SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2004 or
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[ ] 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.
(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 August 9, 2004.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Act)
Yes __ No _X_.
MITEK SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
a) Balance Sheets
As of June 30, 2004 and September 30, 2003 (unaudited) 1
b) Statements of Operations
for the Three and Nine Months Ended June 30, 2004 and
2003 (unaudited)...................................... 2
c) Statements of Cash Flows
for the Nine Months Ended June 30, 2004 and 2003
(unaudited)........................................... 3
d) Notes to Financial Statements (unaudited)............. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 13
Item 4. Controls and Procedures.................................... 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................. 14
Item 6. Exhibits and Reports on Form 8-K........................... 14
SIGNATURE................................................................... 16
PART I: ITEM 1. FINANCIAL INFORMATION
MITEK SYSTEMS, INC
BALANCE SHEETS
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
2004 2003
------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 2,719,226 $ 1,819,102
Accounts and notes receivable-net of allowances of 1,439,659 2,900,693
$325,697 and $253,697, respectively
Note receivable - related party 146,245 195,623
Inventories 18,516 43,182
Prepaid expenses and other assets 181,213 84,167
------------------------------
Total current assets 4,504,859 5,042,767
PROPERTY AND EQUIPMENT-net 119,370 321,029
OTHER ASSETS 31,746 279,985
------------------------------
TOTAL ASSETS $ 4,655,975 $ 5,643,781
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 477,175 $ 881,032
Accrued payroll and related taxes 537,581 690,388
Deferred revenue 646,220 884,917
Net liabilities held for sale 376,516 0
Other accrued liabilities 272,060 245,818
------------------------------
Total current liabilities 2,309,552 2,702,155
LONG-TERM LIABILITIES:
Convertible debt - net 2,327,196 0
Deferred rent 15,538 16,135
Deferred revenue 0 318,826
Long-term payable 8,539 34,194
------------------------------
Total long-term liabilities 2,351,273 369,155
------------------------------
TOTAL LIABILITIES 4,660,825 3,071,310
STOCKHOLDERS' EQUITY(DEFICIT):
Common stock - $.001 par value; 20,000,000
shares authorized; 11,389,481 and 11,185,282
issued and outstanding at June 30, 2004
and September 30, 2003, respectively 11,389 11,185
Warrants 531,280 0
Additional paid-in capital 9,542,527 9,327,736
Accumulated deficit (10,090,046) (6,766,450)
------------------------------
Net stockholders' equity (deficit) (4,850) 2,572,471
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,655,975 $ 5,643,781
==============================
See notes to financial statements
1
MITEK SYSTEMS, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
------------------------------------------------------------
SALES
Software $ 389,440 $ 1,479,956 $ 2,024,455 $ 6,609,543
Hardware 85,016 1,107,197 858,571 1,960,078
Professional services, education and other 513,012 454,585 1,817,403 1,301,359
------------------------------------------------------------
NET SALES 987,468 3,041,738 4,700,429 9,870,980
COSTS AND EXPENSES:
Cost of sales - Software 141,573 218,970 468,947 740,026
Cost of sales - Hardware 71,227 923,462 804,159 2,083,305
Cost of sales - Prof. Services, education and 158,585 249,742 620,303 675,771
Operations 326,343 431,638 1,065,035 1,291,633
Selling and marketing 449,742 1,101,175 1,571,762 2,908,291
Research and development 644,090 556,245 1,811,606 1,680,478
General and administrative 613,914 517,179 1,673,589 1,355,523
------------------------------------------------------------
Total costs and expenses 2,405,474 3,998,411 8,015,401 10,735,027
------------------------------------------------------------
OPERATING LOSS (1,418,006) (956,673) (3,314,972) (864,047)
Other income (expense) - net (12,570) 3,645 (5,614) 7,586
------------------------------------------------------------
LOSS BEFORE INCOME TAXES (1,430,576) (953,028) (3,320,586) (856,461)
PROVISION FOR INCOME TAXES 457 380 3,007 10,355
------------------------------------------------------------
NET LOSS $ (1,431,033) $ (953,408) $ (3,323,593) $ (866,816)
============================================================
NET LOSS PER SHARES - BASIC AND DILUTED $ (0.13) $ (0.09) $ (0.29) $ (0.08)
============================================================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC AND DILUTED 11,389,481 11,156,437 11,340,979 11,144,660
============================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING - DILUTED 11,389,481 11,156,437 11,340,979 11,144,660
============================================================
See notes to financial statements
2
MITEK SYSTEMS, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
2004 2003
--------------------------
OPERATING ACTIVITIES
Net loss $(3,323,593) $ (866,816)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 340,996 336,969
Provision for bad debts 72,000 75,000
Loss on disposal of property and equipment 2,113 986
Provision for sales returns & allowances 104,090 153,000
Fair value of stock options granted to non-employees 10,776 2,823
Changes in operating assets and liabilities:
Accounts receivable 1,389,034 803,827
Inventory, prepaid expenses, and other assets (11,442) (136,991)
Accounts payable (403,857) (222,575)
Accrued payroll and related taxes (152,807) 324,900
Long-term payable (25,655) (25,655)
Deferred revenue (557,523) 392,214
Other accrued liabilities (78,446) (14,147)
--------------------------
Net cash provided by (used in) operating activities (2,634,314) 823,535
INVESTING ACTIVITIES
Purchases of property and equipment (45,339) (180,067)
Proceeds from sale of property and equipment 0 1,203
Property and Equipment held for sale 91,187 0
Net Liabilities held for sale 376,516 0
Payment (advances) on related party note receivable-net 49,378 (8,517)
--------------------------
Net cash provided by (used in) investing activities 471,742 (187,381)
FINANCING ACTIVITIES
Proceeds from borrowings 0 360,000
Repayment of borrowings 0 (360,000)
Proceeds from convertible debt 3,000,000 0
Deferred costs related to convertible debt (141,524) 0
Proceeds from exercise of stock options 204,220 19,201
--------------------------
Net cash provided by financing activities 3,062,696 19,201
--------------------------
NET INCREASE IN CASH 900,124 655,355
CASH AT BEGINNING OF PERIOD 1,819,102 760,416
--------------------------
CASH AT END OF PERIOD $ 2,719,226 $ 1,415,771
==========================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 18,510 $ 6,736
=========== ===========
Cash paid for income taxes $ 3,007 $ 10,355
=========== ===========
Fair value of warrants granted to non-employees $ 531,280 $ --
=========== ===========
See notes to financial statements
3
MITEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
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 as of June 30, 2004 and for the three and nine months ended June
30, 2004 are not necessarily indicative of results which may be reported for any
other interim period or for the year as a whole.
Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingencies at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
The operations from Fiscal 2003 and the nine months ended June 30, 2004
have resulted in significant operating losses. The Company has managed its cash
requirements for this period principally from cash generated from operations,
though the last quarter saw the Company address its cash requirements by issuing
Convertible Debt as discussed in Note 6 of the accompanying financial
statements. Additionally, the Company reduced its expected future cash needs by
entering into the agreement with Harland Financial Solutions whereby certain
personnel and overhead expenses were assumed by Harland in the transactions
discussed in Note 7 of the accompanying financial statements.
Certain prior year's balances have been reclassified to conform to the
2003 presentation.
2. New Accounting Pronouncements
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 December 2002, the FASB issued Statement of Financial Accounting
Standards ("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 No. 123 provided for under SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002. The
4
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 January 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company adopted the provisions of this Statement and it
had no impact on its financial statements.
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.
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 the three months and nine
months ended June 30, 2004 and 2003.
2004 2003
---- ----
Risk free interest rates 2.6% 2.0%
Dividend yields 0% 0%
Volatility 77% 76%
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 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 income/loss
per share information):
Three months ended Nine months ended
June 30 June 30
-----------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss as reported $ (1,431) $ (953) $ (3,323) $ (867)
Net loss pro forma (1,527) (968) (3,612) (1,507)
Net loss per share as reported (.13) (.09) (.29) (.08)
Net loss per share pro forma (.13) (.09) (.32) (.14)
5
4. Revolving Line of Credit
In June 2004, the Company entered into a Convertible Note with Laurus
Master Fund (Laurus). The principal amount of the note was $3,000,000. Laurus
can convert any portion of the principal outstanding to common stock at a fixed
price per share of $.70 (Conversion Price) any time the market price of the
Company's common stock exceeds the Conversion Price by 10%. The note carries an
interest rate of prime (as published in the Wall Street Journal) plus 1%, with
monthly interest payments to be made by the Company. Principal repayments begin
on December 1, 2004, and are ratable over a 36 month term. In connection with
this transaction, the Company issued warrants to Laurus for the purchase of up
to 860,000 shares of common stock at prices ranging from $0.79 to $0.92 per
share. The Note is secured by a general lien on all assets of the Company, and
as a condition of this transaction, the Company's line of Credit with First
National Bank was cancelled. (Note 6)
5. Product Revenues - Below is a summary of the revenues by product lines.
Three Months Ended Nine Months Ended
June 30 June 30
REVENUE 2004 2003 2004 2003
---- ---- ---- ----
(000'S)
Recognition Toolkits $ 330 $ 453 $1,568 $ 4,071
Check Image Solutions 197 2,298 1,406 4,490
Document and Image Processing
Solutions 65 40 420 611
Maintenance and other 395 251 1,306 699
------------------------------------------------------------------
Total Revenue $ 987 $ 3,042 $4,700 $ 9,871
==================================================================
6. Issuance of Convertible Debt
In June 2004, the Company entered into a Convertible Note with Laurus
Master Fund (Laurus). The principal amount of the note was $3,000,000. Laurus
can convert any portion of the principal outstanding to common stock at a fixed
price per share of $.70 (Conversion Price) any time the market price of the
Company's common stock exceeds the Conversion Price by 10%. The note carries an
interest rate of prime (as published in the Wall Street Journal) plus 1%, with
monthly interest payments to be made by the Company. Principal repayments begin
on December 1, 2004, and are ratable over a 36 month term. The Note is secured
by a general lien on all assets of the Company, and as a condition of this
transaction, the Company's line of Credit with First National Bank was
cancelled.
In connection with the Convertible Note, the Company issued warrants to
Laurus to purchase 860,000 of common stock, at prices ranging from $.79 to $.92
and paid fees of $74,400. The fair value attributable to the warrants was
$531,280, determined by the Black-Scholes valuation model. Additionally, the
Company incurred legal and other costs amounting to $142,000 in connection with
this transaction. These costs and the value attributable to the warrants are
shown as an offset to the Convertible Note and will be amortized as interest
expense over the term of the Note. At June 30, 2004, the unamortized amounts
were $672,804. Because the note contains a contingent beneficial conversion
feature, when such contingency is met and the note becomes convertible, the
value of the beneficial conversion feature will be recorded by the Company.
6
7. Subsequent Events
On July 7, 2004, the Company entered into an agreement with Harland
Financial Solutions (HFS) wherein HFS acquired certain of the Company's trade
assets relating to its Item Processing line of business. In addition, HFS
assumed the trade liabilities and hired certain of the Company's personnel
relating to this line of business. In connection with this transaction, the
Company entered into a reseller agreement wherein HFS will be the exclusive
reseller of this line of business. The consideration for this transaction was
$1,425,000, plus the assumption of liabilities. Under the agreement with HFS,
the Company may receive additional consideration from HFS should certain
contractual issues be resolved, but no assurance can be made this will occur.
8. Net Liabilities Held for Sale
Certain assets and Liabilities of the Company's CheckQuest product line
have been classified as held for sale at June 30, 2004. The Components of these
net liabilities at June 30, 2004 are as follows:
Accounts Payable $ 6,916
Deferred Revenue 940,213
Customer Deposits 40,198
Other Liabilities 688
Accounts Receivable -453,436
Fixed Assets (Net of Accumulated Depreciation) -91,187
Prepaid Licenses -60,938
Other Assets -5,938
------------
Net Liabilities $ 376,516
============
7
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 2004 is to grow the identified markets
for its new products and enhance the functionality and marketability of the
Company's character recognition technology. 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 penetrate
additional markets for its Document and Image Processing Solutions by taking
advantage of specific vertical applications which lend themselves to this type
of labor-saving technology. The Company has also taken steps to generate working
capital, including in June entering into a $3,000,000 promissory note with
Laurus Master Fund, Ltd and in July divesting to Harland Financial Solutions
("HFS") certain assets and liabilities associated with the Company's Item
Processing line of business and entering into an exclusive reselling
relationship with HFS for the Item Processing line of business. The arrangement
with HFS generated working capital, while at the same time reduced ongoing
personnel and overhead expenses.
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
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
Audited Financial Statements for the year ended September 30, 2003 included in
the Company's Form 10-K.
8
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.
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.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Comparison of Three Months and Nine Months Ended June 30, 2004 and 2003
Net Sales. Net sales for the three-month period ended June 30, 2004 were
$987,000, compared to $3,042,000 for the same period in 2003, a decrease of
$2,055,000, or 68%. The decrease was primarily attributable to a 91% decrease in
revenue from Check Image Solutions. The Company continued to experience delayed
purchasing decisions, which we believe are due to continued customer hesitancy
to adopt check imaging solutions. Though image acceptance is mandated by the
passage of Check 21, imaging standards required under this legislation are not
yet final. The Company also experienced substantial purchasing hesitancy from
customers who expressed concern over the Company's recent quarterly losses and
the delisting of the Company's stock from NASDAQ. Subsequent to the quarter
ended June 30, 2004, the Company substantially exited this line of business, by
agreeing to the transaction with Harland Financial Solutions described in Note 7
9
of the accompanying financial statements. The Company also experienced a 27%
decline in revenue associated with our recognition toolkits, the result of
continued customer concern over the Company's recent quarterly losses, and
enterprise licenses signed during fiscal 2003 which will not renew until later
in fiscal 2004. Sales in the Document and Image Processing Solutions increased
by 63%, primarily due to orders from two key resellers. Sales of Maintenance
rose by 57%, reflecting the Company's efforts to contact current and past
customers to encourage the renewal of product support contracts. This has
resulted in an increase in the installed base of customers purchasing product
support.
Net sales for the nine-month period ended June 30, 2004 were
$4,700,000, compared to $9,871,000 for the same period in 2003, a decrease of
$5,171,000 or 52%. The decrease was primarily attributable to a 69% decrease in
revenue from Check Image Solutions. The Company continued to experience delayed
purchasing decisions, which we believe are due to continued customer hesitancy
to adopt check imaging solutions. Though image acceptance is mandated by the
passage of Check 21, imaging standards required under this legislation are not
yet final. The Company also experienced substantial purchasing hesitancy from
customers who expressed concern over the Company's recent quarterly losses and
the delisting of the Company's stock from NASDAQ. Subsequent to the quarter
ended June 30, 2004, the Company substantially exited this line of business, by
agreeing to the transaction with Harland Financial Solutions described in Note 7
of the accompanying financial statements. The Company also experienced a 61%
decline in revenue associated with our recognition toolkits, the result of
continued customer concern over the Company's recent quarterly losses, and
enterprise licenses signed during fiscal 2003 which will not renew until later
in fiscal 2004. Sales in the Document and Image Processing Solutions decreased
by 31%. This is primarily due to the absence of a dedicated sales force for this
product line, which the Company intends to put into place later during the 2004
fiscal year. Sales of Maintenance rose by 87%, reflecting the Company's efforts
to contact current and past customers to encourage the renewal of product
support contracts. This has resulted in an increase in the installed base of
customers purchasing product support.
Cost of Sales. Cost of sales for the three-month period ended June 30,
2004 was $371,000, compared to $1,392,000 for the same period in 2003, a
decrease of $1,021,000 or 73%. Stated as a percentage of net sales, cost of
sales decreased to 38% for the three-month period ended June 30, 2004 compared
to 46% for the same period in 2003. The dollar decrease in cost of sales is
almost entirely due to reduced hardware installations related to the Company's
Checkquest product line, which typically carry higher costs, during the quarter,
as compared to the same quarter in 2003. The decrease as a percentage of net
sales is due to the product mix shifting from hardware installations to the
Company's software product lines, which typically carry higher margins.
Cost of sales for the nine-month period ended June 30, 2004 was
$1,893,000, compared to $3,499,000 for the same period in 2003, a decrease of
$1,606,000 or 46%. Stated as a percentage of net sales, cost of sales increased
to 40% for the nine-month period ended June 30, 2004, compared to 35% for the
same period in 2003. The dollar decrease in cost of sales is almost entirely due
to reduced hardware installations related to the Company's Checkquest product
line, which typically carry higher costs. The increase as a percentage of net
sales is due to the product mix of software sold shifting toward the Company's
Checkscript and QuickStrokes Premier Banking Edition products, each of which
carries a royalty.
Operations Expenses. 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
expenses for the three-month period ended June 30, 2004 were $454,000, compared
to $583,000 for the same period in 2003, a decrease of $129,000 or 22%. Net
Operations expenses for the three-month period ended June 30, 2004 were
$326,000, compared to $432,000 for the same period in 2003, a decrease of
$106,000 or 25%. Stated as a percentage of net sales, operations expenses were
33% for the three-month period ended June 30, 2003, as compared with 14% for the
same period in 2003. The dollar decrease in gross expenses is primarily
attributable to reduced amount of salaries and wages, due to a reassignment of
personnel into sales functions. The dollar decrease in net expense is
attributable to the reduced spending discussed above. The increase in expenses
as a percentage of net sales is primarily attributable to lower revenues.
Gross Operations expenses for the nine-month period ended June 30, 2004
were $1,458,000, compared to $1,717,000 for the same period in 2003, a decrease
of $259,000 or 15%. Net Operations expenses for the nine-month period ended June
30, 2004 were $1,065,000, compared to $1,292,000 for the same period in 2003, a
10
decrease of $227,000 or 18%. Stated as a percentage of net sales, operations
expenses increased to 23% for the nine-month period ended June 30, 2004,
compared to 13% for the same period in 2003. The dollar decrease in gross
expenses is primarily attributable to reduced amount of salaries and wages, due
to a reassignment of personnel into sales functions. The dollar decrease in net
expense is attributable to the reduced spending discussed above. The increase in
expenses as a percentage of net sales is primarily attributable to lower
revenues.
Selling and Marketing Expenses. Selling and marketing expenses for the
three-month period ended June 30, 2004 were $450,000, compared to $1,101,000 for
the same period in 2003, a decrease of $651,000 or 59%. Stated as a percentage
of net sales, selling and marketing expenses increased to 46% for the
three-month period ended June 30, 2004, as compared with 36% for the same period
in 2003. The dollar decrease in expenses is primarily attributable to reduced
commissions resulting from lower sales, as well as reduced salaries expense, as
the Company reduced its direct sales force in the check image solution product
line. The Company believes this product line is better suited to an indirect
sales channel, and the Company has signed two resellers to representation
agreements to move in this direction.
Selling and marketing expenses for the nine-month period ended June 30,
2004 were $1,572,000, compared to $2,908,000 for the same period in 2003, a
decrease of $1,336,000 or 46%. Stated as a percentage of net sales, selling and
marketing expenses increased to 33% from 29% for the same period in 2003. The
dollar decrease in expenses is primarily attributable to reduced commissions
resulting from lower sales, as well as reduced salaries expense, as the Company
reduced its direct sales force in the check image solution product line. The
Company believes this product is better suited to an indirect sales channel, and
the Company has signed two resellers to representation agreements to move in
this direction. The increase as a percentage of net sales is primarily
attributable to reduced sales.
Research and Development Expenses. Research and development expenses
are incurred to maintain existing products, develop new products or new product
features, technical customer support, and development of custom projects.
Research and development expenses for the three-month period ended June 30, 2004
were $644,000, compared to $556,000 for the same period in 2003, an increase of
$88,000 or 16%. Stated as a percentage of net sales, research and development
expenses increased to 65% for the three-month period ended June 30, 2004,
compared to 18% for the same period in 2003. The dollar increase in expenses is
the result of consultants engaged to complete two engineering projects. The
increase as a percentage of net sales for the three-month period is primarily
attributable to the decrease in sales.
