<PAGE>
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 JUNE 30, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15235
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MITEK SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 87-0418827
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10070 CARROLL CANYON ROAD, SAN DIEGO, CALIFORNIA 92131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 635-5900
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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
---- ----
There were 11,553,152 shares outstanding of the registrant's Common Stock
as of July 23, 1998.
<PAGE>
PART I: FINANCIAL INFORMATION
MITEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,427,746 $ 1,261,117
Accounts receivable-net 1,910,689 2,363,028
Note receivable 208,460 502,031
Inventories-net 163,922 415,973
Prepaid expenses and other assets 125,935 151,705
---------------- ----------------
Total current assets 3,836,752 4,693,854
---------------- ----------------
PROPERTY AND EQUIPMENT-at cost 1,145,728 1,150,122
Less accumulated depreciation
and amortization 972,130 945,109
---------------- ----------------
Property and equipment-net 173,598 205,013
---------------- ----------------
OTHER ASSETS 1,478,658 2,289,428
---------------- ----------------
TOTAL $ 5,489,008 $ 7,188,295
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 528,640 485,855
Accrued payroll and related taxes 194,859 272,603
Other accrued liabilities 679,047 652,440
Current portion of long-term liabilities 4,706
---------------- ----------------
Total current liabilities 1,402,546 1,415,604
---------------- ----------------
LONG-TERM LIABILITIES 55,625 21,761
---------------- ----------------
Total liabilities 1,458,171 1,437,365
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COMMITMENTS (NOTE F)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value;
1,000,000 shares authorized;
no shares issued and outstanding
Common stock - $.001 par value;
20,000,000 shares authorized;
11,553,152 and 11,537,009 issued and
outstanding, respectively 11,553 11,537
Additional paid-in capital 9,178,787 9,164,589
Accumulated deficit (5,159,503) (3,425,196)
---------------- ----------------
Total stockholders' equity 4,030,837 5,750,930
---------------- ----------------
TOTAL $ 5,489,008 $ 7,188,295
---------------- ----------------
---------------- ----------------
</TABLE>
See notes to consolidated financial statements
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
June 30, June 30,
1998 1997 1998 1997
----------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
NET SALES $ 1,700,897 $ 700,853 $ 4,488,662 $ 3,677,032
COST OF GOODS SOLD 323,593 284,863 1,251,537 906,189
----------------- --------------- --------------- -----------------
GROSS MARGIN 1,377,304 415,990 3,237,125 2,770,843
----------------- --------------- --------------- -----------------
COSTS AND EXPENSES:
Operations 101,303 74,163 304,374 285,059
General and administrative 467,854 410,671 1,288,283 1,135,874
Research and development 382,682 407,128 1,143,738 1,031,659
Selling and marketing 363,150 590,947 1,338,326 1,526,037
Other charges (Note C) 988,549
Interest income - net (19,228) (26,792) (57,582) (76,093)
----------------- --------------- --------------- -----------------
Total costs and expenses 1,295,761 1,456,117 5,005,688 3,902,536
----------------- --------------- --------------- -----------------
INCOME (LOSS) BEFORE
INCOME TAXES 81,543 (1,040,127) (1,768,563) (1,131,693)
OTHER INCOME (Note D) 34,256
INCOME TAX BENEFIT 104,012 113,169
----------------- --------------- --------------- -----------------
NET INCOME (LOSS) $ 81,543 $ (936,115) $ (1,734,307) $ (1,018,524)
----------------- --------------- --------------- -----------------
----------------- --------------- --------------- -----------------
NET INCOME (LOSS)
PER SHARE - BASIC $ .01 $ (.09) $ (.15) $ (.11)
----------------- --------------- --------------- -----------------
----------------- --------------- --------------- -----------------
NET INCOME (LOSS)
PER SHARE - DILUTED $ .01 $ (.09) $ (.15) $ (.11)
----------------- --------------- --------------- -----------------
----------------- --------------- --------------- -----------------
WEIGHTED AVERAGE COMMON
SHARES - BASIC 11,552,794 10,288,853 11,548,486 9,687,654
----------------- --------------- --------------- -----------------
----------------- --------------- --------------- -----------------
WEIGHED AVERAGE COMMON
SHARES - DILUTED 11,615,592 10,288,853 11,548,486 9,687,654
----------------- --------------- --------------- -----------------
----------------- --------------- --------------- -----------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
1998 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,734,307) $ (1,018,524)
Gain on sale of Fax business (34,256)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 360,006 415,638
