SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K/A
AMENDMENT NO. 1
AMENDMENT NO. 1
(Mark
One)
| x | Annual Report
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 2004 or |
| o |
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
(State
or other jurisdiction of incorporation or organization) |
87-0418827
(I.R.S
Employer Identification No.) |
14145
Danielson St., Suite B, Poway, CA 92064
(Address
of principal executive offices) (Zip Code)
(858)
513-4600
Registrant's
telephone number, including area code
None
Securities
registered pursuant to Section 12(b) of the Act
Common
Stock, par value $.001 per share
Securities
registered pursuant to Section 12(g) of the Act
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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act)
Yes o No x.
The
aggregate market value of voting stock held by non-affiliates of the registrant
was $9,272,751 as of March 31, 2004 (computed by reference to the last sale
price of a share of the registrant's Common Stock on that date as reported by
NASDAQ).
There
were 11,389,481 shares outstanding of the registrant's Common Stock as of
December 3, 2004.
Documents
incorporated by reference in this report: Part II incorporates certain
information by reference from the Annual Report to Stockholders for the year
ended September 30, 2004. Part III incorporates certain information by reference
from the Proxy Statement for the 2005 Annual Meeting of Stockholders.
MITEK
SYSTEMS, INC.
FORM
10-K
For
The Fiscal Year Ended September 30, 2004
Index
Part
I
|
Item
1 |
Business |
3 |
|
Item
2 |
Properties |
11 |
|
Item
3 |
Legal
Proceedings |
11 |
|
Item
4 |
Submission
of Matters to a Vote of Security Holders |
11 |
|
Item
4A |
Executive
Officers of the Registrant |
11 |
Part
II
|
Item
5 |
Market
for Registrant’s Common Stock and Related Shareholder
Matters |
12 |
|
Item
6 |
Selected
Financial Data |
14 |
|
Item
7 |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
15 |
|
Item
7A |
Quantitative
and Qualitative Disclosures about Market Risk |
35 |
|
Item
8 |
Financial
Statements and Supplementary Data |
36 |
|
Item
9 |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures |
60 |
|
Item
9A |
Controls
and Procedures |
60 |
Part
III
|
Item
10 |
Directors
and Executive Officers of the Registrant |
61 |
|
Item
11 |
Executive
Compensation |
62 |
|
Item
12 |
Security
Ownership of Certain Beneficial Owners and Management |
62 |
|
Item
13 |
Certain
Relationships and Related Transactions |
62 |
|
Item
14 |
Principal
Accounting Fees and Services |
62 |
Part
IV
|
Item
15 |
Exhibits,
Financial Statement Schedules and Reports on Form 8-K |
62 |
|
Signatures |
65 |
PART
I
ITEM
1. BUSINESS
GENERAL
This
Form 10-K of Mitek Systems, Inc. (the “Company”) contains forward-looking
statements concerning anticipated future revenues and earnings, adequacy of
future cash flow and related matters. These forward-looking statements include,
but are not limited to, statements containing the words “expect,” “believe,”
“will,” “may,” “should,” “project,” “estimate,” “scheduled” and like
expressions, and the negative thereof. These statements address matters
including, but not limited to, statements relating to the development and pace
of sales of the Company’s products, expected trends and growth in the Company’s
results of operations, projections concerning the Company’s available cash flow
and liquidity, anticipated penetration in new and existing markets for the
Company’s products and the size of such markets, anticipated acceptance of the
Company’s products by existing and new customers, and the ability of the Company
to achieve or sustain any growth in sales and revenue. The forward-looking
statements are subject to a variety of risks and uncertainties that could cause
actual results to differ materially from the statements, including those risks
described in the Company’s Securities and Exchange Commission reports, and the
risk factors described in this Form 10-K Issues and Uncertainties.”
The
Company was incorporated under the laws of the State of Delaware in 1986. The
Company is primarily engaged in the development and sale of software products
with particular focus on intelligent character recognition and forms processing
technology, products and services for the document imaging markets.
The
Company develops, markets and supports what it believes to be the most accurate
Automated Document Recognition (“ADR”) products commercially available for the
recognition of hand printed characters. The Company's unique proprietary
technology recognizes hand printed and machine generated characters with a level
of accuracy that renders the Company's ADR products a viable alternative to
manual data entry in certain applications. The Mitek solution allows customers
that process large volumes of hand printed and machine generated documents to do
so more quickly, with greater accuracy and at reduced costs.
PRODUCTS
AND RELATED MARKETS
During
fiscal 2004, the Company had one operating segment based on its product and
service offerings: Automated Document Processing.
AUTOMATED
DOCUMENT PROCESSING
Since
1992 the Company has developed and marketed ADR products, which enable the
automation of costly, labor intensive business functions such as check and
remittance processing, forms processing and order entry. The Company's ADR
products incorporate proprietary neural network software technology for the
recognition and conversion of hand printed and machine generated characters into
digital data. Neural networks are powerful tools for pattern recognition
applications and consist of sets of coupled mathematical equations with adaptive
parameters that self adjust to "learn" various forms and patterns. The Company's
ADR products combine the Company's neural network software technology with an
extensive database of character patterns, enabling them to make fine
distinctions across a wide variety of patterns with high speed, accuracy and
consistency. The Company leverages its core technology across a family of ADR
products that the Company believes offers the highest accuracy commercially
available for the recognition of hand printed characters and the automated
processing of documents. Mitek’s family of ADR products is made up of the three
distinct product lines: Recognition Toolkits, Document and Image Processing
Solutions and Check Imaging Solutions.
Page
3
Recognition
Toolkits
The
Company's ADR products incorporate the Company's proprietary intelligent
character recognition (ICR) software engine QuickStrokesâ
API (Application Programmers Interface), and a licensed ICR software engine
CheckScriptÔ
(a trademark of Parascript LLC).
QuickStrokesâ
API and CheckScriptÔ
are sold to original equipment manufacturers (OEMs) such as BancTec, Unisys, and
J&B Software, and to systems integrators such as Computer Sciences
Corporation. We estimate that one-third of all checks processed in the U.S. use
Mitek’s software.
The
CheckScriptÔ
product, used in financial document processing, combines the Legal Amount
Recognition (LAR) capabilities licensed from Parascript, LLC with the Company’s
proprietary QuickStrokesâ
API Courtesy Amount Recognition (CAR) technology. This product provides a high
level of accuracy in remittance processing, proof of deposit, and lock box
processing applications.
QuickFXâ
Pro is a software toolkit that provides automatic form ID, form registration and
form/template removal. The Company believes it will significantly improve
automatic data capture (ICR/OCR), forms processing, document imaging and storage
performance. QuickFXâ
Pro reduces the image size by removing extraneous information such as
pre-printed text, lines, and boxes; leaving only the filled-in data. It repairs
the characters that are left, ensuring better recognition, enhanced throughput,
and higher accuracy rates.
ImageScore
is Mitek’s Check 21 readiness solution for any financial institution that
truncates or uses check images in an accounts receivables conversion
environment. Integrated solution providers for financial institutions can also
buy ImageScore to enhance their products. ImageScore can quickly, accurately and
comprehensively analyze check images to provide the usability and quality
information needed to help financial institutions act and conform to regulatory
and industry mandates. As a result, institutions minimize their risk by ensuring
the integrity of check images they process, and they eliminate costly manual
processes associated with managing transactions from bad check
images
Page
4
Forgery
Detection Toolkits
Mitek’s
Signature
& Check Stock Verification API is fully automated and incorporates advanced
imaging, image analysis and data extraction technologies that can help verify
the authenticity of every signature on every check that passes through a bank,
and analyzes paper stock for any indication that an item is a
counterfeit.
Mitek's
PayeeFind prevents payee-altered checks from clearing. As a result, PayeeFind
can substantially reduce losses and cut administrative costs by eliminating the
need for organizations to complete and file affidavits to recover funds from
checks that have cleared with fraudulent payees. With PayeeFind, this type of
fraud can be stopped before recovery becomes an issue.
Mitek's
PADsafe toolkit is the first tookit of its kind to detect fraudulent
preauthorized drafts. It automatically identifies PADs from checks, then
notifies the user of any potentially suspicious PADs. As a result, the
withdrawal of unauthorized funds due to fraudulent PAD transactions is reduced
and often prevented.
Forgery
Detection Solution
Mitek’s
FraudProtect™ System is a unique and innovative solution for community and
mid-sized banks to detect the most common forms of check fraud, signature
forgery and counterfeit checks. Using FraudProtect System, banks can
significantly reduce losses due to fraud.
Document
and Image Processing Solutions
DynaFindâ is a
software toolkit that captures data from many types of unstructured business
documents. DynaFind is used in challenging data capture applications where data
must be found and extracted from documents that have no pre-determined format or
layout, but share common data elements. DynaFind locates this data on documents
using contextual, positional, format- and keyword-specific information, even if
it appears in a different location on each document. The Company has supplied
DynaFindâas a stand
alone API to several important OEMs in the document processing field.
DynaFindâ is also
available as an add-on feature that has been integrated into Doctus, Mitek’s
forms processing solution.
Leveraging
its core technical competency in ICR, the Company has addressed the forms
processing market with its Doctusâ
product. Doctusâ
incorporates the Company's core ICR technology in an application designed for
end users in a broad variety of industries that require high volume automated
data entry. The Company believes its Doctusâ
software is a major innovation in forms processing because it economically
handles both structured and unstructured forms. As a result, it significantly
increases the number and types of forms that can be automatically processed.
Doctusâ
is able to process unstructured forms because it incorporates Mitek’s
DynaFindâ forms
understanding technology. With DynaFindâ,
Doctusâ
automatically classifies unstructured forms and extracts relevant data from the
form contents. Major Doctusâ
customers include AIG and Sungard.
Page
5
Check
Imaging Solutions
CheckQuestâ
is Mitek’s image-enabled check and item processing solution. It is specifically
designed for check image processing applications at community and regional
banks, such as Proof of Deposit, Retail/Wholesale Lock Box, and Remittance
Processing. CheckQuest is designed to expand and improve an institution’s
operational efficiency and customer service without adding staff, while reducing
monthly expenses. CheckQuest utilizes Mitek’s field-proven CAR/LAR technology,
currently in use worldwide for processing billions of checks per year. With the
passage of the Check Clearing for the 21st
Century Act, or Check 21, in October of 2003, banks can substitute electronic
check images for paper checks in the clearance and settlement process. This new
electronic format is expected to dramatically reduce bank operating costs and
save millions of dollars each year. With Check 21 calling for the use of
electronic check images within a year’s time, The Company believes CheckQuest
can play a strategic role in preparing banks for check truncation and electronic
check presentment. The Company substantially exited this line of business, by
agreeing to the transaction with Harland Financial Solutions described in Note 8
of the accompanying financial statements.
RESEARCH
AND DEVELOPMENT
During
fiscal years 2004, 2003, and 2002 research and development expense was
approximately $2,204,000, $2,242,000, and $2,049,000, respectively. Those
amounts represented 42%, 19%, and 16%, respectively, of revenue in each of those
years. We plan to continue spending significant amounts for research and product
development.
Most
of the Company’s software products are developed internally. The Company also
purchases technology and licenses intellectual property rights. The Company
believes that its future success depends in part on its ability to maintain and
improve its core technologies, enhance its existing products and develop new
products that meet an expanding range of customer requirements. We do not
believe we are materially dependent upon licenses and other agreements with
third parties, relating to the development of our products. Internal development
allows Mitek to maintain closer technical control over its products and gives
the Company the freedom to designate which modifications and enhancements are
most important and when they should be implemented. Mitek devises innovative
solutions to automated character processing problems, such as the enhancement
and improvement of degraded images, and the development of user-manipulated
tools to aid in automated document processing. The Company intends to expand its
existing product offerings and to introduce new document processing software
solutions. In the development of new products and enhancements to existing
products, the Company uses its own tools extensively. The Company performs all
quality assurance and develops documentation internally. The Company strives to
become informed at the earliest possible time about changing usage patterns and
hardware advances that may affect software design. The Company intends to
continue to support industry standard operating environments.
Page
6
The
Company's team of specialists in recognition algorithms, software engineering,
user interface design, product documentation and quality improvement is
responsible for maintaining and enhancing the performance, quality and usability
of all of the Company's products. In addition to research and development, the
engineering staff provides customer technical support on an as needed basis,
along with technical sales support.
In
order to improve the accuracy of its ADR products, the Company focuses research
and development efforts on continued enhancement of its core technology and on
its database of millions of character images that is used to "train" the neural
network software that forms the core of the Company's ICR engine. In addition,
the Company has expanded its research and development tasks to include pre- and
post-processing of data subject to automated processing.
The
Company's research and development organization included thirteen software
engineers at September 30, 2004, including six with advanced degrees. The
Company balances its engineering resources between development of ICR technology
and applications development. Of the thirteen software engineers, approximately
nine are
involved in ICR research and development of the QuickStrokesâ
API recognition engine. The remaining software engineers are involved in
applications development, including the Doctusâ,
QuickFXâ
Pro, CheckQuestâ
and FraudProtect’
products, and customer services and support.
INTELLECTUAL
PROPERTY
The
Company’s success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on a combination of patent, copyright
and trade secret laws and non-disclosure agreements to protect its proprietary
technology. The Company holds a U.S. patent for its hierarchical character
recognition systems. The patent covers the Company’s multiple-pass,
multiple-expert system that significantly increases the accuracy of forms
processing and item processing applications. The Company may seek to file
additional patents to expand the scope of patent coverage. The Company may also
file future patents to cover technologies under development. There can be no
assurance that patents will be issued with respect to future patent applications
or that the Company’s patents will be upheld as valid or will prevent the
development of competitive products.
The
Company also seeks to protect its intellectual property rights by limiting
access to the distribution of its software, documentation and other proprietary
information. In addition, the Company enters into confidentiality agreements
with its employees and certain customers, vendors and strategic partners. There
can be no assurance that the steps taken by the Company in this regard will be
adequate to prevent misappropriation of its technology or that the Company’s
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company’s technologies.
The
Company is also subject to the risk of adverse claims and litigation alleging
infringement on the intellectual property rights of others. In this regard,
there can be no assurance that third parties will not assert infringement claims
in the future with respect to the Company’s current or future products or that
any such claims will not require the Company to enter into license arrangements
or result in protracted and costly litigation, regardless of the merits of such
claims. No assurance can be given that any necessary licenses will be available
or that, if available, such licenses can be obtained on commercially reasonable
terms.
Page
7
SALES AND MARKETING
The
Company markets its products and services primarily through its internal, direct
sales organization. The Company employs a technically-oriented sales force with
management assistance to identify the needs of existing and prospective
customers. The Company's sales strategy concentrates on those companies that it
believes are key users and designers of automated document processing systems
for high- performance, large volume applications, in addition to small and large
financial institutions. The Company currently maintains its sales and support
office in California. In addition, the Company sells and supports its products
through foreign resellers in Germany, France, Italy, the United Kingdom and
Australia. The sales process is supported with a broad range of marketing
programs which include trade shows, direct marketing, public relations and
advertising.
The
Company provides maintenance and support on a contractual basis after the
initial product warranty has expired. The Company provides telephone support and
on-site support. Customers with maintenance coverage receive software updates
from the Company. Foreign distributors generally provide customer training,
service and support for the products they sell. Additionally, the Company's
products are supported internationally by periodic distributor and customer
visits by Company management. These visits include attending imaging shows, as
well as sales and training efforts. Technical support is provided by telephone
as well as technical visits in addition to those previously mentioned.
The
Company licenses its software to organizations on a perpetual basis. The Company
also licenses software to organizations under Enterprise Agreements that allow
the end-user customer to acquire multiple licenses, without having to acquire
separate packaged products. These Enterprise Agreements are targeted at large
organizations that want to acquire perpetual licenses to software products for
their entire enterprise along with rights to unspecified future versions of
software products over the term of the agreement.