Research and development expenses for the nine-month period ended June
30, 2004 were $1,812,000, compared to $1,680,000 for the same period in 2003, an
increase of $132,000 or 8%. Stated as a percentage of net sales, research and
development expenses increased to 39% for the nine-month period ended June 30,
2004, compared to 17% for the same period in 2003. The dollar increase in
expenses is the result of consultants engaged to complete two engineering
projects, offset by the prior quarters' reclassification of costs. Such costs,
amounting to $92,000 were reclassified as costs of goods sold, and served to
reduce research and development expense during the first quarter. The increase
as a percentage of net sales for the three-month period is primarily
attributable to the decrease in sales.
General and Administrative Expenses. General and administrative expenses
for the three-month period ended June 30, 2004 were $614,000, compared to
$517,000 for the same period in 2003, an increase of $97,000 or 19%. Stated as a
percentage of net sales, general and administrative expenses increased to 62%
for the three-month period ended June 30, 2004, compared to 17% for the same
period in 2003. The dollar increase in expenses for the three month period is
attributable to $20,000 of additional salaries expense, as the President and
Chief Executive Officer was not a separate position in 2003 and $145,000 in
11
increased legal costs primarily relating to analysis of strategic alternatives,
including potential mergers, capital infusions, and other strategic
alternatives. The increase in expenses as a percentage of net sales is primarily
attributable to lower revenues.
General and administrative expenses for the nine-month period ended
June 30, 2004 were $1,674,000, compared to $1,356,000 for the same period in
2003, an increase of $318,000 or 23%. Stated as a percentage of net sales,
general and administrative expenses increased to 36% for the nine-month period
ended June 30, 2004, compared to 14% for the same period in 2003. The dollar
increase in expenses for the three month period is attributable to $120,000 of
additional salaries expense, as the President and Chief Executive Officer was
not a separate position in 2003 and $215,000 in increased legal costs primarily
relating to analysis of strategic alternatives, including potential mergers,
capital infusions, and other strategic alternatives. The increase in expenses as
a percentage of net sales is primarily attributable to lower revenues.
Interest and Other Income (Expense) - Net. Interest and other income
(expense) for the three-month period ended June 30, 2004 was ($13,000), compared
to $4,000 for the same period in 2003, a decrease of $17,000. Interest and other
income (expense) for the nine-month period ended June 31, 2004 was ($6,000),
compared to $8,000 for the same period in 2003, a decrease of $12,000. The
decrease in net interest and other income (expense) for the period ended June
30, 2004 is primarily the result of the Company's share of the net income from
the Company's affiliate, Mitek Systems, Ltd.
LIQUIDITY AND CAPITAL
At June 30, 2004 the Company had $2,719,000 in cash as compared to
$1,819,000 at September 30, 2003. Accounts receivable totaled $1,440,000, a
decrease of $1,461,000 over the September 30, 2003, balance of $2,901,000.
The Company has financed its cash needs during the third quarter of
fiscal 2004 primarily from collection of accounts receivable and the proceeds
from its convertible debt financing with Laurus. The Company financed its cash
needs during fiscal 2003 primarily from collection of accounts receivable.
Net cash used by operating activities during the nine months ended June
30, 2004 was ($2,634,000). The primary use of cash from operating activities was
the operating loss of ($3,324,000), a decrease in accounts payable of
($404,000), and a decrease in the accrued payroll and related taxes of
($153,000). The primary source of cash from operating activities was a decrease
in accounts receivable of $1,389,000 and depreciation and amortization of
$341,000.
The Company used part of the cash provided from operating activities to
finance the acquisition of equipment used in its business.
During the nine months ended June 30, 2004, the Company also received
cash of approximately $204,000 from financing activities in the form of proceeds
from the exercise of stock options by employees and directors.
The Company's working capital and current ratio were $2,195,000 and
1.75, respectively, at June 30, 2004, and $2,341,000 and 1.87, respectively, at
September 30, 2003. At June 30, 2004, total liabilities to equity ratio was
- -1087.08 to 1 compared to 1.19 to 1 at September 30, 2003. As of June 30, 2004,
total liabilities were increased by $2,201,000 as compared to September 30,
2003.
In June 2004, the Company entered into a Convertible Note with Laurus
Master Fund (Laurus). The principal amount of the note was $3,000,000. Laurus
can convert any portion of the principal outstanding to common stock at a fixed
price per share of $.70 (Conversion Price) any time the market price of the
Company's common stock exceeds the Conversion Price by 10%. The note carries an
interest rate of prime (as published in the Wall Street Journal) plus 1%, with
monthly interest payments to be made by the Company. Principal repayments begin
on December 1, 2004, and are ratable over a 36 month term. The Note is secured
by a general lien on all assets of the Company, and as a condition of this
transaction, the Company's line of Credit with First National Bank was
cancelled. See Part II Other Information - Item 2. Changes in Securities and Use
of Proceeds.
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, though the last quarter saw the Company address
its cash requirements by issuing Convertible Debt. Additionally, the Company
reduced its expected future cash needs by entering into the agreement with
Harland Financial Solutions whereby certain personnel and overhead expenses were
assumed by Harland. 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
12
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 it has sufficient cash on hand and will generate sufficient
cash from operations to meet its requirements for the next 12 months.
New Accounting Pronouncements
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 December 2002, the FASB issued Statement of Financial Accounting
Standards ("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 No. 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 January 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company adopted the provisions of this Statement and it
had no impact on its financial statements.
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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to certain market risks arising from adverse
changes in interest rates, primarily due to the potential effect of such changes
on the Company's variable rate Convertible Note, as described under
"Management's Discussion and Analysis of Financial Condition and Results of
13
Operations--Liquidity and Capital." The Company does not use interest rate
derivative instruments to manage exposure to interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of our management, including Mr. DeBello, the Company's
President and Chief Executive Officer and Mr. Thornton, the Company's Chairman
of the Board and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14 as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based upon that evaluation, Mr. DeBello and Mr. Thornton
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company's periodic filings with the Securities and Exchange
Commission. There was no change in the Company's internal control over financial
reporting that occurred during the fiscal quarter covered by this Quarterly
Report likely to materially affect our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 2004, we issued to Laurus Master Fund, Ltd. a $3.0 million
secured convertible promissory note with a term of three years, along with a
warrant which is exercisable at any time through June 11, 2011, to purchase up
to 860,000 shares of common stock at an exercise price of (i) $0.79 for the
first 230,000 shares acquired thereunder; (ii) $0.85 for the next 230,000 shares
acquired thereunder; and (iii) $0.92 for the remaining shares acquired
thereunder. The note is convertible into approximately 4,285,714 shares of our
common stock at an initial conversion price of $.70 per share, without taking
into account additional shares which may be issuable upon conversion of interest
paid on the note. The conversion price is subject to certain anti-dilution
adjustments, including if we issue convertible or equity securities (subject to
certain exceptions) at a price less than the conversion price. The proceeds from
the promissory note will be used for working capital.
As part of the issuance of the convertible promissory note, we granted
to Laurus a blanket security interest in all of our assets. In the event we
default in payment on the debt, or any other event of default occurs under the
investment documents, 130% of the outstanding principal amount of the note and
accrued interest will accelerate and be due and payable in full.
We have agreed to register with the SEC for resale the shares of common
stock that are issuable upon conversion of the note and upon exercise of the
warrant, prior to September 9, 2004. The note and warrant were offered and sold
in reliance on the exemption from registration provided by Rule 506 of
Regulation D under the Securities Act. At closing, we paid a closing payment of
$121,000 to Laurus Capital Management, LLC, manager of Laurus Master Fund, Ltd.
and additional fees of approximately $30,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
The following exhibits are filed herewith:
--------------------------- ----------------------------------------------------------
Exhibit Number Exhibit Title
--------------------------- ----------------------------------------------------------
10.1 Securities Purchase Agreement dated June 11, 2004
between Mitek Systems, Inc. and Laurus Master Fund, Ltd.
--------------------------- ----------------------------------------------------------
10.2 Warrant Certificate issued in connection with receipt of
proceeds from issuance of Promissory Note dated June 11,
2004
--------------------------- ----------------------------------------------------------
10.3 Security Agreement dated June 11, 2004 issued to Laurus
Master Fund, Ltd.
--------------------------- ----------------------------------------------------------
14
--------------------------- ----------------------------------------------------------
Exhibit Number Exhibit Title
--------------------------- ----------------------------------------------------------
10.4 Registration Rights Agreement dated June 11, 2004
between Mitek Systems, Inc. and Laurus Master Fund, Ltd.
--------------------------- ----------------------------------------------------------
10.5 10% Secured Convertible Term Note, dated June 11, 2004
issued to Laurus Master Fund, Ltd.
--------------------------- ----------------------------------------------------------
31.1 Rule 15d-14(a) Certification of the Chief Executive
Officer
--------------------------- ----------------------------------------------------------
31.2 Rule 15d-14(a) Certification of the Chief Financial
Officer
--------------------------- ----------------------------------------------------------
32.1 Section 1350 Certification of the Chief Executive
Officer
--------------------------- ----------------------------------------------------------
32.2 Section 1350 Certification of the Chief Financial
Officer
--------------------------- ----------------------------------------------------------
b. Reports on Form 8-K: No report on Form 8-K was filed by the Company
during the three months ended June 30, 2004.
Form 8-K filed with the Securities and Exchange Commission on April 5,
2004, under Item 5 and Item 7 announced that the NASDAQ had scheduled a hearing
date to consider the delisting of the common stock of Mitek Systems, Inc. from
the NASDAQ SmallCap Market.
Form 8-K filed with the Securities and Exchange Commission on May 4
2004, under Item 7 and Item 12 announced Mitek Systems, Inc.'s financial results
for the second fiscal quarter ended March 31, 2004.
Form 8-K filed with the Securities and Exchange Commission on May 24,
2004, under Item 5 and Item 7 announced that the NASDAQ had determined to delist
the common stock of Mitek Systems, Inc. from the NASDAQ SmallCap Market.
Form 8-K filed with the Securities and Exchange Commission on June 14,
2004, under Item 5 and Item 7 announced that Mitek Systems, Inc. had issued a
$3,000,000 convertible secured promissory note and certain warrants to Laurus
Master Fund, Ltd.
There were no other reports filed on Form 8-K in the quarter ended June
30, 2004.
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: August 12, 2003 /s/ James B. Debello
-----------------------------------
James B. DeBello, President and
Chief Executive Officer
(Authorized Officer and Principal Executive
Officer)
Date: August 12, 2003 /s/ John M. Thornton
-----------------------------------
John M. Thornton, Chairman and
Chief Financial Officer
(Principal Financial Officer)
16
MITEK SYSTEMS, INC.
SECURITIES PURCHASE AGREEMENT
June 11, 2004
TABLE OF CONTENTS
PAGE
----
1. Agreement to Sell and Purchase........................................3
2. Fees and Warrant......................................................3
3. Closing, Delivery and Payment.........................................4
3.1 Closing......................................................4
3.2 Delivery.....................................................4
4. Representations and Warranties of the Company.........................4
4.1 Organization, Good Standing and Qualification................4
4.2 Subsidiaries.................................................5
4.3 Capitalization; Voting Rights................................5
4.4 Authorization; Binding Obligations...........................6
4.5 Liabilities..................................................6
4.6 Agreements; Action...........................................6
4.7 Obligations to Related Parties...............................7
4.8 Changes......................................................8
4.9 Title to Properties and Assets; Liens, Etc...................9
4.10 Intellectual Property........................................9
4.11 Compliance with Other Instruments...........................10
4.12 Litigation..................................................10
4.13 Tax Returns and Payments....................................10
4.14 Employees...................................................10
4.15 Registration Rights and Voting Rights.......................11
4.16 Compliance with Laws; Permits...............................11
4.17 Environmental and Safety Laws ..............................11
4.18 Valid Offering..............................................12
4.19 Full Disclosure.............................................12
4.20 Insurance...................................................12
4.21 SEC Reports.................................................12
4.22 Listing.....................................................13
4.23 No Integrated Offering......................................13
4.24 Stop Transfer...............................................13
4.25 Dilution....................................................13
4.26 Patriot Act.................................................13
5. Representations and Warranties of the Purchaser......................14
5.1 No Shorting.................................................14
5.2 Requisite Power and Authority...............................14
5.3 Investment Representations..................................14
5.4 Purchaser Bears Economic Risk...............................15
5.5 Acquisition for Own Account.................................15
5.6 Purchaser Can Protect Its Interest..........................15
5.7 Accredited Investor ........................................15
1
5.8 Legends.....................................................15
6. Covenants of the Company.............................................16
6.1 Stop-Orders.................................................16
6.2 Listing.....................................................16
6.3 Market Regulations..........................................17
6.4 Reporting Requirements......................................17
6.5 Use of Funds................................................17
6.6 Access to Facilities........................................17
6.7 Taxes ......................................................17
6.8 Insurance...................................................17
6.9 Intellectual Property.......................................18
6.10 Properties..................................................19
6.11 Required Approvals..........................................19
6.12 Reissuance of Securities....................................20
6.13 Opinion ....................................................20
6.14 Margin Stock................................................20
7. Covenants of the Purchaser...........................................21
7.1 Confidentiality ............................................21
7.2 Non-Public Information......................................21
8. Covenants of the Company and Purchaser Regarding Indemnification.....21
8.1 Company Indemnification.....................................21
8.2 Purchaser's Indemnification.................................21
9. Conversion of Convertible Note.......................................21
9.1 Mechanics of Conversion.....................................21
10. Registration Rights..................................................23
10.1 Registration Rights Granted.................................23
10.2 Offering Restrictions.......................................23
11. Miscellaneous........................................................23
11.1 Governing Law...............................................23
11.2 Survival....................................................24
11.3 Successors..................................................24
11.4 Entire Agreement............................................24
11.5 Severability................................................24
11.6 Amendment and Waiver........................................24
11.7 Delays or Omissions.........................................24
11.8 Notices.....................................................24
11.9 Attorneys' Fees.............................................26
11.10 Titles and Subtitles........................................26
11.11 Facsimile Signatures; Counterparts..........................26
11.12 Broker's Fees...............................................26
11.13 Construction................................................26
2
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of June 11, 2004, by and between MITEK SYSTEMS, INC., a Delaware
corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands
company (the "Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale to the Purchaser of a
Convertible Term Note in the aggregate principal amount of Three Million Dollars
($3,000,000 ) (the "Note"), which Note is convertible into shares of the
Company's common stock, $0.001 par value per share (the "Common Stock") at an
initial fixed conversion price of $0.70 per share of Common Stock ("Fixed
Conversion Price");
WHEREAS, the Company wishes to issue a warrant to the Purchaser to
purchase up to 860,000 shares of the Company's Common Stock (subject to
adjustment as set forth therein) in connection with Purchaser's purchase of the
Note;
WHEREAS, Purchaser desires to purchase the Note and the Warrant (as
defined in Section 2) on the terms and conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Note and Warrant to
Purchaser on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises, representations, warranties and covenants hereinafter set forth
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Agreement to Sell and Purchase1. Pursuant to the terms and
conditions set forth in this Agreement, on the Closing Date (as defined in
Section 3), the Company agrees to sell to the Purchaser, and the Purchaser
hereby agrees to purchase from the Company a Note in the aggregate principal
amount of $3,000,000 convertible in accordance with the terms thereof into
shares of the Company's Common Stock in accordance with the terms of the Note
and this Agreement. The Note purchased on the Closing Date shall be known as the
"Offering." A form of the Note is annexed hereto as Exhibit A. The Note will
mature on the Maturity Date (as defined in the Note). Collectively, the Note and
Warrant and Common Stock issuable in payment of the Note, upon conversion of the
Note and upon exercise of the Warrant are referred to as the "Securities."
2. Fees and Warrant. On the Closing Date:
(a) The Company will issue and deliver to the Purchaser a
Warrant to purchase up to 860,000 shares of Common Stock in connection with the
3
Offering (the "Warrant") pursuant to Section 1 hereof. The Warrant must be
delivered on the Closing Date. A form of Warrant is annexed hereto as Exhibit B.
To the extent applicable, All the representations, covenants, warranties,
undertakings, and indemnification herein, and other rights made or granted to or
for the benefit of the Purchaser by the Company herein are hereby also made and
granted in respect of the Warrant on the date hereof.
(b) Subject to the terms of Section 2(d) below, the Company
shall pay to Laurus Capital Management, LLC, manager of Purchaser, a closing
payment in an amount equal to three and one-half percent (3.50%) of the
aggregate principal amount of the Note. The foregoing fee is referred to herein
as the "Closing Payment."
(c) The Company shall reimburse the Purchaser for its
reasonable expenses (including legal fees and expenses) incurred in connection
with the preparation and negotiation of this Agreement and the Related
Agreements (as hereinafter defined), and expenses incurred in connection with
the Purchaser's due diligence review of the Company and its Subsidiaries (as
defined in Section 6.8) and all related matters. Amounts required to be paid
under this Section 2(c) will be paid on the Closing Date and shall be $29,500
for such expenses referred to in this Section 2(c).
(d) The Closing Payment and the expenses referred to in the
preceding clause (c) (net of deposits previously paid by the Company) shall be
paid at closing out of funds held pursuant to a Funds Escrow Agreement of even
date herewith among the Company, Purchaser, and an Escrow Agent (the "Funds
Escrow Agreement") and a disbursement letter (the "Disbursement Letter").
3. Closing, Delivery and Payment3. .
3.1 Closing. Subject to the terms and conditions herein, the
closing of the transactions contemplated hereby (the "Closing"), shall take
place on the date hereof, at such time or place as the Company and Purchaser may
mutually agree (such date is hereinafter referred to as the "Closing Date").
3.2 Delivery. Pursuant to the Funds Escrow Agreement in the
form attached hereto as Exhibit D, at the Closing on the Closing Date, the
Company will deliver to the Purchaser, among other things, a Note in the form
attached as Exhibit A representing the principal amount of $3,000,000 and a
Warrant in the form attached as Exhibit B in the Purchaser's name representing
860,000 Warrant Shares and the Purchaser will deliver to the Company, among
other things, the amounts set forth in the Disbursement Letter by certified
funds or wire transfer.
4. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser as follows (which representations and
warranties are supplemented by, and subject to, the Company's filings under the
Securities Exchange Act of 1934 (collectively, the "Exchange Act Filings"),
copies of which have been provided to the Purchaser:
4.1 Organization, Good Standing and Qualification. The Company
is a corporation duly organized, validly existing and in good standing under the
4
laws of its jurisdiction of organization. The Company has the corporate power
and authority to own and operate its properties and assets, to execute and
deliver (i) this Agreement, (ii) the Note and the Warrant to be issued in
connection with this Agreement, (iii) the Security Agreement dated as of the
date hereof between the Company and the Purchaser, (iv) the Registration Rights
Agreement relating to the Securities dated as of the date hereof between the
Company and the Purchaser, (v) the Escrow Agreement dated as of the date hereof
among the Company, the Purchaser and the escrow agent referred to therein and
(vi) all other agreements related to this Agreement and the Note and referred to
herein (the preceding clauses (ii) through (vi), collectively, the "Related
Agreements"), to issue and sell the Note and the shares of Common Stock issuable
upon conversion of the Note (the "Note Shares"), to issue and sell the Warrant
and the Warrant Shares, and to carry out the provisions of this Agreement and
the Related Agreements and to carry on its business as presently conducted. The
Company is duly qualified and is authorized to do business and is in good
standing as a foreign corporation in all jurisdictions, except for those
jurisdictions in which the failure to do so has not had, or could not reasonably
be expected to have, individually or in the aggregate, a material adverse effect
on the business, assets, liabilities, financial condition, properties,
operations of the Company (a "Material Adverse Effect").
