MITEK SYSTEMS INC - Annual Report: 2008 (Form 10-K)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the fiscal year ended September 30, 2008
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
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)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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.
|
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 o No x
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
January 8, 2009 (See definition of affiliate in Rule 12b-2 of the Exchange
Act.) is $1,187,332.
There
were 16,751,137 shares outstanding of the registrant's Common Stock as of
January 8, 2009.
MITEK
SYSTEMS, INC.
FORM
10-K
For
The Fiscal Year Ended September 30, 2008
|
Important
Note About Forward-Looking Statements
|
(i)
|
|
|
Part
I
|
||
|
Item
1.
|
Business
|
1
|
|
Item
1A.
|
Risk
Factors
|
6
|
|
Item
1B.
|
Unresolved
Staff Comments
|
12
|
|
Item
2.
|
Properties
|
12
|
|
Item
3.
|
Legal
Proceedings
|
12
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
12
|
|
Part
II
|
||
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters
and
|
|
|
Issuer
Purchases of Equity Securities
|
13
|
|
|
Item
6.
|
Selected
Financial Data
|
14
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
17
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
18
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
Page
36
|
|
Item
9A(T).
|
Controls
and Procedures
|
Page
36
|
|
Item
9B.
|
Other
Information
|
Page
37
|
|
Part
III
|
||
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
Page
37
|
|
Item
11.
|
Executive
Compensation
|
Page
39
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and
|
|
|
Related
Stockholder Matters
|
Page
41
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Page
43
|
|
Part
IV
|
||
|
Item
14.
|
Principal
Accountant Fees and Services
|
Page
43
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
Page
45
|
|
Signatures
|
Page
46
|
|
|
Exhibit
Index
|
Page
47
|
|
IMPORTANT
NOTE ABOUT FORWARD-LOOKING STATEMENTS
We make
forward-looking statements in this report, particularly in Item 1. "Business"
and Item 7. "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 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 I,
Item 1A of this report, and in Mitek's other public filings with the Security
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;
|
|
|
·
|
inability
to raise prices;
|
|
|
·
|
the
risk of litigation and administrative
proceedings;
|
|
|
·
|
higher
than anticipated labor costs;
|
|
|
·
|
the
possible fluctuation and volatility of operating results and financial
condition;
|
|
|
·
|
adverse
publicity and news coverage;
|
|
|
·
|
inability
to carry out marketing and sales
plans;
|
|
|
·
|
loss
of key employees and executives;
|
|
|
·
|
changes
in interest rates; and
|
|
|
·
|
inflationary
factors.
|
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.
(i)
PART
I
|
ITEM
1.
|
BUSINESS.
|
Overview
Mitek
Systems, Inc., referred to as "we," "our," "us," "Mitek," or the "Company" in
this report, was incorporated under the laws of the State of Delaware in
1986. We are primarily engaged in the development and sale of
software solutions.
During
our most recent completed fiscal year, our business was primarily focused on
document image processing and image analytics. Our business also
focuses on intelligent character recognition and forms processing technology,
products and services used in the financial services markets. We also
develop fraud detection and prevention products, which find signatures on any
document and, using patented algorithms, convert them into compact numeric
codes, which are then compared against one or more reference codes of trusted
signatures for highly accurate signature verification. Most recently,
we have been expanding our business focus to include a software product that
captures and reads data from mobile devices using our proprietary
technology. We refer to this software product as Mobile
Capture. Mobile Capture technology converts a camera-equipped mobile
phone into a mobile scanner that has the ability to read and extract data from
any digital photo or video image.
Products
and Related Markets
During
fiscal year ended September 30, 2008, we had one operating segment based on
our product and service offerings: document image processing and image
analytics.
Document
Image Processing and Image Analytics
Since
1992, we have developed and marketed pattern recognition products which enable
the automation of costly, labor-intensive business functions such as check and
remittance processing, forms processing, order entry and fraud
detection. Our proprietary software algorithms allow us to process
images of scanned documents in many ways, including image "cleanup" and repair,
image quality analysis, document identification, and the extraction of
hand-printed as well as machine-printed text. These capabilities work
on a multitude of scanned documents: checks, coupons and other
financial documents, as well as most types of other business forms including
images captured on a camera-equipped mobile phone. Our software can
find data on so-called unstructured documents which contain the data in variable
locations and formats. Our fraud detection and prevention products
find signatures on any document and, using patented algorithms, convert them
into compact numeric codes, which are then compared against one or more
reference codes of trusted signatures for highly accurate signature
verification. Other capabilities include the detection of forged or
illegally modified checks. To further reduce manual labor, our
software automatically distinguishes between common document types such as
personal and business checks, substitute checks (so-called IRDs, permitted by
the Check 21 law), pre-authorized drafts, and other document types specified by
the customer.
Our
product family consists of Mobile Capture, software development toolkits, or
"SDKs," and end-user applications. All our products are
Internet-enabled and they integrate the use of the latest
technologies.
Mobile
Capture
Mobile
Capture is a software solution that captures and reads data from mobile devices
using proprietary technology. Mobile Capture technology converts a
camera-equipped mobile phone into a mobile scanner that has the ability to read
and extract data from any digital photo or video image. We created
Mobile Capture by modifying our proprietary pattern recognition software that
recognizes and reads typed or hand-written characters and specific document
features using a scanner attached to a personal computer. Utilizing
Mobile Capture we have created business productivity applications specifically
for camera-equipped mobile phones and recently developed our first mobile
product, ImageNet Mobile Deposit. ImageNet Mobile Deposit is the
first mobile product to utilize Mitek’s image analytics and pattern recognition
software that allow banks to accept paper check deposits and bill payments via
camera-equipped mobile phones. As of September 30, 2008, we had
recorded no revenue related to Mobile Capture.
1
We have
also untethered our core technology from the personal computer to read and
extract data from digital photos and video images from additional sources
including images taken from security and Web cameras or images or video directly
uploaded from the Web. This gives our customers the ability to read
captured objects embedded in video stills or images such as license plates,
street signs or billboards.
Intelligent
Recognition Toolkits
Our
Intelligent Recognition Toolkits include a suite of products, that we call
"Image Net," that leverage our proprietary intelligent character recognition, or
"ICR," image processing, and dynamic data extraction software
engines. The Image Net suite of recognition toolkits includes
Payments, Prep and ID, Data Capture, Fraud and Signature. These
products are sold to original equipment manufacturers or "OEMs" such as
Metavante Image Solutions, Harland Financial Solutions, a John Harland Company,
SunGard, BancTec, J&B Software; and Leap, Inc.
Our
products used in financial document processing, are a combination of the Legal
Amount Recognition capabilities licensed from a vendor with our proprietary
Image Net Payments Courtesy Amount Recognition technology. These
products provide a high level of accuracy in remittance processing, proof of
deposit, and lock box processing applications.
The
ImageNet Payments 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 bank documents, such as checks, deposit slips, and remittance
coupons. ImageNet Payments integrates technology components from the
"CheckReader" product licensed from a vendor which specifically increases read
rates of the currency and legal amounts of checks drawn on US and Canadian
financial institutions.
