convertible into shares of our common stock at an initial fixed price of $0.70 per share, a premium to the 10-day average closing share price as of June 11, 2004. The conversion price of the Secured Note is subject to adjustment upon the occurrence of certain events. The effective annual interest rate of this Convertible Debt, after considering the total debt issue costs (discussed below), is approximately 36%.

4
In connection with the financing, Laurus was also issued warrants to purchase up to 860,000 shares of our common stock. The warrants are exercisable as follows: 230,000 shares at $0.79 per share; 230,000 shares at $0.85 per share and the balance at $0.92 per share. The gross proceeds of the convertible debt were allocated to the debt instrument and the warrants on a relative fair value basis. Then we computed the beneficial conversion feature embedded in the debt instrument using the effective conversion price in accordance with EITF 98-5 and 00-27. We have recorded a debt discount of (i) $367,887 for the valuation of the 860,000 warrants issued with the note (computed using a Black-Scholes model with an interest rate of 2.53%, volatility of 81%, zero dividends and expected term of three years); (ii) $522,384 for a beneficial conversion feature inherent in the Secured Note and (iii) $151,000 for debt issue costs paid to affiliates of the lender, for a total discount of $1,041,271. The $1,041,271 is being amortized over the term of the Secured Note. Cumulative amortization of the debt discounts through December 31, 2005 was $911,271.

A registration rights agreement was executed requiring us to register the shares of our common stock underlying the Secured Note and warrants so as to permit the public resale thereof. Liquidated damages of 2% of the Secured Note balance per month accrued if stipulated deadlines were not met. Prior to the end of fiscal 2004, we incurred a penalty of $208,000 to Laurus Funds for failing to register the securities underlying the Debt Instrument. On October 4, 2004, the Company settled this penalty with Laurus Master Fund, LLC by agreeing to issue an additional warrant for the purchase of 200,000 shares at a price of $0.70 per share. The value of this additional warrant was calculated by us to be $73,159, using a Black-Scholes option pricing model. The registration statement was filed with the Securities and Exchange Commission on October 4, 2004. We were required to have received an effective registration no later than December 31, 2004. The registration was not effective by that time, so we incurred liquidated damages, payable in cash, in the amount of $215,000 for the period January 1, 2005 to May 13, 2005. The registration became effective on May 13, 2005, and we do not anticipate there will be future penalties associated with the registration.

In conjunction with raising capital through the issuance of convertible debt, the Company has issued various warrants that have registration rights for the underlying shares.  As the contracts must be settled by the delivery of registered shares and the delivery of the registered shares is not controlled by the Company, pursuant to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the net value of the warrants at the date of issuance was recorded as a warrant liability on the balance sheet ($367,887) and the change in fair value from the date of issuance to September 30, 2004 has been included in other (expense) income.

To secure the payment of all obligations, we entered into a Master Security Agreement which assigns and grants to Laurus a continuing security interest in all of the following property now owned or at any time upon execution of the agreement, acquired by us or subsidiaries, or in which any assignor now have or at any time in the future may acquire any right, title or interest: all cash, cash equivalents, accounts, deposit accounts, inventory, equipment, goods, documents, instruments (including, without limitation, promissory notes), contract rights, general tangibles, chattel paper, supporting obligations, investment property, letter-of-credit rights, trademarks, trademark applications, patents, patent applications, copyrights, copyright applications, tradestyles and any other intellectual property, in each case, in which any Assignor now have or may acquire any right, title or interest, all proceeds and products thereof (including, without limitation, proceeds of insurance) and all additions, accessions and substitutions. In the event any Assignor wishes to finance an acquisition in the ordinary course of business of any hereafter-acquired equipment and have obtained a commitment from a financing source to finance such equipment from an unrelated third party, Laurus agrees to release its security interest on such hereafter-acquired equipment so financed by such third party financing source.

The Secured Notes stipulates that the Secured Note is to be repaid using cash payment along with an equity conversion option; the details of both methods for repayment are as follows: The cash repayments stipulate that beginning on December 1, 2004, or the first amortization date, we shall make monthly payments to Laurus on each repayment date until the maturity date, each in the amount of $90,909, together with any accrued and unpaid interest to date. The conversion repayment states that each month by the fifth business day prior to each amortization date, Laurus shall deliver to us a written notice converting the monthly amount payable on the next repayment date in either cash or shares of common stock, or a combination of both. If a repayment notice is not delivered by Laurus on or before the applicable notice date for such repayment date, then we pay the monthly amount due in cash. Any portion of the monthly amount paid in cash shall be paid to Laurus in an amount equal to 102% of the principal portion of the monthly amount due. If Laurus converts all or a portion of the monthly amount in shares of our common stock, the number of such shares to be issued by us will be the number determined by dividing the portion of the monthly amount to be paid in shares of common stock, by the applicable fixed conversion price, which is presently $0.70 per share.

