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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, 2003 or
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[ ] 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.
(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 Street, Suite 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
Yes No X.
--- ---
There were 11,182,661 shares outstanding of the registrant's Common Stock
as of August 1, 2003.
MITEK SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Balance Sheets
As of June 30, 2003 and September 30, 2002-Unaudited..................
b) Statements of Operations
for the Three and Nine Months Ended June 30, 2003 and 2002-Unaudited..
c) Statements of Cash Flow
for the Nine Months Ended June 30, 2003 and 2002-Unaudited............
e) Notes to Financial Statements-Unaudited.................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................
Item 4. Controls and Procedures....................................................
PART II. OTHER INFORMATION
Item 5. Other Information..........................................................
Item 6. Exhibits and Reports on Form 8-K...........................................
SIGNATURE...................................................................................
PART 1: FINANCIAL INFORMATION
MITEK SYSTEMS, INC
BALANCE SHEETS
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
2003 2002
-----------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 1,415,771 $ 760,416
Accounts and notes receivable-net of allowances of 5,395,160 6,273,987
$225,208 and $339,025, respectively
Note receivable - related party 207,744 199,227
Inventories 128,830 18,443
Prepaid expenses and other assets 155,701 129,097
-----------------------------------------------
Total current assets 7,303,206 7,381,170
PROPERTY AND EQUIPMENT-net 366,693 379,533
OTHER ASSETS 324,246 470,496
-----------------------------------------------
TOTAL ASSETS $ 7,994,145 $ 8,231,199
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,344,547 $ 1,567,121
Accrued payroll and related taxes 973,310 648,410
Deferred revenue 909,183 479,570
Other accrued liabilities 172,388 42,805
-----------------------------------------------
Total current liabilities 3,399,428 2,737,906
LONG-TERM LIABILITIES:
Deferred rent 17,689 8,419
Deferred revenue 351,523 388,923
Long-term payable 42,745 68,400
-----------------------------------------------
Total long-term liabilities 411,957 465,742
-----------------------------------------------
TOTAL LIABILITIES 3,811,385 3,203,648
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000
shares authorized; 11,182,661 and 11,138,772
issued and outstanding at June 30, 2003
and September 30, 2002, respectively 11,183 11,139
Additional paid-in capital 9,312,652 9,290,671
Accumulated deficit (5,141,075) (4,274,259)
-----------------------------------------------
Net stockholders' equity 4,182,760 5,027,551
-----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,994,145 $ 8,231,199
===============================================
See notes to financial statements
MITEK SYSTEMS, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---------------------------------------------------------------
NET SALES $ 3,041,738 $ 2,762,731 $ 9,870,980 $ 9,231,063
COSTS AND EXPENSES:
Cost of sales 1,392,174 397,801 3,499,102 2,221,080
Operations 431,638 498,352 1,291,633 1,297,284
Selling and marketing 1,101,175 774,435 2,908,291 2,376,657
Research and development 556,245 504,370 1,680,478 1,474,546
General and administrative 517,179 425,706 1,355,523 1,453,248
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Total costs and expenses 3,998,411 2,600,664 10,735,027 8,822,815
---------------------------------------------------------------
OPERATING INCOME (LOSS) (956,673) 162,067 (864,047) 408,248
Other income (expense) - net 3,645 5,596 7,586 3,897
---------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (953,028) 167,663 (856,461) 412,145
PROVISION (BENEFIT) FOR INCOME TAXES 380 (5,000) 10,355 0
---------------------------------------------------------------
NET INCOME (LOSS) $ (953,408) $ 172,663 $ (866,816) $ 412,145
===============================================================
EARNINGS (LOSS) PER SHARES - BASIC AND DILUTED $ (0.09) $ 0.02 $ (0.08) $ 0.04
===============================================================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 11,156,437 11,136,689 11,144,660 11,130,984
===============================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING - DILUTED 11,156,437 11,498,474 11,144,660 11,489,868
===============================================================
See notes to financial statements
MITEK SYSTEMS, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
2003 2002
---------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (866,816) $ 412,145
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 336,969 518,157
Provision for bad debts 75,000 90,000
Loss on disposal of property and equipment 986 0
Provision for sales returns & allowances 153,000 0
Fair value of stock options granted to non-employees 2,823 62,599
Changes in operating assets and liabilities:
Accounts receivable 803,827 (766,023)
Inventory, prepaid expenses, and other assets (136,991) (33,361)
Other long term assets 0 (31,746)
Accounts payable (222,575) (392,484)
Accrued payroll and related taxes 324,900 378,873
Long-term payable (25,655) 0
Deferred revenue 392,214 604,188
Other accrued liabilities (14,147) (21,374)
---------------------------------------------
Net cash provided by operating activities 823,535 820,974
