SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005 or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15235
---------------------------------------------------------
Mitek Systems, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 87-0418827
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14145 Danielson St, Ste B,Poway, California 92064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 513-4600
----------------------------
- --------------------------------------------------------------------------------
(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 12,460,909 shares outstanding of the registrant's Common Stock
as of April 30, 2005.
MITEK SYSTEMS, INC.
FORM 10-QSB
For the Quarter Ended March 31, 2005
INDEX
Part 1. Financial Information
Item 1. Financial Statements Page
----
a) Balance Sheets
As of March 31, 2005 (Unaudited) and September 30, 2004 (Audited) ........1
b) Statements of Operations
for the Three and Six Months Ended March 31, 2005
and 2004 (Unaudited) .....................................................2
c) Statements of Cash Flows
for the Six Months Ended March 31, 2005 and 2004 (Unaudited) .............3
d) Notes to Financial Statements ..............................................4
Item 2. Management's Discussion and Analysis or Plan of Operation.....................11
Item 3. Controls and Procedures.......................................................16
Part II. Other Information
Item 1. Legal Proceedings.............................................................17
Item 6. Exhibits and Reports on Form 8-K..............................................17
Signature......................................................................................18
ITEM 1:
FINANCIAL INFORMATION
MITEK SYSTEMS, INC
BALANCE SHEETS
March 31, September 30,
2005 2004
ASSETS (Unaudited) (Audited)
------------ ------------
CURRENT ASSETS:
Cash $ 1,009,934 $ 2,607,173
Accounts receivable-net of allow ances of
$621,699 and $773,473 respectively 1,890,262 570,154
Note receivable - related party 0 133,841
Inventories - net 11,290 11,078
Prepaid expenses and other assets 165,519 180,876
----------------------------
Total current assets 3,077,005 3,503,122
PROPERTY AND EQUIPMENT-net 106,182 119,111
OTHER ASSETS 69,585 0
----------------------------
TOTAL ASSETS $ 3,252,772 $ 3,622,233
============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 547,911 $ 288,909
Accrued payroll and related taxes 335,309 240,000
Deferred revenue 627,666 397,724
Warrants-liability 373,655 415,907
Current portion of Convertible Debt, net of
unamortized financing costs of $470,045 and $338,624
respectively 620,864 570,827
Other accrued liabilities 785,085 743,056
----------------------------
Total current liabilities 3,290,490 2,656,423
LONG-TERM LIABILITIES:
Deferred rent 8,479 13,215
Convertible Debt, net of unamortized financing
costs of $231,525 and $606,760 respectively 1,313,929 1,484,149
----------------------------
Total long-term liabilities 1,322,408 1,497,364
----------------------------
TOTAL LIABILITIES 4,612,898 4,153,787
----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock - $.001 par value; 20,000,000
shares authorized, 12,460,909 and 11,389,481
issued and outstanding at
March 31, 2005 and September 30, 2004, respectively 12,461 11,389
Additional paid-in capital 10,956,183 10,069,833
Accumulated deficit (12,328,770) (10,612,776)
----------------------------
Net stockholders' deficit (1,360,126) (531,554)
----------------------------
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,252,772 $ 3,622,233
============================
See accompanying notes to financial statements
1
MITEK SYSTEMS, INC
STATEMENTS OF OPERATIONS
Unaudited
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
2005 2004 2005 2004
------------------------------------------------------------
SALES
Software $ 1,126,009 $ 963,365 $ 1,944,947 $ 1,635,015
Hardware -- 403,450 -- 773,555
Professional Services, education and other 645,790 651,264 1,127,274 1,304,391
------------------------------------------------------------
NET SALES 1,771,799 2,018,079 3,072,221 3,712,961
COSTS AND EXPENSES:
Cost of sales-Software 57,538 211,962 138,737 327,374
Cost of sales-Hardware 0 392,955 0 732,932
Cost of sales-Professional services,
education and other 171,903 174,595 274,023 461,718
Operations 35,570 377,583 76,408 738,692
Selling and marketing 622,893 495,229 1,202,774 1,122,020
Research and development 346,915 658,456 716,942 1,167,516
General and administrative 1,084,517 520,371 2,011,331 1,059,675
------------------------------------------------------------
Total costs and expenses 2,319,336 2,831,151 4,420,215 5,609,927
------------------------------------------------------------
OPERATING LOSS (547,537) (813,072) (1,347,994) (1,896,966)
OTHER INCOME (EXPENSE):
Interest expense, including liquidating
damages (2005) (370,752) (2,773) (504,411) 6,956
Change in fair value of warrant liability 118,886 0 115,410 0
Interest and other income 923 0 21,001 0
------------------------------------------------------------
Total other income (expense) - net (250,943) (2,773) (368,000) 6,956
LOSS BEFORE INCOME TAXES (798,480) (815,845) (1,715,994) (1,890,010)
PROVISION FOR INCOME TAXES 0 0 0 2,550
------------------------------------------------------------
NET LOSS $ (798,480) $ (815,845) $ (1,715,994) $ (1,892,560)
============================================================
LOSS PER SHARE - BASIC & DILUTED $ (0.07) $ (0.07) $ (0.15) $ (0.17)
============================================================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC & DILUTED 11,841,862 11,369,942 11,613,186 11,316,861
============================================================
See accompanying notes to financial statements
2
MITEK SYSTEMS, INC
STATEMENTS OF CASH FLOWS
Unaudited
SIX MONTHS ENDED
March 31,
2005 2004
-----------------------------
OPERATING ACTIVITIES
Net loss $ (1,715,994) $ (1,892,560)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 46,939 228,538
Provision for bad debts 24,000 48,000
Change in fair value of w arrant liability (115,410) 0
Amortization of debt discount 243,454 0
Provision for sales returns & allow ances (4,837) 61,112
Fair value of stock options issued to non-employees 2,580 10,776
Gain on sale of equity investment (16,159) 0
Changes in operating assets and liabilities:
Accounts receivable (1,344,108) 342,368
Inventories, prepaid expenses, and other assets (54,440) (13,016)
Accounts payable 259,002 (139,541)
