SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC. 20549
FORM
10-Q/A
AMENDMENT
NO. 2
(Mark
One)
|X| Amended
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
of the Securities Exchange Act of 1934
For the
quarterly period ended June
30, 2004
or
|_| Transition
Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
of the Securities Exchange Act of 1934
Commission
file number 0-15235
Mitek
Systems, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware (State or other jurisdiction of |
87-0418827 (I.R.S.
Employer |
14145
Danielson St, Ste B, Poway, California 92064
(Address of principal executive offices)(Zip Code)
(Address of principal executive offices)(Zip Code)
Registrant's
telephone number, including area code (858)
513-4600
(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
December 3, 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-QA
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) |
5 | |
|
Item
2. |
Management’s
Discussion and Analysis of Financial |
|
|
Condition
and Results of Operations |
11 |
|
Item
3. |
Quantitative
and Qualitative Disclosures about Market Risk |
17 |
|
Item
4. |
Controls
and Procedures |
17 |
Part
II. Other Information
|
Item
2. |
Changes
in Securities and Use of Proceeds |
17 |
|
Item
6. |
Exhibits
and Reports on Form 8-K |
18 |
|
Signature |
20 |
EXPLANATORY NOTE
Mitek
Systems, Inc. (the "Company") is filing this Amendment No. 2 to its Form 10-Q/A
for the quarter ended June 30, 2004 to provide additional information regarding
our controls and procedures.
The
original Form 10-Q for the quarter ended June 30, 2004 (the “10-Q”) was filed on
August 16, 2004. Amendment No. 1 to the Company’s Form 10-Q for the quarter
ended June 30, 2004 was filed on January 13, 2005 to reflect the restatement of
our financial statements (the "Restatement"). The Restatement reflects
adjustments recognized in the quarter, which also affects current and long-term
liabilities and stockholders' equity at or for the three and nine months ended
June 30, 2004. A discussion of this Restatement and a summary of the effects of
the Restatement are presented in Note 10 to the Financial
Statements.
For the
convenience of the reader, this Amendment No. 2 amends in its entirety the 10-Q
and Amendment No.1. This Amendment No. 2 continues to speak as of the date of
the 10-Q, and we have not updated the disclosure contained herein to reflect any
events that occurred at a later date other than as described in this explanatory
note. All information contained in this Amendment No. 2 is subject to updating
and supplementing as provided in our periodic reports filed with the Securities
and Exchange Commission subsequent to the date of the filing of the
10-Q.
The
following section of this Quarterly Report on Form 10-Q/A has been revised from
Amendment No. 1:
Item 4 -
Controls and Procedures
1
|
PART
1: ITEM 1. FINANCIAL INFORMATION | ||||||||||
|
MITEK
SYSTEMS, INC | ||||||||||
|
BALANCE
SHEETS | ||||||||||
|
(UNAUDITED) | ||||||||||
|
June
30, 2004 |
September
30, |
|||||||||
|
As
restated |
2003 |
|||||||||
|
ASSETS |
||||||||||
| CURRENT ASSETS: | ||||||||||
|
Cash
and cash equivalents |
$ |
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
|
||||||||
|
Liabilities
in excess of assets held for sale |
376,516
|
0
|
||||||||
|
Other
accrued liabilities |
272,060
|
245,818
|
||||||||
|
Warrants-liability |
367,887
|
0
|
||||||||
|
Current
portion of Convertible Debt |
||||||||||
|
net
of unamortized financing costs of $347,090 (2004) |
289,273
|
0
|
||||||||
|
Total
current liabilities |
2,966,712
|
2,702,155
|
||||||||
|
LONG-TERM
LIABILITIES: |
||||||||||
|
Convertible