The
ability to support international markets has assisted the Company in its
international sales effort. International sales accounted for approximately 4%,
3%, and 4%, of the Company's net sales for the fiscal years ended September 30,
2004, 2003, and 2002, respectively. The Company believes that a significant
percentage of the products in its domestic sales are incorporated into systems
that are delivered to end users outside the United States. International sales
in fiscal 2004 were made to customers in fifteen countries including Australia,
Brazil, Canada, Czech Republic, United Kingdom, France, Germany, Spain, India,
Italy, Jamaica, Japan, Netherlands, Portugal, and Sweden. The Company sells its
products in United States currency only. The Company recorded a significant
portion of its revenues from one customer in fiscal 2004, three customers in
fiscal 2003, and three customers in fiscal 2002, respectively. Net sales from
these customers aggregated 12%, 30%, and 34%, for the fiscal years 2004, 2003
and 2002, respectively.
Page
8
MAINTENANCE AND SUPPORT
Following
the installation of our software at a customer site, we provide ongoing software
support services to assist our customers in operating the systems. The Company
has an internal customer service department that handles installation and
maintenance requirements. The majority of inquiries are handled by telephone.
For more complicated issues, our staff, with our customers’ permission, can log
on to our customers’ systems remotely. Occasionally, visits to the customer's
facilities are required to resolve support issues. We maintain our customers’
software largely through releases which contain improvements and incremental
additions. Nearly all of our in-house customers contract for annual support
services from us. These services are a significant source of recurring revenue,
and are contracted for on an annual basis and are typically priced at
approximately 15% to 18% of the particular software product’s license fee. The
Company believes that as the installed base of its products grows and as
customers purchase additional complementary products, the software support
function will become a larger source of recurring revenues. Maintenance and
support service fees are deferred and recognized into income over the contract
period on a straight-line basis. Costs incurred by the Company to supply
maintenance and support services are charged to cost of sales.
COMPETITION
The
market for the Company's ADR products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company faces direct and indirect
competition from a broad range of competitors who offer a variety of products
and solutions to the Company's current and potential customers. The Company's
principal competition comes from (i) customer-developed solutions; (ii) direct
competition from companies offering automated document processing systems; (iii)
companies offering competing technologies capable of recognizing hand-printed
and cursive characters; and (iv) direct competition from companies offering
check imaging systems to banks.
It
is also possible that the Company will face competition from new competitors.
Moreover, as the market for automated document processing, ICR, check imaging
and fraud detection software develops, a number of companies with significantly
greater resources than the Company could attempt to enter or increase their
presence in the Company's market either independently or by acquiring or forming
strategic alliances with competitors of the Company or to otherwise increase
their focus on the industry. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's current and prospective customers.
The
Company's QuickStrokesâ
API product and licensed CheckScript’
product compete, to various degrees, with products produced by a number of
substantial competitors such as A2IA, Parascript, and Orbograph. Competition
among product providers in this market generally focuses on price, accuracy,
reliability and technical support. The Company believes its primary competitive
advantages are (i) recognition accuracy with regard to hand printed characters,
(ii) flexibility, since it may operate on a broad range of computer operating
platforms, (iii) scalability and (iv) an architectural software design, which
allows it to be more readily modified, improved with added functionality,
configured for new products, and ported to new operating systems and upgrades.
Despite these advantages, QuickStrokesâ
API and CheckScriptÔ
competitors have existed longer and have far greater financial resources and
industry connections than the Company.
Page
9
The
Company's Doctusâ
product competes against complete proprietary systems offered by software
developers, such as Microsystems Technology, Readsoft, and Cardiff Software,
Inc. In addition, Doctusâ
faces competition from providers of recognition systems that incorporate ADR
technology such as Microsystems Technology, Inc., and Captiva. Because
Doctusâ
is based on the Company's proprietary QuickStrokesâ
API engine, its competitive advantages reflect the advantages of the
QuickStrokesâ
engine. The Company believes its Doctusâ
and DynaFindâ
software provides the highest levels of automation in the industry. DynaFind,
the Company’s document understanding software, does not require extensive rules
written by a programmer based on a large set of training documents. The software
automatically “learns” how to process unstructured forms by reading only a few
examples. Competitors in this market offer both high and low cost systems. The
Company's strategy is to position Doctusâ
to compete successfully in a scalable midrange price while offering a higher
degree of accuracy and greater flexibility than competing systems currently on
the market.
The
Company’s CheckQuestâ
product competes against complete proprietary systems offered by software
developers such as Bankware, AFS, and BISYS/Document Solutions. Because
CheckQuestâ
is based on the Company’s proprietary QuickStrokesâ
engine, the Company believes its CheckQuestâ
software provides superior workflow technology, combined with the labor-saving
recognition capabilities typically found in larger systems. By incorporating our
superior check reading technology, we are providing our banking customers a
streamlined check imaging process. The CheckQuestâ
system allows bank customers to research checks via the Internet and receive
check image statements via e-mail. The Company’s strategy is to position
CheckQuestâ
to compete successfully in the community and regional bank marketplace, while
offering superior accuracy, workflow and flexibility than competing systems
currently on the market. The Company substantially exited this line of business,
by agreeing to the transaction with Harland Financial Solutions described in
Note 8 of the accompanying financial statements.
Increased
competition may result in price reductions, reduced gross margins, and loss of
market share, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
EMPLOYEES
AND LABOR RELATIONS
As
of September 30, 2004, the Company employed a total of 30 full-time and 1
part-time person, consisting of 10 in marketing, sales and support, 13 in
research and development, 1 in operations, and 6 in finance, administration and
other capacities. The Company has never had a work stoppage. None of its
employees are represented by a labor organization, and the Company considers its
relations with its employees to be good
Page
10
AVAILABLE INFORMATION
Our
internet address is www.miteksys.com.
There we make available, free of charge, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. Our SEC reports can be accessed
through the investor relations section of our Web site. The information found on
our Web site is not part of this or any other report we file with or furnish to
the SEC.
ITEM
2. PROPERTIES
The
Company's principal executive offices, as well as its principal research and
development facility, is located in approximately 26,455 square feet of leased
office building space in Poway, California. The lease on this facility expires
September 30, 2005. During the year, the Company leased a customer services and
support facility in Alabama. This lease was assumed by Harland Financial
Solutions as part of the transaction described in Footnote 8 of the accompanying
financial statements. The Company also leased a sales, customer services and
support facility in Maryland. The Company believes that its existing facilities
are adequate for its current needs.
ITEM
3. LEGAL
PROCEEDINGS
The
Company is currently in litigation with BSM regarding a certain license
agreement pursuant to which we licensed certain of BSM’s technology. BSM has
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. At this time, the matter is in
binding arbitration and we cannot make a reasonable determination regarding the
outcome of this matter.
Other
than as described above, we are not aware of any legal proceedings or claims
that we believe may have, individually or in the aggregate, a material adverse
effect on our business, financial condition, operating results, cash flow or
liquidity.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders during the fourth
quarter ended September 30, 2004.
ITEM
4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our
executive officers as of December 29, 2004 were as follows:
Page
11
|
Name |
Age |
Position
with the Company |
|
James
B. DeBello |
46 |
President,
Chief Executive Officer |
|
John
M. Thornton |
72 |
Chairman,
Chief Financial Officer |
|
Murali
Narayanan |
52 |
Vice
President - Marketing |
|
Emmanuel
deBoucaud |
38 |
Vice
President - Sales |
Mr.
DeBello was named President and Chief Executive Officer in May 2003. He has
served as a director of the company since 1994. Prior to being named Chief
Executive Officer, he served as Chief Executive Officer of Asia Corporation
Communications from 2001 to May 2003. Prior to that, he served as Chief
Executive Officer of IdeaEdge Ventures from 2000 to 2001. Prior to that, he
served as Chief Operating Officer of CollegeClub.com from 1999 to
2000.
Mr.
Thornton served as Chairman, President, Chief Executive Officer and Chief
Financial Officer from August 1998 to May 2003, when he resigned as President
and Chief Executive Officer but remained as Chairman and Chief Financial
Officer. He has served as Chairman since 1987.
Mr.
Narayanan joined the Company in July 2003 as Vice President of Marketing. Prior
to joining the Company, he served from May, 2000 as Vice President of Business
Development of Embrace Networks. Prior to that, he served from May 1999 to April
2000 as Director of Marketing, Internet and Connectivity Solutions for Motorola,
Inc.
Mr.
deBoucaud joined the Company in July 2004. Prior to joining the Company, he
served from September 1995 to March 2004 as Vice President of Sales for Cardiff
Software, Inc.
Part
II
ITEM
5. MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our
common stock is traded on the OTC Bulletin Board under the symbol MITK.OB and
the closing bid price on December 3, 2004 was $0.50. As of December 3, 2004,
there were 476 holders of record of Mitek Systems, Inc. Common Stock.
During
the fiscal year ended September 30 ,2004, the Company's Common Stock initially
traded on the Nasdaq SmallCap Market under the symbol "MITK". The Common
Stock was delisted from the Nasdaq SmallCap Market, because it failed
satisfy the requirement that it maintain at least $2.5 million in shareholders
equity. The delisting was effective on May 24, 2004, and since that time,
the Common Stock has traded on the OTC Bulletin Board maintained by the NASD.
The
following table sets forth, for the fiscal period indicated, the high and low
closing bid prices for the Common Stock as reported on the Nasdaq National
Market or the OTC Bulletin Board. The quotations for the Common Stock traded on
the OTC Bulletin Board may reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual transactions.
(1):
Page
12
Quarter
Ended |
Dec.
31 |
Mar.
31 |
Jun.
30 |
Sept.
30 |
Year |
|||||||||||
Fiscal
2003 |
||||||||||||||||
Common
stock price per share |
||||||||||||||||
High |
1.44 |
1.49 |
1.64 |
1.49 |
1.64 |
|||||||||||
|
Low |
.83 |
.85 |
1.00 |
.96 |
.83 |
|||||||||||
Fiscal
2004 |
||||||||||||||||
Common
stock price per share |
||||||||||||||||
High |
$ |
3.32 |
$ |
2.72 |
$ |
1.47 |
$ |
0.87 |
$ |
3.32 |
||||||
|
Low |
0.98 |
1.40 |
0.40 |
.46 |
.40 |
|||||||||||
We
have not paid any dividends on our common stock. We currently intend to retain
earnings for use in our business and do not anticipate paying cash dividends in
the foreseeable future. We are prohibited from paying cash dividends under the
terms of our convertible note agreement.
Page
13
ITEM
6. SELECTED
FINANCIAL DATA
The
selected financial data set forth below with respect to our financial statements
has been derived from the audited financial statements. The data set forth below
should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the financial statements and
related notes included elsewhere in this filing.
|
(DOLLARS
IN THOUSANDS EXCEPT PER SHARE DATA) |
2004 |
2003 |
2002 |
2001 |
2000 |
|||||||||||
|
Statement
of Operations Data |
||||||||||||||||
|
Net
Sales |
$ |
5,240 |
$ |
11,594 |
$ |
13,083 |
$ |
9,387 |
$ |
9,348 |
||||||
|
Net
income (loss) |
(3,846 |
) |
(2,492 |
) |
397 |
(341 |
) |
(1,434 |
) | |||||||
|
Net
income (loss) per share (basic
and diluted) |
(0.34 |
) |
(0.22 |
) |
0.04 |
(0.03 |
) |
(0.13 |
) | |||||||
|
Balance
Sheet Data |
||||||||||||||||
|
Cash
and short-term investments |
$ |
2,607 |
$ |
1,819 |
$ |
760 |
$ |
865 |
$ |
537 |
||||||
|
Total
assets |
$ |
3,622 |
5,644 |
8,231 |
6,616 |
7,774 |
||||||||||
|
Long-term
liabilities |
1,497 |
369 |
466 |
175 |
41 |
|||||||||||
|
Stockholders’
equity (deficit) |
(532 |
) |
2,572 |
5,028 |
4,564 |
4,890 |
||||||||||
Page
14
PART
II
ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD
LOOKING STATEMENTS
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, in context,
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,
adverse economic conditions, general decreases in demand for Company products
and services, intense competition, including entry of new competitors, increased
or adverse federal, state and local government regulation, inadequate capital,
unexpected costs, lower revenues and net income than forecast, price increases
for supplies, inability to raise prices, the risk of litigation and
administrative proceedings involving the Company and its employees, higher than
anticipated labor costs, the possible fluctuation and volatility of the
Company's operating results and financial condition, adverse publicity and news
coverage, inability to carry out marketing and sales plans, loss of key
executives, changes in interest rates, inflationary factors, and other specific
risks that may be alluded to in this MD&A.
RESULTS
OF OPERATIONS
NET
SALES
Net
sales were $5,240,000, $11,594,000 and $13,083,000 for fiscal 2004, 2003 and
2002, respectively. Net sales decreased by $6,354,000 in fiscal 2004 compared to
fiscal 2003. The decrease from fiscal 2003 to fiscal 2004 was primarily due to
reduced sales of Check Imaging Solutions. Throughout 2004, the Company
experienced decreased check imaging solutions revenue, which we believe was due
to continued customer hesitancy to adopt check imaging solutions, pending
finalization of Check 21 Imaging Standards. Though image acceptance is mandated
by the passage of Check 21, the imaging standards required under this
legislation were not final until September 2004. 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. The Company substantially exited this product line, by agreeing to the
transaction with Harland Financial Solutions described in Note 8 of the
accompanying financial statements.
Page
15
The
Company also experienced a decline in revenue from fiscal 2003 to fiscal 2004 of
approximately $2,606,000 or approximately 58% associated with our recognition
toolkits, the result of continued customer concern over the Company’s recent
quarterly losses. The Company also experienced a decline in revenue as a result
of its decision to negotiate contracts with customers which are intended to
create recurring revenue based upon product shipped. Historically, these
customers typically would have entered into enterprise licenses with the Company
which would have provided unlimited quantities of software over a specified
period. The Company believes the new contract terms will create recurring
quarterly revenue, which is likely to exceed the amounts which would have been
received under the enterprise licenses over the contract term. Prospectively,
the Company expects that this area will grow during fiscal 2005, as this is now
the primary focus of the Company’s sales force.
Sales
of the Company’s Document and Image Processing Solutions decreased by $301,000,
or 41%, for fiscal 2004. This reflects the Company’s efforts that were
principally focused on Check Imaging Solutions and recognition toolkits, not on
Imaging Processing Solutions. Prospectively, the Company expects this area to
yield moderate growth, with revenue from existing customers likely to remain
constant.
The
decrease from fiscal 2002 to fiscal 2003 was primarily due to reduced sales of
Recognition Toolkits, which declined in revenue by $1,498,000, or 25%, in fiscal
2003. The decrease reflects the Company’s efforts that were principally focused
on Check Imaging Solutions. Though the Company experienced a nominal increase in
the installed customer base for Recognition Toolkits, there were certain
existing customers whose Fiscal 2002 enterprise licenses did not renew until
fiscal 2004. Check Imaging Solutions revenue increased by $98,000, or 2%, during
fiscal 2003 from 2002. This increase reflects additional market penetration
during the fiscal year. Sales of the Company’s Document and Image Processing
Solutions decreased by $270,000, or 26%, for fiscal 2003 from 2002. This
reflects the Company’s efforts that were principally focused on Check Imaging
Solutions, not on Imaging Processing Solutions.
To aid
investor understanding of our historical results of operations and the impact of
the transaction described in NOTE 8 - SALE OF ASSETS, 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.
Generally,
the revenue and cost of sales attributable to the Check Image line of business
was substantially eliminated in the Harland transaction and is not expected to
generate any future revenue.