Accrued payroll and related taxes 95,309 (222,999)
Deferred revenue 229,942 323,942
Other accrued liabilities 250,130 (94,220)
-----------------------------
Net cash used in operating activities (2,099,592) (1,347,600)
INVESTING ACTIVITIES
Purchases of property and equipment (34,580) (26,155)
Proceeds from sale of property and equipment 569 0
Payment (advances) on related party note receivable-net 150,000 32,279
-----------------------------
Net cash provided by investing activities 115,989 6,124
FINANCING ACTIVITIES
Repayment on convertible debt (363,636) 0
Proceeds from sale of common shares 750,000
Proceeds from exercise of stock options 0 204,220
-----------------------------
Net cash provided by financing activities 386,364 204,220
-----------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,597,239) (1,137,256)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,607,173 1,819,102
-----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,009,934 $ 681,846
=============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
-----------------------------
Cash paid for interest $ 260,958 $ 695
=============================
Cash paid for income taxes $ -- $ 2,550
=============================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Warrants issued in connection w ith settlement $ 73,159 $ --
See accompanying notes to financial statements
3
MITEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements of Mitek Systems, Inc.
(the "Company") have been prepared in accordance with the instructions to Form
10-QSB and, therefore, do not include all information and footnote disclosures
that are otherwise required by Regulation S-B and that will normally be made in
the Company's Annual Report on Form 10-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.
Mitek recently began to file its periodic reports with the SEC in
compliance with the "small business issues" provisions of Regulation S-B, under
the Securities Exchange Act of 1934. Previously, Mitek had filed its periodic
reports under Regulation S-K and S-X under the Exchange Act. Generally, a small
business issuer cannot file under Regulation S-B if its annual revenues or
public float exceed $25.0 million for two consecutive years. Mitek qualifies as
a Regulation S-B filer since its annual revenues for both 2004 and 2003 were
less than $25.0 million and its public float has not exceeded $25.0 million.
Regulation S-B is tailored for the small business issuer, and although it
requires accurate and complete disclosure, it does not require certain specific
disclosure which is required under Regulation S-K and S-X.
Results for the three and six months ended March 31, 2005 are not
necessarily indicative of results which may be reported for any other interim
period or for the year as a whole.
2. New Accounting Pronouncements
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment". Statement 123(R) will provide investors and other users
of financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those filing as
small business issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after June 15, 2005. The
Company has evaluated the impact of the adoption of SFAS 123(R), and does not
believe the impact will be significant to the Company's overall results of
operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). In December 2003, FIN
46 was replaced by FASB interpretation No. 46(R) "Consolidation of Variable
Interest Entities." FIN 46(R) clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46(R) requires an enterprise to consolidate a variable
interest entity if that enterprise will absorb a majority of the entity's
expected losses, is entitled to receive a majority of the entity's expected
residual returns, or both. FIN 46(R) is effective for entities being evaluated
under FIN 46(R) for consolidation no later than the end of the first reporting
period that ends after March 15, 2004. The Company does not currently have any
variable interest entities that will be impacted by adoption of FIN 46(R).
In December 2004 the Financial Accounting Standards Board issued two
FASB Staff Positions--FSP FAS 109-1, Application of FASB Statement 109
"Accounting for Income Taxes" to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS 109-2
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004. Neither of these
affected the Company as it does not participate in the related activities.
4
In March 2004, the Financial Accounting Standards Board (FASB) approved
the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objective of this Issue is to provide guidance for identifying
impaired investments. EITF 03-1 also provides new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting
provisions of EITF 03-1 are effective for all reporting periods beginning after
June 15, 2004, while the disclosure requirements for certain investments are
effective for annual periods ending after December 15, 2003, and for other
investments such disclosure requirements are effective for annual periods ending
after June 15, 2004. The Company does not currently have any investments that
will be impacted by this provision.
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 March 31, 2005 and 2004.
2005 2004
---- ----
Risk free interest rates 3.5 2.3
Dividend yields 0% 0%
Volatility 75% 111%
Weighted average expected life 3 years 3 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for net loss per share
information):
Three months ended Six months ended
March 31 March 31
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income (loss) as reported $ (798) $ (815) $ (1,716) $ (1,892)
Net income (loss) pro forma (878) (1,194) (1,874) (2,431)
Net income (loss) per share as reported (.07) (.07) (.15) (.17)
Net income (loss) per share pro forma (.08) (.10) (.17) (.28)
4. Convertible Debt
On June 11, 2004, the Company secured a financing arrangement with
Laurus. The financing consists of a $3 million Secured Note that bears interest
at the rate of prime (as published in the Wall Street Journal), plus one percent
(6% as of December 2, 2004) and has a term of three years (June 11, 2007). The
Secured Note is convertible into shares of the Company's common stock at an
initial fixed price of $0.70 per share, a premium to the 10-day average closing
share price as of June 11, 2004. The conversion price of the Secured Note is
subject to adjustment upon the occurrence of certain events. The effective
annual interest rate of this Convertible Debt, after considering the total debt
issue costs (discussed below), is approximately 23%.
