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 MARCH 31, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15235
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MITEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0418827
- ---------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10070 CARROLL CANYON ROAD, SAN DIEGO, CALIFORNIA 92131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 635-5900
----------------------------
- -------------------------------------------------------------------------------
(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 11,552,376 shares outstanding of the registrant's Common Stock
as of May 7, 1998.
PART I: FINANCIAL INFORMATION
MITEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, September 30,
1998 1997
-------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 993,696 $ 1,261,117
Accounts receivable-net 1,898,459 2,363,028
Note receivable 466,940 502,031
Inventories-net 203,846 415,973
Prepaid expenses and other assets 103,879 151,705
----------- ------------
Total current assets 3,666,820 4,693,854
----------- ------------
PROPERTY AND EQUIPMENT-at cost 1,164,686 1,150,122
Less accumulated depreciation
and amortization 986,850 945,109
----------- ------------
Property and equipment-net 177,836 205,013
----------- ------------
OTHER ASSETS 1,530,904 2,289,428
----------- ------------
TOTAL $ 5,375,560 $ 7,188,295
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 484,019 485,855
Accrued payroll and related taxes 251,582 272,603
Other accrued liabilities 643,047 652,440
Current portion of long-term liabilities 281 4,706
----------- ------------
Total current liabilities 1,378,929 1,415,604
----------- ------------
LONG-TERM LIABILITIES 48,027 21,761
----------- ------------
Total liabilities 1,426,956 1,437,365
COMMITMENTS (NOTE F)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value;
1,000,000 shares authorized;
no shares issued and outstanding
Common stock - $.001 par value;
20,000,000 shares authorized;
11,552,376 and 11,537,009 issued and
outstanding, respectively 11,552 11,537
Additional paid-in capital 9,178,097 9,164,589
Accumulated deficit (5,241,045) (3,425,196)
----------- ------------
Total stockholders' equity 3,948,604 5,750,930
----------- ------------
TOTAL $ 5,375,560 $ 7,188,295
----------- ------------
----------- ------------
See notes to consolidated financial statements
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
1998 1997 1998 1997
------------ ----------- ----------- -----------
NET SALES $ 1,481,837 $ 1,875,247 $ 2,787,766 $ 2,976,179
COST OF GOODS SOLD 637,910 481,227 1,236,220 882,220
------------ ----------- ----------- -----------
GROSS MARGIN 843,927 1,394,020 1,551,546 2,093,959
------------ ----------- ----------- -----------
COSTS AND EXPENSES:
General and administrative 321,376 372,289 699,812 675,204
Research and development 312,448 320,336 765,046 624,532
Selling and marketing 448,157 509,479 986,599 935,090
Other charges (Note C) 0 0 988,549 0
Interest income - net (17,117) (35,678) (38,354) (49,301)
------------ ----------- ----------- -----------
Total costs and expenses 1,064,864 1,166,426 3,401,652 2,185,525
------------ ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (220,937) 227,594 (1,850,106) (91,566)
OTHER INCOME (Note D) 34,256 0 34,256 0
INCOME TAX EXPENSE
(BENEFIT) 0 22,843 0 (9,157)
------------ ----------- ----------- -----------
NET INCOME (LOSS) $ (186,681) $ 204,751 $ (1,815,850) $ (82,409)
------------ ----------- ----------- -----------
NET INCOME (LOSS)
PER SHARE - BASIC $ (.02) $ .02 $ (.16) $ (.01)
------------ ----------- ----------- -----------
NET INCOME (LOSS)
PER SHARE - DILUTED $ (.02) $ .02 $ (.16) $ (.01)
------------ ----------- ----------- -----------
WEIGHTED AVERAGE COMMON
SHARES - BASIC 11,552,376 10,080,228 11,546,333 9,382,300
------------ ----------- ----------- -----------
WEIGHED AVERAGE COMMON
SHARES - DILUTED 11,552,376 10,346,584 11,546,333 9,382,300
------------ ----------- ----------- -----------
See notes to consolidated financial statements.