COST
OF SALES
Cost
of sales includes manufacturing and distribution costs for products and programs
sold, operation costs related to product support, and costs associated with the
delivery of consulting services. Cost of sales were $1,980,000, $4,541,000, and
$3,751,000, for fiscal 2004, 2003 and 2002, respectively. The dollar decrease in
cost of sales in 2003 from 2002 resulted primarily from substantially reduced
hardware sales related to the Company’s Check Imaging Solutions. The dollar
increase in cost of sales in 2003 from 2002 resulted primarily from margin
erosion in the Company’s Check Imaging Solutions. Prospectively, the Company
expects the dollar cost of sales to decrease significantly, as the Company
substantially exited this product line, by agreeing to the transaction with
Harland Financial Solutions described in Note 8 of the accompanying financial
statements.
Page
16
Stated
as a percentage of net sales, cost of sales for the corresponding periods were
38%, 39% and 29%, respectively. The fixed amount in cost of sales, stated as a
percentage of sales, resulted from the continued margin pressure on the sales of
hardware. The increase in cost of sales, as a percentage of sales, in fiscal
2003 from 2002 resulted from the increased pricing pressures in the marketplace,
which caused the Company to reduce prices.
OPERATIONS
Gross
operations expense include payroll, employee benefits, and other
headcount-related costs associated with shipping and receiving, quality
assurance, customer support, installation and training. As installation,
training, maintenance and customer support revenues are recognized, the amounts
expensed are charged to cost of sales, with unabsorbed costs remaining in
operations expense.
Gross
Operations expenses were $1,529,000, $2,267,000 and $2,220,000 for fiscal 2004,
2003 and 2002, respectively. Net Operations expenses were $1,136,000, $1,694,000
and $1,872,000, for fiscal 2004, 2003, and 2002, respectively. The dollar
decrease in the gross 2004 expense is primarily attributable to the costs
associated with the Item Processing product line being reduced as a result of
the Company’s sale of certain assets to Harland Financial Solutions, described
in Note 8 of the accompanying financial statement. Much of the Gross Operations
expenses were related to the support, installation and training function for
this product line. These individuals were hired by Harland Financial Solutions.
The dollar decrease in the 2003 expense is primarily attributable to additional
amounts charged to cost of sales, reflecting increased activity in installation
and training. Prospectively, the Company expects these amounts to decline, as
the product line which contained most of these costs was exited.
Stated
as a percentage of net sales, operations expenses for fiscal 2004, 2003, and
2002 were 22%, 15%, and 14%, respectively. The increase in the 2004 expense, as
a percentage of net sales, was primarily attributable to the reduced amount of
sales. The increase in the 2003 expense, as a percentage of net sales, was
primarily attributable to the reduced amount of sales.
SELLING
AND MARKETING
Selling
and marketing expenses include payroll, employee benefits, and other
headcount-related costs associated with sales and marketing personnel and
advertising, promotions, trade shows, seminars, and other programs. Selling and
marketing expenses were $1,942,000, $3,768,000, and $3,014,000, for fiscal 2004,
2003, and 2002, respectively. The dollar decrease in 2004 expense is primarily
attributable to reduced salaries and commission expense, which resulted from the
elimination of four salespersons primarily focused on the community bank market.
The dollar increase in 2003 expense is primarily attributable to increased
salaries and commission expense, which resulted from the addition of three
salespersons primarily focused on the community bank market.
Stated
as a percentage of net sales, selling and marketing expenses for fiscal 2004,
2003, and 2002 were 37%, 32%, and 23%, respectively. The increase in 2004
expense, as a percentage of net sales, was primarily attributable to the
decreased sales. The increase in 2003 expense, as a percentage of net sales, was
primarily attributable to the increased expense, combined with the decreased
sales.
Page
17
Prospectively,
these amounts are expected to increase with the addition of four salespersons
primarily focused in the recognition toolkits market.
RESEARCH
AND DEVELOPMENT
Research
and development expenses include payroll, employee benefit, and other
headcount-related costs associated with product development. These costs are
incurred to maintain and enhance existing products. The Company maintains what
it believes to be sufficient staff to maintain its existing product lines,
including development of newer, more feature-rich versions of its existing
product lines, as the Company determines is demanded by the marketplace. The
Company also maintains research personnel, whose efforts are designed to ensure
product paths from current technologies to anticipated future generations of
products within the Company’s area of business.
Research
and development expenses were $2,204,000, $2,242,000, and $2,049,000, for fiscal
2004, 2003, and 2002, respectively. The dollar decrease in the 2004 expense is
primarily due to the reduction of personnel whose primary focus was in the Item
Processing product line. These individuals were terminated, as the Company
substantially exited this product line, by agreeing to the transaction with
Harland Financial Solutions described in Note 8 of the accompanying financial
statements. This cost savings was somewhat offset by the hiring of two
personnel, whose primary focus will be in the Recognition toolkits area, with a
principal focus on fraud detection. The dollar increase in the 2003 expense is
primarily due to ordinary salary adjustments given to engineering personnel.
Stated
as a percentage of net sales, research and development expense for fiscal 2004,
2003, and 2002, including charges to cost of sales, were 42%, 19%, and 16%,
respectively. The increase in 2004 expense, as a percentage of net sales, is
primarily attributable to the decrease in sales. The increase in 2003 expense,
as a percentage of net sales, is primarily due to ordinary salary adjustments
given to engineering personnel.
Prospectively,
we do not expect any material change in our research and development expenses,
due to the addition of two more personnel, and as a result of annual salary
adjustments.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses include payroll, employee benefit, and other
headcount-related costs associated with the finance, facilities, and legal and
other administrative fees. General and administrative costs were $2,720,000,
$1,848,000, and $2,010,000, for fiscal 2004, 2003, and 2002, respectively. The
dollar increase in the 2004 expense is primarily attributable to increased bad
debt expense, primarily resulting from one software license sold during the
year, which the Company now believes may not be entirely collectible, increased
legal costs and the full year’s cost of the Chief Executive Officer, a position
which was filled during fiscal 2003. The dollar decrease in the 2003 expense is
primarily attributable to reduced bad debt expense, resulting from more
stringent order acceptance criteria.
Page
18
Stated
as a percentage of net sales, general and administrative expense for fiscal
2004, 2003, and 2002 were 52%, 16%, and 15%, respectively. The increase in 2004
expense, as a percentage of net sales, was primarily due to decreased sales.
Prospectively,
we expect our general and administrative expense to decline, based upon our
current operating plan for fiscal 2005.
GAIN
ON SALE OF ASSETS
The
gain on sale of assets consisted of the $1,270,000 gain on the disposition of
the CheckQuest product line, as discussed in Note 8 to the accompanying
financial statements.
OTHER
INCOME (EXPENSE)
Other
Income (Expense) for fiscal 2004 consisted interest expense on the Convertible
Note, as discussed in Note 8 of the accompanying financial statements, $208,000
in interest expense for late registration fees, $48,000 for a change in fair
value of the warrant liability, as discussed in Note 9 of the accompanying
financial statements and $31,000 in interest and other income. Net interest and
other income was $18,000, and $9,000, for fiscal 2003, and 2002, respectively.
Stated as a percentage of net sales, net other income (expense) for the
corresponding periods was (7%), 0.2%, and 0.1%, respectively. The increase in
interest income in Fiscal 2004 and 2003 is attributable to interest earned on
cash invested during the year.
INCOME
TAXES
For
the fiscal year 2004, the Company recorded income tax expense, which was
primarily franchise taxes paid to states in which the Company operated. In
fiscal 2003, the Company recorded income tax expense, which was primarily
franchise taxes paid to states in which the Company operated. In Fiscal 2002 the
Company did not record an income tax provision or benefit for income taxes
because the deferred tax assets generated by the current year net benefit was
offset by a corresponding decrease in the valuation allowance.
FINANCIAL
CONDITION
At
September 30, 2004 the Company had $2,607,000 in cash as compared to $1,819,000
at September 30, 2003. Accounts receivable totaled $570,000, a decrease of
$2,331,000 from the September 30, 2003, balance of $2,901,000. This decrease was
primarily a result of collection of existing receivables and the provision of an
allowance for doubtful accounts of $520,000 and sale of receivables relating to
the CheckQuest product line to Harland of $443,000, and as a result of decline
in revenues. The
allowance for doubtful accounts receivable increased substantially at September
30, 2004 as compared to September 30, 2003, both as an absolute amount and as a
percentage of outstanding receivables. This is primarily due to a dispute over a
receivable from a single customer. The Company engaged legal counsel to
negotiate a settlement; however, the specific amount collectable under this
license was not determinable at September 30, 2004, and the Company adjusted its
allowance for doubtful accounts to reserve the entire amount of this receivable
until such time as collectability could be reasonably determined and
assured.
Unearned
revenue as of September 30, 2004 was $398,000, increasing $182,000 from
September 30, 2003, reflecting the addition of new and anniversary product
support agreements, offset by continued recognition of unearned revenue from
product support agreements licensed in prior periods and the assignment of such
obligations as a result of the transaction with Harland Financial Solutions
described in Note 8 of the accompanying financial statements.
Page
19
During
fiscal 2004, the Company financed its cash needs primarily from financing and
investing activities.
Net
cash used by operating activities during the year ended September 30, 2004 was
$3,381,000. The primary use of cash from operating activities was the net loss
of $3,846,000, a increase in deferred revenue of $182,000, a decrease in
accounts payable of $592,000 and a decrease in accrued payroll and related taxes
of $450,000 and an increase in other accrued liabilities of $274,000. The
primary sources of cash from operating activities was a decrease in accounts
receivable of $1,357,000, an increase in the provision for doubtful accounts of
$520,000 and depreciation and amortization expense, which does not require cash,
of $441,000.
Net
cash provided from investing activities was primarily from the transaction with
Harland Financial Solutions described in Note 8 of the accompanying financial
statements and collections on the note receivable from Mitek Systems, Ltd.,
which were somewhat offset by the acquisition of fixed assets, primarily
computer equipment.
Net
cash from financing activities was primarily the proceeds from the Convertible
debt, net of debt issuance costs, described in Note 7 of the accompanying
financial statements, as well as the proceeds from the exercise of stock
options.
The
Company's working capital and current ratio was $847,000 and 1.32, respectively
at September 30, 2004 and $2,345,000 and 1.87, respectively, at September 30,
2003. At September 30, 2004, total liabilities to equity ratio was -7.81 to 1
compared to 1.19 to 1 a year earlier. As of September 30, 2004, total
liabilities increased by $1,082,000 than on September 30, 2003.
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 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 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, with the final payment of any unpaid principal and
interest due on June 11, 2007. 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. In connection with this transaction, the Company issued
warrants to Laurus for the purchase of up to 860,000 shares of common stock at
prices ranging from $0.79 to $0.92 per share. An additional 200,000 warrants
exercisable at $0.70 per share were issued in October 2004 in connection with
the Company’s Registration Rights Agreement with Laurus as consideration for
settlement of late registration and effectiveness charges. The Common shares
underlying the Convertible Debt and the 1,060,000 warrants have registration
rights which required the Company to file and have these underlying shares
effective by a certain date. Pursuant to the Registration Rights agreement,
failure to have these underlying shares registered and effective by January 1,
2005 would trigger substantial cash penalties. The Note is secured by a general
lien on all assets of the Company, and as a condition of this transaction, the
Company’s line of Credit with First National Bank was cancelled. (Note
3)
Page
20
There
are no significant capital expenditures planned for the foreseeable
future.
The
Company signed an agreement to lease office space at 14145 Danielson Street,
Suite B, Poway, California effective July 1, 2002 through September 30, 2005.
The future annual minimum rents have been disclosed in the footnotes to the
Financial Statements.
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 2005 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. Anticipated 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.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
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.
Page
21
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
November 2004, the FASB issued Statement No. 151, Inventory
Costs—an amendment of ARB No. 43, Chapter 4.
This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing,
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that ". . . under some circumstances, items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
may be so abnormal as to require treatment as current period charges. . . ."
This Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The Company does not believe adoption of this Statement will have a
material effect on its financial statements
In
December 2004, the FASB issued Statement No. 152, Accounting
for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66
and 67.
This Statement amends FASB Statement No. 66, Accounting
for Sales of Real Estate,
to reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position (SOP)
04-2, Accounting
for Real Estate Time-Sharing Transactions.
This Statement also amends FASB Statement No. 67, Accounting
for Costs and Initial Rental Operations of Real Estate
Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005. The Company does not have real
estate which is subject to this Statement.
In
December 2004, the FASB issued Statement No. 153 “Exchanges
of Nonmonetary Assets—an amendment of APB Opinion No. 29”
This Statement amends Opinion 29, Accounting for Nonmonetary Transactions, which
provided based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in that
Opinion, however, included certain exceptions to that principle. This Statement
was issued to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The Company does not
have any such assets subject to this statement.
Page
22
In
November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees.
This Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This Interpretation does not
prescribe a specific approach for subsequently measuring the guarantor's
recognized liability over the term of the related guarantee. This Interpretation
also incorporates, without change, the guidance in FASB Interpretation No. 34,
Disclosure
of Indirect Guarantees of Indebtedness of Others,
which is being superseded. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has issued no guarantees that qualify for disclosure in this
interim financial statement.
In
January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities.
In general, a variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity’s activities or entitled to receive a majority of the entity’s
residual returns or both. The consolidation requirements of FIN 46 were
initially to apply to variable interest entities created after January 31, 2003.
The consolidation requirements were initially to apply to transactions entered
into prior to February 1, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. The FASB postponed implementation of FIN 46 in
December 2003. The Company has no variable interest entities.
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment”. Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. The Company has evaluated the impact of the adoption of
SFAS 123(R), and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
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APPLICATION
OF 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.
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.
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24
Accounts
Receivable.
We
evaluate the creditworthiness of our customers prior to order fulfillment and we
perform ongoing credit evaluations of our customers to adjust credit limits
based on payment history and our assessment of the customer's current
creditworthiness. We constantly monitor collections from our customers and
maintain a provision for estimated credit losses that is based on historical
experience and on specific customer collection issues. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. Since our revenue recognition policy requires
customers to be deemed creditworthy, our accounts receivable are based on
customers whose payment is reasonably assured. Our accounts receivable are
derived from sales to a wide variety of customers. We do not believe a change in
liquidity of any one customer or our inability to collect from any one customer
would have a material adverse impact on our financial position.
Loss
Contingencies
The
financial statements presented include accruals for a loss contingency, relating
to the litigation with BSM, discussed in Item 3. While the Company believes it
has meritorious defenses against such claims, the ultimate resolution to the
matter, which is expected to occur within one year could result in a loss in
excess of the amount accrued.
Fair
Value of Equity Instruments
The
valuation of certain items, including valuation of warrants, beneficial
conversion feature related to convertible debt and compensation expense related
to stock options granted, involve significant estimations with underlying
assumptions judgmentally determined. The valuation of warrants and stock options
are based upon a Black Scholes valuation model, which involve estimates of stock
volatility, expected life of the instruments and other assumptions. As the
Company’s stock is thinly traded, the estimates, which are based partly on
historical pricing of the Company’s stock, may not represent fair value, but the
Company believes it is presently the best form of estimating objective fair
value.
Deferred
Income Taxes.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. We maintain a valuation allowance
against the deferred tax asset due to uncertainty regarding the future
realization based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences.
Until such time as the Company can demonstrate that it will no longer incur
losses or if the Company is unable to generate sufficient future taxable income
we could be required to maintain the valuation allowance against our deferred
tax assets.
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25
ISSUES
AND UNCERTAINTIES
This
Annual Report on Form 10-K contains statements that are forward-looking. These
statements are based on current expectations and assumptions that are subject to
risks and uncertainties. Actual results could differ materially because of
issues and uncertainties such as those listed below and elsewhere in this
report, which, among others, should be considered in evaluating our financial
outlook.
