Attached files
| file | filename |
|---|---|
| EX-32.2 - MITEK SYSTEMS INC | v193715_ex32-2.htm |
| EX-31.2 - MITEK SYSTEMS INC | v193715_ex31-2.htm |
| EX-32.1 - MITEK SYSTEMS INC | v193715_ex32-1.htm |
| EX-31.1 - MITEK SYSTEMS INC | v193715_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended June 30, 2010
or
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from _________ to ___________.
Commission
File Number 0-15235
MITEK
SYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
of Incorporation)
|
87-0418827
(I.R.S.
Employer Identification No.)
|
|
8911
Balboa Ave., Suite B
San Diego,
California
(Address
of principal executive offices)
|
92123
(Zip
Code)
|
Registrant's
telephone number: (858)
503-7810
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act Check one):
|
Large
Accelerated Filer o
|
Accelerated
Filer o
|
|
|
Non-Accelerated
Filer o
|
Smaller
Reporting Company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
There
were 17,418,337 shares outstanding of the registrant's common stock as of August
12, 2010.
MITEK
SYSTEMS, INC.
FORM
10-Q
For
the quarterly period ended June 30, 2010
|
Special
Note About Forward–Looking Statements
|
(ii)
|
||||
|
Part
I - Financial Information
|
|||||
|
ITEM 1.
|
Financial Statements
|
1 | |||
|
ITEM 2.
|
Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
12 | |||
|
ITEM 3.
|
Quantitative and Qualitative Disclosures About
Market Risk
|
17 | |||
|
ITEM 4.
|
Controls and Procedures
|
17 | |||
|
Part
I I - Other Information
|
|||||
|
ITEM 1.
|
Legal Proceedings
|
18 | |||
|
ITEM 1A.
|
Risk Factors
|
18 | |||
|
ITEM 2.
|
Unregistered Sales of Equity Securities and Use of
Proceeds
|
18 | |||
|
ITEM 3.
|
Defaults Upon Senior
Securities
|
18 | |||
|
ITEM 4.
|
(Removed and Reserved)
|
19 | |||
|
ITEM 5.
|
Other Information
|
19 | |||
|
ITEM 6.
|
Exhibits
|
19 | |||
|
Signatures
|
20 | ||||
(i)
Special
Note About Forward-Looking Statements
We make
forward-looking statements in this report, particularly in Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and in the documents that are incorporated by reference into this
report, if any. These forward-looking statements relate to Mitek's
outlook or expectations for earnings, revenues, expenses, asset quality or other
future financial or business performance, strategies or expectations, or the
impact of legal, regulatory or supervisory matters on Mitek's business, results
of operations or financial condition. Specifically, forward looking
statements used in this report may include statements relating to future
business prospects, revenue, income and financial condition of
Mitek.
Forward-looking
statements can be identified by the use of words such as "estimate," "may,"
"plan," "project," "forecast," "intend," "expect," "anticipate," "believe,"
"seek," "target" or similar expressions. These statements reflect
Mitek's judgment based on currently available information at June 30, 2010 and
involve a number of risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements.
In
addition to those factors discussed under the heading "Risk Factors" in Part II,
Item 1A of this report, and in Mitek's other public filings with the Securities
and Exchange Commission, important factors could cause actual results to differ
materially from our expectations. These factors include, but are not
limited to:
|
|
·
|
adverse
economic conditions;
|
|
|
·
|
general
decreases in demand for Mitek products and
services;
|
|
|
·
|
intense
competition (including entry of new competitors), including among
competitors with substantially greater resources than
Mitek;
|
|
|
·
|
loss
of key customers or contracts;
|
|
|
·
|
increased
or adverse federal, state and local government
regulation;
|
|
|
·
|
inadequate
capital;
|
|
|
·
|
unexpected
costs;
|
|
|
·
|
lower
revenues and net income than
forecast;
|
|
|
·
|
the
risk of litigation and administrative
proceedings;
|
|
|
·
|
the
possible fluctuation and volatility of operating results and financial
condition;
|
|
|
·
|
adverse
publicity and news coverage;
|
|
|
·
|
inability
to carry out marketing and sales plans;
and
|
|
|
·
|
loss
of key employees and executives.
|
You are
cautioned not to place undue reliance on any forward-looking statements, which
speak only as of the date hereof, or in the case of a document incorporated by
reference, as of the date of that document. Except as required by
law, we undertake no obligation to publicly update or release any revisions to
these forward-looking statements to reflect any events or circumstances after
the date of this report or to reflect the occurrence of unanticipated
events.
The above
list is not intended to be exhaustive and there may be other factors that would
preclude us from realizing the predictions made in the forward-looking
statement. We operate in a continually changing business environment
and new factors emerge from time to time. We cannot predict such
factors or assess the impact, if any, of such factors on their respective
financial positions or results of operations.
In this
report, unless the context indicates otherwise, the terms "Mitek," "Company,"
"we," "us," and "our" refer to Mitek Systems, Inc., a Delaware
corporation.
(ii)
PART I - FINANCIAL
INFORMATION
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
MITEK
SYSTEMS, INC
BALANCE
SHEETS
|
June
30,
|
||||||||
|
2010
|
September
30,
|
|||||||
|
(Unaudited)
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,495,428 | $ | 674,115 | ||||
|
Accounts
receivable including related party of $1,485 and $10,003, respectively,
net of allowance of $6,003 and $24,268,
respectively
|
554,403 | 360,817 | ||||||
|
Deferred
maintenance fees
|
99,353 | 60,683 | ||||||
|
Inventory,
prepaid expenses and other current assets
|
90,715 | 49,910 | ||||||
|
Total
current assets
|
2,239,899 | 1,145,525 | ||||||
|
PROPERTY
AND EQUIPMENT-net
|
39,559 | 60,367 | ||||||
|
SOFTWARE
DEVELOPMENT COSTS-net
|
262,885 | 365,753 | ||||||
|
OTHER
LONG-TERM ASSETS
|
49,538 | 29,465 | ||||||
|
TOTAL
ASSETS
|
$ | 2,591,881 | $ | 1,601,110 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 335,254 | $ | 356,305 | ||||
|
Accrued
payroll and related taxes
|
230,109 | 206,197 | ||||||
|
Deferred
revenue
|
809,097 | 700,714 | ||||||
|
Deferred
rent, current
|
9,193 | 118,732 | ||||||
|
Other
accrued liabilities
|
40,647 | 44,023 | ||||||
|
Total
current liabilities
|
1,424,300 | 1,425,971 | ||||||
|
LONG-TERM
LIABILITIES:
|
||||||||
|
Convertible
debt
|
587,339 | - | ||||||
|
Deferred
rent, non-current
|
42,350 | 49,374 | ||||||
|
Total
long-term liabilities
|
629,689 | 49,374 | ||||||
|
TOTAL
LIABILITIES
|
2,053,989 | 1,475,345 | ||||||
|
STOCKHOLDERS'
EQUITY:
|
||||||||
|
Preferred
stock, $0.001 par value, 1,000,000 shares authorized, none issued
and outstanding
|
- | - | ||||||
|
Common
stock, $0.001 par value, 40,000,000 shares authorized, 17,226,137
and 16,751,137 issued and outstanding, respectively
|
17,226 | 16,751 | ||||||
|
Additional
paid-in capital
|
16,195,188 | 14,920,999 | ||||||
|
Accumulated
deficit
|
(15,674,522 | ) | (14,811,985 | ) | ||||
|
Total
stockholders' equity
|
537,892 | 125,765 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 2,591,881 | $ | 1,601,110 | ||||
The
accompanying notes form an integral part of these financial
statements.
