SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2003 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15235
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Mitek Systems, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 87-0418827
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14145 Danielson St, Ste B,Poway, California 92064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 513-4600
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
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There were 11,368,370 shares outstanding of the registrant's Common Stock
as of January 31, 2004.
MITEK SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2003
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements Page
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a) Balance Sheets
As of December 31, 2003 and September 30, 2003 (Unaudited).............. 1
b) Statements of Operations
for the Three Months Ended December 31, 2003 and 2002(Unaudited) ....... 2
c) Statements of Cash Flows
for the Three Months Ended December 31, 2003 and 2002(Unaudited) ....... 3
d) Notes to Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 11
Item 4. Controls and Procedures...................................................... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................. 12
SIGNATURE...................................................................................... 13
BALANCE SHEETS
December 31, September 30,
2003 2003
(Unaudited) (Unaudited)
-------------------- ---------------------
ASSETS
CURRENT ASSETS:
Cash $ 1,465,077 $ 1,819,102
Accounts receivable-net of allowances of
$277,697 and $253,697 respectively 1,748,079 2,900,693
Note receivable - related party 189,782 195,623
Inventories - net 35,646 43,182
Prepaid expenses and other assets 161,795 84,167
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Total current assets 3,600,379 5,042,767
PROPERTY AND EQUIPMENT-net 280,328 321,029
OTHER ASSETS 223,033 279,985
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TOTAL ASSETS $ 4,103,740 $ 5,643,781
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 656,914 $ 881,032
Accrued payroll and related taxes 480,350 690,388
Deferred revenue 788,991 884,917
Other accrued liabilities 228,593 245,818
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Total current liabilities 2,154,848 2,702,155
LONG-TERM LIABILITIES:
Deferred rent 15,844 16,135
Deferred revenue 286,130 318,826
Long-term payable 25,642 34,194
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Total long-term liabilities 327,616 369,155
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TOTAL LIABILITIES 2,482,464 3,071,310
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares authorized,
11,314,593 and 11,185,282 issued and outstanding at
December 31, 2003 and September 30,2003, respectively 11,315 11,185
Additional paid-in capital 9,453,128 9,327,736
Accumulated deficit (7,843,167) (6,766,450)
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Net stockholders' equity 1,621,276 2,572,471
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,103,740 $ 5,643,781
================================================
1
MITEK SYSTEMS, INC
STATEMENTS OF OPERATIONS
Unaudited
THREE MONTHS ENDED
December 31,
2003 2002
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SALES
Software $ 671,650 $ 2,449,099
Hardware 370,105 99,030
Professional Services, education and other 653,127 422,968
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NET SALES 1,694,882 2,971,097
COSTS AND EXPENSES:
Cost of sales-Software 115,412 257,179
Cost of sales-Hardware 339,977 187,938
Cost of sales-Professional Services, education and other 287,123 194,902
Operations 361,108 462,766
Selling and marketing 626,791 828,120
Research and development 509,060 572,120
General and administrative 539,304 404,642
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Total costs and expenses 2,778,775 2,907,667
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OPERATING (LOSS) INCOME (1,083,893) 63,430
Other income (expense) - net 9,729 (1,689)
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(LOSS) INCOME BEFORE INCOME TAXES (1,074,164) 61,741
PROVISION FOR INCOME TAXES 2,550 1,230
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NET (LOSS) INCOME $ (1,076,714) $ 60,511
NET (LOSS) INCOME PER SHARE - BASIC AND DILUTED $ (0.10) $ 0.01
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 11,264,356 11,138,772
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WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING - DILUTED 11,264,356 11,257,380
================================================
See accompanying notes to financial statements
2
MITEK SYSTEMS, INC
STATEMENTS OF CASH FLOWS
Unaudited
THREE MONTHS ENDED
December 31,
2003 2002
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OPERATING ACTIVITIES
Net (loss) income $ (1,076,714) $ 60,511
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 113,044 115,862
Provision for bad debts 24,000 (25,000)
Provision for sales returns & allowances 31,768 51,000
Fair value of stock options issued to non-employees 0 3,523
Changes in operating assets and liabilities:
Accounts receivable 1,128,614 669,225
Inventories, prepaid expenses, and other assets (70,092) (54,299)
Accounts payable (224,118) (628,766)
Accrued payroll and related taxes (210,038) 198,604
Long-term payable (8,552) (8,552)
Deferred revenue (128,622) 195,454
Other accrued liabilities (49,284) 10,747
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Net cash (used in) provided by operating activities (469,994) 588,309
INVESTING ACTIVITIES
Purchases of property and equipment (15,395) (114,511)
