UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-KSB
(Mark
One)
| x |
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
| |
For the fiscal year ended September
30,
2005 |
| o |
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
Commission
file number 0-15235
|
MITEK
SYSTEMS, INC.
|
|
(Name
of small business issuer in its charter)
|
| |
|
Delaware
|
|
87-0418827
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S
Employer Identification No.)
|
|
14145
Danielson St., Suite B, Poway, CA 92064
|
|
(Address
of principal executive offices) (Zip Code)
|
| |
|
|
Issuer’s
telephone number (858)
513-4600
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $.001 per share
(Title
of
class)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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 xNo
o
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. ‰
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes
o
No x.
State
issuer’s revenues for its most recent fiscal year. $6,594,000
The
aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked price of such common equity, as of October
7,
2005 (See definition of affiliate in Rule 12b-2 of the Exchange Act.) is
$10,576,364.
There
were 14,832,337 shares outstanding of the registrant's Common Stock as of
October 19, 2005
MITEK
SYSTEMS, INC.
FORM
10-KSB
Index
PART
I
GENERAL
This
Form
10-KSB of Mitek Systems, Inc. contains forward-looking statements concerning
anticipated future revenues and earnings, adequacy of future cash flow and
related matters. These forward-looking statements include, but are not limited
to, statements containing the
words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “scheduled” and
like expressions, and the negative thereof. These statements address matters
including, but not limited to, statements relating to the development and pace
of sales of our products, expected trends and growth in our results of
operations, projections concerning our available cash flow and liquidity,
anticipated penetration in new and existing markets for our products and the
size of such markets, anticipated acceptance of our products by existing and
new
customers, and our ability to achieve or sustain any growth in sales and
revenue. The forward-looking statements are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from the
statements, including those risks described in our Securities and Exchange
Commission reports, and the risk factors described in this Form 10-KSB Issues
and Uncertainties.
We
were
incorporated under the laws of the State of Delaware in 1986. We are primarily
engaged in the development and sale of software products with particular focus
on intelligent character recognition and forms processing technology, products
and services for the document imaging markets.
We
develop, market and support what we believe to be the most accurate Automated
Document Recognition (“ADR”) products commercially available for the recognition
of hand printed characters. Our unique proprietary technology recognizes hand
printed and machine generated characters with a level of accuracy that renders
ourADR products a viable alternative to manual data entry in certain
applications. The Mitek solution allows customers that process large volumes
of
hand printed and machine generated documents to do so more quickly, with greater
accuracy and at reduced costs.
PRODUCTS
AND RELATED MARKETS
During
fiscal year ending 2005, we had one operating segment based on our product
and
service offerings: Automated Document Processing.
AUTOMATED
DOCUMENT PROCESSING
Since
1992 we have developed and marketed ADR products, which enable the automation
of
costly, labor intensive business functions such as check and remittance
processing, forms processing and order entry. Our ADR products incorporate
proprietary neural network software technology for the recognition and
conversion of hand printed and machine generated characters into digital data.
Neural networks are powerful tools for pattern recognition applications and
consist of sets of coupled mathematical equations with adaptive parameters
that
self adjust to "learn" various forms and patterns. Our ADR products combine
our
neural network software technology with an extensive database of character
patterns, enabling them to make fine distinctions across a wide variety of
patterns with high speed, accuracy and consistency. We leverage our core
technology across a family of ADR products that we believe offers the highest
accuracy commercially available for the recognition of hand printed characters
and the automated processing of documents. Mitek’s family of ADR products is
made up of the three distinct product lines: Recognition Toolkits, Document
and
Image Processing Solutions and Check Imaging Solutions.
Intelligent
Recognition Toolkits
Our
Intelligent Recognition Toolkits include a suite of products that leverage
our
proprietary intelligent character recognition (ICR), image processing, and
dynamic data extraction software engines. The suite of recognition toolkits
includes QuickStrokesâ,
QuickFX
Pro™, ImageScore™, and Dynafind™.These products are sold to original equipment
manufacturers (OEMs) such as Advanced Financial Solutions a Metavante Company,
Harland Financial Solutions a John Harland Company, Sungard, BancTec and J&B
Software, and to systems integrators such as Computer Sciences
Corporation.
Products
used in financial document processing, are a combination of the Legal Amount
Recognition (LAR) capabilities licensed from Parascript, LLC with our
proprietary QuickStrokesâ
API
Courtesy Amount Recognition (CAR) technology. This product provides a high
level
of accuracy in remittance processing, proof of deposit, and lock box processing
applications.
The
QuickStrokesâ
product
allows for the automatic reading of machine and hand print information found
on
scanned documents and forms from any structured form as well as all bank
documents (checks, deposit slips, remittance coupons etc). Quickstrokes
integrates technology components from the ‘CheckReader’ product licensed from
A2iA Corporation or CheckScriptÔ
product
licensed from Parascript, LLC which specifically increases read rates of the
courtesy and legal amounts of US and Canadian checks.
QuickFXâ
Pro is a
software toolkit that provides automatic form ID, form registration and
form/template removal. We believe it will significantly improve automatic data
capture (ICR/OCR), forms processing, document imaging and storage performance.
QuickFXâ
Pro
reduces the image size by removing extraneous information such as pre-printed
text, lines, and boxes; leaving only the filled-in data. It repairs the
characters that are left, ensuring better recognition, enhanced throughput,
and
higher accuracy rates.
ImageScore
is Mitek’s Check 21 readiness solution for any financial institution that
truncates or uses check images in an accounts receivables conversion
environment. Integrated solution providers for financial institutions can also
buy ImageScore to enhance their products. ImageScore can quickly, accurately
and
comprehensively analyze check images to provide the usability and quality
information needed to help financial institutions act in accordance with
regulatory and industry mandates. As a result, institutions minimize their
risk
by ensuring the integrity of check images they process, and they eliminate
costly manual processes associated with managing transactions from bad check
images.
DynaFindâ
is a
software toolkit that captures data from many types of unstructured business
documents. DynaFind is used in challenging data capture applications where
data
must be found and extracted from documents that have no pre-determined format
or
layout, but share common data elements. DynaFind locates this data on documents
using contextual, positional, format- and keyword-specific information, even
if
it appears in a different location on each document. We have supplied
DynaFindâas
a
stand alone API to several important OEMs in the document processing field.
DynaFindâ
is also
available as an add-on feature that has been integrated into Doctus, which
is
Mitek’s forms processing solution.
Document
and Image Processing Solution
Leveraging
our core technical competency in Intelligent Recognition, we have addressed
the
forms processing market with its Doctusâ
product.
Doctusâ
incorporates our core Intelligent Recognition technologies in an application
designed for end users in a broad variety of industries that require high volume
automated data entry. The Doctusâ
software
handles both structured and unstructured forms. As a result, it significantly
increases the number and types of forms that can be automatically processed.
Doctusâ
is able
to process unstructured forms through the integration of its
DynaFindâ dynamic
data extraction technology. With DynaFindâ,
Doctusâ
automatically classifies unstructured forms and extracts relevant data from
the
form contents. Major Doctusâ
customers and resell partners include AIG, IKON Office Solutions, Sungard,
and
J&B Software.
IDENTITY
VALIDATION AND FORGERY DETECTION
Since
2001, we have applied and adapted our core competency in Automatic Document
processes and Image Analytics to create a product offering Mitek’s Image
Analytics, which are built on Mitek’s portfolio of innovative recognition
technologies used to test, clean, read and authenticate imaged
documents.
Our
capabilities include:
Image
analysis of signatures
Image
repair and optimization
OCR/ICR
Dynamic
data finding on any document or check
Distributed
Capture CAR/LAR
Forgery
Detection Toolkits
Mitek's
FraudProtect™ Toolkit is an innovative product for detecting check fraud and
forgery using Image analytics to uncover inconsistencies and alterations in
checks as they are processed by banks. These products are sold to OEMs such
as
SoftPro and CSC.
Signature
& Check Stock Verification API is fully automated and incorporates advanced
imaging, image analysis and data extraction technologies that can help verify
the authenticity of every signature on every check that passes through a bank,
and analyzes paper stock for any indication that an item is a
counterfeit.
Mitek's
PADsafe toolkit is the first toolkit of its kind to detect fraudulent
preauthorized drafts. It automatically identifies PADs from checks, then
notifies the user of any potentially suspicious PADs. As a result, the
withdrawal of unauthorized funds due to fraudulent PAD transactions is reduced
and often prevented. Mitek's
PayeeFind prevents payee-altered checks from clearing. As a result, PayeeFind
can substantially reduce losses and cut administrative costs by eliminating
the
need for organizations to complete and file affidavits to recover funds from
checks that have cleared with fraudulent payees. With PayeeFind, this type
of
fraud can be stopped before recovery becomes an issue.
Forgery
Detection Solution
Mitek’s
FraudProtect™ System is a comprehensive, automated software application that
allows banks to detect the most common forms of check fraud from forged
signatures and counterfeit checks, as well as the detection of pre-authorized
drafts and payee name alterations. Banks can significantly reduce losses due
to
Check Fraud by using the FraudProtect System.
RESEARCH
AND DEVELOPMENT
During
fiscal years 2005 and 2004 research and development expense was approximately
$1,508,000 and $2,204,000 respectively. Those amounts represented 23% and 42%
respectively, of revenue in each of those years. The reduction in Research
and
Development in fiscal 2005 was due to the reclassification of $802,000 from
Research and Development to cost of goods sold for engineering services provided
to our customers. The total Research and Development expense would have been
$2,310,000 before reclassification. We plan to continue spending significant
amounts for research and product development.
Most
of
our software products are developed internally. We also purchase technology
and
license intellectual property rights. We believe that our future success depends
in part on our ability to maintain and improve our core technologies, enhance
our existing products and develop new products that meet an expanding range
of
customer requirements. We do not believe we are materially dependent upon
licenses and other agreements with third parties, relating to the development
of
our products. Internal development allows us to maintain closer technical
control over our products and gives the us the freedom to designate which
modifications and enhancements are most important and when they should be
implemented. We devise innovative solutions to automated character processing
problems, such as the enhancement and improvement of degraded images, and the
development of user-manipulated tools to aid in automated document processing.
We intend to expand our existing product offerings and to introduce new document
processing software solutions. In the development of new products and
enhancements to existing products, we use our own tools extensively. We perform
all quality assurance and develop documentation internally. We strive to become
informed at the earliest possible time about changing usage patterns and
hardware advances that may affect software design. We intend to continue to
support industry standard operating environments.
Our
team
of specialists in recognition algorithms, software engineering, user interface
design, product documentation and quality improvement is responsible for
maintaining and enhancing the performance, quality and usability of all of
our
products. In addition to research and development, the engineering staff
provides customer technical support on an as needed basis, along with technical
sales support.
In
order
to improve the accuracy of its ADR products, we focus research and development
efforts on continued enhancement of our core technology and on our database
of
millions of character images that is used to "train" the neural network software
that forms the core of our ICR engine. In addition, we have expanded our
research and development tasks to include pre- and post-processing of data
subject to automated processing.
Our
research and development organization included fourteen software engineers
on
September 30, 2005, including four with advanced degrees. We balance our
engineering resources between development of ICR technology and applications
development. All the
software engineers are involved in applications development, including ICR
research and development of the QuickStrokesâ
API
recognition engine , Doctusâ,
QuickFXâ
Pro, and
FraudProtect™
products, quality assurance, and customer services and support.
INTELLECTUAL
PROPERTY
Our
success and ability to compete is dependent in part upon its proprietary
technology. We rely on a combination of patent, copyright and trade secret
laws
and non-disclosure agreements to protect its proprietary technology. We hold
a
U.S. patent for our hierarchical character recognition systems. The patent
covers our multiple-pass, multiple-expert system that significantly increases
the accuracy of forms processing and item processing applications. We may seek
to file additional patents to expand the scope of patent coverage. We may also
file future patents to cover technologies under development. There can be no
assurance that patents will be issued with respect to future patent applications
or that our patents will be upheld as valid or will prevent the development
of
competitive products.
We
also
seek to protect our intellectual property rights by limiting access to the
distribution of our software, documentation and other proprietary information.
In addition, we enter into confidentiality agreements with our employees and
certain customers, vendors and strategic partners. There can be no assurance
that the steps we take in this regard will be adequate to prevent
misappropriation of its technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technologies.
We
are
also subject to the risk of adverse claims and litigation alleging infringement
on the intellectual property rights of others. In this regard, there can be
no
assurance that third parties will not assert infringement claims in the future
with respect to our current or future products or that any such claims will
not
require us to enter into license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms.
SALES
AND MARKETING
We
market
our products and services primarily through our internal, direct sales
organization. We employ a technically-oriented sales force with management
assistance to identify the needs of existing and prospective customers. Our
sales strategy concentrates on Original Equipment Manufacturers (OEM),
Distributors and companies that we believe are key users and designers of
automated document processing systems for high- performance, large volume
applications, in addition to small and large financial institutions. We
currently maintain our sales and support office in California. In addition,
we
sell and support our products through foreign resellers in Canada, Greece,
Portugal France, Italy, the United Kingdom, India, and Japan. The sales process
is supported with a broad range of marketing programs which include trade shows,
direct marketing, public relations and advertising.
We
license our software to organizations on a perpetual basis. We also license
software to organizations under Enterprise Agreements that allow the end-user
customer to acquire multiple licenses, without having to acquire separate
packaged products. These Enterprise Agreements are targeted at large
organizations that want to acquire perpetual licenses to software products
for
their entire enterprise along with rights to unspecified future versions of
software products over the term of the agreement.
Our
ability to support international customers has helped in increasing
international sales. International sales accounted for approximately 23% and
4%,
of our net sales for the fiscal years ended September 30, 2005 and 2004,
respectively. We believe that a significant percentage of the products in our
domestic sales are incorporated into systems that are delivered to end users
outside the United States. International sales in fiscal year 2005 were made
to
customers in fourteen countries including Australia, Greece, Canada, Czech
Republic, United Kingdom, France, Germany, Spain, India, Italy, Japan, New
Zealand, Portugal, and Sweden. We sell our products in United States currency
only. We recorded a significant portion of our revenues from two customers
in
fiscal year 2005, and from one customer in fiscal year 2004. Net sales from
these customers aggregated 31% and 12% for the fiscal years 2005 and 2004,
respectively.
MAINTENANCE
AND SUPPORT
Following
the installation of Mitek’s software at a customer site, we provide ongoing
software support services to assist our customers in operating the systems.
We
have an internal customer service department that handles installation and
maintenance requirements. The majority of inquiries are handled by telephone.
For more complicated issues, our staff, after customer consent, can log on
to
our customers’ systems remotely. Occasionally, visits to the customers’
facilities are required to resolve support issues. We maintain our customers’
software largely through releases which contain improvements and incremental
additions. Nearly all of our in-house customers contract for annual support
services from us. These services are a significant source of recurring revenue,
and are contracted for an annual basis and are typically priced at approximately
8% to 18% of the particular software product’s license fee.
We
provide maintenance and support on a contractural basis after the initial
product warranty has expired. We provide telephone support and on-site support.
Customers with maintenance coverage receive software updates from us. Foreign
distributors generally provide customer training, service and support for the
products they sell. Additionally, our products are supported internationally
by
periodic distributor and customer visits by our management. These visits include
attending imaging shows, as well as sales and training efforts. Technical
support is provided by telephone as well s technical visits in addition to
those
previously mentioned.
We
believe that as the installed base of our products grows and as customers
purchase additional complementary products, the software support function will
become a larger source of recurring revenues. Maintenance and support service
fees are deferred and recognized into income over the contract period on a
straight-line basis. Costs incurred by us to supply maintenance and support
services are charged to cost of sales.
COMPETITION
The
market for our ADR products is intensely competitive, subject to rapid change
and significantly affected by new product introductions and other market
activities of industry participants. We face direct and indirect competition
from a broad range of competitors who offer a variety of products and solutions
to our current and potential customers. Our principal competition comes from
(i)
customer-developed solutions; (ii) direct competition from companies offering
automated document processing systems; (iii) companies offering competing
technologies capable of recognizing hand-printed and cursive characters; and
(iv) direct competition from companies offering check imaging systems to
banks.
It
is
also possible that we will face competition from new competitors. Moreover,
as
the market for automated document processing, ICR, check imaging and fraud
detection software develops, a number of companies with significantly greater
resources than we have could attempt to enter or increase their presence in
our
market either independently or by acquiring or forming strategic alliances
with
our competitors or to otherwise increase their focus on the industry. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the
ability of their products to address the needs of our current and prospective
customers.