1
MITEK
SYSTEMS, INC
STATEMENTS
OF OPERATIONS
(Unaudited)
|
Three
Months Ended June
30, |
Nine
Months Ended June
30, |
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
SALES:
|
||||||||||||||||
|
Software
|
$ | 370,464 | $ | 418,778 | $ | 2,076,220 | $ | 1,346,869 | ||||||||
|
Maintenance
and professional services
|
452,026 | 495,960 | 1,422,246 | 1,467,600 | ||||||||||||
|
Total
sales
|
822,490 | 914,738 | 3,498,466 | 2,814,469 | ||||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||
|
Cost
of sales-software
|
139,713 | 117,473 | 562,090 | 338,273 | ||||||||||||
|
Cost
of sales-maintenance and professional services
|
63,531 | 70,268 | 176,433 | 180,104 | ||||||||||||
|
Operations
|
- | - | - | 29,840 | ||||||||||||
|
Selling
and marketing
|
224,772 | 133,340 | 620,611 | 684,397 | ||||||||||||
|
Research
and development
|
491,619 | 409,903 | 1,505,443 | 1,413,588 | ||||||||||||
|
General
and administrative
|
458,184 | 268,737 | 1,289,969 | 1,160,843 | ||||||||||||
|
Total
costs and expenses
|
1,377,819 | 999,721 | 4,154,546 | 3,807,045 | ||||||||||||
|
OPERATING
LOSS
|
(555,329 | ) | (84,983 | ) | (656,080 | ) | (992,576 | ) | ||||||||
|
OTHER
(EXPENSE) INCOME:
|
||||||||||||||||
|
Interest
and other expense
|
(91,782 | ) | (1,337 | ) | (205,337 | ) | (3,770 | ) | ||||||||
|
Interest
income
|
547 | 643 | 1,218 | 4,442 | ||||||||||||
|
Total
other (expense) income - net
|
(91,235 | ) | (694 | ) | (204,119 | ) | 672 | |||||||||
|
LOSS
BEFORE INCOME TAXES
|
(646,564 | ) | (85,677 | ) | (860,199 | ) | (991,904 | ) | ||||||||
|
PROVISION
FOR INCOME TAXES
|
- | - | (2,338 | ) | (1,800 | ) | ||||||||||
|
NET
LOSS
|
$ | (646,564 | ) | $ | (85,677 | ) | $ | (862,537 | ) | $ | (993,704 | ) | ||||
|
NET
LOSS PER SHARE - BASIC AND DILUTED
|
$ | (0.04 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.06 | ) | ||||
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING - BASIC AND DILUTED
|
16,867,236 | 16,751,137 | 16,791,705 | 16,751,137 | ||||||||||||
The
accompanying notes form an integral part of these financial
statements.
2
|
MITEK
SYSTEMS, INC
|
|||||
|
STATEMENTS
OF CASH FLOWS
|
|||||
|
(Unaudited)
|
|
For
the nine months ended
June
30,
|
||||||||
|
2010
|
2009
|
|||||||
|
OPERATING
ACTIVITIES
|
||||||||
|
Net
loss
|
$ | (862,537 | ) | $ | (993,704 | ) | ||
|
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
||||||||
|
Stock-based
compensation expense
|
291,229 | 92,037 | ||||||
|
Accretion
of discount on convertible debt
|
202,425 | - | ||||||
|
Depreciation
and amortization
|
130,408 | 40,017 | ||||||
|
Amortization
of capitalized debt issuance costs
|
25,091 | - | ||||||
|
Provision
for bad debts
|
(18,265 | ) | (23,609 | ) | ||||
|
Loss
on disposal of property and equipment
|
- | 1,767 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(175,321 | ) | 297,695 | |||||
|
Deferred
maintenance fees
|
(38,670 | ) | - | |||||
|
Inventory,
prepaid expenses, and other current assets
|
4,358 | (14,454 | ) | |||||
|
Accounts
payable
|
(21,051 | ) | (55,929 | ) | ||||
|
Accrued
payroll and related taxes
|
23,912 | (123,446 | ) | |||||
|
Deferred
revenue
|
108,383 | 5,062 | ||||||
|
Deferred
rent
|
(116,563 | ) | (3,982 | ) | ||||
|
Other
accrued liabilities
|
(3,376 | ) | 88,196 | |||||
|
Net
cash used in operating activities
|
(449,977 | ) | (690,350 | ) | ||||
|
INVESTING
ACTIVITIES
|
||||||||
|
Purchases
of property and equipment
|
(6,733 | ) | (9,050 | ) | ||||
|
Investment
in software development costs
|
- | (63,735 | ) | |||||
|
Proceeds
from sale of property and equipment
|
- | 70 | ||||||
|
Net
cash used in investing activities
|
(6,733 | ) | (72,715 | ) | ||||
|
FINANCING
ACTIVITIES
|
||||||||
|
Proceeds
from the issuance of convertible debt-net
|
922,223 | - | ||||||
|
Proceeds
from the issuance of common stock
|
345,000 | - | ||||||
|
Proceeds
from exercise of stock options
|
10,800 | - | ||||||
|
Net
cash cash provided by financing activities
|
1,278,023 | - | ||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
821,313 | (763,065 | ) | |||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
674,115 | 1,300,281 | ||||||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 1,495,428 | $ | 537,216 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
|
Cash
paid for interest
|
$ | 2,353 | $ | 2,003 | ||||
|
Cash
paid for income taxes
|
$ | 2,338 | $ | 1,800 | ||||
|
NON-CASH
FINANCING AND INVESTING ACTIVITIES
|
||||||||
|
Debt
discount on convertible note due to warrants
|
$ | 226,068 | $ | - | ||||
|
Beneficial
conversion feature related to convertible debt issued
|
$ | 401,568 | $ | - | ||||
The
accompanying notes form an integral part of these financial
statements.
3
MITEK
SYSTEMS, INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
|
1.
|
Basis
of Presentation
|
The accompanying unaudited financial
statements as of June 30, 2010 of Mitek Systems, Inc. (the “Company”) have been
prepared in accordance with the instructions to Form 10-Q and Article 8 of
Regulation S-X and accordingly, they do not include all information and footnote
disclosures required by accounting principles generally accepted in the United
States of America. Refer to the Company’s financial statements on
Form 10-K for the year ended September 30, 2009 for additional
information. The financial statements do, however, reflect all
adjustments (solely of a normal recurring nature) which are, in the opinion of
management, necessary for a fair statement of the results of the interim periods
presented.
Results for the three and nine months
ended June 30, 2010 are not necessarily indicative of results which may be
reported for any other interim period or for the year as a whole.
Going
Concern
The
Company incurred net losses of approximately $647,000 and $863,000 for the three
and nine months ended June 30, 2010, respectively, compared to net losses of
approximately $86,000 and $994,000 for the three and nine months ended June 30,
2009. As of June 30, 2010, the Company has incurred an accumulated
deficit of approximately $15,700,000. Net cash used in operating
activities decreased from approximately $690,000 in the third quarter of fiscal
2009 to approximately $450,000 in the third quarter of fiscal
2010. Net cash used in investing activities was approximately $7,000
in the nine months ended June 30, 2010, compared to approximately $73,000 in the
nine months ended June 30, 2009. The Company’s cash balance was
approximately $1,495,000 as of June 30, 2010.
In
January 2009, the Company implemented a plan to decrease its operating expenses
by reducing its workforce in light of the economic contraction of the financial
services market into which the Company primarily sells its
products. The staff reduction included general and administrative,
sales and marketing and technical staff. The Company has diligently
maintained key resources to adequately pursue new sales opportunities and
support its operations. The Company's management does not believe
that such reductions have impaired the Company’s ability to develop its ImageNet
Mobile Deposit application and other mobile capture products, or to provide
technical support to its current and prospective customers.