Loss on disposal of property 2,423
Asset impairment 489,000
Changes in assets and liabilities:
Accounts & notes receivable 745,910 (116,488)
Inventory, prepaid expense and other assets 43,540 (956,835)
Accounts payable and accrued expenses (68,343) (90,563)
---------------- ----------------
Net cash used in operating activities (196,027) (1,766,772)
---------------- ----------------
INVESTING ACTIVITIES:
Purchases of property and equipment (66,860) (173,181)
Proceeds from sale of Fax business 420,000
Acquisition of TSI - net (205,867)
Proceeds from sale of property and equipment 8
---------------- ----------------
Net cash provided by (used in) investing activities 353,148 (379,048)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from borrowings 150,000
Repayment of notes payable and long-term liabilities (4,706) (156,843)
Proceeds from exercise of stock options and warrants 14,214 68,722
Net proceeds from sales of stock 4,089,316
---------------- ----------------
Net cash provided by financing activities 9,508 4,151,195
---------------- ----------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 166,629 2,005,375
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,261,117 210,413
---------------- ----------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,427,746 $ 2,215,788
---------------- ----------------
---------------- ----------------
</TABLE>
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnote disclosures that are otherwise required by
Regulation S-X and that will normally be made in the Company's Annual Report on
Form 10-K. The financial statements do, however, reflect all adjustments (solely
of a normal recurring nature) which are, in the opinion of management, necessary
for a fair statement of the results of the interim periods presented.
Results for the three and nine months ended June 30, 1998 and 1997 are not
necessarily indicative of results which may be reported for any other interim
period or for the year as a whole.
B. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
-------------------- --------------------
<S> <C> <C>
Raw materials $ 46,278 $ 75,082
Work in process 9,575 0
Finished goods 108,069 340,891
-------------------- --------------------
Total $ 163,922 $ 415,973
==================== ====================
</TABLE>
Inventories are recorded at the lower of cost (on the first-in, first-out
basis) or market.
C. Other Charges
Several charges to operations, totaling $989,000, consist of the following
components:
Goodwill impairment -In June, 1997 the Company purchased substantially all
of the assets of Technology Solutions, Inc., a software developer and solution
provider of document image processing systems. One of the key employees of the
Company, a former principle of Technology Solutions, Inc., opted to resign his
employment. The unexpected departure, in the opinion of management, could
detrimentally impact the future cash flows of the Company. The Company
determined the fair value of the goodwill by evaluating the expected future net
cash flows (undiscounted and without interest charges), in accordance with FAS
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. The evaluation indicates the carrying value of the
goodwill exceeded the fair value, resulting in an impairment loss of $293,000.
License Fee impairment - In April, 1997 the Company entered into an
exclusive software licensing agreement with Parascript LLC. In December, 1997,
Parascript notified the Company of its dissatisfaction with the Company's
progress in marketing the software affected by the license agreement, along with
an assertion that the Company had committed material breach of contract. The
Company has strongly and vigorously denied the claims. A proposed solution to
the dispute by Parascript included converting the Company's software license
from exclusive to non-exclusive. In addition, the Company over-estimated the
availability and the performance of the product and anticipated prices for the
software affected by the agreement. The adversarial condition of the
relationship coupled with the decreased expectations, in the opinion of
management, will detrimentally impact the future cash flows of the Company. The
Company determined the fair value of the goodwill represented by the license fee
paid for the exclusive license by evaluating the expected future net cash flows
(undiscounted and without interest charges), in accordance with FAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. The evaluation indicates the carrying value of the goodwill
exceeded the fair value, resulting in an impairment loss of $196,000. The
Company believes that as a result of continuing discussions with Parascript, the
Company and Parascript will be able to work together in a positive manner,
eliminating the need for recording any further reserve for this situation at
this time.