Our
QuickStrokesâ
API
product and licensed CheckScript™
product
compete, to various degrees, with products produced by a number of substantial
competitors such as A2iA, Parascript, and Orbograph. Competition among product
providers in this market generally focuses on price, accuracy, reliability
and
technical support. We believe our primary competitive advantages are (i)
recognition accuracy with regard to hand printed characters, (ii) flexibility,
since it may operate on a broad range of computer operating platforms, (iii)
scalability and (iv) an architectural software design, which allows it to be
more readily modified, improved with added functionality, configured for new
products, and ported to new operating systems and upgrades. Despite these
advantages, QuickStrokesâ
API and
CheckScriptÔ
competitors have existed longer and have far greater financial resources and
industry connections than we have.
Our
Doctusâ
product
competes against complete proprietary systems offered by software developers,
such as Microsystems Technology, Readsoft, and Cardiff Software, Inc. In
addition, Doctusâ
faces
competition from providers of recognition systems that incorporate ADR
technology such as Microsystems Technology, Inc., and Captiva. Because
Doctusâ
is based
on our proprietary QuickStrokesâ
API
engine, its competitive advantages reflect the advantages of the
QuickStrokesâ
engine.
We believe our Doctusâ
and
DynaFindâ
software
provides the highest levels of automation in the industry. DynaFind, our
document understanding software, does not require extensive rules written by
a
programmer based on a large set of training documents. The software
automatically “learns” how to process unstructured forms by reading only a few
examples. Competitors in this market offer both high and low cost systems.
Our
strategy is to position Doctusâ
to
compete successfully in a scalable midrange price while offering a higher degree
of accuracy and greater flexibility than competing systems currently on the
market.
Increased
competition may result in price reductions, reduced gross margins, and loss
of
market share, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
EMPLOYEES
AND LABOR RELATIONS
As
of
September 30, 2005, we employed a total of 31 full-time and 1 part-time person,
consisting of 6 in sales and marketing, 19 in research and development, product
management and support, 1 in operations, and 6 in finance, administration and
other capacities. We have never had a work stoppage. None of our employees
are
represented by a labor organization, and we consider our relations with our
employees to be good
AVAILABLE
INFORMATION
Our
internet address is www.miteksys.com.
There
we make available, free of charge, our annual report on Form 10-KSB, quarterly
reports on Form 10-QSB, current reports on Form 8-K and any amendments to those
reports, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Our SEC reports can be accessed
through the investor relations section of our Web site. The public may also
obtain such information on the operation of the SEC Public Reference Room by
calling the SEC at 1-800-SEC-0330. The information found on our Web site is
not
part of this or any other report we file with or furnish to the
SEC.
Our
principal executive offices, as well as its principal research and development
facility, is located in approximately 26,455 square feet of leased office
building space in Poway, California. The lease on this facility expired on
September 30, 2005 and we continued to occupy the building on a month to month
basis. We have signed a seven year lease with Arden Properties for a 16,000
square foot building located at 8911 Balboa Avenue, San Diego California. We
expect to move to the new location in December 2005. We believe that our new
facilities are adequate.
We
are
not aware of any legal proceedings or claims that we believe may have,
individually or in the aggregate, a material adverse effect on our business,
financial condition, operating results, cash flow or liquidity.
| ITEM
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
There
were no matters submitted to a vote of security holders during the fourth
quarter ended September 30, 2005.
| ITEM
4A. |
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
Our
executive officers as of October 19, 2005 were as follows:
|
Name
|
|
Age
|
|
Position
with Mitek
|
|
James
B. DeBello
|
|
47
|
|
President,
Chief Executive Officer
|
|
John
M. Thornton
|
|
73
|
|
Chairman
|
|
Tesfaye
Hailemichael
|
|
56
|
|
Chief
Financial Officer
|
|
Murali
Narayanan
|
|
53
|
|
Vice
President - Marketing
|
|
Emmanuel
deBoucaud
|
|
39
|
|
Vice
President - Sales
|
Mr.
DeBello was named President and Chief Executive Officer in May 2003. He has
served as a director of Mitek since 1994. Prior to being named Chief Executive
Officer, he served as Chief Executive Officer of Asia Corporation Communications
from 2001 to May 2003. Prior to that, he served as Chief Executive Officer
of
IdeaEdge Ventures from 2000 to 2001. Prior to that, he served as Chief Operating
Officer of CollegeClub.com from 1999 to 2000.
Mr.
Thornton served as Chairman, President, Chief Executive Officer and Chief
Financial Officer from August 1998 to May 2003, when he resigned as President
and Chief Executive Officer but remained as Chairman and Chief Financial
Officer. Mr. Thornton resigned as Chief Financial Officer in May 2005 but
remains as Chairman. He has served as Chairman since 1987.
Mr.
Hailemichael joined Mitek in May 2005 as Chief Financial Officer. Prior to
joining Mitek, he served as Chief Financial Officer at Maxwell Technologies
from
2003 to 2005. Prior to that, he served as Chief Financial Officer at Raidtec
Ltd
from 2001 to 2003. Prior to that, he served as Executive Vice President of
Transnational Computer Technology, Inc. from 1998 to 2001. Mr. Hailemichael
served as Vice President of Finance and Chief Financial Officer of Dothill
Systems, Inc. from 1990 to 1998.
Mr.
Narayanan joined Mitek in July 2003 as Vice President of Marketing. Prior to
joining Mitek, he served from May, 2000 as Vice President of Business
Development of Embrace Networks. Prior to that, he served from May 1999 to
April
2000 as Director of Marketing, Internet and Connectivity Solutions for Motorola,
Inc.
Mr.
deBoucaud joined Mitek in July 2004. Prior to joining Mitek, he served from
September 1995 to March 2004 as Vice President of Sales for Cardiff Software,
Inc.
PART
II
| ITEM
5. |
MARKET
FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
|
Our
common stock is traded on the OTC Bulletin Board under the symbol MITK.OB and
the closing bid price on November 18, 2005 was $0.82. As of November 18, 2005,
there were 450
holders
of record of Mitek Systems, Inc. Common Stock.
Our
Common Stock initially traded on the Nasdaq SmallCap Market under the symbol
"MITK". The Common Stock was delisted from the Nasdaq SmallCap
Market, because it failed to satisfy the requirement that it maintain at least
$2.5 million in shareholders equity. The delisting was effective on
May
24, 2004, and since that time, the Common Stock has traded on the OTC Bulletin
Board maintained by the NASD.
The
following table sets forth, for the fiscal period indicated, the high and low
closing bid prices for the Common Stock as reported on the Nasdaq National
Market or the OTC Bulletin Board. The quotations for the Common Stock traded
on
the OTC Bulletin Board may reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual
transactions.
|
Quarter
Ended
|
|
Dec.
31
|
|
Mar.
31
|
|
Jun.
30
|
|
Sept.
30
|
|
Year
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock price per share
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
.56
|
|
$
|
1.03
|
|
$
|
.88
|
|
$
|
.94
|
|
$
|
1.03
|
|
|
Low
|
|
|
.33
|
|
|
.36
|
|
|
.55
|
|
|
.55
|
|
|
.33
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock price per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
3.32
|
|
$
|
2.72
|
|
$
|
1.47
|
|
$
|
0.87
|
|
$
|
3.32
|
|
|
Low
|
|
|
0.98
|
|
|
1.40
|
|
|
0.40
|
|
|
.46
|
|
|
.40
|
|
We
have
not paid any dividends on our common stock. We currently intend to retain
earnings for use in our business and do not anticipate paying cash dividends
in
the foreseeable future. We are prohibited from paying cash dividends under
the
terms of our convertible note agreement.
In
June
2005, we issued 25,000 shares of our common stock at the conversion price of
$.70 per share to Laurus Master Fund, Ltd. (“Laurus”) in connection with the
payment of $17,500 of the principal related to a convertible term note of
$3,000,000, issued to Laurus in June 2004 (the “Note”). In August 2005, we
issued 775,000 shares of common stock at the conversion price of $.70 per share
to Laurus in connection with the payment of $542,500 of the principal related
to
the Note. In October 2005, we issued 500,000 shares of our common stock at
the
conversion price of $.70 per share to Laurus in connection with the payment
of
$350,000 of the principal related to the Note. These conversions were made
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as Laurus
is
a sophisticated investor who had access to information about Mitek.
PART
II
| ITEM
6. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF OR PLAN OF
OPERATION
|
FORWARD
LOOKING STATEMENTS
In
addition to historical information, this Management's Discussion and Analysis
of
or Plan of Operation (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 Mitek, 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 Mitek, please be advised that our actual financial condition, operating
results and business performance may differ materially from that projected
or
estimated by Mitek in forward-looking statements. We have attempted to identify,
in context, certain factors that we currently believe may cause actual future
experiences and results to differ from our 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 our 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 Mitek and its employees, higher than anticipated labor
costs, the possible fluctuation and volatility of our operating results and
financial condition, adverse publicity and news coverage, inability to carry
out
marketing and sales plans, loss of key executives, changes in interest rates,
inflationary factors, and other specific risks that may be alluded to in this
MD&A.
RESULTS
OF OPERATIONS
NET
SALES
Net
sales
were $6,594,000 and $5,240,000 for fiscal 2005 and 2004, respectively. Net
sales
increased by $1,354,000 in fiscal 2005 compared to fiscal 2004. The increase
in
fiscal 2005 revenue is due to engineering services provided to Harland and
significant sales to International customers. Throughout 2004, the we
experienced decreased check imaging solutions revenue, which we believe was
due
to continued customer hesitancy to adopt check imaging solutions, pending
finalization of Check 21 Imaging Standards. Though image acceptance is mandated
by the passage of Check 21, the imaging standards required under this
legislation were not final until September 2004. We also experienced substantial
purchasing hesitancy from customers who expressed concern over our recent
quarterly losses and the delisting of our stock from NASDAQ. We substantially
exited this product line, by agreeing to the transaction with Harland Financial
Solutions described in Note 7 of the accompanying financial
statements.
Sales
of
our Document Processing Solutions decreased by 64% or $279,000 and $301,000
or
41%, for fiscal year of 2005 and 2004, respectively. This reflects our efforts
that were principally focused on Check Imaging Solutions and recognition
toolkits, not on Imaging Processing Solutions. Prospectively, expect this area
to yield moderate growth, with revenue from existing customers likely to remain
constant.
COST
OF
SALES
Cost
of
sales includes manufacturing and distribution costs for products and programs
sold, operation costs related to product support, and costs associated with
the
delivery of consulting services. Cost of sales were $1,130,000 and $1,980,000
for fiscal year 2005 and 2004, respectively. Cost of sales for 2005 decreased
by
$850,000 due to product mix and reduction in operations expenses and
discontinuation of hardware sales and related costs.
Stated
as
a percentage of net sales, cost of sales for the corresponding periods were
17%
and 38%, respectively. There was no significant percentage change from 2004
to
2005.
OPERATIONS
Gross
operations expense for the current fiscal year included payroll, employee
benefits, and other headcount-related costs associated with shipping and
receiving, and in fiscal year 2004 operations expense also included quality
assurance, customer support, installation and training. As installation,
training, maintenance and customer support revenues are recognized, the amounts
expensed are charged to cost of sales, with unabsorbed costs remaining in
operations expense.
Operations
expenses were $145,000 and $1,136,000 for fiscal 2005 and 2004, respectively.
Net operations expenses were $145,000 and $1,136,000 for fiscal year 2005 and
2004, respectively. For fiscal year 2005, there was a decrease in operation
expenses of $991,000, which was due to our sale to Harland in July of 2004,
of
certain assets used in the Item Processing product line. The dollar decrease
in
the gross 2005 expense is primarily attributable to the costs associated with
the Item Processing product line being reduced as a result of our sale to
Harland in July of 2004, of certain assets used in the Item Processing product
line. The sale of the Item Processing assets to Harland,
is
described in Note 7 of the accompanying financial statement. A majority of
the
operations expenses were related to the support, installation and training
function for the Item Processing product line. Upon our exit from the Item
Processing product line, certain of the Mitek employees associated with the
product line were terminated and were hired by Harland.
Stated
as
a percentage of net sales, operations expenses for fiscal year 2005 and 2004
were 2% and 22%, respectively. The decrease in fiscal year 2005 from 2004 was
due primarily to the sale of the Item Processing product line and revenue
increase in 2005.
SELLING
AND MARKETING
Selling
and marketing expenses include payroll, employee benefits, and other
headcount-related costs associated with sales and marketing personnel and
advertising, promotions, trade shows, seminars, and other programs. Selling
and
marketing expenses were $2,074,000 and $1,942,000 for fiscal 2005 and 2004,
respectively. The dollar increase in 2005 expense compared to 2004 is primarily
attributable to commission expense which increased approximately $215,000 as
compared to fiscal year 2004.
Stated
as
a percentage of net sales, selling and marketing expenses for fiscal year 2005
and 2004 were 32% and 37%, respectively. The percentage decrease in fiscal
year
2005, compared to fiscal year 2004, was primarily due to an increase in sales
in
fiscal year 2005.
RESEARCH
AND DEVELOPMENT
Research
and Development expenses include payroll, employee benefits, and other
headcount-related costs associated with product development. These costs are
incurred to maintain and enhance existing products. We maintain what we believe
to be sufficient staff to maintain our existing product lines, including
development of new, more feature-rich versions of our existing product lines,
as
we determine our demands by the marketplace. We also maintain research
personnel, whose efforts are designed to ensure product paths from current
technologies to anticipated future generations of products within our area
of
business.
Research
and Development expenses for fiscal year 2005 was $1,508,000 after the
reclassification of $802,000 from Research and Development to the cost of goods
sold in relation to engineering services to our customers. Total Research and
Development would have been $2,310,000 if there was no reclassification.
Research and Development expenses for fiscal year 2004 was
$2,204,000.
The
dollar decrease in the 2005 expense is primarily due to the reduction of
personnel whose primary focus was in the Item Processing product line. These
individuals were terminated, as we substantially exited this product line,
by
agreeing to the transaction with Harland Financial Solutions described in Note
7
of the accompanying financial statements. This cost savings was somewhat offset
by the hiring of two personnel, whose primary focus will be in the Recognition
toolkits area, with a principal focus on fraud detection.
Stated
as
a percentage of net sales, research and development expense for fiscal year
2005
and 2004, including charges to cost of sales, were 23% and 42%, respectively.
The percentage decrease in fiscal year 2005 was due to the increase in revenue
over fiscal 2004 and the reclassification of $802,000 or 12% to cost of goods
sold as mentioned above.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses include payroll, employee benefit, and other
headcount-related costs associated with the finance, facilities, and legal
and
other administrative fees. General and administrative costs were $3,050,000
and
$2,720,000 for fiscal year 2005 and 2004, respectively.
The
expense increase in 2005 over 2004 was primarily due to legal expenses related
to legal matters resolved in 2005.
Stated
as
a percentage of net sales, general and administrative expense for fiscal year
2005 and 2004 were 46% and 52%, respectively. The decrease in the 2005 expense,
as a percentage of net sales, was primarily due to increased sales.
GAIN
ON
SALE OF ASSETS
In
fiscal
year 2005, the gain on the sale of assets of $1,106,000 related to the
contingent payment on the sale of the CheckQuest product line as discussed
in
Note 7 to the accompanying financial statements. In fiscal year 2004,
the
gain
on sale of assets consisted of the $1,270,000 gain on the disposition of the
CheckQuest product line, as discussed in Note 7 to the accompanying financial
statements.
OTHER
INCOME (EXPENSE)
Other
Income (Expense) for fiscal year 2005 consists of interest expense on the
Convertible Note, as discussed in Note 5 of the accompanying financial
statements, of which $765,000 represents amortization of the beneficial
conversion feature and interest paid, $82,000 represents the change in fair
value of warrant liability, and $25,000 represents interest and other income.
Other Income (Expense) for fiscal year 2004 consisted of interest expense on
the
Convertible Note, as discussed in Note 5 of the accompanying financial
statements, $208,000 in interest expense for late registration fees, $48,000
for
a change in fair value of the warrant liability, as discussed in Note 7 of
the
accompanying financial statements and $31,000 in interest and other income.
Net
other (expenses) was $822,000 and $372,000 for fiscal year 2005 and 2004,
respectively. Stated as a percentage of net sales, net other expense for the
corresponding periods were 12% and 7%, respectively.