In
December 2009, the Company raised approximately $922,000, net of transaction
costs and expenses, from the private placement of debentures and
warrants. This private placement is discussed in greater detail in
Note 4 to the financial statements included in this report.
In June
2010, the Company sold 460,000 shares of common stock at $0.75 per share to
accredited investors in a private placement, resulting in net proceeds of
$345,000.
With the
proceeds raised from the issuance of the convertible debentures in December 2009
and the sale of common stock in June 2010 together with improved year-over-year
performance, the Company has been able to selectively retain additional staff to
pursue its growth plan.
Based on
its current operating plan, the Company’s existing working capital may not be
sufficient to meet the cash requirements to fund its planned operating expenses,
capital expenditures, and working capital requirements for the next twelve
months without additional sources of cash and/or the deferral, reduction or
elimination of significant planned expenditures. The Company may need
to raise significant additional funds to continue its
operations. Although the Company had negative cash flows from
operations during the nine months ended June 30, 2010, the Company did have a
significant increase in cash over September 30, 2009. 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, if attainable at all.
4
These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. This basis of accounting contemplates the recovery of the
Company’s assets and the satisfaction of liabilities in the normal course of
business. In addition, these financial statements do not include any
adjustments to the specific amounts and classifications of assets and
liabilities, which might be necessary should the Company be unable to continue
as a going concern. The Company is taking expense reduction measures
to conserve cash.
Earnings
per share
The
computation of basic and diluted earnings per share is as follows:
|
Three
months ended
|
Nine
months ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
loss
|
$ | (646,564 | ) | $ | (85,677 | ) | $ | (862,537 | ) | $ | (993,704 | ) | ||||
|
Weighted-average
common shares and share equivalents outstanding - basic and
diluted
|
16,867,236 | 16,751,137 | 16,791,705 | 16,751,137 | ||||||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
and diluted
|
$ | (0.04 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.06 | ) | ||||
|
2.
|
Recently
Issued Accounting Pronouncements
|
During
June 2008, the Financial Accounting Standards Board ("FASB") issued an update to
Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging,
(“ASC 815”), which is effective for fiscal years beginning after December 15,
2008. ASC 815 addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock. If an
instrument (or an embedded feature) that has the characteristics of a derivative
instrument under ASC 815 is indexed to an entity’s own stock, it is still
necessary to evaluate whether it is classified in stockholders’ equity (or would
be classified in stockholders’ equity if it were a freestanding
instrument). The Company has determined that ASC 815 did not
materially affect its financial statements during the nine months ended June 30,
2010.
In October 2009, the FASB issued
Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition:
Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), which amends ASC
Topic 605, Revenue Recognition. ASU 2009-13 revises the current
accounting treatment to specifically address how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. This guidance is applicable to revenue arrangements
entered into or materially modified during the first fiscal year that begins
after June 15, 2010. The guidance may be applied either
prospectively from the beginning of the fiscal year for new or materially
modified arrangements or retrospectively. The Company does not
anticipate the adoption of this guidance will have a material impact on the
financial statements.
In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements
That Include Software Elements (“ASU 2009-14”), which amends ASC Topic 985,
Software. ASU 2009-14 amends the ASC to change the accounting model
for revenue arrangements that include both tangible products and software
elements, such that tangible products containing both software and non-software
components that function together to deliver the tangible product’s essential
functionality are no longer within the scope of software revenue guidance.
The changes to the ASC as a result of this update are effective prospectively
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company does not
anticipate the adoption of this guidance will have a material impact on the
financial statements.
In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (“ASU 2010-06”), which amends ASC Topic 820, Fair Value Measurements
and Disclosures, adding new requirements for disclosures for Levels 1 and 2,
separate disclosures of purchases, sales, issuances, and settlements relating to
Level 3 measurements and clarification of existing fair value
disclosures. ASU 2010-06 is effective for interim and annual periods
beginning after December 15, 2009, except for the requirement to provide Level 3
activity of purchases, sales, issuances, and settlements on a gross basis, which
will be effective for fiscal years beginning after December 15, 2010; although,
early adoption is permitted. The Company is currently evaluating the
impact of adopting ASU 2010-06 on its financial statements.
In
February 2010, the FASB issued ASU No. 2010-09, Subsequent Events – Amendments
to Certain Recognition and Disclosure Requirements (“ASU 2010-09”) that amends
ASC Subtopic 855-10, Subsequent Events – Overall. ASU 2010-09
requires an SEC filer to evaluate subsequent events through the date that the
financial statements are issued but removed the requirement to disclose this
date in the notes to the entity’s financial statements. The
amendments are effective upon issuance of the final update and accordingly, the
Company has adopted the provisions of ASU 2010-09. The Company has
determined that adoption of ASU 2010-09 did not materially affect its financial
statements.
5
In April
2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition
("ASU 2010-17") to (i) limit the scope of this ASU to research or development
arrangements and (ii) require that guidance in this ASU be met for an entity to
apply the milestone method (record the milestone payment in its entirety in the
period received). However, the FASB clarified that, even if the
requirements in ASU 2010-17 are met, entities would not be precluded from making
an accounting policy election to apply another appropriate accounting policy
that results in the deferral of some portion of the arrangement
consideration. ASU 2010-17 will apply to milestones in both
single-deliverable and multiple-deliverable arrangements involving research or
development transactions. ASU 2010-17 will be effective for fiscal
years (and interim periods within those fiscal years) beginning on or after June
15, 2010; although, early adoption is permitted. Entities can apply
this guidance prospectively to milestones achieved after adoption; however,
retrospective application to all prior periods is also permitted. The
Company is currently evaluating the impact, if any, that adoption of ASU 2010-17
will have on its financial statements.
|
3.
|
Capitalized
Software Development Costs
|
The
Company has developed Mobile Capture software, a software solution that captures
and reads data from mobile devices using proprietary technology. The
Company has completed all of the planning, designing, coding, and testing
activities necessary to establish technological feasibility of the product and
has determined that the product can be produced to meet its design
specifications including functions, features, and technical performance
requirements.
Costs of
internally developed software are expensed until the technological feasibility
of the software product has been established. Thereafter, software
development costs, to the extent that management expects such costs to be
recoverable against future revenues, are capitalized until the product's general
availability to customers in accordance with FASB ASC Topic 985-20, Costs of
Software to Be Sold, Leased, or Marketed ("ASC 985-20").
The
Company evaluates its capitalized software development costs at each balance
sheet date to determine if the unamortized balance related to any given product
exceeds the estimated net realizable value of that product. Any such
excess is written off through accelerated amortization in the quarter it is
identified. Determining net realizable value, as defined by ASC
985-20, requires making estimates and judgments in quantifying the appropriate
amount to write off, if any. Actual amounts realized from the
software products could differ from those estimates. Also, any future
changes to the Company's product portfolio could result in significant increases
to its cost of license revenue as a result of the write-off of capitalized
software development costs. The Company completed its first
production general release of ImageNet Mobile DepositTM on
October 31, 2008, and entered into an agreement with a major financial
institution on November 4, 2008 to conduct a performance evaluation of the
product. In accordance with ASC 985-20, the Company ceased
capitalizing software development costs related to this product on the date that
it completed its first production general release.