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
5
convertible debt were allocated to the debt instrument and the warrants on a
relative fair value basis. Then the Company computed the beneficial conversion
feature embedded in the debt instrument using the effective conversion price in
accordance with EITF 98-5 and 00-27. The Company recorded a debt discount of (i)
$367,887 for the valuation of the 860,000 warrants issued with the note
(computed using a Black-Scholes model with an interest rate of 2.53%, volatility
of 81%, zero dividends and expected term of three years); (ii) $522,384 for a
beneficial conversion feature inherent in the Secured Note and (iii) $151,000
for debt issue costs paid to affiliates of the lender, for a total discount of
$1,041,271. The $1,041,271 is being amortized over the term of the Secured Note.
On October 4, 2004 the Company filed the registration statement with the
Securities and Exchange Commission. Amortization of the debt discounts through
September 30, 2004 was $96,247. During the six months ended March 31, 2005,
amortization of the debt discount was $243,454.
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 has 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 Note stipulates that the Secured Note is to be repaid using
cash payment along with an equity conversion option; the details of both methods
for repayment are as follows: The cash repayments stipulate that beginning on
December 1, 2004, or the first amortization date, the Company shall make monthly
payments to Laurus on each repayment date until the maturity date, each in the
amount of $90,909, together with any accrued and unpaid interest to date. The
conversion repayment states that each month by the fifth business day prior to
each amortization date, Laurus shall deliver to the Company a written notice
converting the monthly amount payable on the next repayment date in either cash
or shares of common stock, or a combination of both. If a repayment notice is
not delivered by Laurus on or before the applicable notice date for such
repayment date, then the Company pays the monthly amount due in cash. Any
portion of the monthly amount paid in cash shall be paid to Laurus in an amount
equal to 102% of the principal portion of the monthly amount due. If Laurus
converts all or a portion of the monthly amount in shares of the Company's
common stock, the number of such shares to be issued by the Company will be the
number determined by dividing the portion of the monthly amount to be paid in
shares of common stock, by the applicable fixed conversion price, which is
presently $0.70 per share.
A registration rights agreement was executed requiring the Company to
register the shares of its common stock underlying the Secured Note and warrants
so as to permit the public resale thereof (See Note 9). Liquidated damages of 2%
of the Secured Note balance per month accrue if stipulated deadlines are not
met. The registration statement was filed with the Securities and Exchange
Commission on October 4, 2004. The Company was required to have received an
effective registration no later than December 31, 2004. The registration was not
effective by that time, so the Company incurred liquidating damages, payable in
cash, in the amount of $180,000 for the period ended March 31, 2005. The Company
was notified on May 13, 2005, that its registration is now effective.
During the six months ended March 31, 2005, the Company has paid $363,636
of principal and $260,958 in cash interest.
The following table reflects the Convertible Debt at March 31, 2005:
Current Long-Term Total
================= ================ =================
Convertible Debt $ 1,090,909 $ 1,545,455 $ 2,636,364
Deferred financing costs (470,045) (231,525) (701,571)
----------------- ---------------- -----------------
$ 620,864 $ 1,313,929 $1,934,793
================= ================ =================
The debt has the following principal amounts due over the remaining life
as follows:
Year ended 9/30/05 $ 545,455
Year ended 9/30/06 1,090,909
Year ended 9/30/07 $1,000,000
6
5. Warrant Liability
In conjunction with raising capital through the issuance of convertible
debt, the Company has issued various warrants that have registration rights for
the underlying shares. As the contracts must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet ($492,541) and the change in fair value from the
date of issuance to March 31, 2005 has been included in other (expense) income.
Prior to the end of fiscal 2004, the Company incurred a penalty to Laurus
Funds for failing to register the securities underlying the Debt Instrument
described in Note 7. The amount of the penalty was $208,000. This amount was
shown as interest expense in the Financial Statements for the year ended
September 30, 2004. On October 4, 2004, the Company settled this penalty with
Laurus Master Fund, LLC by agreeing to issue an additional warrant for the
purchase of 200,000 shares at a price of $0.70 per share. The value of this
additional warrant was calculated by the Company to be $73,159, using a
Black-Scholes option pricing model.
For the quarter ended March 31, 2005 the change in fair value of the
warrants issued with registration rights for the underlying shares decreased by
approximately $118,886 to $373,655 at March 31, 2005 and is recognized in other
income.
The Company was notified on May 13, 2005 that the Registration Statement
filed was effective. As a result, the warrant liability will be redetermined on
that date, with any difference between the $373,655 value as of March 31, 2005
and the value on May 13, 2005 being recognized in other income or expense.
Thereafter the value of such warrants will be reclassified to warrant equity
effective on this date.
6. Stockholders' Deficit
On February 22, 2005, the Company entered into an agreement to sell
common stock to John H. Harland Company, the parent company to Harland Financial
Solutions. John H. Harland invested $750,000 in exchange for 1,071,428 shares of
unregistered common stock. In addition to the shares, John H. Harland received
warrants to purchase 160,714 additional shares of common stock at $0.70 per
share. This warrant is valid until February 22, 2012. Per the terms of this
investment, if the Company was able to increase the authorized shares, John H.