Payment (advances) on related party note receivable-net 5,841 (29,864)
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Net cash used in investing activities (9,554) (144,375)
FINANCING ACTIVITIES
Proceeds from borrowings 0 360,000
Repayment of borrowings 0 (360,000)
Proceeds from exercise of stock options 125,523 0
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Net cash provided by financing activities 125,523 0
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NET (DECREASE) INCREASE IN CASH (354,025) 443,934
CASH AT BEGINNING OF PERIOD 1,819,102 760,416
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CASH AT END OF PERIOD $ 1,465,077 $ 1,204,350
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SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest $ - $ 6,628
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Cash paid for income taxes $ 2,550 $ 1,230
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See accompanying notes to financial statements
3
MITEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements of Mitek Systems, Inc. (the
"Company") have been prepared in accordance with the instructions to Form 10-Q
and, therefore, do not include all information and footnote disclosures that are
otherwise required by Regulation S-X and that will normally be made in the
Company's Annual Report on Form 10-K. The financial statements do, however,
reflect all adjustments (solely of a normal recurring nature) which are, in the
opinion of management, necessary for a fair statement of the results of the
interim periods presented.
The operations from Fiscal 2003 and the quarter ended December 31, 2003
have resulted in significant operating losses. 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 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. See also Note 4
regarding Revolving Line of Credit.
Results for the three months ended December 31, 2003 and 2002 are not
necessarily indicative of results which may be reported for any other interim
period or for the year as a whole.
2. New Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees. This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This
Interpretation does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related guarantee.
This Interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which is being superseded. The initial recognition and measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in this Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company has issued no guarantees that qualify for
disclosure in this interim financial statement.
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148 Accounting for Stock-Based Compensation - Transition
and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
amendments to SFAS No. 123 provided for under SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company has not elected to adopt the fair value accounting provisions of SFAS
No. 123 and therefore the adoption of SFAS No. 148 did not have a material
effect on our results of operations or financial position.
In January 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company adopted the provisions of this Statement and it
had no impact on its financial statements.
4
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 were initially to apply to variable
interest entities created after January 31, 2003. The consolidation requirements
were initially to apply to transactions entered into prior to February 1, 2003
in the first fiscal year or interim period beginning after June 15, 2003. The
FASB postponed implementation of FIN 46 in December 2003. The Company has no
variable interest entities.
3. Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees, and FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation.
Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, Accounting for Stock-based Compensation, and has been determined
as if the Company had accounted for its employee stock options under the fair
value method of that Statement. The fair value for these options was estimated
at the dates of grant using the Black-Scholes option valuation model with the
following weighted-average assumptions for December 31, 2003 and 2002.
2003 2002
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Risk free interest rates 1.9% 5.5%
Dividend yields 0% 0%
Volatility 78% 82%
Weighted average expected life 3 years 3 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for net loss per share
information):
Three months ended
December 31
-----------------------------
2003 2002
Net income (loss) as reported $(1,077) $ 60
Net income (loss) pro forma (1,237) (663)
Net income (loss) per share as reported (.10) .01
Net income (loss) per share pro forma (.11) (.06)
4. Revolving Line of Credit
On February 19, 2003 the Company revised its working capital revolving line
of credit. This line requires interest to be paid at prime plus 1 percentage
point, and is subject to a limit on maximum available borrowings of $750,000.
The Company had no borrowings under the working capital line of credit on
December 31, 2003 or on September 30, 2003. This credit line is subject to a net
worth covenant whereby the Company must 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. The Company is currently negotiating with its
lender regarding a new credit line. No assurance can be made that the Company
will be able to obtain a new credit line on favorable terms, or at all. The
inability to obtain a favorable credit line would have a detrimental impact on
the Company's liquidity and could have a material adverse effect on its
business, results of operations and financial position.