INCOME
TAXES
For
the
fiscal year 2005, we recorded a tax benefit of $714 for income taxes which
was
primarily franchise taxes over paid to states in which we operated. For the
fiscal year 2004, we recorded an income tax expense of $2,168, which was
primarily franchise taxes paid to states in which we operated.
FINANCIAL
CONDITION
On
September 30, 2005, we had $2,387,000 in cash as compared to $2,607,000 on
September 30, 2004 which is a decrease of $220,000. Accounts receivable totaled
$773,000, an increase of $203,000 from the September 30, 2004 balance of
$570,000. This increase was primarily a result of an increase in revenue in
2005
over 2004.
Unearned
revenue as of September 30, 2005 was $428,000, an increase of $30,000 from
September 30, 2004, which reflects the addition of new and anniversary product
support agreements offset by continued recognition of unearned revenue from
product support agreements licensed in prior periods.
During
fiscal year 2005, we financed our cash needs primarily from financing and
investing activities.
Net
cash
used by operating activities during the year ended September 30, 2005 was
$2,022,000. The primary use of cash from operating activities was the net loss
of $1,027,000, an increase in deferred revenue of $30,000, a decrease in
accounts payable of $82,000, an increase in accrued payroll and related taxes
of
$111,000, and a decrease in other accrued liabilities of $127,000. The primary
sources of cash from operating activities was an increase in accounts receivable
of $172,000, a gain on sale of CheckQuest assets of $1,106,000, amortization
of
debt discount of $527,000 and depreciation and amortization expense of $92,000
both of which do not require cash.
Net
cash
provided from investing activities was primarily from the transaction with
Harland Financial Solutions as described in Note 7 of the accompanying financial
statements and collections on the note receivable from Mitek Systems, Ltd.,
which were in part offset by the acquisition of fixed assets, primarily computer
equipment.
Net
cash
from financing activities was primarily the proceeds from the Convertible debt,
net of debt issuance costs, described in Note 5 of the accompanying financial
statements, which was offset by the borrowings of $801,000, as well as the
proceeds from the sale of common stock to John H. Harland Company.
Our
working capital and current ratio was $1,323,000 and 1.67, respectively on
September 30, 2005 and $847,000 and 1.32, respectively, on September 30, 2004.
On September 30, 2005, total liabilities to equity ratio was 2.36 to 1 compared
to -7.81 to 1 year earlier. As of September 30, 2005, total liabilities
decreased by $1,646,000 compared to total liabilities on September 30,
2004.
On
June
11, 2004, we secured a financing arrangement with Laurus. The financing consists
of a $3 million Secured Note that bears interest at the rate of prime (as
published in the Wall Street Journal) plus one percent and has a term of three
years (June 11, 2007). The Secured Note is convertible into shares of the our
common stock at an initial fixed price of $0.70 per share, a premium to the
10-day average closing share price as of June 11, 2004. The conversion price
of
the Secured Note is subject to adjustment upon the occurrence of certain events.
The Secured Notes stipulates that the Secured Note is to be repaid using cash
payment along with an equity conversion option; the details of both methods
for
repayment are as follows: The cash repayments stipulate that beginning on
December 1, 2004, or the first amortization date, we shall make monthly payments
to Laurus on each repayment date until the maturity date, each in the amount
of
$90,909.09, together with any accrued and unpaid interest to date, with the
final payment of any unpaid principal and interest due on June 11, 2007. The
conversion repayment states that each month by the fifth business day prior
to
each amortization date, Laurus shall deliver to Mitek a written notice
converting the monthly amount payable on the next repayment date in either
cash
or shares of common stock, or a combination of both. If a repayment notice
is
not delivered by Laurus on or before the applicable notice date for such
repayment date, then we pay the monthly amount due in cash. Any portion of
the
monthly amount paid in cash shall be paid to Laurus in an amount equal to 102%
of the principal portion of the monthly amount due. In connection with this
transaction, we issued warrants to Laurus for the purchase of up to 860,000
shares of common stock at prices ranging from $0.79 to $0.92 per
share.
An
additional 200,000 warrants exercisable at $0.70 per share were issued in
October 2004 in connection with our Registration Rights Agreement with Laurus
as
consideration for settlement of late registration and effectiveness charges.
The
Common shares underlying the Convertible Debt and the 1,060,000 warrants have
registration rights which require Mitek to file and have these underlying shares
effective by a certain date. Pursuant to the Registration Rights agreement,
failure to have these underlying shares registered and effective by January
1,
2005 would trigger substantial cash penalties. The registration was not
effective by that time so we incurred liquidated damages, payable in cash,
in
the amount of $215,000 for the period January 1, 2005 to May 13, 2005. The
registration became effective May 13, 2005, and we do not anticipate there
will
be future penalties associated with the registration.The Note is secured by
a
general lien on all of our assets, and as a condition of this transaction,
our
line of Credit with First National Bank was cancelled.
There
are
no significant capital expenditures planned for the foreseeable
future.
Our
lease
of 14145 Danielson Street, Suite B, Poway, California expired on September
30,
2005 and a month to month lease has been in place. We have signed a seven year
lease for 16,000 square feet office space located at 8911 Balboa Avenue, San
Diego, California with Arden Properties.
We
evaluate our cash requirements on a quarterly basis. Historically, we have
managed our cash requirements principally from cash generated from operations.
Although our strategy for fiscal 2005 is to grow the identified markets for
its
new products and enhance the functionality and marketability of our character
recognition technology, we have not yet observed a significant change in
liquidity or future cash requirements as a result of this strategy. Anticipated
cash requirements over the next twelve months are principally to fund
operations, including spending on research and development. We believe that
it
will have sufficient liquidity to finance our operations for the next twelve
months using existing cash and cash generated from operations, as discussed
above.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
December 2004, the Financial Accounting Standards Board (FASB) issued the
Statement of Financial Accounting Standard (SFAS) No.123 (revised 2004),
“Share-Based Payment” Statement 123(R) which will provide investors and other
users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That compensation
cost will be measured based on the fair value of the equity or liability
instruments issued. Statement 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25,
as long as the footnotes to financial statements disclosed what net income
would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. We are continuously evaluating the impact of the adoption
of SFAS 123(R), and currently believe the impact will be significant to our
overall results of operations or financial position.
In
January 2003, the FASB issued FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). In December 2003,
FIN 46 was replaced by FASB interpretation No. 46(R) "Consolidation
of
Variable Interest Entities." FIN 46(R) clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46(R) requires an enterprise to consolidate
a
variable interest entity if that enterprise will absorb a majority of the
entity's expected losses, is entitled to receive a majority of the entity's
expected residual returns, or both. FIN 46(R) is effective for entities being
evaluated under FIN 46(R) for consolidation no later than the end of the first
reporting period that ends after March 15, 2004. We do not currently
have
any variable interest entities that will be impacted by adoption of FIN 46(R).
In
March
2004, the FASB approved the consensus reached on the Emerging Issues Task Force
(EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its
Application to Certain Investments." The objective of this Issue is to provide
guidance for identifying impaired investments. EITF 03-1 also provides new
disclosure requirements for investments that are deemed to be temporarily
impaired. The accounting provisions of EITF 03-1 are effective for all reporting
periods beginning after June 15, 2004, while the disclosure requirements for
certain investments are effective for annual periods ending after December
15,
2003, and for other investments such disclosure requirements are effective
for
annual periods ending after June 15, 2004. We do not currently have any
investments that will be impacted by this provision.
In
September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt
and
equity securities, in particular investments within the scope of FASB Statement
No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and
investments accounted for under the cost method. We do not currently have any
investments that will be impacted by this provision.
Effective
April 1, 2004, the SEC adopted Staff Accounting Bulletin No. 105, “Application
of Accounting Principles to Loan Commitments” (“SAB 105”). SAB 105
clarifies the requirements for the valuation of loan commitments that are
accounted for as derivatives in accordance with SFAS 133. Management
does
not expect the implementation of this new bulletin to have any impact on our
financial position, results of operations and cash flows. We do not
have
any loan commitments.
In
July
2004, the EITF issued a draft abstract for EITF Issue No. 04-08, “The Effect of
Contingently Convertible Debt on Diluted Earnings per Share” (“EITF
04-08”). EITF 04-08 reflects the Task Force's tentative conclusion that
contingently convertible debt should be included in diluted earnings per share
computations regardless of whether the market price trigger has been met.
If adopted, the consensus reached by the Task Force in this Issue will be
effective for reporting periods ending after December 15, 2004. Prior
period earnings per share amounts presented for comparative purposes would
be
required to be restated to conform to this consensus and we would be required
to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding. Management does not expect the implementation
of this new standard to have a material impact on its computation of diluted
earnings per share.
In
December 2004, the FASB issued two Staff Positions (FSP) that provide accounting
guidance on how companies should account for the effect of the American Jobs
Creation Act of 2004 that was signed into law on October 22, 2004. In FSP FAS
109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes,
to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004", the FASB concluded that the special tax deduction
for domestic manufacturing, created by the new legislation, should be accounted
for as a "special deduction" instead of a tax rate reduction. As such, the
special tax deduction for domestic manufacturing is recognized no earlier than
the year in which the deduction is taken on the tax return. FSP FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004", allows additional
time
to evaluate the effects of the new legislation on any plan for reinvestment
or
repatriation of foreign earnings for purposes of applying FASB Statement No.
109. We do not anticipate that this legislation will impact our results of
operations or financial condition. Accordingly, FSP FAS 109-1 and FSP FAS 109-2
are not currently expected to have any material impact on our financial
statements. These FSPs were effective December 21, 2004.
In
December 2004, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.
SFAS
No. 154 requires retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of
a
change in accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
nondiscretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization or depletion method for
long-lived, non-financial assets be accounted for as a change in an accounting
estimate effected by a change in accounting principle. SFAS No. 154
is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Early adoption is permitted for
accounting changes and corrections of errors made in fiscal years beginning
after the date this Statement is issued. Management does not expect
the
implementation of this new standard to have a material impact on our financial
position, results of operations and cash flows.
In
March
2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based
Payment”(“SAB 107”), which provides interpretive guidance related to the
interaction between SFAS 123(R) and certain SEC rules and regulations.
It
also provides the SEC staff's views regarding valuation of share-based payment
arrangements. In April 2005, the SEC amended the compliance dates for
SFAS
123(R), to allow companies to implement the standard at the beginning of their
next fiscal year, instead of the next reporting period beginning after June
15,
2005. Management is currently evaluating the impact SAB 107 will have
on
our financial statements.
On
June
15-16, 2005 the Emerging Issue Task Force meeting discussed Effect of a
Liquidated Damages Clause on a Free standing Financial Instrument Subject to
EITF 05-04 Issue No. 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock.” The Task Force
further discussed (a)
whether a registration rights penalty meets the definition of a derivative
and
(b) whether the registration rights agreement and the financial instrument
to
which it pertains should be considered as a combined freestanding instrument
or
as separate freestanding instruments. Additionally, some Task Force members
expressed a preference for evaluating a liquidated damages provision based
on
the probable amount that the issuer would pay rather than the maximum amount.
The Task Force was not asked to reach a consensus on this Issue. The Task Force
asked the FASB staff to obtain additional information about how entities
currently evaluate and account for registration rights agreements in practice.
Additionally, the Task Force asked the FASB staff to analyze registration rights
penalties in comparison with other penalties that do not meet the definition
of
a derivative. Further discussion is expected at a future meeting.
Management
cannot determine the impact this new standard will have on our financial
position, results of operations and cash flows until the standard is
issued.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
Mitek’s
financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates by management are affected by management’s
application of accounting policies are subjective and may differ from actual
results. Critical accounting policies for Mitek include revenue recognition,
allowance for accounts receivable, fair value of equity instruments and
accounting for income taxes.
Revenue
Recognition
We
enter
into contractual arrangements with end users that may include licensing of
the
our 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. Our accounting
policies regarding the recognition of revenue for these contractual arrangements
is fully described in the Notes to the Financial Statements.
We
consider many factors when applying generally accepted accounting principles
in
the United States of America to revenue recognition. These factors include,
but
are not limited to:
| · |
The
actual contractual terms, such as payment terms, delivery dates,
and
pricing of the various product and service elements of a
contract
|
| · |
Availability
of products to be delivered
|
| · |
Time
period over which services are to be
performed
|
| · |
Creditworthiness
of the customer
|
| · |
The
complexity of customizations to our software required by service
contracts
|
| · |
The
sales channel through which the sale is made (direct, VAR, distributor,
etc.)
|
| · |
Discounts
given for each element of a
contract
|
| · |
Any
commitments made as to installation or implementation “go live”
dates
|
Each
of
the relevant factors is analyzed to determine its impact, individually and
collectively with other factors, on the revenue to be recognized for any
particular contract with a customer. Management is required to make judgments
regarding the significance of each factor in applying the revenue recognition
standards, as well as whether or not each factor complies with such standards.
Any misjudgment or error by management in its evaluation of the factors and
the
application of the standards, especially with respect to complex or new types
of
transactions, could have a material adverse affect on our future revenues and
operating results.
Accounts
Receivable.
We
evaluate the creditworthiness of our customers prior to order fulfillment and
we
perform ongoing credit evaluations of our customers to adjust credit limits
based on payment history and our assessment of the customers’ current
creditworthiness. We constantly monitor collections from our customers and
maintain a provision for estimated credit losses that is based on historical
experience and on specific customer collection issues. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. Since our revenue recognition policy requires
customers to be deemed creditworthy, our accounts receivable are based on
customers whose payment is reasonably assured. Our accounts receivable are
derived from sales to a wide variety of customers. We do not believe a change
in
liquidity of any one customer or our inability to collect from any one customer
would have a material adverse impact on our financial position.
Loss
Contingencies
The
financial statements presented include accruals for a loss
contingency.
Fair
Value of Equity Instruments
The
valuation of certain items, including valuation of warrants, beneficial
conversion feature related to convertible debt and compensation expense related
to stock options granted, involve significant estimations with underlying
assumptions judgmentally determined. The valuation of warrants and stock options
are based upon a Black Scholes valuation model, which involve estimates of
stock
volatility, expected life of the instruments and other assumptions. As our
stock
is thinly traded, the estimates, which are based partly on historical pricing
of
our stock, may not represent fair value, but we believe it is presently the
best
form of estimating objective fair value.
Deferred
Income Taxes.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. We maintain a valuation allowance
against the deferred tax asset due to uncertainty regarding the future
realization based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences.
Until such time as we can demonstrate that we will no longer incur losses or
if
we are unable to generate sufficient future taxable income we could be required
to maintain the valuation allowance against our deferred tax
assets.
ISSUES
AND UNCERTAINTIES
This
Annual Report on Form 10-KSB contains statements that are forward-looking.
These
statements are based on current expectations and assumptions that are subject
to
risks and uncertainties. Actual results could differ materially because of
issues and uncertainties such as those listed below and elsewhere in this
report, which, among others, should be considered in evaluating our financial
outlook.
Risks
Associated With Our Business
Because
most of our revenues are from a single type of technology, our product
concentration
may make us especially vulnerable to market demand and competition
from
other technologies, which could reduce our sales and revenues and cause us
to be
unable to continue our business.
We
currently derive substantially all of our product revenues from licenses and
sales of software products incorporating our character recognition technology.
As a result, factors adversely affecting the pricing of or demand for our
products and services, such as competition from other products or technologies,
any decline in the demand for automated entry of hand printed characters,
negative publicity or obsolescence of the software environments in which our
products operate could result in lower sales or gross margins and would have
a
material adverse effect on our business, operating results and financial
condition.
Competition
in our market may result in pricing pressures, reduced margins or
the
inability of our products and services to achieve market
acceptance.
We
compete against numerous other companies which address the character recognition
market, many of which have greater financial, technical, marketing and other
resources. Other companies could choose to enter our marketplace. We may be
unable to compete successfully against our current and potential competitors,
which may result in price reductions, reduced margins and the inability to
achieve market acceptance for our products. Moreover, from time to time, our
competitors or we may announce new products or technologies that have the
potential to replace our existing product offerings. There can be no assurance
that the announcement of new product offerings will not cause potential
customers to defer purchases of our existing products, which could adversely
affect our business, operating results and financial condition.
We
must continue extensive research and development in order to remain competitive.
If our products fail to gain market acceptance, our business, operating results
and financial condition would be materially adversely affected by the lower
sales.