INVESTING ACTIVITIES
Purchases of property and equipment (180,067) (207,451)
Procees from sale of property and equipment 1,203 0
Net change in note receivable (8,517) (136,712)
---------------------------------------------
Net cash used in investing activities (187,381) (344,163)
FINANCING ACTIVITIES
Proceeds from borrowings 360,000 200,000
Repayment of borrowings (360,000) (100,000)
Proceeds from exercise of stock options 19,201 10,957
---------------------------------------------
Net cash provided by financing activities 19,201 110,957
---------------------------------------------
NET INCREASE IN CASH 655,355 587,768
CASH AT BEGINNING OF PERIOD 760,416 865,347
---------------------------------------------
CASH AT END OF PERIOD $ 1,415,771 $ 1,453,115
=============================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 6,736 $ 1,582
==================== =====================
Cash paid for income taxes $ 10,355 $ --
==================== =====================
See notes to financial statements
MITEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
1. Basis of Presentation
The accompanying unaudited financial statements of Mitek Systems, Inc. (the
"Company") at June 30, 2003 and for the three and nine months ended June 30,
2003 and 2002 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, 2003 are not
necessarily indicative of results which may be reported for any other interim
period or for the year as a whole.
Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingencies at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
Certain prior year's balances have been reclassified to conform to the 2003
presentation.
2. New Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets," which requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized, but instead be tested for impairment at least annually. In addition,
the standard includes provisions for the reclassification of certain existing
intangibles as goodwill and reassessment of the useful lives of existing
recognized intangibles. SFAS 142 is effective for fiscal years beginning after
December 31, 2001. The adoption of SFAS 142 effective October 1, 2002 had no
effect on the Company's operations or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes one accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supercedes SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB No. 30. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144
effective October 1, 2002 had no effect on the Company's operations or financial
position.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of this statement could impact the accounting for future exit or
disposal activities, should they occur.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The amendments to SFAS 123 provided for under SFAS No. 148 are
effective for financial statements for fiscal years ending after December 15,
2002. However, certain provisions of SFAS 148 relating to interim financial
statements are effective for the Company's second quarter beginning January 1,
2003. The Company has not elected to change to the fair value method of
accounting for stock-based transactions.
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.
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 values for these options was estimated
at the dates of grant using the Black-Scholes option valuation model with the
following weighted-average assumptions for June 30, 2003 and 2002.
2003 2002
---- ----
Risk free interest rates 2% 5.5%
Dividend yields 0% 0%
Volatility 76% 82.1%
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 Nine months ended
June 30 June 30
------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) as reported $ (953) $ 173 $ (867) $ 412
Net income (loss) pro forma (968) 137 (1,507) (449)
Net income (loss) per share as reported (.09) .02 (.08) .04
Net income (loss) per share pro forma (.09) .01 (.14) (.04)
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 $1,200,000.
The Company had no borrowings under the working capital line of credit on June
30, 2003 or on September 30, 2002. This credit line is subject to a net worth
covenant whereby the Company must maintain a tangible net worth of $4,800,000 in
order to use the credit line. The loss sustained during the quarter ended June
30, 2003 caused the Company's net worth to fall to $4,183,000. Though the
Company had no borrowings under the credit line as of June 30, 2003, the Company
was no longer in compliance with the aforementioned net worth covenant. The
Company requested, and the lender agreed to, a modification of the net worth
covenant, which reduced the required minimum tangible net worth to $3,750,000.
All other covenants and conditions remained the same. The existing credit line
expires on February 28, 2004.
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 maintain 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 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; (xii) inability to successfully carry out marketing and sales plans;
(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 and
in the Company's filings with the SEC.
The Company's strategy for fiscal 2003 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 CheckQuest(R) product line, while
maintaining sustained growth of the existing market for its QuickStrokes(R) and
CheckScript(TM) product lines, and servicing specific applications of its Doctus
product to those customers and markets best suited to this solution. Mitek also
seeks to broaden the use of its products with current customers by identifying
new and innovative applications of its existing technology.