Mitek Systems, Inc.
Consolidated Statements of Cash Flows
SIX MONTHS ENDED MAR. 31,
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ (1,815,850) $ (82,409)
Gain on sale of Fax business (34,256)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 278,933 210,462
Loss on disposal of property 2,423
Asset impairment 489,000
Changes in assets and liabilities:
Accounts & notes receivable 499,660 (762,203)
Inventory, prepaid expense and other assets 25,679 102,371
Accounts payable and accrued expenses (99,839) (406,347)
----------- -----------
Net cash used in operating activities (654,250) (938,126)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (42,269) (89,488)
Proceeds from sale of Fax business 420,000
----------- -----------
Net cash provided by investing activities 377,731 (89,488)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings 150,000
Repayment of notes payable and long-term (4,425) (154,714)
liabilities
Proceeds from exercise of stock options 13,523 68,722
and warrants
Net proceeds from sales of stock 4,244,098
----------- -----------
Net cash provided by financing activities 9,098 4,308,106
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (267,421) 3,280,492
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,261,117 210,413
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 993,696 $ 3,490,905
----------- -----------
----------- -----------
MITEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnote disclosures that are otherwise required by
Regulation S-X and that will normally be made in the Company's Annual Report on
Form 10-K. The financial statements do, however, reflect all adjustments
(solely of a normal recurring nature) which are, in the opinion of management,
necessary for a fair statement of the results of the interim periods presented.
Results for the three and six months ended March 31, 1998 and 1997 are not
necessarily indicative of results which may be reported for any other interim
period or for the year as a whole.
B. Inventories
Inventories are summarized as follows:
MARCH 31, 1998 SEPTEMBER 30, 1997
-------------- ------------------
Raw materials $ 59,283 $ 75,082
Work in process 0 0
Finished goods 144,563 340,891
-------------- ------------------
Total $ 203,846 $ 415,973
-------------- ------------------
-------------- ------------------
Inventories are recorded at the lower of cost (on the first-in, first-out
basis) or market.
C. Other Charges
Totaling $989,000, consists of several charges to operations. The
charges consist of the following components:
Goodwill impairment -In June, 1997 the Company purchased substantially
all of the assets of Technology Solutions, Inc., a software developer and
solution provider of document image processing systems. One of the key
employees of the Company, a former principle of Technology Solutions, Inc.,
opted to resign his employment. The unexpected departure, in the opinion of
management, could detrimentally impact the future cash flows of the Company.
The Company determined the fair value of the goodwill by evaluating the
expected future net cash flows (undiscounted and without interest charges),
in accordance with FAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The evaluation indicates
the carrying value of the goodwill exceeded the fair value, resulting in an
impairment loss of $293,000.
License Fee impairment - In April, 1997 the Company entered into an
exclusive software licensing agreement with Parascript LLC. In December, 1997,
Parascript notified the Company of its dissatisfaction with the Company's
progress in marketing the software affected by the license agreement, along with
assertion that the Company had committed material breach of contract. The
Company has strongly and vigorously denied the claims. A proposed solution to
the dispute by Parascript included converting the Company's exclusive to a
non-exclusive software license. In addition, the Company over-estimated the
availability and the performance of the product and anticipated prices for the
software affected by the agreement. The adversarial condition of the
relationship coupled with the decreased expectations, in the opinion of
management, will detrimentally impact the future cash flows of the Company. The
Company determined the fair value of the goodwill represented by the license fee
paid for the exclusive license by evaluating the expected future net cash
flows (undiscounted and without interest charges), in accordance with FAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. The evaluation indicates the carrying value of the goodwill
exceeded the fair value, resulting in an impairment loss of $196,000.
The Company believes that as a result of continuing discussions with
Parascript, the Company and Parascript will be able to work together in a
positive manner, eliminating the need for recording any further reserve for this
situation at this time.