Harland had the right to invest an additional $750,000 at similar terms and
conditions. In connection with the sale, the Company granted Harland board
observation rights for as long as Harland continues to hold at least 20% of the
shares of common stock it purchases under the Securities Purchase Agreement
together with the shares of common stock issuable upon exercise of the warrants.
Also, see Footnote 8, Subsequent Events, below.
7. Product Revenues - To aid investor understanding of our historical results of
operations and the impact of the transaction described in Footnote 8 of our Form
10K/A for the fiscal year ended September 30, 2004, as previously filed with the
Securities and Exchange Commission on May 12, 2005, whereby certain assets
relating to the Company's Check Image Solution business were sold to Harland
Financial Solutions, presented below are the sales and cost of sales for the
above mentioned revenue items, with detail corresponding to the line items of
revenue and cost of sales as presented in the accompanying financial statements.
7
Quarter Ended March 31, 2005
(000's)
Document and
Recognition Check Image Image Processing Maintenance &
Toolkits Solutions Solutions Other Total
--------------------------------------------------------------------------------
Sales
Software 1,093 0 33 0 1,126
Hardware 0 0 0 0
Professional Services 0 0 646 646
--------------------------------------------------------------------------------
Total Sales 1,093 0 33 646 1,772
--------------------------------------------------------------------------------
Cost of Sales
Software 45 0 12 0 57
Hardware 0 0 0 0 0
Professional Services 0 0 0 172 172
--------------------------------------------------------------------------------
Total Cost of Sales 45 0 12 172 229
--------------------------------------------------------------------------------
Quarter Ended March 31, 2004
(000's)
Document and
Recognition Check Image Image Processing Maintenance &
Toolkits Solutions Solutions Other Total
--------------------------------------------------------------------------------
Sales (000's)
Software 836 22 105 0 963
Hardware 0 403 0 0 403
Professional Services 0 96 11 545 652
--------------------------------------------------------------------------------
Total Sales 836 521 116 545 2,018
--------------------------------------------------------------------------------
Cost of Sales
Software 194 2 15 0 211
Hardware 0 393 0 0 393
Professional Services 0 63 6 106 175
--------------------------------------------------------------------------------
Total Cost of Sales 194 458 21 106 779
--------------------------------------------------------------------------------
8
Six Months Ended March 31, 2005
(000's)
Document and
Recognition Check Image Image Processing Maintenance &
Toolkits Solutions Solutions Other Total
--------------------------------------------------------------------------------
Sales
Software 1,848 0 97 0 1,945
Hardware 0 0 0 0 0
Professional Services 0 0 0 1,127 1,127
--------------------------------------------------------------------------------
Total Sales 1,848 0 97 1,127 3,072
--------------------------------------------------------------------------------
Cost of Sales
Software 123 0 16 0 139
Hardware 0 0 0 0 0
Professional Services 0 0 0 274 274
--------------------------------------------------------------------------------
Total Cost of Sales 123 0 16 274 413
--------------------------------------------------------------------------------
Six Months Ended March 31, 2004
(000's)
Document and
Recognition Check Image Image Processing Maintenance &
Toolkits Solutions Solutions Other Total
--------------------------------------------------------------------------------
Sales
Software 1,288 209 138 0 1,635
Hardware 0 774 0 0 774
Professional Services 0 226 217 861 1,304
--------------------------------------------------------------------------------
Total Sales 1,288 1,209 355 861 3,713
--------------------------------------------------------------------------------
Cost of Sales
Software 176 128 23 0 327
Hardware 0 733 0 0 733
Professional Services 0 138 96 228 462
--------------------------------------------------------------------------------
Total Cost of Sales 176 999 119 228 1,522
--------------------------------------------------------------------------------
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 product line. In addition, HFS assumed
the trade liabilities and hired certain of the Company's personnel relating to
this product line. In connection with this transaction, the Company entered into
a reseller agreement wherein HFS will be the exclusive reseller of this product
line. The consideration for this transaction was $1,425,000, plus the assumption
of liabilities. The Company recognized this transaction as of July 7, 2004, as
previously disclosed in Footnote 8 of the Form 10K for the year ended September
30, 2004. . Under the agreement, HFS had the right to acquire certain additional
assets for an additional consideration of $ 1 million by December 31, 2004, only
if the Company was able to comply with certain closing conditions. In October
2004, such rights were extended through March 31, 2005.
As discussed in Item 3 of the Company's Form 10-K, the Company was
party to a binding arbitration with BSM regarding a certain license agreement
pursuant to which the Company licensed certain of BSM's technology. BSM had
claimed over $400,000 in unpaid royalties and the Company has counterclaimed for
over $1,000,000 with respect to interference with business relations, breach of
confidentiality and unfair competition. Pending the successful outcome of this
arbitration, HFS withheld final payment on the assets purchased and no income
was recognized on this contingent payment. This arbitration was held in San
Diego from March 21 to March 24, 2005. On March 30, 2005, the Company was
notified that the arbitration was concluded and on March 31, 2005, the Company
notified HFS of the results of the binding arbitration. On April 13th , the
9
Company received the additional $1,000,000 and delivered certain executed
documents according to terms satisfactory to the buyer. Accordingly, the Company
will recognize this transaction as of April 13, 2005.