Risks
Associated With Our Business
Because
most of our revenues are from a single type of technology, our product
concentration
may make us especially vulnerable to market demand and competition
from
other technologies, which could reduce our sales and revenues and cause us to be
unable to continue our business.
We
currently derive substantially all of our product revenues from licenses and
sales of hardware and software products incorporating our character recognition
technology. As a result, factors adversely affecting the pricing of or demand
for our products and services, such as competition from other products or
technologies, any decline in the demand for automated entry of hand printed
characters, negative publicity or obsolescence of the hardware or software
environments in which our products operate could result in lower sales or gross
margins and would have a material adverse effect on our business, operating
results and financial condition.
Competition
in our market may result in pricing pressures, reduced margins or
the
inability of our products and services to achieve market
acceptance.
We
compete against numerous other companies which address the character recognition
market, many of which have greater financial, technical, marketing and other
resources. Other companies could choose to enter our marketplace. We may be
unable to compete successfully against our current and potential competitors,
which may result in price reductions, reduced margins and the inability to
achieve market acceptance for our products. Moreover, from time to time, our
competitors or we may announce new products or technologies that have the
potential to replace our existing product offerings. There can be no assurance
that the announcement of new product offerings will not cause potential
customers to defer purchases of our existing products, which could adversely
affect our business, operating results and financial condition.
We
must continue extensive research and development in order to remain competitive.
If our products fail to gain market acceptance, our business, operating results
and financial condition would be materially adversely affected by the lower
sales.
Our
ability to compete effectively with our character recognition product line will
depend upon our ability to meet changing market conditions and develop
enhancements to our products on a timely basis in order to maintain our
competitive advantage. Rapidly advancing technology and rapidly changing user
preferences characterize the markets for products incorporating character
recognition technology. Our continued growth will ultimately depend upon our
ability to develop additional technologies and attract strategic alliances for
related or separate product lines. There can be no assurance that we will be
successful in developing and marketing product enhancements and additional
technologies, that we will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these
products, or that our new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality, or will
achieve market acceptance.
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If
our new products fail to gain market acceptance, our business, operating results
and financial condition would be materially adversely affected by the lower
sales. If we are unable, for technological or other reasons, to develop and
introduce products in a timely manner in response to changing market conditions
or customer requirements, our business, operating results and financial
condition may be materially and adversely affected by lower sales.
Our
quarterly results have fluctuated greatly in the past and will likely continue
to do so, which may cause substantial fluctuations in our common stock
price.
Our
quarterly operating results have in the past and may in the future vary
significantly depending on factors including the timing of customer projects and
purchase orders, new product announcements and releases by us and other
companies, gain or loss of significant customers, price discounting of our
products, the timing of expenditures, customer product delivery requirements,
availability and cost of components or labor and economic conditions generally
and in the information technology market specifically. Any unfavorable change in
these or other factors could have a material adverse effect on our operating
results for a particular quarter, which may cause downward pressure on our
common stock price. We expect quarterly fluctuations to continue for the
foreseeable future.
We
recently closed on $3.0 million in senior secured convertible debt financing.
Our ability to make required payments of principal and interest on the debt
depends primarily on cash flow from operations, which may not be sufficient to
service the debt.
We
recently closed on a $3.0 million debt financing with Laurus Master Funds Ltd.,
and issued a three year term note, with monthly payments of interest only
commencing July 1, 2004, and monthly principal payments commencing December 1,
2004. See “COMPANY OVERVIEW - Laurus Debt Investment” below. Based on current
interest rates, our monthly cash payments of principal and interest beginning
December 1, 2004 would be approximately $90,909.09. Our actual required cash
payments on the note will vary depending on interest rates and whether amounts
under the note are converted into our common stock.
Our
ability to make scheduled monthly payments under the note primarily depends on
our future performance and working capital, including our ability to increase
revenues and cash flows. To a certain extent our ability to increase revenues
and control costs are subject to a number of economic, financial, competitive,
regulatory and other factors beyond our control. Based upon the current level of
operations and our business development efforts, we believe that we should have
adequate available cash and cash flows from operations to meet our anticipated
future requirements for working capital, capital expenditures, and scheduled
payments of principal and interest on our debt through September 30, 2005.
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However,
if our cash flow is insufficient to enable us to service our debt, we may be
forced to find alternative sources of financing, or to take further drastic
measures, including significantly reducing operations, seeking to sell Mitek, or
pursuing a liquidation. Any future alternative sources of debt or equity
financing may not be available to us when needed or in amounts required, and we
currently do not have available to us a bank line of credit or other general
borrowing facility. Alternatively, we may be forced to attempt to negotiate with
our debt holders on our payment terms, which may not be successful or may be on
terms onerous to us.
We
granted a blanket security interest in all of our assets to the holders of our
secured debt. If we are unable to make our required monthly payments on the
debt, or any other event of default occurs, it could have a material adverse
effect on our business and operations, and the debt holders may foreclose on our
assets.
As
part of our recent debt financing with Laurus Master Fund, Ltd., we granted to
Laurus, a blanket security interest in all of our assets. See “COMPANY OVERVIEW
- - Laurus Debt Investment” below. 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. Events of default include the following:
•
a failure to pay interest or principal payments under the note within three days
of when due;
•
a breach by us of any material covenant or term or condition of the note or in
any of the investment agreements, if not cured within 15 days of such breach;
•
a breach by us of any material representation or warranty made in the note or in
any of the investment agreements;
•
if we make an assignment for the benefit of our creditors, or a receiver or
trustee is appointed for us, or any form of bankruptcy or insolvency proceeding
is instituted by us, or any involuntary proceeding is instituted against us;
•
the filing of any money judgment or similar final process against us for more
than $50,000, which remains unvacated, unbonded or unstayed for a period of 30
days;
•
if our common stock is suspended for 5 consecutive days or for 5 days during any
10 consecutive days from a principal market or pursuant to an SEC stop order;
and
•
a failure by us to timely deliver shares of common stock when due upon
conversions of the note.
The
cash required to pay such accelerated amounts on the note following an event of
default would most likely come out of our working capital. As we rely on our
working capital for our day to day operations, such a default could have a
material adverse effect on our business, operating results, or financial
condition to such extent that we are forced to restructure, file for bankruptcy,
sell assets or cease operations. In addition, upon an event of default, the
holders of the secured debt could foreclose on our assets or exercise any other
remedies available to them. If our assets were foreclosed upon, we were forced
to file for bankruptcy or cease operations, stockholders may not receive any
proceeds from disposition of our assets and may lose their entire investment in
our stock.
We
have not complied with our securities registration obligations in connection
with our issuance of senior secured debt and we face substantial and continuing
penalties if we do not timely register and maintain registration of common stock
issuable to the holders of our secured debt upon conversion of such debt into
common stock. Payment of these penalties could have a material adverse effect on
our business and operations and if we are unable to make payments, as and if
required, the debt holders may foreclose on our assets.
As part of
our recent debt financing with Laurus Master Fund, Ltd., we entered into a
registration rights agreement with Laurus, under which we were obligated to
register the common stock into which the debt is convertible. Under the
registration rights agreement, as amended, the registration was required to be
effective by December 31, 2004. We are obligated to pay the holder of our debt
liquidated damages of two percent, or $60,000 as of December 31, 2004 and for
each subsequent thirty day period which elapses without registration becoming
effective. Payment of these penalties could have a material adverse effect upon
our results of operations and financial condition.
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28
We
have the right at any time to prepay our secured debt obligation only upon
payment of 120% of the then current principal balance, plus all other amounts
owing under the note. As such, any prepayment would require a significant amount
of cash and may limit our ability to prepay, even if we wanted to.
We
have the right at any time to prepay our secured debt obligation only upon
payment of 120% of the then principal balance, plus all other amounts owing
under the note. See “COMPANY OVERVIEW - Laurus Debt Investment” below. Based on
a principal balance of $3.0 million, a prepayment would require a cash payment
of $3.6 million. As we make principal payments over time on the secured debt,
the prepayment amount would also decrease. As of September 30, 2004, we had $2.7
million in cash and cash equivalents, and $3.5 million in current assets.
Accordingly, if at any time during the term of the note we desire to prepay the
debt, we may not be able to, unless we were able to obtain additional available
cash, which we may not be able to do. This could impact our ability to enter
into any potential significant transaction in which we would need to have the
debt paid off and security interests released (such as a merger, sale of
substantially all our assets, joint venture, or similar
transaction).
We
may need to raise additional capital to fund continuing operations. If our
financing efforts are not successful, we will need to explore alternatives to
continue operations, which may include a merger, asset sale, joint venture,
loans or further expense reductions. If these measures are not successful, we
may be unable to continue our operations.
Our
efforts to reduce expenses and generate revenue may not be successful. Although
we recently raised $3.0 million in gross proceeds from our June secured debt
financing and approximately $1.3 million in gross proceeds from our July sale of
certain assets and granting of exclusive distribution and licensing rights
related to our CheckQuest® item processing and CaptureQuest® electronic document
management solutions to Harland Financial Solutions, Inc., if our revenues do
not increase we expect to need to raise additional capital through equity or
debt financing or through the establishment of other funding facilities in order
to keep funding operations.
However,
raising capital has been, and will continue to be difficult, and we may not
receive sufficient funding. Any future financing that we seek may not be
available in amounts or at times when needed, or, even if it is available, may
not be on terms acceptable to us. Also, if we raise additional funds by selling
equity or equity-based securities, the percentage ownership of our existing
stockholders will be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of our common
stock.
If
we are unable to obtain sufficient cash either to continue to fund operations or
to locate a strategic alternative, we may be forced to seek protection from
creditors under the bankruptcy laws or cease operations. Any inability to obtain
additional cash as needed could have a material adverse effect on our financial
position, results of operations and ability to continue in existence.
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29
Our
historical order flow patterns, which we expect to continue, have caused
forecasting difficulties for us. If we do not meet our forecasts or analysts’
forecasts for us, the price of our common stock may go
down.
Historically,
a significant portion of our sales have resulted from shipments during the last
few weeks of the quarter from orders received in the last month of the
applicable quarter. We do, however, base our expense levels, in significant
part, on our expectations of future revenue. As a result, we expect our expense
levels to be relatively fixed in the short term. Any concentration of sales at
the end of the quarter may limit our ability to plan or adjust operating
expenses. Therefore, if anticipated shipments in any quarter do not occur or are
delayed, expenditure levels could be disproportionately high as a percentage of
sales, and our operating results for that quarter would be adversely affected.
As a result, we believe that period-to-period comparisons of our results of
operations are not and will not necessarily be meaningful, and you should not
rely upon them as an indication of future performance. If our operating results
for a quarter are below the expectations of public market analysts and
investors, the price of our common stock may be materially adversely
affected.
Revenue
recognition accounting standards and interpretations may change,
causing
us
to recognize lower revenues.
In
October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 97-2, Software Revenue Recognition. We
adopted SOP 97-2, as amended by SOP 98-4 Deferral of the Effective Date of a
Provision of SOP 97-2 as of July 1, 1998. In December 1998, the AICPA issued SOP
98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions. We adopted SOP 98-9 on January 1, 2000. These standards
address software revenue recognition matters primarily from a conceptual level
and do not include specific implementation guidance. We believe that we are
currently in compliance with SOP 97-2 and SOP 98-9. In addition, in December
1999, the Securities and Exchange Commission (SEC) staff issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
provides further guidance with regard to revenue recognition, presentation and
disclosure. We adopted SAB 101 during the fourth quarter of fiscal
2000.
The
accounting profession and the SEC continue to discuss certain provisions of SOP
97-2, SAB 101 and other revenue recognition standards and related
interpretations with the objective of providing additional guidance on potential
application of the standards and interpretations. These discussions could lead
to unanticipated changes in revenue recognition standards and, as a result, in
our current revenue accounting practices, which could cause us to recognize
lower revenues and lead to a decrease in our stock price.
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If
our products have product defects, it could damage our reputation, sales,
profitability and result in other costs, any of which could adversely affect our
operating results which could cause our common stock price to go
down.
Our
products are extremely complex and are constantly being modified and improved,
and as such they may contain undetected defects or errors when first introduced
or as new versions are released. As a result, we have in the past and could in
the future face loss or delay in recognition of revenues as a result of software
errors or defects. In addition, our products are typically intended for use in
applications that are critical to a customer's business. As a result, we believe
that our customers and potential customers have a greater sensitivity to product
defects than the market for software products generally.
There
can be no assurance that, despite our testing, errors will not be found in new
products or releases after commencement of commercial shipments, resulting in
loss of revenues or delay in market acceptance, diversion of development
resources, damage to our reputation, adverse litigation, or increased service
and warranty costs, any of which would have a material adverse effect upon our
business, operating results and financial condition.
Our
success and our ability to compete are dependent, in part, upon protection of
our proprietary technology. If we are unable to protect our proprietary
technology, our revenues and operating results would be materially adversely
affected.
We
generally rely on trademark, trade secret, copyright and patent law to protect
our intellectual property. We may also rely on creative skills of our personnel,
new product developments, frequent product enhancements and reliable product
maintenance as means of protecting our proprietary technologies. There can be no
assurance, however, that such means will be successful in protecting our
intellectual property. There can be no assurance that others will not develop
technologies that are similar or superior to our technology.
The
source code for our proprietary software is protected both as a trade secret and
as a copyrighted work. Despite these precautions, it may be possible for a third
party to copy or otherwise obtain and use our products or technology without
authorization, or to develop similar technology independently.
We
may have difficulty protecting our proprietary technology in countries other
than the United States. If we are unable to protect our proprietary technology,
our revenues and operating results would be materially adversely
affected.
We
operate in a number of countries other than the United States. Effective
copyright and trade secret protection may be unavailable or limited in certain
countries. Moreover, there can be no assurance that the protection provided to
our proprietary technology by the laws and courts of foreign nations against
piracy and infringement will be substantially similar to the remedies available
under United States law. Any of the foregoing considerations could result in a
loss or diminution in value of our intellectual property, which could have a
material adverse effect on our business, financial condition, and results of
operations.
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31
Companies
may claim that we infringe their intellectual property or proprietary rights,
which could cause us to incur significant expenses or prevent us from selling
our products.
We
have in the past had companies claim that certain technologies incorporated in
our products infringe their patent rights. Although we have resolved the past
claims and there are currently no claims of infringement pending against us,
there can be no assurance that we will not receive notices in the future from
parties asserting that our products infringe, or may infringe, those parties'
intellectual property rights. There can be no assurance that licenses to
disputed technology or intellectual property rights would be available on
reasonable commercial terms, if at all.
Furthermore,
we may initiate claims or litigation against parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights.
Litigation, either as plaintiff or defendant, could result in significant
expense to us and divert the efforts of our technical and management personnel
from operations, whether or not such litigation is resolved in our favor. In the
event of an adverse ruling in any such litigation, we might be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology. In the event of a successful claim against us and our
failure to develop or license a substitute technology, our business, financial
condition and results of operations would be materially and adversely
affected.
We
depend upon our key personnel.
Our
future success depends in large part on the continued service of our key
technical and management personnel. We do not have employment contracts with, or
"key person" life insurance policies on, any of our employees, including James
B. DeBello, our President and Chief Executive Officer, or John M. Thornton, our
Chairman of the Board and Chief Financial Officer. Loss of services of key
employees could have a material adverse effect on our operations and financial
condition. We are also dependent on our ability to identify, hire, train, retain
and motivate high quality personnel, especially highly skilled engineers
involved in the ongoing developments required to refine our technologies and to
introduce future applications. The high technology industry is characterized by
a high level of employee mobility and aggressive recruiting of skilled
personnel.
We
cannot assure you that we will be successful in attracting, assimilating and
retaining additional qualified personnel in the future. If we were to lose the
services of one or more of our key personnel, or if we failed to attract and
retain additional qualified personnel, it could materially and adversely affect
our customer relationships, competitive position and revenues.
We
do not have a current credit facility.