The Company was sued earlier this year for wrongful termination by two
former employees of its Canadian subsidiary. The Company has strongly defended
the action. The former employees obtained a bench order requiring the amount of
the dispute to be deposited in escrow pending the outcome of the case. In the
opinion of management, the actions of the Canadian court indicate a high
likelihood of an adverse decision, which necessitated the recording of a reserve
in the amount of $134,000, plus costs, equaling a reserve of $142,000. The
Company is presently in settlement negotiations and believes that a settlement
of this dispute will be achieved which will have no material effect on the
Company.
In December, 1997, the Company entered into an employment agreement with
Mr. Elliot Wassarman (see footnote G. - Subsequent events). The agreement
included the commitment of the Company to pay certain recruitment and relocation
costs aggregating $166,000.
The Company has traditionally sold its QuickStrokes Application Programmer
Interface products with various acceleration hardware boards. Decreasing prices
coupled with the higher speeds of general hardware have rapidly altered the
market need for these acceleration boards. The largest customer utilizing these
acceleration boards has informed the Company of its intent to discontinue the
offering of these products in the domestic market. As a result, the Company has
recorded a reserve for inventory obsolescence in the amount of $200,000.
D. Sale of Fax business
On January 30, 1998, the Company sold its Fax Products assets in a cash
transaction, resulting in a gain of $34,000. The gross proceeds of the sale
were $420,000 in cash, offset by the carrying value of the assets sold
($308,000) and costs related to the transaction ($78,000).
E. Net Income (Loss) Per Share
The Company calculates net income (loss) per share in accordance with SFAS
No. 128, "Earnings per Share" .Net income (loss) per share-basic is based on the
weighted average number of common shares outstanding during the period. Net
income (loss) per share-diluted is based on the weighted average number of
common shares in the period and takes into account the common equivalents affect
of outstanding stock options and warrants (common equivalents) using the
treasury stock method when the affect is dilutive
F. Commitments
The Company has signed an agreement to sub-lease approximately 8,824
square feet of office space adjacent to its primary offices, effective May 1,
1998 through June 30, 2002. The sub-lease will result in reduction of rent
expense to the Company in the amount of $455,645 over the term of the
agreement.
G. Option Repricing
During the first quarter the Company undertook an option repricing
program in which employees could elect to have their options repriced at an
exercise price of $.89. There were a total number of 762,052 options
repriced under this program.
H. Restructure
The Company entered into an Employment Agreement with Mr. Elliot Wassarman,
effective as of January 5, 1998. Pursuant to the Agreement, Mr. Wassarman will
serve as President and Chief Executive Officer of the Company for a base salary
of $220,000. In addition to base salary, Mr. Wassarman is entitled to
participate in the Executive and Key Employee Bonus Plan. In the event that the
Company terminates Mr. Wassarman's employment under certain circumstances, Mr.
Wassarman will receive a severance payment equal to six months salary, payable
over a six month period of time, and continuation of certain employee benefits.
In addition, the Company has entered into a Nonqualified Stock Option Agreement
with Mr. Wassarman providing him options to acquire up to 800,000 shares of the
Company's common stock at $1.25 per share, subject to certain vesting
requirements. Of such options, 550,000 vest on a monthly basis at the rate of
15,278 per month for each month Mr. Wassarman remains in the employ of the
Company. Upon change in control of the Company, the unvested portion of the
550,000 options will vest immediately, and Mr. Wassarman will be eligible to
receive up to an additional 250,000 vested options.
In mid-February, 1998, the Company executed a plan of operations
restructure, which included a realignment of the Company's expense structure,
including expense and personnel reductions. The costs and expenses of the
restructure totaled $19,600.
I. Legal Matter
Recently the Company was sued for $1 million by one if its system
integrator customers, Adaptive Solutions, Inc. In its suit, Adaptive
Solutions, Inc. charged the Company with breach of contract. The Company has
consulted its counsel, has adamantly denied the assertions of Adaptive
Solutions, Inc. and is vigorously defending the suit. As a result of
discussions between the parties and their respective counsel, there have been
ongoing settlement negotiations with Adaptive Solutions, Inc.. The Company
believes it has a strong defense and that the matter will be settled
amicably, and without material impact on the Company. Therefore, no reserves
have been recorded at this time for this claim.