5

The following table reflects the Convertible Debt at December 31, 2005:

Convertible Debt
  
$
789,318
  
Deferred financing costs
    
(130,000
)
     
659,318
  

The debt has the following principal amounts due over the remaining life as follows:

Year ended 9/30/06
  
$
789,318
  

4.
Commitments and Contingencies

We signed a seven year lease for a property located at 8911 Balboa Avenue, Suite B, San Diego, California 92123 which became effective in December 2005. The initial term of the Lease is seven years. The Lease will be terminable by the Company after the calendar month which is forty-eight (48) full calendar months after the Commencement Date (December 9, 2005); however, termination will require certain penalties to be paid equal to two months of base rent and all unamortized improvements and commissions.

Future annual minimum rental payments payable by us under non-cancelable leases are as follows:

   
Operating
Leases
  
Year Ending September 30:
        
2006
  
$
271,555
  
2007
    
305,002
  
2008
    
314,558
  
2009
    
324,814
  
2010
    
333,671
  
Thereafter
    
724,775
  
Total
  
$
2,274,375
  

5.
Related Party Transactions

In the first quarter of fiscal 2006, we realized revenue of approximately $350,000 with John H. Harland Company (“John Harland”) for engineering development services pursuant to an agreement dated February 22, 2005 which was subsequently amended on December 29, 2005. The amendment extended the life of the agreement and increased the amount of non-refundable engineering development services. In addition, we sold to Harland Financial Solutions, a subsidiary of John Harland, software licenses and software maintenance for approximately $17,000. In the first quarter of fiscal 2005, we realized revenue of approximately $25,000 with John H. Harland Company for engineering development services. In addition, we sold to Harland Financial Solutions software licenses and software maintenance for approximately $34,000.

6.
Product Revenues - Below is a summary of the revenues by product lines.
 
   
Three Months Ended
December 31
  
Revenue
  
2005
  
2004
  
(000’s)
          
Recognition Toolkits
  
$
1,126
  
$
911
  
Document and Image Processing
Solutions
    
10
    
64
  
Maintenance and other
    
385
    
325
  
Total Revenue
  
$
1,521
  
$
1,300
  

7.
Subsequent Events

As of January 17, 2006, Laurus Mater Fund has converted its note in the amount of $87,500 to 125,000 shares. The balance of Laurus convertible note on January 20, 2006 was approximately $702,000.
 
6

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion

In addition to historical information, this Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. As contained herein, the words "expects," "anticipates," "believes," "intends," "will," and similar types of expressions identify forward-looking statements, which are based on information that is currently available to us, speak only as of the date hereof, and are subject to certain risks and uncertainties. To the extent that the MD&A contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in forward-looking statements. We have attempted to identify certain of the factors that it currently believes may cause actual future experiences and results to differ from our current expectations. The difference may be caused by a variety of factors, including, but not limited, to the following: (i) adverse economic conditions; (ii) decreases in demand for our products and services; (iii) intense competition, including entry of new competitors into our markets; (iv) increased or adverse federal, state and local government regulation; (v) our inability to retain or renew its working capital credit line or otherwise obtain additional capital on terms satisfactory to us; (vi) increased or unexpected expenses; (vii) lower revenues and net income than forecast; (viii) price increases for supplies; (ix) inability to raise prices; (x) the risk of additional litigation and/or administrative proceedings involving us and our employees; (xi) higher than anticipated labor costs; (xii) adverse publicity or news coverage regarding us; (xiii) inability to successfully carry out marketing and sales plans, including the Company’s strategic realignment; (xiv) loss of key executives; (xv) changes in interest rates; (xvi) inflationary factors; (xvii) and other specific risks that may be alluded to in this MD&A.

Our strategy for fiscal 2006 is to grow the identified markets for its new products and enhance the functionality and marketability of our image based recognition and forgery detection technologies.  In particular, Mitek is determined to expand the installed base of its Recognition Toolkits and leverage existing technology by devising recognition-based applications to detect potential fraud and loss at financial institutions.  We also seek to expand the installed base of our Check Forgery detection Solutions by entering into reselling relationships with key resellers who will better penetrate the market and provide entrée into a larger base of community banks.