4.2 Subsidiaries. Each direct and indirect Subsidiary of the
Company, the direct owner of such Subsidiary and its percentage ownership
thereof, is set forth on Schedule 4.2. For the purpose of this Agreement, a
"Subsidiary" of any person or entity means (i) a corporation or other entity
whose shares of stock or other ownership interests having ordinary voting power
(other than stock or other ownership interests having such power only by reason
of the happening of a contingency) to elect a majority of the directors of such
corporation, or other persons or entities performing similar functions for such
person or entity, are owned, directly or indirectly, by such person or entity or
(ii) a corporation or other entity in which such person or entity owns, directly
or indirectly, more than 50% of the equity interests at such time.
4.3 Capitalization; Voting Rights.
(a) The authorized capital stock of the Company, as of the
date hereof, consists of 21,000,000 shares, of which 20,000,000 are shares of
Common Stock, par value $0.001 per share, 11,389,481shares of which were issued
and outstanding as of May 12, 2004, and 1,000,000 are shares of preferred stock,
par value $0.001 per share, of which no shares are issued and outstanding.
(b) Except as disclosed on Schedule 4.3, other than: (i) the
shares reserved for issuance under the Company's stock option plans; and (ii)
shares which may be issued pursuant to this Agreement and the Related
Agreements, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Company of any of its securities. Except as
disclosed on Schedule 4.3, neither the offer, issuance or sale of any of the
Note or Warrant, or the issuance of any of the Note Shares or Warrant Shares,
nor the consummation of any transaction contemplated hereby will result in a
change in the price or number of any securities of the Company outstanding,
under anti-dilution or other similar provisions contained in or affecting any
such securities.
5
(c) All issued and outstanding shares of the Company's Common
Stock: (i) have been duly authorized and validly issued and are fully paid and
nonassessable; and (ii) were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) The rights, preferences, privileges and restrictions of
the shares of the Common Stock are as stated in the Company's Certificate of
Incorporation (the "Charter"). The Note Shares and Warrant Shares have been duly
and validly reserved for issuance. When issued in compliance with the provisions
of this Agreement and the Company's Charter and, as applicable, the Note and the
Warrant, the Securities will be validly issued, fully paid and nonassessable,
and will be free of any liens or encumbrances; provided, however, that the
Securities may be subject to restrictions on transfer under state and/or federal
securities laws as set forth herein or as otherwise required by such laws at the
time a transfer is proposed.
4.4 Authorization; Binding Obligations. All corporate action
on the part of the Company, its officers and directors necessary for the
authorization of this Agreement and the Related Agreements, the performance of
all obligations of the Company hereunder and under the Related Agreements at the
Closing and, the authorization, sale, issuance and delivery of the Note and
Warrant has been taken or will be taken prior to the Closing. This Agreement and
the Related Agreements, when executed and delivered and to the extent it is a
party thereto, will be valid and binding obligations of the Company enforceable
in accordance with their terms, except:
(a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; and
(b) general principles of equity that restrict the
availability of equitable or legal remedies.
(c) The sale of the Note and the subsequent conversion of the
Note into Note Shares are not and will not be subject to any preemptive rights
or rights of first refusal that have not been properly waived or complied with.
The issuance of the Warrant and the subsequent exercise of the Warrant for
Warrant Shares are not and will not be subject to any preemptive rights or
rights of first refusal that have not been properly waived or complied with.
4.5 Liabilities. The Company does not have any contingent
liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.
4.6 Agreements; Action. Except as set forth on Schedule 4.6 or
as disclosed in any Exchange Act Filings:
(a) There are no agreements, understandings, instruments,
contracts, judgments, orders, writs or decrees to which the Company is a party
or to its knowledge by which it is bound which may involve: (i) obligations
(contingent or otherwise) of, or payments to, the Company in excess of $50,000
(other than obligations of, or payments to, the Company arising from purchase or
sale agreements entered into in the ordinary course of business); or (ii) the
transfer or license of any patent, copyright, trade secret or other proprietary
right to or from the Company (other than licenses arising in the ordinary course
6
of business from the purchase of "off the shelf" or other standard products of
the Company) ; or (iii) provisions restricting the development, manufacture or
distribution of the Company's products or services; or (iv) indemnification by
the Company in excess of $50,000 in the aggregate with respect to infringements
of proprietary rights.
(b) Since September 30, 2003, the Company has not: (i)
declared or paid any dividends, or authorized or made any distribution upon or
with respect to any class or series of its capital stock; (ii) incurred any
indebtedness for money borrowed or any other liabilities (other than ordinary
course obligations) individually in excess of $50,000 or, in the case of
indebtedness and/or liabilities individually less than $50,000, in excess of
$100,000 in the aggregate; (iii) made any loans or advances to any person not in
excess, individually or in the aggregate, of $100,000, other than advances made
in the ordinary course of business for travel expenses or other legitimate
business purpose; or (iv) sold, exchanged or otherwise disposed of of its assets
or rights in excess of an aggregate consideration of $25,000, other than the
sale of its inventory in the ordinary course of business.
(c) For the purposes of subsections (a) and (b) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
4.7 Obligations to Related Parties. Except as set forth on
Schedule 4.7, there are no obligations of the Company to officers, directors,
stockholders or employees of the Company other than:
(a) for payment of salary for services rendered and for bonus
payments;
(b) reimbursement for reasonable expenses incurred on behalf
of the Company;
(c) for other standard employee benefits made generally
available to all employees (including stock option agreements outstanding under
any stock option plan approved by the Board of Directors of the Company); and
(d) obligations listed in the Company's financial statements
or disclosed in any of its Exchange Act Filings.
Except as described above or set forth on Schedule 4.7, none of the officers,
directors of the Company or any members of their immediate families, are
indebted to the Company, individually or in the aggregate, in excess of $50,000
or have any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation which competes with the Company, other
than passive investments in publicly traded companies (representing less than
one percent (1%) of such company) which may compete with the Company. Except as
described above, no agreements, understandings or proposed transactions are
contemplated between the Company and any officer, director, or any member of
their immediate families directly or indirectly. Except as set forth on Schedule
7
4.7, the Company is not a guarantor or indemnitor of any indebtedness of any
other person, firm or corporation.
4.8 Changes. Since September 30, 2003, except as disclosed in
any Exchange Act Filing or in any Schedule to this Agreement or to any of the
Related Agreements, there has not been:
(a) any change in the business, assets, liabilities, financial
condition, properties or operations of the Company, which, individually or in
the aggregate, has had or could reasonably be expected to have, a Material
Adverse Effect;
(b) any resignation or termination of any officer or group of
employees of the Company;
(c) any material change, except in the ordinary course of
business, in the contingent obligations of the Company by way of guaranty,
endorsement, indemnity, warranty or otherwise;
(d) any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect;
(e) to the Company's knowledge, after due inquiry, any waiver
by the Company of a valuable right or of a material debt owed to it;
(f) any direct or indirect material loans made by the Company
to any stockholder, employee, officer or director of the Company, other than
advances made in the ordinary course of business;
(g) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(h) any declaration or payment of any dividend or other
distribution of the assets of the Company;
(i) to the Company's knowledge, any labor organization
activity related to the Company;
(j) any debt, obligation or liability incurred, assumed or
guaranteed by the Company, except those for immaterial amounts and for current
liabilities incurred in the ordinary course of business;
(k) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(l) any change in any material agreement to which the Company
is a party or by which it is bound which, either individually or in the
aggregate, has had, or could reasonably be expected to have, a Material Adverse
Effect;
8
(m) any other event or condition of any character that, either
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect; or
(n) any arrangement or commitment by the Company to do any of
the acts described in subsection (a) through (m) above.
4.9 Title to Properties and Assets; Liens, Etc. Except as set
forth on Schedule 4.9, the Company has good and marketable title to its
properties and assets, and good title to its leasehold estates, in each case
subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than:
(a) those resulting from taxes which have not yet become
delinquent;
(b) minor liens and encumbrances which do not materially
detract from the value of the property subject thereto or materially impair the
operations of the Company; and
(c) those that have otherwise arisen in the ordinary course of
business.
All facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by the Company are in good operating condition and repair
(except for ordinary wear and tear) and are reasonably fit and usable for the
purposes for which they are being used. Except as set forth on Schedule 4.9, the
Company is in compliance with all material terms of each lease to which it is a
party or is otherwise bound.
4.10 Intellectual Property.
(a) The Company owns or possesses sufficient legal rights to
all patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes necessary for
its business as now conducted and to the Company's knowledge as presently
proposed to be conducted (the "Intellectual Property"), without any known
infringement of the rights of others. There are no outstanding options, licenses
or agreements of any kind relating to the foregoing proprietary rights, nor is
the Company bound by or a party to any options, licenses or agreements of any
kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and other proprietary rights
and processes of any other person or entity other than such licenses or
agreements arising from the purchase of "off the shelf" or standard products of
the Company.
(b) The Company has not received any communications alleging
that the Company has violated any of the patents, trademarks, service marks,
trade names, copyrights or trade secrets or other proprietary rights of any
other person or entity, nor is the Company aware of any basis therefor.
(c) The Company does not believe it is or will be necessary to
utilize any inventions, trade secrets or proprietary information of any of its
employees made prior to their employment by the Company, except for inventions,
trade secrets or proprietary information that have been rightfully assigned to
the Company.
9
4.11 Compliance with Other Instruments. The Company is not in
violation or default of (x) any term of its Charter or Bylaws, or (y) of any
provision of any indebtedness, mortgage, indenture, contract, agreement or
instrument to which it is party or by which it is bound or of any judgment,
decree, order or writ, which violation or default, in the case of this clause
(y), has had, or could reasonably be expected to have, either individually or in
the aggregate, a Material Adverse Effect. Other than as contemplated by this
Agreement and the Related Agreements, the execution, delivery and performance of
and compliance with this Agreement and the Related Agreements to which it is a
party, and the issuance and sale of the Note by the Company and the other
Securities by the Company each pursuant hereto and thereto, will not, with or
without the passage of time or giving of notice, result in any such material
violation, or be in conflict with or constitute a default under any such term or
provision, or result in the creation of any mortgage, pledge, lien, encumbrance
or charge upon any of the properties or assets of the Company or the suspension,
revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties which has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect.
4.12 Litigation. Except as set forth on Schedule 4.12 hereto,
there is no action, suit, proceeding or investigation pending or, to the
Company's knowledge, currently threatened against the Company that prevents the
Company from entering into this Agreement or the Related Agreements, or from
consummating the transactions contemplated hereby or thereby, or which has had,
or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect or could result in any change in the
current equity ownership of the Company, nor is the Company aware that there is
any basis to assert any of the foregoing. The Company is not a party or subject
to the provisions of any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
4.13 Tax Returns and Payments. The Company has timely filed
all tax returns (federal, state and local) required to be filed by it. All taxes
shown to be due and payable on such returns, any assessments imposed, and all
other taxes due and payable by the Company on or before the Closing, have been
paid or will be paid prior to the time they become delinquent. Except as set
forth on Schedule 4.13, the Company has not been advised:
(a) that any of its returns, federal, state or other, have
been or are being audited as of the date hereof; or
(b) of any deficiency in assessment or proposed judgment to
its federal, state or other taxes.
The Company has no knowledge of any liability of any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.
4.14 Employees. Except as set forth on Schedule 4.14, the
Company has no collective bargaining agreements with any of its employees. There
is no labor union organizing activity pending or, to the Company's knowledge,
threatened with respect to the Company. Except as disclosed in the Exchange Act
10
Filings or on Schedule 4.14, the Company is not a party to or bound by any
currently effective employment contract, deferred compensation arrangement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation plan or agreement. To the Company's knowledge, no employee
of the Company, nor any consultant with whom the Company has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual to
be employed by, or to contract with, the Company because of the nature of the
business to be conducted by the Company; and to the Company's knowledge the
continued employment by the Company of its present employees, and the
performance of the Company's contracts with its independent contractors, will
not result in any such violation. The Company is not aware that any of its
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
their duties to the Company. The Company has not received any notice alleging
that any such violation has occurred. Except for employees who have a current
effective employment agreement with the Company, except as set forth on Schedule
4.14 hereto, no employee of the Company has been granted the right to continued
employment by the Company or to any material compensation following termination
of employment with the Company . Except as set forth on Schedule 4.14, the
Company is not aware that any officer, key employee or group of employees
intends to terminate his, her or their employment with the Company, nor does the
Company have a present intention to terminate the employment of any officer, key
employee or group of employees.
4.15 Registration Rights and Voting Rights. Except as set
forth on Schedule 4.15 and except as disclosed in Exchange Act Filings, the
Company is presently not under any obligation, and has not granted any rights,
to register any of the Company's presently outstanding securities or any of its
securities that may hereafter be issued. Except as set forth on Schedule 4.15
and except as disclosed in Exchange Act Filings, to the Company's knowledge, no
stockholder of the Company has entered into any agreement with respect to the
voting of equity securities of the Company.
4.16 Compliance with Laws; Permits. The Company is not in
violation of any applicable statute, rule, regulation, order or restriction of
any domestic or foreign government or any instrumentality or agency thereof in
respect of the conduct of its business or the ownership of its properties which
has had, or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect. No governmental orders, permissions,
consents, approvals or authorizations are required to be obtained and no
registrations or declarations are required to be filed in connection with the
execution and delivery of this Agreement or any Related Agreement and the
issuance of any of the Securities, except such as has been duly and validly
obtained or filed, or with respect to any filings that must be made after the
Closing, as will be filed in a timely manner. The Company has all material
franchises, permits, licenses and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which could,
either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
4.17 Environmental and Safety Laws. To the Company's knowledge
after due and careful inquiry, the Company is not in violation of any applicable
statute, law or regulation relating to the environment or occupational health
11
and safety, and to its knowledge, no material expenditures are or will be
required in order to comply with any such existing statute, law or regulation.
Except as set forth on Schedule 4.17, no Hazardous Materials (as defined below)
are used or have been used, stored, or disposed of by the Company or, to the
Company's knowledge, by any other person or entity on any property owned, leased
or used by the Company. For the purposes of the preceding sentence, "Hazardous
Materials" shall mean:
(a) materials which are listed or otherwise defined as
"hazardous" or "toxic" under any applicable local, state, federal and/or foreign
laws and regulations that govern the existence and/or remedy of contamination on
property, the protection of the environment from contamination, the control of
hazardous wastes, or other activities involving hazardous substances, including
building materials; or
(b) any petroleum products or nuclear materials.
4.18 Valid Offering. Assuming the accuracy of the
representations and warranties of the Purchaser contained in this Agreement, the
offer, sale and issuance of the Securities will be exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
and will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.
4.19 Full Disclosure. The Company has provided the Purchaser
with all information requested by the Purchaser in connection with its decision
to purchase the Note and Warrant, including all information the Company believes
is reasonably necessary to make such investment decision. Neither this
Agreement, the Related Agreements nor the exhibits and schedules hereto and
thereto nor any other document delivered by the Company to Purchaser or its
attorneys or agents in connection herewith or therewith or with the transactions
contemplated hereby or thereby, contain any untrue statement of a material fact
nor omit to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading. Any financial projections and other estimates provided to
the Purchaser by the Company were based on the Company's experience in the
industry and on assumptions of fact and opinion as to future events which the
Company, at the date of the issuance of such projections or estimates, believed
to be reasonable.
4.20 Insurance. The Company has general commercial, product
liability, fire and casualty insurance policies with coverages which the Company
believes are customary for companies similarly situated to the Company in the
same or similar business.
4.21 SEC Reports. Except as set forth on Schedule 4.21, the
Company has filed all proxy statements, reports and other documents required to
be filed by it under the Securities Exchange Act 1934, as amended (the "Exchange
Act"). The Company has furnished or made available to the Purchaser via the
EDGAR System copies of: (i) its Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2003 ; and (ii) its Quarterly Reports on Form 10-QSB for the
fiscal quarters ended December 31, 2003 and March 31, 2004 , and the Form 8-K
filings which it has made during the fiscal year 2003 to date (collectively, the
"SEC Reports"). Except as set forth on Schedule 4.21, each SEC Report was, at
12
the time of its filing, in substantial compliance with the requirements of its
respective form and none of the SEC Reports, nor the financial statements (and
the notes thereto) included in the SEC Reports, as of their respective filing
dates, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.22 Trading. The Company's Common Stock is traded on the OTC
Bulletin Board ("OTCBB") and satisfies all requirements for the continuation of
such trading. The Company has not received any notice that its Common Stock will
be ineligible to be traded on the OTCBB or that its Common Stock does not meet
all requirements for such continued trading .
4.23 No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement or any Related Agreement to be integrated
with prior offerings by the Company for purposes of the Securities Act which
would prevent the Company from selling the Securities pursuant to Rule 506 under
the Securities Act, or any applicable exchange-related stockholder approval
provisions, nor will the Company or any of its affiliates or subsidiaries take
any action or steps that would cause the offering of the Securities to be
integrated with other offerings.
4.24 Stop Transfer. The Securities are restricted securities
as of the date of this Agreement. The Company will not issue any stop transfer
order or other order impeding the sale and delivery of any of the Securities,
except as required by applicable state or federal securities laws.
4.25 Dilution. The Company specifically acknowledges that its
obligation to issue the shares of Common Stock upon conversion of the Note and
exercise of the Warrant is binding upon the Company and enforceable regardless
of the dilution such issuance may have on the ownership interests of other
shareholders of the Company.
4.26 Patriot Act. The Company certifies that, to the best of
Company's knowledge, the Company has not been designated, and is not owned or
controlled, by a "suspected terrorist" as defined in Executive Order 13224. The
Company hereby acknowledges that the Purchaser seeks to comply with all
applicable laws concerning money laundering and related activities. In
furtherance of those efforts, the Company hereby represents, warrants and agrees
that: (i) none of the cash or property that the Company will pay or will
contribute to the Purchaser has been or shall be derived from, or related to,
any activity that is deemed criminal under United States law; and (ii) no
contribution or payment by the Company to the Purchaser, to the extent that they
are within the Company's control shall cause the Purchaser to be in violation of
the United States Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company shall
promptly notify the Purchaser if any of these representations ceases to be true
and accurate regarding the Company. The Company agrees to provide the Purchaser
any additional information regarding the Company that the Purchaser deems
necessary or convenient to ensure compliance with all applicable laws concerning
money laundering and similar activities. The Company understands and agrees that
13
if at any time it is discovered that any of the foregoing representations are
incorrect, or if otherwise required by applicable law or regulation related to
money laundering similar activities, the Purchaser may undertake appropriate
actions to ensure compliance with applicable law or regulation, including but
not limited to segregation and/or redemption of the Purchaser's investment in
the Company. The Company further understands that the Purchaser may release
confidential information about the Company and, if applicable, any underlying
beneficial owners, to proper authorities if the Purchaser, in its sole
discretion, determines that it is in the best interests of the Purchaser in
light of relevant rules and regulations under the laws set forth in subsection
(ii) above.
5. Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Company as follows (such representations
and warranties do not lessen or obviate the representations and warranties of
the Company set forth in this Agreement)
5.1 No Shorting. The Purchaser or any of its affiliates and
investment partners has not, will not and will not cause any person or entity,
directly or indirectly, to engage in "short sales" of the Company's Common Stock
or any other hedging strategies utilizing the Company's Common Stock as long as
the Note shall be outstanding.
5.2 Requisite Power and Authority. The Purchaser has all
necessary power and authority under all applicable provisions of law to execute
and deliver this Agreement and the Related Agreements and to carry out their
provisions. All corporate action on Purchaser's part required for the lawful
execution and delivery of this Agreement and the Related Agreements have been or
will be effectively taken prior to the Closing. Upon their execution and
delivery, this Agreement and the Related Agreements will be valid and binding
obligations of Purchaser, enforceable in accordance with their terms, except:
(a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; and
(b) as limited by general principles of equity that restrict
the availability of equitable and legal remedies.