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MANAGEMENT'S DISCUSSION
The following cautionary statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 in order for the Company to avail
itself on the "safe harbor" provisions of that Act. The discussion and
information in Managements' Discussion and Analysis of Financial Condition
and Result of Operations (the "MD&A") may contain both historical and
forward-looking statements. To the extent that 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, in context, certain of the factors that it currently believes may
cause actual future experience 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 adverse economic conditions, general decreases
in demand for Company products and services, intense competition, including
entry of new competitors, increased or adverse federal, state and local
government regulation, inadequate capital, unexpected costs, lower revenues
and net income than forecast, price increases for supplies, inability to
raise prices, the risk of litigation and administrative proceedings involving
the Company and its employees, higher than anticipated labor costs, the
possible fluctuation and volatility of the Company's operating results and
financial condition, adverse publicity and news coverage, inability to carry
out marketing and sales plans, loss of key executives, changes in interest
rates, inflationary factors, and other specific risks that may be alluded to
in this MD&A.
In the three months ended March 31, 1998, with improvements over its
planned revenues and expenses, along with improvements in operating
efficiencies, the Company improved its financial results compared to the first
quarter results of fiscal 1998. For the three months ended March 31, 1998,
there was a net loss of $187,000 or $.02 per share, compared to a net loss of
$1,629,000 or $.14 per share in the first quarter. For the six months ended
March 31, 1998, the Company had a net loss of $1,816,000 or $.16 per share,
compared to a net loss of $82,000 or $.01 per share for the same period in 1997.
In the three months ended March 31, 1998, revenues were $1,482,000, an
improvement over the Company's forecast of $1.3 million, and a 13.5% increase
over the first quarter revenues of $1,306,000. Gross margin for the quarter
ended March 31, 1998 increased by 19% and expenses decreased by 52% ($1.1
million in the second quarter compared to $2.3 million in the first quarter)
compared to the first quarter of fiscal 1998. Additionally, the Company
decreased second quarter loss before taxes by $1,408,000 over the first quarter.
The Company's cash flow for the second quarter of fiscal 1998 improved
significantly compared to the first quarter, and at March 31, 1998 had $1
million in cash and cash equivalents, plus an unused credit facility of
$400,000. The Company is in the process of establishing an increase in its
credit facility.
The Company is pleased that it has outperformed its second quarter
forecast announced at the Annual Meeting in February, and feels cautiously
optimistic that this trend will continue as the Company continues to execute
its turn around plan. The Company is cautiously optimistic that it will
break even in its third quarter, period ending June 30, 1998, and show a
modest profit in the fourth quarter ending September 30, 1998. These
improvements will come as the result of increased sales, improved trade
receivables collection management, the organization and product related
improvements made by the Company in the first and second quarters, and the
planned actions in the coming quarters.
In addition to establishing an increase to its credit facility, the
Company is reorganizing its executive staff around its core competencies,
including the recruitment of industry knowledgeable executives to help drive
the Company's growth. The Company plans to introduce two new products in the
third quarter (PFP Pro-TM-, a 32-bit distributed network forms procession
solution, and QuickFX-TM-, a Microsoft NT based leading edge technology image
pre-processing tool set). Plus, the Company has released a new version of
its industry leading QuickStrokes-TM- software. We believe these new
products, along with our leading edge QuickModules product line, integration
services, and our CheckScript-TM- offering will allow the Company to enter
new vertical markets that are larger in potential than our existing markets,
while remaining focused on its core competencies.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Comparison of Three Months and Six Months Ended March 31, 1998 and 1997
NET SALES. Net sales for the three month period ended March 31, 1998
were $1,482,000, compared to $1,875,000 for the same period in 1997, a decrease
of $393,000 or 21%. Net sales for the sixth month period ended March 31, 1998
were $2,788,000, compared to $2,976,000 for the same period in 1997, a decrease
of $188,000 or 6%. The decrease in both periods were attributed to delay in
orders from OEM's and integrators.