5
5.Product Revenues - Below is a summary of the revenues by product lines.
Three Months Ended
December 31
REVENUE 2003 2002
(000'S) ---- ----
Recognition Toolkits $ 452 $1,538
Check Image Solutions 688 825
Document and Image Processing
Solutions 240 349
Maintenance and other 315 259
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Total Revenue $ 1,695 $ 2,971
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6
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion
In addition to historical information, this Management's Discussion and
Analysis of Financial Condition and Results of Operations (the "MD&A") contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. As contained herein, the words "expects,"
"anticipates," "believes," "intends," "will," and similar types of expressions
identify forward-looking statements, which are based on information that is
currently available to the Company, speak only as of the date hereof, and are
subject to certain risks and uncertainties. To the extent that the MD&A contains
forward-looking statements regarding the financial condition, operating results,
business prospects or any other aspect of the Company, please be advised that
the Company's actual financial condition, operating results and business
performance may differ materially from that projected or estimated by the
Company in forward-looking statements. The Company has attempted to identify
certain of the factors that it currently believes may cause actual future
experiences and results to differ from the Company's current expectations. The
difference may be caused by a variety of factors, including, but not limited, to
the following: (i) adverse economic conditions; (ii) decreases in demand for
Company products and services; (iii) intense competition, including entry of new
competitors into the Company's markets; (iv) increased or adverse federal, state
and local government regulation; (v) the Company's inability to retain or renew
its working capital credit line or otherwise obtain additional capital on terms
satisfactory to the Company; (vi) increased or unexpected expenses; (vii) lower
revenues and net income than forecast; (viii) price increases for supplies; (ix)
inability to raise prices; (x) the risk of additional litigation and/or
administrative proceedings involving the Company and its employees; (xi) higher
than anticipated labor costs; (xii) adverse publicity or news coverage regarding
the Company; (xiii) inability to successfully carry out marketing and sales
plans, including the Company's strategic realignment; (xiv) loss of key
executives; (xv) changes in interest rates; (xvi) inflationary factors; (xvii)
and other specific risks that may be alluded to in this MD&A.
The Company's strategy for fiscal 2004 is to grow the identified markets
for its new products and enhance the functionality and marketability of the
Company's character recognition technology. In particular, Mitek is determined
to expand the installed base of its Recognition Toolkits and leverage existing
technology by devising recognition-based applications to detect potential fraud
and loss at financial institutions. The Company also seeks to penetrate
additional markets for its Document and Image Processing Solutions by taking
advantage of specific vertical applications which lend themselves to this type
of labor-saving technology. The Company also seeks to expand the installed base
of its Check Imaging Solutions by entering into reselling relationships with key
resellers who will better penetrate the market and provide entree into a larger
base of community.
Management presumes that users of these interim financial statements and
information have read or have access to the discussion and analysis for the
preceding fiscal year. See also Item 3, "Quantitative and Qualitative
Disclosures about Market Risk."
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company enters into contractual arrangements with end users that may
include licensing of the Company's software products, product support and
maintenance services, consulting services, resale of third-party hardware, or
various combinations thereof, including the sale of such products or services
separately. The Company's accounting policies regarding the recognition of
revenue for these contractual arrangements is fully described in Notes to the
Audited Financial Statements for the year ended September 30, 2003 included in
the Company's Form 10-K.
The Company considers many factors when applying accounting principles
generally accepted in the United States of America related to revenue
recognition. These factors include, but are not limited to:
o The actual contractual terms, such as payment terms, delivery dates, and
pricing of the various product and service elements of a contract
o Availability of products to be delivered
o Time period over which services are to be performed
o Creditworthiness of the customer
o The complexity of customizations to the Company's software required by
service contracts
7
o The sales channel through which the sale is made (direct, VAR, distributor,
etc.)
o Discounts given for each element of a contract
o Any commitments made as to installation or implementation "go live" dates
Each of the relevant factors is analyzed to determine its impact,
individually and collectively with other factors, on the revenue to be
recognized for any particular contract with a customer. Management is required
to make judgments regarding the significance of each factor in applying the
revenue recognition standards, as well as whether or not each factor complies
with such standards. Any misjudgment or error by management in its evaluation of
the factors and the application of the standards, especially with respect to
complex or new types of transactions, could have a material adverse affect on
the Company's future revenues and operating results.