5.3 Investment Representations. Purchaser understands that the
Securities are being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon Purchaser's representations
contained in the Agreement, including, without limitation, that the Purchaser is
an "accredited investor" within the meaning of Regulation D under the Securities
Act of 1933, as amended (the "Securities Act"). The Purchaser confirms that it
has received or has had full access to all the information it considers
necessary or appropriate to make an informed investment decision with respect to
the Note and the Warrant to be purchased by it under this Agreement and the Note
Shares and the Warrant Shares acquired by it upon the conversion of the Note and
the exercise of the Warrant, respectively. The Purchaser further confirms that
it has had an opportunity to ask questions and receive answers from the Company
regarding the Company's business, management and financial affairs and the terms
and conditions of the Offering, the Note, the Warrant and the Securities and to
obtain additional information (to the extent the Company possessed such
14
information or could acquire it without unreasonable effort or expense)
necessary to verify any information furnished to the Purchaser or to which the
Purchaser had access.
5.4 Purchaser Bears Economic Risk. The Purchaser has
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Company so that it is
capable of evaluating the merits and risks of its investment in the Company and
has the capacity to protect its own interests. The Purchaser must bear the
economic risk of this investment until the Securities are sold pursuant to: (i)
an effective registration statement under the Securities Act; or (ii) an
exemption from registration is available with respect to such sale.
5.5 Acquisition for Own Account. The Purchaser is acquiring
the Note and Warrant and the Note Shares and the Warrant Shares for the
Purchaser's own account for investment only, and not as a nominee or agent and
not with a view towards or for resale in connection with their distribution.
5.6 Purchaser Can Protect Its Interest. The Purchaser
represents that by reason of its, or of its management's, business and financial
experience, the Purchaser has the capacity to evaluate the merits and risks of
its investment in the Note, the Warrant and the Securities and to protect its
own interests in connection with the transactions contemplated in this
Agreement, and the Related Agreements. Further, the Purchaser is aware of no
publication of any advertisement in connection with the transactions
contemplated in the Agreement or the Related Agreements.
5.7 Accredited Investor. Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
5.8 Legends.
(a) The Note shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO MITEK SYSTEMS, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(b) The Note Shares and the Warrant Shares, if not issued by
DWAC system (as hereinafter defined), shall bear a legend which shall be in
substantially the following:
15
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES
ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO MITEK SYSTEMS, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(c) The Warrant shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF
COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO MITEK
SYSTEMS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
6. Covenants of the Company. The Company covenants and agrees with the
Purchaser as follows:
6.1 Stop-Orders. The Company will advise the Purchaser,
promptly after it receives notice of issuance by the Securities and Exchange
Commission (the "SEC"), any state securities commission or any other regulatory
authority of any stop order or of any order preventing or suspending any
offering of any securities of the Company, or of the suspension of the
qualification of the Common Stock of the Company for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
6.2 Trading. The Company shall promptly secure the trading of
the shares of Common Stock issuable upon conversion of the Note and upon the
exercise of the Warrant on the OTCBB (the "Principal Market") as required by the
Registration Rights Agreement and shall maintain such trading eligibility so
long as any other shares of Common Stock shall be so traded . The Company will
maintain the trading of its Common Stock on the Principal Market, and will
comply in all material respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers ("NASD") and such exchanges, as applicable.
16
6.3 Market Regulations. The Company shall notify the SEC, NASD
and applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the
Purchaser and promptly provide copies thereof to the Purchaser.
6.4 Reporting Requirements. The Company will timely file with
the SEC all reports required to be filed pursuant to the Exchange Act and
refrain from terminating its status as an issuer required by the Exchange Act to
file reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination.
6.5 Use of Funds. The Company agrees that it will use the
proceeds of the sale of the Note and Warrant for general working capital
purposes only.
6.6 Access to Facilities. The Company will permit any
representatives designated by the Purchaser (or any successor of the Purchaser),
upon reasonable notice and during normal business hours, at such person's
expense and accompanied by a representative of the Company, to:
(a) visit and inspect any of the properties of the Company;
(b) examine the corporate and financial records of the Company
(unless such examination is not permitted by federal, state or local law or by
contract) and make copies thereof or extracts therefrom; and
(c) discuss the affairs, finances and accounts of the Company
with the directors, officers and independent accountants of the Company.
Notwithstanding the foregoing, the Company will not provide any material,
non-public information to the Purchaser unless the Purchaser signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.
6.7 Taxes. The Company will promptly pay and discharge, or
cause to be paid and discharged, when due and payable, all lawful taxes,
assessments and governmental charges or levies imposed upon the income, profits,
property or business of the Company; provided, however, that any such tax,
assessment, charge or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if the
Company shall have set aside on its books adequate reserves with respect
thereto, and provided, further, that the Company will pay all such taxes,
assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefor.
6.8 Insurance. The Company will keep its assets which are of
an insurable character insured by financially sound and reputable insurers
against loss or damage by fire, explosion and other risks customarily insured
against by companies in similar business similarly situated as the Company; and
the Company will maintain, with financially sound and reputable insurers,
insurance against other hazards and risks and liability to persons and property
to the extent and in the manner which the Company reasonably believes is
customary for companies in similar business similarly situated as the Company
17
and to the extent available on commercially reasonable terms. The Company and
each of its Subsidiaries will jointly and severally bear the full risk of loss
from any loss of any nature whatsoever with respect to the assets pledged to the
Purchaser as security for its obligations hereunder and under the Related
Agreements. At the Company's own cost and expense in amounts and with carriers
reasonably acceptable to Purchaser, the Company and each of the Subsidiaries
shall (i) keep all its insurable properties and properties in which it has an
interest insured against the hazards of fire, flood, sprinkler leakage, those
hazards covered by extended coverage insurance and such other hazards, and for
such amounts, as is customary in the case of companies engaged in businesses
similar to the Company's or the respective Subsidiary's including business
interruption insurance; (ii) maintain a bond in such amounts as is customary in
the case of companies engaged in businesses similar to the Company's or the
Subsidiary's insuring against larceny, embezzlement or other criminal
misappropriation of insured's officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of the
Company either directly or through governmental authority to draw upon such
funds or to direct generally the disposition of such assets; (iii) maintain
public and product liability insurance against claims for personal injury, death
or property damage suffered by others; (iv) maintain all such worker's
compensation or similar insurance as may be required under the laws of any state
or jurisdiction in which the Company or the Subsidiary is engaged in business;
and (v) furnish Purchaser with (x) copies of all policies and evidence of the
maintenance of such policies at least thirty (30) days before any expiration
date, (y) excepting the Company's workers' compensation policy, endorsements to
such policies naming Purchaser as "co-insured" or "additional insured" and
appropriate loss payable endorsements in form and substance satisfactory to
Purchaser, naming Purchaser as loss payee, and (z) evidence that as to Purchaser
the insurance coverage shall not be impaired or invalidated by any act or
neglect of the Company or any Subsidiary and the insurer will provide Purchaser
with at least thirty (30) days notice prior to cancellation. The Company and
each Subsidiary shall instruct the insurance carriers that in the event of any
loss thereunder, the carriers shall make payment for such loss to the Company
and/or the Subsidiary and Purchaser jointly. In the event that as of the date of
receipt of each loss recovery upon any such insurance, the Purchaser has not
declared an event of default with respect to this Agreement or any of the
Related Agreements, then the Company shall be permitted to direct the
application of such loss recovery proceeds toward investment in property, plant
and equipment that would comprise "Collateral" secured by Purchaser's security
interest pursuant to its security agreement, with any surplus funds to be
applied toward payment of the obligations of the Company to Purchaser. In the
event that Purchaser has properly declared an event of default with respect to
this Agreement or any of the Related Agreements, then all loss recoveries
received by Purchaser upon any such insurance thereafter may be applied to the
obligations of the Company hereunder and under the Related Agreements, in such
order as the Purchaser may determine. Any surplus (following satisfaction of all
Company obligations to Purchaser) shall be paid by Purchaser to the Company or
applied as may be otherwise required by law. Any deficiency thereon shall be
paid by the Company or the Subsidiary, as applicable, to Purchaser, on demand.
6.9 Intellectual Property. The Company shall maintain in full
force and effect its corporate existence, rights and franchises and all licenses
and other rights to use Intellectual Property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business.
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6.10 Properties. The Company will keep its properties in good
repair, working order and condition, reasonable wear and tear excepted, and from
time to time make all needful and proper repairs, renewals, replacements,
additions and improvements thereto; and the Company will at all times comply
with each provision of all leases to which it is a party or under which it
occupies property if the breach of such provision could reasonably be expected
to have a Material Adverse Effect.
6.11 Confidentiality. The Company agrees that it will not
disclose, including without limitation, in any public announcement, the name of
the Purchaser, unless expressly agreed to by the Purchaser or unless and until
such disclosure (i) is required by law or applicable regulation, and then only
to the extent of such requirement or (ii) the Purchaser has previously agreed to
the language of the proposed disclosure. Purchaser acknowledges that promptly
following Closing, the Company will issue a press release, the text of which
shall have been approved by Purchaser, and will file with the SEC a Form 8-K
Current Report with respect to this Agreement, the Related Agreements and the
transactions contemplated hereunder and thereunder, and the Purchaser shall
cooperate with the Company in connection with such required disclosure.
6.12 Required Approvals. For so long as twenty-five percent
(25%) of the principal amount of the Note is outstanding, the Company, without
the prior written consent of the Purchaser, shall not:
(a) directly or indirectly declare or pay any dividends;
(b) liquidate, dissolve or effect a material reorganization
(it being understood that in no event shall the Company dissolve, liquidate or
merge with any other person or entity (unless the Company is the surviving
entity);
(c) become subject to (including, without limitation, by way
of amendment to or modification of) any agreement or instrument which by its
terms would (under any circumstances) restrict the Company's right to perform
the provisions of this Agreement or any of the agreements contemplated thereby;
(d) materially alter or change the scope of the business of
the Company;
(e) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt and debt incurred to finance the purchase of equipment
(not in excess of five percent (5%) per annum of the fair market value of the
Company's assets) whether secured or unsecured other than (x) the Company's
indebtedness to Laurus, (y) indebtedness set forth on Schedule 6.12(e) attached
hereto and made a part hereof and any refinancings or replacements thereof on
terms no less favorable to the Purchaser than the debt being refinanced or
replaced, and (z) any indebtedness incurred in connection with the purchase of
assets in the ordinary course of business, and any refinancings or replacements
thereof on terms no less favorable to the Purchaser than the indebtedness being
refinanced or replaced; (ii) cancel any indebtedness owing to it in excess of
$50,000 in the aggregate during any 12 month period; (iii) assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
19
any obligations of any other Person, except the endorsement of negotiable
instruments by the Company for deposit or collection or similar transactions in
the ordinary course of business; and
(f) make investments in, make any loans or advances to, or
transfer assets to, any of its Subsidiaries, other than any immaterial
investments, loans, advances and/or asset transfers made in the ordinary course
of business.
6.13 Reissuance of Securities. The Company agrees to reissue
certificates representing the Securities without the legends set forth in
Section 5.8 above at such time as:
(a) the holder thereof is permitted to dispose of such
Securities pursuant to Rule 144(k) under the Securities Act; or
(b) upon resale subject to an effective registration statement
after such Securities are registered under the Securities Act.
The Company agrees to cooperate with the Purchaser in connection with all
resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions
necessary to allow such resales provided the Company and its counsel receive
reasonably requested representations from the selling Purchaser and broker, if
any.
6.14 Opinion. On the Closing Date, the Company will deliver to
the Purchaser an opinion reasonably acceptable to the Purchaser from the
Company's legal counsel in substantially the form in Exhibit C hereto. The
Company will provide, at the Company's expense, such other legal opinions in the
future as are reasonably necessary for the conversion of the Note and exercise
of the Warrant.
6.15 Margin Stock. The Company will not permit any of the
proceeds of the Note or the Warrant to be used directly or indirectly to
"purchase" or "carry" "margin stock" or to repay indebtedness incurred to
"purchase" or "carry" "margin stock" within the respective meanings of each of
the quoted terms under Regulation U of the Board of Governors of the Federal
Reserve System as now and from time to time hereafter in effect.
6.16 Lockbox Arrangement for Company Accounts. On or prior to
the Closing Date, (i) Company shall cause, and provide evidence to Purchaser
that it has caused, any and all of its account debtors with respect to any of
its Accounts (as defined in the Uniform Commercial Code as in effect on the date
hereof in the State of New York (the "UCC")) to remit their payments to a
lockbox account maintained at Commerce Bank (the "Lockbox Account") and (ii) the
Company shall enter into, and cause Commerce Bank to enter into, a control
agreement with the Purchaser, which control agreement (x) shall grant to
Purchaser a first priority security interest in the Lockbox Account and any
other deposit account related thereto and be, to the satisfaction of Purchaser,
sufficient to perfect such security interest pursuant to the UCC, and (y) shall
be in form and substance otherwise satisfactory to the Purchaser and Commerce
Bank. The Purchaser hereby agrees to terminate its security interests in the
Lockbox Account upon the earlier to occur of the date upon which (A) the sum of
$1,000,000 aggregate outstanding principal remains on the Note and (B) June 11,
2006.
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6.17 Stock Pledge. No later than sixty (60) days following the
date hereof, the Company shall take all actions necessary and adviseable to
grant to Purchaser a perfected pledge and security interest (or its equivalent)
in of all of the equity interests of Mitek Systems, Ltd. owned by the Company,
such pledge and security interest being granted to secure the obligations of the
Company set forth in this Agreement and the Related Agreements, in each case
pursuant to documentation governed by the jurisdiction of organization of Mitek
Systems Ltd. (the "Stock Pledge Documentation"). The Company shall reimburse the
Purchaser for any and all reasonable legal fees and other expenses incurred by
the Purchaser in connection with the preparation, execution, negotiation and
delivery of the Stock Pledge Documentation.
7. Covenants of the Purchaser. The Purchaser covenants and agrees with
the Company as follows:
7.1 Confidentiality. The Purchaser agrees that it will not
disclose, and will not include in any public announcement, the name of the
Company, unless expressly agreed to by the Company or unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement.
7.2 Non-Public Information. The Purchaser agrees not to effect
any sales in the shares of the Company's Common Stock while in possession of
material, non-public information regarding the Company if such sales would
violate applicable securities law.
8. Covenants of the Company and Purchaser Regarding Indemnification.
8.1 Company Indemnification. The Company agrees to indemnify,
hold harmless, reimburse and defend Purchaser, each of Purchaser's officers,
directors, agents, affiliates, control persons, and principal shareholders,
against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Purchaser which results, arises out of or is based upon: (i) any
misrepresentation by Company or breach of any warranty by Company in this
Agreement, any Related Agreement or in any exhibits or schedules attached hereto
or thereto; or (ii) any breach or default in performance by Company of any
covenant or undertaking to be performed by Company hereunder, or any other
agreement entered into by the Company and Purchaser relating hereto.
8.2 Purchaser's Indemnification. Purchaser agrees to
indemnify, hold harmless, reimburse and defend the Company and each of the
Company's officers, directors, agents, affiliates, control persons and principal
shareholders, at all times against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company which results, arises out of or is based
upon: (i) any misrepresentation by Purchaser or breach of any warranty by
Purchaser in this Agreement or in any exhibits or schedules attached hereto or
any Related Agreement; or (ii) any breach or default in performance by Purchaser
of any covenant or undertaking to be performed by Purchaser hereunder, or any
other agreement entered into by the Company and Purchaser relating hereto.
9. Conversion of Convertible Note.
9.1 Mechanics of Conversion.
21
(a) Provided the Purchaser has notified the Company of the
Purchaser's intention to sell the Note Shares and the Note Shares are included
in an effective registration statement or are otherwise exempt from registration
when sold: (i) Upon the conversion of the Note or part thereof, the Company
shall, at its own cost and expense, take all necessary action (including the
issuance of an opinion of counsel reasonably acceptable to the Purchaser
following a request by the Purchaser) to assure that the Company's transfer
agent shall issue shares of the Company's Common Stock in the name of the
Purchaser (or its nominee in compliance with applicable securities law) or such
other persons as designated by the Purchaser in accordance with Section 9.1(b)
hereof and in such denominations to be specified representing the number of Note
Shares issuable upon such conversion; and (ii) The Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company's Common Stock and that after the Effectiveness
Date (as defined in the Registration Rights Agreement) the Note Shares issued
will be transferable subject to the prospectus delivery requirements of the
Securities Act and the provisions of this Agreement.
(b) Purchaser will give notice of its decision to exercise its
right to convert the Note or part thereof by telecopying or otherwise delivering
an executed and completed notice of the number of shares to be converted to the
Company (the "Notice of Conversion"). The Purchaser will not be required to
surrender the Note until the Purchaser receives a credit to the account of the
Purchaser's prime broker through the DWAC system (as defined below),
representing the Note Shares or until the Note has been fully satisfied. Each
date on which a Notice of Conversion is telecopied or delivered to the Company
in accordance with the provisions hereof shall be deemed a "Conversion Date."
Pursuant to the terms of the Notice of Conversion, the Company will issue
instructions to the transfer agent accompanied by an opinion of counsel within
one (1) business day of the date of the delivery to the Company of the Notice of
Conversion and shall cause the transfer agent to transmit the certificates
representing the Conversion Shares to the Holder by crediting the account of the
Purchaser's prime broker with the Depository Trust Company ("DTC") through its
Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business
days after receipt by the Company of the Notice of Conversion (the "Delivery
Date").
(c) The Company understands that a delay in the delivery of
the Note Shares in the form required pursuant to Section 9 hereof beyond the
Delivery Date could result in economic loss to the Purchaser. In the event that
the Company fails to direct its transfer agent to deliver the Note Shares to the
Purchaser via the DWAC system within the time frame set forth in Section 9.1(b)
above and the Note Shares are not delivered to the Purchaser by the Delivery
Date, as compensation to the Purchaser for such loss, the Company agrees to pay
late payments to the Purchaser for late issuance of the Note Shares in the form
required pursuant to Section 9 hereof upon conversion of the Note in the amount
equal to the greater of: (i) $500 per business day after the Delivery Date; or
(ii) the Purchaser's actual damages from such delayed delivery. Notwithstanding
the foregoing, the Company will not owe the Purchaser any late payments if the
delay in the delivery of the Note Shares beyond the Delivery Date is solely out
of the control of the Company and the Company is actively trying to cure the
cause of the delay. The Company shall pay any payments incurred under this
Section in immediately available funds upon demand and, in the case of actual
damages, accompanied by reasonable documentation of the amount of such damages.
Such documentation shall show the number of shares of Common Stock the Purchaser
is forced to purchase (in an open market transaction) which the Purchaser
22
anticipated receiving upon such conversion, and shall be calculated as the
amount by which (A) the Purchaser's total purchase price (including customary
brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (B) the aggregate principal and/or interest amount of the Note, for
which such Conversion Notice was not timely honored.
Nothing contained herein or in any document referred to herein or delivered in
connection herewith shall be deemed to establish or require the payment of a
rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest or dividends required to
be paid or other charges hereunder exceed the maximum amount permitted by such
law, any payments in excess of such maximum shall be credited against amounts
owed by the Company to a Purchaser and thus refunded to the Company.
10. Registration Rights.
10.1 Registration Rights Granted. The Company hereby grants
registration rights to the Purchaser pursuant to a Registration Rights Agreement
dated as of even date herewith between the Company and the Purchaser.
10.2 Offering Restrictions. Except as previously disclosed in
the SEC Reports or in the Exchange Act Filings, or stock or stock options
granted to employees or directors of the Company (these exceptions hereinafter
referred to as the "Excepted Issuances"), the Company will not issue any
securities with a continuously variable/floating conversion feature which are or
could be (by conversion or registration) free-trading securities (i.e. common
stock subject to a registration statement) prior to the full repayment or
conversion of the Note (together with all accrued and unpaid interest and fees
related thereto (the "Exclusion Period").
11. Miscellaneous.
11.1 Governing Law. THIS AGREEMENT AND EACH RELATED AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT
BY EITHER PARTY AGAINST THE OTHER CONCERNING THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE
COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK.