The Company was sued earlier this year for wrongful termination by two
former employees of its Canadian subsidiary. The Company has strongly defended
the action. The former employees obtained a bench order requiring the amount of
the dispute to be deposited in escrow pending the outcome of the case. In the
initial
<PAGE>
opinion of management, the actions of the Canadian court indicated a high
likelihood of an adverse decision, which necessitated the recording of a
reserve in the amount of $134,000, plus costs, equaling a reserve of
$142,000. Based upon subsequent findings, the Company offered a $34,000
settlement, which was rejected. The Company believes it has a very strong
position in this dispute and that the outcome will have no material effect on
the Company.
In December 1997, the Company entered into an employment agreement with Mr.
Elliot Wassarman (see footnote H. - Restructure). The agreement included the
commitment of the Company to pay certain recruitment and relocation costs
aggregating $166,000.
The Company has traditionally sold its QuickStrokes Application Programmer
Interface products with various acceleration hardware boards. Decreasing prices
coupled with the higher speeds of general hardware have rapidly altered the
market need for these acceleration boards. The largest customer utilizing these
acceleration boards has informed the Company of its intent to discontinue the
offering of these products in the domestic market. As a result, the Company has
recorded a reserve for inventory obsolescence in the amount of $200,000.
D. Sale of Fax business
On January 30, 1998, the Company sold its Fax Products assets in a cash
transaction, resulting in a gain of $34,000. The gross proceeds of the sale were
$420,000 in cash, offset by the carrying value of the assets sold ($308,000) and
costs related to the transaction ($78,000).
E. Net Income (Loss) Per Share
The Company calculates net income (loss) per share in accordance with SFAS
No. 128, Earnings per Share. Net income (loss) per share-basic is based on the
weighted average number of common shares outstanding during the period. Net
income (loss) per share-diluted is based on the weighted average number of
common shares in the period and takes into account the common equivalents affect
of outstanding stock options and warrants (common share equivalents) using the
treasury stock method when the affect is dilutive.
F. Commitments
The Company has signed an agreement to sub-lease approximately 8,824 square
feet of office space adjacent to its primary offices, effective May 1, 1998
through June 30, 2002. The sub-lease will result in reduction of rent expense to
the Company in the amount of $389,176 over the term of the agreement.
G. Option Repricing
During the first quarter the Company undertook an option repricing program
in which employees could elect to have their options repriced at an exercise
price of $.89. There were a total number of 762,052 options repriced under this
program.
H. Restructure
The Company entered into an Employment Agreement with Mr. Elliot Wassarman,
effective January 5, 1998. Pursuant to the Agreement, Mr. Wassarman will serve
as President and Chief Executive Officer of the Company for a base salary of
$220,000. In addition to base salary, Mr. Wassarman is entitled to participate
in the Executive and Key Employee Bonus Plan. In the event that the Company
terminates Mr. Wassarman's employment under certain circumstances, Mr. Wassarman
will receive a severance payment equal to six months salary, payable over a six
month period of time, and continuation of certain employee benefits. In
addition, the Company has entered into a Nonqualified Stock Option Agreement
with Mr. Wassarman providing him options to acquire up to 800,000 shares of the
Company's common stock at $1.25 per share, subject to certain vesting
requirements. Of such options, 550,000 vest on a monthly basis at the rate of
15,278 per month for each month Mr. Wassarman remains in the employ of the
Company. Upon change in control of the Company, the unvested portion of the
550,000 options will vest immediately, and Mr. Wassarman will be eligible to
receive up to an additional 250,000 vested options.
In mid-February, 1998, the Company executed a plan of operations
restructure, which included a realignment of the Company's expense structure,
including expense and personnel reductions. The costs and expenses of the
restructure totaled $19,600.
<PAGE>
I. Legal Matters
Recently the Company was sued for $1 million by one if its system
integrator customers, Adaptive Solutions, Inc. In its suit, Adaptive Solutions,
Inc. charged the Company with breach of contract. The Company has consulted its
counsel, has adamantly denied the assertions of Adaptive Solutions, Inc. and is
vigorously defending the suit. There are presently no ongoing settlement
negotiations. The Company believes it has a strong defense and will prevail in
any legal action, with no material impact on the Company. Therefore, no reserves
have been recorded at this time for this claim.