In
June 2009, the Company began to recognize revenue from the sale of ImageNet
Mobile DepositTM, at
which time it started amortizing the capitalized software development costs
associated with the product in accordance with ASC 985-20. Under ASC
985-20, the annual amortization shall be the greater of the amount computed
using (a) the ratio that current gross revenues for a product bear to the total
of current and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product
including the period being reported on. The Company determined it was
appropriate to amortize the related capitalized software development costs over
the remaining economic life of the product, estimated to be three
years. The Company recorded amortization of software development
costs of approximately $34,000 and $103,000 in the three and nine months ended
June 30, 2010, respectively, compared to approximately $11,000 in the three and
nine months ended June 30, 2009.
|
4.
|
Convertible
Debt
|
On
December 10, 2009, the Company entered into a securities purchase agreement with
accredited investors pursuant to which the Company agreed to issue in exchange
for aggregate consideration of approximately $1,000,000 the following
securities: (i) 5% senior secured convertible debentures in the principal amount
of approximately $1,000,000, and (ii) warrants to purchase an aggregate of
337,501 shares of the Company’s common stock with an exercise price of $0.91 per
share. Each investor received a warrant to purchase that number of
shares of the Company’s common stock that equals 25% of the quotient obtained by
dividing such investor’s aggregate subscription amount by $0.75. The
transaction resulted in proceeds to the Company of approximately $922,000, net
of transaction costs and expenses.
Interest
is payable in cash or stock at the rate of 5% per annum on each conversion date
(as to the principal amount being converted), on each early redemption date (as
to the principal amount being redeemed) and on the maturity date. The
principal amount of the debentures, if not paid earlier, is due and payable on
December 10, 2011. The Company has the right to redeem all or a
portion of the debentures before maturity by payment in cash of the outstanding
principal amount plus accrued and unpaid interest being redeemed. The
Company agreed to honor any notices of conversion that it receives from the
holder before the date the Company pays off the debentures. The
debentures are convertible into shares of the Company’s common stock at any time
at the discretion of the holder at a conversion price per share of $0.75,
subject to adjustment for stock splits, stock dividends and the
like. The Company has the right to force conversion of the debentures
if (i) the closing price of its common stock exceeds 200% of the then effective
conversion price for 20 trading days out of a consecutive 30 trading day period
or (ii) the average daily trading volume for its common stock exceeds 100,000
shares per trading day for 20 trading days out of a consecutive 30 trading day
period and the closing price of its common stock exceeds 100% of the then
effective conversion price for 20 trading days out of a consecutive 30 trading
day period. The debentures impose certain covenants on the Company
including restrictions against paying cash dividends or distributions on shares
of its outstanding common stock. The debentures are secured by all of
the Company’s assets under the terms of a security agreement it entered into
with the investors dated December 10, 2009.
6
In
evaluating the accounting for the convertible note, the Company considered
whether the conversion option related to the convertible note required
bifurcation and separate accounting as a liability at fair
value. Because the conversion option entitles the holder to convert
to a fixed number of shares at a fixed price, the Company believes it is not
required to bifurcate the conversion option and the related debt
host. Similarly, the warrant contract entitles the holder to convert
to a fixed number of shares at a fixed price and is therefore recorded in
stockholders’ equity.
Of the
gross proceeds, approximately $786,000 was allocated to the debentures and
approximately $226,000 to the warrants. The value of the warrants was
estimated using a Black-Scholes option valuation model. The amount allocated to
the warrants was recorded as a discount on the debentures and is being amortized
to interest expense over the term of the debentures. In addition,
based on the conversion price of $0.75 and relative value of the debentures, a
beneficial conversion feature of approximately $402,000 was recorded as an
additional discount on the debentures and is being amortized to interest expense
in the accompanying statements of operations over the term of the
debentures.
The fair
value of the vested warrants was estimated on the grant date using the
Black-Scholes option valuation model with the following
assumptions:
|
Risk-free
interest rate
|
2.19 | % | ||
|
Expected
term (in years)
|
5.00 | |||
|
Stock
price volatility
|
2.07 | |||
|
Expected
dividend yield
|
0 | % |
The
following represents the principal amount of the liability component, the
unamortized discount, and the net carrying amount of the debentures at June 30,
2010:
|
Principal,
including accrued interest of $28,751
|
$ | 1,041,301 | ||
|
Unamortized
discount
|
(453,962 | ) | ||
|
Net
carrying amount
|
$ | 587,339 |
|
5.
|
Income
Taxes
|
At
September 30, 2009, the Company had net deferred tax assets of approximately
$7,240,000. The deferred tax assets are primarily comprised of
federal and state net operating loss carryforwards (approximately 79% of the net
deferred tax assets at October 1, 2009). Such carryforwards began to
expire in 2008 and will continue to expire through 2023. Under the
Tax Reform Act of 1986, the amount of and the benefit from net operating losses
that can be carried forward may be limited in certain
circumstances. The Company carries a deferred tax valuation allowance
equal to 100% of total net deferred assets. In recording this
allowance, management has considered a number of factors, but chiefly, the
Company's recent history of sustained operating losses. Management
has concluded that a valuation allowance is required for 100% of the total
deferred tax assets as it is more likely than not that the deferred tax assets
will not be realized.
The
Company has not determined the amount of the annual limitation on operating loss
carryforwards that can be utilized in a taxable year. Any operating
loss carryforwards that will expire prior to utilization as a result of such
limitations will be removed from deferred tax assets with a corresponding
reduction of the valuation allowance. Based on the 100% valuation
allowance on the deferred tax assets, the Company does not anticipate that
future changes in the Company's unrecognized tax benefits will impact its
effective tax rate.
7
The
Company's policy is to classify interest and penalties related to income tax
matters as income tax expense. The Company had no accrual for
interest or penalties as of September 30, 2009 or June 30, 2010, and has not
recognized interest and/or penalties in the statements of operations for the
three and nine month periods ended June 30, 2010.
|
6.
|
Stockholders'
Equity
|
On June 11, 2010, the Company sold
460,000 shares of common stock at $0.75 per share to accredited investors in a
private placement, resulting in net proceeds of $345,000.
Warrants
Historically,
the Company has granted warrants to purchase its common stock to service
providers and investors. As of September 30, 2009, the Company had
warrants to purchase 1,381,428 shares of its common stock outstanding with
exercise prices ranging from $0.70 to $0.92 per share, subject to adjustment per
the terms of the agreements. These warrants expire from June 2011 to
May 2012.
Included
in the warrants discussed above, are warrants to purchase, in the aggregate,
321,428 shares of the Company’s common stock at an exercise price of $0.70 per
share, subject to adjustment per the terms of the agreement the Company granted
to John H. Harland Company, a related party. These warrants expire
from February 2012 to May 2012.
In
connection with the issuance of the convertible debentures in December 2009, the
Company issued warrants to purchase an aggregate of 337,501 shares of the
Company’s common stock with an exercise price of $0.91 per share as discussed in
greater detail in Note 4 to the financial statements included in this
report.
The
following table summarizes warrant activity in the nine months ended June 30,
2010:
|
Number of
warrants |
Weighted-average exercise
price |
|||||||
|
Oustanding
and exercisable at September 30, 2009
|
1,381,428 | $ | 0.80 | |||||
|
Issued
|
337,501 | $ | 0.91 | |||||
|
Exercised
for cash
|
- | - | ||||||
|
Expired
|
- | - | ||||||
|
Oustanding
and exercisable at June 30, 2010
|
1,718,929 | $ | 0.82 | |||||
There
were no exercises of warrants during the nine months ended June 30, 2010 and
2009. Subsequent to the end of the quarter, on July 27, 2010, a warrant
holder exercised a warrant to purchase 200,000 shares of the Company’s common
stock at $0.70 per share. The warrant, which was granted on October
4, 2004, was exercised under the cashless exercise method, resulting in the
issuance of 83,333 shares of common stock to the warrant holder and the
cancellation of the remaining 116,667 shares in consideration of the
issue. On August 11, 2010, the warrant holder exercised a second
warrant to purchase 230,000 shares of the Company's common stock at $0.79 per
share. This warrant, which was granted on June 11, 2004, was also
exercised under the cashless exercise method, resulting in the issuance of
108,867 shares of common stock to the warrant holder and the cancellation of the
remaining 121,133 shares in consideration of the issue.
Stock-based
Compensation
The
Company adopted the fair value recognition provisions of the FASB ASC Topic 718,
Compensation-Stock Compensation (“ASC 718”).