debt - net of unamortized |
||||||||||
|
financing
costs of $679,719 (2004) |
1,683,918
|
0
|
||||||||
|
Deferred
rent |
15,538
|
16,135
|
||||||||
|
Deferred
revenue |
0
|
318,826
|
||||||||
|
Long-term
payable |
8,539
|
34,194
|
||||||||
|
Total
long-term liabilities |
1,707,995
|
369,155
|
||||||||
|
TOTAL
LIABILITIES |
4,674,707
|
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
|
||||||||
|
Additional
paid-in capital |
10,064,911
|
9,327,736
|
||||||||
|
Accumulated
deficit |
(10,095,032 |
) |
(6,766,450 |
) | ||||||
|
Net
stockholders' equity (deficit) |
(18,732 |
) |
2,572,471
|
|||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
$ |
4,655,975 |
$ |
5,643,781 |
||||||
|
See
notes to financial statements |
||||||||||
2
|
MITEK
SYSTEMS, INC |
|||||||||||||
|
STATEMENTS
OF OPERATIONS |
|||||||||||||
|
(Unaudited) |
|||||||||||||
| THREE MONTHS ENDED | NINE MONTHS ENDED | ||||||||||||
| June 30, | June 30, | ||||||||||||
|
2004 |
2003 |
2004 | 2003 | ||||||||||
|
AS
RESTATED |
AS
RESTATED |
||||||||||||
|
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 other |
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 |
(17,556 |
) |
3,645
|
(10,600 |
) |
7,586
|
|||||||
|
LOSS
BEFORE INCOME TAXES |
(1,435,562 |
) |
(953,028 |
) |
(3,325,572 |
) |
(856,461 |
) | |||||
|
PROVISION
FOR INCOME TAXES |
457
|
380
|
3,007
|
10,355
|
|||||||||
|
NET
LOSS |
$ |
(1,436,019 |
) |
$ |
(953,408 |
) |
$ |
(3,328,579 |
) |
$ |
(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 |
|||||||||||||
3
|
MITEK
SYSTEMS, INC | |||||||
|
STATEMENTS
OF CASH FLOWS | |||||||
|
(Unaudited) | |||||||
| NINE MONTHS ENDED | |||||||
| June 30, | |||||||
|
2004 |
2003 |
||||||
|
AS
RESTATED |
|||||||
|
OPERATING
ACTIVITIES |
|||||||
|
Net
loss |
$ |
(3,328,579 |
) |
$ |
(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
|
|||||
|
Amortization
of debt discount |
14,462
|
0
|
|||||
|
Changes
in operating assets and liabilities: |
|||||||
|
Accounts
receivable |
1,389,034
|
803,827
|
|||||
|
Inventory,
prepaid expenses, and other assets |
79,745
|
(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
|
||||
|
Liabilities
in excess of assets held for sale |
376,516
|
0
|
|||||
|
Other
accrued liabilities |
(78,446 |
) |
(14,147 |
) | |||
|
Net
cash provided by (used in) operating activities |
(2,157,135 |
) |
823,535
|
||||
|
INVESTING
ACTIVITIES |
|||||||
|
Purchases
of property and equipment |
(45,339 |
) |
(180,067 |
) | |||
|
Proceeds
from sale of property and equipment |
0
|
1,203
|
|||||
|
Payment
(advances) on related party note receivable-net |
49,378
|
(8,517 |
) | ||||
|
Net
cash provided by (used in) investing activities |
4,039
|
(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 |
(151,000 |
) |
0
|
||||
|
Proceeds
from exercise of stock options |
204,220
|
19,201
|
|||||
|
Net
cash provided by financing activities |
3,053,220
|
19,201
|
|||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS |
900,124
|
655,355
|
|||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
1,819,102
|
760,416
|
|||||
|
CASH
AND CASH EQUIVALENTS 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 |
|||
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING |
|||||||
|
ACTIVITIES |
|||||||
|
Options
issued in exchange for services |
$ |
10,776 |
$ |
2,823 |
|||
|
Warrants
issued in connection with financing |
$ |
367,887 |
$ |
0 |
|||
|
Beneficial
conversion feature of convertible debt |
$ |
522,384 |
$ |
0 |
|||
|
See
notes to financial statements |
|||||||
4
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 9 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 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.