CRITICAL ACCOUNTING POLICIES
Mitek's financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for Mitek
include revenue recognition, impairment of accounts and notes receivable, and
accounting for income taxes.
Revenue Recognition
The Company enters into contractual arrangements with end users that may
include licensing of the Company's software products, product support and
maintenance services, consulting services, resale of third-party hardware, or
various combinations thereof, including the sale of such products or services
separately. The Company's accounting policies regarding the recognition of
revenue for these contractual arrangements is fully described in the Company's
Form 10-K for the year ended September 30, 2002.
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
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 the customer's current
creditworthiness. Certain contractual arrangements contain ratable payment terms
of up to twelve months. 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 and Nine Months Ended June 30, 2003 and 2002
NET SALES. Net sales for the three-month period ended June 30, 2003 were
$3,042,000, compared to $2,763,000 for the same period in 2002, an increase of
$279,000, or 10%. The increase is primarily attributable to a 43% increase in
sales in our CheckQuest product line, a 12% increase in sales of our recognition
engines, a 43% increase in maintenance revenue, and was offset by a 93% decrease
in sales of our Doctus product line. The increase in sales of our CheckQuest
product line reflects market penetration into larger financial institutions,
which typically require larger configurations. The increase in sales of our
recognition engines reflects additional market penetration with existing system
integrators. The decrease in sales of our Doctus product line reflects longer
sales cycles than historically seen, and continued weakness in the capital
spending sector.
Net sales for the nine-month period ended June 30, 2003 were $9,871,000,
compared to $9,231,000 for the same period in 2002, an increase of $640,000 or
7%. The increase was primarily attributable to a 16% increase in sales of our
CheckQuest product line, a 69% increase in maintenance revenue, a 3% increase in
sales of our recognition engines, and was partially offset by a 30% decline in
sales of our Doctus product line. The increase in sales of our CheckQuest
product line reflects continued market penetration into financial institutions.
The increase in sales of our recognition engines reflects additional market
penetration with existing system integrators. We believe the decrease in sales
of our Doctus product line primarily reflects longer sales cycles than
historically seen, and continued weakness in the capital spending sector.
COST OF SALES. Cost of sales for the three-month period ended June 30, 2003
was $1,392,000, compared to $398,000 for the same period in 2002, an increase of
$994,000 or 250%. Stated as a percentage of net sales, cost of sales increased
to 46% for the three-month period ended June 30, 2003 compared to 14% 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 quarter, as compared to the same quarter in 2002.
Cost of sales for the nine-month period ended June 30, 2003 was $3,499,000,
compared to $2,221,000 for the same period in 2002, an increase of $1,278,000 or
58%. Stated as a percentage of net sales, cost of sales increased to 35% for the
nine-month period ended June 30, 2003, compared to 24% 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 nine months, as compared to the same period in 2002.
OPERATIONS EXPENSES. Operations expenses include costs associated with
shipping and receiving, quality assurance, customer support, installation and
training. As installation, training, maintenance and customer support revenues
are recognized, an appropriate amount of these costs are charged to cost of
sales, with unabsorbed costs remaining in operations expense. Operations
expenses for the three-month period ended June 30, 2003 were $432,000, compared
to $498,000 for the same period in 2002, a decrease of ($66,000) or 13%. Stated
as a percentage of net sales, operations expenses were 14% for the three-month
period ended June 30, 2003, as compared with 18% for the same period in 2002.
The dollar decrease in expenses is primarily attributable to additional amounts
being charged to cost of sales, as a result of the completion of several
installations. The decrease as a percentage of net sales is attributable to the
aforementioned additional amounts being charged to cost of sales.