ImageNet
Prep & ID is a software toolkit that provides automatic form ID, form
registration and form/template removal. We believe it significantly
improves automatic data capture (ICR/OCR), forms processing, document imaging
and storage performance. Image Net Prep & ID 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 our 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.
ImageNet
Data Capture is a software toolkit that captures data from many types of
unstructured business documents. ImageNet Data Capture 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. ImageNet Data Capture 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
ImageNet Data Capture as a stand alone application programming interface, or
"API," to several important OEMs in the document processing field.
Identity
Validation and Forgery Detection
Since
2001, we have applied and adapted our core competency in automatic document
processes and image analytics creating a product offering , which is built on
our portfolio of innovative recognition technologies used to test, clean, read
and authenticate imaged documents.
2
Our
capabilities include:
|
|
·
|
Image
analysis of signatures;
|
|
|
·
|
Image
repair and optimization;
|
|
|
·
|
OCR/ICR;
|
|
|
·
|
Dynamic
data finding on any document or check;
and
|
|
|
·
|
Distributed
Capture Courtesy Amount Recognition / Legal Amount
Recognition
|
Forgery
Detection Toolkits
Our
FraudProtect™ Toolkit product detects 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 and System
Integrators.
Signature &
Check Stock Verification API is fully automated and incorporates advanced
imaging, image analysis and data extraction technologies that can help verify
the authenticity signatures on checks that pass through a bank, and analyzes
paper stock for any indication that an item is a counterfeit.
Pre-authorized
Draft, or "PAD," safe toolkit is the first toolkit of its kind using Mitek’s
patented technology to detect fraudulent preauthorized drafts. It
automatically identifies PADs from checks, and 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.
Our
PayeeFind™ product is designed to prevent payee-altered checks from
clearing. As a result, PayeeFind™ can 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
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.
Research
and Development
Typically,
our software products are developed internally. We also purchase or
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 or 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 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 document image processing. We intend to expand our existing
product offerings and to introduce new document image 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.
3
In order
to improve the accuracy of our Document Image Processing products, we devote
significant research and development resources to enhance our core technology
including our database of millions of character images that are 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,
including five with advanced degrees, and three consultants as of
September 30, 2008. We balance our engineering resources between
development of ICR technology and applications development. All of
our software engineers are involved in applications development, including ICR
research and development of the Service Oriented Architecture compliant ImageNet
API recognition engine suite, with solutions for Payments Prep & ID,
Mobile Capture, Data Capture, Fraud Detection and Signatures, quality assurance,
and customer services and support.
Intellectual
Property
Our
success depends significantly upon our proprietary technology. We
attempt to protect our intellectual property rights primarily through
copyrights, trade secrets, employee and third party nondisclosure agreements and
other measures. If we are unable to protect our intellectual property
or infringe intellectual property of a third party, our operating results could
be harmed.
As of
September 30, 2008, we have been awarded a total of five patents, one of
which was awarded in 2008. Four of the patents generally cover System
and Method for Check Fraud detection using Signature Validation, which we
believe could provide us with a material competitive advantage. In
addition, as of September 30, 2008, we had two patent applications on
file.
We have
21 registered trademarks and we will continue to evaluate the registration of
additional trademarks as appropriate. We claim common law protection
for, and may seek to register, other trademarks. In addition, we
generally enter into confidentiality agreements with our employees.
Sales
and Marketing
We market
our products and services primarily through our internal, direct sales
organization. We contract the services of marketing companies to
assist us with our marketing strategy during new product introduction and
provide us insight in marketing materials design. We employ a
technically oriented sales force with management assistance to identify the
needs of existing and prospective customers. Our sales strategy
concentrates on OEMs, systems integrators and distributors and software solution
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 that are positioning themselves in the
emerging mobile capture and remote data capture market. We currently
maintain our sales and support office in California. In addition, we
sell and support our products through foreign resellers. 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 term or 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 mostly appeal to large organizations that want to acquire
perpetual licenses to software products for their entire
enterprise.
International
sales accounted for approximately 35% and 28%, of our net sales for the fiscal
years ended September 30, 2008 and 2007,
respectively. International sales in fiscal year 2008 were made to
customers in 14 countries including Canada, Finland, Greece, India, Italy,
Japan, Portugal, Spain, Switzerland, and the United Kingdom. We sell
our products in United States currency only. We recorded a
significant portion of our revenues from two customers in fiscal year 2008 and
fiscal year 2007. Net sales from these customers aggregated 31% and
32% for the fiscal years 2008 and 2007, respectively.
4
Maintenance
and Support
Following
the installation of our 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 customers purchase post contract support from us. These services
are a significant source of our recurring revenue and they are typically
contracted on an annual basis and priced at approximately 10% to 20% of the
license fee of the particular software product.
We
typically provide telephone maintenance and support on a contractual basis after
the initial product warranty of 90 days has expired. On site support
is made at the customer's request along with pre-approval of reimbursable
expenses from the customer. Customers with maintenance coverage
receive software updates from us on an if-and-when-available basis
only. Foreign distributors generally provide customer training,
service and support for the products they sell. Additionally, our
products are supported internationally by distributors. Technical
support is provided by telephone as well as technical visits if necessary 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 as 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 Document Image Processing 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 participants new to the
industry. 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
Service Oriented Architecture compliant ImageNet API products and licensed
Payments, Prep & ID, Fraud Detection and Signatures products compete,
to various degrees, with products produced by a number of substantial
competitors. 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 our products may operate in several Microsoft Web
Services environments, (iii) scalability and (iv) an architectural
software design, which allows our products to be more readily modified, improved
with added functionality and configured for new products allowing our software
to be easily upgraded. Despite these advantages, Image Net
competitors have existed longer and have far greater financial resources and
industry connections than we have.
5
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 our business,
operating results and financial condition.
Employees
and Labor Relations
As of
September 30, 2008, we employed a total of 27 persons, consisting of six in
sales and marketing, 16 in research and development, product management and
support, one in operations, and four in finance, administration and other
capacities. We engaged various consultants in the area of product
development and marketing during the fiscal year ended September 30,
2008. 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.miteksystems.com. There
we make available, free of charge, our annual report, quarterly reports, current
reports 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 website. Our public filings may also be obtained from
the SEC Public Reference Room by calling the SEC at
1-800-SEC-0330. The information found on our website is not part of
this or any other report we file with or furnish to the SEC.
|
ITEM
1A.
|
RISK
FACTORS.
|
The risks
described below could materially and adversely affect our business, results of
operations, financial condition and liquidity. These risks are not
the only risks that we face. Our business operations could also be
affected by additional factors that apply to all businesses operating in the
United States and globally, as well as other risks that are not presently known
to us or that we currently consider to be immaterial to our
operations.
Risks
Associated With Our Business
We
may need to raise additional capital to fund continuing
operations. If our financing efforts are not successful, we may not
be able to continue as a going concern.