Our
ability to compete effectively with our character recognition product line
will
depend upon our ability to meet changing market conditions and develop
enhancements to our products on a timely basis in order to maintain our
competitive advantage. Rapidly advancing technology and rapidly changing user
preferences characterize the markets for products incorporating character
recognition technology. Our continued growth will ultimately depend upon our
ability to develop additional technologies and attract strategic alliances
for
related or separate product lines. There can be no assurance that we will be
successful in developing and marketing product enhancements and additional
technologies, that we will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these
products, or that our new products and product enhancements will adequately
meet
the requirements of the marketplace, will be of acceptable quality, or will
achieve market acceptance.
If
our
new products fail to gain market acceptance, our business, operating results
and
financial condition would be materially adversely affected by the lower sales.
If we are unable, for technological or other reasons, to develop and introduce
products in a timely manner in response to changing market conditions or
customer requirements, our business, operating results and financial condition
may be materially and adversely affected by lower sales.
Our
annual and quarterly results have fluctuated greatly in the past and will likely
continue to do so, which may cause substantial fluctuations in our common stock
price.
Our
quarterly operating results have in the past and may in the future vary
significantly depending on factors including the timing of customer projects
and
purchase orders, new product announcements and releases by us and other
companies, gain or loss of significant customers, price discounting of our
products, the timing of expenditures, customer product delivery requirements,
availability and cost of components or labor and economic conditions generally
and in the information technology market specifically. Any unfavorable change
in
these or other factors could have a material adverse effect on our operating
results for a particular quarter or year, which may cause downward pressure
on
our common stock price. We expect quarterly and annual fluctuations to continue
for the foreseeable future.
We
closed
on a $3.0 million debt financing with Laurus Master Funds Ltd., and issued
a
three year term note in June 2004, with monthly payments of interest commencing
July 1, 2004, and monthly principal payments commencing December 1, 2004. See
“COMPANY OVERVIEW - Laurus Debt Investment” below. Based on current interest
rates, our monthly cash payments of principal and interest beginning December
1,
2004 is approximately $91,000. Our actual required cash payments on the note
will vary depending on interest rates and whether amounts under the note are
converted into our common stock.
Laurus
has converted $910,000 of debt to equity from January 1, 2005 to October 31,
2005. We have made principal payments of $801,000 through October 31, 2005.
The
principal balance as of October 31, 2005 is $1,289,318.
Our
ability to make scheduled monthly payments under the note primarily depends
on
our future performance and working capital, including our ability to increase
revenues and cash flows. To a certain extent our ability to increase revenues
and control costs are subject to a number of economic, financial, competitive,
regulatory and other factors beyond our control. Based upon the current level
of
operations and our business development efforts, we believe that we should
have
adequate available cash and cash flows from operations to meet our anticipated
future requirements for working capital, capital expenditures, and scheduled
payments of principal and interest on our debt through November 30, 2006.
However,
if our cash flow is insufficient to enable us to service our debt, we may be
forced to find alternative sources of financing, or to take further drastic
measures, including significantly reducing operations, seeking to sell Mitek,
or
pursuing a liquidation. Any future alternative sources of debt or equity
financing may not be available to us when needed or in amounts required, and
we
currently do not have available to us a bank line of credit or other general
borrowing facility. Alternatively, we may be forced to attempt to negotiate
with
our debt holders on our payment terms, which may not be successful or may be
on
terms onerous to us.
We
granted a blanket security interest in all of our assets to the holders of
our
secured debt. If we are unable to make our required monthly payments on the
debt, or any other event of default occurs, it could have a material adverse
effect on our business and operations, and the debt holders may foreclose on
our
assets.
As
part
of our debt financing with Laurus Master Fund, Ltd., we granted to Laurus,
a
blanket security interest in all of our assets. See “COMPANY OVERVIEW - Laurus
Debt Investment” below. In the event we default in payment on the debt, or any
other event of default occurs under the investment documents, 130% of the
outstanding principal amount of the note and accrued interest will accelerate
and be due and payable in full. Events of default include the following:
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a
failure to pay interest or principal payments under the note within
three
days of when due;
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a
breach by us of any material covenant or term or condition of the
note or
in any of the investment agreements, if not cured within 15 days
of such
breach;
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a
breach by us of any material representation or warranty made in the
note
or in any of the investment agreements;
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if
we make an assignment for the benefit of our creditors, or a receiver
or
trustee is appointed for us, or any form of bankruptcy or insolvency
proceeding is instituted by us, or any involuntary proceeding is
instituted against us;
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the
filing of any money judgment or similar final process against us
for more
than $50,000, which remains unvacated, unbonded or unstayed for a
period
of 30 days;
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if
our common stock is suspended for 5 consecutive days or for 5 days
during
any 10 consecutive days from a principal market or pursuant to an
SEC stop
order; and
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a
failure by us to timely deliver shares of common stock when due upon
conversions of the note.
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The
cash
required to pay such accelerated amounts on the note following an event of
default would most likely come out of our working capital. As we rely on our
working capital for our day to day operations, such a default could have a
material adverse effect on our business, operating results, or financial
condition to such extent that we are forced to restructure, file for bankruptcy,
sell assets or cease operations. In addition, upon an event of default, the
holders of the secured debt could foreclose on our assets or exercise any other
remedies available to them. If our assets were foreclosed upon, we were forced
to file for bankruptcy or cease operations, stockholders may not receive any
proceeds from disposition of our assets and may lose their entire investment
in
our stock.
As
part
of our debt financing with Laurus Master Fund, Ltd., we entered into a
registration rights agreement with Laurus, under which we were obligated to
register the common stock into which the debt is convertible. We have registered
the common stock on May 13, 2005 and paid $215,000 in liquidated
damages.
We
have the right at any time to prepay our secured debt obligation only upon
payment of 120% of the then current principal balance, plus all other amounts
owing under the note. As such, any prepayment would require a significant amount
of cash and may limit our ability to prepay, even if we wanted to.
We
have
the right at any time to prepay our secured debt obligation only upon payment
of
120% of the then principal balance, plus all other amounts owing under the
note.
See “COMPANY OVERVIEW - Laurus Debt Investment” below. Based on a principal
balance of $1,639,318, as of September 30, 2005, a prepayment would require
a
cash payment of $1,967,182. As we make principal payments over time on the
secured debt, the prepayment amount would also decrease. As of September 30,
2005, we had $2.4 million in cash and cash equivalents, and $3.3 million in
current assets. Accordingly, if at any time during the term of the note we
desire to prepay the debt, we may not be able to, unless we were able to obtain
additional available cash, which we may not be able to do. This could impact
our
ability to enter into any potential significant transaction in which we would
need to have the debt paid off and security interests released (such as a
merger, sale of substantially all our assets, joint venture, or similar
transaction).
We
may need to raise additional capital to fund continuing operations. If our
financing efforts are not successful, we will need to explore alternatives
to
continue operations, which may include a merger, asset sale, joint venture,
loans or further expense reductions. If these measures are not successful,
we
may be unable to continue our operations.
Our
efforts to reduce expenses and generate revenue may not be successful. We have
funded our operations in the past by raising capital, sale of certain assets
and
loan from Laurus Fund. We raised $3.0 million in gross proceeds from our June
2004 secured debt financing and and a total of approximately $2.4 million in
gross proceeds ( $1.3 million in July of 2004 and $1.0 million in April of
2005
and a release of $106,000 from indemnification liability withholding in the
fourth quarter of fiscal 2005) from our July sale of certain assets and granting
of exclusive distribution and licensing rights related to our CheckQuest® item
processing and CaptureQuest® electronic document management solutions to Harland
Financial Solutions, Inc., In addition we received $1.5 million in equity
investment from John H. Harland Company. If
our
revenues do not increase we may expect the need to raise additional capital
through equity or debt financing or through the establishment of other funding
facilities in order to keep funding operations.
However,
raising capital has been, and will continue to be difficult, and we may not
receive sufficient funding. Any future financing that we seek may not be
available in amounts or at times when needed, or, even if it is available,
may
not be on terms acceptable to us. Also, if we raise additional funds by selling
equity or equity-based securities, the percentage ownership of our existing
stockholders will be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of our common
stock.
If
we are
unable to obtain sufficient cash either to continue to fund operations or to
locate a strategic alternative, we may be forced to seek protection from
creditors under the bankruptcy laws or cease operations. Any inability to obtain
additional cash as needed could have a material adverse effect on our financial
position, results of operations and ability to continue in existence.
Our
historical order flow patterns, which we expect to continue, have caused
forecasting difficulties for us. If we do not meet our forecasts or analysts’
forecasts for us, the price of our common stock may
decline.
Historically,
a significant portion of our sales have resulted from shipments during the
last
few weeks of the quarter from orders received in the last month of the
applicable quarter. We do, however, base our expense levels, in significant
part, on our expectations of future revenue. As a result, we expect our expense
levels to be relatively fixed in the short term. Any concentration of sales
at
the end of the quarter may limit our ability to plan or adjust operating
expenses. Therefore, if anticipated shipments in any quarter do not occur or
are
delayed, expenditure levels could be disproportionately high as a percentage
of
sales, and our operating results for that quarter would be adversely affected.
As a result, we believe that period-to-period comparisons of our results of
operations are not and will not necessarily be meaningful, and you should not
rely upon them as an indication of future performance. If our operating results
for a quarter are below the expectations of public market analysts and
investors, the price of our common stock may be materially adversely
affected.
Revenue
recognition accounting standards and interpretations may change, causing
us
to recognize lower revenues.
In
October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 97-2, Software Revenue Recognition.
We
adopted SOP 97-2, as amended by SOP 98-4 Deferral of the Effective Date of
a
Provision of SOP 97-2 as of July 1, 1998. In December 1998, the AICPA issued
SOP
98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect
to
Certain Transactions. We adopted SOP 98-9 on January 1, 2000. These standards
address software revenue recognition matters primarily from a conceptual level
and do not include specific implementation guidance. We believe that we are
currently in compliance with SOP 97-2 and SOP 98-9. In addition, in December
1999, the Securities and Exchange Commission (SEC) staff issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
provides further guidance with regard to revenue recognition, presentation
and
disclosure. We adopted SAB 101 during the fourth quarter of fiscal
2000.
The
accounting profession and the SEC continue to discuss certain provisions of
SOP
97-2, SAB 101 and other revenue recognition standards and related
interpretations with the objective of providing additional guidance on potential
application of the standards and interpretations. These discussions could lead
to unanticipated changes in revenue recognition standards and, as a result,
in
our current revenue accounting practices, which could cause us to recognize
lower revenues and lead to a decrease in our stock price.
If
our products have product defects, it could damage our reputation, sales,
profitability and result in other costs, any of which could adversely affect
our
operating results which could cause our common stock price to go
down.
Our
products are extremely complex and are constantly being modified and improved,
and as such they may contain undetected defects or errors when first introduced
or as new versions are released. As a result, we have in the past and could
in
the future face loss or delay in recognition of revenues as a result of software
errors or defects. In addition, our products are typically intended for use
in
applications that are critical to a customer's business. As a result, we believe
that our customers and potential customers have a greater sensitivity to product
defects than the market for software products generally.
There
can
be no assurance that, despite our testing, errors will not be found in new
products or releases after commencement of commercial shipments, resulting
in
loss of revenues or delay in market acceptance, diversion of development
resources, damage to our reputation, adverse litigation, or increased service
and warranty costs, any of which would have a material adverse effect upon
our
business, operating results and financial condition.
Our
success and our ability to compete are dependent, in part, upon protection
of
our proprietary technology. If we are unable to protect our proprietary
technology, our revenues and operating results would be materially adversely
affected.
We
generally rely on trademark, trade secret, copyright and patent law to protect
our intellectual property. We may also rely on creative skills of our personnel,
new product developments, frequent product enhancements and reliable product
maintenance as means of protecting our proprietary technologies. There can
be no
assurance, however, that such means will be successful in protecting our
intellectual property. There can be no assurance that others will not develop
technologies that are similar or superior to our technology.
The
source code for our proprietary software is protected both as a trade secret
and
as a copyrighted work. Despite these precautions, it may be possible for a
third
party to copy or otherwise obtain and use our products or technology without
authorization, or to develop similar technology independently.
We
may have difficulty protecting our proprietary technology in countries other
than the United States. If we are unable to protect our proprietary technology,
our revenues and operating results would be materially adversely
affected.
We
operate in a number of countries other than the United States. Effective
copyright and trade secret protection may be unavailable or limited in certain
countries. Moreover, there can be no assurance that the protection provided
to
our proprietary technology by the laws and courts of foreign nations against
piracy and infringement will be substantially similar to the remedies available
under United States law. Any of the foregoing considerations could result in
a
loss or diminution in value of our intellectual property, which could have
a
material adverse effect on our business, financial condition, and results of
operations.
Companies
may claim that we infringe their intellectual property or proprietary rights,
which could cause us to incur significant expenses or prevent us from selling
our products.
We
have
in the past had companies claim that certain technologies incorporated in our
products infringe their patent rights. Although we have resolved the past claims
and there are currently no claims of infringement pending against us, there
can
be no assurance that we will not receive notices in the future from parties
asserting that our products infringe, or may infringe, those parties'
intellectual property rights. There can be no assurance that licenses to
disputed technology or intellectual property rights would be available on
reasonable commercial terms, if at all.
Furthermore,
we may initiate claims or litigation against parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights.
Litigation, either as plaintiff or defendant, could result in significant
expense to us and divert the efforts of our technical and management personnel
from operations, whether or not such litigation is resolved in our favor. In
the
event of an adverse ruling in any such litigation, we might be required to
pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses
to
infringing technology. In the event of a successful claim against us and our
failure to develop or license a substitute technology, our business, financial
condition and results of operations would be materially and adversely
affected.
We
depend upon our key personnel.
Our
future success depends in large part on the continued service of our key
technical and management personnel. We do not have employment contracts with,
or
"key person" life insurance policies on, any of our employees, including James
B. DeBello, our President and Chief Executive Officer, John M. Thornton, our
Chairman and Mr. Tesfaye Hailemichael our Chief Financial Officer. Loss of
services of key employees could have a material adverse effect on our operations
and financial condition. We are also dependent on our ability to identify,
hire,
train, retain and motivate high quality personnel, especially highly skilled
engineers involved in the ongoing developments required to refine our
technologies and to introduce future applications. The high technology industry
is characterized by a high level of employee mobility and aggressive recruiting
of skilled personnel.
We
cannot
assure you that we will be successful in attracting, assimilating and retaining
additional qualified personnel in the future. If we were to lose the services
of
one or more of our key personnel, or if we failed to attract and retain
additional qualified personnel, it could materially and adversely affect our
customer relationships, competitive position and revenues.
We
do not have a current credit facility.
While
we
believe that our current cash on hand and cash generated from operations, to
finance our operations for the next twelve months, we can make no assurance
that
we will not need additional financing during the next twelve months or beyond.
Actual sales, expenses, market conditions or other factors which could have
a
material affect upon us could require us to obtain additional financing. If
such
financing is not available, or if available, is not available on reasonable
terms, it could have a material adverse effect upon our results of operations
and financial condition.
The
liability of our officers and directors is limited pursuant to Delaware
law.
Pursuant
to our Certificate of Incorporation, and as authorized under applicable Delaware
Law, our directors and officers are not liable for monetary damages for breach
of fiduciary duty, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law or (iv) for any transaction from which the director derived an improper
personal benefit.
Risks
Related to Our Stock
A
few of our stockholders have significant control over our voting stock which
may
make it difficult to complete some corporate transactions without their support
and may prevent a change in control.
As
of
September 30, 2005, John M. Thornton, who is our Chairman of the Board and
his
spouse, Director Sally B. Thornton, beneficially owned 2,699,959 shares of
common stock or approximately 18.8% of our outstanding common stock. Our
directors and executive officers as a whole, own approximately 19% of our
outstanding common stock. Laurus Master Funds Ltd. may acquire up to 2,413,311
shares of common stock in the aggregate, which would amount to approximately
14% of
our
outstanding common stock, assuming Laurus converts its balance of promissory
note of $1,639,318 into approximately 2,413,311 shares of common stock. Laurus
may acquire up to a total of 3,473,311 shares if it exercises its 1,060,000
warrant or approximately 18% of the outstanding common stock. Harland Financial
Solution has 321,428 warrants which was included in the calculation of the
percentage of Laurus Funds potential holdings. Because the Laurus promissory
note is subject to anti-dilution provisions and accrues interest which may
be
converted into common stock, Laurus could acquire an even greater number of
shares of common stock than described.