Operations expenses for the nine-month period ended June 30, 2003 were
$1,292,000, compared to $1,297,000 for the same period in 2002, a decrease of
$5,000 or 0.4%. Stated as a percentage of net sales, operations expenses
decreased to 13% for the nine-month period ended June 30, 2003, compared to 14%
for the same period in 2002. The dollar increase in expenses is attributable to
staff additions and operating expenses, primarily facilities depreciation
expense, which was offset by increased amounts being charged to cost of sales,
as a result of the completion of several installations. The decrease as a
percentage of net sales is attributable to increased sales.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses for the
three-month period ended June 30, 2003 were $1,101,000, compared to $774,000 for
the same period in 2002, an increase of $327,000 or 42%. Stated as a percentage
of net sales, selling and marketing expenses increased to 36% from 28% for the
same period in 2002. The dollar increase in expenses is attributable to the
Company's addition of three salespersons focusing their efforts on the
CheckQuest product line, additional commission expense due to the use of an
outside representative, and additional marketing expense, primarily trade shows
attended during the quarter. The increase as a percentage of net sales is
primarily attributable to the dollar increase in expense.
Selling and marketing expenses for the nine-month period ended June 30,
2003 were $2,908,000, compared to $2,377,000 for the same period in 2002, an
increase of $531,000 or 22%. Stated as a percentage of net sales, selling and
marketing expenses increased to 29% from 26% for the same period in 2002. The
dollar increase in expenses is attributable to the Company's addition of three
salespersons focusing their efforts on the CheckQuest product line, additional
commission expense due to the use of an outside representative, and additional
marketing expense, primarily trade shows attended during the quarter. The
increase as a percentage of net sales is primarily attributable to the dollar
increase in expenses.
RESEARCH AND DEVELOPMENT EXPENSES. 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 June 30, 2003 were $556,000, compared to
$504,000 for the same period in 2002, an increase of $52,000 or 10%. Stated as a
percentage of net sales, research and development expenses were 18% for the
three-month period ended June 30, 2003, compared to 18% for the same period in
2002. The dollar increase in expenses is the result of two staff additions as
well as increased compensation of the engineering staff, resulting from normal
periodic performance reviews. The similarity as a percentage of net sales for
the three-month period is primarily attributable to the increased expense,
offset by the increase in sales.
Research and development expenses for the nine-month period ended June 30,
2003 were $1,680,000, compared to $1,475,000 for the same period in 2002, an
increase of $205,000 or 14%. Stated as a percentage of net sales, research and
development expenses increased to 17% for the nine-month period ended June 30,
2003, compared to 16% for the same period in 2002. The dollar increase in
expenses is the result of two staff additions, increased compensation of
engineering staff, resulting from normal periodic performance reviews, and
additional facilities rent. The similarity as a percentage of net sales for the
nine-month period is primarily attributable to the increased expense, offset by
the increase in sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three-month period ended June 30, 2003 were $518,000, compared to
$427,000 for the same period in 2002, an increase of $91,000 or 21%. Stated as a
percentage of net sales, general and administrative expenses increased to 17%
for the three-month period ended June 30, 2003, compared to 15% for the same
period in 2002. The dollar increase in expenses for the three months is
primarily attributable to the addition of a new President and Chief Executive
Office, which were responsibilities previously handled by the Chairman and Chief
Financial Officer. The increase as a percentage of net sales is primarily
attributable to the dollar increase in expenses.
General and administrative expenses for the nine-month period ended June
30, 2003 were $1,356,000, compared to $1,453,000 for the same period in 2002, a
decrease of $97,000 or 7%. Stated as a percentage of net sales, general and
administrative expenses decreased to 14% for the nine-month period ended June
30, 2003, compared to 16% for the same period in 2002. The dollar decrease in
expenses for the nine months is primarily attributable to costs associated with
outside professional services, shareholder relations, and reduced bad debt
expense offset by the increase in payroll and related costs attributable to the
addition of a new President and Chief Executive Officer, which were
responsibilities previously handled by the Chairman and Chief Financial Officer.
The decrease as a percentage of net sales is primarily attributable to the
overall decrease in expenses.
INTEREST AND OTHER INCOME (EXPENSE) - NET. Interest and other income
(expense) for the three-month period ended June 30, 2003 was $4,000, compared to
$6,000 for the same period in 2002, a decrease of $2,000. Interest expense for
the nine-month period ended June 30, 2003 was $7,000, compared to $4,000 for the
same period in 2002, an increase of $3,000. The decrease in net interest expense
for the period ended June 30, 2003 is primarily the result of reduced borrowings
under the Company's line of credit.
