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, 2004 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15235
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MITEK SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 87-0418827
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14145 Danielson St, Ste B,Poway, California 92064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 513-4600
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(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 [ ]
There were 11,389,481 shares outstanding of the registrant's Common Stock
as of January 31, 2005.
MITEK SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2004
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
----
a) Balance Sheets As of December 31, 2004 (Unaudited)
and September 30, 2004 (Audited).......................... 1
b) Statements of Operations for the Three Months Ended
December 31, 2004 and 2003 (Unaudited).................... 2
c) Statements of Cash Flows for the Three Months Ended
December 31, 2004 and 2003 (Unaudited).................... 3
d) Notes to Financial Statements............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
Item 4. Controls and Procedures.........................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................15
Item 6. Exhibits and Reports on Form 8-K................................15
SIGNATURE.....................................................................16
ITEM 1 FINANCIAL INFORMATION
MITEK SYSTEMS, INC
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2004 2004
(UNAUDITED) (AUDITED)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 1,365,074 $ 2,607,173
Accounts receivable-net of allowances of
$797,473 and $773,473 respectively 952,944 570,154
Note receivable - related party 0 133,841
Inventories - net 15,398 11,078
Prepaid expenses and other assets 238,783 180,876
------------ ------------
Total current assets 2,572,199 3,503,122
PROPERTY AND EQUIPMENT-net 108,699 119,111
OTHER ASSETS 20,927 0
------------ ------------
TOTAL ASSETS $ 2,701,825 $ 3,622,233
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 362,193 $ 288,909
Accrued payroll and related taxes 236,056 240,000
Deferred revenue 235,582 397,724
Warrants-liability 492,541 415,907
Current portion of Convertible Debt, net of unamortized
financing costs of $347,088 and $338,264 respectively 743,821 570,827
Other accrued liabilities 625,370 743,056
------------ ------------
Total current liabilities 2,695,563 2,656,423
LONG-TERM LIABILITIES:
Deferred rent 10,891 13,215
Convertible Debt, net of unamortized financing costs
of $511,164 and $606,760 respectively 1,307,018 1,484,149
------------ ------------
Total long-term liabilities 1,317,909 1,497,364
------------ ------------
TOTAL LIABILITIES 4,013,472 4,153,787
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock - $.001 par value; 20,000,000 shares authorized,
11,389,481 issued and outstanding at
December 31, 2004 and September 30,2004, respectively 11,389 11,389
Additional paid-in capital 10,207,255 10,069,833
Accumulated deficit (11,530,291) (10,612,776)
------------ ------------
Net stockholders' equity (deficit) (1,311,647) (531,554)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,701,825 $ 3,622,233
============ ============
See accompanying notes to financial statements
1
MITEK SYSTEMS, INC
STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
SALES
Software $ 818,938 $ 671,650
Hardware 0 370,105
Professional Services, education and other 481,484 653,127
------------ ------------
NET SALES 1,300,422 1,694,882
COSTS AND EXPENSES:
Cost of sales-Software 81,199 115,412
Cost of sales-Hardware 0 339,977
Cost of sales-Professional Services, education and other 102,119 287,123
Operations 40,838 361,108
Selling and marketing 579,880 626,791
Research and development 370,028 509,060
General and administrative 926,815 539,304
------------ ------------
Total costs and expenses 2,100,879 2,778,775
------------ ------------
OPERATING LOSS (800,457) (1,083,893)
OTHER INCOME (EXPENSE):
Interest expense (133,660) 0
Change in fair value of warrant liability (3,475) 0
Interest and other income 20,078 9,729
------------ ------------
Total other income (expense) - net (117,057) 9,729
------------ ------------
LOSS BEFORE INCOME TAXES (917,514) (1,074,164)
PROVISION FOR INCOME TAXES 0 2,550
------------ ------------
NET LOSS $ (917,514) $ (1,076,714)
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.08) $ (0.10)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING - BASIC AND DILUTED 11,389,481 11,264,356
============ ============
See accompanying notes to financial statements
2
MITEK SYSTEMS, INC
STATEMENTS OF CASH FLOWS
UNAUDITED
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net (loss) income $ (917,514) $(1,076,714)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 23,077 113,044
Provision for bad debts 24,000 24,000
Change in fair value of warrant liability 3,476 0
Amortization of debt discount 86,771 0