Accounts Receivable.
We evaluate the creditworthiness of our customers prior to order
fulfillment and we perform ongoing credit evaluations of our customers to adjust
credit limits based on payment history and our assessment of the customer's
current creditworthiness. We constantly monitor collections from our customers
and maintain a provision for estimated credit losses that is based on historical
experience and on specific customer collection issues. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. Since our revenue recognition policy requires
customers to be deemed creditworthy, our accounts receivable are based on
customers whose payment is reasonably assured. Our accounts receivable are
derived from sales to a wide variety of customers. We do not believe a change in
liquidity of any one customer or our inability to collect from any one customer
would have a material adverse impact on our financial position.
Deferred Income Taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. We maintain a valuation
allowance against the deferred tax asset due to uncertainty regarding the future
realization based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences.
Until such time as the Company can demonstrate that it will no longer incur
losses or if the Company is unable to generate sufficient future taxable income
we could be required to maintain the valuation allowance against our deferred
tax assets.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Comparison of Three Months Ended December 31, 2003 and 2002
Net Sales. Net sales for the three month period ended December 31, 2003
were $1,695,000, compared to $2,971,000 for the same period in 2002, a decrease
of $1,276,000, or 43%. The decrease was primarily attributable to a 71% decline
in revenue associated with our recognition toolkits, the result of enterprise
licenses signed in the first quarter of 2003 which will not renew until later in
fiscal 2004. Revenue from Check Image Solutions also declined by 16%. The
Company continues to experience longer sales cycles, which we believe are due to
continued customer hesitancy to adopt check imaging solutions mandated by the
passage of Check 21. While the Company believes this legislation will eventually
result in additional customer demand for check imaging solutions, the Company
believes customers have been reluctant to commit to purchases, while evaluating
the full impact of this newly-enacted legislation. Sales in the Document and
Image Processing Solutions also declined, by 31%. This is primarily due to the
absence of a dedicated sales force for this product line, which the Company
intends to put into place later during the 2004 fiscal year. Sales of
Maintenance rose by 22%, reflecting the continued increase in the installed base
of customers purchasing product support.
Cost of Sales. Cost of Sales for the three month period ended December 31,
2003 was $743,000, compared to $640,000 for the same period in 2002, an increase
of $103,000 or 16%. Stated as a percentage of net sales, cost of sales increased
to 44% for the three month period ended December 31, 2003 compared to 22% for
the same period in 2002. The dollar increase, and the increase as a percentage
of sales, in cost of sales is almost entirely due to increased hardware
installations related to the Company's CheckQuest product line, which typically
carry higher costs, during the three months, as compared to the same period in
2003.
Operations. Operations expenses include costs associated with shipping and
receiving, quality assurance, customer support, installation and training. As
installation, training, maintenance and customer support revenues are
recognized, an appropriate amount of these costs are charged to cost of sales,
with unabsorbed costs remaining in
8
operations expense. Gross Operations expense for the three-month period ended
December 31, 2002 were $510,000, compared to $555,000 for the same period in
2002. Net Operations expenses for the three-month period ended December 31, 2003
were $361,000, compared to $463,000 for the same period in 2002, a decrease of
$102,000 or 22%. As a percentage of net sales, operations expenses increased to
21% for the three-month period ended December 31, 2003, compared to 16% for the
same period in 2002. The dollar decrease in gross expenses is primarily
attributable to reduced amount of salaries and wages, due to a reassignment of
personnel into sales functions. The dollar decrease in net expense is
attributable to the reduced spending discussed above and additional amounts
being charged to cost of sales, as a result of the completion of several
installations. The increase in expenses as a percentage of net sales is
primarily attributable to lower revenues.