While
we believe that our current cash on hand and cash generated from operations, to
finance our operations for the next twelve months, we can make no assurance that
we will not need additional financing during the next twelve months or beyond.
Actual sales, expenses, market conditions or other factors which could have a
material affect upon us could require us to obtain additional financing. If such
financing is not available, or if available, is not available on reasonable
terms, it could have a material adverse effect upon our results of operations
and financial condition.
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32
The
liability of our officers and directors is limited pursuant to Delaware
law.
Pursuant
to our Certificate of Incorporation, and as authorized under applicable Delaware
Law, our directors and officers are not liable for monetary damages for breach
of fiduciary duty, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law or (iv) for any transaction from which the director derived an improper
personal benefit.
Risks
Related to Our Stock
A
few of our stockholders have significant control over our voting stock which may
make it difficult to complete some corporate transactions without their support
and may prevent a change in control.
As
of September 30, 2004, John M. Thornton, who is our Chairman of the Board and
Chief Financial Officer and his spouse, Director Sally B. Thornton, beneficially
owned 2,699,959 shares of common stock or approximately 23.86% of our
outstanding common stock. Our directors and executive officers as a whole, own
approximately 30% of our outstanding common stock. Laurus Master Funds Ltd. may
acquire up to 5,345,714 shares of common stock in the aggregate, which would
amount to approximately 32% of our outstanding common stock, assuming Laurus
converts its promissory note in the original principal amount of $3,000,000,
into approximately 4,285,714 shares of common stock, and assuming it exercises a
warrant for 1,060,000 shares of common stock. Because the Laurus promissory note
is subject to anti-dilution provisions and accrues interest which may be
converted into common stock, Laurus could acquire an even greater number of
shares of common stock than described.
The
above-described significant stockholders may effectively control the outcome of
all matters submitted to our stockholders for approval, including the election
of directors. In addition, this ownership could discourage the acquisition of
our common stock by potential investors and could have an anti-takeover effect,
possibly depressing the trading price of our common stock.
Our
common stock is listed on the Over-The-Counter Bulletin
Board.
Our
common stock is currently listed on the Over-The-Counter Bulletin Board
(the “OTCBB”). If our common stock became ineligible to be listed on the
OTCBB, it would likely continue to be listed on the "pink sheets." Securities
traded on the OTCBB or the "pink sheets" are subject to certain securities
regulations. These regulations may limit, in certain circumstances, certain
trading activities in our common stock, which could reduce the volume of trading
in our common stock or the market price of our common stock. The OTC market and
the "pink sheets" also typically exhibit extreme price and volume fluctuations.
These broad market factors may materially adversely affect the market price of
our common stock, regardless of our actual operating performance. In the past,
individual companies whose securities have exhibited periods of volatility in
their market price have had securities class action litigation instituted
against that company. This type of litigation, if instituted, could result in
substantial costs and a diversion of management's attention and
resources.
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As
we issue additional equity securities in the future, including upon conversion
of any of our secured convertible debt, your share ownership will be diluted. In
particular, the secured convertible debt has a full ratchet anti-dilution
provision that could significantly dilute our stockholders.
In
connection with our recent debt financing, we issued a $3.0 million convertible
note and warrants to Laurus. See “COMPANY OVERVIEW — Laurus Debt Investment”
below. The note is convertible into shares of our common stock at an initial
conversion price of $.70 per share. At this initial conversion rate, for
example, we would issue 4,285,714 shares upon conversion of $3.0 million owing
under the note. The actual number of shares to be issued will depend on the
actual dollar amount of principal and interest being converted. In addition, the
note carries a full ratchet anti-dilution provision, such that if we issue in
the future convertible or equity securities (subject to certain exceptions,
including stock option grants) at a price less than the initial $.70 conversion
price, the note conversion price will be automatically adjusted down to that
lesser price. For example, if we had a non-exempted issuance at $0.50 per share,
the note conversion price would become $0.50, and upon an assumed conversion of
$3.0 million, we would have to issue 6,000,000 shares. In addition to the
conversion rights of the convertible debt, as we issue stock or convertible
securities in the future, including for any future equity financing or upon
exercise of any of the outstanding stock purchase warrants and stock options,
those issuances would also dilute our stockholders. If any of these additional
shares are issued and are sold into the market, it could decrease the market
price of our common stock and could also encourage short sales. Short sales and
other hedging transactions could place further downward pressure on the price of
our common stock.
We
may issue preferred stock, which could adversely affect the rights of common
stock holders.
The
Board of Directors is authorized to issue up to 1,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock. We have no current plans to issue shares of preferred stock. In addition,
Section 203 of the Delaware General Corporation Law restricts certain business
combinations with any "interested stockholder" as defined by such statute. The
statute may have the effect of delaying, deferring or preventing a change in our
control.
Page
34
Our
common stock price has been volatile. You may not be able to sell your shares of
our common stock for an amount equal to or greater than the price at which you
acquire your shares of common stock.
The
market price of our common stock has been, and is likely to continue to be,
highly volatile. Future announcements concerning us or our competitors,
quarterly variations in operating results, announcements of technological
innovations, the introduction of new products or changes in the product pricing
policies of Mitek or its competitors, claims of infringement of proprietary
rights or other litigation, changes in earnings estimates by analysts or other
factors could cause the market price of our common stock to fluctuate
substantially. In addition, the stock market has from time-to-time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of technology companies and that have often
been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the market price of our common stock.
During the fiscal year ended September 30, 2004, our common stock price ranged
from $.40 to $3.32.
Future
sales of our common stock may cause our stock price to
decline.
The
sale of a large number of shares of our common stock in the market after this
offering, or the belief that such sales could occur, could cause a drop in the
market price of our common stock. The shares registered in this offering will be
freely tradable without restriction or further registration under the Securities
Act, unless the shares are purchased by our affiliates.
Applicable
SEC Rules governing the trading of “penny stocks” limit the trading and
liquidity of our common stock which may adversely affect the trading price of
our common stock.
Our
common stock currently trades on the OTC Bulletin Board. Since our common stock
continues to trade below $5.00 per share, our common stock is considered a
“penny stock” and is subject to SEC rules and regulations that impose
limitations upon the manner in which our shares can be publicly traded. These
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure document explaining the penny stock market and the
associated risks. Under these regulations, brokers who recommend penny stocks to
persons other than established customers or certain accredited investors must
make a special written suitability determination for the purchaser and receive
the purchaser’s written agreement to a transaction prior to sale. These
regulations have the effect of limiting the trading activity of our common stock
and reducing the liquidity of an investment in our common stock.
We
do not intend to pay dividends in the foreseeable future.
We
have never declared or paid a dividend on our common stock. We intend to retain
earnings, if any, for use in the operation and expansion of our business and,
therefore, do not anticipate paying any dividends in the foreseeable
future.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Page
35
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
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Page
36
|
STATEMENTS
OF OPERATIONS | ||||||||||
|
FOR
THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002 | ||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
SALES |
||||||||||
|
Software |
$ |
2,229,812 |
$ |
7,227,063 |
$ |
9,688,481 |
||||
|
Hardware |
858,571
|
2,447,252
|
2,146,717
|
|||||||
|
Professional
Services, education and other |
2,151,929
|
1,919,748
|
1,247,985
|
|||||||
|
NET
SALES |
5,240,312
|
11,594,063
|
13,083,183
|
|||||||
|
COSTS
AND EXPENSES: |
||||||||||
|
Cost
of Sales-Software |
497,950
|
864,714
|
1,150,253
|
|||||||
|
Cost
of Sales-Hardware |
805,080
|
2,605,552
|
2,022,788
|
|||||||
|
Cost
of Sales-Professional Services, education and other |
676,860
|
1,070,939
|
578,246
|
|||||||
|
Operations |
1,136,024
|
1,694,489
|
1,872,152
|
|||||||
|
Selling
and marketing |
1,942,064
|
3,767,966
|
3,013,782
|
|||||||
|
Research
and development |
2,204,101
|
2,241,804
|
2,048,676
|
|||||||
|
General
and administrative |
2,720,452
|
1,848,469
|
2,009,821
|
|||||||
|
Gain
on dispostion of assets |
(1,270,355 |
) |
0
|
0
|
||||||
|
Total
costs and expenses |
8,712,176
|
14,093,933
|
12,695,718
|
|||||||
|
OPERATING
(LOSS) INCOME |
(3,471,864 |
) |
(2,499,870 |
) |
387,465
|
|||||
|
OTHER
INCOME (EXPENSE): |
||||||||||
|
Interest
expense |
(355,426 |
) |
(6,736 |
) |
(1,693 |
) | ||||
|
Change
in fair value of warrant liability |
(48,000 |
) |
0
|
0
|
||||||
|
Interest
and other income |
31,132
|
25,070
|
11,034
|
|||||||
|
Total
other income (expense) |
(372,294 |
) |
18,334
|
9,341
|
||||||
|
(LOSS)
INCOME BEFORE INCOME TAXES |
(3,844,158 |
) |
(2,481,536 |
) |
396,806
|
|||||
|
PROVISION
FOR INCOME TAXES |
2,168
|
10,654
|
0
|
|||||||
|
NET
(LOSS) INCOME |
$ |
(3,846,326 |
) |
$ |
(2,492,190 |
) |
$ |
396,806 |
||
|
NET
(LOSS) INCOME PER SHARE - BASIC |
$ |
(0.34 |
) |
$ |
(0.22 |
) |
$ |
0.04 |
||
|
WEIGHTED
AVERAGE NUMBER OF |
||||||||||
|
COMMON
SHARES OUTSTANDING - BASIC |
11,353,171
|
11,154,489
|
11,132,867
|
|||||||
|
NET
(LOSS) INCOME PER SHARE - DILUTED |
$ |
(0.34 |
) |
$ |
(0.22 |
) |
$ |
0.04 |
||
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES AND |
||||||||||
|
COMMON
SHARE EQUIVALENTS OUTSTANDING - DILUTED |
11,353,171
|
11,154,489
|
11,327,163
|
|||||||
|
See
notes to financial statements | ||||||||||
Page
37
|
BALANCE
SHEETS | ||||
|
SEPTEMBER
30, 2004 AND 2003 |
|
2004 |
2003 |
||||||
|
ASSETS |
|||||||
|
CURRENT
ASSETS |
|||||||
|
Cash
and cash equivalents |
$ |
2,607,173 |
$ |
1,819,102 |
|||
|
Accounts
receivable-net of allowances of |
570,154
|
2,900,693
|
|||||
|
$773,473
and $253,697, respectively |
|||||||
|
Note
receivable - related party |
133,841
|
200,112
|
|||||
|
Inventories
- net |
11,078
|
43,182
|
|||||
|
Prepaid
expenses and other assets |
180,876
|
84,167
|
|||||
|
Total
current assets |
3,503,122
|
5,047,256
|
|||||
|
PROPERTY
AND EQUIPMENT - net |
119,111
|
321,029
|
|||||
|
OTHER
ASSETS |
0
|
275,496
|
|||||
|
TOTAL
ASSETS |
$ |
3,622,233 |
$ |
5,643,781 |
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT) |
|||||||
|
CURRENT
LIABILITIES: |
|||||||
|
Accounts
payable |
$ |
288,909 |
$ |
881,032 |
|||
|
Accrued
payroll and related taxes |
240,000
|
690,388
|
|||||
|
Deferred
revenue |
397,724
|
884,917
|
|||||
|
Other
accrued liabilities |
743,056
|
245,818
|
|||||
|
Warrants
liability |
415,907
|
0
|
|||||
|
Current
portion of Convertible Debt, |
|||||||
|
net
of unamortized financing costs of $338,264 (2004) |
570,827
|
0
|
|||||
|
Total
current liabilities |
2,656,423
|
2,702,155
|
|||||
|
LONG-TERM
LIABILITIES: |
|||||||
|
Convertible
Debt, net of unamortized financing costs |
|||||||
|
of
$606,760 (2004) |
1,484,149
|
0
|
|||||
|
Deferred
rent |
13,215
|
16,135
|
|||||
|
Deferred
revenue |
0
|
318,826
|
|||||
|
Long-term
payable |
0
|
34,194
|
|||||
|
Total
long-term liabilities |
1,497,364
|
369,155
|
|||||
|
TOTAL
LIABILITIES |
4,153,787
|
3,071,310
|
|||||
|
COMMITMENTS
AND CONTINGENCIES (Note 5) |
|||||||
|
STOCKHOLDERS'
EQUITY (DEFICIT): |
|||||||
|
Common
stock - $.001 par value; 20,000,000 |
|||||||
|
shares
authorized, 11,389,481 and 11,185,282 issued |
|||||||
|
and
outstanding at September 30, 2004 and 2003, respectively |
11,389
|
11,185
|
|||||
|
Additional
paid-in capital |
10,069,833
|
9,327,736
|
|||||
|
Accumulated
deficit |
(10,612,776 |
) |
(6,766,450 |
) | |||
|
Total
stockholders' equity (deficit) |
(531,554 |
) |
2,572,471
|
||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
$ |
3,622,233 |
$ |
5,643,781 |
|||
|
See
notes to financial statements | |||||||
Page
38
|
STATEMENTS
OF CASH FLOWS | ||||||||||
|
FOR
THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002 | ||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
OPERATING
ACTIVITIES |
||||||||||
|
Net
(loss) income |
$ |
(3,846,326 |
) |
$ |
(2,492,190 |
) |
$ |
396,806 |
||
|
Adjustments
to reconcile net (loss) income to net cash |
||||||||||
|
provided
by (used in) operating activities: |
||||||||||
|
Depreciation
and amortization |
441,171
|
441,931
|
634,352
|
|||||||
|
Provision
for bad debts |
519,776
|
103,489
|
285,000
|
|||||||
|
Loss
on disposal of property and equipment |
3,564
|
986
|
36
|
|||||||
|
Gain
on sale of assets |
(1,270,355 |
) |
0
|
0
|
||||||
|
Change
in fair value of warrant liability |
48,020
|
0
|
0
|
|||||||
|
Amortization
of debt discount |
96,247
|
0
|
0
|
|||||||
|
Provision
for sales returns & allowances |
(29,336 |
) |
128,987
|
(50,000 |
) | |||||
|
Fair
value of stock options issued to non-employees |
15,698
|
15,576
|
54,613
|
|||||||
|
Changes
in assets and liabilities: |
||||||||||
|
Accounts
receivable |
1,357,328
|
3,269,805
|
(1,922,436 |
) | ||||||
|
Inventory,
prepaid expenses, and other assets |
(95,685 |
) |
15,702
|
(209,233 |
) | |||||
|
Other
long term assets |
0
|
0
|
(16,425 |
) | ||||||
|
Accounts
payable |
(592,123 |
) |
(686,089 |
) |
437,547
|
|||||
|
Accrued
payroll and related taxes |
(450,388 |
) |
41,978
|
208,404
|
||||||
|
Long-term
payable |
(34,194 |
) |
(34,206 |
) |
68,400
|
|||||
|
Deferred
revenue |
181,995
|
335,250
|
419,724
|
|||||||
|
Other
accrued liabilities |
273,651
|
81,742
|
67,930
|
|||||||
|
Net
cash provided by (used in) operating activities |
(3,380,957 |
) |
1,222,961
|
374,718
|
||||||
|
INVESTING
ACTIVITIES |
||||||||||
|
Purchases
of property and equipment |
(70,803 |
) |
(190,616 |
) |
(308,659 |
) | ||||
|
Proceeds
from sale of assets, |
||||||||||
|
net
of expenses |
1,139,992
|
1,203
|
0
|
|||||||
|
Payment
(advances) on related party note receivable-net |
46,619
|
3,604
|
(184,039 |
) | ||||||
|
Net
cash provided by (used in) investing activities |
1,115,808
|
(185,809 |
) |
(492,698 |
) | |||||
|
FINANCING
ACTIVITIES |
||||||||||
|
Proceeds
from borrowings |
0
|
360,000
|
300,000
|
|||||||
|
Repayment
of borrowings |
0
|
(360,000 |
) |
(300,000 |
) | |||||
|
Proceeds
from convertible debt |
3,000,000
|
0
|
0
|
|||||||
|
Financing
costs related to convertible debt |
(151,000 |
) |
0
|
0
|
||||||
|
Proceeds
from exercise of stock options |
204,220
|
21,534
|
12,269
|
|||||||
|
Net
cash provided by financing activities |
3,053,220
|
21,534
|
12,269
|
|||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
788,071
|
1,058,686
|
(105,711 |
) | ||||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
1,819,102
|
760,416
|
865,347
|
|||||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR |
$ |
2,607,173 |
$ |
1,819,102 |
$ |
759,636 |
||||
|
SUPPLEMENTAL
DISCLOSURE |
||||||||||
|
OF
CASH FLOW INFORMATION |
||||||||||
|
Cash
paid for interest |
$ |
51,159 |
$ |
6,736 |
$ |
1,693 |
||||
|
Cash
paid for income taxes |
$ |
2,166 |
$ |
10,654 |
$ |
- |
||||
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING |
||||||||||
|
ACTIVITIES |
||||||||||
|
Options
issued in exchange for services |
$ |
15,698 |
$ |
15,576 |
$ |
54,613 |
||||
|
Warrants
issued in connection with financing |
$ |
367,887 |
$ |
0 |
$ |
0 |
||||
|
Beneficial
conversion feature of convertible debt |
$ |
522,384 |
$ |
0 |
$ |
0 |
||||
|
See
notes to financial statements | ||||||||||
Page
39
|
STATEMENTS
OF STOCKHOLDERS' EQUITY (DEFICIT) | |||||||||||||
|
FOR
THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002 | |||||||||||||
|
Additional |
|||||||||||||
|
Common |
Paid-In |
Accumulated |
|||||||||||
|
Stock |
Capital |
Deficit |
Net |
||||||||||
|
Balance,
October 1, 2001 |
$ |
11,121 |
$ |
9,223,808 |
$ |
(4,671,066 |
) |
$ |
4,563,863 |
||||
|
Exercise
of stock options |
18
|
12,251
|
12,269
|
||||||||||
|
Fair
value of stock options issued to non-employees |
54,613
|
54,613
|
|||||||||||
|
Net
income |
396,806
|
396,806
|
|||||||||||
|
Balance,
September 30, 2002 |
11,139
|
9,290,672
|
(4,274,260 |
) |
5,027,551
|
||||||||
|
Exercise
of stock options |
46
|
21,488
|
21,534
|
||||||||||
|
Fair
value of stock options issued to non-employees |
15,576
|
15,576
|
|||||||||||
|
Net
loss |
(2,492,190 |
) |
(2,492,190 |
) | |||||||||
|
Balance,
September 30, 2003 |
11,185
|
9,327,736
|
(6,766,450 |
) |
2,572,471
|
||||||||
|
Exercise
of stock options |
204
|
204,016
|
204,220
|
||||||||||
|
Fair
value of stock options issued to non-employees |
15,698
|
15,698
|
|||||||||||
|
Beneficial
conversion feature embedded in convertible debt |
522,383
|
522,383
|
|||||||||||
|
Net
loss |
(3,846,326 |
) |
(3,846,326 |
) | |||||||||
|
Balance,
September 30, 2004 |
$ |
11,389 |
$ |
10,069,833 |
$ |
(10,612,776 |
) |
$ |
(531,554 |
) | |||
|
See
notes to financial statements | |||||||||||||
Page
40
Mitek
Systems, Inc.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2004, 2003 and 2002
NOTE
1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations - Mitek Systems, Inc. (the "Company") is a designer, manufacturer
and marketer of advanced character recognition products for intelligent forms
processing applications ("Character Recognition") with an emphasis in document
imaging system products and solutions systems integration services.