Provision for sales returns & allowances 5,000 31,768
Fair value of stock options issued to non-employees 2,580 0
Gain on sale of equity investment (16,159) 0
Changes in operating assets and liabilities:
Accounts receivable (406,791) 1,128,614
Inventories, prepaid expenses, and other assets (62,226) (70,092)
Other long term assets (20,927) 0
Accounts payable 73,284 (224,118)
Accrued payroll and related taxes (3,943) (210,038)
Long-term payable 0 (8,552)
Deferred revenue (162,142) (128,622)
Other accrued liabilities 82,990 (49,284)
----------- -----------
Net cash used in operating activities (1,288,524) (469,994)
INVESTING ACTIVITIES
Purchases of property and equipment (13,235) (15,395)
Proceeds from sale of property and equipment 569 0
Payment (advances) on related party note receivable-net 150,000 5,841
----------- -----------
Net cash provided by (used in) investing activities 137,334 (9,554)
FINANCING ACTIVITIES
Repayment on convertible debt (90,909) 0
Proceeds from exercise of stock options 0 125,523
----------- -----------
Net cash provided by financing activities (90,909) 125,523
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,242,099) (354,025)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,607,173 1,819,102
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,365,074 $ 1,465,077
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest $ 46,888 $ --
=========== ===========
Cash paid for income taxes $ -- $ 2,550
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES
Warrants issued in connection with settlement $ 73,159 $ 0
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-Q and, therefore, do not include all information and footnote disclosures
that are otherwise required by Regulation S-X and that will normally be made in
the Company's Annual Report on Form 10-K. 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, 2004 and 2003 are not
necessarily indicative of results which may be reported for any other interim
period or for the year as a whole.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The amendments to SFAS 123 provided for under SFAS No.
148 are effective for financial statements for fiscal years ending after
December 15, 2002. The Company has not elected to adopt the fair value
accounting provisions of SFAS No. 123 and therefore the adoption of SFAS No. 148
did not have a material effect on our results of operations or financial
position.
In November 2004, the FASB issued Statement No. 151, Inventory Costs--an
amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB
No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The Company does not believe
adoption of this Statement will have a material effect on its financial
statements
In December 2004, the FASB issued Statement No. 152, Accounting for Real
Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67.
This Statement amends FASB Statement No. 66, Accounting for Sales of Real
Estate, to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement
also amends FASB Statement No. 67, Accounting for Costs and Initial Rental
Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. The Company does not have real estate which is subject to this Statement.
In December 2004, the FASB issued Statement No. 153 "Exchanges of
Nonmonetary Assets--an amendment of APB Opinion No. 29" This Statement amends
Opinion 29, Accounting for Nonmonetary Transactions, which provided based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement was issued to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The Company does not have any such assets
subject to this statement.
4
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. This Interpretation also incorporates, without change, the
guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, which is being superseded. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company has issued no guarantees
that qualify for disclosure in this interim financial statement.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 were initially to apply to variable
interest entities created after January 31, 2003. The consolidation requirements
were initially to apply to transactions entered into prior to February 1, 2003
in the first fiscal year or interim period beginning after June 15, 2003. The
FASB postponed implementation of FIN 46 in December 2003. The Company has no
variable interest entities.
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment". Statement 123(R) will provide investors and other users
of financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those filing as
small business issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after June 15, 2005. The
Company has evaluated the impact of the adoption of SFAS 123(R), and does not
believe the impact will be significant to the Company's overall results of
operations or financial position.
3. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts 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 December 31, 2003 and 2002.