On May 4, 2005, the Shareholders of the Company approved a board
resolution which increased the authorized Common Shares of the Company from
20,000,000 to 40,000,000.
As discussed above in Footnote 6, On May 4, 2005, the Company, by a vote
of the shareholders, effected such increase in authorized shares. On May 4,
2005, John Harland invested $750,000 in exchange for 1,071,428 shares of
unregistered common stock. In addition to the shares, John Harland received
warrants to purchase 160,714 additional shares of common stock at $0.70 per
share. This warrant is valid until May 4, 2012. In connection with the sale, the
Company granted Harland board observation rights for as long as Harland
continues to hold at least 20% of the shares of common stock it purchases under
the Securities Purchase Agreement together with the shares of common stock
issuable upon exercise of the warrants. As a result of these transactions, John
Harland Company will be considered a related party, as defined under United
States Generally Accepted Accounting Principals. On February 22, 2005, the
Company signed an agreement with John Harland, whereby the Company would perform
certain engineering services. If certain engineering milestones are met, the
Company could earn as much as $1,000,000. As of March 31, 2005, the Company has
met milestones sufficient to earn $250,000 under this agreement. Though the
Company believes it will meet all milestones under this agreement, no assurances
of such achievement can be made.
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion
In addition to historical information, this Management's Discussion and
Analysis or Plan of Operation (the "MD&A") contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. As
contained herein, the words "expects," "anticipates," "believes," "intends,"
"will," and similar types of expressions identify forward-looking statements,
which are based on information that is currently available to the Company, speak
only as of the date hereof, and are subject to certain risks and uncertainties.
To the extent that the MD&A contains forward-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of the Company, please be advised that the Company's actual financial condition,
operating results and business performance may differ materially from that
projected or estimated by the Company in forward-looking statements. The Company
has attempted to identify certain of the factors that it currently believes may
cause actual future experiences and results to differ from the Company's current
expectations. The difference may be caused by a variety of factors, including,
but not limited, to the following: (i) adverse economic conditions; (ii)
decreases in demand for Company products and services; (iii) intense
competition, including entry of new competitors into the Company's markets; (iv)
increased or adverse federal, state and local government regulation; (v) the
Company's inability to retain or renew its working capital credit line or
otherwise obtain additional capital on terms satisfactory to the Company; (vi)
increased or unexpected expenses; (vii) lower revenues and net income than
forecast; (viii) price increases for supplies; (ix) inability to raise prices;
(x) the risk of additional litigation and/or administrative proceedings
involving the Company and its employees; (xi) higher than anticipated labor
costs; (xii) adverse publicity or news coverage regarding the Company; (xiii)
inability to successfully carry out marketing and sales plans, including the
Company's strategic realignment; (xiv) loss of key executives; (xv) changes in
interest rates; (xvi) inflationary factors; (xvii) and other specific risks that
may be alluded to in this MD&A.
The Company's strategy for fiscal 2005 is to grow the identified markets
for its new products and enhance the functionality and marketability of the
Company's image based recognition and forgery detection technologies. In
particular, Mitek is determined to expand the installed base of its Recognition
Toolkits and leverage existing technology by devising recognition-based
applications to detect potential fraud and loss at financial institutions. The
Company also seeks to expand the installed base of its Check Forgery detection
Solutions by entering into reselling relationships with key resellers who will
better penetrate the market and provide entree into a larger base of community
banks.
Management presumes that users of these interim financial statements and
information have read or have access to the discussion and analysis for the
preceding fiscal year. See also Item 3, "Quantitative and Qualitative
Disclosures about Market Risk."
CRITICAL ACCOUNTING POLICIES
Mitek's financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States of
America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses. These estimates by management are affected by
management's application of accounting policies are subjective and may differ
from actual results. Critical accounting policies for Mitek include revenue
recognition, impairment of accounts and notes receivable, loss contingencies,
fair value of equity instruments and accounting for income taxes.
Revenue Recognition
The Company enters into contractual arrangements with end users that may
include licensing of the Company's software products, product support and
maintenance services, consulting services, resale of third-party hardware, or
various combinations thereof, including the sale of such products or services
separately. The Company's accounting policies regarding the recognition of
revenue for these contractual arrangements is fully described in Notes to the
Financial Statements on Form 10K previously filed.
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:
11
o The actual contractual terms, such as payment terms, delivery dates, and
pricing of the various product and service elements of a contract
o Availability of products to be delivered
o Time period over which services are to be performed
o Creditworthiness of the customer
o The complexity of customizations to the Company's software required by
service contracts
o The sales channel through which the sale is made (direct, VAR,
distributor, etc.)
o Discounts given for each element of a contract
o Any commitments made as to installation or implementation "go live" dates
Each of the relevant factors is analyzed to determine its impact,
individually and collectively with other factors, on the revenue to be
recognized for any particular contract with a customer. Management is required
to make judgments regarding the significance of each factor in applying the
revenue recognition standards, as well as whether or not each factor complies
with such standards. Any misjudgment or error by management in its evaluation of
the factors and the application of the standards, especially with respect to
complex or new types of transactions, could have a material adverse affect on
the Company's future revenues and operating results.
Accounts Receivable.