5
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.
6
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
June
30 |
Nine
months ended
June
30 |
||||||||||||
|
2004 |
2003 |
2004 |
2003 |
||||||||||
|
Net
loss as reported |
$ |
(1,436 |
) |
$ |
(953 |
) |
$ |
(3,329 |
) |
$ |
(867 |
) | |
|
Net
loss pro forma |
(1,532 |
) |
(968 |
) |
(3,617 |
) |
(1,507 |
) | |||||
|
Net
loss per share as reported |
(.13 |
) |
(.09 |
) |
(.29 |
) |
(.08 |
) | |||||
|
Net
loss per share pro forma |
(.13 |
) |
(.09 |
) |
(.32 |
) |
(.14 |
) | |||||
4. Revolving
Line of Credit
On
February 19, 2003 the Company revised its working capital revolving line of
credit with First National Bank. This line required interest to be paid at prime
plus 1 percentage point, and was subject to a limit on maximum available
borrowings of $750,000. The Company had no borrowings under the working
capital line of credit on September 30, 2003. This credit line was subject
to a net worth covenant whereby the Company was required to maintain a tangible
net worth of $2,000,000 in order to use the credit line. The loss
sustained during the quarter ended December 31, 2003 caused the Company’s net
worth to fall to $1,602,000. Though the Company had no borrowings under the
credit line as of December 31, 2003, the Company was no longer in compliance
with the aforementioned net worth covenant. In June 2004, the Company
entered into a Convertible Note with Laurus Master Fund (Laurus). This
Convertible Note is described in Note 6 of the financial statements 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.
5. Product
Revenues - Below is a summary of the revenues by product lines.
|
Three
Months Ended
June
30 |
Nine
Months Ended
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
On June
11, 2004, the Company secured a financing arrangement with Laurus. The financing
consists of a $3 million Secured Note that bears interest at the rate of prime
(as published in the Wall Street Journal), plus one percent (6% as of December
2, 2004) and has
a term of three years (June 11, 2007). The Secured Note is convertible into
shares of the Company's common stock at an initial fixed price of $0.70 per
share, a premium to the 10-day average closing share price as of June 11, 2004.
The conversion price of the Secured Note is subject to adjustment upon the
occurrence of certain events. The effective annual interest rate of this
Convertible Debt, after considering the total debt issue costs (discussed
below), is approximately 17.6%
In
connection with the financing, Laurus was also issued warrants to purchase up to
860,000 shares of the Company's common stock. The warrants are exercisable as
follows: 230,000 shares at $0.79 per share; 230,000 shares at $0.85 per share
and the balance at $0.92 per share. The gross proceeds of the convertible debt
were allocated to the debt instrument and the warrants on a relative fair value
basis. Then the Company computed the beneficial conversion feature embedded in
the debt instrument using the effective conversion price in accordance with EITF
98-5 and 00-27. The Company recorded a debt financing costs of (i) $367,887 for
the valuation of the 860,000 warrants issued with the note (computed using a
Black-Scholes model with an interest rate of 2.53%, volatility of 81%, zero
dividends and expected term of three years); (ii) $522,384 for a beneficial
conversion feature inherent in the Secured Note and (iii) $151,000 for debt
issue costs paid to affiliates of the lender, for a total discount of
$1,041,271. The $1,041,271 is being amortized over the term of the Secured Note.
On October 4, 2004 the Company filed the registration statement with the
Securities and Exchange Commission and the registration statement remains
pending as of the date of this report. Amortization of the debt financing costs
through June 30, 2004 was $9,476.