On May 26, 1998, the remaining founder of T.S.I. (the company acquired
by Mitek in June 1997) resigned his position in Mitek. On July 17, 1998, the
Company filed a lawsuit against T.S.I., Fairfax Consulting and Fairfax
Imaging (newly formed entities by the founders of T.S.I.) in a Virginia State
Court asserting misrepresentation by T.S.I. and its founders and board
regarding the acquisitions, and for misappropriation of trade secrets. On
July 30, 1998, the Company dismissed its Virginia State Court suit against
T.S.I., its Board of Directors and their affiliates, Fairfax Consulting and
Fairfax Imaging, and re-filed its case in Federal Court. The Company believes
it has a strong case against T.S.I. and its principals, and will vigorously
pursue its claims in the Federal Court. A countersuit was filed against the
Company on July 22, 1998 in the Virginia State Court. No countersuit against
Mitek has yet been filed in the Federal Court. The case is in a very
preliminary stage and thus no impairment charge or possible recovery (which
could increase cash, decrease goodwill and possibly decrease outstanding
common stock) has been provided for at this time. The Company will continue
to evaluate its position with counsel and provide for reserves or recovery,
if any, that are deemed appropriate.
See footnote C - Other Charges for legal matters with former employees.
J. Subsequent Events
On August 7, 1998, the Company entered into an agreement with TeleworX
Consulting, Inc. to sub-lease its office facilities located at 109 Carpenter
Drive, Sterling, Virginia. The sub-lease provides for $2,298 monthly rent plus
all other costs under the master lease which expires October 31, 1998.
<PAGE>
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION
The following cautionary statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 in order for the Company to avail
itself on the "safe harbor" provisions of that Act. The discussion and
information in Management's' Discussion and Analysis of Financial Condition and
Result of Operations (the "MD&A") may contain both historical and
forward-looking statements. To the extent that MD&A contains forward-looking
statements regarding the financial condition, operating results, business
prospects or any other aspect of the Company, please be advised that the
Company's actual financial condition, operating results and business performance
may differ materially from that projected or estimated by the Company in
forward-looking statements. The Company has attempted to identify, in context,
certain of the factors that it currently believes may cause actual future
experience and results to differ from the Company's current expectations. The
difference may be caused by a variety of factors, including but not limited to
adverse economic conditions, general decreases in demand for Company products
and services, intense competition, including entry of new competitors, increased
or adverse federal, state and local government regulation, inadequate capital,
unexpected costs, lower revenues and net income than forecast, price increases
for supplies, inability to raise prices, the risk of litigation and
administrative proceedings involving the Company and its employees, higher than
anticipated labor costs, the possible fluctuation and volatility of the
Company's operating results and financial condition, adverse publicity and news
coverage, inability to carry out marketing and sales plans, loss of key
executives, changes in interest rates, inflationary factors, and other specific
risks that may be alluded to in this MD&A.
In the three months ended June 30, 1998, the Company improved its
financial results compared to the second quarter results of 1998 as a result
of improvements in its revenues, gross margin, and product mix, along with
improvements in operating efficiencies. For the three months ended June 30,
1998, the Company earned net income of $82,000 or $.01 per share, compared
with a net loss of $187,000 or $.02 per share in the second quarter of 1998
and a net loss of $1,629,000 or $.14 per share for the first quarter of 1998.
For the nine months ended June 30, 1998, the Company incurred a net loss of
$1,734,000 or $.15 per share, compared to a net loss of $1,019,000 or $.11
per share for the same period in 1997. The fiscal 1998 loss includes first
quarter write-offs taken by the Company, as previously reported.
In the three months ended June 30, 1998, revenues were $1,701,000, an
increase of $219,000 or 14.8% over the second quarter revenues of $1,482,000,
and an increase of $1,000,000 or 143% over the same period last year. Gross
margin for the three months ended June 30, 1998 was $1,377,000, an increase
of $533,000 or 63% over the prior quarter due to improvements in product mix
and controlled expenses, and an increase of $961,000 or 231% over the same
period last year.
The Company's cash flow for the third quarter of fiscal 1998 continued
to improve, and at June 30, 1998 the Company had $1.4 million in cash and
cash equivalents as compared to $1.0 million on March 31, 1998, and $1.3
million on September 30, 1997. The Company also increased its credit facility
to $1,000,000 from $400,000. The new credit facility consists of a $750,000
revolving line of credit which contains lower borrowing rates and higher
percentages of qualified receivables for the Company, and a $250,000
equipment line of credit. There were no borrowings under the lines of credit
as of June 30, 1998.