We may
require additional financing in order to complete our stated plan of operations
for the next twelve months. There can be no assurance, however, that
such financing will be available or, if it is available, that we will be able to
structure such financing on terms acceptable to us or that it will be sufficient
to fund our cash requirements until we can reach a level of profitable
operations and positive cash flows. If we are unable to obtain the
financing necessary to support our operations, we will be unable to continue as
a going concern.
The
trading price of our shares of common stock and the recent downturn in the
United States stock and debt markets could make it more difficult to obtain
financing through the issuance of equity or debt securities. Any
additional equity financing will be dilutive to our stockholders, and debt
financing, if available, may include restrictive covenants and require
significant collateral. Further, if we issue additional equity or
debt securities, stockholders may experience additional dilution or the new
equity securities may have rights, preferences or privileges senior to those of
existing holders of our shares of common stock.
While we
believe that we will be successful in generating additional cash through outside
financing, the outcome of these matters cannot be predicted at this
time. If we are not able to secure additional funding, we may be
required to defer, reduce or eliminate certain planned expenditures or
significantly curtail our operations.
Note 1 to
our financial statements included in Item 8 of this report has additional
disclosures related to our ability to continue as a going concern.
6
We
have a history of losses and we may not achieve profitability in the
future.
Our
operations resulted in a net loss of approximately $749,000 and $384,000 for the
years ended September 30, 2008 and 2007, respectively. 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.
We
do not have a current credit facility.
We have
experienced a significant decline in working capital over the last fiscal
year. We do not currently have any credit facilities in place, or any
arrangement that we can draw upon for additional capital. Our current
cash on hand and cash generated from operations may not be sufficient to sustain
our business 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.
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 to customers 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 document image processing,
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.
If
economic or other factors negatively affect the small and medium-sized business
sector, our customers may become unwilling or unable to purchase our products
and services, which could cause our revenue to decline.
Many of
our existing and target customers are in the small and medium business
sector. These businesses are more likely to be significantly affected
by economic downturns than larger, more established
businesses. Additionally, these customers often have limited
discretionary funds, which they may choose to spend on items other than our
products and services. If small and medium businesses experience
economic hardship, it could negatively affect the overall demand for our
products and services, and could cause our revenue to decline.
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.
7
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 decreased 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, including our recently developed Mobile Capture software solution,
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 decreased
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.
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 ("SOP 97-2"). We adopted SOP 97-2, as amended by SOP
No. 98-4, Deferral of the Effective Date of a Provision of SOP 97-2 ("SOP
98-4"), as of July 1, 1998. In December 1998, the AICPA
issued SOP No. 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions ("SOP 98-9"). 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 ("SAB") 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. In December 2003, the SEC
issued SAB No. 104, Revenue Recognition ("SAB 104"), which superseded SAB
101.
8
The
accounting profession and the SEC continue to discuss certain provisions of SOP
97-2, SAB 104 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 and
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 in general.
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 the laws of the United
States. 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.
9
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 or 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 Mr. John M. Thornton, our Chairman, Mr. James B. DeBello,
our President and Chief Executive Officer, 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.
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, 2008, John M. Thornton, who is our Chairman of the Board and
his spouse, Director Sally B. Thornton, beneficially owned 2,919,959 shares of
common stock including stock options or approximately 17% of our outstanding
common stock. Our directors and executive officers as a whole, own
approximately 16% of our outstanding common stock, or approximately 31%
including outstanding options (vested and unvested) to acquire common
stock. John H. Harland Company ("John Harland") has 2,142,856 shares
of common stock or approximately 13% of our outstanding common
stock. John Harland also holds 321,428 warrants which may be
exercised to acquire 321,428 shares of common stock, thereby increasing the
number of shares of common stock held by John Harland to 2,464,284 shares or
approximately 15% of our outstanding common stock. Laurus Funds may
acquire up to 1,060,000 shares of common stock upon exercise of its warrant or
approximately 6% of the outstanding common stock.
10
The
above-described significant stockholders may have considerable influence over
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 ("OTC") Bulletin
Board. If our common stock became ineligible to be listed on the OTC
Bulletin Board, it would likely continue to be listed on the "pink
sheets." Securities traded on the OTC Bulletin Board 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.
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 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, 2008, the closing price of our common stock ranged from
$0.16 to $0.55.
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.
So long
as 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, and the practices
required by them, have the effect of limiting the trading activity of our common
stock and reducing the liquidity of an investment in our common
stock.
11
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
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
None.
|
ITEM
2.
|
PROPERTIES.
|
Our
principal executive office, as well as our principal research and development
facility, is located in approximately 15,927 square feet of leased office
building space in San Diego, California. The lease on this
facility commenced in December 2005 and expires in
December 2012. The base monthly rent for our facility in fiscal
2008 under this lease was approximately $26,280. The base monthly
rent increases every twelve months by approximately 3%.
Our
leased facility is covered by insurance and we believe our leased space is
suitable for its uses and adequate for our present needs.
|
ITEM
3.
|
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.
|
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, 2008.
12
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
|
Market
Information
Our
common stock is traded on the Over-The-Counter ("OTC") Bulletin Board under the
symbol MITK.OB and the closing bid price on January 7, 2009 was
$0.10. The following table sets forth, for the fiscal period
indicated, the high and low closing bid prices for our common stock as reported
on the OTC Bulletin Board. The quotations for our 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.
|
High
|
Low
|
|||||||
|
FISCAL
YEAR ENDED SEPTEMBER 30, 2008
|
||||||||
|
Fourth
Quarter
|
$ | 0.60 | $ | 0.15 | ||||
|
Third
Quarter
|
0.51 | 0.15 | ||||||
|
Second
Quarter
|
0.40 | 0.25 | ||||||
|
First
Quarter
|
0.60 | 0.31 | ||||||
|
FISCAL
YEAR ENDED SEPTEMBER 30, 2007
|
||||||||
|
Fourth
Quarter
|
$ | 0.68 | $ | 0.49 | ||||
|
Third
Quarter
|
0.78 | 0.63 | ||||||
|
Second
Quarter
|
1.07 | 0.66 | ||||||
|
First
Quarter
|
1.55 | 0.92 | ||||||
Holders
As of
December 31, 2008, there were 426 shareholders of record of our common
stock.
Dividends
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.
Repurchases
We did
not repurchase any of our equity securities during the year ended
September 30, 2008.
13
Securities
Authorized for Issuance Under Equity Compensation Plans.
The table
below sets forth information as of September 30, 2008, with respect to
compensation plans under which our common stock is authorized for issuance. The
figures related to the equity compensation plan approved by security holders
relate to our 1996 Stock Option Plan, 1999 Stock Option Plan, 2000 Stock Option
Plan, 2002 Stock Option Plan and 2006 Stock Option Plan. We do not have any
equity compensation plans that have not been approved by security
holders.
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
|
||||||||||
|
Equity
Compensation Plans Approved by Security Holders
|
3,740,158 | $ | 0.71 | 363,032 | ||||||||
|
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
Disclosure
not required as a result of the Company's status as a smaller reporting
company.