The fair
value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model. The Black-Scholes model requires
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The
expected term of options granted is derived from historical data on employee
exercises and post-vesting employment termination behavior. The
risk-free rate selected to value any particular grant is based on the U.S.
Treasury rate that corresponds to the expected life of the grant effective as of
the date of the grant. The expected volatility is based on the
historical volatility of the Company's stock price. These factors
could change in the future, affecting the determination of stock-based
compensation expense in future periods.
8
The value
of stock-based compensation is based on the single option valuation approach
under ASC 718. It is assumed no dividends will be
declared. The estimated fair value of stock-based compensation awards
to employees is amortized using the straight-line method over the vesting period
of the options. The estimated expected remaining contractual life of
stock option grants at June 30, 2010 was approximately 1.5 years on grants to
directors and 6.7 years on grants to employees.
The fair
value calculations for stock-based compensation awards to employees for the nine
month periods ended June 30, 2010 and 2009 were based on the following
assumptions:
|
2010
|
2009
|
|||
|
Risk-free
interst rate
|
0.35%
- 2.58%
|
0.44%
- 2.29%
|
||
|
Expected
life (in years)
|
5.26
|
5.31
|
||
|
Expected
volatility
|
217%
|
192%
|
||
|
Expected
dividends
|
None
|
None
|
ASC 718
requires the cash flows resulting from the tax benefits ensuing from tax
deductions in excess of the compensation cost recognized for those options to be
classified as financing cash flows. Due to the Company's valuation
allowance from losses in the previous years, there was no such tax benefits
during the three and nine months ended June 30, 2010. Prior to the
adoption of ASC 718 those benefits would have been reported as operating cash
flows had the Company received any tax benefits related to stock option
exercises.
There
were 70,000 stock options granted during the three months ended June 30,
2010.
The
following table summarizes stock-based compensation expense related to stock
options under ASC 718 for the three and nine months ended June 30, 2010 and
2009, which was allocated as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Research
and development
|
$ | 31,785 | $ | 7,807 | $ | 65,475 | $ | 25,376 | ||||||||
|
Sales
and marketing
|
10,199 | 2,350 | 19,772 | 11,074 | ||||||||||||
|
General
and administrative
|
32,561 | 13,130 | 205,982 | 55,587 | ||||||||||||
|
Stock-based
compensation expense related to employee stock options included in
operating expenses
|
$ | 74,545 | $ | 23,287 | $ | 291,229 | $ | 92,037 | ||||||||
The
following table summarizes vested and unvested options, fair value per share
weighted average remaining term and aggregate intrinsic value at June 30,
2010:
|
Number
of Shares
|
Weighted
Average Grant Date Fair Value Per Share
|
Weighted
Average Remaining Contractual Life (in Years)
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
Vested
|
3,138,593 | 0.39 | 4.96 | $ | 974,043 | |||||||||||
|
Unvested
|
1,268,407 | 0.52 | 9.16 | 400,952 | ||||||||||||
|
Total
|
4,407,000 | 0.42 | 6.17 | $ | 1,374,995 | |||||||||||
As of June 30, 2010, the Company had
$631,944 of unrecognized compensation expense expected to be recognized over the
weighted average remaining vesting life of approximately 2.2 years.
9
A summary
of option activity under the Company’s stock equity plans during the nine months
ended June 30, 2010 is as follows:
|
Number
of Shares |
Weighted
Average Exercise Price
Per |
Weighted
Average Remaining |
||||||||||
|
Oustanding,
September 30, 2009
|
3,533,000 | $ | 0.56 | 6.10 | ||||||||
|
Granted:
|
||||||||||||
|
Board
of Directors
|
150,000 | $ | 0.79 | 2.66 | ||||||||
|
Executive
Officers
|
250,000 | $ | 0.79 | 9.66 | ||||||||
|
Employees
|
595,500 | $ | 0.79 | 9.41 | ||||||||
|
Exercised
|
(15,000 | ) | $ | 0.72 | - | |||||||
|
Cancelled
|
(106,500 | ) | $ | 1.15 | - | |||||||
|
Oustanding,
June 30, 2010
|
4,407,000 | $ | 0.60 | 6.17 | ||||||||
The
following table summarizes significant ranges of outstanding and exercisable
options as of June 30, 2010:
|
Weighted
|
||||||||||||||||||||||||||
|
Average
|
Weighted
|
|||||||||||||||||||||||||
|
Remaining
|
Average
|
|||||||||||||||||||||||||
|
Number
of
|
Contractual
|
Weighted
|
Number
of
|
Exercise
Price
|
Number
of
|
|||||||||||||||||||||
|
Range
of
|
Options
|
Life
|
Average
|
Exercisable
|
of
Exercisable
|
Unvested
|
||||||||||||||||||||
|
Exercise
Prices
|
Outstanding
|
(in
Years)
|
Exercise
Price
|
Options
|
Options
|
Options
|
||||||||||||||||||||
|
$0.07
- $0.69
|
2,300,500 | 6.10 | $ | 0.29 | 1,795,318 | $ | 0.32 | 505,182 | ||||||||||||||||||
|
$0.70
- $0.92
|
1,341,500 | 7.70 | $ | 0.79 | 578,275 | $ | 0.80 | 763,225 | ||||||||||||||||||
|
$1.06
- $1.68
|
725,000 | 3.82 | $ | 1.11 | 725,000 | $ | 1.11 | - | ||||||||||||||||||
|
$2.13
- $2.68
|
38,500 | 1.65 | $ | 2.28 | 38,500 | $ | 2.28 | - | ||||||||||||||||||
|
$3.25
to $12.37
|
1,500 | 0.09 | $ | 6.13 | 1,500 | $ | 6.13 | - | ||||||||||||||||||
| 4,407,000 | 6.17 | $ | 0.60 | 3,138,593 | $ | 0.62 | 1,268,407 | |||||||||||||||||||
On June
10, 2009, the Company’s 1999 Stock Option Plan expired in accordance with the
terms of the plan, and since that date no further options could be granted under
the plan. Options granted under the plan that were outstanding at
such date remain in effect until such options are exercised, forfeited or expire
in accordance with the plan. As of June 30, 2010, options to purchase
678,250 shares of the Company’s common stock were outstanding under the
plan.
|
7.
|
Product
Revenue and Sales
Concentrations
|
Product
Revenues
During
the three and nine months ended June 30, 2010 and 2009, the Company’s revenues
were derived primarily from its Character Recognition Product line.
Below is
a summary of revenues:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Revenue
|
||||||||||||||||
|
Software
licenses
|
$ | 370,464 | $ | 418,778 | $ | 2,076,220 | $ | 1,346,869 | ||||||||
|
Maintenance
and professional services
|
452,026 | 495,960 | 1,422,246 | 1,467,600 | ||||||||||||
|
Total
Revenue
|
$ | 822,490 | $ | 914,738 | $ | 3,498,466 | $ | 2,814,469 | ||||||||
10
Sales
Concentration
The
Company sells its products primarily to original equipment manufacturers, system
integrators and resellers who ultimately sell to depository
institutions. For the three and nine months ended June 30, 2010 and
2009, the Company had the following sales concentrations:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Customers
to which sales were in excess of 10% of total
sales:
|
||||||||||||||||
|
Number
of customers
|
1 | 2 | 3 | 1 | ||||||||||||
|
Aggregate
percentage of sales
|
17.0 | % | 30.5 | % | 40.2 | % | 14.8 | % | ||||||||
Below is
a summary of sales to customers to which sales were in excess of 10% of total
sales and the corresponding accounts receivable balances for the three and nine
months ended June 30, 2010 and 2009:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Sales
|
140,075 | 279,000 | 1,404,803 | 418,000 | ||||||||||||
|
Accounts
receivable balance
|
21,439 | 177,000 | 201,731 | 100 | ||||||||||||
|
8.
|
Related
Parties
|
John H.