BOTH PARTIES AND THE INDIVIDUALS EXECUTING THIS AGREEMENT AND THE RELATED
AGREEMENTS ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH
COURTS AND WAIVE TRIAL BY JURY. IN THE EVENT THAT ANY PROVISION OF THIS
AGREEMENT OR ANY RELATED AGREEMENT DELIVERED IN CONNECTION HEREWITH IS INVALID
OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH
PROVISION SHALL BE DEEMED INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT
THEREWITH AND SHALL BE DEEMED MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF
LAW. ANY SUCH PROVISION WHICH MAY PROVE INVALID OR UNENFORCEABLE UNDER ANY LAW
SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS
AGREEMENT OR ANY RELATED AGREEMENT.
23
11.2 Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by the Purchaser and
the closing of the transactions contemplated hereby to the extent provided
therein. All statements as to factual matters contained in any certificate or
other instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument.
11.3 Successors. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, heirs, executors and administrators of the parties hereto
and shall inure to the benefit of and be enforceable by each person who shall be
a holder of the Securities from time to time, other than the holders of Common
Stock which has been sold by the Purchaser pursuant to Rule 144 or an effective
registration statement. Purchaser may not assign its rights hereunder to a
competitor of the Company.
11.4 Entire Agreement60. . This Agreement, the Related Agreements, the exhibits
and schedules hereto and thereto and the other documents delivered pursuant
hereto constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and no party shall be liable or bound
to any other in any manner by any representations, warranties, covenants and
agreements except as specifically set forth herein and therein.
11.5 Severability61. . In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
11.6 Amendment and Waiver.
(a) This Agreement may be amended or modified only upon the
written consent of the Company and the Purchaser.
(b) The obligations of the Company and the rights of the
Purchaser under this Agreement may be waived only with the written consent of
the Purchaser.
(c) The obligations of the Purchaser and the rights of the
Company under this Agreement may be waived only with the written consent of the
Company.
11.7 Delays or Omissions. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to any party, upon any
breach, default or noncompliance by another party under this Agreement or the
Related Agreements, shall impair any such right, power or remedy, nor shall it
be construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of or in any similar breach, default or noncompliance
thereafter occurring. All remedies, either under this Agreement, or the Related
Agreements, by law or otherwise afforded to any party, shall be cumulative and
not alternative.
11.8 Notices. All notices required or permitted hereunder
shall be in writing and shall be deemed effectively given:
24
(a) upon personal delivery to the party to be notified;
(b) when sent by confirmed facsimile if sent during normal
business hours of the recipient, if not, then on the next business day;
(c) three (3) business days after having been sent by
registered or certified mail, return receipt requested, postage prepaid; or
(d) one (1) day after deposit with a nationally recognized
overnight courier, specifying next day delivery, with written verification of
receipt.
All communications shall be sent as follows:
If to the Company, to: Mitek Systems, Inc.
14145 Danielson Street
Suite B
Poway, California 92064
Attention: Chief Financial Officer
Facsimile: 858-513-4622
With a copy to:
Luce Forward Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
Attention: P. Blake Allen, Esq.
Facsimile: 619-645-5357
If to the Purchaser, to: Laurus Master Fund, Ltd.
c/o Ironshore Corporate Services ltd.
P.O. Box 1234 G.T.
Queensgate House, South Church Street
Grand Cayman, Cayman Islands
Facsimile: 345-949-9877
With a copy to:
John E. Tucker, Esq.
825 Third Avenue 14th Floor
New York, New York 10022
Facsimile: 212-541-4434
or at such other address as the Company or the Purchaser may designate by
written notice to the other parties hereto given in accordance herewith.
25
11.9 Attorneys' Fees. In the event that any suit or action is
instituted to enforce any provision in this Agreement, the prevailing party in
such dispute shall be entitled to recover from the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Agreement, including, without limitation, such reasonable fees
and expenses of attorneys and accountants, which shall include, without
limitation, all fees, costs and expenses of appeals.
11.10 Titles and Subtitles. The titles of the sections and
subsections of the Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
11.11 Facsimile Signatures; Counterparts. This Agreement may
be executed by facsimile signatures and in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
11.12 Broker's Fees. Except as set forth on Schedule 11.12
hereof, Each party hereto represents and warrants that no agent, broker,
investment banker, person or firm acting on behalf of or under the authority of
such party hereto is or will be entitled to any broker's or finder's fee or any
other commission directly or indirectly in connection with the transactions
contemplated herein. Each party hereto further agrees to indemnify each other
party for any claims, losses or expenses incurred by such other party as a
result of the representation in this Section 11.12 being untrue.
11.13 Construction. Each party acknowledges that its legal
counsel participated in the preparation of this Agreement and the Related
Agreements and, therefore, stipulates that the rule of construction that
ambiguities are to be resolved against the drafting party shall not be applied
in the interpretation of this Agreement to favor any party against the other.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
26
IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES
PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.
COMPANY: PURCHASER:
MITEK SYSTEMS, INC. LAURUS MASTER FUND, LTD.
By: By:
---------------------------------- ----------------------------------
Name: Name:
-------------------------------- --------------------------------
Title: Title:
------------------------------- -------------------------------
27
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO MITEK SYSTEMS, INC. THAT SUCH REGISTRATION IS
NOT REQUIRED.
Right to Purchase up to 860,000 Shares of Common Stock of
Mitek Systems, Inc.
--------------------
(subject to adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No. _________________ Issue Date: June 11, 2004
MITEK SYSTEMS, INC., a corporation organized under the laws of the
State of Delaware hereby certifies that, for value received, LAURUS MASTER FUND,
LTD., or assigns (the "Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company (as defined herein) from and after the Issue
Date of this Warrant and at any time or from time to time before 5:00 p.m., New
York time, through the close of business June 11, 2011 (the "Expiration Date"),
up to 860,000 fully paid and nonassessable shares of Common Stock (as
hereinafter defined), $0.001 par value per share, at the applicable Exercise
Price per share (as defined below). The number and character of such shares of
Common Stock and the applicable Exercise Price per share are subject to
adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Company" shall include Mitek Systems, Inc. and
any corporation which shall succeed, or assume the obligations of,
Mitek Systems, Inc. hereunder.
(b) The term "Common Stock" includes (i) the Company's common
stock, par value $0.001 per share; and (ii) any other securities into
which or for which any of the securities described in (a) may be
converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other
than Common Stock) and other securities of the Company or any other
person (corporate or otherwise) which the holder of the Warrant at any
time shall be entitled to receive, or shall have received, on the
exercise of the Warrant, in lieu of or in addition to Common Stock, or
which at any time shall be issuable or shall have been issued in
1
exchange for or in replacement of Common Stock or Other Securities
pursuant to Section 4 or otherwise.
(d) The "Exercise Price" applicable under this Warrant shall
be as follows:
(i) a price of $0.79 for the first 230,000 shares
acquired hereunder;
(ii) a price of $0.85 for the next 230,000 shares
acquired hereunder; and
(iii) a price of $0.92 for any additional shares
acquired hereunder.
Exercise of Warrant.
Number of Shares Issuable upon Exercise. From and after the
date hereof through and including the Expiration Date, the Holder shall be
entitled to receive, upon exercise of this Warrant in whole or in part, by
delivery of an original or fax copy of an exercise notice in the form attached
hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the
Company, subject to adjustment pursuant to Section 4.
Fair Market Value. For purposes hereof, the "Fair Market
Value" of a share of Common Stock as of a particular date (the "Determination
Date") shall mean:
IF THE COMPANY'S COMMON STOCK IS TRADED ON THE AMERICAN STOCK
EXCHANGE OR ANOTHER NATIONAL EXCHANGE OR IS QUOTED ON THE NATIONAL OR
SMALLCAP MARKET OF THE NASDAQ STOCK MARKET, INC.("NASDAQ"), THEN THE
CLOSING OR LAST SALE PRICE, RESPECTIVELY, REPORTED FOR THE LAST
BUSINESS DAY IMMEDIATELY PRECEDING THE DETERMINATION DATE.
IF THE COMPANY'S COMMON STOCK IS NOT TRADED ON THE AMERICAN
STOCK EXCHANGE OR ANOTHER NATIONAL EXCHANGE OR ON THE NASDAQ BUT IS
TRADED ON THE NASD OTC BULLETIN BOARD, THEN THE MEAN OF THE AVERAGE OF
THE CLOSING BID AND ASKED PRICES REPORTED FOR THE LAST BUSINESS DAY
IMMEDIATELY PRECEDING THE DETERMINATION DATE.
EXCEPT AS PROVIDED IN CLAUSE (D) BELOW, IF THE COMPANY'S
COMMON STOCK IS NOT PUBLICLY TRADED, THEN AS THE HOLDER AND THE COMPANY
AGREE OR IN THE ABSENCE OF AGREEMENT BY ARBITRATION IN ACCORDANCE WITH
THE RULES THEN IN EFFECT OF THE AMERICAN ARBITRATION ASSOCIATION,
BEFORE A SINGLE ARBITRATOR TO BE CHOSEN FROM A PANEL OF PERSONS
QUALIFIED BY EDUCATION AND TRAINING TO PASS ON THE MATTER TO BE
DECIDED.
IF THE DETERMINATION DATE IS THE DATE OF A LIQUIDATION,
DISSOLUTION OR WINDING UP, OR ANY EVENT DEEMED TO BE A LIQUIDATION,
DISSOLUTION OR WINDING UP PURSUANT TO THE COMPANY'S CHARTER, THEN ALL
AMOUNTS TO BE PAYABLE PER SHARE TO HOLDERS OF THE COMMON STOCK PURSUANT
TO THE CHARTER IN THE EVENT OF SUCH LIQUIDATION, DISSOLUTION OR WINDING
UP, PLUS ALL OTHER AMOUNTS TO BE PAYABLE PER SHARE IN RESPECT OF THE
COMMON STOCK IN LIQUIDATION UNDER THE CHARTER, ASSUMING FOR THE
PURPOSES OF THIS CLAUSE (D) THAT ALL OF THE SHARES OF COMMON STOCK THEN
ISSUABLE UPON EXERCISE OF THE WARRANT ARE OUTSTANDING AT THE
DETERMINATION DATE.
Company Acknowledgment. The Company will, at the time of the
exercise of the Warrant, upon the request of the holder hereof acknowledge in
writing its continuing obligation to afford to such holder any rights to which
such holder shall continue to be entitled after such exercise in accordance with
the provisions of this Warrant. If the holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.
Trustee for Warrant Holders. In the event that a bank or trust
company shall have been appointed as trustee for the holders of the Warrant
pursuant to Subsection 3.2, such bank or trust company shall have all the powers
and duties of a warrant agent (as hereinafter described) and shall accept, in
2
its own name for the account of the Company or such successor person as may be
entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
Procedure for Exercise.
Delivery of Stock Certificates, Etc., on Exercise. The Company
agrees that the shares of Common Stock purchased upon exercise of this Warrant
shall be deemed to be issued to the Holder as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares in accordance herewith. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within three (3) business days thereafter, the Company at its expense
(including the payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to the Holder, or as such Holder (upon
payment by such Holder of any applicable transfer taxes) may direct in
compliance with applicable securities laws, a certificate or certificates for
the number of duly and validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such Holder shall be entitled on
such exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the then Fair
Market Value of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
Exercise. Payment may be made either (i) in cash or by
certified or official bank check payable to the order of the Company equal to
the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, or
shares of Common Stock and/or Common Stock receivable upon exercise of the
Warrant in accordance with Section (b) below, or (iii) by a combination of any
of the foregoing methods, for the number of Common Shares specified in such
Exercise Notice (as such exercise number shall be adjusted to reflect any
adjustment in the total number of shares of Common Stock issuable to the Holder
per the terms of this Warrant) and the Holder shall thereupon be entitled to
receive the number of duly authorized, validly issued, fully-paid and
non-assessable shares of Common Stock (or Other Securities) determined as
provided herein. Notwithstanding any provisions herein to the contrary, if the
Fair Market Value of one share of Common Stock is greater than the Exercise
Price (at the date of calculation as set forth below), in lieu of exercising
this Warrant for cash, the Holder may elect to receive shares equal to the value
(as determined below) of this Warrant (or the portion thereof being exercised)
by surrender of this Warrant at the principal office of the Company together
with the properly endorsed Exercise Notice in which event the Company shall
issue to the Holder a number of shares of Common Stock computed using the
following formula:
X = Y (A-B)
--------
A
Where X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised (at the
date of such calculation)
A = the Fair Market Value of one share of the Company's Common
Stock (at the date of such calculation)
B = Exercise Price (as adjusted to the date of such calculation)
Effect of Reorganization, Etc.; Adjustment of Exercise Price.
Reorganization, Consolidation, Merger, Etc. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
3
adequate provision shall be made by the Company whereby the Holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such Holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.
Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, concurrently with any distributions made to holders of its Common
Stock, shall at its expense deliver or cause to be delivered to the Holder the
stock and other securities and property (including cash, where applicable)
receivable by the Holder of the Warrant pursuant to Section 3.1, or, if the
Holder shall so instruct the Company, to a bank or trust company specified by
the Holder and having its principal office in New York, NY as trustee for the
Holder of the Warrant (the "Trustee").
Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the shares of stock and other securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in the
case of any such transfer, the person acquiring all or substantially all of the
properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 4. In the
event this Warrant does not continue in full force and effect after the
consummation of the transactions described in this Section 3, then the Company's
securities and property (including cash, where applicable) receivable by the
Holders of the Warrant will be delivered to Holder or the Trustee as
contemplated by Section 3.2.
Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Exercise Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Exercise Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Exercise Price then in effect. The
Exercise Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be increased to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Exercise Price that would otherwise (but for the provisions of this
Section 4) be in effect, and (b) the denominator is the Exercise Price in effect
on the date of such exercise.
Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrant, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
4
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the holder of the Warrant and any
Warrant agent of the Company (appointed pursuant to Section 11 hereof).
Reservation of Stock, Etc., Issuable on Exercise of Warrant. The
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of the Warrant, shares of Common Stock (or Other
Securities) from time to time issuable on the exercise of the Warrant.
Assignment; Exchange of Warrant. Subject to compliance with applicable
securities laws, this Warrant, and the rights evidenced hereby, may be
transferred by any registered holder hereof (a "Transferor") in whole or in
part. On the surrender for exchange of this Warrant, with the Transferor's
endorsement in the form of Exhibit B attached hereto (the "Transferor
Endorsement Form") and together with evidence reasonably satisfactory to the
Company demonstrating compliance with applicable securities laws, which shall
include, without limitation, the provision of a legal opinion from the
Transferor's counsel (at the Company's expense) that such transfer is exempt
from the registration requirements of applicable securities laws, and with
payment by the Transferor of any applicable transfer taxes) will issue and
deliver to or on the order of the Transferor thereof a new Warrant of like
tenor, in the name of the Transferor and/or the transferee(s) specified in such
Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant so surrendered by the Transferor.
Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, on surrender
and cancellation of this Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
Registration Rights. The Holder of this Warrant has been granted
certain registration rights by the Company. These registration rights are set
forth in a Registration Rights Agreement entered into by the Company and
Purchaser dated as of even date of this Warrant.
Maximum Exercise. The Holder shall not be entitled to exercise this
Warrant on an exercise date, in connection with that number of shares of Common
Stock which would be in excess of the sum of (i) the number of shares of Common
Stock beneficially owned by the Holder and its affiliates on an exercise date,
and (ii) the number of shares of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this proviso is being made on
an exercise date, which would result in beneficial ownership by the Holder and
its affiliates of more than 4.99% of the outstanding shares of Common Stock of
the Company on such date. For the purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
5
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation
13d-3 thereunder. Notwithstanding the foregoing, the restriction described in
this paragraph may be revoked upon 75 days prior notice from the Holder to the
Company and is automatically null and void upon an Event of Default under the
Note.
Warrant Agent. The Company may, by written notice to the each Holder of
the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other
Securities) on the exercise of this Warrant pursuant to Section 1, exchanging
this Warrant pursuant to Section 7, and replacing this Warrant pursuant to
Section 8, or any of the foregoing, and thereafter any such issuance, exchange
or replacement, as the case may be, shall be made at such office by such agent.
Transfer on the Company's Books. Until this Warrant is transferred on
the books of the Company, the Company may treat the registered holder hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
Notices, Etc. All notices and other communications from the Company to
the Holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such Holder or, until any such Holder furnishes to the
Company an address, then to, and at the address of, the last Holder of this
Warrant who has so furnished an address to the Company.
Voluntary Adjustment by the Company. The Company may at any time during
the term of this Warrant reduce the then current Exercise Price to any amount
and for any period of time deemed appropriate by the Board of Directors of the
Company.
Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by and construed in accordance with the
laws of State of New York without regard to principles of conflicts of laws. Any
action brought concerning the transactions contemplated by this Warrant shall be
brought only in the state courts of New York or in the federal courts located in
the state of New York; provided, however, that the Holder may choose to waive
this provision and bring an action outside the state of New York. The
individuals executing this Warrant on behalf of the Company agree to submit to
the jurisdiction of such courts and waive trial by jury. The prevailing party
shall be entitled to recover from the other party its reasonable attorney's fees
and costs. In the event that any provision of this Warrant is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of this Warrant.
The headings in this Warrant are for purposes of reference only, and shall not
limit or otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision hereof. The Company acknowledges that
legal counsel participated in the preparation of this Warrant and, therefore,
stipulates that the rule of construction that ambiguities are to be resolved
against the drafting party shall not be applied in the interpretation of this
Warrant to favor any party against the other party.
6
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SIGNATURE PAGE FOLLOWS.]
7
IN WITNESS WHEREOF, the Company has executed this Warrant as of the
date first written above.
MITEK SYSTEMS, INC.
WITNESS:
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
8
EXHIBIT A
FORM OF SUBSCRIPTION
(To Be Signed Only On Exercise Of Warrant)
TO: Mitek Systems, Inc.
Attention: Chief Financial Officer
The undersigned, pursuant to the provisions set forth in the attached
Warrant (No.____), hereby irrevocably elects to purchase (check applicable box):
________ ________ shares of the Common Stock covered by such Warrant; or
________ the maximum number of shares of Common Stock covered by such Warrant
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned herewith makes payment of the full Exercise Price for
such shares at the price per share provided for in such Warrant, which is
$___________. Such payment takes the form of (check applicable box or boxes):
________ $________ in lawful money of the United States; and/or
________ the cancellation of such portion of the attached Warrant as is
exercisable for a total of _______ shares of Common Stock (using a Fair
Market Value of $_______ per share for purposes of this calculation);
and/or
________ the cancellation of such number of shares of Common Stock as is
necessary, in accordance with the formula set forth in Section 2.2, to
exercise this Warrant with respect to the maximum number of shares of
Common Stock purchasable pursuant to the cashless exercise procedure
set forth in Section 2.
The undersigned requests that the certificates for such shares be
issued in the name of, and delivered to ______________________________ whose
address is ___________________________________________________________________ .
The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable upon exercise of the within Warrant
shall be made pursuant to registration of the Common Stock under the Securities
Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from
registration under the Securities Act.
Dated:
------------------------ -----------------------------------------
(Signature must conform to name of holder
as specified on the face of the Warrant)
Address:
-------------------------------
-------------------------------
A-1
EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(To Be Signed Only On Transfer Of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees" the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of Mitek Systems, Inc. into which the within Warrant
relates specified under the headings "Percentage Transferred" and "Number
Transferred," respectively, opposite the name(s) of such person(s) and appoints
each such person Attorney to transfer its respective right on the books of Mitek
Systems, Inc. with full power of substitution in the premises.
Percentage Number
Transferees Address Transferred Transferred
- ----------- ------- ----------- -----------
- --------------------- ------------------------ ------------------ -----------
- --------------------- ------------------------ ------------------ -----------
- --------------------- ------------------------ ------------------ -----------
- --------------------- ------------------------ ------------------ -----------
Dated:
------------------------ -----------------------------------------
(Signature must conform to name of holder
as specified on the face of the Warrant)
Address:
--------------------------------
--------------------------------
SIGNED IN THE PRESENCE OF:
-----------------------------------------
(Name)
ACCEPTED AND AGREED:
[TRANSFEREE]
- ------------------------------------
(Name)
MITEK SYSTEMS, INC.