Fiscal
2004 operations resulted in a significant operating loss. The
Company addressed its cash requirements by issuing Convertible Debt as discussed
in Note 7 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 8 of the accompanying
financial statements. Should
additional losses occur, the Company may need to raise significant additional
funds to continue its activities. In the absence of positive cash flows from
operations, the Company may be dependent on its ability to secure additional
funding through the issuance of debt or equity instruments. If adequate funds
are not available, the Company may be forced to significantly curtail its
operations or to obtain funds through entering into additional collaborative
agreements or other arrangements that may be on unfavorable terms. The Company's
failure to raise sufficient additional funds on favorable terms, or at all,
would have a material adverse effect on its business, results of operations and
financial position.
Basis
of Accounting - The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.
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,
liabilities, revenue, and expenses. Examples include estimates of loss
contingencies and product life cycles, and assumptions such as the elements
comprising a software arrangement, including the distinction between
upgrades/enhancements and new products; and when technological feasibility is
achieved for our products. Actual results may differ from management’s estimates
and assumptions.
Fair
Value of Financial Instruments - The carrying amount of cash, cash equivalents,
accounts receivable, notes receivable, accounts payable, and accrued liabilities
are considered representative of their respective fair values because of the
short-term nature of those instruments.
Cash
and Cash Equivalents - Cash equivalents are defined as highly liquid financial
instruments with original maturities of three months or less. A substantial
portion of the Company’s cash is deposited with one financial institution. The
Company monitors the financial condition of the financial institution and does
not believe that the deposit is subject to a significant degree of
risk.
Page
41
Reclassification
- - Certain prior year’s balances have been reclassified to conform to the 2004
presentation.
Allowance
for Doubtful Accounts - The allowance for doubtful accounts reflects the
Company’s best estimate for probable losses inherent in the accounts receivable
balance. The Company determines the allowance based on known troubled accounts,
historical experience, and other currently available evidence. Activity in the
allowance for doubtful accounts is as follows:
|
Balance
at beginning of period |
Charged
to costs and expenses |
Write-offs
and other |
Balance
at end of period |
||||||||||
|
Year
Ended September 30 |
|||||||||||||
|
2002 |
$ |
339,025 |
$ |
285,000 |
$ |
473,817 |
$ |
150,208 |
|||||
|
2003 |
150,208 |
103,489 |
0 |
253,697 |
|||||||||
|
2004 |
253,697 |
519,776 |
0 |
773,473 |
|||||||||
Inventories
- - Inventories are recorded at the lower of average cost or market.
Property
and Equipment - Property and Equipment are carried at cost. Following is a
summary of property and equipment as of September 30, 2004 and
2003.
|
2004 |
2003 |
||||||
|
Property
and equipment - at cost: |
|||||||
|
Equipment |
$ |
932,504 |
$ |
1,367,459 |
|||
|
Furniture
and fixtures |
159,672 |
159,672 |
|||||
|
Leasehold
improvements |
5,331 |
6,700 |
|||||
|
1,097,507 |
1,533,831 |
||||||
|
Less:
accumulated depreciation and amortization |
(978,396 |
) |
(1,212,802 |
) | |||
|
Total |
$ |
119,111 |
$ |
321,029 |
|||
Property
and Equipment are carried at cost. Depreciation and amortization of property and
equipment are provided using the straight-line method over estimated useful
lives ranging from three to five years. Depreciation and amortization of
property and equipment totaled $177,770, $246,931, and $222,468 for the years
ended September 30, 2004, 2003 and 2002, respectively.
Other
Assets - The costs of acquiring the Company’s software product rights were
capitalized and are being amortized over the estimated periods to be benefited,
typically 2 to 3 years. Other assets consisted of the following at September 30,
2004 and 2003:
Page
42
|
2004 |
2003 |
||||||
|
Prepaid
software rights - Docubase- net |
$ |
0 |
$ |
243,750 |
|||
|
Other
- net |
0 |
31,746 |
|||||
|
Total |
$ |
(0 |
) |
$ |
275,496 |
||
Amortization
of prepaid software rights, which is charged to cost of sales, for fiscal 2004,
2003 and 2002 was $243,750, $195,000, and $332,758, respectively.
Long-Lived
Assets - The Company periodically evaluates the carrying value of license
agreements and other intangible assets to determine whether any impairment of
these assets has occurred or whether any revision to the related amortization
periods should be made. This evaluation is based on management’s projections of
the undiscounted future cash flows associated with each product or asset. If
management’s evaluation were to indicate that the carrying values of these
intangible assets were impaired, the impairment to be recognized is measured by
the amount the carrying amount of the assets exceeds the fair value of the
assets. The Company did not record any impairment for the years ended September
30, 2004, 2003, or 2002.
Investment
in Mitek Systems Ltd. - On September 1, 2000 the Company acquired a 15%
investment in Itech Business Solutions Ltd. (“Itech”), which was accounted for
under the cost method at September 30, 2000. On October 3, 2000 the Company
acquired an additional 15% interest in Itech for $88,506. After this additional
investment, the Company accounted for its 30% interest in Itech under the equity
method. Subsequent to the additional investment on October 3, 2000, Itech
changed their name to Mitek Systems Ltd. During fiscal 2002, the Company
acquired an additional 18% interest in consideration for a loan to Mitek Systems
Ltd. This loan carries monthly payment terms and a 10% rate of interest. Amounts
due on the loan from Mitek Systems Ltd are shown combined with the accumulated
investment (deficit) as follows:
|
September
30 |
|||||||
|
2004 |
2003 |
||||||
|
Amount
Due from Mitek Systems, Ltd. |
$ |
149,004 |
$ |
195,623 |
|||
|
Investment
in Mitek Systems, Ltd |
(15,163 |
) |
4,489 |
||||
|
Total |
$ |
133,841 |
$ |
200,112 |
|||
The
additional interest in Mitek Systems Ltd required no additional investment.
Included in fiscal 2004, 2003 and 2002 Other Income (Expenses) is ($19,652),
$4,489, and ($11,636), respectively, related to the Company’s equity in the
income (loss) of Mitek Systems, Ltd. Subsequent to September 30, 2004, the
Company’s entire interest in Mitek Systems, Ltd. was repurchased by the
principal stockholder of Mitek Systems, Ltd. See Note 10 to the Financial
Statements.
Deferred
Revenue - Deferred revenue represents customer billings, paid either upfront or
annually at the beginning of each billing period, which are accounted for as
subscriptions with revenue recognized ratably over the billing coverage period.
For certain other licensing arrangements revenue attributable to undelivered
elements, including free post-delivery telephone support and the right to
receive unspecified upgrades/enhancements on the Company’s software on a
when-and-if-available basis, is based upon the sales price of those elements
when sold separately and is recognized ratably on a straight-line basis over the
term of the agreement. Historically, the percentage of revenue recorded as
unearned due to undelivered elements generally ranged from approximately 8% to
15% of the sales price of the software.
Page
43
Revenue
Recognition - Revenues from sales of software licenses sold through direct and
indirect channels, which do not contain multiple elements, are recognized upon
shipment of the related product, if the requirements of Statement of Position
("SOP") 97-2, as amended, are met. If the requirements of SOP 97-2, including
evidence of an arrangement, delivery, fixed or determinable fee, collectibility
or vendor specific evidence about the value of an element are not met at the
date of shipment, revenue is not recognized until such elements are known or
resolved. Software license revenue for arrangements to deliver unspecified
additional software products in the future is recognized ratably over the term
of the arrangement, beginning with the initial shipment. Revenue from
post-contract customer support is recognized ratably over the term of the
contract. Revenue from professional services is recognized when such services
are delivered and accepted by the customer
Research
and Development -
Research and development costs are expensed in the period
incurred.
Income
Taxes - The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting
for Income Taxes.
Deferred tax assets and liabilities arise from temporary differences between the
tax bases of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future
years.
Management
evaluates the available evidence about future taxable income and other possible
sources of realization of deferred tax assets. The valuation allowance reduces
deferred tax assets to an amount that represents management’s best estimate of
the amount of such deferred tax assets that more likely than not will be
realized. - see Note 4.
Net
Income
(Loss) Per Share - The Company calculates net income (loss) per share in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128,
Earnings
per Share.
Basic net income (loss) per share is based on the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
also gives effect to all potential dilutive common shares outstanding during the
period, such as convertible debt, options and warrants, if dilutive. Outstanding
stock options for fiscal 2004, 2003 and 2002 of 1,834,238, 2,350,963 and
1,868,597, respectively, were excluded from this calculation, as they would have
been antidilutive. In addition, 4,285,714 shares issuable upon conversion of
debt to equity and exercise of 860,000 warrants for fiscal 2004 (none in 2003
and 2002) were excluded from this calculation, as they would reduce net loss per
share.
Stock
Based Compensation - As permitted by SFAS No. 123, Accounting
for Stock-Based Compensation,
the Company accounts for costs of stock-based compensation to employees in
accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting
for Stock Issued to Employees
and related interpretations, and accordingly, discloses the pro forma effect on
net income (loss) and related per-share amounts using the fair value based
method to account for stock-based compensation (Note 2). The fair value of stock
compensation issued to non-employees is determined using the Black-Scholes
option pricing model and compensation expense is recorded pursuant to the
provisions of EITF 96-18.
Page
44
The
Company accounts for stock options granted to its employees and members of its
board of directors under the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25 (APB No. 25) Accounting
for Stock Issued to Employees, and
related interpretations, and with the disclosure requirements of SFAS No. 123,
Accounting
for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure. The
following table illustrates the effect on net (loss) income and net (loss)
income per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation (in thousands, except per
share amounts).
|
Year
Ended
September
30
2004 |
Year
Ended
September
30
2003 |
Year
Ended
September
30
2002 |
||||
|
Net
(loss) income, as reported |
($3,846 |
) |
($2,492 |
) |
$397 |
|
|
Add:
Stock-based employee compensation expense included in reported net (loss)
income, net of related tax effects |
0 |
0 |
0 |
|||
|
Deduct;
Total stock-based employee compensation expense determined under the fair
value method, net of related tax effects |
(302 |
) |
(647 |
) |
(962 |
) |
|
Pro
Forma net (loss) income |
($4,148 |
) |
($3,139 |
) |
($565 |
) |
|
Net
(loss) income per share |
(.37 |
) |
(.28 |
) |
(.05 |
) |
Segment
Reporting - SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information,
results in the use of a management approach in identifying segments of an
enterprise. Management has determined that the Company operates in only one
segment.
Comprehensive
Income (Loss) - There are no differences between net income and comprehensive
income and, accordingly, no amounts have been reflected in the accompanying
financial statements.
Recent
Accounting Pronouncements -
In December 2002, the FASB issued SFAS No. 148
Accounting for Stock-Based Compensation - Transition and
Disclosure.
SFAS No. 148 amends SFAS No. 123, Accounting
for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The amendments to SFAS 123
provided for under SFAS No. 148 are effective for financial statements for
fiscal years ending after December 15, 2002. The Company has not elected to
adopt the fair value accounting provisions of SFAS No. 123 and therefore the
adoption of SFAS No. 148 did not have a material effect on our results of
operations or financial position.
Page
45
In November
2004, the FASB issued Statement No. 151, Inventory
Costs—an amendment of ARB No. 43, Chapter 4. This
Statement amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The Company does not believe adoption of this Statement will have a
material effect on its financial statements
In December
2004, the FASB issued Statement No. 152, Accounting
for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66
and 67. This
Statement amends FASB Statement No. 66, Accounting
for Sales of Real Estate, to
reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position (SOP)
04-2, Accounting for Real Estate Time-Sharing Transactions. This
Statement also amends FASB Statement No. 67, Accounting
for Costs and
Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005. The Company does not have real
estate which is subject to this Statement.
In December
2004, the FASB issued Statement No. 153 “Exchanges
of Nonmonetary Assets—an amendment of APB Opinion No. 29” This
Statement amends Opinion 29, Accounting for Nonmonetary Transactions, which
provided based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in that
Opinion, however, included certain exceptions to that principle. This Statement
was issued to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The Company does not
have any such assets subject to this statement.