Harland Company ("JHH Co.") made investments in the Company in February and
May 2005. JHH Co. acquired a total of 2,142,856 shares of
unregistered common stock for an aggregate purchase price of $1,500,000 or $0.70
per share. As part of the acquisition of shares, JHH Co. received
warrants to purchase 321,428 additional shares of common stock at $0.70 per
share. This transaction resulted in JHH Co. and its subsidiary,
Harland Financial Solutions (collectively "John Harland"), being considered
related parties of the Company due to the amount of the Company's common stock
beneficially owned by John Harland. John Harland is not involved in
the management decisions of the Company and does not participate in any board
meetings, unless invited.
The
Company recognized revenues from John Harland of approximately $14,000 and
$15,000 for the three months ended June 30, 2010 and 2009, respectively, for
professional services, including software maintenance. Revenue
recognized from John Harland for professional services was approximately $45,000
and $46,000 in the nine months ended June 30, 2010 and 2009,
respectively. There was an outstanding accounts receivable balance
due from John Harland of approximately $1,000 at both June 30, 2010 and at June
30, 2009.
|
9.
|
Commitments
and Contingencies
|
The
Company’s principal executive office, as well as its research and development
facility, is located in an office building in San Diego, California that the
Company leases under a non-cancelable operating lease. The lease
costs are expensed on a straight-line basis over the lease term. The
lease on this facility commenced in December 2005 and expires in
December 2012. On February 1, 2009, the lease was amended to
allow the Company to defer the payment of 50% of the basic rent due for the
months of February through September 2009. The Company began repaying
the deferred rent with interest at an annual rate of 6% in equal monthly
installments on October 1, 2009. The Company paid the final
installment on March 1, 2010. In addition, in connection with the
February 2009 amendment, the Company waived its right to exercise an early
termination option. On September 13, 2009, the lease was amended to
reduce the amount of office space subject to the lease by approximately 1,722
square feet to approximately 14,205 square feet, which reduced the Company’s
basic rent proportionately starting in December 2009.
11
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Special
Note Regarding Forward-Looking Statements
To the
extent that this management’s discussion and analysis of financial condition and
results of operations contains forward-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of the Company, please be advised that our actual financial condition, operating
results and business performance may differ materially from those projected or
estimated by us in forward-looking statements. We have attempted to
identify certain of the factors that we currently believe may cause actual
future experiences and results to differ from our current
expectations. Please see "Special Note About Forward–Looking
Statements" at the beginning of this report. Please consider our
forward-looking statements in light of those risks as you read this
report.
Business
Our
business develops and markets intelligent character recognition and document
capture products and services deployed primarily in the financial services
markets. Our technology is currently used to process checks by banks
and is used in other markets for specialized applications.
During
the past fiscal year, we have leveraged our technology and industry customer
relationships to enter the rapidly growing market for smartphone mobile business
applications. Branded “Oomph” for Office on My Phone, our new mobile
applications use our proprietary technology to capture and read data from photos
of documents taken using camera-equipped smartphones.
We have
developed and deployed a software application that allows users to remotely
deposit a check using their smartphone camera. Additionally, we have
developed and deployed a receipt archival application and a mobile document
faxing application using our proprietary technology.
Application
of Critical Accounting Policies
Our
financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles in the United States of America, or
GAAP. 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. Our critical accounting policies
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 integrators, resellers and end users that may
include licensing of 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
accompanying Notes to the Financial Statements included in this
report.
We
consider many factors when applying GAAP 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;
|
|
|
·
|
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;
and
|
|
|
·
|
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 effect on
our future revenues and operating results.
12
Accounts
Receivable
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.
Fair Value of Equity
Instruments
The valuation of certain items,
including valuation of warrants, beneficial conversion feature related to
debentures 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.
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.
Capitalized
Software Development Costs
Research
and development costs are charged to expense as incurred. However,
the costs incurred for the development of computer software that will be sold,
leased, or otherwise marketed are capitalized when technological feasibility has
been established. These capitalized costs are subject to an ongoing
assessment of recoverability based on anticipated future revenues and changes in
hardware and software technologies. Costs that are capitalized
include direct labor and related overhead.
Amortization
of capitalized software development costs begins when product sales
commence. Amortization is provided on a product-by-product basis on
either the straight-line method over periods not exceeding three years or the
sales ratio method. Unamortized capitalized software development
costs determined to be in excess of net realizable value of the product are
expensed immediately.
Analysis
of Financial Condition and Results of Operations
Comparison
of the Three Months Ended June 30, 2010 and 2009
Sales
Sales
were approximately $822,000 and $915,000 for three months ended June 30, 2010
and 2009, respectively, a decrease of approximately $93,000, or
10%. Sales of software licenses decreased by approximately $49,000 or
12% to approximately $370,000 in the three months ended June 30, 2010 from
approximately $419,000 in the three months ended June 30, 2009. The
decrease in net sales primarily relates to reduced sales of our core products
due to the continued decline of manual check processing in the back office of
financial institutions. Sales of maintenance and professional
services decreased by approximately $44,000 or 9% to $452,000 in the current
fiscal quarter, compared to approximately $496,000 in the same period last year,
primarily due to the timing of the renewals of maintenance
contracts.
We
recognized no revenue from Harland Financial Solutions, a subsidiary of John H.
Harland Company (collectively “John Harland”), from the sale of software
licenses in the three months ended June 30, 2010 and 2009. Revenue
from John Harland from the sale of maintenance and professional services was
approximately $14,000 in the three months ended June 30, 2010, compared to
approximately $15,000 in the three months ended June 30, 2009. John
Harland is a related party as discussed in greater detail in Note 8 to our
financial statements included in this report.
13
Cost
of Sales
Cost of
sales was approximately $203,000 in the three months ended June 30, 2010,
compared to approximately $188,000 in the three months ended June 30, 2009, an
increase of approximately $15,000 or 8%, primarily due to an increase in sales
of products containing third-party software. The increase in cost of
sales resulted in lower margins in the current three-month
period. Stated as a percentage of sales, cost of sales was 25% for
the three months ended June 30, 2010, compared to 21% for the three months ended
June 30, 2009.
Operations
Expenses
Operations
expenses include payroll, employee benefits, and other personnel-related costs
associated with purchasing, shipping and receiving. Due to the
workforce reduction implemented in January 2009, we eliminated our operations
department. Other costs previously included in this department have
been reallocated to the other departments. As a result, there were no
operations expenses for the three months ended June 30, 2010 and
2009.
Selling
and Marketing Expenses
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. In the three months ended June 30, 2010 and 2009, selling
and marketing expenses were approximately $225,000 and $133,000, respectively,
an increase of approximately $92,000 or 69%. The increase in the
current three-month period primarily relates to increased direct operating
expenses, such as outside services, travel reimbursements costs and stock-based
compensation expense, increased public relations and other product promotion
costs and increased personnel costs due to increased
headcount. Stated as a percentage of sales, selling and marketing
expenses for the three months ended June 30, 2010 were 27%, compared to 15% in
the three months ended June 30, 2009.
Research
and Development Expenses
Research
and development expenses include payroll, employee benefits, consultant expenses
and other headcount-related costs associated with product
development. These costs are incurred to maintain and enhance
existing products. We retain what we believe to be sufficient staff
to sustain our existing product lines, including development of new, more
feature-rich versions of our existing product, as we determine the marketplace
demands. We also employ research personnel, whose efforts are
instrumental in ensuring product paths from current technologies to anticipated
future generations of products within our area of business.