Laurus
has converted $350,000 of its convertible note since September 30, 2005 and
its
promissory note balance as of October 31, 2005 was $1,289,318
The
above-described significant stockholders may effectively control the outcome
of
all matters submitted to our stockholders for approval, including the election
of directors. In addition, this ownership could discourage the acquisition
of
our common stock by potential investors and could have an anti-takeover effect,
possibly depressing the trading price of our common stock.
Our
common stock is listed on the Over-The-Counter Bulletin
Board.
Our
common stock is currently listed on the Over-The-Counter Bulletin Board
(the “OTCBB”). If our common stock became ineligible to be listed on the
OTCBB, it would likely continue to be listed on the "pink sheets." Securities
traded on the OTCBB or the "pink sheets" are subject to certain securities
regulations. These regulations may limit, in certain circumstances, certain
trading activities in our common stock, which could reduce the volume of trading
in our common stock or the market price of our common stock. The OTC market
and
the "pink sheets" also typically exhibit extreme price and volume fluctuations.
These broad market factors may materially adversely affect the market price
of
our common stock, regardless of our actual operating performance. In the past,
individual companies whose securities have exhibited periods of volatility
in
their market price have had securities class action litigation instituted
against that company. This type of litigation, if instituted, could result
in
substantial costs and a diversion of management's attention and
resources.
As
we issue additional equity securities in the future, including upon conversion
of any of our secured convertible debt, your share ownership will be diluted.
In
particular, the secured convertible debt has a full ratchet anti-dilution
provision that could significantly dilute our stockholders.
In
connection with our debt financing, we issued a $3.0 million convertible note
and warrants to Laurus. See “COMPANY OVERVIEW — Laurus Debt Investment” below.
The note is convertible into shares of our common stock at an initial conversion
price of $.70 per share. Laurus Fund has converted $560,000 to stock and has
$1,639,318 convertible debt as of September 30, 2005. Laurus has converted
$350,000 into stock after September 30, 2005. At this initial conversion rate,
for example, we would issue 1,841,883 shares upon conversion of $1,289,318
owing
under the note as of October 31, 2005. The actual number of shares to be issued
will depend on the actual dollar amount of principal being converted. In
addition, the note carries a full ratchet anti-dilution provision, such that
if
we issue in the future convertible or equity securities (subject to certain
exceptions, including stock option grants) at a price less than the initial
$.70
conversion price, the note conversion price will be automatically adjusted
down
to that lesser price. For example, if we had a non-exempted issuance at $0.50
per share, the note conversion price would become $0.50, and upon an assumed
conversion of $1,289,318 we would have to issue 2,578,636 shares. In addition
to
the conversion rights of the convertible debt, as we issue stock or convertible
securities in the future, including for any future equity financing or upon
exercise of any of the outstanding stock purchase warrants and stock options,
those issuances would also dilute our stockholders. If any of these additional
shares are issued and are sold into the market, it could decrease the market
price of our common stock and could also encourage short sales. Short sales
and
other hedging transactions could place further downward pressure on the price
of
our common stock.
We
may issue preferred stock, which could adversely affect the rights of common
stock holders.
The
Board
of Directors is authorized to issue up to 1,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action
by
the stockholders. The rights of the holders of common stock will be subject
to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for
a third party to acquire a majority of our outstanding voting stock. We have
no
current plans to issue shares of preferred stock. In addition, Section 203
of
the Delaware General Corporation Law restricts certain business combinations
with any "interested stockholder" as defined by such statute. The statute may
have the effect of delaying, deferring or preventing a change in our
control.
Our
common stock price has been volatile. You may not be able to sell your shares
of
our common stock for an amount equal to or greater than the price at which
you
acquire your shares of common stock.
The
market price of our common stock has been, and is likely to continue to be,
highly volatile. Future announcements concerning us or our competitors,
quarterly variations in operating results, announcements of technological
innovations, the introduction of new products or changes in the product pricing
policies of Mitek or its competitors, claims of infringement of proprietary
rights or other litigation, changes in earnings estimates by analysts or other
factors could cause the market price of our common stock to fluctuate
substantially. In addition, the stock market has from time-to-time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of technology companies and that have often
been unrelated to the operating performance of particular companies. These
broad
market fluctuations may adversely affect the market price of our common stock.
During the fiscal year ended September 30, 2005, our common stock price ranged
from $0.33 to $1.03.
Future
sales of our common stock may cause our stock price to
decline.
The
sale
of a large number of shares of our common stock in the market or the belief
that
such sales could occur, could cause a drop in the market price of our common
stock. The shares registered in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless the shares
are purchased by our affiliates.
Applicable
SEC Rules governing the trading of “penny stocks” limit the trading and
liquidity of our common stock which may adversely affect the trading price
of
our common stock.
Our
common stock currently trades on the OTC Bulletin Board. Since our common stock
continues to trade below $5.00 per share, our common stock is considered a
“penny stock” and is subject to SEC rules and regulations that impose
limitations upon the manner in which our shares can be publicly traded. These
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure document explaining the penny stock market and the
associated risks. Under these regulations, brokers who recommend penny stocks
to
persons other than established customers or certain accredited investors must
make a special written suitability determination for the purchaser and receive
the purchaser’s written agreement to a transaction prior to sale. These
regulations have the effect of limiting the trading activity of our common
stock
and reducing the liquidity of an investment in our common stock.
We
do not intend to pay dividends in the foreseeable future.
We
have
never declared or paid a dividend on our common stock. We intend to retain
earnings, if any, for use in the operation and expansion of our business and,
therefore, do not anticipate paying any dividends in the foreseeable
future.
| ITEM
7. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Mitek Systems, Inc.:
Poway,
California
We
have
audited the accompanying balance sheet of Mitek Systems, Inc. (the “Company”) as
of September 30, 2005, and the related statements of operations, stockholders’
equity (deficit), and cash flows for the years in the period ended September
30,
2005 and 2004. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). These standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company at September 30, 2005,
and the results of its operations and its cash flows for the years in the period
ended September 30, 2005 and 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/
Stonefield Josephson, Inc.
STONEFIELD
JOSEPHSON, INC.
Santa
Monica, California
November
21,
2005
MITEK
SYSTEMS, INC.
BALANCE
SHEET
SEPTEMBER
30, 2005
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,387,204
|
|
|
Accounts
receivable-net of allowances
|
|
|
773,210
|
|
|
for
doubtful accounts of $48,631
|
|
|
|
|
|
Inventory,
prepaid expenses and other current assets
|
|
|
162,337
|
|
|
Total
current assets
|
|
|
3,322,751
|
|
| |
|
|
|
|
|
PROPERTY
AND EQUIPMENT - net
|
|
|
82,626
|
|
|
OTHER
ASSETS
|
|
|
148,580
|
|
| |
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
3,553,957
|
|
| |
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
| |
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
Accounts
payable
|
|
|
206,936
|
|
|
Accrued
payroll and related taxes
|
|
|
351,105
|
|
|
Deferred
revenue
|
|
|
427,507
|
|
|
Other
accrued liabilities
|
|
|
300,341
|
|
|
Current
portion of Convertible Debt,
|
|
|
|
|
|
net
of unamortized financing costs of $376,723
|
|
|
714,187
|
|
|
Total
current liabilities
|
|
|
2,000,076
|
|
| |
|
|
|
|
|
Convertible
Debt, net of unamortized financing costs
|
|
|
|
|
|
of
$41,363
|
|
|
507,046
|
|
|
TOTAL
LIABILITIES
|
|
$
|
2,507,122
|
|
| |
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
| |
|
|
|
|
|
Common
stock - $.001 par value; 40,000,000
|
|
|
|
|
|
shares
authorized, 14,332,337 issued
|
|
|
|
|
|
and
outstanding at September 30, 2005
|
|
|
14,332
|
|
|
Additional
paid-in capital
|
|
|
12,672,635
|
|
|
Accumulated
deficit
|
|
|
(11,640,132
|
)
|
|
Total
stockholders' equity
|
|
|
1,046,835
|
|
| |
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
3,553,957
|
|
The
accompanying notes form an integral part to these financial
statements.
MITEK
SYSTEMS, INC.
STATEMENTS
OF OPERATIONS
FOR
THE
YEARS ENDED SEPTEMBER 30, 2005 AND 2004
| |
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
SALES
|
|
|
|
|
|
|
|
|
Software,
including $195,880 to related party in 2005
|
|
$
|
4,432,043
|
|
$
|
2,229,812
|
|
|
Hardware
|
|
|
-
|
|
|
858,571
|
|
|
Professional
Services, education and other, including $750,000 to related
party in
2005
|
|
|
2,161,802
|
|
|
2,151,929
|
|
|
NET
SALES
|
|
|
6,593,845
|
|
|
5,240,312
|
|
| |
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
Cost
of Sales-Software
|
|
|
300,606
|
|
|
497,950
|
|
|
Cost
of Sales-Hardware
|
|
|
0
|
|
|
805,080
|
|
|
Cost
of Sales-Professional Services, education and other
|
|
|
829,088
|
|
|
676,860
|
|
|
Operations
|
|
|
145,223
|
|
|
1,136,024
|
|
|
Selling
and marketing
|
|
|
2,073,977
|
|
|
1,942,064
|
|
|
Research
and development
|
|
|
1,507,510
|
|
|
2,204,101
|
|
|
General
and administrative
|
|
|
3,050,037
|
|
|
2,720,452
|
|
|
Gain
on sale of CheckQuest assets to Harland
|
|
|
(1,106,129
|
)
|
|
(1,270,355
|
)
|
|
Total
costs and expenses
|
|
|
6,800,312
|
|
|
8,712,176
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(206,467
|
)
|
|
(3,471,864
|
)
|
| |
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(765,080
|
)
|
|
(355,426
|
)
|
|
Change
in fair value of warrant liability
|
|
|
(81,993
|
)
|
|
(48,000
|
)
|
|
Interest
and other income
|
|
|
25,470
|
|
|
31,132
|
|
|
Total
other income (expense)
|
|
|
(821,603
|
)
|
|
(372,294
|
)
|
| |
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(1,028,070
|
)
|
|
(3,844,158
|
)
|
| |
|
|
|
|
|
|
|
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
|
|
(714
|
)
|
|
2,168
|
|
| |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,027,356
|
)
|
$
|
(3,846,326
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE - BASIC AND DILUTED
|
|
$
|
(0.08
|
)
|
$
|
(0.34
|
)
|
| |
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
COMMON
SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
12,569,617
|
|
|
11,353,171
|
|
The
accompanying notes form an integral part to these financial
statements.
MITEK
SYSTEMS, INC.
STATEMENTS
OF CASH FLOWS
FOR
THE
YEARS ENDED SEPTEMBER 30, 2005 AND 2004
| |
|
2005
|
|
2004
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,027,356
|
)
|
$
|
(3,846,326
|
)
|
|
Adjustments
to reconcile net loss
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
92,320
|
|
|
441,171
|
|
|
Provision
for bad debts
|
|
|
(31,000
|
)
|
|
519,776
|
|
|
Loss
on disposal of property and equipment
|
|
|
0
|
|
|
3,564
|
|
|
Gain
on sale of checkquest assets
|
|
|
(1,106,129
|
)
|
|
(1,270,355
|
)
|
|
Change
in fair value of warrant liability
|
|
|
(81,993
|
)
|
|
48,020
|
|
|
Amortization
of debt discount
|
|
|
526,938
|
|
|
96,247
|
|
|
Provision
for sales returns & allowances
|
|
|
(14,583
|
)
|
|
(29,336
|
)
|
|
Fair
value of stock options issued to non-employees
|
|
|
2,580
|
|
|
15,698
|
|
|
Gain
on sale of equity investment
|
|
|
(16,159
|
)
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(172,056
|
)
|
|
1,357,328
|
|
|
Inventory,
prepaid expenses, and other assets
|
|
|
(126,434
|
)
|
|
(95,685
|
)
|
|
Accounts
payable
|
|
|
(81,973
|
)
|
|
(592,123
|
)
|
|
Accrued
payroll and related taxes
|
|
|
111,105
|
|
|
(450,388
|
)
|
|
Long-term
payable
|
|
|
0
|
|
|
(34,194
|
)
|
|
Deferred
revenue
|
|
|
29,783
|
|
|
181,995
|
|
|
Other
accrued liabilities
|
|
|
(127,217
|
)
|
|
273,651
|
|
|
Net
cash used in operating activities
|
|
|
(2,022,174
|
)
|
|
(3,380,957
|
)
|
| |
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(48,932
|
)
|
|
(70,803
|
)
|
|
Proceeds
from sale of property and equipment
|
|
|
569
|
|
|
0
|
|
|
Proceeds
from sale of assets,
|
|
|
|
|
|
|
|
|
net
of expenses
|
|
|
1,000,000
|
|
|
1,139,992
|
|
|
Proceeds
(advances) on related party note receivable-net
|
|
|
150,000
|
|
|
46,619
|
|
|
Net
cash provided by investing activities
|
|
|
1,101,637
|
|
|
1,115,808
|
|
| |
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayment
of borrowings
|
|
|
(800,682
|
)
|
|
0
|
|
|
Proceeds
from convertible debt
|
|
|
0
|
|
|
3,000,000
|
|
|
Financing
costs related to convertible debt
|
|
|
0
|
|
|
(151,000
|
)
|
|
Proceeds
from sale of common stock
|
|
|
1,501,250
|
|
|
0
|
|
|
Proceeds
from exercise of stock options
|
|
|
0
|
|
|
204,220
|
|
|
Net
cash provided by financing activities
|
|
|
700,568
|
|
|
3,053,220
|
|
| |
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(219,969
|
)
|
|
788,071
|
|
| |
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
2,607,173
|
|
|
1,819,102
|
|
| |
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
2,387,204
|
|
$
|
2,607,173
|
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE
|
|
|
|
|
|
|
|
|
OF
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
402,127
|
|
$
|
51,159
|
|
|
Cash
paid for income taxes
|
|
$
|
1,056
|
|
$
|
2,166
|
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING
|
|
|
|
|
|
|
|
|
ACTIVITIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Options
issued in exchange for services
|
|
$
|
2,580
|
|
$
|
15,698
|
|
|
Warrants
issued in connection with financing
|
|
$
|
73,159
|
|
$
|
367,887
|
|
|
Beneficial
conversion feature of convertible debt
|
|
$
|
-
|
|
$
|
522,384
|
|
|
Conversion
of debt to equity
|
|
$
|
560,000
|
|
$
|
-
|
|
|
Settlement
of indemnification liability
|
|
$
|
106,129
|
|
$
|
-
|
|
|
Settlement
of registration penalty that of issuance of warrant
|
|
$
|
208,000
|
|
$
|
-
|
|
|
Reclassification
of warrants with registration obligation to liability
|
|
$
|
73,159
|
|
$
|
-
|
|
|
Reclassification
of warrants upon fulfillment of registration obligation to
equity
|
|
$
|
407,074
|
|
$
|
-
|
|
The
accompanying note form an integral part to these financial
statements.
MITEK
SYSTEMS, INC.
STATEMENTS
OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR
THE
YEARS ENDED SEPTEMBER 30, 2005 AND 2004
| |
|
|
|
|
|
Additional
|
|
|
|
|
|
| |
|
Common
Stock
|
|
Common
|
|
Paid-In
|
|
Accumulated
|
|
|
|
| |
|
Outstanding
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
Net
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 1, 2003
|
|
|
11,185,282
|
|
$
|
11,185
|
|
$
|
9,327,736
|
|
$
|
(6,766,450
|
)
|
$
|
2,572,471
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
204,199
|
|
|
204
|
|
|
204,016
|
|
|
|
|
|
204,220
|
|
|
Fair
value of stock options issued to non-employees
|
|
|
|
|
|
|
|
|
15,698
|
|
|
|
|
|
15,698
|
|
|
Beneficial
conversion feature embedded in convertible debt
|
|
|
|
|
|
|
|
|
522,383
|
|
|
|
|
|
522,383
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(3,846,326
|
)
|
|
(3,846,326
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2004
|
|
|
11,389,481
|
|
|
11,389
|
|
|
10,069,833
|
|
|
(10,612,776
|
)
|
|
(531,554
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
Fair
value of stock options issued to non-employees
|
|
|
|
|
|
|
|
|
2,580
|
|
|
|
|
|
2,580
|
|
|
Proceeds
from issuance of common stock
|
|
|
2,142,856
|
|
|
2,143
|
|
|
1,499,107
|
|
|
|
|
|
1,501,250
|
|
|
Common
stock issued in exchange for convertible debt
|
|
|
800,000
|
|
|
800
|
|
|
559,200
|
|
|
|
|
|
560,000
|
|
|
Settlement
of registration penalty through issuance of warrants
|
|
|
|
|
|
|
|
|
208,000
|
|
|
|
|
|
208,000
|
|
|
Reclassification
of warrants with registration obligation to
liability
|
|
|
|
|
|
|
|
|
(73,159
|
)
|
|
|
|
|
(73,159
|
)
|
|
Reclassification
of warrants upon fullfilment of registration obligations to
equity
|
|
|
|
|
|
|
|
|
407,074
|
|
|
|
|
|
407,074
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(1,027,356
|
)
|
|
(1,027,356
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2005
|
|
|
14,332,337
|
|
$
|
14,332
|
|
$
|
12,672,635
|
|
$
|
(11,640,132
|
)
|
$
|
1,046,835
|
|
The
accompanying note form an integral part to these financial
statements.