The Company is pleased it has achieved a profit in the third quarter and
an increase in revenues compared with last quarter and a dramatic increase
over the same period last year. This is somewhat ahead of the February Annual
Shareholder Meeting forecast that the Company would achieve break even
results in the third quarter period ending June 30, 1998, and show a modest
profit in the fourth quarter ending September 30, 1998 as the Company
continues on its plan to achieve a turnaround situation from its fiscal 1997
results. The Company expects its current cash flows from operations to
significantly improve by the end of the fourth quarter, exclusive of its new
credit facility. These operating improvements come as a result of increased
focus on the Company's core competencies and core markets, improvements in
gross margins due to product mix improvements, its strategic decision to
focus sales efforts away from low margin government contracts, and
elimination of non-productive R&D efforts.
The company has strengthened its management team through the recent
addition of Michael Jackman as Senior Vice President, Integration Solutions,
the elevation of Dennis Brittain to Chief Technical Officer, and the
elevation of Noel Flynn to Vice President, Operations & Customer Support. The
Company is currently recruiting other executive positions to round out the
Company's senior management team and position it for the growth challenges it
will face in the coming years.
<PAGE>
During the third quarter Mitek introduced PFP Pro(TM), a 32-bit distributed
networks form processing solution, and QuickFX(TM), an image pre-processing
solution. Both products are designed for compatibility with Microsoft Windows
95, Microsoft NT, and Microsoft Windows 98. The Company believes that these new
products, along with its leading edge QuickStrokes product line, QuickModules
software, integration services, and CheckScript(TM) offering will allow the
Company to enter associated new vertical markets that are larger in potential
than its existing markets, while remaining focused on its core competencies.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Comparison of Three Months and Nine Months Ended June 30, 1998 and 1997
NET SALES. Net sales for the three month period ended June 30, 1998 were
$1,701,000, compared to $701,000 for the same period in 1997, an increase of
$1,000,000 or 143%. Net sales for the nine month period ended June 30, 1998 were
$4,489,000, compared to $3,677,000 for the same period in 1997, an increase of
$812,000 or 22%. The increase in both periods was primarily attributable to
orders received from OEM's and integrators.
GROSS MARGIN. Gross margin for the three month period ended June 30,
1998 was $1,377,000, compared to $416,000 for the same period in 1997, an
increase of $961,000 or 231%. Stated as a percentage of net sales, gross
margin increased to 81% for the three month period ended June 30, 1998
compared to 59% for the same period in 1997. Gross margin for the nine month
period ended June 30, 1998 was $3,237,000, compared to $2,771,000 for the
same period in 1997, an increase of $466,000 or 17%. Stated as a percentage
of net sales, gross margin decreased to 72% for the nine month period ended
June 30, 1998, compared to 75% for the same period in 1997. The changes in
both periods were primarily the result of a change in product mix. Costs
previously stated as part of costs of goods sold have been reclassified to
conform with the current year presentation. These reclassified costs relate
to the expenses of operations (shipping/receiving, purchasing, customer
support, quality assurance) and goodwill amortization. These reclassified
costs for the prior year amount to $127,000 for the three month period and
$388,000 for the nine month period.