Research
and development expenses for the three months ended June 30, 2010 were
approximately $492,000, compared to approximately $410,000 for the three months
ended June 30, 2009, an increase of approximately $82,000 or 20%. The
increase in the current three-month period primarily relates to increased direct
operating expenses, such as travel reimbursements and stock-based compensation
expense, and increased personnel costs due to increased
headcount. Stated as a percentage of sales, research and development
expenses were 60% and 45% in the three months ended June 30, 2010 and 2009,
respectively.
General
and Administrative Expenses
General
and administrative expenses include payroll, employee benefits, and other
personnel-related costs associated with the finance, facilities, and legal,
accounting and other administrative fees. General and administrative
expenses were approximately $458,000 in the three months ended June 30, 2010
compared to approximately $269,000 in the three months ended June 30, 2009, an
increase of approximately $189,000 or 70%. The increase in the
current three month period primarily relates to increased personnel costs due to
payment of a one-time management performance bonus and salary increases and
increased direct operating expenses, such as legal fees, travel reimbursements
and stock-based compensation expense. Stated as a percentage of
sales, general and administrative expenses were 56% for the three months ended
June 30, 2010, compared to 29% for the three months ended June 30,
2009.
Other
(Expense) Income
Interest
and other expense increased by approximately $91,000 for the three months ended
June 30, 2010 to approximately $92,000, compared to approximately $1,000 for the
same period last fiscal year. The increase in the current period
primarily relates to accretion of the discount on the debentures issued in
December 2009 and accrued interest on the principal amount of the
debentures. Interest income was approximately $1,000 for the three
months ended June 30, 2010 and 2009.
14
Comparison
of the Nine Months Ended June 30, 2010 and 2009
Sales
Sales in
the nine months ended June 30, 2010 were approximately $3,498,000, compared to
approximately $2,814,000 in the nine months ended June 30, 2009, an increase of
approximately $684,000 or 24%. Sales of software licenses increased
by approximately $729,000 or 54% to approximately $2,076,000 in the nine months
ended June 30, 2010 from approximately $1,347,000 in the nine months ended June
30, 2009. The increase in software license sales primarily relates to
the one-time sale of a $524,000 license of one of our core products to an
existing key customer in the second quarter of fiscal 2010 and increased sales
of ImageNet Mobile DepositTM
software licenses. Sales of maintenance and professional services
were approximately $1,422,000 and $1,468,000 in the nine months ended June 30,
2010 and 2009, respectively, a decrease of approximately $46,000 or 3%, due to
the timing of the renewals of maintenance contracts
We
recognized no revenue from John Harland from the sale of software licenses in
the nine months ended June 30, 2010 and 2009. Revenue from John
Harland from the sale of maintenance and professional services was approximately
$45,000 and $46,000 in the nine months ended June 30, 2010 and 2009,
respectively.
Cost
of Sales
Cost of
sales was approximately $739,000 in the nine months ended June 30, 2010,
compared to approximately $518,000 in the nine months ended June 30, 2009, an
increase of approximately $221,000 or 43%, primarily the result of the increase
in sales and the decreased margin on significant sales of our core product in
the current nine month period. Stated as a percentage of sales, cost
of sales was 21% for the nine months ended June 30, 2010, compared to 18% for
the nine months ended June 30, 2009.
Operations
Expenses
As a
result of the workforce reduction in January 2009 and the elimination of the
operations department, there were no operations expenses for the nine months
ended June 30, 2010 compared to approximately $30,000 for the nine months ended
June 30, 2009, which included payroll, employee benefits, and other
personnel-related costs associated with purchasing, shipping and
receiving. Stated as a percentage of sales, operations expenses were
0% and 1% in the nine months ended June 30, 2010 and 2009,
respectively.
Selling
and Marketing Expenses
Selling
and marketing expenses decreased by approximately $63,000 or 9% to $621,000 in
the nine months ended June 30, 2010, down from approximately $684,000 in the
same period last year. The decrease in the current nine month period
primarily relates to a decrease in personnel costs due to the workforce
reduction implemented in January 2009, partially offset by increases in direct
operating expenses, such as outside services, travel reimbursements and
stock-based compensation expense, and increased public relations and other
product promotion costs. Stated as a percentage of sales, selling and
marketing expenses for the nine months ended June 30, 2010 were 18%, compared to
24% in the nine months ended June 30, 2009.
Research
and Development Expenses
Research
and development expenses for the nine months ended June 30, 2010 were
approximately $1,505,000, compared to approximately $1,414,000 for the nine
months ended June 30, 2009, an increase of approximately $91,000 or
6%. The increase in the current nine month period primarily relates
to increases in outside services, travel reimbursements, stock-based
compensation expense and other direct operating expenses, partially offset by
decreases in personnel costs due to the workforce reduction implemented in
January 2009. Stated as a percentage of sales, research and
development expenses were 43% and 50% in the nine months ended June 30, 2010 and
2009, respectively.
General
and Administrative Expenses
General
and administrative expenses were approximately $1,290,000 in the nine months
ended June 30, 2010 compared to approximately $1,161,000 in the nine months
ended June 30, 2009, an increase of approximately $129,000 or
11%. The increase in the current nine month period primarily relates
to increased personnel costs due to payment of a one-time management performance
bonus and salary increases and increases in other direct operating expenses,
such as stock-based compensation expense and travel reimbursements, partially
offset by decreases in accounting fees and other outside
services. Stated as a percentage of sales, general and administrative
expenses were 37% for the nine months ended June 30, 2010, compared to 41% for
the nine months ended June 30, 2009.
15
Other
(Expense) Income
Interest
and other expense increased by approximately $201,000 for the nine months ended
June 30, 2010 to approximately $205,000, compared to approximately $4,000 for
the same period last fiscal year. The increase in the current period
primarily relates to accretion of the discount on the debentures issued in
December 2009 and accrued interest on the principal amount of the
debentures. Interest income was approximately $1,000 and $4,000 for
the nine months ended June 30, 2010 and 2009, respectively.
Liquidity
and Capital Resources
At June
30, 2010, we had approximately $1,495,000 in cash and cash equivalents compared
to approximately $674,000 on September 30, 2009, an increase of
approximately $821,000, or 122%, primarily related to proceeds of approximately
$922,000 from the issuance of the debentures in December 2009. See
Note 4 to our financial statements included in this report. In
addition, in June 2010, we sold 460,000 shares of common stock at $0.75 per
share to accredited investors in a private placement, resulting in net proceeds
of $345,000. The balance of accounts receivable was approximately
$554,000 and $361,000 at June 30, 2010 and 2009, respectively, an increase of
approximately $193,000 or 54%, inclusive of a decrease of approximately $18,000
in the allowance for bad debts. The increase in accounts receivable
was primarily due to increased sales and the timing of customer billings and the
receipt of payments.
Deferred
revenue, which consists of maintenance and support service fees that are
deferred and recognized as income over the contract period on a straight-line
basis, was approximately $809,000 and $701,000 at June 30, 2010 and
September 30, 2009, respectively. We believe that as the
installed base of our products grows and as customers purchase additional
complementary products, the maintenance and support service fees that are
deferred, as well as those recognized as income over the contract term, will
increase.
In
addition to the proceeds we raised from the issuance of the convertible
debentures in December 2009 and the sale of common stock in June 2010, we
financed our cash needs during the nine months ended June 30, 2010 from
collections of accounts receivable and existing cash and cash
equivalents. Prior to the December 2009 financing, we financed our
cash needs from the collection of accounts receivable and existing cash and cash
equivalents.