2004 2003
---- ----
Risk free interest rates 3.09 1.9%
Dividend yields 0% 0%
Volatility 77% 78%
Weighted average expected life 3 years 3 years
5
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 the Company's 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. The Company's
pro forma information is as follows (in thousands, except for net loss per share
information):
THREE MONTHS ENDED
DECEMBER 31
------------------------
2004 2003
--------- ---------
Net income (loss) as reported $ (917) $ (1,077)
Net income (loss) pro forma (1,009) (1,237)
Net income (loss) per share as reported (.09) (.10)
Net income (loss) per share pro forma (.09) (.11)
4. CONVERTIBLE DEBT
On June 11, 2004, the Company secured a financing arrangement with
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% as of December 2, 2004)and has a term of three years (June 11, 2007). The
Secured Note is convertible into shares of the Company's 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 17.6%
In connection with the financing, Laurus was also issued warrants to
purchase up to 860,000 shares of the Company's 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 the Company computed the beneficial conversion
feature embedded in the debt instrument using the effective conversion price in
accordance with EITF 98-5 and 00-27. The Company 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.
On October 4, 2004 the Company filed the registration statement with the
Securities and Exchange Commission and the registration statement remains
pending as of the date of this report. Amortization of the debt discounts
through September 30, 2004 was $96,247.
To secure the payment of all obligations, the Company 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 the Company 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.
6
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, the Company 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 the Company 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 the Company pays 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 the Company's
common stock, the number of such shares to be issued by the Company 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.
A registration rights agreement was executed requiring the Company to
register the shares of its common stock underlying the Secured Note and warrants
so as to permit the public resale thereof (See Note 9). Liquidated damages of 2%
of the Secured Note balance per month accrue if stipulated deadlines are not
met. The registration statement was filed with the Securities and Exchange
Commission on October 4, 2004.
The following table reflects the Convertible Debt at December 31, 2004:
Convertible Debt $ 2,909,091
Deferred financing costs (858,252)
-----------
2,050,839
Less: Current Portion, net of unamortized financing costs (743,821)
-----------
$ 1,307,018
===========
The debt has the following principal amounts due over the remaining life
as follows:
Year ended 9/30/05 $ 818,182
Year ended 9/30/06 1,090,909
Year ended 9/30/07 $ 1,000,000
7
5. WARRANT LIABILITY
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 ($492,541) and the change in fair value from the
date of issuance to September 30, 2004 has been included in other (expense)
income.
Prior to the end of fiscal 2004, the Company incurred a penalty to
Laurus Funds for failing to register the securities underlying the Debt
Instrument described in Note 7. The amount of the penalty was $208,000. This
amount was shown as interest expense in the Financial Statements for the year
ended September 30, 2004. 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 the Company to be $73,159, using a
Black-Scholes option pricing model.
For the quarter ended December 31, 2004 the change in fair value of the
warrants issued with registration rights for the underlying shares increased by
approximately $3,476 to $492,541 at December 31, 2004 and is recognized in other
expense.
6. NOTE RECEIVABLE FROM MITEK SYSTEMS, LTD.
During the Quarter, the Company was approached by the Principal
Shareholder of Mitek Systems, Ltd, who offered to repurchase the Company's
interest. In exchange for a cash payment of $150,000 and the cancellation of the
stock options granted the principal, the Company agreed to exchange the shares
held and the note outstanding, including accrued and unpaid interest. Mitek
Systems, Ltd also agreed to cease using the Company's trade name and entered
into a reseller agreement on terms similar to other resellers unrelated to the
Company.
7. PRODUCT REVENUES - Below is a summary of the revenues by product lines.
THREE MONTHS
ENDED
DECEMBER 31
---------------
REVENUE 2004 2003
------ ------
(000'S)
Recognition Toolkits $ 911 $ 452
Check Image Solutions 0 688
Document and Image Processing
Solutions 64 240
Maintenance and other 325 315
------ ------
Total Revenue $1,300 $1,695
====== ======
8
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 the Company, 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
the Company's actual financial condition, operating results and business
performance may differ materially from that projected or estimated by the
Company in forward-looking statements. The Company has attempted to identify
certain of the factors that it currently believes may cause actual future
experiences and results to differ from the Company's 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
Company products and services; (iii) intense competition, including entry of new
competitors into the Company's markets; (iv) increased or adverse federal, state
and local government regulation; (v) the Company's inability to retain or renew
its working capital credit line or otherwise obtain additional capital on terms
satisfactory to the Company; (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 the Company and its employees; (xi) higher
than anticipated labor costs; (xii) adverse publicity or news coverage regarding
the Company; (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.