We evaluate the creditworthiness of our customers prior to order
fulfillment and we perform ongoing credit evaluations of our customers to adjust
credit limits based on payment history and our assessment of the customer's
current creditworthiness. We constantly monitor collections from our customers
and maintain a provision for estimated credit losses that is based on historical
experience and on specific customer collection issues. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. Since our revenue recognition policy requires
customers to be deemed creditworthy, our accounts receivable are based on
customers whose payment is reasonably assured. Our accounts receivable are
derived from sales to a wide variety of customers. We do not believe a change in
liquidity of any one customer or our inability to collect from any one customer
would have a material adverse impact on our financial position.
Loss Contingencies
The financial statements presented included an accrual for a loss
contingency, relating to the litigation with BSM. As discussed in Footnote 8 of
the Financial Statements, the Company substantially prevailed against such
claims. As a result, no loss relating to this claim was incurred. There are no
other loss contingencies of which the Company is aware.
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 Ended December 31, 2005 and 2004
Net Sales. Net sales for the three-month period ended March 31, 2005 were
$1,772,000, compared to $2,018,000 for the same period in 2004, a decrease of
$246,000, or 12%. The decrease was primarily attributable to the elimination of
revenue from the Check Image Solutions business, which accounted for $521,000 in
fiscal 2004. This 100% decline in revenue was offset by a 31% increase in
revenue associated with our recognition toolkits, the result of license renewals
signed in the second quarter of 2005. Sales in the Document and Image Processing
Solutions also declined by 71%. This is primarily due to the absence of a
dedicated sales force for this product line. Sales of Maintenance declined by
30%, reflecting the reduction of the installed base of maintenance customers,
due to the elimination of the Check Image Solution business, offset by continued
increase in the installed base of recognition toolkit customers purchasing
product support.
Net sales for the six-month period ended March 31, 2005 were
$3,072,000, compared to $3,713,000 for the same period in 2004, a decrease of
$641,000 or 17%. The decrease was primarily attributable to the elimination of
revenue from the Check Image Solutions business, which accounted for $1,209,000
in fiscal 2004. This 100% decline in revenue was offset by a 43% increase in
revenue associated with our recognition toolkits, the result of license renewals
signed in the first and second quarter of 2005. Sales in the Document and Image
Processing Solutions also declined by 73%. This is primarily due to the absence
of a dedicated sales force for this product line. Sales of Maintenance declined
by 17%, reflecting the reduction of the installed base of maintenance customers,
due to the elimination of the Check Image Solution business, offset by continued
increase in the installed base of recognition toolkit customers purchasing
product support.
Cost of Sales. Cost of sales for the three-month period ended March 31,
2005 was $229,000, compared to $780,000 for the same period in 2004, a decrease
of $551,000 or 71%. Stated as a percentage of net sales, cost of sales increased
to 13% for the three-month period ended March 31, 2005 compared to 39% for the
same period in 2004. The dollar decrease, and the decrease as a percentage of
sales, and in cost of sales, is almost entirely due to the elimination of
hardware installations related to the Company's CheckQuest product line, which
was sold to Harland Financial Solutions last year, during the three months, as
compared to the same period in 2004.
Cost of sales for the six-month period ended March 31, 2005 was $413,000,
compared to $1,522,000 for the same period in 2004, a decrease of $1,109,000 or
73%. Stated as a percentage of net sales, cost of sales decreased to 13% for the
six-month period ended March 31, 2005, compared to 41% for the same period in
2004. The dollar decrease, and the decrease as a percentage of sales, and in
cost of sales, is almost entirely due to the elimination of hardware
installations related to the Company's CheckQuest product line, which was sold
to Harland Financial Solutions last year, during the three months, as compared
to the same period in 2004.
Operations 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 March 31, 2005 were $36,000, compared
to $495,000 for the same period in 2004, a decrease of $459,000 or 93%. Net
Operations expenses for the three-month period ended March 31, 2005 were
$36,000, compared to $378,000 for the same period in 2004, a decrease of
$342,000 or 90%.Stated as a percentage of net sales, operations expenses were 2%
for the three-month period ended March 31, 2005, as compared with 19% for the
same period in 2004. The dollar decrease in gross expenses is almost entirely
due to the elimination of hardware installations related to the Company's
CheckQuest product line, was sold to Harland Financial Solutions last year. The
dollar decrease in net expense, and the decrease in expense as a percentage of
net sales attributable to the reduced spending discussed above.
Gross Operations expenses for the six-month period ended March 31, 2005
were $76,000, compared to $1,005,000 for the same period in 2004, a decrease of
$929,000 or 92%. Net Operations expenses for the six-month period ended March
31, 2005 were $76,000, compared to $739,000 for the same period in 2004, a
decrease of $663,000 or 90%. Stated as a percentage of net sales, operations
expenses decreased to 2% for the six-month period ended March 31, 2005, compared
to 20% for the same period in 2004. The dollar decrease in gross expenses is
almost entirely due to the elimination of hardware installations related to the
Company's CheckQuest product line, was sold to Harland Financial Solutions last
year. The dollar decrease in net expense, and the decrease in expense as a
percentage of net sales attributable to the reduced spending discussed above.
Selling and Marketing Expenses. Selling and marketing expenses for the
three-month period ended March 31, 2005 were $623,000, compared to $495,000 for
13
the same period in 2004, an increase of $128,000 or 26%. Stated as a percentage
of net sales, selling and marketing expenses increased to 35% for the
three-month period ended March 31, 2005, as compared with 25% for the same
period in 2004. The dollar increase in expenses is primarily attributable to
additional Marketing personnel and outside services. The increase as a
percentage of net sales is attributable to the increased spending discussed
above.