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our financial statements and the notes
to those statements included in this report. This discussion and analysis may
contain forward-looking statements, which are based on information that is
currently available to us, speak only as of the date hereof, and are subject to
certain risks and uncertainties. See "IMPORTANT NOTE ABOUT FORWARD-LOOKING
STATEMENTS," at the beginning of this report. Our actual results may differ
materially from those anticipated in these forward-looking statements. In
evaluating such statements, we urge you to carefully consider various factors
identified in this report, including those discussed under "Risk Factors" in
Part I, Item 1A of this report, which could cause actual results to differ
materially from those indicated by such forward-looking statements.
RESULTS
OF OPERATIONS
Net
Sales
Net sales
were approximately $5,229,000 and approximately $5,570,000 for fiscal 2008 and
2007, respectively, a decrease of approximately $341,000, or 6%. The
decrease in revenue is due primarily to a reduction in development revenue of
$280,000. We recorded $280,000 in development revenue during fiscal
2007 for engineering development services we provided to John H. Harland
Company. There was no development revenue in fiscal
2008. John H. Harland Company and its subsidiary, Harland Financial
Solutions, is a related party which is discussed in Note 6 to our financial
statements included in Item 8 of this report.
Cost
of Sales
Cost of
sales for fiscal year 2008 was approximately $899,000 compared to approximately
$634,000 for fiscal year 2007, an increase of approximately $265,000 or
42%. Stated as a percentage of net sales, cost of sales were 17% for
fiscal 2008 compared to 11% for fiscal 2007. The increase is
primarily due to an increase in license fees paid to third-party software
providers of integrated software products, partially off-set by a decrease in
direct costs related to the John H. Harland Company engineering development
project that ended in the fourth quarter of 2007.
14
Operations
Expenses
Operations
expenses for fiscal year 2008 and 2007 included payroll, employee benefits, and
other personnel-related costs associated with purchasing, shipping and
receiving. Operations expenses were approximately $95,000 and $88,000
for fiscal 2008 and 2007, respectively, an increase of approximately $7,000 or
8%. Stated as a percentage of net sales, operations expenses were 2%
in both the twelve months ended September 30, 2008 and 2007. The
increase in 2008 operation expenses as compared to 2007 operation expenses
primarily relates to increased personnel and employee benefit
costs.
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. Selling and marketing expenses were approximately
$1,469,000 and $1,173,000 for fiscal 2008 and 2007,
respectively. Stated as a percentage of net sales, selling and
marketing expenses for fiscal year 2008 and 2007 were 28% and 21%,
respectively. The dollar increase in the current twelve-month period
primarily relates to increased personnel costs, including salaries, taxes,
vacation and other benefits, outside services and promotions and advertising
costs.
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 twelve months ended September 30, 2008
were approximately $1,802,000, compared to approximately $1,901,000 for the
twelve months ended September 30, 2007, a decrease of approximately $99,000
or 5%. Stated as a percentage of net sales, research and development
expenses were 34% in both the twelve months ended September 30, 2008 and
2007. The decrease in expenses in the twelve months ended September
30, 2008 was primarily due to software development costs of approximately
$348,000 related to our Mobile Capture software application that were
capitalized in accordance with Statement of Financial Accounting Standards
("SFAS) No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed ("SFAS No. 86"). The decrease was
partially off-set by increased personnel costs, including salaries, taxes,
vacation and other benefits, due to increased headcount and increases in other
direct operating expenses in connection with the outsourcing of programming and
the costs related to enhancements of our existing products as compared to fiscal
2007. In addition, research and development expenses related to
contract development services in the amount of approximately $47,000 and
$140,000 for the twelve months ended September 30, 2008 and 2007,
respectively, was charged to cost of sales-professional services, education and
other.
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 $1,719,000 in fiscal year 2008 compared to
approximately $2,162,000 in fiscal year 2007, a decrease of approximately
$443,000 or 20%. The decrease primarily relates to the fact that we
incurred costs and expenses in fiscal 2007 related to a propsed merger
transaction, which was not consummated, while no such expenses were incurred in
fiscal 2008. Stated as a percentage of net sales, general and administrative
expenses were 33% and 39% for the twelve months ended September 30, 2008
and 2007, respectively.
15
Interest
and Other Income (Expense) – Net
Interest
and other income (net) for fiscal 2008 was $8,000, compared to $4,000 for fiscal
2007. The increase was primarily due to higher interest charges in
the 2007 fiscal year, partially off-set by reduced interest income in the 2008
fiscal year due to lower cash balances.
Income
Taxes
For the
fiscal years 2008 and 2007, we recorded tax provisions of approximately $2,800
and $800, respectively, for income taxes which was primarily state franchise
tax.
LIQUIDITY
AND CAPITAL RESOURCES
On
September 30, 2008, we had approximately $1,300,000 in cash and cash
equivalents compared to approximately $2,096,000 on September 30, 2007, a
decrease of approximately $796,000 or 38%. The decrease in cash was
primarily due to the loss for the year, capital invested in software
development, lower revenue and higher accounts receivable balances at the end of
September 2008. The balance of accounts receivable at the end of
fiscal 2008 was approximately $913,000, an increase of approximately $371,000
from the September 30, 2007 balance of approximately
$542,000. The increase in accounts receivable was primarily due to
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 $676,000 and $541,000 at September 30, 2008 and
2007, respectively, an increase of approximately $135,000 or 25%. 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 those recognized as income over the contract
term, will continue to increase.
We
financed our cash needs during the twelve months ended September 30, 2008
and for the same period in fiscal 2007 primarily from collections of accounts
receivable and existing cash and cash equivalents.
Net cash
used in operating activities during the twelve months ended September 30,
2008 was approximately $399,000. The primary use of cash from
operating activities was the net loss of approximately $749,000, increases in
accounts receivable of approximately $398,000, net of the provision for bad
debt, accounts payable of approximately $283,000, non-cash stock-based
compensation of approximately $222,000, deferred revenue of approximately
$135,000, bad debt reserve of approximately $27,000, and depreciation and
amortization of fixed assets of approximately $36,000. In addition,
during the twelve months ended September 30, 2008, we spent approximately
$49,000 of the cash provided from operating activities to finance the
acquisition of equipment used in our business, compared to approximately $35,000
during the twelve months ended September 30, 2007.
Net cash
used in investing activities during the twelve months ended September 30, 2008
was approximately $397,000, compared to approximately $34,000 during the twelve
months ended September 30, 2007. During the current fiscal year, we
invested approximately $348,000 in software development costs related to our
Mobile Capture software application and we expect to continue to incur such
costs for the foreseeable future. Other than our investment in
software development costs, we do not have any significant capital expenditures
planned for the foreseeable future.
Our
working capital and current ratio were approximately $919,000 and 1.66,
respectively, at September 30, 2008 and approximately $1,796,000 and 2.91,
respectively, at September 30, 2007. On September 30, 2008,
the total liability to equity ratio was 1.09 to 1 compared to 0.53 to 1 on
September 30, 2007. As of September 30, 2008, total
liabilities increased by approximately $463,000 or 47% over total liabilities as
of September 30, 2007. We have experienced a significant decline
in working capital over the last fiscal year. We do not currently
have any credit facilities in place, or any arrangement that we can draw upon
for additional capital.