MITEK
SYSTEMS, INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2005 and 2004
NOTE
1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of
Operations - Mitek Systems, Inc. (the "Company") is a designer, manufacturer
and
marketer of advanced character recognition products for intelligent forms
processing applications ("Character Recognition") with an emphasis in document
imaging system products and solutions systems integration services.
The
Company has a cash balance of $2.4 million as of September 30, 2005. The cash
balance and cash to be generated from operations for the next twelve months
will
be adequate to satisfy its working capital needs for the next twelve months.
The
company has incurred losses in 2005 and 2004. However, its losses have improved
in 2005 compared with 2004. In 2004, the Company addressed its cash requirements
by issuing Convertible Debt as discussed in Note 5 of the accompanying financial
statements. Additionally, the Company received equity investment and reduced
its
expected future cash needs by entering into the agreement with Harland Financial
Solutions whereby certain personnel and overhead expenses were assumed by
Harland in the transactions discussed in Note 7 of the accompanying financial
statements. Should additional losses occur, the Company may need to raise
significant additional funds to continue its activities. In the absence of
positive cash flows from operations, the Company may be dependent on its ability
to secure additional funding through the issuance of debt or equity instruments.
If adequate funds are not available, the Company may be forced to significantly
curtail its operations or to obtain funds through entering into additional
collaborative agreements or other arrangements that may be on unfavorable terms.
The Company's failure to raise sufficient additional funds on favorable terms,
or at all, would have a material adverse effect on its business, results of
operations and financial position.
Basis
of
Accounting - The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America.
Accounting
Estimates
-
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Examples include estimates of loss
contingencies and product life cycles, and assumptions such as the elements
comprising a software arrangement, including the distinction between
upgrades/enhancements and new products; and when technological feasibility
is
achieved for our products. Actual results may differ from management’s estimates
and assumptions.
Fair
Value of Financial Instruments - The carrying amount of cash, cash equivalents,
accounts receivable, notes receivable, accounts payable, and accrued liabilities
are considered representative of their respective fair values because of the
short-term nature of those instruments.
Cash
and
Cash Equivalents - Cash equivalents are defined as highly liquid financial
instruments with original maturities of three months or less. A substantial
portion of our cash is deposited with one financial institution. We monitor
the
financial condition of the financial institution and we do not believe that
the
deposit is subject to a significant degree of risk. However, the bank has FDIC
insurance of up to $100,000. Any financial problem with the bank may impact
the
company.
Reclassification
- Certain prior year’s balances have been reclassified to conform to the 2005
presentation.
Allowance
for Doubtful Accounts - The allowance for doubtful accounts reflects our best
estimate for probable losses inherent in the accounts receivable balance. We
determine the allowance based on known troubled accounts, historical experience,
and other currently available evidence.
Inventories,
prepaid expenses and other current assets consisted of the following at
September 30, 2005.
|
Inventories
|
|
$
|
4,822
|
|
|
Prepaid
insurance
|
|
|
48,493
|
|
|
Prepaid
rent
|
|
|
24,687
|
|
|
Deposits
|
|
|
44,316
|
|
|
Prepaid
- other
|
|
|
40,019
|
|
|
Total
|
|
$
|
162,337
|
|
| |
|
|
|
|
Inventories
- Inventories are recorded at the lower of cost or market.
Property
and Equipment - Property and Equipment are carried at cost. Following is a
summary of property and equipment as of September 30, 2005.
|
Property
and equipment - at cost:
|
|
|
|
|
Equipment
|
|
$
|
700,152
|
|
|
Furniture
and fixtures
|
|
|
164,254
|
|
|
Leasehold
improvements
|
|
|
5,331
|
|
| |
|
$
|
869,737
|
|
| |
|
|
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(787,111
|
)
|
|
Total
|
|
$
|
82,626
|
|
Property
and Equipment are carried at cost. Depreciation and amortization of property
and
equipment are provided using the straight-line method over estimated useful
lives ranging from three to five years. Depreciation and amortization of
property and equipment totaled $92,320 and $177,770 for the years ended
September 30, 2005 and 2004, respectively.
Other
Assets - Other assets consisted of the following at September 30,
2005:
|
Prepaid
rent
|
|
$
|
79,635
|
|
|
Prepaid
licenses
|
|
|
45,927
|
|
|
Prepaid
- other
|
|
|
23,018
|
|
|
Total
|
|
$
|
148,580
|
|
Long-Lived
Assets - We periodically evaluate the carrying value of license agreements
and
other intangible assets to determine whether any impairment of these assets
has
occurred or whether any revision to the related amortization periods should
be
made. This evaluation is based on management’s projections of the undiscounted
future cash flows associated with each product or asset. If management’s
evaluation were to indicate that the carrying values of these intangible assets
were impaired, the impairment to be recognized is measured by the amount the
carrying amount of the assets exceeds the fair value of the assets. We did
not
record any impairment for the years ended September 30, 2005 and
2004.
Investment
in Mitek Systems Ltd. - Between September 1, 2000 and fiscal 2001, we acquired
an investment in Itech Business Solutions Ltd., who subsequently changed their
name to Mitek Systems Ltd. In fiscal year 2002, we made an interest bearing
loan
to Mitek Systems Ltd. which was later converted to equity. In the first quarter
of fiscal 2005, our entire interest in Mitek Systems Ltd. was repurchased by
the
principal stockholder of Mitek Systems Ltd., which resulted in net proceeds
of
$150,000. Included in fiscal 2005 and 2004 Other Income (Expenses) is $15,710
and ($19,652), respectively, related to the gain (loss) in equity investment
in
Mitek Systems Ltd.
Deferred
Revenue - Deferred revenue represents customer billings, paid either upfront
or
annually at the beginning of each billing period, which are accounted for as
subscriptions with revenue recognized ratably over the billing coverage period.
For certain other licensing arrangements revenue attributable to undelivered
elements, including free post-delivery telephone support and the right to
receive unspecified upgrades/enhancements on our software on a
when-and-if-available basis, is based upon the sales price of those elements
when sold separately and is recognized ratably on a straight-line basis over
the
term of the agreement. Historically, the percentage of revenue recorded as
unearned due to undelivered elements generally ranged from approximately 8%
to
18% of the sales price of the software.
Revenue
Recognition - Revenues from sales of software licenses sold through direct
and
indirect channels, which do not contain multiple elements, are recognized upon
shipment of the related product, if the requirements of Statement of Position
("SOP") 97-2, as amended, are met. If the requirements of SOP 97-2, including
evidence of an arrangement, delivery, fixed or determinable fee, collectability
or vendor specific evidence about the value of an element are not met at the
date of shipment, revenue is not recognized until such elements are known or
resolved. Software license revenue for arrangements to deliver unspecified
additional software products in the future is recognized ratably over the term
of the arrangement, beginning with the initial shipment. Revenue from
post-contract customer support is recognized ratably over the term of the
contract. Revenue from professional services is recognized when such services
are delivered and accepted by the customer.
Research
and Development -
Research and development costs are expensed in the period
incurred.
Income
Taxes - The Company accounts for income taxes in accordance with Statement
of
Financial Accounting Standards No. 109, Accounting
for Income Taxes.
Deferred tax assets and liabilities arise from temporary differences between
the
tax bases of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future
years.
Management
evaluates the available evidence about future taxable income and other possible
sources of realization of deferred tax assets. The valuation allowance reduces
deferred tax assets to an amount that represents management’s best estimate of
the amount of such deferred tax assets that more likely than not will be
realized. - see Note 3.
Net
Income
(Loss)
Per Share - We calculate net income (loss) per share in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings
per Share.
Basic
net income (loss) per share is based on the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share also
gives effect to all potential dilutive common shares outstanding during the
period, such as convertible debt, options and warrants, if dilutive. Outstanding
stock options for fiscal 2005 and 2004 of 2,006,719 and 1,834,238,
respectively, were excluded from this calculation, as they would have been
antidilutive. In addition,
2,341,883
shares issuable upon conversion of debt to equity, 1,060,000
Laurus warrants and 321,428 Harland warrants were excluded from this calculation
in fiscal 2005, as they would reduce net loss per share. In fiscal 2004,
4,285,714 shares issuable upon conversion of debt to equity and exercise of
860,000 warrants were excluded from this calculation, as they would reduce
net
loss per share.
Segment
Reporting - SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information,
results
in the use of a management approach in identifying segments of an enterprise.
Management has determined that we operate in only one segment.
Comprehensive
Income (Loss) - There are no differences between net income and comprehensive
income and, accordingly, no amounts have been reflected in the accompanying
financial statements and a statement of comprehensive loss is not
presented.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”
Statement 123(R) will provide investors and other users of financial statements
with more complete and neutral financial information by requiring that the
compensation cost relating to share-based payment transactions be recognized
in
financial statements. That compensation cost will be measured based on the
fair
value of the equity or liability instruments issued. Statement 123(R) covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. Statement 123(R) replaces FASB Statement No.
123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued
in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25,
as long as the footnotes to financial statements disclosed what net income
would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. We are continuously evaluating the impact of the adoption
of SFAS 123(R), and currently believe the impact will be significant to our
overall results of operations or financial position.
In
January 2003, the FASB issued FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). In December 2003,
FIN 46 was replaced by FASB interpretation No. 46(R) "Consolidation
of
Variable Interest Entities." FIN 46(R) clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46(R) requires an enterprise to consolidate
a
variable interest entity if that enterprise will absorb a majority of the
entity's expected losses, is entitled to receive a majority of the entity's
expected residual returns, or both. FIN 46(R) is effective for entities being
evaluated under FIN 46(R) for consolidation no later than the end of the first
reporting period that ends after March 15, 2004. We do not currently
have
any variable interest entities that has been impacted by the adoption of FIN
46(R).
In
March
2004, the Financial Accounting Standards Board (FASB) approved the consensus
reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, "The Meaning
of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
The
objective of this Issue is to provide guidance for identifying impaired
investments. EITF 03-1 also provides new disclosure requirements for investments
that are deemed to be temporarily impaired. The accounting provisions of EITF
03-1 are effective for all reporting periods beginning after June 15, 2004,
while the disclosure requirements for certain investments are effective for
annual periods ending after December 15, 2003, and for other investments such
disclosure requirements are effective for annual periods ending after June
15,
2004. We do not currently have any investments that has been impacted by this
provision.
In
September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt
and
equity securities, in particular investments within the scope of FASB Statement
No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and
investments accounted for under the cost method. We are currently
evaluating the effect of this proposed statement on its financial position
and
results of operations.
Effective
April 1, 2004, the SEC adopted Staff Accounting Bulletin No. 105, “Application
of Accounting Principles to Loan Commitments” (“SAB 105”). SAB 105
clarifies the requirements for the valuation of loan commitments that are
accounted for as derivatives in accordance with SFAS 133. Management
does
not expect the implementation of this new bulletin to have any impact on our
financial position, results of operations and cash flows. We do not
have
any loan commitments.
In
July
2004, the EITF issued a draft abstract for EITF Issue No. 04-08, “The Effect of
Contingently Convertible Debt on Diluted Earnings per Share” (“EITF
04-08”). EITF 04-08 reflects the Task Force's tentative conclusion that
contingently convertible debt should be included in diluted earnings per share
computations regardless of whether the market price trigger has been met.
If adopted, the consensus reached by the Task Force in this Issue will be
effective for reporting periods ending after December 15, 2004. Prior
period earnings per share amounts presented for comparative purposes would
be
required to be restated to conform to this consensus and we would be required
to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding. We
did
not have a material impact on our computation of diluted earnings per share
upon
implementation of this new standard.
In
December 2004, the FASB issued two Staff Positions (FSP) that provide accounting
guidance on how companies should account for the effect of the American Jobs
Creation Act of 2004 that was signed into law on October 22, 2004. In FSP FAS
109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes,
to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004", the FASB concluded that the special tax deduction
for domestic manufacturing, created by the new legislation, should be accounted
for as a "special deduction" instead of a tax rate reduction. As such, the
special tax deduction for domestic manufacturing is recognized no earlier than
the year in which the deduction is taken on the tax return. FSP FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004", allows additional
time
to evaluate the effects of the new legislation on any plan for reinvestment
or
repatriation of foreign earnings for purposes of applying FASB Statement No.
109. We do not anticipate that this legislation will impact its results of
operations or financial condition. Accordingly, FSP FAS 109-1 and FSP FAS 109-2
are not currently expected to have any material impact on its financial
statements. These FSPs were effective December 21, 2004.
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3. SFAS No. 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS No. 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle,
such
as a change in nondiscretionary profit-sharing payments resulting from an
accounting change, should be recognized in the period of the accounting
change. SFAS No. 154 also requires that a change in depreciation,
amortization or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS No. 154 is effective for accounting changes
and
corrections of errors made in fiscal years beginning after December 15,
2005. Early adoption is permitted for accounting changes and corrections
of errors made in fiscal years beginning after the date this Statement is
issued. Management does not expect the implementation of this new standard
to have a material impact on our financial position, results of operations
and
cash flows.
In
March
2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based
Payment”(“SAB 107”), which provides interpretive guidance related to the
interaction between SFAS 123(R) and certain SEC rules and regulations.
It
also provides the SEC staff's views regarding valuation of share-based payment
arrangements. In April 2005, the SEC amended the compliance dates for
SFAS
123(R), to allow companies to implement the standard at the beginning of their
next fiscal year, instead of the next reporting period beginning after June
15,
2005. Management is currently evaluating the impact SAB 107 will have
on
our consolidated financial statements.
On
June
15-16, 2005 the Emerging Issue Task Force meeting discussed Effect of a
Liquidated Damages Clause on a Free standing Financial Instrument Subject to
EITF 05-04 Issue No. 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock. The Task Force
further discussed (a)
whether a registration rights penalty meets the definition of a derivative
and
(b) whether the registration rights agreement and the financial instrument
to
which it pertains should be considered as a combined freestanding instrument
or
as separate freestanding instruments. Additionally, some Task Force members
expressed a preference for evaluating a liquidated damages provision based
on
the probable amount that the issuer would pay rather than the maximum amount.
The Task Force was not asked to reach a consensus on this Issue. The Task Force
asked the FASB staff to obtain additional information about how entities
currently evaluate and account for registration rights agreements in practice.
Additionally, the Task Force asked the FASB staff to analyze registration rights
penalties in comparison with other penalties that do not meet the definition
of
a derivative. Further discussion is expected at a future meeting.
Management
cannot determine the impact this new standard will have on our financial
position, results of operations and cash flows until the standard is
issued.
NOTE
2 - STOCK BASED COMPENSATION
As
permitted by SFAS No. 123, Accounting
for Stock-Based Compensation,
we
account for costs of stock-based compensation to employees in accordance with
Accounting Principles Board (“APB”) Opinion No. 25, Accounting
for Stock Issued to Employees
and
related interpretations, and accordingly, discloses the pro forma effect on
net
income (loss) and related per-share amounts using the fair value based method
to
account for stock-based compensation (Note 2). The fair value of stock
compensation issued to non-employees is determined using the Black-Scholes
option pricing model and compensation expense is recorded pursuant to the
provisions of EITF 96-18.