The Company's strategy for fiscal 2005 is to grow the identified markets
for its new products and enhance the functionality and marketability of the
Company's 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. The
Company also seeks to expand the installed base of its Check Forgery detection
Solutions by entering into reselling relationships with key resellers who will
better penetrate the market and provide entree 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. See also Item 3, "Quantitative and Qualitative
Disclosures about Market Risk."
CRITICAL ACCOUNTING POLICIES
Mitek's 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 Mitek include revenue
recognition, impairment of accounts and notes receivable, loss contingencies,
fair value of equity instruments and accounting for income taxes.
Revenue Recognition
The Company enters into contractual arrangements with end users that
may include licensing of the Company's 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. The Company's accounting policies regarding the recognition of
revenue for these contractual arrangements is fully described in Notes to the
Financial Statements on Form 10K previously filed.
9
The Company considers 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:
o The actual contractual terms, such as payment terms, delivery dates,
and pricing of the various product and service elements of a
contract
o Availability of products to be delivered
o Time period over which services are to be performed
o Creditworthiness of the customer
o The complexity of customizations to the Company's software required
by service contracts
o The sales channel through which the sale is made (direct, VAR,
distributor, etc.)
o Discounts given for each element of a contract
o 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 affect on
the Company's 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, relating to the litigation with BSM. While the Company believes it
has meritorious defenses against such claims, the ultimate resolution to the
matter, which is expected to occur within one year could result in a loss in
excess of the amount accrued.
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 the Company's stock is thinly traded, the estimates, which are
based partly on historical pricing of the Company's stock, may not represent
fair value, but the Company believes 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 the Company can demonstrate that it will no
longer incur losses or if the Company is unable to generate sufficient future
taxable income we could be required to maintain the valuation allowance against
our deferred tax assets.
10
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Comparison of Three Months Ended December 31, 2004 and 2003
Net Sales. Net sales for the three month period ended December 31, 2004
were $1,300,000, compared to $1,695,000 for the same period in 2003, a decrease
of $395,000, or 23%. The decrease was primarily attributable to the elimination
of revenue from the Check Image Solutions business, which accounted for $688,000
in fiscal 2004. This 100% decline in revenue was offset by a 105% increase in
revenue associated with our recognition toolkits, the result of license renewals
signed in the first quarter of 2004 Sales in the Document and Image Processing
Solutions also declined, by 71%. This is primarily due to the absence of a
dedicated sales force for this product line. Sales of Maintenance declined by
5%, reflecting the reduction of the installed base of maintenance customers, due
to the elimination of the Check Image Solution business, offset by continued
increase in the installed base of recognition toolkit customers purchasing
product support.
Cost of Sales. Cost of Sales for the three month period ended December
31, 2004 was $183,000, compared to $743,000 for the same period in 2003, a
decrease of $560,000 or 75%. Stated as a percentage of net sales, cost of sales
decreased to 14% for the three month period ended December 31, 2004 compared to
44% for the same period in 2003. The dollar decrease, and the decrease as a
percentage of sales, in cost of sales is almost entirely due to the elimination
of hardware installations related to the Company's CheckQuest product line,
which was sold to Harland Financial Solutions last year, during the three
months, as compared to the same period in 2004.
Operations. Operations expenses include costs associated with shipping
and receiving, quality assurance, customer support, installation and training.
As installation, training, maintenance and customer support revenues are
recognized, an appropriate amount of these costs are charged to cost of sales,
with unabsorbed costs remaining in operations expense. Gross Operations expense
for the three-month period ended December 31, 2004 were $41,000, compared to
$510,000 for the same period in 2003. Net Operations expenses for the
three-month period ended December 31, 2004 were $41,000, compared to $361,000
for the same period in 2003, a decrease of $320,000 or 89%. As a percentage of
net sales, operations expenses decreased to 3% for the three-month period ended
December 31, 2004, compared to 21% for the same period in 2003. The dollar
decrease in gross expenses is is almost entirely due to the elimination of
hardware installations related to the Company's CheckQuest product line, was
sold to Harland Financial Solutions last year. The dollar decrease in net
expense, and the decrease in expense as a percentage of net sales attributable
to the reduced spending discussed above.