16
We
evaluate our cash requirements on a quarterly basis. Historically, we
have managed our cash requirements principally from cash generated from
operations and financing transactions, and we may need to raise additional
capital to fund continuing operations in the future. 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. 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 through
September 30, 2009 without additional sources of cash and/or the deferral,
reduction or elimination of significant planned expenditures
On
January 9, 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 sells 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. Our
management does not believe that such reductions will impair our ability to
develop our ImageNet Mobile Deposit application and other mobile capture
products, or to provide technical support to our current and prospective
customers.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
The
possible effect on our consolidated financial statements of new accounting
pronouncements that have been issued for future implementation is discussed Note
1 to our audited financial statements included in this report.
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. 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. Our critical
accounting policies are disclosed in Note 1 to our financial statements included
in this report.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Disclosure
not required as a result of the Company's status as a smaller reporting
company.
17
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Mitek
Systems, Inc.
We have
audited the accompanying balance sheet of Mitek Systems, Inc. as of
September 30, 2008 and 2007, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. 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 the 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 Mitek Systems, Inc. as of
September 30, 2008 and 2007, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As more fully described in Note 1, the Company
has incurred recurring operating losses and negative cash flows from operations.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern. Management’s plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/Mayer
Hoffman McCann P.C.
San Diego,
California
January 13,
2009
18
|
MITEK
SYSTEMS, INC
|
|
BALANCE
SHEET
|
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,300,281 | $ | 2,096,282 | ||||
|
Accounts
receivable including related party of $4,591 and $203,466,
|
||||||||
|
respectively,
net of allowance of $47,877 and $18,977, respectively
|
912,831 | 542,009 | ||||||
|
Inventory,
prepaid expenses and other current assets
|
100,000 | 99,476 | ||||||
|
Total
current assets
|
2,313,112 | 2,737,767 | ||||||
|
PROPERTY
AND EQUIPMENT-net
|
91,066 | 77,827 | ||||||
|
SOFTWARE
DEVELOPMENT COSTS
|
347,738 | - | ||||||
|
OTHER
ASSETS
|
29,465 | 29,465 | ||||||
|
TOTAL
ASSETS
|
$ | 2,781,381 | $ | 2,845,059 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 403,925 | $ | 120,519 | ||||
|
Accrued
payroll and related taxes
|
289,300 | 249,036 | ||||||
|
Deferred
revenue
|
676,085 | 541,010 | ||||||
|
Other
accrued liabilities
|
24,712 | 31,510 | ||||||
|
Total
current liabilities
|
1,394,022 | 942,075 | ||||||
|
Deferred
rent
|
55,745 | 44,596 | ||||||
|
TOTAL
LIABILITIES
|
1,449,767 | 986,671 | ||||||
|
STOCKHOLDERS'
EQUITY:
|
||||||||
|
Preferred
stock, $0.001 par value, 1,000,000 shares authorized,
|
||||||||
|
none
issued and outstanding
|
- | - | ||||||
|
Common
stock, $.001 par value; 40,000,000 shares authorized,
|
||||||||
|
16,751,137
issued and outstanding
|
16,751 | 16,751 | ||||||
|
Additional
paid-in capital
|
14,804,884 | 14,582,894 | ||||||
|
Accumulated
deficit
|
(13,490,021 | ) | (12,741,257 | ) | ||||
|
Total
stockholders' equity
|
1,331,614 | 1,858,388 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 2,781,381 | $ | 2,845,059 | ||||
|
The
accompanying notes form an integral part of these financial
statements.
|
19
|
MITEK
SYSTEMS, INC
|
|
STATEMENTS
OF OPERATIONS
|
|
For the years ended
|
||||||||
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
SALES
|
||||||||
|
Software
including sales to a related party of $227,812 and
$267,442
|
||||||||
|
for
the years ended September 30, 2008 and 2007, respectively
|
$ | 3,396,054 | $ | 3,158,229 | ||||
|
Professional
services including sales to a related party of $56,792 and
|
||||||||
|
$730,493
for the years ended September 30, 2008 and 2007,
respectively
|
1,833,394 | 2,411,711 | ||||||
| 5,229,448 | 5,569,940 | |||||||
|
COSTS
AND EXPENSES:
|
||||||||
|
Cost
of sales-software
|
729,818 | 380,792 | ||||||
|
Cost
of sales-professional services, education and other
|
168,879 | 252,916 | ||||||
|
Operations
|
94,852 | 87,656 | ||||||
|
Selling
and marketing
|
1,469,103 | 1,172,689 | ||||||
|
Research
and development
|
1,801,633 | 1,901,215 | ||||||
|
General
and administrative
|
1,719,463 | 2,162,110 | ||||||
|
Total
costs and expenses
|
5,983,748 | 5,957,378 | ||||||
|
OPERATING
LOSS
|
(754,300 | ) | (387,438 | ) | ||||
|
OTHER
INCOME (EXPENSE):
|
||||||||
|
Interest
and other expense
|
(294 | ) | (9,556 | ) | ||||
|
Interest
income
|
8,630 | 13,996 | ||||||
|
Total
other income - net
|
8,336 | 4,440 | ||||||
|
LOSS
BEFORE INCOME TAXES
|
(745,964 | ) | (382,998 | ) | ||||
|
PROVISION
FOR INCOME TAXES
|
(2,800 | ) | (800 | ) | ||||
|
NET
LOSS
|
$ | (748,764 | ) | $ | (383,798 | ) | ||
|
NET
LOSS PER SHARE - BASIC AND DILUTED
|
$ | (0.04 | ) | $ | (0.02 | ) | ||
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND
DILUTED
|
16,751,137 | 16,750,592 | ||||||
|
The
accompanying notes form an integral part of these financial
statements.