Management presumes that users of these interim financial statements and information have read or have access to the discussion and analysis for the preceding fiscal year.
 
APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates by management are affected by management’s application of accounting policies are subjective and may differ from actual results. Critical accounting policies for us include revenue recognition, impairment of accounts and notes receivable, loss contingencies, fair value of equity instruments and accounting for income taxes.

Revenue Recognition

We enter into contractual arrangements with end users that may include licensing of our software products, product support and maintenance services, consulting services, resale of third-party hardware, or various combinations thereof, including the sale of such products or services separately. Our accounting policies regarding the recognition of revenue for these contractual arrangements is fully described in Notes to the Financial Statements on Form 10-KSB previously filed.

We consider many factors when applying accounting principles generally accepted in the United States of America related to revenue recognition. These factors include, but are not limited to:

·
The actual contractual terms, such as payment terms, delivery dates, and pricing of the various product and service elements of a contract
·
Availability of products to be delivered
·
Time period over which services are to be performed
 
7
 
·
Creditworthiness of the customer
·
The complexity of customizations to our software required by service contracts
·
The sales channel through which the sale is made (direct, VAR, distributor, etc.)
·
Discounts given for each element of a contract
·
Any commitments made as to installation or implementation “go live” dates

Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for any particular contract with a customer. Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards. Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse impact on our future revenues and operating results.

Accounts Receivable.

We evaluate the creditworthiness of our customers prior to order fulfillment and we perform ongoing credit evaluations of our customers to adjust credit limits based on payment history and our assessment of the customer's current creditworthiness. We constantly monitor collections from our customers and maintain a provision for estimated credit losses that is based on historical experience and on specific customer collection issues. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our revenue recognition policy requires customers to be deemed creditworthy, our accounts receivable are based on customers whose payment is reasonably assured. Our accounts receivable are derived from sales to a wide variety of customers. We do not believe a change in liquidity of any one customer or our inability to collect from any one customer would have a material adverse impact on our financial position.

Loss Contingencies

The financial statements presented include accruals for a loss contingency.
 
Fair Value of Equity Instruments

The valuation of certain items, including valuation of warrants, beneficial conversion feature related to convertible debt and compensation expense related to stock options granted, involve significant estimations with underlying assumptions judgmentally determined. The valuation of warrants and stock options are based upon a Black Scholes valuation model, which involve estimates of stock volatility, expected life of the instruments and other assumptions. As our stock is thinly traded, the estimates, which are based partly on historical pricing of our stock, may not represent fair value, but we believe it is presently the best form of estimating objective fair value.

Deferred Income Taxes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We maintain a valuation allowance against the deferred tax asset due to uncertainty regarding the future realization based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. Until such time as we can demonstrate that it will no longer incur losses or if we are unable to generate sufficient future taxable income we could be required to maintain the valuation allowance against our deferred tax assets.

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

Comparison of Three Months Ended December 31, 2005 and 2004

Net Sales. Net sales for the three month period ended December 31, 2005 were approximately $1,521,000, compared to approximately $1,300,000 for the same period in 2004, an increase of approximately $221,000, or 17%. The increase was primarily attributable to the increase in revenue from John Harland & companies for professional services.

8
Revenue from Harland for engineering development services was approximately $350,000 for the first Quarter of fiscal 2006 compared with approximately $25,000 for the same period in fiscal 2005.
 
Cost of Sales. Cost of Sales for the three month period ended December 31, 2005 was approximately $410,000 compared to approximately $183,000 for the same period in 2005, an increase of approximately $227,000 or 124%. Stated as a percentage of net sales, cost of sales was 27% compared to 14% for the three month period ended December 31, 2004. The dollar increase, and the increase as a percentage of sales, in cost of sales is due to an increase in professional services revenue and direct cost related to professional services.

Operations Operations expenses for the three-month period ended December 31, 2005 were approximately $21,000, compared to approximately $41,000 for the same period in 2004, a decrease of approximately $20,000 or 95% The decrease in expenses is almost entirely due to the cost reduction effort made by management in the fourth quarter of fiscal 2005.
 