Selling and Marketing. Selling and marketing expenses for the three month
period ended December 31, 2003 were $627,000, compared to $828,000 for the same
period in 2002, a decrease of $201,000 or 24%. Stated as a percentage of net
sales, selling and marketing expenses increased to 37% for the three month
period ended December 31, 2003, compared to 28% for the same period in 2002. The
dollar decrease in expenses is primarily attributable to reduced commissions
resulting from lower sales. The increase in expenses as a percentage of net
sales is primarily attributable to lower revenues.
Research and Development. Research and development expenses are incurred to
maintain existing products, develop new products or new product features, and
development of custom projects. Research and development expenses for the three
month period ended December 31, 2003 were $509,000 compared to $572,000 for the
same period in 2002, a decrease of $63,000 or 11%. Stated as a percentage of net
sales, research and development expenses increased to 30% for the three month
period ended December 31, 2003, compared to 19% for the same period in 2002. The
decrease in expenses for the three-month period is primarily the result of a
reclassification of costs associated with professional services sold and
completed during the quarter. Such costs, amounting to $92,000 were reclassified
as costs of goods sold, and served to reduce research and development expense
during the quarter. The increase in expenses as a percentage of net sales is
primarily attributable to lower revenues.
General and Administrative. General and administrative expenses for the
three month period ended December 31, 2003 were $539,000, compared to $405,000
for the same period in 2002, an increase of $134,000 or 33%. As a percentage of
net sales, general and administrative expenses increased to 32% in 2003, from
14% in 2002. The dollar increase in expenses for the three month period is
attributable to $78,000 of additional salaries expense, as the President and
Chief Executive Officer was not a separate position in 2002, $21,000 in
increased legal costs primarily relating to intellectual property work, and
$49,000 in increased reserve for bad debt expense. The increase in expenses as a
percentage of net sales is primarily attributable to lower revenues.
Interest and Other Income (Expense) - Net. Interest and other income
(expense) for the three-month period ended December 31, 2003 was $10,000,
compared to interest and other income (expense) of ($1,000) for the same period
in 2002, a change of $11,000. The increase in net interest income for the period
ended December 31, 2003 is primarily the result of interest payable by the
Company's affilliate, Mitek Systems, Ltd.
LIQUIDITY AND CAPITAL
At December 31, 2003 the Company had $1,465,000 in cash as compared to
$1,819,000 at September 30, 2003. Accounts receivable totaled $1,748,000, a
decrease of $1,153,000 over the September 30, 2003, balance of $2,901,000. This
decrease was primarily a result of collections made on 2003 fourth fiscal
quarter sales.
The Company has financed its cash needs during the first quarter of fiscal
2004 primarily from collection of accounts receivable. The Company financed its
cash needs during fiscal 2003 primarily from collection of accounts receivable.
Net cash provided by (used by) operating activities during the three months
ended December 31, 2003 was ($470,000). The primary use of cash from operating
activities was a decrease in accounts payable of $224,000, a decrease to the
deferred revenue accounts of $129,000 and a decrease in accrued payroll and
related taxes of $210,000. The primary source of cash from operating activities
was a decrease in accounts receivable of $1,129,000, depreciation and
amortization of $113,000. During the first quarter, the Company had no
borrowings on its revolving line of credit. The Company used part of the cash
provided from operating activities to finance the acquisition of equipment used
in its business.
During the quarter ended December 31, 2003, the Company also received cash
of approximately $125,000 from financing activities in the form of proceeds from
the exercise of stock options by employees and directors.
9
The Company's working capital and current ratio were $1,445,000 and 1.67,
respectively, at December 31, 2003, and $2,341,000 and 1.87, respectively, at
September 30, 2003. At December 31, 2003, total liabilities to equity ratio was
1.53 to 1 compared to 1.19 to 1 at September 30, 2003. As of December 31, 2003,
total liabilities were $588,000 less than on September 30, 2003.
The Company currently has a working capital line of credit. This line
requires interest to be paid at prime plus 1 percentage point, but is subject to
a limit on available borrowings of $750,000. The Company had no borrowings under
the working capital line of credit on December 31, 2003 or on September 30,
2003. This credit line is subject to a net worth covenant whereby the Company
must maintain a net worth of $2,000,000 in order to use the credit line. Though
the Company had no borrowings under the credit line as of December 31, 2003, at
such time the Company's net worth was $1,621,000.