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.
Page
46
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 were initially to apply to variable interest entities created after January 31, 2003. The consolidation requirements were initially to apply to transactions entered into prior to February 1, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The FASB postponed implementation of FIN 46 in December 2003. The Company has no variable interest entities.
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment”. Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. The Company has evaluated the impact of the adoption of
SFAS 123(R), and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
Page
47
NOTE
2 - STOCKHOLDERS’ EQUITY (DEFICIT)
Stock
Options -
The Company has stock option plans for executives and key individuals who make
significant contributions to the Company. The 1986 plan provides for the
purchase of up to 630,000 shares of common stock through incentive and
non-qualified options. The 1986 plan expired on September 30, 1996 and no
additional options may be granted under this plan. The 1988 plan provides for
the purchase of up to 650,000 shares of common stock through non-qualified
options. The 1988 plan expired on September 13, 1998. For both plans, options
were granted at fair market value of the Company’s stock at the grant date and
for a term of not more than six years. Employees owning in excess of 10% of the
outstanding stock are excluded from the plans.
The
1996 plan provides for the purchase of up to 1,000,000 shares of common stock
through incentive and non-qualified options. Options must be granted at fair
market value of the Company’s stock at the grant date and for a term of not more
than ten years. Employees owning in excess of 10% of the outstanding stock are
included in the plan on the same terms except that the options must be granted
for a term of not more than five years. The 1996 plan maximized in February 1999
and no additional options may be granted under this plan.
The
1999 plan provides for the purchase of up to 1,000,000 shares of common stock
through incentive and non-qualified options. Incentive options must be granted
at fair market value of the Company’s stock at the grant date while
non-qualified options may be granted at no less than 85% of fair market value of
the Company’s stock at the grant date, and for a term of not more than ten
years. Employees owning in excess of 10% of the outstanding stock are included
in the plan on the same terms except that the options must be granted for a term
of not more than five years.
The
2000 plan provides for the purchase of up to 1,000,000 shares of common stock
through incentive and non-qualified options. Incentive options must be granted
at fair market value while non-qualified options may be granted at no less than
85% of fair market value, and for a term of not more than ten years. Employees
owning in excess of 10% of the outstanding stock are included in the plan on the
same terms except that the options must be granted for a term of not more than
five years.
Information
concerning stock options granted by the Company under all plans for the years
ended September 30, 2004, 2003 and 2002 is as follows:
|
Shares |
Weighted
Average Exercise Price Per Share |
||||||
|
Balance,
October 1, 2001 |
1,472,443 |
$ |
2.84 |
||||
|
Granted |
510,500 |
$ |
1.65 |
||||
|
Exercised |
(17,818 |
) |
$ |
0.69 |
|||
|
Cancelled |
(96,528 |
) |
$ |
1.41 |
|||
|
Balance,
September 30, 2002 |
1,868,597 |
$ |
2.56 |
||||
|
Granted |
856,000 |
$ |
1.17 |
||||
|
Exercised |
(46,510 |
) |
$ |
.46 |
|||
|
Cancelled |
(327,124 |
) |
$ |
3.20 |
|||
|
Balance,
September 30, 2003 |
2,350,963 |
$ |
2.03 |
||||
|
Granted |
629,750 |
$ |
1.02 |
||||
|
Exercised |
(204,199 |
) |
$ |
1.00 |
|||
|
Cancelled |
(942,276 |
) |
$ |
2.46 |
|||
|
Balance,
September 30, 2004 |
1,834,238 |
$ |
1.58 |
||||
Page
48
The
following table summarizes information about stock options outstanding at
September 30, 2004:
|
Range
of
Exercise
Price |
Number Outstanding |
Weighted Average Remaining Contractual Life |
Weighted
Average Exercise Price |
Number
Exercisable |
Weighted
Average Exercise Price of Exercisable Options |
|||||||||||
|
$
0.43- - $ 0.69 |
362,500 |
9.82 |
$ |
0.67 |
5,056 |
$ |
0.59 |
|||||||||
|
$
0.81- - $ 0.99 |
169,502 |
4.03 |
$ |
0.94 |
128,210 |
$ |
0.92 |
|||||||||
|
$
1.00- - $ 1.39 |
766,000 |
7.66 |
$ |
1.16 |
345,612 |
$ |
1.17 |
|||||||||
|
$
1.40- - $ 1.99 |
240,417 |
4.13 |
$ |
1.60 |
99,063 |
$ |
1.63 |
|||||||||
|
$
2.00- - $ 3.68 |
182,396 |
4.12 |
$ |
2.42 |
152,829 |
$ |
2.43 |
|||||||||
|
$
5.09- - $12.37 |
113,423 |
4.81 |
$ |
6.61 |
113,423 |
$ |
6.74 |
|||||||||
|
1,834,238 |
6.86 |
$ |
1.58 |
844,192 |
$ |
2.16 |
||||||||||
All
stock options are granted with an exercise price equal to the fair market value
of the Company’s common stock at the grant date. The weighted average fair value
of the stock options granted was $.63, $.59, and $.93 for fiscal 2004, 2003 and
2002, respectively. The fair value of each stock option grant is estimated on
the date of the grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 2004: risk-free
interest rate of 2.6%; expected dividend yield of 0%; expected life of 3 years;
and expected volatility of 77%. In 2003 the assumptions were: risk-free interest
rate of 2%; expected dividend yield of 0%; expected life of 3 years; and
expected volatility of 78%. In 2002, the assumptions were: risk-free interest
rate of 5.5%; expected dividend yield of 0%; expected life of 3 years; and
expected volatility of 82%. Stock options generally expire between three to ten
years from the grant date. Stock options generally vest over a three-year
period, with one thirty-sixth becoming exercisable on each of the monthly
anniversaries of the grant date.
Page
49
The
Company has also issued 20,000 stock options to non-employees which are
accounted for as variable arrangements under the provisions of EITF 96-18.
Compensation expense related to such awards were $15,698, $15,576, and $54,612
for the years ended September 30, 2004, 2003, and 2002, respectively, and are
included in general and administrative expense. Future increases in the fair
value of the Company’s common stock could result in additional compensation
expense.
NOTE
3 - LINE OF CREDIT - BANK
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 7 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.
NOTE
4 - INCOME TAXES
For
the years ended September 30, 2004, 2003 and 2002, the provision for income
taxes were as follows:
|
2004 |
2003 |
2002 |
||||||||
|
Federal
- Current |
$ |
0 |
$ |
0 |
$ |
0 |
||||
|
State
- Current |
2,000 |
11,000 |
0 |
|||||||
|
Total |
$ |
2,000 |
$ |
11,000 |
$ |
0 |
||||
Under
SFAS No. 109, deferred income tax liabilities and assets 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.
Significant
components of the Company's net deferred tax liabilities and assets as of
September 30, 2003 and 2002 are as follows:
|
2004 |
2003 |
||||||
|
Deferred
tax assets (liabilities): |
|||||||
|
Reserves
not currently deductible |
$ |
531,000 |
$ |
159,000 |
|||
|
Book
depreciation and amortization in excess of tax |
28,000 |
333,000 |
|||||
|
Research
credit carryforwards |
551,000 |
529,000 |
|||||
|
AMT
credit carryforward |
69,000 |
69,000 |
|||||
|
Net
operating loss carryforwards |
4,028,000 |
3,088,000 |
|||||
|
Capitalized
research and development costs |
24,000 |
104,000 |
|||||
|
Uniform
capitalization |
4,000 |
(19,000 |
) | ||||
|
Other |
635,000 |
132,000 |
|||||
|
Total
deferred tax assets |
5,870,000 |
4,395,000 |
|||||
|
Valuation
allowance for net deferred tax assets |
(5,870,000 |
) |
(4,395,000 |
) | |||
|
Total |
$ |
0 |
$ |
0 |
|||
Page
50
The
Company has provided a valuation allowance against deferred tax assets recorded
as of September 30, 2004 and 2003 due to uncertainties regarding the realization
of such assets.
The
research credit and net operating loss carryforwards expire during the years
2005 to 2020. The federal and California net operating loss carryforwards at
September 30, 2004 are approximately $11,100,000 and $4,368,000,
respectively.
The
differences between the provision for income taxes and income taxes computed
using the U.S. federal income tax rate were as follows for the years ended
September 30:
|
2004 |
2003 |
2002 |
||||||||
|
Amount
computed using statutory rate (34%) |
$ |
(1,308,000 |
) |
$ |
(844,000 |
) |
$ |
(135,000 |
) | |
|
Net
change in valuation allowance
for
net deferred tax assets |
1,331,000 |
919,000 |
(157,000 |
) | ||||||
|
Non-deductible
items |
15,000 |
26,000 |
22,000 |
|||||||
|
State
income taxes |
(
36,000 |
) |
(
90,000 |
) |
0 |
|||||
|
Provision
for income taxes |
$ |
2,000 |
$ |
11,000 |
$ |
0 |
||||
NOTE
5 - COMMITMENTS AND CONTINGENCIES
Legal
Matters -
The Company is currently in litigation with BSM regarding a certain license
agreement pursuant to which we licensed certain of BSM’s technology. BSM has
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. At this time, the matter is in
binding arbitration and we cannot make a reasonable determination regarding the
outcome of this matter.
Other
than as described above, we are not aware of any legal proceedings or claims
that we believe may have, individually or in the aggregate, a material adverse
effect on our business, financial condition, operating results, cash flow or
liquidity.
Employee
401(k) Plan -
The Company has a 401(k) plan that allows participating employees to contribute
up to 15% of their salary, subject to annual limits. The Board may, at its sole
discretion, approve Company contributions. During fiscal 2004, 2003 and 2002,
the Company elected not to make any contributions to the plan.
Page
51
Leases -
The Company's offices and manufacturing facilities are leased under
non-cancelable operating leases. The primary facilities lease expires on
September 30, 2005. In addition, the Company leases office space in Frederick,
Maryland which expires January 31, 2007. The lease costs are expensed on a
straight-line basis over the lease term.
Future
annual minimum rental payments payable by the Company under non-cancelable
leases are as follows:
|
Operating
Leases |
||||
|
Year
Ending September 30: |
||||
|
2005 |
$ |
425,135 |
||
|
2006 |
18,491 |
|||
|
Thereafter |
6,224 |
|||
|
Total |
$ |
449,850 |
||
Rent
expense for operating leases, net of sub-lease income, for the years ended
September 30, 2004, 2003 and 2002 totaled $524,180, $505,711 and $314,872,
respectively.
The
Company, as part of the lease on its headquarters in June 2002, agreed to
purchase the furniture located on the premises. This lease agreement requires a
portion of the rent payments be applied to the purchase of this furniture.
NOTE
6 - RELATED
PARTY TRANSACTIONS
During
the second and third quarter of 2002, the Company engaged the services of a
director of the Company, to provide financial consulting services unrelated to
service as a board member. The total amount paid for these services was
$105,875.
NOTE
7 - 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%
Page
52
In
connection with the financing, Laurus was also issued warrants to purchase up to
860,000 shares of the Company's common stock. The warrants are exercisable as
follows: 230,000 shares at $0.79 per share; 230,000 shares at $0.85 per share
and the balance at $0.92 per share. The gross proceeds of the convertible debt
were allocated to the debt instrument and the warrants on a relative fair value
basis. Then the Company computed the beneficial conversion feature embedded in
the debt instrument using the effective conversion price in accordance with EITF
98-5 and 00-27. The Company recorded a debt discount of (i) $367,887 for the
valuation of the 860,000 warrants issued with the note (computed using a
Black-Scholes model with an interest rate of 2.53%, volatility of 81%, zero
dividends and expected term of three years); (ii) $522,384 for a beneficial
conversion feature inherent in the Secured Note and (iii) $151,000 for debt
issue costs paid to affiliates of the lender, for a total discount of
$1,041,271. The $1,041,271 is being amortized over the term of the Secured Note.
On October 4, 2004 the Company filed the registration statement with the
Securities and Exchange Commission and the registration statement remains
pending as of the date of this report. Amortization of the debt discounts
through September 30, 2004 was $96,247.
To
secure the payment of all obligations, the Company entered into a Master
Security Agreement which assigns and grants to Laurus a continuing security
interest in all of the following property now owned or at any time upon
execution of the agreement, acquired by the Company or subsidiaries, or in which
any assignor now have or at any time in the future may acquire any right, title
or interest: all cash, cash equivalents, accounts, deposit accounts, inventory,
equipment, goods, documents, instruments (including, without limitation,
promissory notes), contract rights, general tangibles, chattel paper, supporting
obligations, investment property, letter-of-credit rights, trademarks, trademark
applications, patents, patent applications, copyrights, copyright applications,
tradestyles and any other intellectual property, in each case, in which any
Assignor now have or may acquire any right, title or interest, all proceeds and
products thereof (including, without limitation, proceeds of insurance) and all
additions, accessions and substitutions. In the event any Assignor wishes to
finance an acquisition in the ordinary course of business of any
hereafter-acquired equipment and have obtained a commitment from a financing
source to finance such equipment from an unrelated third party, Laurus agrees to
release its security interest on such hereafter-acquired equipment so financed
by such third party financing source.
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.
Page
53
A
registration rights agreement was executed requiring the Company to register the
shares of its common stock underlying the Secured Note and warrants so as to
permit the public resale thereof (See Note 9). Liquidated damages of 2% of the
Secured Note balance per month accrue if stipulated deadlines are not met. The
registration statement was filed with the Securities and Exchange Commission on
October 4, 2004.
The
following table reflects the Convertible Debt at September 30,
2004:
|
Convertible
Debt |
$ |
3,000,000 |
||
|
Deferred
financing costs |
(945,024 |
) | ||
|
2,054,976 |
||||
|
Less:
Current Portion |
(570,827 |
) | ||
$ |
1,484,149 |
The
debt has the following principal amounts due over the remaining life as
follows:
|
Year
ended 9/30/05 |
$
909,091 |
|
Year
ended 9/30/06 |
1,090,909 |
|
Year
ended 9/30/07 |
$1,000,000 |
NOTE
8 - SALE OF ASSETS
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. The consideration was reduced by $100,000, which has
been placed in escrow pending delivery of the Company’s Fraud Protect System to
certain customers. The agreement required the Company to Indemnify HFS for
future liabilities. The indemnification is limited to $250,000, which has been
recorded as a liability, and will expire one year from the date of the
transaction. 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. The gain on sale is shown as
follows:
|
Total
Consideration |
$ |
1,425,000 |
||
|
Less:
amounts held in escrow |
(100,000 |
) | ||
|
Less:
indemnifications |
(250,000 |
) | ||
|
Plus:
liabilities and deferred revenue assumed by Harland |
988,014 |
|||
|
Less:
expenses of sale |
(181,160 |
) | ||
|
Cost
basis of receivables sold |
(453,436 |
) | ||
|
Cost
basis of fixed assets sold |
(95,237 |
) | ||
|
Cost
basis of licenses sold |
(60,938 |
) | ||
|
Cost
basis of inventory sold |
(1,888 |
) | ||
|
Gain
on Sale |
$ |
1,270,355 |
Page
54
NOTE
9 - 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) and the change in fair value from the
date of issuance to September 30, 2004 has been included in other (expense)
income.
For
the year ended September 30, 2004 the change in fair value of the warrants
issued with registration rights for the underlying shares increased by
approximately $48,020 to $415,907 at September 30, 2004 and is recognized in
other expense.
NOTE
10 - SUBSEQUENT
EVENTS
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.