SECURITY AGREEMENT
To: Laurus Master Fund, Ltd.
c/o Ironshore Corporate Services, Ltd.
P.O. Box 1234 G.T
Queensgate House
South Church Street
Grand Cayman, Cayman Islands
Date: June 11, 2004
To Whom It May Concern:
To secure the payment of all Obligations (as hereafter defined), Mitek
Systems, Inc., a Delaware corporation (the "Assignor"), hereby assigns and
grants to Laurus Master Fund, Ltd., Cayman Islands company, a continuing
security interest in all of the following property now owned or at any time
hereafter acquired by the Assignor, or in which the Assignor now has or at any
time in the future may acquire any right, title or interest (the "Collateral"):
all cash, cash equivalents, accounts, deposit accounts (including, without
limitation, the Restricted Account (the "Restricted Account") maintained at
Commerce Bank (Account Name: Mitek Systems, Inc., Account Number: 7915474816)
referred to in the Restricted Account Agreement), accounts receivable,
inventory, equipment, goods, documents, instruments (including, without
limitation, promissory notes), contract rights, general intangibles (including,
without limitation, payment intangibles and an absolute right to license on
terms no less favorable than those currently in effect among our affiliates),
chattel paper, supporting obligations, investment property (including, without
limitation, all equity interests owned by the Assignor), letter-of-credit
rights, trademarks, trademark applications, tradestyles, patents, patent
applications, copyrights and copyright applications in which the Assignor now
has or hereafter may acquire any right, title or interest, all proceeds and
products thereof (including, without limitation, proceeds of insurance) and all
additions, accessions and substitutions thereto or therefore. In the event the
Assignor wishes to finance the acquisition 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. Except as otherwise defined herein, all capitalized terms used herein
shall have the meaning provided such terms the Securities Purchase Agreement
referred to below.
The term "Obligations" as used herein shall mean and include all debts,
liabilities and obligations owing by the Assignor to Laurus arising under, out
of, or in connection with: (i) that certain Securities Purchase Agreement dated
as of the date hereof by and between the Company and Laurus (the "Securities
Purchase Agreement") and (ii) the Related Agreements referred to in the
Securities Purchase Agreement the Securities Purchase Agreement and each Related
Agreement as each may be amended, modified, restated or supplemented from time
to time, are collectively referred to herein as the "Documents"), or any
documents, instruments or agreements relating to or executed in connection with
the Documents or any documents, instruments or agreements referred to therein or
otherwise, or any other indebtedness, obligations or liabilities of the Assignor
to Laurus, whether now existing or hereafter arising, direct or indirect,
liquidated or unliquidated, absolute or contingent, due or not due and whether
under, pursuant to or evidenced by a note, agreement, guaranty, instrument or
otherwise, in each case, irrespective of the genuineness, validity, regularity
or enforceability of such Obligations, or of any instrument evidencing any of
the Obligations or of any collateral therefor or of the existence or extent of
such collateral, and irrespective of the allowability, allowance or disallowance
of any or all of the Obligations in any case commenced by or against the
Assignor under Title 11, United States Code, including, without limitation,
obligations or indebtedness of the Assignor for post-petition interest, fees,
costs and charges that would have accrued or been added to the Obligations but
for the commencement of such case.
The Assignor hereby represents, warrants and covenants to Laurus that:
it is a corporation, partnership or limited liability company,
as the case may be, validly existing, in good standing and organized
under the laws of the State of Delaware , and it will provide Laurus
thirty (30) days' prior written notice of any change in its
jurisdiction of organization;
its legal name, as set forth in its Certificate of
Incorporation (or equivalent organizational document) as amended
through the date hereof, is Mitek Systems, Inc. and it will provide
Laurus thirty (30) days' prior written notice of any change in its
legal name;
its Internal Revenue Service Employer Identification Number
(if applicable) is 87-0418827 , and it will provide Laurus thirty (30)
days' prior written notice of any change in its organizational
identification number;
it is the lawful owner of the Collateral and it has the sole
right to grant a security interest therein and will defend the
Collateral against all claims and demands of all persons and entities;
it will keep the Collateral owned by it free and clear of all
attachments, levies, taxes, liens, security interests and encumbrances
of every kind and nature ("Encumbrances"), except (i) Encumbrances
securing the Obligations and (ii) to the extent said Encumbrance does
not secure indebtedness in excess of $50,000 and such Encumbrance is
removed or otherwise released within ten (10) days of the creation
thereof;
it will at its own cost and expense keep the Collateral in
good state of repair (ordinary wear and tear excepted) and will not
waste or destroy the same or any part thereof other than ordinary
course discarding of items no longer used or useful in its business;
it will not without Laurus' prior written consent, sell,
exchange, lease or otherwise dispose of the Collateral, whether by
sale, lease or otherwise, except for the sale of inventory in the
ordinary course of business and for the disposition or transfer in the
ordinary course of business during any fiscal year of obsolete and
worn-out equipment or equipment no longer necessary for its ongoing
needs, having an aggregate fair market value of not more than $25,000
and only to the extent that:
THE PROCEEDS OF ANY SUCH DISPOSITION ARE USED TO
ACQUIRE REPLACEMENT COLLATERAL WHICH IS SUBJECT TO LAURUS'
FIRST PRIORITY PERFECTED SECURITY INTEREST OR ARE USED TO
REPAY OBLIGATIONS OR TO PAY GENERAL CORPORATE EXPENSES; AND
FOLLOWING THE OCCURRENCE OF AN EVENT OF DEFAULT WHICH
CONTINUES TO EXIST THE PROCEEDS OF WHICH ARE REMITTED TO
LAURUS TO BE HELD AS CASH COLLATERAL FOR THE OBLIGATIONS;
it will insure the Collateral in Laurus' name against loss or
damage by fire, theft, burglary, pilferage, loss in transit and such
other hazards as Laurus shall specify in amounts and under policies by
insurers acceptable to Laurus and all premiums thereon shall be paid by
the Assignor and the policies delivered to Laurus. If the Assignor
fails to do so, Laurus may procure such insurance and the cost thereof
shall be promptly reimbursed by the Assignor and shall constitute
Obligations;
it will at all reasonable times allow Laurus or Laurus'
representatives free access to and the right of inspection of the
Collateral;
the Assignor hereby indemnifies and saves Laurus harmless from
all loss, costs, damage, liability and/or expense, including reasonable
attorneys' fees, that Laurus may sustain or incur to enforce payment,
performance or fulfillment of any of the Obligations and/or in the
enforcement of this Security Agreement or in the prosecution or defense
of any action or proceeding either against the Assignor or Laurus
concerning any matter growing out of or in connection with this
Security Agreement, and/or any of the Obligations and/or any of the
Collateral except to the extent caused by Laurus' own gross negligence
or willful misconduct (as determined by a court of competent
jurisdiction in a final and nonappealable decision).
The occurrence of any of the following events or conditions shall
constitute an "Event of Default" under this Security Agreement:
any covenant, warranty, representation or statement made or
furnished to Laurus by the Assignor or on the Assignor's behalf was
false in any material respect when made or furnished, and if subject to
cure, shall not be cured for a period of fifteen (15) days;
the loss, theft, substantial damage, destruction, sale or
encumbrance to or of any of the Collateral or the making of any levy,
seizure or attachment thereof or thereon except to the extent:
SUCH LOSS IS COVERED BY INSURANCE PROCEEDS WHICH ARE
USED TO REPLACE THE ITEM OR REPAY LAURUS; OR
SAID LEVY, SEIZURE OR ATTACHMENT DOES NOT SECURE
INDEBTEDNESS IN EXCESS OF $100,000 AND SUCH LEVY, SEIZURE OR
ATTACHMENT HAS NOT BEEN REMOVED OR OTHERWISE RELEASED WITHIN
TEN (10) DAYS OF THE CREATION OR THE ASSERTION THEREOF;
the Assignor shall become insolvent, cease operations,
dissolve, terminate our business existence, make an assignment for the
benefit of creditors, suffer the appointment of a receiver, trustee,
liquidator or custodian of all or any part of the Assignor's property;
any proceedings under any bankruptcy or insolvency law shall
be commenced by or against the Assignor and if commenced against the
Assignor shall not be dismissed within thirty (30) days;
the Assignor shall repudiate, purport to revoke or fail to
perform any of its obligations under the Note (after passage of
applicable cure period, if any); or
an Event of Default (or similar term) shall have occurred
under and as defined in the Securities Purchase Agreement or any other
Document.
Upon the occurrence of any Event of Default and at any time thereafter,
Laurus may declare all Obligations immediately due and payable and Laurus shall
have the remedies of a secured party provided in the Uniform Commercial Code as
in effect in the State of New York, this Master Security Agreement and other
applicable law. Upon the occurrence of any Event of Default and at any time
thereafter, Laurus will have the right to take possession of the Collateral and
to maintain such possession on the Assignor's premises or to remove the
Collateral or any part thereof to such other premises as Laurus may desire. Upon
Laurus' request, the Assignor shall assemble the Collateral and make it
available to Laurus at a place designated by Laurus. If any notification of
intended disposition of any Collateral is required by law, such notification, if
mailed, shall be deemed properly and reasonably given if mailed at least ten
(10) days before such disposition, postage prepaid, addressed to the Assignor
either at the Assignor's address shown herein or at any address appearing on
Laurus' records for the Assignor. Any proceeds of any disposition of any of the
Collateral shall be applied by Laurus to the payment of all expenses in
connection with the sale of the Collateral, including reasonable attorneys' fees
and other legal expenses and disbursements and the reasonable expense of
retaking, holding, preparing for sale, selling, and the like, and any balance of
such proceeds may be applied by Laurus toward the payment of the Obligations in
such order of application as Laurus may elect, and the Assignor shall be liable
for any deficiency. For the avoidance of doubt, following the occurrence and
during the continuance of an Event of Default, Laurus shall have the immediate
right to withdraw any and all monies contained in the Restricted Account and
apply same to the repayment of the Obligations (in such order of application as
Laurus may elect).
If the Assignor defaults in the performance or fulfillment of any of
the terms, conditions, promises, covenants, provisions or warranties on the
Assignor's part to be performed or fulfilled under or pursuant to this Security
Agreement, Laurus may, at its option without waiving its right to enforce this
Security Agreement according to its terms, immediately or at any time thereafter
and without notice to the Assignor, perform or fulfill the same or cause the
performance or fulfillment of the same for the Assignor's account and at the
Assignor's cost and expense, and the cost and expense thereof (including
reasonable attorneys' fees) shall be added to the Obligations and shall be
payable on demand with interest thereon at the highest rate permitted by law,
or, at Laurus' option, debited by Laurus from the Restricted Account referred to
in the Restricted Account Agreement.
The Assignor hereby appoints Laurus, any of Laurus' officers, employees
or any other person or entity whom Laurus may designate as our attorney, with
power to execute such documents in our behalf and to supply any omitted
information and correct patent errors in any documents executed by the Assignor
or on our behalf; to file financing statements against the Assignor covering the
Collateral (and, in connection with the filing of any such financing statements,
describe the Collateral as "all assets and all personal property, whether now
owned and/or hereafter acquired" (or any substantially similar variation
thereof)); to sign the Assignor's name on public records; and to do all other
things Laurus deems necessary to carry out this Security Agreement. The Assignor
hereby ratifies and approve all acts of the attorney and neither Laurus nor the
attorney will be liable for any acts of commission or omission, nor for any
error of judgment or mistake of fact or law other than their gross negligence or
willful misconduct (as determined by a court of competent jurisdiction in a
final and non-appealable decision). This power being coupled with an interest,
is irrevocable so long as any Obligations remains unpaid.
No delay or failure on Laurus' part in exercising any right, privilege
or option hereunder shall operate as a waiver of such or of any other right,
privilege, remedy or option, and no waiver whatever shall be valid unless in
writing, signed by Laurus and then only to the extent therein set forth, and no
waiver by Laurus of any default shall operate as a waiver of any other default
or of the same default on a future occasion. Laurus' books and records
containing entries with respect to the Obligations shall be admissible in
evidence in any action or proceeding, shall be binding upon the Assignor for the
purpose of establishing the items therein set forth and shall constitute prima
facie proof thereof. Laurus shall have the right to enforce any one or more of
the remedies available to Laurus, successively, alternately or concurrently. The
Assignor agrees to join with Laurus in executing financing statements or other
instruments to the extent required by the Uniform Commercial Code in form
satisfactory to Laurus and in executing such other documents or instruments as
may be required or deemed necessary by Laurus for purposes of affecting or
continuing Laurus' security interest in the Collateral.
This Security Agreement shall be governed by and construed in
accordance with the laws of the State of New York and cannot be terminated
orally. All of the rights, remedies, options, privileges and elections given to
Laurus hereunder shall inure to the benefit of Laurus' successors and assigns.
The term "Laurus" as herein used shall include Laurus, any parent of Laurus, any
of Laurus' subsidiaries and any co-subsidiaries of Laurus' parent, whether now
existing or hereafter created or acquired, and all of the terms, conditions,
promises, covenants, provisions and warranties of this Security Agreement shall
inure to the benefit of each of the foregoing, and shall bind the
representatives, successors and assigns of the Assignor. Each of Laurus and the
Assignor hereby (a) waives any and all right to trial by jury in litigation
relating to this Security Agreement and the transactions contemplated hereby and
the Assignor hereby agrees not to assert any counterclaim in such litigation,
(b) submit to the nonexclusive jurisdiction of any New York State court sitting
in the borough of Manhattan, the city of New York and (c) waive any objection
the Assignor or Laurus may have as to the bringing or maintaining of such action
with any such court.
All notices from Laurus to the Assignor shall be sufficiently given if
mailed or delivered to the Assignor at its address set forth in the Securities
Purchase Agreement and the Security Agreement.
Very truly yours,
MITEK SYSTEMS, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
ACKNOWLEDGED:
LAURUS MASTER FUND, LTD.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of June 11, 2004, by and between Mitek Systems, Inc., a Delaware
corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands
company (the "Purchaser").
This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof, by and between the Purchaser and the Company (the
"Securities Purchase Agreement"), and pursuant to the Note and the Warrants
referred to therein.
The Company and the Purchaser hereby agree as follows:
12. Definitions. Capitalized terms used and not otherwise defined
herein that are defined in the Securities Purchase Agreement shall have the
meanings given such terms in the Securities Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Commission" means the Securities and Exchange Commission.
"Common Stock" means shares of the Company's common stock, par value
$0.001 per share.
"Effectiveness Date" means the 90th day following the date hereof.
"Effectiveness Period" shall have the meaning set forth in Section
2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and any successor statute.
"Filing Date" means, with respect to the Registration Statement
required to be filed hereunder, a date no later than thirty (30) days following
the date hereof and with respect to shares of Common Stock issuable to the
Holder as a result of adjustments to the Fixed Conversion Price made pursuant to
Section 3.4 of the Secured Convertible Term Note or Section 4 of the Warrant or
otherwise, thirty (30) days after the occurrence such event or the date of the
adjustment of the Fixed Conversion Price.
"Holder" or "Holders" means the Purchaser or any of its affiliates or
transferees to the extent any of them hold Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Note" has the meaning set forth in the Securities Purchase Agreement.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock issued upon
the conversion of the Note and issuable upon exercise of the Warrants.
"Registration Statement" means each registration statement required to
be filed hereunder, including the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 424" means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended, and any
successor statute.
"Securities Purchase Agreement" means the agreement between the parties
hereto calling for, among other things, the issuance by the Company of a
$3,000,000 convertible Note plus Warrants.
"Trading Market" means any of the NASD OTC Bulletin Board ("OTCBB"),
NASDAQ SmallCap Market, the Nasdaq National Market, the American Stock Exchange
or the New York Stock Exchange.
"Warrants" means the Common Stock purchase warrants issued pursuant to
the Securities Purchase Agreement.
13. Registration.
8
13.1 On or prior to the Filing Date the Company shall prepare
and file with the Commission a Registration Statement covering the Registrable
Securities for an offering to be made on a continuous basis pursuant to Rule
415. The Registration Statement shall be on Form SB-2 (except if the Company is
not then eligible to register for resale the Registrable Securities on Form
SB-2, in which case such registration shall be on another appropriate form in
accordance herewith). The Company shall cause the Registration Statement to
become effective and remain effective as provided herein. The Company shall use
its reasonable commercial efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event no later than the Effectiveness Date. The
Company shall use its reasonable commercial efforts to keep the Registration
Statement continuously effective under the Securities Act until the date which
is the earlier date of when (i) all Registrable Securities have been sold or
(ii) all Registrable Securities may be sold immediately without registration
under the Securities Act and without volume restrictions pursuant to Rule
144(k), as determined by the counsel to the Company pursuant to a written
opinion letter to such effect, addressed and acceptable to the Company's
transfer agent and the affected Holders (the "Effectiveness Period").
13.2 If: (i) the Registration Statement is not filed on or
prior to the Filing Date; (ii) the Registration Statement is not declared
effective by the Commission by the Effectiveness Date; (iii) after the
Registration Statement is filed with and declared effective by the Commission,
the Registration Statement ceases to be effective (by suspension or otherwise)
as to all Registrable Securities to which it is required to relate at any time
prior to the expiration of the Effectiveness Period (without being succeeded
immediately by an additional registration statement filed and declared
effective) for a period of time which shall exceed 30 days in the aggregate per
year or more than 20 consecutive calendar days (defined as a period of 365 days
commencing on the date the Registration Statement is declared effective); or
(iv) the Common Stock is not listed or quoted, or is suspended from trading on
any Trading Market for a period of three (3) consecutive Trading Days (provided
the Company shall not have been able to cure such trading suspension within 30
days of the notice thereof or list the Common Stock on another Trading Market);
(any such failure or breach being referred to as an "Event," and for purposes of
clause (i) or (ii) the date on which such Event occurs, or for purposes of
clause (iii) the date which such 30 day or 20 consecutive day period (as the
case may be) is exceeded, or for purposes of clause (iv) the date on which such
three (3) Trading Day period is exceeded, being referred to as "Event Date"),
then until the applicable Event is cured, the Company shall pay to each Holder
an amount in cash, as liquidated damages and not as a penalty, equal to 2.0% for
each thirty (30) day period (prorated for partial periods) on a daily basis of
the original principal amount of the Note. While such Event continues, such
liquidated damages shall be paid not less often than each thirty (30) days. Any
unpaid liquidated damages as of the date when an Event has been cured by the
Company shall be paid within three (3) days following the date on which such
Event has been cured by the Company.
13.3 Within three business days of the Effectiveness Date, the
Company shall cause its counsel to issue a blanket opinion substantially in the
form attached hereto as Exhibit A subject to customary assumptions and
exclusions, to the transfer agent stating that the shares are subject to an
effective registration statement and can be reissued free of restrictive legend
upon notice of a sale by Laurus and confirmation by Laurus that it has complied
with the prospectus delivery requirements, provided that the Company has not
advised the transfer agent orally or in writing that the opinion has been
9
withdrawn. Copies of the blanket opinion required by this Section 2(c) shall be
delivered to Laurus within the time frame set forth above.