Selling and marketing expenses for the six-month period ended March 31,
2005 were $1,203,000, compared to $1,122,000 for the same period in 2004, an
increase of $81,000 or 7%. Stated as a percentage of net sales, selling and
marketing expenses increased to 39% from 30% for the same period in 2004. The
dollar increase in expenses is primarily attributable to additional Marketing
personnel and outside services. The increase as a percentage of net sales is
attributable to the increased spending discussed above.
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 March 31,
2005 were $347,000, compared to $658,000 for the same period in 2004, a decrease
of $311,000 or 47%. Stated as a percentage of net sales, research and
development expenses decreased to 20% for the three-month period ended March 31,
2005, compared to 33% for the same period in 2004. The decrease in expenses for
the three-month period is primarily the result of the elimination of four full
time engineers associated with the CheckQuest business, which was sold to
Harland Financial Solutions last year. The decrease in expenses as a percentage
of net sales is primarily attributable to reduced costs, as discussed above.
Research and development expenses for the six-month period ended March
31, 2005 were $717,000, compared to $1,168,000 for the same period in 2004, a
decrease of $451,000 or 39%. Stated as a percentage of net sales, research and
development expenses decreased to 23% for the six-month period ended March 31,
2005, compared to 31% for the same period in 2004. The decrease in expenses for
the three-month period is primarily the result of the elimination of four full
time engineers associated with the CheckQuest business, which was sold to
Harland Financial Solutions last year. The decrease in expenses as a percentage
of net sales is primarily attributable to reduced costs, as discussed above
General and Administrative Expenses. General and administrative expenses
for the three-month period ended March 31, 2005 were $1,085,000, compared to
$520,000 for the same period in 2004, an increase of $565,000 or 109%. Stated as
a percentage of net sales, general and administrative expenses increased to 61%
for the three-month period ended March 31, 2005, compared to 26% for the same
period in 2004. The dollar increase in expenses for the three month period is
attributable to increased legal costs primarily relating to litigation with BSM.
The increase in expenses as a percentage of net sales is primarily attributable
to the increased spending discussed above.
General and administrative expenses for the six-month period ended March
31, 2005 were $2,011,000, compared to $1,060,000 for the same period in 2004, an
increase of $951,000 or 90%. Stated as a percentage of net sales, general and
administrative expenses increased to 65% for the six-month period ended March
31, 2005, compared to 29% for the same period in 2004. The dollar increase in
expenses for the three month period is primarily attributable to increased legal
costs primarily relating to litigation with BSM. The increase in expenses as a
percentage of net sales is primarily attributable to the increased spending
discussed above.
Interest and Other Income (Expense) - Net. Interest and other income
(expense) for the three-month period ended March 31, 2005 was ($251,000),
compared to interest and other income (expense) of ($3,000) for the same period
in 2004, a change of $248,000. The primary reason for the change is the cash
interest and liquidating damages for failure to achieve an effective
registration statement paid to Laurus Master Fund during the quarter of
$261,000, as well as amortization of the deferred loan costs related to the
warrants issued and the beneficial conversion feature of the convertible note.
LIQUIDITY AND CAPITAL
At March 31, 2005 the Company had $1,010,000 in cash as compared to
$2,607,000 at September 30, 2004. Accounts receivable totaled $1,890,000, an
increase of $1,320,000 over the September 30, 2004, balance of $570,000. This
increase was primarily a result of increased sales activity during the first
fiscal quarter.
The Company has financed its cash needs during the six months of fiscal
2005 primarily from financing and investing activities. During fiscal 2004, the
Company financed its cash needs primarily from financing and investing
activities.
14
Net cash used in operating activities during the three months ended March
31, 2005 was ($2,100,000). The primary use of cash from operating activities was
the loss during the six months of $1,716,000 and an increase in accounts
receivable of $1,344,000. The primary source of cash from operating activities
was an increase to deferred revenue of $230,000 and increased accounts payable
and other accrued liabilities of $509,000. The Company used part of the cash
provided from operating activities to finance the acquisition of equipment used
in its business.
During the six months ended March 31, 2005, the Company also received cash
of approximately $150,000 from investing activities in the form of proceeds from
the repayment of the note receivable from Mitek Systems, Ltd.
During the six months ended March 31, 2005, the Company also received cash
of approximately $750,000 from financing activities in the form of proceeds from
the equity investment from John Harland Company as discussed in Note 7 of the
accompanying financial statements.
The Company's working capital and current ratio were ($213,000) and 0.94,
respectively, at March 31, 2005, and $847,000 and 1.32, respectively, at
September 30, 2004. At March 31, 2005, total liabilities to equity ratio was
(3.39) to 1 compared to (7.81) to 1 at September 30, 2004. As of March 31, 2005,
total liabilities were $459,000 greater than on September 30, 2004.
There are no significant capital expenditures planned for the foreseeable
future.
The Company evaluates its cash requirements on a quarterly basis.
