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, 1997 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15235
-------------------------------------------------
MITEK SYSTEMS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 87-0418827
- ---------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10070 CARROLL CANYON ROAD, SAN DIEGO, CALIFORNIA 92131
- -------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 635-5900
--------------------
- ------------------------------------------------------------------------------
(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 11,552,376 shares outstanding of the registrant's Common Stock
as of January 23, 1998.
PART I: FINANCIAL INFORMATION
MITEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, September 30,
1997 1997
---- ----
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 928,545 $ 1,261,117
Accounts receivable-net 1,976,414 2,363,028
Note receivable 478,657 502,031
Inventories-net 210,000 415,973
Prepaid expenses and other assets 166,404 151,705
------------ ------------
Total current assets 3,760,020 4,693,854
------------ ------------
PROPERTY AND EQUIPMENT-at cost 1,165,998 1,150,122
Less accumulated depreciation
and amortization 972,694 945,109
------------ ------------
Property and equipment-net 193,304 205,013
------------ ------------
OTHER ASETS 1,653,522 2,289,428
------------ ------------
TOTAL $ 5,606,846 $ 7,188,295
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 581,973 485,855
Accrued payroll and related taxes 225,706 272,603
Other accrued liabilities 619,269 652,440
Current portion of long-term liabilities 2,521 4,706
------------ ------------
Total current liabilities 1,429,469 1,415,604
------------ ------------
LONG-TERM LIABILITIES 42,093 21,761
------------ ------------
Total liabilities 1,471,562 1,437,365
COMMITMENTS (NOTE E)
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;
11,552,376 and 11,537,009 issued and
outstanding, respectively 11,552 11,537
Additional paid-in capital 9,178,097 9,164,589
Accumulated deficit (5,054,365) (3,425,196)
------------- ------------
Total stockholders' equity 4,135,284 5,750,930
------------- ------------
TOTAL $ 5,606,846 $ 7,188,295
------------- ------------
------------- ------------
See notes to consolidated financial statements
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
December 31
1997 1996
---- ----
NET SALES $ 1,305,929 $ 1,100,932
COST OF GOODS SOLD 598,312 400,993
------------ ------------
GROSS MARGIN 707,617 699,939
------------ ------------
COSTS AND EXPENSES:
General and administrative 378,436 302,915
Research and development 452,598 304,196
Selling and marketing 538,440 425,611
Other charges (Note C) 988,549
Interest income - net (21,237) (13,623)
------------ ------------
Total costs and expenses 2,336,786 1,019,099
------------ ------------
LOSS BEFORE INCOME TAXES (1,629,169) (319,160)
INCOME TAX BENEFIT 0 (32,000)
------------ ------------
NET LOSS $ (1,629,169) $ (287,160)
------------ ------------
------------ ------------
NET LOSS PER SHARE - BASIC $ (.14) $ (.03)
------------ ------------
------------ ------------
NET LOSS PER SHARE - DILUTED $ (.14) $ (.03)
------------ ------------
------------ ------------
WEIGHTED AVERAGE COMMON SHARES - BASIC 11,540,421 8,699,544
------------ ------------
------------ ------------
WEIGHTED AVERAGE COMMON SHARES - DILUTED 11,540,421 8,699,544
------------ ------------
------------ ------------
See notes to consolidated financial statements.
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31,
1997 1996
---- ----
OPERATING ACTIVITIES:
Net loss $(1,629,169) $ (287,160)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 197,156 104,477
Asset impairment 489,000
Changes in assets and liabilities:
Accounts and notes receivable 409,988 62,418
Inventories, prepaid expenses and other
assets 172,524 183,809
Accounts payable and accrued expenses 36,382 (525,282)
------------ ----------
Net cash used in operating activities (324,119) (461,738)
------------ ----------
INVESTING ACTIVITIES:
Purchases of property and equipment (19,791) (50,927)
------------ ----------
Net cash used in investing activities (19,791) (50,927)
------------ ----------
FINANCING ACTIVITIES:
Proceeds from borrowings 0 150,000
Repayment of notes payable and long-term
liabilities (2,185) (152,294)
Proceeds from exercise of stock options
and warrants 13,523 51,183
Net proceeds from sale of stock 0 4,352,590
------------ ----------
Net cash provided by financing
activities 11,338 4,401,479
------------ ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (332,572) 3,888,814
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,261,117 210,413
------------ ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 928,545 $4,099,227
------------ ----------
------------ ----------
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 months ended December 31, 1997 and 1996 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:
December 31, 1997 September 30, 1997
----------------- ------------------
Raw materials $ 78,677 $ 75,082
Work in process 3,500 0
Finished goods 127,823 340,891
----------------- ------------------
Total $ 210,000 $ 415,973
----------------- ------------------
----------------- ------------------
Inventories are recorded at the lower of cost (on the first-in, first-out
basis) or market.