14. Registration Procedures. If and whenever the Company is required by
the provisions hereof to effect the registration of any Registrable Securities
under the Securities Act, the Company will, as expeditiously as possible:
14.1 prepare and file with the Commission the Registration
Statement with respect to such Registrable Securities, respond as promptly as
possible to any comments received from the Commission, and use its best efforts
to cause the Registration Statement to become and remain effective for the
Effectiveness Period with respect thereto, and promptly provide to the Purchaser
copies of all filings and Commission letters of comment relating thereto;
14.2 prepare and file with the Commission such amendments and
supplements to the Registration Statement and the Prospectus used in connection
therewith as may be necessary to comply with the provisions of the Securities
Act with respect to the disposition of all Registrable Securities covered by the
Registration Statement and to keep such Registration Statement effective until
the expiration of the Effectiveness Period;
14.3 furnish to the Purchaser such number of copies of the
Registration Statement and the Prospectus included therein (including each
preliminary Prospectus) as the Purchaser reasonably may request to facilitate
the public sale or disposition of the Registrable Securities covered by the
Registration Statement;
14.4 use its commercially reasonable efforts to register or
qualify the Purchaser's Registrable Securities covered by the Registration
Statement under the securities or "blue sky" laws of such jurisdictions within
the United States as the Purchaser may reasonably request, provided, however,
that the Company shall not for any such purpose be required to qualify generally
to transact business as a foreign corporation in any jurisdiction where it is
not so qualified or to consent to general service of process in any such
jurisdiction;
14.5 list the Registrable Securities covered by the
Registration Statement with any securities exchange on which the Common Stock of
the Company is then listed;
14.6 immediately notify the Purchaser at any time when a
Prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event of which the Company has knowledge as a
result of which the Prospectus contained in such Registration Statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing; and
14.7 make available for inspection by the Purchaser and any
attorney, accountant or other agent retained by the Purchaser, all publicly
available, non-confidential financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all publicly available, non-confidential
information reasonably requested by the attorney, accountant or agent of the
Purchaser.
10
15. Registration Expenses. All expenses relating to the Company's
compliance with Sections 2 and 3 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel and independent public accountants for the Company, fees and expenses
(including reasonable counsel fees) incurred in connection with complying with
state securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of
transfer agents and registrars, are called "Registration Expenses". All selling
commissions applicable to the sale of Registrable Securities, including any fees
and disbursements of any special counsel to the Holders beyond those included in
Registration Expenses, are called "Selling Expenses." The Company shall only be
responsible for all Registration Expenses.
16. Indemnification.
16.1 In the event of a registration of any Registrable
Securities under the Securities Act pursuant to this Agreement, the Company will
indemnify and hold harmless the Purchaser, and its officers, directors and each
other person, if any, who controls the Purchaser within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which the Purchaser, or such persons may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement under which such Registrable Securities were
registered under the Securities Act pursuant to this Agreement, any preliminary
Prospectus or final Prospectus contained therein, or any amendment or supplement
thereof, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Purchaser, and
each such person for any reasonable legal or other expenses incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by or on behalf of the Purchaser or any such person in writing
specifically for use in any such document.
16.2 In the event of a registration of the Registrable
Securities under the Securities Act pursuant to this Agreement, the Purchaser
will indemnify and hold harmless the Company, and its officers, directors and
each other person, if any, who controls the Company within the meaning of the
Securities Act, against all losses, claims, damages or liabilities, joint or
several, to which the Company or such persons may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact which was
furnished in writing by the Purchaser to the Company expressly for use in (and
such information is contained in) the Registration Statement under which such
Registrable Securities were registered under the Securities Act pursuant to this
Agreement, any preliminary Prospectus or final Prospectus contained therein, or
any amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse the Company and each such person for any reasonable legal or
11
other expenses incurred by them in connection with investigating or defending
any such loss, claim, damage, liability or action, provided, however, that the
Purchaser will be liable in any such case if and only to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished in writing to the Company by or on behalf
of the Purchaser specifically for use in any such document. Notwithstanding the
provisions of this paragraph, the Purchaser shall not be required to indemnify
any person or entity in excess of the amount of the aggregate net proceeds
received by the Purchaser in respect of Registrable Securities in connection
with any such registration under the Securities Act.
16.3 Promptly after receipt by a party entitled to claim
indemnification hereunder (an "Indemnified Party") of notice of the commencement
of any action, such Indemnified Party shall, if a claim for indemnification in
respect thereof is to be made against a party hereto obligated to indemnify such
Indemnified Party (an "Indemnifying Party"), notify the Indemnifying Party in
writing thereof, but the omission so to notify the Indemnifying Party shall not
relieve it from any liability which it may have to such Indemnified Party other
than under this Section 5(c) and shall only relieve it from any liability which
it may have to such Indemnified Party under this Section 5(c) if and to the
extent the Indemnifying Party is prejudiced by such omission. In case any such
action shall be brought against any Indemnified Party and it shall notify the
Indemnifying Party of the commencement thereof, the Indemnifying Party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such Indemnified
Party, and, after notice from the Indemnifying Party to such Indemnified Party
of its election so to assume and undertake the defense thereof, the Indemnifying
Party shall not be liable to such Indemnified Party under this Section 5(c) for
any legal expenses subsequently incurred by such Indemnified Party in connection
with the defense thereof; if the Indemnified Party retains its own counsel, then
the Indemnified Party shall pay all fees, costs and expenses of such counsel,
provided, however, that, if the defendants in any such action include both the
indemnified party and the Indemnifying Party and the Indemnified Party shall
have reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the Indemnifying
Party or if the interests of the Indemnified Party reasonably may be deemed to
conflict with the interests of the Indemnifying Party, the Indemnified Party
shall have the right to select one separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
reasonable expenses and fees of such separate counsel and other expenses related
to such participation to be reimbursed by the Indemnifying Party as incurred.
16.4 In order to provide for just and equitable contribution
in the event of joint liability under the Securities Act in any case in which
either (i) the Purchaser, or any officer, director or controlling person of the
Purchaser, makes a claim for indemnification pursuant to this Section 5 but it
is judicially determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that this Section 5 provides for indemnification
in such case, or (ii) contribution under the Securities Act may be required on
the part of the Purchaser or such officer, director or controlling person of the
Purchaser in circumstances for which indemnification is provided under this
Section 5; then, and in each such case, the Company and the Purchaser will
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) in such proportion so that the
Purchaser is responsible only for the portion represented by the percentage that
12
the public offering price of its securities offered by the Registration
Statement bears to the public offering price of all securities offered by such
Registration Statement, provided, however, that, in any such case, (A) the
Purchaser will not be required to contribute any amount in excess of the public
offering price of all such securities offered by it pursuant to such
Registration Statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 10(f) of the Act) will be
entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
17. Representations and Warranties.
17.1 The Common Stock of the Company is registered pursuant to
Section 12(b) or 12(g) of the Exchange Act and, except with respect to certain
matters which the Company has disclosed to the Purchaser on Schedule 4.21 to the
Securities Purchase Agreement, the Company has timely filed all proxy
statements, reports, schedules, forms, statements and other documents required
to be filed by it under the Exchange Act with such timely filing including the
filing within the extension period obtained through filing Form 12b-25. The
Company has filed (i) its Annual Report on Form 10-K for its fiscal year ended
September 30, 2003 and (ii) its Quarterly Report on Form 10-Q for the fiscal
quarters ended December 31, 2003 and March 31, 2004 (collectively, the "SEC
Reports"). Each SEC Report was, at the time of its filing, in substantial
compliance with the requirements of its respective form and none of the SEC
Reports, nor the financial statements (and the notes thereto) included in the
SEC Reports, as of their respective filing dates, contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Reports comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the Commission or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") applied on
a consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed) and fairly present in all material respects the financial
condition, the results of operations and the cash flows of the Company and its
subsidiaries, on a consolidated basis, as of, and for, the periods presented in
each such SEC Report.
17.2 The Common Stock is traded on the OTCBB and satisfies all
requirements for the continuation of such trading . The Company has not received
any notice that its Common Stock will be ineligible to trade on the OTCBB
(except for prior notices which have been fully remedied) or that the Common
Stock does not meet all requirements for the continuation of such trading .
17.3 Neither the Company, nor any of its affiliates, nor any
person acting on its or their behalf, has directly or indirectly made any offers
or sales of any security or solicited any offers to buy any security under
circumstances that would cause the offering of the Securities pursuant to the
Securities Purchase Agreement to be integrated with prior offerings by the
Company for purposes of the Securities Act which would prevent the Company from
selling the Common Stock pursuant to Rule 506 under the Securities Act, or any
applicable exchange-related stockholder approval provisions, nor will the
13
Company or any of its affiliates or subsidiaries take any action or steps that
would cause the offering of the Securities to be integrated with other
offerings.
17.4 The Warrants, the Note and the shares of Common Stock
which the Purchaser may acquire pursuant to the Warrants and the Note are all
restricted securities under the Securities Act as of the date of this Agreement.
The Company will not issue any stop transfer order or other order impeding the
sale and delivery of any of the Registrable Securities except as required by
applicable federal or state securities laws.
17.5 The Company understands the nature of the Registrable
Securities issuable upon the conversion of the Note and the exercise of the
Warrant and recognizes that the issuance of such Registrable Securities may have
a potential dilutive effect. The Company specifically acknowledges that its
obligation to issue the Registrable Securities is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.
17.6 Except for agreements made in the ordinary course of
business, there is no agreement that has not been filed with the Commission as
an exhibit to a registration statement or to a form required to be filed by the
Company under the Exchange Act, the breach of which could reasonably be expected
to have a material and adverse effect on the Company and its subsidiaries, or
would prohibit or otherwise interfere with the ability of the Company to enter
into and perform any of its obligations under this Agreement in any material
respect.
17.7 The Company will at all times have authorized and
reserved a sufficient number of shares of Common Stock for the full conversion
of the Note and exercise of the Warrants.
18. Miscellaneous.
18.1 Remedies. In the event of a breach by the Company or by a
Holder, of any of their respective obligations under this Agreement, each Holder
or the Company, as the case may be, in addition to being entitled to exercise
all rights granted by law and under this Agreement, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement.
18.2 No Piggyback on Registrations. Except as and to the
extent specified in Schedule 7(b) hereto, neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in any Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right for inclusion of shares in the
Registration Statement to any of its security holders. Except as and to the
extent specified in Schedule 7(b) hereto, the Company has not previously entered
into any agreement granting any registration rights with respect to any of its
securities to any Person that have not been fully satisfied.
14
18.3 Compliance. Each Holder covenants and agrees that it will
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.
18.4 Discontinued Disposition. Each Holder agrees by its
acquisition of such Registrable Securities that, upon receipt of a notice from
the Company of the occurrence of a Discontinuation Event (as defined below),
such Holder will forthwith discontinue disposition of such Registrable
Securities under the applicable Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement or until it is advised in writing (the "Advice") by the Company that
the use of the applicable Prospectus may be resumed, and, in either case, has
received copies of any additional or supplemental filings that are incorporated
or deemed to be incorporated by reference in such Prospectus or Registration
Statement. The Company may provide appropriate stop orders to enforce the
provisions of this paragraph. For purposes of this Section 7(d), a
"Discontinuation Event" shall mean (i) when the Commission notifies the Company
whether there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement (the Company shall
provide true and complete copies thereof and all written responses thereto to
each of the Holders); (ii) any request by the Commission or any other Federal or
state governmental authority for amendments or supplements to such Registration
Statement or Prospectus or for additional information; (iii) the issuance by the
Commission of any stop order suspending the effectiveness of such Registration
Statement covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and/or (v) the occurrence of any event or passage of time that makes
the financial statements included in such Registration Statement ineligible for
inclusion therein or any statement made in such Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to such
Registration Statement, Prospectus or other documents so that, in the case of
such Registration Statement or Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
18.5 Piggy-Back Registrations. If at any time during the
Effectiveness Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered to the extent the Company may do so without
violating registration rights of others which exist as of the date of this
15
Agreement, subject to customary underwriter cutbacks applicable to all holders
of registration rights and subject to obtaining any required the consent of any
selling stockholder(s) to such inclusion under such registration statement.
18.6 Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of the then outstanding Registrable Securities. Notwithstanding
the foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of certain Holders
and that does not directly or indirectly affect the rights of other Holders may
be given by Holders of at least a majority of the Registrable Securities to
which such waiver or consent relates; provided, however, that the provisions of
this sentence may not be amended, modified, or supplemented except in accordance
with the provisions of the immediately preceding sentence.
18.7 Notices. Any notice or request hereunder may be given to
the Company or the Purchaser at the respective addresses set forth below or as
may hereafter be specified in a notice designated as a change of address under
this Section 7(g). Any notice or request hereunder shall be given by registered
or certified mail, return receipt requested, hand delivery, overnight mail,
Federal Express or other national overnight next day carrier (collectively,
"Courier") or telecopy (confirmed by mail). Notices and requests shall be, in
the case of those by hand delivery, deemed to have been given when delivered to
any party to whom it is addressed, in the case of those by mail or overnight
mail, deemed to have been given three (3) business days after the date when
deposited in the mail or with the overnight mail carrier, in the case of a
Courier, the next business day following timely delivery of the package with the
Courier, and, in the case of a telecopy, when confirmed. The address for such
notices and communications shall be as follows:
If to the Company: Mitek Systems, Inc.
14145 Danielson Street
Suite B
Poway, California 92064
Attention: Chief Financial Officer
Facsimile: 858-513-4622
With a copy to:
Luce Forward Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
Attention: P. Blake Allen, Esq.
Facsimile: 619-645-5357
16
If to a Purchaser: To the address set forth under such Purchaser
name on the signature pages hereto.
If to any other Person who is then the
registered Holder:
or such other address as may be designated in writing hereafter in accordance
with this Section 7(g) by such Person.
18.8 Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Notes and the Securities
Purchase Agreement with the prior written consent of the Company, which consent
shall not be unreasonably withheld.
18.9 Execution and Counterparts. This Agreement may be
executed in any number of counterparts, each of which when so executed shall be
deemed to be an original and, all of which taken together shall constitute one
and the same Agreement. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid binding obligation
of the party executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such facsimile signature were the original
thereof.
18.10 Governing Law. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by and construed and enforced in accordance with the internal laws
of the State of New York, without regard to the principles of conflicts of law
thereof. Each party agrees that all Proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement shall
be commenced exclusively in the state and federal courts sitting in the City of
New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to
the exclusive jurisdiction of the state and federal courts sitting in the City
of New York, Borough of Manhattan for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
Proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such Proceeding is improper. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of a Transaction Document, then
the prevailing party in such Proceeding shall be reimbursed by the other party
17
for its reasonable attorneys fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.
18.11 Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
18.12 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
18.13 Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
MITEK SYSTEMS, INC. LAURUS MASTER FUND, LTD.
By: By:
---------------------------------- ----------------------------------
Name: Name:
-------------------------------- --------------------------------
Title: Title:
------------------------------- -------------------------------
Address for Notices:
825 Third Avenue - 14th Floor
New York, NY 10022
Attention: David Grin
Facsimile: 212-541-4434
19
EXHIBIT A
[Month __, 2004]
Mellon Investor Services
400 South Hope Street, 4th Floor
Los Angeles, CA 90071
Attn: ________________
Re: Mitek Systems, Inc. Registration Statement on Form SB-2
-------------------------------------------------------
Ladies and Gentlemen:
As counsel to Mitek Systems, Inc., a Delaware corporation (the
"Company"), we have been requested to render our opinion to you in connection
with the resale by the individuals or entitles listed on Schedule A attached
hereto (the "Selling Stockholders"), of an aggregate of [amount] shares (the
"Shares") of the Company's Common Stock.
A Registration Statement on Form SB-2 under the Securities Act of 1933,
as amended (the "Act"), with respect to the resale of the Shares was declared
effective by the Securities and Exchange Commission on [date]. Enclosed is a
copy of the Prospectus dated [date] contained in such Registration Statement
(the "Prospectus"). We understand that the Shares are to be offered and sold in
the manner described in the Prospectus.
Except as expressly set forth herein, if a Selling Stockholder sells
any of the Shares in accordance with the Prospectus, Mellon Investor Services
("Mellon") may effect transfers of such Shares so sold by such Selling
Stockholder provided the following requirements are satisfied: (i) the Selling
Stockholder resells such Shares presented for transfer in accordance with the
terms of the Prospectus, including the Prospectus delivery requirements; and
(ii) as of the date of the particular transfer, Mellon has not been notified
that the Registration Statement is no longer effective.
In the event a certificate covering Shares, which have been sold by the
Selling Stockholder pursuant to the Prospectus, is presented for the transfer of
less than the total number of shares represented by such certificate, the shares
so sold by a Selling Stockholder may be transferred without restrictive legend;
however, the shares remaining which are to be returned to the Selling
Stockholder shall bear the identical legend(s) as those affixed to the
certificate representing the shares presented for transfer.
Very truly yours,
[Company counsel]
SCHEDULE A
Shares
Selling Stockholder Being Offered
------------------- -------------
THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO MITEK SYSTEMS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SECURED CONVERTIBLE TERM NOTE
FOR VALUE RECEIVED, MITEK SYSTEMS, INC., a Delaware corporation (the
"BORROWER"), hereby promises to pay to LAURUS MASTER FUND, LTD., a Cayman
Islands company, c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T.,
Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax:
345-949-9877 (the "HOLDER") or its registered assigns or successors in interest,
on order, the sum of Three Million Dollars ($3,000,000), together with any
accrued and unpaid interest hereon, on June 11, 2007 (the "MATURITY DATE") if
not sooner paid.
Capitalized terms used herein without definition shall have the
meanings ascribed to such terms in that certain Securities Purchase Agreement
dated as of the date hereof between the Borrower and the Holder (the "PURCHASE
AGREEMENT").
The following terms shall apply to this Note:
ARTICLE I
INTEREST & AMORTIZATION
1.1(a) Interest Rate. Subject to Sections 4.11 and 5.6 hereof, interest
payable on this Note shall accrue at a rate per annum (the "Interest Rate")
equal to the "prime rate" published in The Wall Street Journal from time to
time, plus one percent (1.0%). The prime rate shall be increased or decreased as
the case may be for each increase or decrease in the prime rate in an amount
equal to such increase or decrease in the prime rate; each change to be
effective as of the day of the change in such rate. Interest shall be (i)
calculated on the basis of a 360 day year, and (ii) payable monthly, in arrears,
commencing on July 1, 2004 and on the first business day of each consecutive
calendar month thereafter until the Maturity Date (and on the Maturity Date),
whether by acceleration or otherwise (each, a "REPAYMENT DATE").
1.1 (b) Interest Rate Adjustment. The Interest Rate shall be calculated
on the last business day of each month hereafter until the Maturity Date (each a
"Determination Date") and shall be subject to adjustment as set forth herein. If
(i) the Borrower shall have registered the shares of the Borrower's common stock
underlying each of the conversion of the Note and that certain warrant issued to
Holder on a registration statement declared effective by the Securities and
Exchange Commission (the "SEC"), and (ii) the market price (the "Market Price")
of the Common Stock as reported by Bloomberg, L.P. on the Principal Market (as
defined below) for the five (5) trading days immediately preceding a
Determination Date exceeds the then applicable Fixed Conversion Price by at
least twenty five percent (25%), the Interest Rate for the succeeding calendar
month shall automatically be reduced by 200 basis points (200 b.p.) (2.0.%) for
1
each incremental twenty five percent (25%) increase in the Market Price of the
Common Stock above the then applicable Fixed Conversion Price. If (i) the
Borrower shall not have registered the shares of the Borrower's common stock
underlying the conversion of the Note and that certain warrant issued to Holder
on a registration statement declared effective by the SEC and which remains
effective, and (ii) the Market Price of the Common Stock as reported by
Bloomberg, L.P. on the principal market for the five (5) trading days
immediately preceding a Determination Date exceeds the then applicable Fixed
Conversion Price by at least twenty five percent (25%), the Interest Rate for
the succeeding calendar month shall automatically be decreased by 100 basis
points (100 b.p.) (1.0.%) for each incremental twenty five percent (25%)
increase in the Market Price of the Common Stock above the then applicable Fixed
Conversion Price. In no event shall the Interest Rate be less than zero percent
(0%).