|
Page
20
MITEK
SYSTEMS, INC
STATEMENTS
OF CASH FLOWS
|
For the years ended
|
||||||||
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
OPERATING
ACTIVITIES
|
||||||||
|
Net
loss
|
$ | (748,764 | ) | $ | (383,798 | ) | ||
|
Adjustments
to reconcile net loss to net cash
|
||||||||
|
used
in operating activities:
|
||||||||
|
Depreciation
and amortization
|
36,084 | 39,343 | ||||||
|
Provision
(recoveries) for bad debts
|
26,900 | (50,654 | ) | |||||
|
Stock-based
compensation expense
|
221,990 | 221,221 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(397,722 | ) | 587,221 | |||||
|
Inventory,
prepaid expenses, and other assets
|
(524 | ) | 121,701 | |||||
|
Accounts
payable
|
283,406 | (614,188 | ) | |||||
|
Accrued
payroll and related taxes
|
40,264 | (31,364 | ) | |||||
|
Deferred
revenue
|
135,075 | (116,495 | ) | |||||
|
Other
accrued liabilities
|
(6,798 | ) | 583 | |||||
|
Deferred
rent
|
11,149 | 20,706 | ||||||
|
Net
cash used in operating activities
|
(398,940 | ) | (205,724 | ) | ||||
|
INVESTING
ACTIVITIES
|
||||||||
|
Purchases
of property and equipment
|
(49,323 | ) | (34,685 | ) | ||||
|
Proceeds
from sale of property and equipment
|
- | 1,044 | ||||||
|
Investment
in software development costs
|
(347,738 | ) | - | |||||
|
Net
cash used in investing activities
|
(397,061 | ) | (33,641 | ) | ||||
|
FINANCING
ACTIVITIES
|
||||||||
|
Proceeds
from exercise of stock options
|
- | 4,636 | ||||||
|
Net
cash provided by financing activities
|
- | 4,636 | ||||||
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(796,001 | ) | (234,729 | ) | ||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
2,096,282 | 2,331,011 | ||||||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 1,300,281 | $ | 2,096,282 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH
FLOW INFORMATION
|
||||||||
|
Cash
paid for interest
|
$ | 243 | $ | 9,556 | ||||
|
Cash
paid for income taxes
|
|
$ | 2,800 | $ | 800 | |||
The
accompanying notes form an integral part of these financial
statements.
Page
21
MITEK
SYSTEMS, INC.
STATEMENTS
OF STOCKHOLDERS' EQUITY
For
the years ended September 30, 2008 and 2007
|
Common Stock
Outstanding
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
Stockholders
Equity
|
||||||||||||||||
|
Balance,
September 30, 2006
|
16,745,609 | $ | 16,746 | $ | 14,357,042 | $ | (12,357,459 | ) | $ | 2,016,329 | ||||||||||
|
Exercise
of stock options
|
5,528 | 5 | 4,631 | 4,636 | ||||||||||||||||
|
Stock-based
compensation expense
|
221,221 | 221,221 | ||||||||||||||||||
|
Net
loss
|
(383,798 | ) | (383,798 | ) | ||||||||||||||||
|
Balance,
September 30, 2007
|
16,751,137 | 16,751 | 14,582,894 | (12,741,257 | ) | 1,858,388 | ||||||||||||||
|
Stock-based
compensation expense
|
221,990 | 221,990 | ||||||||||||||||||
|
Net
loss
|
(748,764 | ) | (748,764 | ) | ||||||||||||||||
|
|
||||||||||||||||||||
|
Balance,
September 30, 2008
|
16,751,137 | $ | 16,751 | $ | 14,804,884 | $ | (13,490,021 | ) | $ | 1,331,614 | ||||||||||
The
accompanying notes form an integral part of these financial
statements.
Page
22
MITEK
SYSTEMS, INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007
|
1.
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature
of Operations
Mitek
Systems, Inc. (the "Company") is primarily engaged in the development and sale
of software solutions. During its most recent completed fiscal year,
the Company’s business was primarily focused on document image processing and
image analytics.
The
Company also focuses on intelligent character recognition and forms processing
technology, products and services used in the financial services
markets. The Company also develops fraud detection and prevention
products, which find signatures on any document, and using patented algorithms,
converts them into compact numeric codes, which are then compared against one or
more reference codes of trusted signatures for highly accurate signature
verification. Most recently, the Company has been expanding its
business focus to include a software product that captures and reads data from
mobile devices using its proprietary technology. This software
product is called Mobile Capture.
Basis
of Accounting
The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America.
Going
Concern
The
Company incurred net losses of approximately $749,000 and $384,000 for the years
ended September 30, 2008 and 2007, respectively, and has an accumulated deficit
of approximately $13.5 million as of September 30, 2008. Cash used
for operations increased from approximately $206,000 in 2007 to $399,000 in
2008. Cash used in investing activities during the twelve months
ended September 30, 2008 was approximately $397,000, compared to approximately
$34,000 in the same period in fiscal 2007. The Company has a cash
balance of approximately $1.3 million as of September 30,
2008.
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 through September 30,
2009 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. 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.
These factors raise substantial doubt
about the Company’s ability to continue as a going concern. The
accompanying consolidated 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 consolidated 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 and has retained an investment banking firm to explore strategic
alternatives.
On January 9, 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 will impair 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.
Page
23
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 or
enhancements and new products; and when technological feasibility is achieved of
new products. Balance sheet items that are significantly impacted by
estimates include the contingencies related to the collectability of accounts
receivable, the useful lives of fixed assets and the associated depreciation
expense thereupon, and the valuation of tax losses and credits. In
addition, the Company uses assumptions to estimate the fair value of stock-based
compensation. Actual results may differ from management's estimates and
assumptions.
Fair
Value of Financial Instruments
The
carrying amount of cash, cash equivalents, accounts receivable, accounts
payable, and accrued liabilities are considered representative of their
respective fair values because of the short-term nature of those
instruments.
Revenue
Recognition
Revenue
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,
Software Revenue Recognition ("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 fair value of an element are not met at the date of
shipment, revenue is not recognized until such elements are known or
resolved. Customer support services, or maintenance revenues, include
post-contract support and the rights to unspecified upgrades and
enhancements. Vendor specific objective evidence ("VSOE") of fair
value for customer support is determined by reference to the price the customer
pays for such element when sold separately; that is, the renewal rates offered
to customers. 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. When a software sales arrangement requires
professional services related to significant production, modification or
customization of software, or when a customer considers our professional
services essential to the functionality of the software product, the Company
follows the guidance in SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
("SOP 81-1"). In these arrangements, revenue is recognized based
on predetermined milestone objectives required to complete the project, under
the guidance of SOP 81-1 as those milestone objectives are deemed to be
substantive in relationship to the work performed. Any expected
losses on contracts in progress are recorded in the period in which the losses
become probable and reasonably estimable.
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 post contract customer support which typically includes
telephone support and the right to receive unspecified upgrades and enhancements
of 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.
Page
24
Stock-Based
Compensation
The
Company records stock-based compensation in accordance with Statement of
Financial Accounting Standards ("SFAS) No. 123(R), Share-Based Payment
("SFAS No. 123(R)") and Staff Accounting Bulletin No. 107 ("SAB No. 107").
The Company estimates the fair value of stock options using the Black-Scholes
option pricing model. The fair value of stock options granted is recognized
as expense over the requisite service period. Stock-based compensation expense
for all share-based payment awards is recognized using the straight-line
single-option method.
Advertising
Expense
Advertising
costs are expensed as incurred and totaled approximately $7,000 and $14,000
during the years ended September 30, 2008, and 2007,
respectively.
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 two financial institutions. The Company monitors
the financial condition of these financial institutions and it does not believe
that funds on deposit are subject to a significant degree of risk. At
September 30, 2008, the Company’s funds on deposit were insured by the FDIC only
up to $100,000. On October 3, 2008, in response to the recent crisis
in the banking industry, the FDIC temporarily increased the basic deposit
insurance limit from $100,000 to $250,000 per depositor through December 31,
2009, at which time the limit will return to $100,000. Any financial
problems with the Company's banks may impact its cash balances.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts reflects the Company's best estimate for
probable losses inherent in accounts receivable balances. Management
determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence.