GROSS MARGIN. Gross margins for the three month period ended March 31,
1998 were $844,000, compared to $1,394,000 for the same period in 1997, a
decrease of $550,000 or 39%. Stated as a percentage of net sales,
gross margins decreased to 57% for the three month period ended March 31,
1998 compared to 74% for the same period in 1997. Gross margins for the six
month period ended March 31, 1998 were $1,552,000, compared to $2,094,000 for
the same period in 1997, a decrease of $542,000 or 26%. Stated as a
percentage of net sales, gross margins decreased to 56% for the sixth month
period ended March 31, 1998, compared to 70% for the same period in 1997. The
changes in both periods were primarily the result of product mix, combined
with reduced revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the three month period ended March 31, 1998 were $321,000, compared to
$372,000 for the same period ended in 1997, a decrease of $51,000 or 14%.
The decrease in expenses for the three month period were attributed to
reduction in travel, recruitment costs and regulatory fees. Stated as a
percentage of net sales, general and administrative expenses increased to 22%
for the three month period ended March 31, 1998, compared to 20% for the same
period in 1997. General and administrative expenses for the sixth month
period ended March 31, 1998 were $700,000, compared to $675,000 for the same
period in 1997, an increase of $25,000 or 4%. Stated as a percentage of net
sales, general and administrative expenses increased to 25% the six month
period ended March 31, 1998, compared to 23% for the same period in 1997.
The increase in expenses for the six month period were primarily attributable
to bad debt expense. The increase as a percentage of net sales for the three
month and six month periods were primarily attributable to the decline in
revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three month period ended March 31, 1998 were $312,000, compared to $320,000 for
the same period ended in 1997, a decrease of $8,000 or 3%. The reduction in
expenses are the result of engineering staff reductions and the elimination of
certain engineering projects. Stated as a percentage of net sales, research and
development expenses increased to 21% for the three month period ended March
31, 1998, compared to 17% for the same period in 1997 and were the result of the
decline in revenues. Research and development expenses for the sixth month
period ended March 31, 1998 were $765,000, compared to $625,000 for the same
period ended in 1997, an increase of $140,000 or 22%. Stated as a percentage of
net sales, research and development expenses increased to 27% for the sixth
month period ended March 31, 1998, compared to 21% for the same period in 1997.
The increase in expense and the increase in the percentage of net sales for the
six month period were primarily attributable to new product development of
solutions products, the result of the Technology Solutions, Inc. acquisition in
June, 1997, and a decline in revenues.
SELLING AND MARKETING. Selling and marketing expenses for the three
month period ended March 31, 1998 were $448,000, compared to $510,000 for the
same period in 1997, a decrease of $62,000 or 12%. Stated as a percentage of
net sales, selling and marketing expenses increased to 30% for the three month
period ended March 31, 1998, compared to 27% for the same period in 1997.
Selling and marketing expenses for the sixth month period ended March 31, 1998
were $987,000, compared to $935,000 for the same period in 1997, an increase of
$52,000 or 6%. Stated as a percentage of net sales, selling and marketing
expenses increased to 35% for the sixth month period ended March 31, 1998,
compared to 31% for the same period in 1997. The increase in expenses for the
six month period is primarily related to the increase in product promotion
expenses, while the increase to the percentage of net sales relate to the
decline in revenues.
OTHER CHARGES. For the sixth month period ended March 31, 1998, other
charges totaling $989,000, consist of several non-recurring charges to
operations. The charges consist of the following components:
Goodwill impairment -In June, 1997 the Company purchased substantially
all of the assets of Technology Solutions, Inc., a software developer and
solution provider of document image processing systems. One of the key employees
of the Company, a former principle of Technology Solutions, Inc., opted to
resign his employment. The unexpected departure, in the opinion of management,
will detrimentally impact the future cash flows of the Company. The Company
determined the fair value of the goodwill by evaluating the expected future net
cash flows (undiscounted and without interest charges), in accordance with FAS
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. The evaluation indicates the carrying value of the
goodwill exceeded its fair value, resulting in an impairment loss of $293,000.