1.2 Minimum Monthly Principal Payments. Amortizing payments of the
aggregate principal amount outstanding under this Note at any time (the
"PRINCIPAL AMOUNT") shall begin on December 1, 2004 and shall recur on the first
business day of each succeeding month thereafter until the Maturity Date (each,
an "AMORTIZATION DATE"). Subject to Article 3 below, beginning on the first
Amortization Date, the Borrower shall make monthly payments to the Holder on
each Repayment Date, each in the amount of $90,909.09, together with any accrued
and unpaid interest to date on such portion of the Principal Amount plus any and
all other amounts which are then owing under this Note, the Purchase Agreement
or any other Related Agreement but have not been paid (collectively, the
"MONTHLY AMOUNT"). Any Principal Amount that remains outstanding on the Maturity
Date shall be due and payable on the Maturity Date.
ARTICLE II
CONVERSION REPAYMENT
2.1 (a) Payment of Monthly Amount in Cash or Common Stock. Each month
by the fifth (5th) business day prior to each Amortization Date (the "NOTICE
DATE"), the Holder shall deliver to Borrower a written notice in the form of
Exhibit B attached hereto converting the Monthly Amount payable on the next
Repayment Date in either cash or Common Stock, or a combination of both (each, a
"REPAYMENT NOTICE"). If a Repayment Notice is not delivered by the Holder on or
before the applicable Notice Date for such Repayment Date, then the Borrower
shall pay the Monthly Amount due on such Repayment Date in cash. Any portion of
the Monthly Amount paid in cash on a Repayment Date, shall be paid to the Holder
an amount equal to 102% of the principal portion of the Monthly Amount due and
owing to Holder on the Repayment Date. If the Holder converts all or a portion
of the Monthly Amount in shares of Common Stock as provided herein, the number
of such shares to be issued by the Borrower to the Holder on such Repayment Date
shall be the number determined by dividing (x) the portion of the Monthly Amount
to be paid in shares of Common Stock, by (y) the then applicable Fixed
Conversion Price. For purposes hereof, the initial "FIXED CONVERSION PRICE"
means $0.70.
(b) Monthly Amount Conversion Guidelines. Subject to Sections 2.1(a),
2.2, and 3.2 hereof, the Holder shall convert all or a portion of the Monthly
Amount due on each Repayment Date in shares of Common Stock if the average
closing price of the Common Stock as reported by Bloomberg, L.P. on the
Principal Market for the five (5) trading days immediately preceding such
2
Repayment Date was greater than or equal to 110% of the Fixed Conversion Price,
provided, however, that such conversions shall not exceed twenty five percent
(25%) of the aggregate dollar trading volume of the Common Stock for the five
(5) day trading period immediately preceding delivery of a Notice of Conversion
to the Borrower. Any part of the Monthly Amount due on a Repayment Date that the
Holder has not converted into shares of Common Stock shall be paid by the
Borrower in cash on such Repayment Date. Any part of the Monthly Amount due on
such Repayment Date which must be paid in cash (as a result of the closing price
of the Common Stock on one or more of the five (5) trading days preceding the
applicable Repayment Date being less than 110% of the Fixed Conversion Price)
shall be paid in cash at the rate of 102% of the Monthly Amount otherwise due on
such Repayment Date, within three (3) business days of the applicable Repayment
Date.
2.2 No Effective Registration. Notwithstanding anything to the contrary
herein, none of the Borrower's obligations to the Holder may be converted into
Common Stock unless (i) either (x) an effective current Registration Statement
(as defined in the Registration Rights Agreement) covering the shares of Common
Stock to be issued in connection with satisfaction of such obligations exists or
(y) an exemption from registration of the Common Stock is available to pursuant
to Rule 144 of the Securities Act and (ii) no Event of Default hereunder exists
and is continuing, unless such Event of Default is cured within any applicable
cure period or is otherwise waived in writing by the Holder in whole or in part
at the Holder's option.
2.3 Optional Redemption in Cash. The Borrower will have the option of
prepaying this Note ("OPTIONAL REDEMPTION") by paying to the Holder a sum of
money equal to one hundred twenty percent (120%) of the principal amount of this
Note together with accrued but unpaid interest thereon and any and all other
sums due, accrued or payable to the Holder arising under this Note, the Purchase
Agreement, or any Related Agreement (the "REDEMPTION AMOUNT") outstanding on the
day written notice of redemption (the "NOTICE OF REDEMPTION") is given to the
Holder. The Notice of Redemption shall specify the date for such Optional
Redemption (the "REDEMPTION PAYMENT DATE") which date shall be seven (7)
business days after the date of the Notice of Redemption (the "REDEMPTION
PERIOD"). A Notice of Redemption shall not be effective with respect to any
portion of this Note for which the Holder has a pending election to convert
pursuant to Section 3.1, or for conversions initiated or made by the Holder
pursuant to Section 3.1 during the Redemption Period. The Redemption Amount
shall be determined as if such Holder's conversion elections had been completed
immediately prior to the date of the Notice of Redemption. On the Redemption
Payment Date, the Redemption Amount must be paid in good funds to the Holder. In
the event the Borrower fails to pay the Redemption Amount on the Redemption
Payment Date as set forth herein, then such Redemption Notice will be null and
void.
ARTICLE III
CONVERSION RIGHTS
3.1. Holder's Conversion Rights. The Holder shall have the right, but
not the obligation, to convert all or any portion of the then aggregate
3
outstanding principal amount of this Note, together with interest and fees due
hereon, into shares of Common Stock subject to the terms and conditions set
forth in this Article III. The Holder may exercise such right by delivery to the
Borrower of a written notice of conversion not less than one (1) day prior to
the date upon which such conversion shall occur.
3.2 Conversion Limitation. Notwithstanding anything contained herein to
the contrary, the Holder shall not be entitled to convert pursuant to the terms
of this Note an amount that would be convertible into that number of Conversion
Shares which would exceed the difference between the number of shares of Common
Stock beneficially owned by such Holder or issuable upon exercise of warrants
held by such Holder and 4.99% of the outstanding shares of Common Stock of the
Borrower. For the purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and Regulation 13d-3 thereunder. The Holder may void the Conversion Share
limitation described in this Section 3.2 upon 75 days prior notice to the
Borrower or without any notice requirement upon an Event of Default.
3.3 Mechanics of Holder's Conversion. (a) In the event that the Holder
elects to convert this Note into Common Stock, the Holder shall give notice of
such election by delivering an executed and completed notice of conversion
("NOTICE OF CONVERSION") to the Borrower and such Notice of Conversion shall
provide a breakdown in reasonable detail of the Principal Amount, accrued
interest and fees being converted. On each Conversion Date (as hereinafter
defined) and in accordance with its Notice of Conversion, the Holder shall make
the appropriate reduction to the Principal Amount, accrued interest and fees as
entered in its records and shall provide written notice thereof to the Borrower
within two (2) business days after the Conversion Date. Each date on which a
Notice of Conversion is delivered or telecopied to the Borrower in accordance
with the provisions hereof shall be deemed a Conversion Date (the "CONVERSION
DATE"). A form of Notice of Conversion to be employed by the Holder is annexed
hereto as Exhibit A. (a)
(b) Pursuant to the terms of the Notice of Conversion, the Borrower
will issue instructions to the transfer agent accompanied by an opinion of
counsel within one (1) business day of the date of the delivery to Borrower of
the Notice of Conversion and shall cause the transfer agent to transmit the
certificates representing the Conversion Shares to the Holder by crediting the
account of the Holder's designated broker with the Depository Trust Corporation
("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within
three (3) business days after receipt by the Borrower of the Notice of
Conversion (the "DELIVERY DATE"). In the case of the exercise of the conversion
rights set forth herein the conversion privilege shall be deemed to have been
exercised and the Conversion Shares issuable upon such conversion shall be
deemed to have been issued upon the date of receipt by the Borrower of the
Notice of Conversion. The Holder shall be treated for all purposes as the record
holder of such Common Stock, unless the Holder provides the Borrower written
instructions to the contrary.
3.4 Conversion Mechanics.
(a) The number of shares of Common Stock to be issued upon each
conversion of this Note shall be determined by dividing that portion of the
principal and interest and fees to be converted, if any, by the then applicable
Fixed Conversion Price. In the event of any conversions of outstanding principal
amount under this Note in part pursuant to this Article III, such conversions
shall be deemed to constitute conversions of outstanding principal amount
applying to Monthly Amounts for the remaining Repayment Dates in chronological
order. By way of example, if the original principal amount of this Note is
$200,000 and the Holder converted $0 of such original principal amount prior to
the first Repayment Date, then (1) the principal amount of the Monthly Amount
due on the first Repayment Date would equal $0, (2) the principal amount of the
4
Monthly Amount due on the second Repayment Date would equal $ and (3) the
principal amount of the Monthly Amount due on the third Repayment Dates would be
$18,181.81.
(b) The Fixed Conversion Price and number and kind of shares or other
securities to be issued upon conversion is subject to adjustment from time to
time upon the occurrence of certain events, as follows:
A. Stock Splits, Combinations and Dividends. If the shares of Common
Stock are subdivided or combined into a greater or smaller number of shares of
Common Stock, or if a dividend is paid on the Common Stock in shares of Common
Stock, the Fixed Conversion Price or the Conversion Price, as the case may be,
shall be proportionately reduced in case of subdivision of shares or stock
dividend or proportionately increased in the case of combination of shares, in
each such case by the ratio which the total number of shares of Common Stock
outstanding immediately after such event bears to the total number of shares of
Common Stock outstanding immediately prior to such event.
B. During the period the conversion right exists, the Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the full conversion of
this Note. The Borrower represents that upon issuance, such shares will be duly
and validly issued, fully paid and non-assessable. The Borrower agrees that its
issuance of this Note shall constitute full authority to its officers, agents,
and transfer agents who are charged with the duty of executing and issuing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note.
C. Share Issuances. Subject to the provisions of this Section 3.4, if
the Borrower shall at any time prior to the conversion or repayment in full of
the Principal Amount issue any shares of Common Stock or securities convertible
into Common Stock to a person other than the Holder (except (i) pursuant to
Subsections A or B above; (ii) pursuant to options, warrants, or other
obligations to issue shares outstanding on the date hereof as disclosed to
Holder in writing; or (iii) pursuant to options that may be issued under any
employee incentive stock option and/or any qualified stock option plan adopted
by the Borrower) for a consideration per share (the "Offer Price") less than the
Fixed Conversion Price in effect at the time of such issuance, then the Fixed
Conversion Price shall be immediately reset to such lower Offer Price at the
time of issuance of such securities.
D. Reclassification, etc. If the Borrower at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
to evidence the right to purchase an adjusted number of such securities and kind
of securities as would have been issuable as the result of such change with
respect to the Common Stock immediately prior to such reclassification or other
change.
3.5 Issuance of New Note. Upon any partial conversion of this Note, a
new Note containing the same date and provisions of this Note shall, at the
request of the Holder, be issued by the Borrower to the Holder for the principal
balance of this Note and interest which shall not have been converted or paid.
5
The Borrower will pay no costs, fees or any other consideration to the Holder
for the production and issuance of a new Note.
ARTICLE IV
EVENTS OF DEFAULT
Upon the occurrence and continuance of an Event of Default beyond any
applicable grace period, the Holder may make all sums of principal, interest and
other fees then remaining unpaid hereon and all other amounts payable hereunder
immediately due and payable. In the event of such an acceleration, within five
(5) days after written notice from Holder to Borrower (each occurrence being a
"DEFAULT NOTICE PERIOD") the amount due and owing to the Holder shall be 130% of
the outstanding principal amount of the Note (plus accrued and unpaid interest
and fees, if any) (the "DEFAULT PAYMENT"). If, with respect to any Event of
Default, the Borrower cures the Event of Default, the Event of Default will be
deemed to no longer exist and any rights and remedies of Holder pertaining to
such Event of Default will be of no further force or effect. The Default Payment
shall be applied first to any fees due and payable to Holder pursuant to the
Note or the Related Agreements, then to accrued and unpaid interest due on the
Note and then to outstanding principal balance of the Note.
The occurrence of any of the following events set forth in Sections 4.1
through 4.10, inclusive, is an "EVENT OF DEFAULT":
4.1 Failure to Pay Principal, Interest or other Fees. The Borrower
fails to pay when due any installment of principal, interest or other fees
hereon in accordance herewith, or the Borrower fails to pay when due any amount
due under any other promissory note issued by Borrower, and in any such case,
such failure shall continue for a period of three (3) days following the date
upon which any such payment was due.
4.2 Breach of Covenant. The Borrower breaches any covenant or other
term or condition of this Note, the Purchase Agreement or any Related Agreement
in any material respect and such breach, if subject to cure, continues for a
period of fifteen (15) days after the occurrence thereof.
4.3 Breach of Representations and Warranties. Any representation or
warranty of the Borrower made herein, in the Purchase Agreement, or in any
Related Agreement shall be false or misleading in any material respect on the
date that such representation or warranty was made or deemed made.
4.4 Receiver or Trustee. The Borrower shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or such
a receiver or trustee shall otherwise be appointed.
4.5 Judgments. Any money judgment, writ or similar final process shall
be entered or filed against the Borrower or any of its property or other assets
for more than $50,000, and shall remain unvacated, unbonded or unstayed for a
period of thirty (30) days.
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4.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower.
4.7 Stop Trade. An SEC stop trade order or Principal Market trading
suspension of the Common Stock shall be in effect for five (5) consecutive days
or five (5) days during a period of ten (10) consecutive days, excluding in all
cases a suspension of all trading on a Principal Market, provided that the
Borrower shall not have been able to cure such trading suspension within thirty
(30) days of the notice thereof or list the Common Stock on another Principal
Market within sixty (60) days of such notice. The "Principal Market" for the
Common Stock shall include the NASD OTC Bulletin Board, NASDAQ SmallCap Market,
NASDAQ National Market System, American Stock Exchange, or New York Stock
Exchange (whichever of the foregoing is at the time the principal trading
exchange or market for the Common Stock, or any securities exchange or other
securities market on which the Common Stock is then being listed or traded.
4.8 Failure to Deliver Common Stock or Replacement Note. The Borrower
shall fail (i) to timely deliver Common Stock to the Holder pursuant to and in
the form required by this Note, and Section 9 of the Purchase Agreement, if such
failure to timely deliver Common Stock shall not be cured within two (2)
business days or (ii) to deliver a replacement Note to Holder within seven (7)
business days following the required date of such issuance pursuant to this
Note, the Purchase Agreement or any Related Agreement (to the extent required
under such agreements).
4.9 Default Under Related Agreements or Other Agreements. The
occurrence and continuance of any Event of Default as defined in the Related
Agreements or any event of default (or similar term) under any other
indebtedness.
4.10 Change in Control. The occurrence of a change in the controlling
ownership of the Company.
DEFAULT RELATED PROVISIONS
4.11 Payment Grace Period. Following the occurrence and continuance of
an Event of Default beyond any applicable cure period hereunder, the Borrower
shall pay the Holder a default interest rate of two percent (2%) per month on
all amounts due and owing under the Note,, which default interest shall be
payable upon demand.
4.12 Conversion Privileges. The conversion privileges set forth in
Article III shall remain in full force and effect immediately from the date
hereof and until this Note is paid in full.
4.13 Cumulative Remedies. The remedies under this Note shall be
cumulative.
ARTICLE V
MISCELLANEOUS
5.1 Failure or Indulgence Not Waiver. No failure or delay on the part
of the Holder hereof in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
7
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5.2 Notices. Any notice herein required or permitted to be given shall
be in writing and shall be deemed effectively given: (a) upon personal delivery
to the party notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day, (c) five days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the
Borrower at the address provided in the Purchase Agreement executed in
connection herewith, and to the Holder at the address provided in the Purchase
Agreement for such Holder, with a copy to John E. Tucker, Esq., 825 Third
Avenue, 14th Floor, New York, New York 10022, facsimile number (212) 541-4434,
or at such other address as the Borrower or the Holder may designate by ten days
advance written notice to the other parties hereto. A Notice of Conversion shall
be deemed given when made to the Borrower pursuant to the Purchase Agreement.
5.3 Amendment Provision. The term "Note" and all reference thereto, as
used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument issued pursuant to Section 3.5
hereof, as it may be amended or supplemented.
5.4 Assignability. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements of the Purchase Agreement. This Note shall not be assigned by the
Borrower without the consent of the Holder.
5.5 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York. Both parties and the individual signing this Note on behalf of the
Borrower agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Note is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or unenforceability of any other provision of this
Note. Nothing contained herein shall be deemed or operate to preclude the Holder
from bringing suit or taking other legal action against the Borrower in any
other jurisdiction to collect on the Borrower's obligations to Holder, to
8
realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court in favor of the Holder.
5.6 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
5.7 Security Interest. The holder of this Note has been granted a
security interest in certain assets of the Borrower more fully described in a
Security Agreement dated as of the date hereof.
5.8 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
5.9 Cost of Collection. If default is made in the payment of this Note,
the Borrower shall pay to Holder reasonable costs of collection, including
reasonable attorney's fees.
[Balance of page intentionally left blank; signature page follows.]
9
IN WITNESS WHEREOF, the Borrower has caused this Convertible Term Note
to be signed in its name effective as of this 11th day of June, 2004.
MITEK SYSTEMS, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
WITNESS:
- -------------------------------
10
EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert all or part of the Note into
Common Stock
[Name and Address of Holder]
The Undersigned hereby converts $_________ of the principal due on [specify
applicable Repayment Date] under the Convertible Term Note issued by MITEK
SYSTEMS, INC. dated June __, 2004 by delivery of Shares of Common Stock of MITEK
SYSTEMS, INC. on and subject to the conditions set forth in Article III of such
Note.
1. Date of Conversion _______________________
2. Shares To Be Delivered: _______________________
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
EXHIBIT B
CONVERSION NOTICE
(To be executed by the Holder in order to convert all or part of a Monthly
Amount into Common Stock)
[Name and Address of Holder]
Holder hereby converts $_________ of the Monthly Amount due on [specify
applicable Repayment Date] under the Convertible Term Note issued by MITEK
SYSTEMS, INC. dated _______, 200__ by delivery of Shares of Common Stock of
MITEK SYSTEMS, INC. on and subject to the conditions set forth in Article III of
such Note.
1. Fixed Conversion Price: $_______________________
2. Amount to be paid: $_______________________
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3. Shares To Be Delivered (2 divided by 1): _____________________
4. Cash payment to be made by Borrower : $_____________________
Date: ____________ LAURUS MASTER FUND, LTD.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
1
MITEK SYSTEMS, INC.
FORM 10-Q CERTIFICATIONS
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, James B. DeBello, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mitek Systems,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Dated: August 12, 2004 By: /s/ James B. DeBello
------------------------
James B. DeBello
President and
Chief Executive Officer
2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, John M. Thornton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mitek Systems,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Dated: August 12, 2004 By: /s/ John M. Thornton
------------------------
John M. Thornton
Chairman of the Board and
Chief Financial Officer
3
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James B. DeBello, President and Chief Executive Officer of Mitek Systems,
Inc. (the "Registrant"), do hereby certify pursuant to Rule 15d-14(b) of the
Securities and Exchange Act of 1934, as amended, and Section 1350 of Chapter 63
of Title 18 of the United States Code that:
(1) the Registrant's Quarterly Report on Form 10-Q of the Registrant for the
period ended June 30, 2004 (the "Report"), to which this statement is filed as
an exhibit, fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
Dated: August 12, 2004 By: /s/ James B. DeBello
-------------------------
James B. DeBello
President and
Chief Executive Officer
4
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, John M. Thornton, Chairman of the Board and Chief Financial Officer of Mitek
Systems, Inc. (the "Registrant"), do hereby certify pursuant to Rule 15d-14(b)
of the Securities and Exchange Act of 1934, as amended, and Section 1350 of
Chapter 63 of Title 18 of the United States Code that:
(1) the Registrant's Quarterly Report on Form 10-Q of the Registrant for the
period ended June 30, 2004 (the "Report"), to which this statement is filed as
an exhibit, fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
Dated: August 12, 2004 By: /s/ John M. Thornton
------------------------
John M. Thornton
Chairman of the Board and
Chief Financial Officer
5