Selling and Marketing. Selling and marketing expenses for the three
month period ended December 31, 2004 were $580,000, compared to $627,000 for the
same period in 2003, a decrease of $47,000 or 7%. Stated as a percentage of net
sales, selling and marketing expenses increased to 45% for the three month
period ended December 31, 2004, compared to 37% for the same period in 2003. The
dollar decrease in expenses is primarily attributable to reduced commissions
resulting from lower sales. The increase in expenses as a percentage of net
sales is primarily attributable to lower revenues.
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, 2004 were $370,000 compared to $509,000 for the
same period in 2003, a decrease of $139,000 or 27%. Stated as a percentage of
net sales, research and development expenses decreased to 28% for the three
month period ended December 31, 2004, compared to 30% for the same period in
2003. The decrease in expenses for the three-month period is primarily the
result of the elimination of four full time engineers associated with the
CheckQuest business, which was sold to Harland Financial Solutions last year.
The decrease in expenses as a percentage of net sales is primarily attributable
to reduced costs, as discussed above.
General and Administrative. General and administrative expenses for the
three month period ended December 31, 2004 were $927,000, compared to $539,000
for the same period in 2003, an increase of $388,000 or 72%. As a percentage of
net sales, general and administrative expenses increased to 71% in 2004, from
32% in 2003. The dollar increase in expenses for the three month period is
attributable to increased legal costs primarily relating to patent work and
litigation with BSM, and increased audit fees, due to the restatement of prior
reported quarters. The increase in expenses as a percentage of net sales is
primarily attributable to the increased spending discussed above.
Interest and Other Income (Expense) - Net. Interest and other income
(expense) for the three-month period ended December 31, 2004 was ($117,000),
compared to interest and other income (expense) of $10,000 for the same period
in 2003, a change of $124,000. The primary reason for the change is the cash
interest paid to Laurus Master Fund during the quarter of $47,000, as well as
amortization of the deferred loan costs related to the warrants issued and the
beneficial conversion feature of the convertible note.
11
LIQUIDITY AND CAPITAL
At December 31, 2004 the Company had $1,365,000 in cash as compared to
$2,607,000 at September 30, 2004. Accounts receivable totaled $953,000, an
increase of $383,000 over the September 30, 2004, balance of $570,000. This
increase was primarily a result of increased sales activity during the first
fiscal quarter.
The Company has financed its cash needs during the first quarter of
fiscal 2005 primarily from collection of accounts receivable. During fiscal
2004, the Company financed its cash needs primarily from financing and investing
activities.
Net cash used in operating activities during the three months ended
December 31, 2004 was ($1,289,000). The primary use of cash from operating
activities was the loss during the quarter of $918,000, an increase in accounts
receivable of $407,000, a decrease to the deferred revenue accounts of $162,000.
The primary source of cash from operating activities was depreciation and
amortization of $110,000 and increased deferred loan fees related to issuance of
warrants of $73,000. The Company used part of the cash provided from operating
activities to finance the acquisition of equipment used in its business.
During the quarter ended December 31, 2004, the Company also received
cash of approximately $150,000 from financing activities in the form of proceeds
from the repayment of the note receivable from Mitek Systems, Ltd. as discussed
in Note 6 of the accompanying financial statements.
The Company's working capital and current ratio were ($123,000) and .95,
respectively, at December 31, 2004, and $847,000 and 1.32, respectively, at
September 30, 2004. At December 31, 2004, total liabilities to equity ratio was
(3.13) to 1 compared to (7.81) to 1 at September 30, 2004. As of December 31,
2004, total liabilities were $185,000 less than on September 30, 2004.
There are no significant capital expenditures planned for the
foreseeable future.
The Company evaluates its cash requirements on a quarterly basis.