7
To secure
the payment of all obligations, the Company entered into a Master Security
Agreement which assigns and grants to Laurus a continuing security interest in
all of the following property now owned or at any time upon execution of the
agreement, acquired by the Company or subsidiaries, or in which any assignor now
have or at any time in the future may acquire any right, title or interest: all
cash, cash equivalents, accounts, deposit accounts, inventory, equipment, goods,
documents, instruments (including, without limitation, promissory notes),
contract rights, general tangibles, chattel paper, supporting obligations,
investment property, letter-of-credit rights, trademarks, trademark
applications, patents, patent applications, copyrights, copyright applications,
tradestyles and any other intellectual property, in each case, in which any
Assignor now have or may acquire any right, title or interest, all proceeds and
products thereof (including, without limitation, proceeds of insurance) and all
additions, accessions and substitutions. In the event any Assignor wishes to
finance an acquisition in the ordinary course of business of any
hereafter-acquired equipment and have obtained a commitment from a financing
source to finance such equipment from an unrelated third party, Laurus agrees to
release its security interest on such hereafter-acquired equipment so financed
by such third party financing source.
The
Secured Notes stipulates that the Secured Note is to be repaid using cash
payment along with an equity conversion option; the details of both methods for
repayment are as follows: The cash repayments stipulate that beginning on
December 1, 2004, or the first amortization date, the Company shall make monthly
payments to Laurus on each repayment date until the maturity date, each in the
amount of $90,909.09, together with any accrued and unpaid interest to date. The
conversion repayment states that each month by the fifth business day prior to
each amortization date, Laurus shall deliver to the Company a written notice
converting the monthly amount payable on the next repayment date in either cash
or shares of common stock, or a combination of both. If a repayment notice is
not delivered by Laurus on or before the applicable notice date for such
repayment date, then the Company pays the monthly amount due in cash. Any
portion of the monthly amount paid in cash shall be paid to Laurus in an amount
equal to 102% of the principal portion of the monthly amount due. If Laurus
converts all or a portion of the monthly amount in shares of the Company's
common stock, the number of such shares to be issued by the Company will be the
number determined by dividing the portion of the monthly amount to be paid in
shares of common stock, by the applicable fixed conversion price, which is
presently $0.70 per share.
A
registration rights agreement was executed requiring the Company to register the
shares of its common stock underlying the Secured Note and warrants so as to
permit the public resale thereof (See Note 8). Liquidated damages of 2% of the
Secured Note balance per month accrue if stipulated deadlines are not met. The
registration statement was filed with the Securities and Exchange Commission on
October 4, 2004.
The
following table reflects the Convertible Debt at June 30, 2004:
|
Convertible
Debt |
$ |
3,000,000 |
||
|
Deferred
financing costs |
(1,026,809 |
) | ||
|
1,973,191 |
||||
|
Less:
Current Portion |
(289,273 |
) | ||
$ |
1,683,918 |
The debt
has the following principal amounts due over the remaining life as
follows:
8
|
Year
ended 9/30/05 |
$ |
909,091 |
||
|
Year
ended 9/30/06 |
1,090,909 |
|||
|
Year
ended 9/30/07 |
$ |
1,000,000 |
7. Warrant Liability
In
conjunction with raising capital through the issuance of convertible debt, the
Company has issued various warrants that have registration rights for the
underlying shares. As the contracts must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet ($367,887).
8. 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.
Prior to
the end of the Fiscal 2004, the Company incurred a penalty to Laurus Funds for
failing to register the securities underlying the Debt Instrument described in
Note 7. The amount of the penalty was $208,000. This amount is shown as interest
expense in the Financial Statements for the year ended September 30, 2004. On
October 4, 2004, the Company settled this penalty with Laurus Master Fund, LLC
by agreeing to issue an additional warrant for the purchase of 200,000 shares at
a price of $0.70 per share. The value of this additional warrant was calculated
by the Company to be $77,925, using a Black-Scholes option pricing
model.