OPERATIONS. Operations expenses for the three month period ended June
30, 1998 were $101,000, compared to $74,000 for the same period in 1997, an
increase of $27,000 or 37%. Stated as a percentage of net sales, operations
expenses decreased to 6% for the three month period ended June 30, 1998,
compared to 11% for the same period in 1997. Operations expenses for the nine
month period ended June 30, 1998 were $304,000, compared to $285,000 for the
same period in 1997, an increase of $19,000 or 7%. Stated as a percentage of
net sales, operations expenses decreased to 7% for the nine month period
ended June 30, 1998, compared to 8% for the same period in 1997. The
increases in expenses for the three and nine month periods were primarily
attributable to staff additions, while the decrease in the percentage of net
sales was primarily attributable to increased revenues. The operations
expenses were previously stated as part of costs of goods sold. These costs
have been reclassified to conform with the current year presentation.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three month period ended June 30, 1998 were $468,000, compared to $411,000
for the same period in 1997, an increase of $57,000 or 14%. Stated as a
percentage of net sales, general and administrative expenses decreased to 28%
for the three month period ended June 30, 1998, compared to 59% for the same
period in 1997. General and administrative expenses for the nine month period
ended June 30, 1998 were $1,288,000, compared to $1,136,000 for the same
period in 1997, an increase of $152,000 or 13%. Stated as a percentage of net
sales, general and administrative expenses decreased to 29% for the nine
month period ended June 30, 1998, compared to 31% for the same period in
1997. The increases in expenses for the three and nine month periods were
primarily attributable to costs associated with outside professional
services, legal fees, recruitment fees and staff additions, while the
decrease in the percentage of net sales for the three month and nine month
periods was primarily attributable to increased revenues. Certain costs
previously stated as part of costs of goods sold, specifically goodwill and
executive costs and expenses, have been reclassified to general and
administrative expenses and have been reclassified to conform with the
current year presentation. These reclassified costs for the prior year amount
to $53,000 for the three month period and $103,000 for the nine month period.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three
month period ended June 30, 1998 were $383,000, compared to $407,000 for the
same period in 1997, a decrease of $24,000 or 6%. The reductions in
expenses are the result of engineering staff reductions and the elimination of
certain engineering projects. Stated as a percentage of net sales, research and
development expenses decreased to 23% for the three month period ended June 30,
1998, compared to 58% for the same period in 1997. The decrease as a percentage
of
<PAGE>
net sales for the three month period was primarily attributable to the
increase in revenues. Research and development expenses for the nine month
period ended June 30, 1998 were $1,144,000, compared to $1,032,000 for the
same period in 1997, an increase of $112,000 or 11%. Stated as a percentage
of net sales, research and development expenses decreased to 26% for the nine
month period ended June 30, 1998, compared to 28% for the same period in
1997. The decrease in the percentage of net sales for the nine month period
was primarily attributable to the increase in revenues, while the increase in
expenses for the nine month period was primarily attributable to new product
development of solutions products, the result of the Technology Solutions,
Inc. acquisition in June, 1997.
SELLING AND MARKETING. Selling and marketing expenses for the three month
period ended June 30, 1998 were $363,000, compared to $591,000 for the same
period in 1997, a decrease of $228,000 or 39%. Stated as a percentage of net
sales, selling and marketing expenses decreased to 21% for the three month
period ended June 30, 1998, compared to 84% for the same period in 1997. Selling
and marketing expenses for the nine month period ended June 30, 1998 were
$1,338,000, compared to $1,526,000 for the same period in 1997, a decrease of
$188,000 or 12%. Stated as a percentage of net sales, selling and marketing
expenses decreased to 30% for the nine month period ended June 30, 1998,
compared to 42% for the same period in 1997. The decreases in expenses and in
the percentage of net sales for the nine month and three month periods are
primarily attributable to the termination of marketing efforts on certain
products, staff reductions, and the increase in revenues.
OTHER CHARGES. For the nine month period ended June 30, 1998, other charges
totaling $989,000, consist of several non-recurring charges to operations. The
charges consist of the following components:
Goodwill impairment -In June, 1997 the Company purchased substantially all
of the assets of Technology Solutions, Inc., a software developer and solution
provider of document image processing systems. One of the key employees of the
Company, a former principle of Technology Solutions, Inc., opted to resign his
employment. The unexpected departure, in the opinion of management, will
detrimentally impact the future cash flows of the Company. The Company
determined the fair value of the goodwill by evaluating the expected future net
cash flows (undiscounted and without interest charges), in accordance with FAS
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. The evaluation indicates the carrying value of the
goodwill exceeded its fair value, resulting in an impairment loss of $293,000.
License Fee impairment - In April, 1997 the Company entered into an
exclusive software licensing agreement with Parascript LLC. In December, 1997,
Parascript notified the Company of its dissatisfaction with the Company's
progress in marketing the software affected by the license agreement, along with
an assertion that the Company had committed material breach of contract. The
Company has strongly and vigorously denied the claims. A proposed solution to
the dispute by Parascript included converting the Company's software license
from exclusive to non-exclusive. In addition, the Company over-estimated the
availability and the performance of the product and anticipated prices for the
software affected by the agreement. The adversarial condition of the
relationship coupled with the decreased expectations, in the opinion of
management, will detrimentally impact the future cash flows of the Company. The
Company determined the fair value of the goodwill represented by the license fee
paid for the exclusive license by evaluating the expected future net cash flows
(undiscounted and without interest charges), in accordance with FAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. The evaluation indicates the carrying value of the goodwill
exceeded the fair value, resulting in an impairment loss of $196,000. The
Company believes that as a result of continuing discussions with Parascript, the
Company and Parascript will be able to work together in a positive manner,
eliminating the need for recording any further reserve for this situation.