We
account for stock options granted to our employees and members of our board
of
directors under the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25 (APB No. 25) Accounting
for Stock Issued to Employees, and
related interpretations, and with the disclosure requirements of SFAS No. 123,
Accounting
for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure. The
following table illustrates the effect on net (loss) income and net (loss)
income per share if we had applied the fair value recognition provisions of
SFAS
No. 123 to stock-based compensation.
| |
|
Year
Ended
September
30
2005
|
|
Year
Ended
September
30
2004
|
|
|
Net
loss, as reported
|
|
|
($1,027,000
|
)
|
|
($3,846,000
|
)
|
|
Add:
Stock-based employee compensation expense included in reported net
(loss)
income, net of related tax effects
|
|
|
0
|
|
|
0
|
|
|
Deduct;
Total stock-based employee compensation expense determined under
the fair
value method, net of related tax effects
|
|
|
(322,000
|
)
|
|
(302,000
|
)
|
|
Pro
Forma net loss
|
|
|
($1,349,000
|
)
|
|
($4,148,000
|
)
|
|
Pro
Forma net loss per share
|
|
|
(.12
|
)
|
|
(.37
|
)
|
| |
|
|
|
|
|
|
|
NOTE
3 - INCOME TAXES
For
the
years ended September 30, 2005 and 2004 the provision (benefit) for income
taxes
were as follows (rounded):
| |
|
2005
|
|
2004
|
|
|
Federal
- Current
|
|
$
|
0
|
|
$
|
0
|
|
|
State
- Current
|
|
$
|
(1,000
|
)
|
$
|
2,000
|
|
|
Total
|
|
$
|
(1,000
|
)
|
$
|
2,000
|
|
Under
SFAS No. 109, deferred income tax liabilities and assets reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax
purposes.
Significant
components of our net deferred tax liabilities and assets as of September 30,
2005 and 2004 are as follows:
| |
|
2005
|
|
2004
|
|
|
Deferred
tax assets (liabilities):
|
|
|
|
|
|
|
Reserves
not currently deductible
|
|
$
|
34,000
|
|
$
|
531,000
|
|
|
Book
depreciation and amortization in excess of tax
|
|
|
33,000
|
|
|
28,000
|
|
|
Research
credit carryforwards
|
|
|
551,000
|
|
|
551,000
|
|
|
AMT
credit carryforward
|
|
|
69,000
|
|
|
69,000
|
|
|
Net
operating loss carryforwards
|
|
|
4,485,000
|
|
|
4,028,000
|
|
|
Capitalized
research and development costs
|
|
|
548,000
|
|
|
24,000
|
|
|
Uniform
capitalization
|
|
|
1,000
|
|
|
4,000
|
|
|
Other
|
|
|
610,000
|
|
|
635,000
|
|
|
Total
deferred tax assets
|
|
|
6,331,000
|
|
|
5,870,000
|
|
|
Valuation
allowance for net deferred tax assets
|
|
|
(6,331,000
|
)
|
|
(5,870,000
|
)
|
|
Total
|
|
$
|
0
|
|
$
|
0
|
|
We
have
provided a valuation allowance against deferred tax assets recorded as of
September 30, 2005 and 2004 due to uncertainties regarding the realization
of
such assets.
The
research credit and net operating loss carryforwards expire during the years
2005 to 2025. The federal and California net operating loss carryforwards at
September 30, 2005 are approximately $17,500,000 and $11,100,000,
respectively.
The
differences between the provision for income taxes and income taxes computed
using the U.S. federal income tax rate were as follows for the years ended
September 30:
| |
|
2005
|
|
2004
|
|
|
Amount
computed using statutory rate (34%)
|
|
$
|
(372,000
|
)
|
$
|
(1,308,000
|
)
|
|
Net
change in valuation allowance
for
net deferred tax assets
|
|
|
461,000
|
|
|
1,331,000
|
|
|
Non-deductible
items
|
|
|
8,000
|
|
|
15,000
|
|
|
State
income taxes
|
|
|
(
98,000
|
)
|
|
(
36,000
|
)
|
|
Provision
for income taxes
|
|
$
|
(
1,000
|
)
|
$
|
2,000
|
|
NOTE
4 - COMMITMENTS AND CONTINGENCIES
Legal
Matters -
We are
not aware of any legal proceedings or claims that Management believes may have,
individually or in the aggregate, a material adverse effect on the business,
financial condition, operating results, cash flow or liquidity.
Employee
401(k) Plan
- We
have a 401(k) plan that allows participating employees to contribute up to
15%
of their salary, subject to annual limits. The Board may, at its sole
discretion, approve Mitek’s contributions. During fiscal 2005 and 2004, the
Board elected not to make any contributions to the plan.
Leases
- Our
office is leased under a non-cancelable operating lease. The facilities lease
expired on September 30, 2005 and we have retained the space on a month to
month
lease until we move to the new location. The lease costs are expensed on a
straight-line basis over the lease term. We signed a seven year lease for a
property located at 8911 Balboa Avenue, San Diego, California and intend to
move
some time in early December of 2005.The Lease is effective and binding on the
parties as of September 19, 2005; however, the term of the Lease will begin
on
date on which the Landlord achieves substantial completion of certain
improvements in accordance with the terms of the Lease (the "Commencement
Date"). The initial term of the Lease is seven years. The Lease will be
terminable by the Company after the calendar month which is forty-eight (48)
full calendar months after the Commencement Date; however, termination will
require certain penalties to be paid equal to two months of base rent and all
unamortized improvements and commissions.
Future
annual minimum rental payments payable by us under non-cancelable leases are
as
follows:
| |
|
Operating
Leases
|
|
|
Year
Ending September 30:
|
|
|
|
|
2006
|
|
$
|
271,555
|
|
|
2007
|
|
|
305,002
|
|
|
2008
|
|
|
314,558
|
|
|
2009
|
|
|
324,814
|
|
|
2010
|
|
|
333,671
|
|
|
Thereafter
|
|
|
724,775
|
|
|
Total
|
|
$
|
2,274,375
|
|
| |
|
|
|
|
Rent
expense for operating leases, net of sub-lease income of $60,000 and $0, for
the
years ended September 30, 2005 and 2004 totaled $410,128 and $524,180,
respectively.
We
have,
as part of the lease in June 2002, agreed to purchase the furniture located
on
the premises. This lease agreement requires a portion of the rent payments
be
applied to the purchase of this furniture. At September 30, 2005, there was
no
further obligations on the furniture purchase.
NOTE
5 - ISSUANCE OF CONVERTIBLE DEBT
On
June
11, 2004, we secured a financing arrangement with Laurus. The financing consists
of a $3 million Secured Note that bears interest at the rate of prime (as
published in the Wall Street Journal), plus one percent (6.75% as of September
30, 2005) and has a term of three years (June 11, 2007). The Secured Note is
convertible into shares of our common stock at an initial fixed price of $0.70
per share, a premium to the 10-day average closing share price as of June 11,
2004. The conversion price of the Secured Note is subject to adjustment upon
the
occurrence of certain events. The effective annual interest rate of this
Convertible Debt, after considering the total debt issue costs (discussed
below), is approximately 36%
In
connection with the financing, Laurus was also issued warrants to purchase
up to
860,000 shares of our common stock. The warrants are exercisable as follows:
230,000 shares at $0.79 per share; 230,000 shares at $0.85 per share and the
balance at $0.92 per share. The gross proceeds of the convertible debt were
allocated to the debt instrument and the warrants on a relative fair value
basis. Then we computed the beneficial conversion feature embedded in the debt
instrument using the effective conversion price in accordance with EITF 98-5
and
00-27. We have recorded a debt discount of (i) $367,887 for the valuation of
the
860,000 warrants issued with the note (computed using a Black-Scholes model
with
an interest rate of 2.53%, volatility of 81%, zero dividends and expected term
of three years); (ii) $522,384 for a beneficial conversion feature inherent
in
the Secured Note and (iii) $151,000 for debt issue costs paid to affiliates
of
the lender, for a total discount of $1,041,271. The $1,041,271 is being
amortized over the term of the Secured Note. Amortization of the debt discounts
for fiscal 2005 was $526,938, and $96,247 for fiscal 2004.
A
registration rights agreement was executed requiring us to register the shares
of our common stock underlying the Secured Note and warrants so as to permit
the
public resale thereof. Liquidated damages of 2% of the Secured Note balance
per
month accrued if stipulated deadlines were not met. Prior to the end
of
fiscal 2004, we incurred a penalty of $208,000 to Laurus Funds for failing
to
register the securities underlying the Debt Instrument. On October 4, 2004,
the
Company settled this penalty with Laurus Master Fund, LLC by agreeing to issue
an additional warrant for the purchase of 200,000 shares at a price of $0.70
per
share. The value of this additional warrant was calculated by us to be $73,159,
using a Black-Scholes option pricing model. The registration statement was
filed
with the Securities and Exchange Commission on October 4, 2004. We were required
to have received an effective registration no later than December 31, 2004.
The
registration was not effective by that time, so we incurred liquidated damages,
payable in cash, in the amount of $215,000 for the period January 1, 2005 to
May
13, 2005. The registration became effective on May 13, 2005, and we do not
anticipate there will be future penalties associated with the
registration
In
conjunction with raising capital through the issuance of convertible debt,
the
Company has issued various warrants that have registration rights for the
underlying shares. As the contracts must be settled by the delivery
of
registered shares and the delivery of the registered shares is not controlled
by
the Company, pursuant to EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet ($367,887) and the change in fair value from
the
date of issuance to September 30, 2004 has been included in other (expense)
income.
For
the
year ended September 30, 2005, the change in fair value of the warrants issued
with registration rights decreased by $82,000. Upon effectiveness of the
registration statement, the remaining warrant value of $407,073
was reclassified to additional-paid-in-capital. For the year
ended
September 30, 2004, the change in fair value of the warrants issued with
registration rights for the underlying shares increased by approximately
$48,020
to $415,907 at September 30, 2004 and is recognized in other
expense.
To
secure
the payment of all obligations, we entered into a Master Security Agreement
which assigns and grants to Laurus a continuing security interest in all of
the
following property now owned or at any time upon execution of the agreement,
acquired by us or subsidiaries, or in which any assignor now have or at any
time
in the future may acquire any right, title or interest: all cash, cash
equivalents, accounts, deposit accounts, inventory, equipment, goods, documents,
instruments (including, without limitation, promissory notes), contract rights,
general tangibles, chattel paper, supporting obligations, investment property,
letter-of-credit rights, trademarks, trademark applications, patents, patent
applications, copyrights, copyright applications, tradestyles and any other
intellectual property, in each case, in which any Assignor now have or may
acquire any right, title or interest, all proceeds and products thereof
(including, without limitation, proceeds of insurance) and all additions,
accessions and substitutions. In the event any Assignor wishes to finance an
acquisition in the ordinary course of business of any hereafter-acquired
equipment and have obtained a commitment from a financing source to finance
such
equipment from an unrelated third party, Laurus agrees to release its security
interest on such hereafter-acquired equipment so financed by such third party
financing source.
The
Secured Notes stipulates that the Secured Note is to be repaid using cash
payment along with an equity conversion option; the details of both methods
for
repayment are as follows: The cash repayments stipulate that beginning on
December 1, 2004, or the first amortization date, we shall make monthly payments
to Laurus on each repayment date until the maturity date, each in the amount
of
$90,909.09, together with any accrued and unpaid interest to date. The
conversion repayment states that each month by the fifth business day prior
to
each amortization date, Laurus shall deliver to us a written notice converting
the monthly amount payable on the next repayment date in either cash or shares
of common stock, or a combination of both. If a repayment notice is not
delivered by Laurus on or before the applicable notice date for such repayment
date, then we pay the monthly amount due in cash. Any portion of the monthly
amount paid in cash shall be paid to Laurus in an amount equal to 102% of the
principal portion of the monthly amount due. If Laurus converts all or a portion
of the monthly amount in shares of our common stock, the number of such shares
to be issued by us will be the number determined by dividing the portion of
the
monthly amount to be paid in shares of common stock, by the applicable fixed
conversion price, which is presently $0.70 per share.
The
following table reflects the Convertible Debt on September 30,
2005:
| |
|
|
|
|
|
Convertible
Debt
|
|
$
|
1,639,318
|
|
|
Deferred
financing costs
|
|
|
(418,085
|
)
|
| |
|
|
1,221,233
|
|
|
Less:
Current Portion
|
|
|
(714,187
|
)
|
| |
|
$
|
507,046
|
|
The
debt
has the following principal amounts due over the remaining life as
follows:
| |
|
|
|
|
|
Year
ended 9/30/06
|
|
$
|
1,090,909
|
|
| |
|
|
|
|
|
Year
ended 9/30/07
|
|
|
548,409
|
|
NOTE
6 - RELATED
PARTY TRANSACTIONS
In
fiscal
2005, we realized revenue of approximately $750,000 with John H. Harland Company
(“John Harland”) for engineering development services, unrelated to the sale of
assets (Note 7). In addition, we invoiced Harland Financial Solutions, a
subsidiary of John Harland, for software license purchases and software
maintenance for approximately $196,000. Harland Financial Solutions sub-leased
office space from us during fiscal 2005 which totaled $60,000. John H. Harland
Company made an investment
in Mitek in February and May 2005, which is discussed in detail in Note 8 under
Stockholders’ Equity resulting in classification as related parties. There were
no related party transactions in fiscal 2004 (at the time of the Checkquest
sale
to Harland Financial Solutions in July 2004, management determined
that Harland Financial Services and John Harland were
not
related parties).
NOTE
7 - SALE OF ASSETS
On
July
7, 2004, we entered into an agreement with Harland Financial Solutions (HFS)
wherein HFS acquired certain of our trade assets relating to its Item Processing
line of business. In addition, HFS assumed the trade liabilities and hired
certain of our personnel relating to this line of business. In connection with
this transaction, we entered into a reseller agreement wherein HFS will be
the
exclusive reseller of this line of business. The consideration for this
transaction was $1,425,000, plus the assumption of liabilities. The
consideration was reduced by $100,000, which was placed in escrow pending
delivery of our Fraud Protect System to certain customers. Mitek fulfilled
the
required obligations and HFS released the $100,000 in the 4th
Quarter
of fiscal 2005 and was applied against the indemnification. The agreement
required us to Indemnify HFS for future liabilities. The indemnification is
limited to $250,000. The Indemnification was settled for a total amount of
$144,000 in the fourth quarter of fiscal 2005 and the indemnification has
expired as of September 30, 2005. A summary of asset sold in 2004 is as
follows:
| |
|
2004
|
|
|
Total
Consideration
|
|
$
|
1,425,000
|
|
|
Less:
amounts held in escrow
|
|
|
(100,000
|
)
|
|
Less:
indemnifications
|
|
|
(250,000
|
)
|
|
Plus:
liabilities and deferred revenue assumed by Harland
|
|
|
988,014
|
|
|
Less:
expenses of sale
|
|
|
(181,160
|
)
|
|
Cost
basis of receivables sold
|
|
|
(453,436
|
)
|
|
Cost
basis of fixed assets sold
|
|
|
(95,237
|
)
|
|
Cost
basis of licenses sold
|
|
|
(60,938
|
)
|
|
Cost
basis of inventory sold
|
|
|
(1,888
|
)
|
|
Gain
on Sale
|
|
$
|
1,270,355
|
|
Under
the
agreement, HFS had the right to acquire certain additional assets for an
additional consideration of $1 million if we were able to comply with certain
closing conditions such as resolution on BSM, Inc. arbitration hearing. In
March
2005, we delivered certain executed documents according to terms satisfactory
to
the buyer, and received the additional $1,000,000 in April 2005. In addition,
we
recognized a gain of $106,129 relating to the indemnification as stated
above.
NOTE
8 - STOCKHOLDERS' EQUITY
Shares
Sold For Cash
On
May 4,
2005, John H. Harland Company ("John Harland") acquired 1,071,428 shares of
unregistered common stock for an aggregate purchase price of $750,000, or $.70
per share. As part of the acquisition of the shares on May 4, John Harland
received warrants to purchase 160,714 additional shares of common stock at
an
exercise price of $0.70 per share. These warrants are valid until May 4, 2012.
This sale was the second sale of securities pursuant to the terms of a
Securities Purchase Agreement between Mitek and John Harland dated February
22,
2005, under which, on February 22, 2005, John Harland acquired 1,071,428 shares
of unregistered common stock for an aggregate purchase price of $750,000, or
$.70 per share As part of the acquisition of shares on February 22, John Harland
received warrants to purchase 160,714 additional shares of common stock at
$0.70
per share. These warrants are valid until February 22, 2012.