Subsequent
to the end of Fiscal 2004, the Company was approached by the Principal
Shareholder of Mitek Systems, Ltd, who offered to repurchase the Company’s
interest. In exchange for a cash payment of $150,000 and the cancellation of the
stock options granted the principal, the Company agreed to exchange the shares
held and the note outstanding, including accrued and unpaid interest. Mitek
Systems, Ltd also agreed to cease using the Company’s trade name and entered
into a reseller agreement on terms similar to other resellers unrelated to the
Company.
9. Liabilities
in Excess of Assets 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
liabilities in excess of assets held for sale 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 |
|||
|
Liabilities
in Excess of Assets |
$ |
376,516 |
9
10.
Restatement
In December 2004, the Company discovered an error resulting in an adjustment
relating to (i) the warrants issued to Laurus in connection with our issuance to
Laurus of convertible secured notes were incorrectly accounted for as equity,
rather than as a liability; and (ii) the beneficial conversion feature of the
convertible secured notes were incorrectly accounted for in our financial
statements for the quarter ended June 30, 2004. Our financial statements
contained in this Report have been restated to reflect our such changes. A
summary of the significant effects of the restatement is as
follows:
As restated, our originally stated interest expense of $12,570 for the quarter
ended June 30, 2004 should have been reported as approximately $5,000 greater,
or $17,556. Our net loss of $1,431,027 for the quarter ended June 30, 2004
should have been reported as approximately $5,000 greater or $1,436,019.
As restated, the liability associated with our warrants issued to Laurus should
have been reflected as of June 30, 2004 as approximately $370,000. The
current portion of convertible debt net of unamortized financing costs should
have been reflected as of June 30, 2004 as approximately $289,000.
Accordingly, our originally stated current liabilities as of June 30, 2004 of
approximately $2,310,000 should have been reported as approximately $660,000
greater or approximately $2,967,000. Our originally stated total liabilities as
of June 30, 2004 of approximately $4,661,000 should have been reported as
approximately $14,000 greater or $4,675,000. Our originally stated equity of
$(5,000) as of June 30, 2004 should have been reported as approximately $14,000
less or $(19,000).
10
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.
11
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:
| · | The actual contractual terms, such as payment terms, delivery dates, and pricing of the various product and service elements of a contract |
| · | Availability of products to be delivered |
| · | Time period over which services are to be performed |
| · | Creditworthiness of the customer |
| · | The complexity of customizations to the Company’s software required by service contracts |
| · | The sales channel through which the sale is made (direct, VAR, distributor, etc.) |
| · | Discounts given for each element of a contract |
| · | Any commitments made as to installation or implementation “go live” dates |
Each of
the relevant factors is analyzed to determine its impact, individually and
collectively with other factors, on the revenue to be recognized for any
particular contract with a customer. Management is required to make judgments
regarding the significance of each factor in applying the revenue recognition
standards, as well as whether or not each factor complies with such standards.
Any misjudgment or error by management in its evaluation of the factors and the
application of the standards, especially with respect to complex or new types of
transactions, could have a material adverse 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.
Fair
Value of Equity Instruments
The
valuation of certain items, including valuation of warrants, beneficial
conversion feature related to convertible debt and compensation expense related
to stock options granted, involve significant estimations with underlying
assumptions judgmentally determined. The valuation of warrants and stock options
are based upon a Black Scholes valuation model, which involve estimates of stock
volatility, expected life of the instruments and other assumptions. As the
Company’s stock is thinly traded, the estimates, which are based partly on
historical pricing of the Company’s stock, may not represent fair value, but the
Company believes it is presently the best form of estimating objective fair
value.
Deferred
Income Taxes.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. We maintain a valuation allowance
against the deferred tax asset due to uncertainty regarding the future
realization based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences.
Until such time as the Company can demonstrate that it will no longer incur
losses or if the Company is unable to generate sufficient future taxable income
we could be required to maintain the valuation allowance against our deferred
tax assets.
12
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 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.