The Company was sued earlier this year for wrongful termination by two
former employees of its Canadian subsidiary. The Company has strongly defended
the action. The former employees obtained a bench order requiring the amount of
the dispute to be deposited in escrow pending the outcome of the case. In the
initial opinion of management, the actions of the Canadian court indicated a
high likelihood of an adverse decision, which necessitated the recording of a
reserve in the amount of $134,000, plus costs, equaling a reserve of $142,000.
Based upon subsequent findings, the Company offered a $34,000 settlement, which
was rejected. The Company believes it has a very strong position in this dispute
and that the outcome will have no material effect on the Company.
Recently the Company was sued for $1 million by one if its system
integrator customers, Adaptive Solutions, Inc. In its suit, Adaptive Solutions,
Inc. charged the Company with breach of contract. The Company has consulted its
counsel, has adamantly denied the assertions of Adaptive Solutions, Inc. and is
vigorously defending the suit. There are presently no ongoing settlement
negotiations. The Company believes it has a strong defense
<PAGE>
and will prevail in any legal action, with no material impact on the Company.
Therefore, no reserves have been recorded at this time for this claim.
On May 26, 1998, the remaining founder of T.S.I. (the company acquired
by Mitek in June 1997) resigned his position in Mitek. On July 17, 1998, the
Company filed a lawsuit against T.S.I., Fairfax Consulting and Fairfax
Imaging (newly formed entities by the founders of T.S.I.) in a Virginia State
Court asserting misrepresentation by T.S.I. and its founders and board
regarding the acquisition, and for misappropriation of trade secrets. On July
30, 1998, the Company dismissed its Virginia State Court suit against T.S.I.,
its Board of Directors and their affiliates, Fairfax Consulting and Fairfax
Imaging, and re-filed its case in Federal Court. The Company believes it has
a strong case against T.S.I. and its principals, and will vigorously pursue
its claims in the Federal Court. A countersuit was filed against the Company
on July 22, 1998 in the Virginia State Court. No countersuit against Mitek
has yet been filed in the Federal Court. The case is in a very preliminary
stage and thus no impairment charge or possible recovery (which could
increase cash, decrease goodwill and possibly decrease outstanding common
stock) has been provided for at this time. The Company will continue to
evaluate its position with counsel and provide for reserves or recovery, if
any, that are deemed appropriate.
In June 1998, the Company was successful in increasing its revolving
line of credit facility with its Bank, Rancho Santa Fe Bank ("Bank"), for
working capital purposes from $400,000 to $750,000. Besides the increase in
the revolving line of credit, the new credit facility contains lower
borrowing rates and higher percentages of qualified receivables for the
Company. Borrowings under this credit line initially bear interest at 10% and
expires on June 8, 1999. In addition, the Company was granted an equipment
credit line in the amount of $250,000. There were no borrowings under the
lines of credit as of June 30, 1998.
On January 5, 1998, the Company entered into an employment agreement
with Mr. Elliot Wassarman (see footnote H. - Restructure). The agreement
included the commitment of the Company to pay certain recruitment and
relocation costs aggregating $166,000.
The Company has traditionally sold its QuickStrokes Application Programmer
Interface products with various acceleration hardware boards. Decreasing prices
coupled with the higher speeds of general hardware have rapidly altered the
market need for these acceleration boards. The largest customer utilizing these
acceleration boards has informed the Company of its intent to discontinue the
offering of these products in the domestic market. As a result, the Company has
recorded a reserve for inventory obsolescence in the amount of $200,000.