License Fee impairment - In April, 1997 the Company entered into an
exclusive software licensing agreement with Parascript LLC. In December, 1997,
Parascript notified the Company of its dissatisfaction with the Company's
progress in marketing the software affected by the license agreement, along with
assertion that the Company had committed material breach of contract. The
Company has strongly and vigorously denied the claims. A proposed solution to
the dispute by Parascript included converting the Company's exclusive to a
non-exclusive software license. In addition, the Company over-estimated the
availability and the performance of the product and anticipated prices for the
software affected by the agreement. The adversarial condition of the
relationship coupled with the decreased expectations, in the opinion of
management, will detrimentally impact the future cash flows of the Company. The
Company determined the fair value of the goodwill represented by the license fee
paid for the exclusive license by evaluating the expected future net cash
flows (undiscounted and without interest charges), in accordance with FAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. The evaluation indicates the carrying value of the goodwill
exceeded the fair value, resulting in an impairment loss of $196,000.
The Company believes that as a result of continuing discussions with
Parascript, the Company and Parascript will be able to work together in a
positive manner, eliminating the need for recording any further reserve for
this situation.
The Company was sued earlier this year for wrongful termination by two
former employees of its Canadian subsidiary. The Company has strongly defended
the action. The former employees obtained a bench order requiring
the amount of the dispute to be deposited in escrow pending the outcome of
the case. In the opinion of management, the actions of the Canadian court
indicate a high likelihood of an adverse decision, which necessitated the
recording of a reserve in the amount of $134,000, plus costs, equaling a
reserve of $142,000. The Company is presently in settlement negotiations and
believes that a settlement of this dispute will be achieved which will have
no material effect on the Company.
Recently the Company was sued for $1 million by one if its system
integrator customers, Adaptive Solutions, Inc. In its suit, Adaptive Solutions,
Inc. charged the Company with breach of contract. The Company has consulted its
counsel, and has adamantly denied the assertions of Adaptive Solutions, Inc. and
is vigorously defending the suit. As a result of discussions between the
parties and their respective counsel, there have been ongoing settlement
negotiations with Adaptive Solutions, Inc.. The Company believes it has a
strong defense and that the matter will be settled amicably, and without
material impact on the Company. Therefore, no reserves have been recorded at
this time for this lawsuit claim.
In December, 1997, the Company entered into an employment agreement with
Mr. Elliot Wassarman (see footnote H. - Restructure). The agreement included the
commitment of the Company to pay certain recruitment and relocation costs
aggregating $166,000.
The Company has traditionally sold its QuickStrokes Application Programmer
Interface products with various acceleration hardware boards. Decreasing prices
coupled with the higher speeds of general hardware have rapidly altered the
market need for these acceleration boards. The largest customer utilizing these
acceleration boards has informed the Company of its intent to discontinue the
offering of these products in the domestic market. As a result, the Company has
recorded a reserve for inventory obsolescence in the amount of $200,000.
INTEREST INCOME. Interest income for the three month period ended March
31,1998 was $17,000, compared to interest income of $36,000 for the same period
in 1997, a decrease of $19,000 or 53%. Interest income for the sixth month
period ended March 31, 1998 was $38,000, compared to interest income of $49,000
for the same period in 1997, a decrease of $11,000 or 22%. Interest income was
generated from invested funds received from the secondary public offering in the
quarter ended December 31, 1996, combined with no bank borrowings in the
quarters ended March 31, 1998 and 1997. The decline in interest income in both
periods reflect the use of invested funds.
OTHER INCOME. Other income for the three month period ended March 31,
1998, reflects the net sale of the company's Fax Products on January 30, 1998.
The Company received $420,000 in cash proceeds which was offset by the carrying
value of the assets sold ($308,000) and costs related to the transaction
($78,000). (Note D).