13
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 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 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
($18,000), compared to $4,000 for the same period in 2003, a decrease of
$22,000. Interest and other income (expense) for the nine-month period ended
June 31, 2004 was ($10,000), compared to $8,000 for the same period in 2003, a
decrease of $18,000. 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
($2,157,000). The primary use of cash from operating activities was the
operating loss of ($3,329,000), a decrease in deferred revenue of ($557,000), 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 an
increase in net liabilities held for sale of $377,000.
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 $1,538,000 and 1.52,
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
- -249.56 to 1 compared to 1.19 to 1 at September 30, 2003. As of June 30, 2004,
total liabilities were increased by $1,603,000 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 Note 6.
15
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
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.
16
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
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
Under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of
the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective as of the end of the fiscal
quarter ended June 30, 2004. During the fiscal quarter ended June 30, 2004, the
Company did not change its internal control over financial reporting in a manner
that materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
In
connection with the audit of the Company's financial statements for the year
ended September 30, 2004, the Company identified that it had incorrectly
accounted for (i) the beneficial conversion feature of the convertible
promissory note issued to Laurus in the third quarter of fiscal 2004 and (ii)
the categorization and recording of the warrants that were issued to Laurus in
connection with the convertible promissory note issued to Laurus in the third
quarter of fiscal 2004. The Company determined that the incorrect accounting
resulted from a significant deficiency in its internal controls over application
of existing accounting principles to new transactions and financial
reporting.
The
Company took various steps subsequent to the quarter ended December 31, 2004, to
enhance its internal controls and now believes that the significant deficiency
has been remediated. Specifically, the Company’s internal control improvements
were to implement the following procedure when the Company is faced with an
accounting issue which the Company perceives to be particularly complex: (i) the
issue will be researched, including analysis of the transaction and how the
appropriate authoritative literature mandates accounting treatment; (ii) the
Company will conduct additional communication with its independent auditor as to
the appropriateness of the authoritative literature considered; (iii) the
Company will generate a memorandum regarding the basis for the Company’s
accounting treatment; (iv) the memorandum will be retained in the Company’s
files as documented evidence of its findings; and (v) the memorandum will be
presented to the Company’s independent auditors for review.
While the
Company believes its significant deficiency has been remediated, it also has
undertaken a search for a full-time Chief Financial Officer with deeper
understanding of the current accounting literature as it relates to the
Company’s business, which the Company anticipates will be completed during the
fiscal year ending September 30, 2005. The Company believes such a Chief
Financial Officer will result in further improvements to its internal control
and to its disclosure controls and procedures.
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.
17
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. |
|
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
13a-14(a) Certification of the Chief Executive Officer |
|
31.2 |
Rule
13a-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.
18
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.
19
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: May 12, 2005 | By: | /s/ James B. DeBello |
|
James
B. DeBello, President and
Chief
Executive Officer
(Authorized
Officer and Principal Executive Officer) | ||
| |
|
|
| Date: May 12, 2005 | By: | /s/ John M. Thornton |
|
John
M. Thornton, Chairman and
Chief
Financial Officer
(Principal
Financial Officer) | ||
20
EXHIBIT
31.1
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.
| |
|
|
| Date: May 12, 2005 | By: | /s/ James B. DeBello |
|
James
B. DeBello
President
and
Chief
Executive Officer | ||
EXHIBIT
31.2
CERTIFICATION
OF
CHIEF FINANCIAL OFFICER
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.
| |
|
|
| Date: May 12, 2005 | By: | /s/ John M. Thornton |
|
John
M. Thornton
Chairman
of the Board and
Chief
Financial Officer | ||
EXHIBIT
32.1
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 13a-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.
| |
|
|
| Date: May 12, 2005 | By: | /s/ James B. DeBello |
|
James
B. DeBello
President
and
Chief
Executive Officer | ||
EXHIBIT
32.2
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 13a-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.
| |
|
|
| Date: May 12, 2005 | By: | /s/ John M. Thornton |
|
John
M. Thornton
Chairman
of the Board and Chief Financial Officer | ||