Inventories
Inventories
primarily consisting of media storage devices 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, 2008:
|
Property
and equipment - at cost:
|
||||
|
Equipment
|
$ | 635,388 | ||
|
Furnitures
and fixtures
|
143,701 | |||
|
Leashold
improvements
|
49,300 | |||
| 828,389 | ||||
|
Less:
accumulated depreciation and amortization
|
(737,323 | ) | ||
|
Total
property and equipment, net
|
$ | 91,066 | ||
Depreciation
and amortization of property and equipment are provided using the straight-line
method over estimated useful lives ranging from three to five
years. Leasehold improvements are amortized over the shorter of the
life of the lease or seven years. Expenditures for repairs and
maintenance are charged to operations. Total repairs and maintenance
expenses for the year ended September 30, 2008 amounted to approximately
$64,000 compared $39,000 for the year ended September 30,
2007. Depreciation and amortization of property and equipment totaled
approximately $36,000 and $39,000 for the years ended September 30, 2008
and 2007, respectively.
Page
25
Long-Lived
Assets
The
Company periodically evaluates the carrying value of long-lived assets including
license agreements and other intangible assets when events and circumstances
indicate that these assets may be impaired 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. The Company did not
record any impairment for the years ended September 30, 2008 and
2007.
Research
and Development
Research
and development costs are expensed in the period incurred.
Capitalized
Software Development Costs
The
Company is currently developing 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 SFAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed ("SFAS
No. 86"). Capitalized software development costs are amortized
based upon the higher of (i.) the ratio of current revenue to total
projected revenue or (ii.) the straight-lined charges, over the product's
estimated economic life beginning at the date of general availability of the
product to customers. 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 SFAS No. 86, 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. Capitalized software development costs during the year ended
September 30, 2008 were approximately $348,000. No software
development costs were capitalized during the year ended September 30,
2007. No amortization of software development costs has been
recorded, because sales of the related software products have not
commenced.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes ("SFAS No. 109"). 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 4.
Page
26
On
October 1, 2007, the Company adopted the provisions of the Financial Accounting
Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty
in Income Taxes—an interpretation of FASB Statement No. 109
("FIN 48"). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in a company's financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. Further, FIN 48 gives guidance regarding the
recognition of a tax position based on a "more likely than not" recognition
threshold; that is, evaluating whether the position is more likely than not of
being sustained upon examination by the appropriate taxing authorities, based on
the technical merits of the position. The adoption of FIN 48 did not
impact the Company's financial condition, results or operations or cash
flows.
Net
Income (Loss) Per Share
The
Company calculates net income (loss) per share in accordance with SFAS
No. 128, Earnings per Share ("SFAS No. 128"). Basic net
income (loss) per share is based on the weighted average number of common shares
outstanding during the period. Diluted net income 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 2008 and 2007 of
3,740,158 and 2,510,879, respectively, were excluded from this calculation, as
they would have been antidilutive. In addition, 1,060,000 warrants
held by Laurus Master Fund and 321,428 warrants held by John Harland Company
were excluded from this calculation in fiscal 2008 and fiscal 2007, as they
would reduce net loss per share.
Segment
Reporting
SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131"), requires the use of a management approach in
identifying segments of an enterprise. Management has determined that
the Company operates in only one segment, document image processing and image
analytics.
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
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). SFAS No. 157 provides a new single
authoritative definition of fair value and provides enhanced guidance for
measuring the fair value of assets and liabilities and requires additional
disclosures related to the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007. The Company is currently assessing the impact, if any, of the
adoption SFAS No. 157 on its financial position, results of operation, or
cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities — including an amendment of SFAS
No. 115 ("SFAS No. 159"), which allows measurement at fair value of
eligible financial assets and liabilities that are not otherwise measured at
fair value. If the fair value option for an eligible item is elected,
unrealized gains and losses for that item shall be reported in current earnings
at each subsequent reporting date. SFAS No. 159 also establishes
presentation and disclosure requirements designed to draw comparison between
different measurement attributes a company elects for similar types of assets
and liabilities. This statement is effective for fiscal years
beginning after November 15, 2007. The Company is currently
assessing the impact, if any, of the adoption of SFAS No. 159 on its
financial condition, results of operations or cash flows.
Page
27
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests
in Consolidated Financial Statements ("SFAS No. 160). SFAS
No. 160 amends Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS
No. 160 also changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the non-controlling
interest. It also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. SFAS
No. 160 requires that a parent recognize a gain or loss in net income when
a subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent owners and the interests of the non-controlling
owners of a subsidiary. SFAS No. 160 is effective for fiscal
periods, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company is currently assessing the
impact, if any, of the adoption of SFAS No. 160 on its financial condition,
results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
("SFAS No. 141(R)"). This Statement replaces SFAS No. 141
and requires an acquirer in a business combination to recognize the assets
acquired, the liabilities assumed, including those arising from contractual
contingencies, any contingent consideration, and any non-controlling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions specified in the Statement. SFAS
No. 141(R) also requires the acquirer in a business combination achieved in
stages (sometimes referred to as a step acquisition) to recognize the
identifiable assets and liabilities, as well as the non-controlling interest in
the acquiree, at the full amounts of their fair values (or other amounts
determined in accordance with SFAS No. 141(R)). In addition,
SFAS No. 141(R)'s requirement to measure the non-controlling interest in
the acquiree at fair value will result in recognizing the goodwill attributable
to the non-controlling interest in addition to that attributable to the
acquirer. SFAS No. 141(R) amends SFAS No. 109, Accounting
for Income Taxes, to require the acquirer to recognize changes in the amount of
its deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the period of the
combination, or directly in contributed capital, depending on the
circumstances. It also amends SFAS No. 142, Goodwill and Other
Intangible Assets, to provide guidance on the impairment testing of acquired
research and development intangible assets and assets that the acquirer intends
not to use. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The Company is currently assessing the impact, if any, of the
adoption of SFAS No. 141(R) on our financial condition, results of
operations or cash flows.
In
April 2008, the FASB issued FASB Staff Position ("FSP") FAS 142-3,
Determination of the Useful Life of Intangible Assets ("FSP FAS
142-3"). FSP FAS 142-3 amends SFAS No. 142, Goodwill and Other
Intangible Assets, to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS No 141,
Business Combinations, and other U.S. GAAP. FSP FAS 142-3 is
effective for fiscal years beginning after December 15,
2008. The guidance for determining the useful life of a recognized
intangible asset is to be applied prospectively, therefore, the impact of the
implementation of this pronouncement cannot be determined until the transactions
occur.
In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS No. 162"). This statement
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. This
Statement shall be effective sixty days following the SEC's approval of the
Public Company Accounting Oversight Board ("PCAOB") amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company does not believe the
adoption of SFAS No. 162 will have a material impact on its financial
condition, results of operations or cash flows.