Historically, the Company has managed its cash requirements principally from
cash generated from operations. Although the Company's strategy for fiscal 2004
is to grow the identified markets for its new products and enhance the
functionality and marketability of the Company's character recognition
technology, it has not yet observed a significant change in liquidity or future
cash requirements as a result of this strategy. Cash requirements over the next
twelve months are principally to fund operations, including spending on research
and development. The Company believes that it will have sufficient liquidity to
finance its operations for the next twelve months using existing cash and cash
generated from operations, as discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. The Company has evaluated the impact of the adoption of
SFAS 123(R), and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). In December 2003, FIN
46 was replaced by FASB interpretation No. 46(R) "Consolidation of Variable
Interest Entities." FIN 46(R) clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46(R) requires an enterprise to consolidate a variable
interest entity if that enterprise will absorb a majority of the entity's
expected losses, is entitled to receive a majority of the entity's expected
residual returns, or both. FIN 46(R) is effective for entities being evaluated
under FIN 46(R) for consolidation no later than the end of the first reporting
period that ends after March 15, 2004. The Company does not currently have any
variable interest entities that will be impacted by adoption of FIN 46(R).
In December 2004 the Financial Accounting Standards Board issued two FASB
Staff Positions--FSP FAS 109-1, Application of FASB Statement 109 "Accounting
15
for Income Taxes" to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004. Neither of these affected the Company as
it does not participate in the related activities.
In March 2004, the Financial Accounting Standards Board (FASB) approved
the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objective of this Issue is to provide guidance for identifying
impaired investments. EITF 03-1 also provides new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting
provisions of EITF 03-1 are effective for all reporting periods beginning after
June 15, 2004, while the disclosure requirements for certain investments are
effective for annual periods ending after December 15, 2003, and for other
investments such disclosure requirements are effective for annual periods ending
after June 15, 2004. The Company does not currently have any investments that
will be impacted by this provision.
ITEM 3
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15 as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures were effective as of the
end of the quarter ended March 31, 2005.
During the quarter ended March 31, 2005, the Company made various
changes to its internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d - 15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting as described in the
following two paragraphs.
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 has taken various steps 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 Registrant'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.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 30, 2005, the Company resolved its previously reported
litigation with BSM through binding arbitration. As a result of
the arbitration ruling, the Company was able to complete the
assignment of CheckQuest software rights to Harland Financial
Solutions, Inc., a subsidiary of John H. Harland Company and
collect a final payment of $1 million related to the sale last
July of Mitek's CheckQuest product to Harland Financial Solutions.
There are no additional material legal proceedings pending against
the Company not previously reported by the Company in Item 3 of
its Form 10-K for the year ended September 30, 2004, as amended,
which Item 3 is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
The following exhibits are filed herewith:
--------------------------------------------------------------------------------------
Exhibit Number Exhibit Title
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
31.1 Certification of Periodic Report by the Chief Executive
Officer Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934
--------------------------------------------------------------------------------------
31.2 Certification of Periodic Report by the Chief Financial
Officer Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934
--------------------------------------------------------------------------------------
32.1 Certification of Periodic Report by the Chief Executive
Officer Pursuant to Section 906 of the Sarbanes Oxley
Act of 2002
--------------------------------------------------------------------------------------
32.2 Certification of Periodic Report by the Chief Financial
Officer Pursuant to Section 906 of the Sarbanes Oxley
Act of 2002
--------------------------------------------------------------------------------------
b. The following is a list of Current Reports on Form 8-K filed by
the Company during the fiscal quarter ended March 31, 2005:
o Form 8-K filed with the Securities and Exchange Commission on
January 13, 2005, under Item 4 and Item 9 announced that Mitek
Systems, Inc. had restated the fiancial results for the
quarter ended June 30, 2004.
o Form 8-K/A filed with the Securities and Exchange Commission
on January 13, 2005, under Item 4 and Item 9 corrected an
exhibit attached to the previous Form 8-K.
o Form 8-K filed with the Securities and Exchange Commission on
February 23, 2005, under Items 1, 3 and 9 announced that Mitek
Systems, Inc. entered into a material definitive agreement for
the sale of the Company's common stock to the John H. Harland
Company.
o Form 8-K filed with the Securities and Exchange Commission on
April 13, 2005, under Item 8 and Item 9 announced that Mitek
Systems, Inc. had completed the second part of the Asset
Purchase Agreement, as more fully described in Footnote 8 of
the accompanying financial statements.
o Form 8-K filed with the Securities and Exchange Commission on
April 13, 2005, under Item 3 and Item 9 announced that Mitek
Systems, Inc. had completed the second part of the stock
purchase agreement previously announced in the Form 8-K filed
on February 23, 2005.
17
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 16, 2005 s/ James B. Debello
-------------------------------
James B. DeBello, President and
Chief Executive Officer
Date: May 16, 2005 /s/ John M. Thornton
-------------------------------
John M. Thornton, Chairman and
Chief Financial Officer
EX 31.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, James B. DeBello, certify that:
1. I have reviewed this quarterly report on Form 10-QSB 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 16, 2005 By:/s/ James B. DeBello
------------------------
James B. DeBello
President and
Chief Executive Officer
EX 31.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, John M. Thornton, certify that:
1. I have reviewed this quarterly report on Form 10-QSB 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 16, 2005 By:/s/ John M. Thornton
------------------------
John M. Thornton
Chairman of the Board and
Chief Financial Officer
EX 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-QSB of the Registrant for the
period ended March 31, 2005 (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 16, 2005 By: /s/ James B. DeBello
-------------------------
James B. DeBello
President and
Chief Executive Officer
EX 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-QSB of the Registrant for the
period ended March 31, 2005 (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 16, 2005 By:/s/ John M. Thornton
------------------------
John M. Thornton
Chairman of the Board and
Chief Financial Officer