Under
the
terms of the Securities Purchase Agreement, John Harland had the right to make
the second investment of $750,000 in the event we were able to increase our
authorized shares of common stock. On May 4, 2005, the Shareholders of Mitek
approved an amendment to our Certificate of Incorporation which increased the
authorized number of shares of common stock of Mitek from 20,000,000 to
40,000,000 and John Harland completed the second investment of $750,000. In
connection with the sale, we granted John Harland board observation rights
for
as long as John Harland continues to hold at least 20% of the shares of common
stock it purchased under the Securities Purchase Agreement together with the
shares of common stock issuable upon exercise of the warrants. As a result
of
these transactions, John Harland will be considered a related party, as defined
under Generally Accepted Accounting Principles.
Shares
Issued For Conversion Of Debt To Equity
We
issued
800,000 shares to Laurus upon conversion of $560,000 of principal to equity
during the year ended September 30, 2005.
Stock
Options
We
have
stock option plans for executives and key individuals who make significant
contributions to Mitek. The 1986 plan provides for the purchase of up to 630,000
shares of common stock through incentive and non-qualified options. The 1986
plan expired on September 30, 1996 and no additional options may be granted
under this plan. The 1988 plan provides for the purchase of up to 650,000 shares
of common stock through non-qualified options. The 1988 plan expired on
September 13, 1998. For both plans, options were granted at fair market value
of
our stock at the grant date and for a term of not more than six
years.
Employees
owning in excess of 10% of the outstanding stock are excluded from the
plans.
The
1996
plan provides for the purchase of up to 1,000,000 shares of common stock through
incentive and non-qualified options. Options must be granted at fair market
value of our stock at the grant date and for a term of not more than ten years.
Employees owning in excess of 10% of the outstanding stock are included in
the
plan on the same terms except that the options must be granted for a term of
not
more than five years. The 1996 plan maximized in February 1999 and no additional
options may be granted under this plan.
The
1999
plan provides for the purchase of up to 1,000,000 shares of common stock through
incentive and non-qualified options. Incentive stock options must be granted
at
fair market value of our stock at the grant date and for a term of not more
than
ten years. Non-qualified stock options may be granted at no less than 85% of
fair market value of our stock at the grant date, and for a term of not more
than five years. However, we have elected a three year term date on
non-qualified stock option grants.
The
2000
plan provides for the purchase of up to 1,000,000 shares of common stock through
incentive and non-qualified options. Incentive options must be granted at fair
market value of our stock at the grant date and for a term of not more than
ten
years. Non-qualified stock options may be granted at no less than 85% of fair
market value of our stock at the grant date, and for a term of not more than
five years. However, we have elected a three year term date on non-qualified
stock option grants.
Information
concerning stock options granted by Mitek under all plans for the years ended
September 30, 2005 and 2004 is as follows:
| |
|
|
|
|
|
| |
|
Shares
|
|
Weighted
Average Exercise Price Per Share
|
|
|
Balance,
September 30, 2003
|
|
|
2,350,963
|
|
$
|
2.03
|
|
| |
|
|
|
|
|
|
|
|
Granted
|
|
|
629,750
|
|
$
|
1.02
|
|
|
Exercised
|
|
|
(204,199
|
)
|
$
|
1.00
|
|
|
Cancelled
|
|
|
(942,276
|
)
|
$
|
2.46
|
|
| |
|
|
|
|
|
|
|
|
Balance,
September 30, 2004
|
|
|
1,834,238
|
|
$
|
1.58
|
|
| |
|
|
|
|
|
|
|
|
Granted
|
|
|
890,500
|
|
$
|
1.02
|
|
|
Exercised
|
|
|
0
|
|
$
|
1.00
|
|
|
Cancelled
|
|
|
(718,019
|
)
|
$
|
2.46
|
|
| |
|
|
|
|
|
|
|
|
Balance,
September 30, 2005
|
|
|
2,006,719
|
|
$
|
1.06
|
|
| |
|
|
|
|
|
|
|
The
following table summarizes information about stock options outstanding on
September 30, 2005:
|
Range
of
Exercise
Price
|
|
Number
Outstanding
|
|
Weighted
Average Remaining
Contractual
Life
|
|
Weighted
Average Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercise Price of
Exercisable
Options
|
|
|
$
0.43- - $ 0.69
|
|
|
871,000
|
|
|
8.64
|
|
$
|
0.56
|
|
|
308,583
|
|
$
|
0.57
|
|
|
$
0.72- - $ 0.92
|
|
|
238,667
|
|
|
8.11
|
|
$
|
0.78
|
|
|
98,701
|
|
$
|
0.86
|
|
|
$
1.06- - $ 1.39
|
|
|
638,000
|
|
|
7.45
|
|
$
|
1.15
|
|
|
484,667
|
|
$
|
1.16
|
|
|
$
1.60- - $ 1.68
|
|
|
132,000
|
|
|
6.27
|
|
$
|
1.60
|
|
|
88,944
|
|
$
|
1.60
|
|
|
$
2.13- - $ 2.68
|
|
|
80,558
|
|
|
6.26
|
|
$
|
2.32
|
|
|
80,558
|
|
$
|
2.33
|
|
|
$
3.25- - $12.37
|
|
|
46,494
|
|
|
4.58
|
|
$
|
6.69
|
|
|
46,494
|
|
$
|
6.64
|
|
| |
|
|
2,006,719
|
|
|
7.85
|
|
$
|
1.06
|
|
|
1,107,947
|
|
$
|
1.32
|
|
All
stock
options are granted with an exercise price equal to the fair market value of
our
common stock at the grant date. The weighted average fair value of the stock
options granted was $.69 and $.63 for fiscal 2005 and 2004, respectively. The
fair value of each stock option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2005: risk-free interest rate of 3.72%; expected
dividend yield of 0%; expected life of 3 years; and expected volatility of
74%.
In 2004 the assumptions were: risk-free interest rate of 2.6%; expected dividend
yield of 0%; expected life of 3 years; and expected volatility of 77%. Stock
options generally expire between three to ten years from the grant date.
Incentive stock options generally vest over a three-year period, with one
thirty-sixth becoming exercisable on each of the monthly anniversaries of the
grant date. Non-qualified stock options vest immediately and expire in three
years from the date of the grant.
We
have
also issued 20,000 stock options to non-employees which are accounted for as
variable arrangements under the provisions of EITF 96-18. Compensation expense
related to such awards were $2,580 and $15,698 for the years ended September
30,
2005 and 2004, respectively, and are included in general and administrative
expense. Future increases in the fair value of our common stock could result
in
additional compensation expense.
NOTE
9 - PRODUCT REVENUES AND SALES CONCENTRATIONS
Product
Revenues - During fiscal years 2005 and 2004, our revenues were derived
primarily from the Character Recognition Product line. Revenues by product
line
as a percentage of net sales are summarized as follows:
| |
|
Year
Ended September 30,
|
|
| |
|
2005
|
|
2004
|
|
|
Character
recognition
|
|
|
64
|
%
|
|
71
|
%
|
| |
|
|
|
|
|
|
|
|
Maintenance
& Other
|
|
|
36
|
%
|
|
29
|
%
|
| |
|
|
|
|
|
|
|
Sales
Concentrations - The Company sells its products primarily to community
depository institutions. For the years ended September 30, 2005 and 2004, the
Company had the following sales concentrations:
| |
|
Year
Ended September 30,
|
|
| |
|
2005
|
|
2004
|
|
|
Customers
to which sales were in excess of 10% of total sales
|
|
|
|
|
|
|
Number
of customers
|
|
|
2
|
|
|
1
|
|
|
Aggregate
percentage of sales
|
|
|
31
|
%
|
|
12
|
%
|
| |
|
|
|
|
|
|
|
|
Foreign
Sales - primarily Europe & Asia
|
|
|
23
|
%
|
|
4
|
%
|
Below
is
a summary of the revenues by product lines.
| |
|
2005
|
|
2004
|
|
|
Revenue
(000’s)
|
|
|
|
|
|
|
Recognition
Toolkits
|
|
$
|
4,059
|
|
$
|
1,859
|
|
|
Check
Image Solutions
|
|
|
0
|
|
|
1,406
|
|
|
Document
and Image Processing Solutions
|
|
|
160
|
|
|
439
|
|
|
Maintenance
and other
|
|
|
2,375
|
|
|
1,536
|
|
|
Total
Revenue
|
|
$
|
6,594
|
|
$
|
5,240
|
|
| |
|
|
|
|
|
|
|
NOTE
10 - SUBSEQUENT
EVENTS
Laurus
Funds has converted its note in the amount of $350,000 to 500,000 shares. The
balance of Laurus Funds convertible note on October 30, 2005 was approximately
$1.3 million.
On
October 19, 2005, the Board of Directors approved stock option grants to
our
employees, officers and directors in the amount of 974,000. The exercise
price was the fair market value as of the date of the grant and vests
periodically over the next 3 years. Options granted to directors
vests
immediately.
| ITEM
8. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
|
NONE
Under
the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective as of the year ended September 30, 2005.
There
have not been any changes in our internal control over financial reporting
(as
such term is defined in Rules 13a-15(f) and 15d - 15(f) under the Exchange
Act)
during the fiscal quarter ended September 30, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
III
| ITEM
9. |
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Information
with respect to Directors may be found under the caption “Election of Directors
and Management Information” of our Proxy Statement for the Annual Meeting of
Shareholders to be held February 22, 2006 (the “Proxy Statement”). Such
information is incorporated herein by reference.
The
information in the Proxy Statement set forth under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
We
have
adopted the Mitek Systems, Inc. financial Code of Professional Conduct (the
“finance code of ethics”), a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer and other finance organization employees.
The
finance code of ethics is publicly available on our website at www.miteksys.com.
If we make any amendments to the finance code of ethics or grant any waiver,
including any implicit waiver, from a provision of the code to our Chief
Executive Office and Chief Financial Officer that requires disclosure under
applicable SEC rules, we intend to disclose the nature of such amendment or
waiver on our website.
The
information in the Proxy Statement set forth under the captions “Information
Regarding Executive Officer Compensation” and “Information Regarding the Board
and its Committees - Director Compensation” is incorporated herein by reference.
| ITEM
11. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information in the Proxy Statement set forth under the captions “Equity
Compensation Plan Information” and “Information Regarding Beneficial Ownership
of Principal Shareholders, Directors, and Management” is incorporated herein by
reference.
| ITEM
12. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The
information set forth under the captions “Certain Relationships and Related
Transactions” of the Proxy Statement is incorporated herein by reference.
| ITEM
13. |
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information
concerning principal accountant fees and services appears in the proxy statement
under the heading “Fees Paid to Stonefield Josephson, Inc.”, is incorporated
herein by reference.
PART
IV
| ITEM
14. |
EXHIBITS,
FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS
ON FORM 8-K
|
|
|
(a)(1) |
The
following documents are included in the Company's Annual Report
to Stockholders for the year ended September 30,
2005:
|
| |
|
Reports
of Independent Registered Public Accounting
Firm |
| |
|
Balance
Sheet - As
of September
30, 2005 |
| |
|
Statements
of Operations - For
the Years Ended September
30, 2005 and 2004 |
| |
|
Statements
of Stockholders’
Equity (Deficit) - For
the Years Ended September
30, 2005
and 2004 |
| |
|
Statements
of Cash Flows - For
the Years Ended September
30, 2005 and 2004 |
| |
|
Notes
to Financial Statements - For
the years Ended September
30, 2005 and 2004 |
With
the
exception of the financial statements listed above and the
other
information incorporated by reference herein, the Annual Report
to
Stockholders for the fiscal year ended September 30, 2005,
is
not to be deemed to be filed as part of this report.
|
|
3.1 |
Certificate
of Incorporation of Mitek
Systems of Delaware Inc. (now
Mitek Systems, Inc.), a Delaware
corporation, as amended. (1)
|
|
|
3.2 |
Bylaws
of Mitek Systems, Inc. as Amended
and Restated. (1)
|
|
|
10.1 |
1986
Stock Option Plan (2)
|
|
|
10.2 |
1988
Non Qualified Stock Option Plan
(2)
|
|
|
10.3 |
1996
Stock Option Plan(3)
|
|
|
10.4 |
1999
Stock Option Plan (4)
|
| |
10.6 |
Office
Lease between Arden Realty Finance V, L.L.C. and the
Company
|
|
|
13. |
Annual
Report to Stockholders for the year ended
September 30, 2005.
|
|
|
23. |
Consents
of Independent Registered Public Accounting
Firms
|
|
|
31.1 |
Certification
of Periodic Report by the Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of
1934.
|
|
|
31.2 |
Certification
of Periodic Report by the Chief Financial Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of
1934.
|
|
|
32.1 |
Certification
of Periodic Report by the Chief Executive Officer Pursuant to Section
906
of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2 |
Certification
of Periodic Report by the Chief Financial Officer Pursuant to
Section 906
of the Sarbanes-Oxley Act of 2002.
|
| (1) |
Incorporated
by reference to the exhibits to the Company’ Annual Report on Form 10-K
for the fiscal year ended September 30,
1987
|
| (2) |
Incorporated
by reference to the exhibits to the Company's Registration Statement
on
Form SB-2 originally filed with the SEC on July 9,
1996
|
| (3) |
Incorporated
by reference to the exhibits to the Company’s Registration Statement on
Form
10-K for the fiscal year ended September 30,
2001
|
| (4) |
Incorporated
by reference to the exhibits to the Company’s Registration Statement on
Form S-8 originally filed with the SEC on June 10,
1999.
|
Upon
request, the Registrant will furnish a copy of any of the listed
exhibits for $0.50 per page.
|
|
(b) |
The
following is a list of Current Reports on Form 8-K filed by the
Company
during or subsequent to the last quarter of the fiscal year ended
September 30, 2005:
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on
its
behalf by the undersigned, thereunto duly authorized.
| |
|
|
| |
MITEK
SYSTEMS, INC. |
|
|
|
| Dated:
November 28, 2005 |
By: |
/s/ James
B. DeBello |
| |
|
| |
James
B. DeBello
President, Chief Executive Officer
|
| |
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
/s/
John M. Thornton
|
|
November
28, 2005
|
|
John
M. Thornton,
|
|
|
|
Chairman
of the Board and Director)
|
|
|
| |
|
|
|
/s/
James B. DeBello
|
|
November
28, 2005
|
|
James
B. DeBello,
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer and Director)
|
|
|
| |
|
|
|
/s/Tesfaye
Hailemichael
|
|
November
28, 2005
|
|
Tesfaye
Hailemichael
|
|
|
|
Chief
Financial officer
|
|
|
| |
|
|
|
/s/
Gerald I. Farmer
|
|
November
28, 2005
|
|
Gerald
I. Farmer, Director
|
|
|
| |
|
|
|
/s/
Michael Bealmear
|
|
November
28, 2005
|
|
Michael
Bealmear, Director
|
|
|
| |
|
|
|
/s/
Sally B. Thornton
|
|
November
28, 2005
|
| Sally B.
Thornton,
Director |
|
|
| |
|
|
|
/s/
William P. Tudor
|
|
November
28, 2005
|
| William
P. Tudor,
Director |
|
|
| |
|
|
|
/s/
Vinton Cunningham
|
|
November
28, 2005
|
| Vinton Cunningham,
Director |
|
|
CORPORATE
OFFICE
Mitek
Systems, Inc.
14145
Danielson Street, Suite B
Poway,
California 92064
(858)
513-4600
CORPORATE
OFFICERS
James
B.
DeBello , President and Chief Executive Officer
Tesfaye
Hailemichael, Chief Financial Officer
Murali
Narayanan, Vice President of Development
Emmanuel
deBoucaud, Vice President of Sales
TRANSFER
AGENT
Mellon
Investor Services LLC
480
Washington Blvd., Jersey City, N 07310-1900
www.melloninvestor.com/isd
AUDITORS
Stonefield
& Josephson, Inc.
1620
26th
St,
Suite 400 South, Santa Monica, California 90404
DIRECTORS
John
M.
Thornton, Chairman of the Board
Sally
B.
Thornton, Investor
Michael
Bealmear (1) (2)
James
B.
DeBello, President, Chief Executive Officer
Gerald
I.
Farmer, Ph.D. (2)
William
P. Tudor (1)
Vinton
Cunningham (2)
NOTES
(1)
Compensation Committee
(2)
Audit
Committee
FORM
10-K REPORT
Copies
of
our Form 10-KSB report to the Securities and Exchange Commission, are available
free to stockholders and may be obtained by writing or calling Secretary, Mitek
Systems, Inc., 14145 Danielson St., Suite B, Poway, California 92064, phone
(858) 513-4600.
Subsequent
to December 9, 2005, submit your request to Mitek Systems, Inc., 8911 Balboa
Ave., Suite B, San Diego, CA 92123.