C. Other Charges
Totaling $989,000, consists of several 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 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 their dissatisfaction with the
Company's progress in marketing the software affected by the license
agreement, along with assertion of material breach of contract. The Company
is strongly refuting the assertions. The proposed remedy by Parascript
includes granting a non-exclusive software license. In addition, the Company
over-estimated 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 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 has been notified of a wrongful termination of two former
employees of its' Canadian subsidiary. The Company is strongly refuting the
assertions. The former employees obtained a bench order demanding the amount
of the dispute to be placed in escrow pending the outcome. In the opinion of
management, the actions of the Canadian court indicate a high likelihood of
an adverse decision, which necessitated a reserve in the amount of $134,000,
plus costs, equaling a reserve of $142,000.
In December, 1997, the Company entered into an employment agreement with
Mr. Elliot Wassarman (see footnote G. - Subsequent events). 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. The
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
their intent to discontinue the offering of these products in the domestic
market. As such the Company has recorded a reserve for inventory
obsolescence in the amount of $200,000.
D. 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
quarter. Net income (loss) per share-diluted is based on the weighted
average number of common shares in the quarter and taken into account the
common equivalents affect of outstanding stock options and warrants (common
equivalents) using the treasury stock method when the affect is dilutive
E. Commitments
The Company has signed an agreement to sub-lease approximately 8,824
square feet of office space adjacent to its primary offices, effective
March 1, 1998 through June 30, 2002. The sub-lease will result in
reduction of rent expense to the Company in the amount of $471,527 over
the term of the agreement.
F. 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.
G. Subsequent Events
The Company has entered into an Employment Agreement with Mr. Elliot
Wassarman, effective as of 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.
On January 30, 1998 the Company sold its Fax Products assets in a cash
transaction, resulting in an approximate gain of $58,600. The gross proceeds
of the sale were $420,000 in cash, offset by the carrying value of the assets
sold ($293,900) and the estimated costs of the transaction ($67,500).
The Company is establishing a plan of operations restructure at an
estimated cost to the Company of $200,000, to be executed in the second
quarter. The restructure will be a realignment of the Company's expense
structure, including expense and personnel reductions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Comparison of Three Months Ended December 31, 1997 and 1996
NET SALES. Net sales for the three month period ended December 31,
1997 were $1,306,000, compared to $1,101,000 for the same period in 1996, an
increase of $205,000 or 18.6%. The increase was attributable to orders from
OEM's.
GROSS MARGIN. Gross margins for the three month period ended December
31, 1997 were $708,000, compared to $700,000 for the same period in 1996, an
increase of $8,000 or 1.1%. As a percentage of net sales, gross margins
decreased to 54.2% for the three month period ended December 31, 1997 compared
to 63.6% for the same period in 1996. The decrease was primarily attributable
to amortization of goodwill and prepaid license fees for a combined total of
$158,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three month period ended December 31, 1997 were $378,000 compared to $303,000
for the same period ended in 1996, an increase of $75,000 or 24.8%. As a
percentage of net sales, general and administrative expenses increased to 29%
for the three month period ended December 31, 1997 compared to 27.5% for the
same period in 1996. The increase as compared to the same period in 1996 was
attributable to executives and directors insurance, investor relations fees,
and bad debt expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three month period ended December 31, 1997 were $453,000 compared to $304,000
for the same period ended in 1996, an increase of $149,000 or 49%. As a
percentage of net sales, research and development expenses increased to 34.6%
for the three month period ended December 31, 1997 compared to 27.6% for the
same period in 1996. The increase 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 December 31, 1997 were $538,000 compared to $426,000 for the
same period in 1996, an increase of $112,000 or 26.3%. As a percentage of net
sales, selling and marketing expenses increased to 41.2% for the three month
period ended December 31, 1997 compared to 38.7% for the same period in 1996.
The increase is primarily related to the increase in sales commissions due to
increased revenues, and product promotion expenses..