Selling and Marketing. Selling and marketing expenses for the three month period ended December 31, 2005 were approximately $399,000, compared to approximately $580,000 for the same period in 2004, a decrease of approximately $181,000 or 31%. Stated as a percentage of net sales, selling and marketing expenses decreased to 26% for the period ended December 31, 2005, as compared to 45% for the same period in 2004. The dollar decrease in expenses is primarily attributable to the expense reduction plan put in place by management in the fourth quarter of fiscal 2005.

Research and Development. Research and development expenses are incurred to maintain existing products, develop new products or new product features, and development of custom projects. Research and development expenses for the three month period ended December 31, 2005 were approximately $327,000 compared to approximately $370,000 for the same period in 2004, a decrease of approximately $43,000 or 12%. Stated as a percentage of net sales, research and development expenses decreased to 22% for the period ended December 31, 2005 as compared to 28% for the same period in 2004. The decrease in expenses for the three-month period is primarily the result of cost control plan instituted in the fourth quarter of fiscal 2005.

General and Administrative. General and administrative expenses for the three month period ended December 31, 2005 were approximately $532,000, compared to approximately $927,000 for the same period in 2004, a decrease of approximately $395,000 or 43%. As a percentage of net sales, general and administrative expenses decreased to 35% for the period ended December 31, 2005 as compared to 71% for the same period in 2004. The decrease in expenses for the three month period is attributable to a reduction in legal costs relating to litigation with BSM and a reduction in audit fees..

Interest and Other Income (Expense) - Net. Interest and other income (expense) for the three-month period ended December 31, 2005 was approximately ($305,000), compared to interest and other income (expense) of approximately ($117,000) for the same period in 2004, a change of approximately $188,000. The primary reason for the change is the cash interest paid to Laurus Master Fund during the quarter of approximately $24,000, as well as amortization of the deferred loan costs related to the beneficial conversion feature of the convertible note, including additional expense recognized from conversion of debt to equity.

LIQUIDITY AND CAPITAL

At December 31, 2005 the Company had approximately $1,763,000 in cash as compared to approximately $2,387,000 at September 30, 2005. Accounts receivable totaled approximately $892,000, an increase of approximately $119,000 over the September 30, 2005 balance of approximately $773,000. This increase was primarily the result of increased sales activity during the first fiscal quarter.

We financed our cash needs during the first quarter of fiscal 2006 primarily from collections of accounts receivable, and existing cash. During fiscal 2005, we financed our cash needs primarily from financing and investing activities.

Net cash used in operating activities during the three months ended December 31, 2005 was approximately ($592,000). The primary use of cash from operating activities was the loss during the quarter of approximately $472,000, an increase in accounts receivable of approximately $119,000, a decrease to the deferred revenue accounts of approximately $116,000. The primary non-cash adjustment to operating activities was depreciation and amortization expense of approximately $301,000. The Company used part of the cash provided from operating activities to finance the acquisition of equipment used in its business.

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Our working capital and current ratio was approximately $1,185,000 and 1.74, respectively, at December 31, 2005, and approximately $1,323,000 and 1.67, respectively, at September 30, 2005. At December 31, 2005, total liabilities to equity ratio was 1.12 to 1 compared to 2.36 to 1 at September 30, 2005.

There are no significant capital expenditures planned for the foreseeable future.

We evaluate our cash requirements on a quarterly basis. Historically, we have managed our cash requirements principally from cash generated from operations. We believe that we will have sufficient liquidity to finance our operations for the next twelve months using existing cash, and cash generated from operations.

CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of the quarter ended December 31, 2005.
 
There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d - 15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting

PART II - OTHER INFORMATION

Item 1.
Legal Proceedings

There are no additional material legal proceedings pending against the Company not previously reported by the Company in Item 3 of its Form 10-KSB for the year ended September 30, 2005, which Item 3 is incorporated herein by reference.

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Item 6.
Exhibits and Reports on Form 8-K

a.
Exhibits:
The following exhibits are filed herewith:

Exhibit Number
Exhibit Title
31.1
Certification of Periodic Report by the Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2
Certification of Periodic Report by the Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1
Certification of Periodic Report by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2
Certification of Periodic Report by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002


b.
The company filed a Form 8-K during the first quarter of fiscal 2006:

Form 8-K filed December 5, 2005.

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       SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

     
  MITEK SYSTEMS, INC.
 
 		  
 		  
 
Date: February 14, 2006 /s/ James B. Debello
 
James B. DeBello, President and
  Chief Executive Officer
     
 
 		  
 		  
 
Date: February 14, 2006 /s/ Tesfaye Hailemichael
 
Tesfaye Hailemichael
  Chief Financial Officer

 
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