The existing credit line expires on February 28, 2004. The loss sustained
during the quarter ended December 31, 2003 caused the Company's net worth to
fall to $1,621,000. 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. The Company is currently negotiating with its
lender regarding a new credit line. No assurance can be made that the Company
will be able to obtain a new credit line on favorable terms, or at all. The
inability to obtain a favorable credit line would have a detrimental impact on
the Company's liquidity and could have a material adverse effect on its
business, results of operations and financial position.
There are no significant capital expenditures planned for the foreseeable
future.
The Company evaluates its cash requirements on a quarterly basis.
Historically, the Company has managed its cash requirements principally from
cash generated from operations. Although the Company's strategy for fiscal 2004
is to grow the identified markets for its new products and enhance the
functionality and marketability of the Company's character recognition
technology, it has not yet observed a significant change in liquidity or future
cash requirements as a result of this strategy. Cash requirements over the next
twelve months are principally to fund operations, including spending on research
and development. The Company believes that it will have sufficient liquidity to
finance its operations for the next twelve months using existing cash, cash
generated from operations, and borrowings under the Company's line of credit, as
discussed above.
The operations from Fiscal 2003 and the quarter ended December 31, 2003
have resulted in significant operating losses. 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 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.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees. This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This
Interpretation does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related guarantee.
This Interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which is being superseded. The initial recognition and measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in this Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company has issued no guarantees that qualify for
disclosure in this interim financial statement.
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148 Accounting for Stock-Based Compensation - Transition
and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
amendments to SFAS No. 123 provided for under SFAS No. 148 are effective for
financial
10
statements for fiscal years ending after December 15, 2002. The Company has not
elected to adopt the fair value accounting provisions of SFAS No. 123 and
therefore the adoption of SFAS No. 148 did not have a material effect on our
results of operations or financial position.
In January 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company adopted the provisions of this Statement and it
had no impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 were initially to apply to variable
interest entities created after January 31, 2003. The consolidation requirements
were initially to apply to transactions entered into prior to February 1, 2003
in the first fiscal year or interim period beginning after June 15, 2003. The
FASB postponed implementation of FIN 46 in December 2003. The Company has no
variable interest entities.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to certain market risks arising from adverse changes
in interest rates, primarily due to the potential effect of such changes on the
Company's variable rate working capital line of credit, as described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital." As of December 31, 2003, the Company had no
outstanding balance under its line of credit. The Company does not use interest
rate derivative instruments to manage exposure to interest rate changes.
ITEM 4
CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of our management, including Mr. DeBello, the Company's President
and Chief Executive Officer and Mr. Thornton, the Company's Chairman of the
Board and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14 as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based upon that evaluation, Mr. DeBello and Mr. Thornton
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company's periodic filings with the Securities and Exchange
Commission. There was no change in the Company's internal control over financial
reporting that occurred during the fiscal quarter covered by this Quarterly
Report likely to materially affect our internal control over financial
reporting.
11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
The following exhibits are filed herewith:
+------------------------+-------------------------------------------------------------+
| Exhibit Number | Exhibit Title |
+------------------------+-------------------------------------------------------------+
| 31.1 | Rule 15d-14(a) Certification of the Chief Executive |
| | Officer |
+------------------------+-------------------------------------------------------------+
| 31.2 | Rule 15d-14(a) Certification of the Chief Financial |
| | Officer |
+------------------------+-------------------------------------------------------------+
| 32.1 | Section 1350 Certification of the Chief Executive |
| | Officer |
+------------------------+-------------------------------------------------------------+
| 32.2 | Section 1350 Certification of the Chief Financial |
| | Officer |
+------------------------+-------------------------------------------------------------+
b. Reports on Form 8-K: Reports on Form 8-K were filed on November 18,
2003 and December 30, 2003 by the Company during the three months
ended December 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MITEK SYSTEMS, INC.
Date: February 12, 2004 /s/ James B. Debello
--------------------------------
James B. DeBello, President and
Chief Executive Officer
Date: February 12, 2004 /s/ John M. Thornton
--------------------------------
John M. Thornton, Chairman and
Chief Financial Officer
13