OTHER CHARGES. Totaling $989,000, consists 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 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 their dissatisfaction with the Company's
progress in marketing the software affected by the license agreement, along
with assertion of material breach of contract. The Company is strongly refuting
the assertions. The proposed remedy by Parascript includes granting a
non-exclusive software license. In addition, the Company over-estimated 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 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 has been notified of a wrongful termination of two former
employees of its' Canadian subsidiary. The Company is strongly refuting the
assertions. The former employees obtained a bench order demanding the amount of
the dispute to be placed in escrow pending the outcome. In the opinion of
management,
the actions of the Canadian court indicate a high likelihood of an adverse
decision, which necessitated a reserve in the amount of $134,000, plus costs,
equaling a reserve of $142,000.
In December, 1997, the Company entered into an employment agreement with
Mr. Elliot Wassarman (see footnote G. - Subsequent events). 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. The
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
their intent to discontinue the offering of these products in the domestic
market. As such 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
December 31,1997 was $21,000 compared to interest income of $14,000 for the
same period in 1996, an increase of $7,000 or 50%. 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 December 31, 1997 and 1996.
INCOME TAX EXPENSE (BENEFIT): The provision for income tax benefit in
quarter ended December 31, 1996 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 December 31, 1997, stockholders' equity was $4,135,000, an increase
of $1,616,000 from September 30, 1997. The Company's working capital and
current ratio was $2,331,000 and 2.63 to 1 at December 31, 1997 compared to
$3,278,000 and 3.321 to 1 at September 30, 1997, respectively.
At December 31, 1997, the total liabilities to equity ratio was .36 to 1
compared to .25 to 1 at September 30, 1997. As of December 31, 1997, the
Company's total liabilities were $34,000 greater than September 30, 1997.
Components of working capital with significant changes during the three
months ended December 31, 1997 were: Cash, Inventory and Accounts Payable.
Compared to September 30, 1997, the components changed as follows:
Cash - Decreased $333,000 which reflects the increases in operating costs
and expenses.
Accounts Receivable - Decreased $387,000 because of cash receipts on
current portion of receivables.
Inventory-net - Decreased $206,000 because of reserves recognition in the
amount of $200,000 as stated in the MD&A under Other Expense, while gross
inventory decreased $6,000.
Accounts Payable - Increased by $96,000 primarily because of executive
insurance and relocation expenses recognized in the last month of the
quarter.
In March, 1996, the Company established a $400,000 line of credit with Rancho
Santa Fe Bank ("Bank") for working capital purposes. Borrowings under this
line bear interest at the rate of 1 1/2% over the Bank's Prime Rate and the
line of credit expires on May 6, 1998. The company has requested the Bank
increase the credit line and add a capital equipment lease line. The line of
credit is secured by a lien on substantially all of the Company's assets.
There were no borrowings against the line of credit on December 31, 1997.
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.
PART II - OTHER INFORMATION
Item 4. The annual meeting of stockholders was held on February 11, 1998.
Brought to vote were the election of Directors for the ensuing year
With 88.20% of shares represented at the meeting, the following
were elected to the Board of Directors: John M. Thornton, Chairman,
Elliot Wassarman, Daniel E. Steimle, James B. DeBello,
Gerald I. Farmer and Sally B. Thornton.
Also voted on, and approved, was the appointment of
Deloitte & Touche LLP as the Company's 1998 auditors.
Item 6. Exhibits and Reports on Form 8-K
a. The exhibits are on Form 8-K: None
b. Reports on Form 8-K: Filed on January 6, 1998 - Appointment of
Elliot Wassarman as Chief Executive Officer and President, and
Director of the Company. Resignation of John F. Kessler from the
position of Chief Executive Officer and President, and Director,
and the appointment of John F. Kessler to the position of Chief
Financial Officer.
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: February 12, 1998 /s/ Elliot Wassarman
------------------------------------
Elliot Wassarman, President and
Chief Executive Officer
Date: February 12, 1998 /s/ John M. Thornton
------------------------------------
John M. Thornton
Chairman
5
3-MOS
SEP-30-1997
DEC-31-1997
928,545
0
1,976,414
0
210,000
3,760,020
1,165,998
972,694
5,606,846
1,429,469
42,093
0
0
11,552
0
5,606,846
1,305,929
1,305,929
598,312
2,358,023
0
0
(21,237)
(1,629,169)
0
(1,629,169)
0
0
0
(1,629,169)
(.14)
(.14)