INCOME TAX EXPENSE (BENEFIT). For the quarters ended March 31, 1998 and
1997, the provision for income tax benefit or expense for federal and state
income taxes is based on the estimated effective tax rates applied to year to
date loss or income before income tax and projected utilization of tax credits
from prior periods.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, stockholders' equity was $3,949,000, a decrease of
$1,802,000 from September 30, 1997. The Company's working capital and current
ratio was $2,288,000 and 2.66 to 1 at March 31, 1998, compared to $3,278,000 and
3.32 to 1 at September 30, 1997, respectively.
At March 31, 1998, the total liabilities to equity ratio was .36 to 1
compared to .25 to 1 at September 30, 1997. As of March 31, 1998, the Company's
total liabilities were $10,000 less than September 30, 1997.
Components of working capital with significant changes during the six months
ended March 31, 1998 were: Cash, Inventory and Accounts Payable. Compared to
September 30, 1997, the components changed as follows:
Cash and Cash Equivalents - Decreased $267,000 as compared to
September 30, 1997, which reflects the increases in operating costs and
expenses. However, cash remained strong with cash on hand of $994,000 at
March 31, 1998, which does not include $400,000 in credit facility
availability.
Accounts Receivable - Decreased $465,000 as compared to September
30, 1997 because of cash receipts on the current portion of receivables.
Inventory-net - Decreased $212,000 because of reserves recognition
in the amount of $200,000 as stated in the MD&A under Other Charges, while
gross inventory decreased $12,000.
Other Assets - Decreased by $759,000 primarily because of
revaluation of goodwill and license fees (see Note C).
In March, 1996, the Company established a $400,000 line of credit with Rancho
Santa Fe Bank ("Bank") for working capital purposes. Borrowings under this line
bear interest at the rate of 1 1/2% over the Bank's Prime Rate and the line of
credit expires on May 6, 1998. The company has requested and expects the Bank
to extend and increase the credit line and add a capital equipment lease line.
The line of credit is secured by a lien on substantially all of the Company's
assets. There were no borrowings against the line of credit on March 31, 1998.
The Company believes that together with existing cash, credit available under
the extended credit line, and cash generated from operations, funds will be
sufficient to finance its operation for the next twelve months.
PART II - OTHER INFORMATION
Item 4. The annual meeting of stockholders was held on February 11, 1998.
Brought to vote were the election of Directors for the ensuing
year. With 88.20% of shares represented at the meeting, the
following were elected to the Board of Directors: John M. Thornton,
Chairman, Elliot Wassarman, Daniel E. Steimle, James B. DeBello,
Gerald I. Farmer and Sally B. Thornton.
Also voted on, and approved, was the appointment of Deloitte &
Touche LLP as the Company's 1998 auditors.
Immediately following the annual meeting of stockholders, an
organizational meeting of the Board of Directors of the Corporation
was held to elect officers of the Corporation for the coming year.
The following persons were elected: John M. Thornton, Chairman of
the Board; Elliot Wassarman, President and Chief Executive Officer;
John M. Thornton, Chief Financial Officer; Barbara Hurlstone,
Secretary.
Item 6. Exhibits and Reports on Form 8-K
a. The exhibits are on Form 8-K: None
b. Reports on Form 8-K: Filed on January 6, 1998 - Appointment of
Elliot Wassarman as Chief Executive Officer and President, and
Director of the Company. Resignation of John F. Kessler from the
position of Chief Executive Officer and President, and Director,
and the appointment of John F. Kessler to the position of Chief
Financial Officer.
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.
(Registrant)
Date: May 7, 1998
-------------------------------
Elliot Wassarman, President and
Chief Executive Officer
Date: May 7, 1998
--------------------------------
John M. Thornton
Chairman
5
3-MOS
SEP-30-1998
JAN-01-1998
MAR-31-1998
993,696
0
2,598,186
232,787
203,846
3,666,820
1,164,686
986,850
5,375,560
1,378,929
48,027
0
0
11,552
0
5,375,560
1,481,837
1,481,837
637,910
1,081,981
(34,256)
0
(17,117)
(186,681)
0
(186,681)
0
0
0
(186,681)
(.02)
(.02)