Historically, the Company has managed its cash requirements principally from
cash generated from operations. Although the Company's strategy for fiscal 2004
is to grow the identified markets for its new products and enhance the
functionality and marketability of the Company's character recognition
technology, it has not yet observed a significant change in liquidity or future
cash requirements as a result of this strategy. Cash requirements over the next
twelve months are principally to fund operations, including spending on research
and development. The Company believes that it will have sufficient liquidity to
finance its operations for the next twelve months using existing cash, cash
generated from operations, and borrowings under the Company's line of credit, as
discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The amendments to SFAS 123 provided for under SFAS No.
148 are effective for financial statements for fiscal years ending after
December 15, 2002. The Company has not elected to adopt the fair value
accounting provisions of SFAS No. 123 and therefore the adoption of SFAS No. 148
did not have a material effect on our results of operations or financial
position.
In November 2004, the FASB issued Statement No. 151, Inventory Costs--an
amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB
No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The Company does not believe
adoption of this Statement will have a material effect on its financial
statements
12
In December 2004, the FASB issued Statement No. 152, Accounting for Real
Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67.
This Statement amends FASB Statement No. 66, Accounting for Sales of Real
Estate, to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement
also amends FASB Statement No. 67, Accounting for Costs and Initial Rental
Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. The Company does not have real estate which is subject to this Statement.
In December 2004, the FASB issued Statement No. 153 "Exchanges of
Nonmonetary Assets--an amendment of APB Opinion No. 29" This Statement amends
Opinion 29, Accounting for Nonmonetary Transactions, which provided based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement was issued to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The Company does not have any such assets
subject to this statement.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. This Interpretation also incorporates, without change, the
guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, which is being superseded. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company has issued no guarantees
that qualify for disclosure in this interim financial statement.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 were initially to apply to variable
interest entities created after January 31, 2003. The consolidation requirements
were initially to apply to transactions entered into prior to February 1, 2003
in the first fiscal year or interim period beginning after June 15, 2003. The
FASB postponed implementation of FIN 46 in December 2003. The Company has no
variable interest entities.
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment". Statement 123(R) will provide investors and other users
of financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those filing as
small business issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after June 15, 2005. The
Company has evaluated the impact of the adoption of SFAS 123(R), and does not
believe the impact will be significant to the Company's overall results of
operations or financial position.
13
ITEM 4 CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of the Company's
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, 2004 to timely alert them to material information relating to the
Company required to be included in the Company's Exchange Act filings. Except as
discussed in the following paragraph, there have been no changes in the
Company's internal control over financial reporting subsequent to the quarter
ended December 31, 2004 that have materially affected, or are reasonably likely
to materially affect, the Company's internal controls over financial reporting.
In connection with the audit of the Company's financial statements for the year
ended September 30, 2004, the Company identified that they had incorrectly
accounted for (i) the beneficial conversion feature of the convertible
promissory note issued to Laurus in the third quarter of fiscal 2004 and (ii)
the categorization and recording of the warrants that were issued to Laurus in
connection with the convertible promissory note issued to Laurus in the third
quarter of fiscal 2004. We have determined that the incorrect accounting
resulted from a significant deficiency in our internal controls over application
of existing accounting principles to new transactions and financial reporting.
Management has enhanced its internal controls and now believes that the
significant deficiency has been remediated.
There have not been any changes in our internal control 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, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. As noted above, we identified certain deficiencies in
our internal controls, for which, we have now enhanced the internal controls. We
now believe that the significant deficiency has been remedied.
14
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-K for the year ended September 30, 2004, which Item 3 is incorporated
herein by reference.
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 following is a list of Current Reports on Form 8-K filed by the
Company during the fiscal quarter ended December 31, 2004:
o Form 8-K filed with the Securities and Exchange Commission on
October 6, 2004, under Item 4 and Item 9 announced that Mitek
Systems, Inc. had dismissed Deloitte & Touche LLP as Mitek's
independent auditor and engaged Stonefield Josephson, Inc. as
Mitek's independent auditor.
15
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 12, 2005 /s/ James B. Debello
----------------------------
James B. DeBello, President and
Chief Executive Officer
Date: February 12, 2005 /s/ John M. Thornton
-----------------------------
John M. Thornton, Chairman and
Chief Financial Officer
16