Net cash
used in operating activities during the nine months ended June 30, 2010 was
approximately $450,000, compared to approximately $690,000 during the nine
months ended June 30, 2009, a decrease of approximately $240,000 or
35%. The primary uses of cash from operating activities during the
nine months ended June 30, 2010 included the net loss of approximately $863,000,
an increase in accounts receivable of approximately $193,000, an increase in
deferred maintenance fees of approximately $39,000 and a decrease in deferred
rent of approximately $117,000 and other accrued liabilities of approximately
$3,000, partially offset by an increase in deferred revenue of approximately
$108,000. Net cash used in operating activities in the current
nine-month period also included non-cash stock-based compensation of
approximately $291,000, accretion of the discount on the debentures of
approximately $202,000, amortization of software development costs of
approximately $103,000, depreciation and amortization of fixed assets of
approximately $27,000 and amortization of debt issuance costs of approximately
$25,000.
Net cash
used in investing activities was approximately $7,000 during the nine months
ended June 30, 2010, compared to approximately $73,000 during the nine months
ended June 30, 2009. The decrease in cash used in investing
activities in the current period is primarily due to a decrease of approximately
$64,000 in software development costs related to our Mobile Deposit software
application, which costs we ceased capitalizing when we completed our first
production general release in November 2008, and a reduction of approximately
$2,000 in purchases of property and equipment. We do not have any
significant capital expenditures planned for the foreseeable
future.
Cash
generated from financing activities during the nine months ended June 30, 2010,
included: (i) the sale in December 2009 of 5% senior secured convertible
debentures in the principal amount of approximately $1,000,000 and warrants to
purchase an aggregate of 337,501 shares of our common stock with an exercise
price of $0.91 per share, and (ii) the sale in June 2010 of 460,000 shares of
our common stock at $0.75 per share, in each case in private placements with
accredited investors. The debentures are convertible into shares of
our common stock at any time at the discretion of the holder at a conversion
price per share of $0.75, subject to adjustment for stock splits, stock
dividends and the like. The December 2009 transaction resulted in
proceeds to us of approximately $922,000, net of transaction costs and expenses,
and the June 2010 transaction resulted in net proceeds of $345,000.
16
We had
working capital of approximately $816,000 and a 1.57 current ratio at June 30,
2010, compared to negative working capital of approximately $280,000 and a 0.80
current ratio at September 30, 2009. At June 30, 2010, our total
liability to equity ratio was 3.82 to 1 compared to 11.73 to 1 on
September 30, 2009. Although our working capital has increased
in the current period as a result of the financings completed in December 2009
and June 2010, we continue to experience a significant decline in working
capital in the long term. We do not currently have any credit
facilities in place, or any arrangement that we can draw upon for additional
capital.
In
January 2009, we implemented a plan to decrease our operating expenses by
reducing our workforce in light of the economic contraction of the financial
services market into which we primarily sell our products. The staff
reduction included general and administrative, sales and marketing and technical
staff. We have diligently maintained key resources to adequately
pursue new sales opportunities and support our operations.
Based on
our current operating plan, our existing working capital may not be sufficient
to fund our planned operating expenses, capital expenditures, and working
capital requirements for the next twelve months without additional sources of
cash and/or the deferral, reduction or elimination of significant planned
expenditures. A shortfall from projected sales levels could have a
material adverse effect on our ability to continue operations at current
levels. If this were to occur, we would be forced to liquidate
certain assets where possible, and/or to suspend or curtail certain of our
operations. Any of these actions could harm our business, results of
operations and future prospects. To guard against this risk, we
intend to seek debt, equity or equity-based financing, as we did in December
2009 and June 2010. We can give no assurance that we will be able to
obtain additional financing on favorable terms or at all. If we raise
additional funds by selling additional shares of our capital stock, or
securities convertible into shares of our capital stock, the ownership interest
of our existing shareholders may be diluted. The amount of dilution
could be increased by the issuance of warrants or securities with other dilutive
characteristics, such as anti-dilution clauses or price resets. If we
need additional funding for operations and we are unable to raise it, we may be
forced to liquidate assets and/or curtail or cease operations or to obtain funds
through entering into additional collaborative agreements or other arrangements
that may be on unfavorable terms. These factors raise substantial
doubt about our ability to continue as a going concern.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure
not required as a result of the Company's status as a smaller reporting
company.
ITEM
4. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
As of the
end of the period covered by this report, 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
Rules 13a-15. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that as of June 30, 2010, our
disclosure controls and procedures were designed and functioning effectively to
provide reasonable assurance that the information required to be disclosed by us
in reports filed under the Exchange Act is (i) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms and
(ii) accumulated and communicated to management including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure.
Changes
in Internal Controls over Financial Reporting
There
have not been any changes in our internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d - 15(f) under the Exchange Act)
during the quarter ended June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
17
PART
II – OTHER INFORMATION
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
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.
|
RISK
FACTORS
|
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in “Part I. Item 1—Description of
Business—Risk Factors” in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2009. These risks and uncertainties have the
potential to materially affect our business, financial condition, results of
operations, cash flows, projected results and future prospects. As of
the date of this report, other than the risk factors set forth below, we do not
believe that there have been any material changes to the risk factors previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2009.
We
have a history of losses and we may not achieve profitability in the
future.
Our
operations resulted in a net loss of approximately $647,000 in the three months
ended June 30, 2010. We incurred a loss of approximately $863,000 in
the nine months ended June 30, 2010. In addition, as a public
company, we incur significant legal, accounting, and other expenses related to
being a public company. As a result of these expenditures, we will
have to generate and sustain increased revenue to achieve and maintain future
profitability. We may not achieve sufficient revenue to achieve or
maintain profitability. We have incurred and may continue to incur
significant losses in the future for a number of reasons, including due to the
other risks described in this report, and we may encounter unforeseen expenses,
difficulties, complications, delays, and other unknown
factors. Accordingly, we may not be able to achieve or maintain
profitability and we may continue to incur significant losses for the
foreseeable future.
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 our
product pricing policies or those of our 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, 2009, the closing price of our common stock ranged from
$0.05 to $1.01. During the first nine months of fiscal 2010, the
closing price our common stock price ranged from $0.56 to $1.04.
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
In
June 2010, we sold an aggregate of 460,000 shares of common stock at $0.75
per share to accredited investors in a private placement.
In July
2010, we issued an aggregate of 83,333 shares of common stock upon the cashless
exercise of a warrant.
In August
2010, we issued an aggregate of 108,867 shares of common stock upon the cashless
exercise of a warrant.
None of
the foregoing transactions involved any underwriters, underwriting discounts or
commissions, or any public offering, and the registrant believes the
transactions were exempt from the registration requirements of the Securities
Act of 1933 in reliance on Section 4(2) thereof and/or, with respect
to the issuance of common stock upon exercise of warrants,
Section 3(a)(9) thereof, and the rules and regulations promulgated
thereunder, as transactions by an issuer not involving a public
offering. All recipients of securities disclosed above were
accredited or sophisticated and either received adequate information about the
registrant or had access, through their relationships with the registrant, to
such information. Appropriate legends were affixed to the share
certificates and instruments issued in such transactions.
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
18
|
ITEM
4.
|
(REMOVED
AND RESERVED)
|
|
ITEM
5.
|
OTHER
INFORMATION
|
None.
|
ITEM
6.
|
EXHIBITS
|
See the
exhibit index immediately following signature page to this report.
19
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
MITEK
SYSTEMS, INC.
|
|||
|
August
16, 2010
|
By:
|
/s/ James B. DeBello | |
| James B. DeBello | |||
| President, Chief Executive Officer, and | |||
| Chief Financial Officer | |||
20
EXHIBIT
INDEX
|
Exhibit
No.
|
Exhibit
Title
|
|
|
31.1
|
Certification
of Periodic Report by the Chief Executive Officer Pursuant to Rules
13a-14(a) of the Securities Exchange Act of 1934
|
|
|
31.2
|
Certification
of Periodic Report by the Chief Financial Officer Pursuant to Rules
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
|
* Furnished
herewith
21