LIQUIDITY AND CAPITAL
At June 30, 2003 the Company had $1,416,000 in cash as compared to $760,000
at September 30, 2002. Accounts receivable totaled $5,395,000, a decrease of
$879,000 over the September 30, 2002, balance of $6,274,000. This decrease was
primarily a result of collection of sales occurring at the end of the 2003
second fiscal quarter. On February 19, 2003 the Company revised its revolving
line of credit. The new revolving line of credit is discussed below. There were
no borrowings under the revolving line of credit at either June 30, 2003 or at
September 30, 2002.
The Company has financed its cash needs during the third quarter of fiscal
2003 primarily through collection of accounts receivables.
Net cash provided by operating activities during the nine months ended June
30, 2003 was $824,000. The primary use of cash from operating activities was a
decrease in accounts payable of $223,000, reflecting longer payment terms to
certain vendors, and an increase in inventory of $137,000. This increase was due
to the purchase of technological software used in the Company's CheckQuest
product, which will be installed in the future. The primary source of cash from
operating activities was a decrease in accounts receivable of $804,000,
depreciation and amortization of $337,000, an increase to the deferred revenue
accounts of $392,000 and an increase in accrued payroll and related taxes of
$325,000. The decrease in accounts receivable was due to the collection of
receivables related to the CheckQuest product line, which typically carry
shorter terms. The increase in deferred revenue relates to the growth in
installed base of the Company's CheckQuest product line, as well as other
products. During the third 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.
The Company's working capital and current ratio were $3,903,000 and 2.15,
respectively, at June 30, 2003, and $4,643,000 and 2.70, respectively, at
September 30, 2002. At June 30, 2003, total liabilities to equity ratio was .91
to 1 compared to .64 to 1 at September 30, 2002. As of June 30, 2003, total
liabilities were $608,000 more than on September 30, 2002.
On February 19, 2003 the Company revised its working capital revolving line
of credit. This line requires interest to be paid at the bank's prime plus 1
percent, but is subject to a limit on available borrowings of $1,200,000. The
Company had no borrowings under the working capital line of credit on June 30,
2003 or on September 30, 2002. This credit line is subject to a net worth
covenant whereby the Company must maintain a net worth of $4,800,000 in order to
use the credit line. The loss sustained during the quarter ended June 30, 2003
caused the Company's net worth to fall to $4,183,000. Though the Company had no
borrowings under the credit line as of June 30, 2003, the Company was no longer
in compliance with the aforementioned net worth covenant. The Company requested,
and the lender agreed to, a modification of the net worth covenant, which
reduced the required minimum tangible net worth to $3,750,000. All other
covenants and conditions remained the same.
The existing credit line expires on February 28, 2004. The Company believes
that it will be able to renew the current credit line with its current lender.
If such renewal cannot be obtained, the Company believes that alternative
financing, under terms satisfactory to the Company will be available. However no
assurance can be made that the Company will be able to renew its current credit
line or that alternative financing can be secured under terms satisfactory to
the Company.
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 2003
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
available, as discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets," which requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized, but instead be tested for impairment at least annually. In addition,
the standard includes provisions for the reclassification of certain existing
intangibles as goodwill and reassessment of the useful lives of existing
recognized intangibles. SFAS 142 is effective for fiscal years beginning after
December 31, 2001. The adoption of SFAS 142 effective October 1, 2002 did not
have a material effect on the Company's operations or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes one accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supercedes SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB No. 30. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144
effective October 1, 2002 did not have a material effect on the Company's
operations or financial position.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of this statement could impact the accounting for future exit or
disposal activities, should they occur.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The amendments to SFAS 123 provided for under SFAS No. 148 are
effective for financial statements for fiscal years ending after December 15,
2002. However, certain provisions of SFAS 148 relating to interim financial
statements are effective for the Company's second quarter beginning January 1,
2003. . The Company has not elected to change to the fair value method of
accounting for stock-based transactions.
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.
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." The Company had no borrowings at June 30,
2003. The Company does not use interest rate derivative instruments to manage
exposure to interest rate changes.
ITEM 4
Controls and Procedures
Within the 90 days prior to the date of this report, 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. 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 were no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls subsequent to
the date of their most recent evaluation.
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: No report on Form 8-K was filed by the Company
during the three months ended June 30, 2003.
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: August 12, 2003 /s/ James B. Debello
-----------------------------------
James B. DeBello, President and
Chief Executive Officer
Date: August 12, 2003 /s/ John M. Thornton
-----------------------------------
John M. Thornton, Chairman and
Chief Financial Officer