INTEREST INCOME. Interest income for the three month period ended June
30,1998 was $19,000, compared to interest income of $27,000 for the same period
in 1997, a decrease of $8,000 or 30%. Interest income for the nine month period
ended June 30, 1998 was $58,000, compared to interest income of $76,000 for the
same period in 1997, a decrease of $18,000 or 24%. Interest income was generated
from invested funds received from the secondary public offering in the quarter
ended December 31, 1996, combined with no bank borrowings in the quarters ended
June 30, 1998 and 1997. The decline in interest income in both periods reflects
the use of invested funds.
OTHER INCOME. Other income for the nine month period ended June 30, 1998,
reflects the net sale of the company's Fax Products on January 30, 1998. The
Company received $420,000 in cash proceeds which was offset by the carrying
value of the assets sold ($308,000) and costs related to the transaction
($78,000). (Note D).
INCOME TAX EXPENSE (BENEFIT). For the quarters ended June 30, 1997, the
provision for income tax benefit or expense for federal and state income taxes
is based on the estimated effective tax rates applied to year to date loss or
income before income tax and projected utilization of tax credits from prior
periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, stockholders' equity was $4,031,000, a decrease of
$1,720,000 from September 30, 1997. The Company's working capital and current
ratio was $2,434,000 and 2.7 to 1 at June 30, 1998, compared to $3,278,000 and
3.3 to 1 at September 30, 1997, respectively.
At June 30, 1998, the total liabilities to equity ratio was .36 to 1
compared to .25 to 1 at September 30, 1997. As of June 30, 1998, the Company's
total liabilities were $21,000 less than September 30, 1997.
<PAGE>
Components of working capital with significant changes during the nine months
ended June 30, 1998 were: cash and cash equivalents, accounts receivable, notes
receivable, inventory and other assets. Compared to September 30, 1997, the
components changed as follows:
Cash and Cash Equivalents - Increased $167,000 as compared to
September 30, 1997, which reflects cash used in the funding of operating
expenses. Cash remained strong with cash on hand of $1,428,000 at June 30,
1998, which does not include $750,000 availability in the revolving line of
credit facility or $250,000 in the equipment line of credit facility.
Accounts Receivable - Decreased $452,000 as compared to September 30,
1997 which reflects improvement in cash receipts on the current portion of
receivables.
Notes Receivable - Decreased $294,000 as compared to September 30,
1997, which is the result of payment received combined with the application
of royalties payable against the note receivable.
Inventory-net - Decreased $252,000 primarily because of reserves
recognition in the amount of $200,000 as stated in the MD&A Other Charges,
while gross inventory decreased $52,000.
Other Assets - Decreased by $811,000 primarily because of revaluation
of goodwill and license fees (see Note C).
In June, 1998, the Company was successful in increasing its line of credit
facility with its Bank, Rancho Santa Fe Bank ("Bank"), for working capital
purposes from $400,000 to $750,000. Besides the increase in the line of credit,
the new credit facility offers improved terms and conditions. Borrowings under
this credit line initially bear interest at 10% and expires on June 8, 1999. In
addition, the Company was granted an equipment credit line in the amount of
$250,000. There were no borrowings under the line of credit and equipment lease
facilities as of June 30, 1998. The Company believes that together with existing
cash, credit available under the extended credit line, and cash generated from
operations, funds will be sufficient to finance its operation for the next
twelve months.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's internal information
systems to process data having dates on or after January 1, 2000 (the "year
2000" issues). Processing errors due to software failure arising from
calculations using the year 2000 date are a recognized risk. The company is
currently addressing the risk with respect to the availability and integrity of
its internal financial systems and the reliability of its internal operating
systems, and is in the process of communicating with suppliers, customers,
financial institutions and others with whom it conducts business transactions to
assess whether they are Year 2000 compliant. The Company does not believe that
it will incur a material financial impact from the risk, or from assessing the
risk, arising from the Year 2000 issues.
ALL OF THE COMPANY'S PRODUCTS OFFERED FOR SALE ARE YEAR 2000 COMPLIANT.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits to Form 10Q
(i) $750,000 revolving line of credit Loan Agreement, Promissory
Note, and Commercial Security Agreement
(ii) $250,000 equipment line of credit Promissory Note and
Commercial Security Agreement
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITEK SYSTEMS, INC.
(Registrant)
Date: August 7, 1998
---------------------------------
Elliot Wassarman, President and
Chief Executive Officer
Date: August 7, 1998
---------------------------------
John M. Thornton
Chairman
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