NOTE
11 - PRODUCT REVENUES AND SALES CONCENTRATIONS
Product
Revenues - During fiscal years 2004, 2003 and 2002, the Company's revenues were
derived primarily from the Character Recognition Product line. Revenues by
product line as a percentage of net sales are summarized as
follows:
|
Year
Ended September 30, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
Character
recognition |
71 |
% |
90 |
% |
95 |
% | ||||
Maintenance
& Other |
29 |
% |
10 |
% |
5 |
% | ||||
Page
55
Sales
Concentrations - The Company sells its products primarily to community
depository institutions. For the years ended September 30, 2004, 2003 and 2002,
the Company had the following sales concentrations:
|
Year
Ended September 30, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
Customers
to which sales were |
||||||||||
|
in
excess of 10% of total sales |
||||||||||
|
Number
of customers |
1 |
3 |
3 |
|||||||
|
Aggregate
percentage of sales |
12 |
% |
30 |
% |
34 |
% | ||||
|
Foreign
Sales - primarily Europe |
4 |
% |
3 |
% |
4 |
% | ||||
Below
is a summary of the revenues by product lines.
|
2004 |
2003 |
2002 |
||||||||
|
Revenue
(000’s) |
||||||||||
|
Recognition
Toolkits |
$ |
1,859 |
$ |
4,465 |
$ |
5,963 |
||||
|
Check
Image Solutions |
1,406 |
5,391 |
5,293 |
|||||||
|
Document
and Image Processing
Solutions |
439 |
740 |
1,010 |
|||||||
|
Maintenance
and other |
1,536 |
998 |
817 |
|||||||
|
Total
Revenue |
$ |
5,240 |
$ |
11,594 |
$ |
13,083 |
||||
NOTE
12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized
quarterly financial information for the years ended September 30, 2004 and 2003
is as follows (In thousands, except per share data):
|
First |
Second |
Third |
Fourth |
||||||||||
|
Quarter |
Quarter |
Quarter* |
Quarter |
||||||||||
|
Year
Ended September 30, 2004 |
|||||||||||||
|
Net
Sales |
$ |
1,695 |
$ |
2,018 |
$ |
987 |
$ |
540 |
|||||
|
Income
(Loss) from Operations |
(1,084 |
) |
(813 |
) |
(1,418 |
) |
(157 |
) | |||||
|
Net
Income (Loss) |
(1,077 |
) |
(816 |
) |
(1,436 |
) |
(517 |
) | |||||
|
Net
Income (Loss) per share-Basic |
(.10 |
) |
(.07 |
) |
(.13 |
) |
(.04 |
) | |||||
|
Net
Income (Loss) per share-Diluted |
(.10 |
) |
(.07 |
) |
(.13 |
) |
(.04 |
) | |||||
|
Year
Ended September 30, 2003 |
|||||||||||||
|
Net
Sales |
$ |
2,971 |
$ |
3,858 |
$ |
3,042 |
$ |
1,723 |
|||||
|
Income
(Loss) from Operations |
63 |
29 |
(957 |
) |
(1,636 |
) | |||||||
|
Net
Income (Loss) |
61 |
26 |
(953 |
) |
(1,625 |
) | |||||||
|
Net
Income (Loss) per share-Basic |
.03 |
.01 |
(.09 |
) |
(.15 |
) | |||||||
|
Net
Income (Loss) per share-Diluted |
.03 |
.01 |
(.09 |
) |
(.15 |
) | |||||||
*See
Note 13
Page
56
NOTE
13 - AMENDED QUARTERLY FINANCIAL STATEMENTS
In
December 2004, the Company discovered an error resulting in an adjustment
relating to the beneficial conversion feature of the Convertible Note
transaction, as discussed in Note 7, and the resulting interest expense from the
amortization of the debt financing costs should have been recorded. In addition,
the Company discovered that, as discussed in Note 9, the warrants, previously
recorded as equity, should have been recorded as a liability, until such time as
the registration of the shares subject to the warrant becomes effective. The
Company intends to file an amended Form 10Q, to reflect these changes, which
will show the following changes:
|
AS
ORIGINALLY FILED |
AS
AMENDED |
||||||
|
CURRENT
LIABILITIES |
$ |
2,309,552 |
$ |
2,966,712 |
|||
|
LONG-TERM
LIABILITIES |
$ |
2,351,273 |
$ |
1,707,995 |
|||
|
TOTAL
LIABILITIES |
$ |
4,660,825 |
$ |
4,674,707 |
|||
|
STOCKHOLDERS
EQUITY (DEFICIT) |
$ |
(4,850 |
) |
$ |
(18,732 |
) | |
|
|
AS
ORIGINALLY FILED |
AS
AMENDED |
|||||
|
NINE
MONTHS |
|||||||
|
INTEREST
EXPENSE |
$ |
18,510 |
$ |
23,896 |
|||
|
NET
LOSS |
$ |
(3,323,033 |
) |
$ |
(3,328,579 |
) | |
|
NET
LOSS PER SHARE |
$ |
(0.29 |
) |
$ |
(0.29 |
) | |
|
THREE
MONTHS |
|||||||
|
INTEREST
EXPENSE |
$ |
17,815 |
$ |
22,801 |
|||
|
NET
LOSS |
$ |
(1,431,033 |
) |
$ |
(1,436,019 |
) | |
|
NET
LOSS PER SHARE |
$ |
(0.13 |
) |
$ |
(0.13 |
) | |
Page
57
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Mitek Systems, Inc.:
We
have audited the accompanying balance sheet of Mitek Systems, Inc. (the
“Company”) as of September 30, 2004, and the related statements of operations,
stockholders’ deficit, and cash flows for the year ended September 30, 2004.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). These standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company at September 30, 2004,
and the results of its operations and its cash flows for the year ended
September 30, 2004, in conformity with accounting principles generally accepted
in the United States of America.
/s/
Stonefield Josephson, Inc.
STONEFIELD
JOSEPHSON, INC.
Santa
Monica, California
January
12, 2005
Page
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the Board of Directors and Stockholders of Mitek Systems, Inc.:
We
have audited the accompanying balance sheet of Mitek Systems, Inc. (the
“Company”) as of September 30, 2003, and the related statements of operations,
stockholders’ deficit, and cash flows for the years ended September 30, 2003 and
2002. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). These standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company at September 30, 2003,
and the results of its operations and its cash flows for the years ended
September 30, 2003 and 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Deloitte & Touche, LLP
San
Diego, California
December
29, 2003
Page
59
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM
9A. 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 year
ended September 30, 2004. During the fiscal quarter ended September 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 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 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 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.
Page
60
PART
III
ITEM
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information
with respect to Directors may be found under the caption “Election of Directors
and Management Information” of our Proxy Statement for the Annual Meeting of
Shareholders to be held February 2, 2005 (the “Proxy Statement”). Such
information is incorporated herein by reference.
The
information in the Proxy Statement set forth under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
We have
adopted the Mitek Systems, Inc. financial Code of Professional Conduct (the
“finance code of ethics”), a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer, Corporate Controller and other finance
organization employees. The finance code of ethics is publicly available on our
website at www.miteksys.com. If we make any amendments to the finance code of
ethics or grant any waiver, including any implicit waiver, from a provision of
the code to our Chief Executive Officer, Chief Financial Officer or Corporate
Controller that requires disclosure under applicable SEC rules, we intend to
disclose the nature of such amendment or waiver on our website.
Page
61
ITEM
11. EXECUTIVE
COMPENSATION
The
information in the Proxy Statement set forth under the captions “Information
Regarding Executive Officer Compensation” and “Information Regarding the Board
and its Committees - Director Compensation” is incorporated herein by reference.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information in the Proxy Statement set forth under the captions “Equity
Compensation Plan Information” and “Information Regarding Beneficial Ownership
of Principal Shareholders, Directors, and Management” is incorporated herein by
reference.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
information set forth under the captions “Certain Relationships and Related
Transactions” of the Proxy Statement is incorporated herein by reference.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Information
concerning principal accountant fees and services appears in the proxy statement
under the heading “Fees Paid to Deloitte & Touche LLP” and is incorporated
herein by reference.
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS
ON FORM 8-K
(a)
(1) The
following documents are included in the Company's Annual
Report to Stockholders for the year ended September 30, 2004:
Report to Stockholders for the year ended September 30, 2004:
Reports
of Independent Registered Public Accounting Firm
Balance
Sheets -
As
of
September
30, 2004 and 2003
Page
62
Statements
of Operations -
For
the Years Ended
September
30, 2004, 2003, and 2002
Statements
of
Stockholders’
Equity (Deficit) -
For
the Years Ended
September
30, 2004,
2003, and 2002
Statements
of Cash Flows -
For
the Years Ended
September
30, 2004, 2003, and 2002
Notes
to Financial Statements -
For
the years Ended
September
30, 2004, 2003, and 2002
With
the exception of the financial statements listed above and
the
other information incorporated by reference herein, the Annual
Report
to Stockholders for the fiscal year ended September 30,
2004,
is not to be deemed to be filed as part of this report.
(a) (2) Exhibits:
|
3.1 |
Certificate
of Incorporation of Mitek Systems of Delaware Inc. (now Mitek Systems,
Inc.), a Delaware corporation, as amended. (1) |
|
3.2 |
Bylaws
of Mitek Systems, Inc. as Amended and Restated. (1) |
|
10.1 |
1986
Stock Option Plan (2) |
|
10.2 |
1988
Non Qualified Stock Option Plan (2) |
|
10.3 |
1996
Stock Option Plan(3) |
|
10.4 |
1999
Stock Option Plan (4) |
|
10.5 |
401(k)
Plan (2) |
Page
63
|
23. |
Consents
of Independent Registered Public Accounting Firms |
|
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. |
| (1) | Incorporated by reference to the exhibits to the Company’ Annual Report on Form 10-K for the fiscal year ended September 30, 1987 |
| (2) | Incorporated by reference to the exhibits to the Company's Registration Statement on Form SB-2 originally filed with the SEC on July 9, 1996 |
| (3) | Incorporated by reference to the exhibits to the Company’s Registration Statement on Form 10-K for the fiscal year ended September 30, 2001 |
| (4) | Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-8 originally filed with the SEC on June 10, 1999. |
|
Upon
request, the Registrant will furnish a copy of any of the listed
exhibits for $0.50 per page. |
| (b) | The following is a list of Current Reports on Form 8-K filed by the Company during the last quarter of the fiscal year ended September 30, 2004: |
| Form 8-K filed with the Securities and
Exchange Commission on July 8, 2004, under Item 5 and Item 7 announced
that Mitek Systems, Inc. had sold certain assets and granted exclusive
distribution and licensing rights to Harland Financial Solutions,
Inc. Form 8-K filed with the Securities and Exchange Commission on August 9, 2004, under Item 7 and Item 12 announced Mitek Systems, Inc.'s financial results for the third fiscal quarter ended June 30, 2004. Form 8-K filed with the Securities and Exchange Commission on September 21, 2004, under Item 5 and Item 9 announced a change in the directors of Mitek Systems, Inc. |
Page
64
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
| Dated: May 12, 2005 | MITEK SYSTEMS, INC. | |
| |
|
|
| By: | /s/ James B. DeBello | |
|
James B. DeBello, | ||
| President, Chief Executive Officer | ||
Page
65
SUPPLEMENTAL
INFORMATION
CORPORATE
OFFICE
Mitek
Systems, Inc.
14145
Danielson Street, Suite B
Poway,
California 92064
(858)
513-4600
CORPORATE
OFFICERS
John
M. Thornton, Chairman of the Board and Chief Financial Officer
James
B. DeBello , President and Chief Executive Officer
Murali
Narayanan, Vice President of Marketing
Emmanuel
deBoucaud, Vice President of Sales
Grigori
Nepomniachtchi, Chief Technical Officer
TRANSFER
AGENT
Mellon
Investor Services LLC
400
S. Hope Street, Fourth Floor, Los Angeles, California 90071
www.melloninvestor.com
AUDITORS
Stonefield
& Josephson, Inc.
1620
26th
St, Suite 400 South, Santa Monica, California 90404
DIRECTORS
John
M. Thornton, Chairman of the Board, and Chief Financial Officer
Sally
B. Thornton, Investor
Michael
Bealmear (1) (2)
James
B. DeBello, President, Chief Executive Officer
Gerald
I. Farmer, Ph.D. (1) (2)
William
P. Tudor (1) (2)
NOTES
(1)
Compensation Committee
(2)
Audit Committee
Page
66
FORM
10-K REPORT
Copies
of the Company’s Form 10-K report to the Securities and Exchange Commission, are
available free to stockholders and may be obtained by writing or calling
Secretary, Mitek Systems, Inc., 14145 Danielson St., Suite B, Poway, California
92064, phone (858) 513-4600.
Page
67
Exhibit
23
INDEPENDENT
AUDITORS' CONSENT
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in Registration Statement Nos.
333-23707, 333-80567, 333-58032 and 333-106843 of Mitek Systems, Inc. on Form
S-8 of our report dated January 12, 2005, appearing in this Amendment No. 1 to
Annual Report on Form 10-K of Mitek Systems, Inc. for the year ended September
30, 2004.
/s/
Stonefield Josephson, Inc.
Stonefield
Josephson, Inc.
Santa
Monica, California
May 11,
2005
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in Registration Statement Nos.
333-23707, 333-80567, 333-58032 and 333-106843 of Mitek Systems, Inc. on Form
S-8 of our report dated December 29, 2003, appearing in this Amendment No. 1 to
Annual Report on Form 10-K of Mitek Systems, Inc. for the year ended September
30, 2004.
/s/
Deloitte & Touche, LLP
Deloitte
& Touche, LLP
San
Diego, California
May 12,
2005
Exhibit
31.1
CERTIFICATION
OF
CHIEF
EXECUTIVE OFFICER
I,
James B. DeBello, certify that:
1.
I
have reviewed this annual report on Form 10-K of Mitek Systems,
Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report.
4.
The
registrant's other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; and
b)
Evaluated the effectiveness of the registrant s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5.
The
registrant's other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal control over financial
reporting.
| |
|
|
| Dated: May 12, 2005 | By: | /s/ James B. DeBello |
|
James B. DeBello | ||
| Chief Executive Officer | ||
CERTIFICATION
OF
CHIEF
FINANCIAL OFFICER
I,
John M. Thornton, certify that:
1.
I
have reviewed this annual report on Form 10-K of Mitek Systems,
Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report.
4.
The
registrant's other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; and
b)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5.
The
registrant's other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal control over financial
reporting.
| |
|
|
| Dated: May 12, 2005 | By: | /s/ John M. Thornton |
|
John M. Thornton | ||
| Chief Financial Officer | ||
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
I,
James B. DeBello, Chief Executive Officer of Mitek Systems, Inc. (the
“Registrant”), do hereby certify pursuant to Rule 13a of the Securities and
Exchange Act of 1934, as amended, and Section 906 of the Sarbanes-Oxley Act of
2002 and Section 1350 of Chapter 63 of Title 18 of the United States Code
that:
(1)
the Registrant’s Annual Report on Form 10-K of the Registrant for the year ended
September 30, 2004 (the "Report"), to which this statement is filed as an
exhibit, fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934, as amended; and
(2)
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Registrant.
| |
|
|
| Dated: May 12, 2005 | By: | /s/ James B. DeBello |
|
James B. DeBello | ||
| Chief Executive Officer | ||
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
I,
John M. Thornton, Chief Financial Officer of Mitek Systems, Inc. (the Registrant
), do hereby certify pursuant to Rule 13a of the Securities and Exchange Act of
1934, as amended, and Section 906 of the Sarbanes-Oxley Act of 2002 and Section
1350 of Chapter 63 of Title 18 of the United States Code that:
(1)
the Registrant s Annual Report on Form 10-K of the Registrant for the year ended
September 30, 2004 (the "Report"), to which this statement is filed as an
exhibit, fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934, as amended; and
(2)
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Registrant.
| |
|
|
| Dated: May 12, 2005 | By: | /s/ John M. Thornton |
|
John M. Thornton | ||
| Chief Financial Officer | ||