Page
28
|
2.
|
INVENTORIES,
PREPAID EXPENSES AND OTHER CURRENT
ASSETS
|
Inventories,
prepaid expenses and other current assets consisted of the following at
September 30, 2008:
|
Inventories
|
$ | 5,537 | ||
|
Prepaid
insurance
|
52,513 | |||
|
Prepaid
expenses
|
18,099 | |||
|
Deposits
|
23,851 | |||
| Total | $ | 100,000 |
|
3.
|
ACCOUNTING
FOR STOCK BASED COMPENSATION
|
Adoption
of SFAS 123 (R)
Effective
October 1, 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123 (R), using the modified prospective transition
method. Under that transition method, compensation expense that the
Company recognized beginning on that date
includes: (a) compensation expense for all share-based awards
granted prior to, but not yet vested as of October 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation expense for all share-based awards
granted on or after October 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS
No. 123(R). Results for prior periods will not be
restated.
SFAS
No. 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The estimated average forfeiture rates for the
twelve months ended September 30, 2008 of approximately 14% for grants to
all employees were based on historical forfeiture experience. The
estimated expected remaining contractual life of stock option grants for the
twelve month period ended September 30, 2008 was 1.8 years on grants to
directors and 5.9 years on grants to employees.
SFAS
No. 123(R) requires the cash flows resulting from the tax benefits
resulting 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 twelve month period ended September 30, 2008.
Prior to the adoption of SFAS No. 123(R) those benefits would have been
reported as operating cash flows had the Company received any tax benefits
related to stock option exercises.
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.
The value
of stock-based compensation is based on the single option valuation approach
under SFAS No. 123(R). 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.
Page
29
The fair
value calculations for stock-based compensation awards to employees for the
twelve month period ended September 30, 2008 and 2007 were based on the
following assumptions:
|
Twelve Months ended September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Risk-free
interest rate
|
1.74% - 3.67 | % | 4.49% - 4.71 | % | ||||
|
Expected
life (years)
|
5.4 | 4.5 - 6.1 | ||||||
|
Expected
volatility
|
98 | % | 90 | % | ||||
|
Expected
dividends
|
None
|
None
|
||||||
The
following table summarizes stock-based compensation expense related to stock
options under SFAS No. 123(R) for the twelve month period ended
September 30, 2008 and 2007 which was allocated as follows:
|
Twelve Months Ended
|
||||||||
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Research
and development
|
$ | 36,779 | $ | 21,517 | ||||
|
Sales
and marketing
|
45,783 | 49,864 | ||||||
|
General
and administrative
|
139,428 | 149,840 | ||||||
|
Stock-based
compensation expense related to employee stock options included in
operating expenses
|
$ | 221,990 | $ | 221,221 | ||||
The following table summarizes vested
and unvested options, fair value per share weighted average remaining term and
aggregate intrinsic value at September 30, 2008:
|
Number of Shares
|
Weighted Average
Grant Date Fair
Value Per Share
|
Weighted Average
Remaining
Contractual Life (in
Years)
|
Aggregate Intrinsic
Value
|
|||||||||||||
|
Vested
|
2,783,374 | 0.47 | 5.57 | $ | - | |||||||||||
|
Unvested
|
956,784 | 0.29 | 9.29 | - | ||||||||||||
|
Total
|
3,740,158 | 0.42 | 6.52 | $ | - | |||||||||||
As of
September 30, 2008, the Company had $263,878 of unrecognized compensation
expense expected to be recognized over a weighted average period of
approximately 1.09 years.
Page
30
A summary
of option activity under the Company's stock equity plans during the twelve
months ended September 30, 2008 and 2007, as follows:
|
|
Weighted Average
|
|||||||||||
|
Weighted Average
|
Remaining
|
|||||||||||
|
Number of
|
Exercise Price Per
|
Contractual Term
|
||||||||||
|
Shares
|
Share
|
(in Years)
|
||||||||||
|
Oustanding,
September 30, 2006
|
2,616,246 | $ | 1.01 | 7.19 | ||||||||
|
Granted:
|
||||||||||||
|
Board
of Directors
|
90,000 | $ | 0.74 | 2.41 | ||||||||
|
Executive
Officers
|
- | - | - | |||||||||
|
Employees
|
230,000 | $ | 0.72 | 8.66 | ||||||||
|
Exercised
|
(5,528 | ) | $ | 0.84 | 6.65 | |||||||
|
Cancelled
|
(419,839 | ) | $ | 1.08 | 6.02 | |||||||
|
Oustanding,
September 30, 2007
|
2,510,879 | $ | 0.96 | 6.39 | ||||||||
|
Granted:
|
||||||||||||
|
Board
of Directors
|
175,000 | $ | 0.37 | 2.18 | ||||||||
|
Executive
Officers
|
600,000 | $ | 0.35 | 9.18 | ||||||||
|
Employees
|
762,000 | $ | 0.35 | 8.95 | ||||||||
|
Cancelled
|
(307,721 | ) | $ | 1.05 | 5.63 | |||||||
|
Oustanding,
September 30, 2008
|
3,740,158 | $ | 0.71 | 6.52 | ||||||||
The
following table summarizes significant ranges of outstanding and exercisable
options as of September 30, 2008:
|
Weighted
|
Weighted
|
|||||||||||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||||||||||
|
Number of
|
Remaining
|
Weighted
|
Number of
|
Exercise Price of
|
Number of
|
|||||||||||||||||||||
|
Range of
|
Options
|
Contractual Life
|
Average
|
Exercisable
|
Exercisable
|
Unvested
|
||||||||||||||||||||
|
Exercise Prices
|
Outstanding
|
(in Years)
|
Exercise Price
|
Options
|
Options
|
Options
|
||||||||||||||||||||
|
$0.33
- $ 0.69
|
1,930,432 | 7.73 | $ | 0.39 | 999,423 | $ | 0.43 | 931,009 | ||||||||||||||||||
|
$0.70
- $ 0.92
|
897,455 | 4.83 | $ | 0.79 | 871,680 | $ | 0.79 | 25,775 | ||||||||||||||||||
|
$1.06
- $ 1.68
|
847,500 | 5.82 | $ | 1.12 | 847,500 | $ | 1.12 | - | ||||||||||||||||||
|
$2.13
- $ 2.68
|
|
49,000 | 3.43 | $ | 2.29 | 49,000 | $ | 2.29 | - | |||||||||||||||||
|
$3.25
- $12.37
|
15,771 | 1.47 | $ | 6.63 | 15,771 | $ | 6.63 | - | ||||||||||||||||||
| 3,740,158 | 6.52 | $ | 0.71 | 2,783,374 | $ | 0.82 | 956,784 | |||||||||||||||||||
The per-share weighted average fair
value of options granted during the twelve months ended September 30, 2008
was $0.26.
Stock
Option Plans
The
Company currently has five stock option plans that allow the Company to grant
options to purchase common stock to the Company's directors, executive officers
and key individuals who make, or are expected to make, significant contributions
to the Company. Under the terms of each of the Company's stock option
plans, the exercise price of options granted to persons owning more than 10% of
the total combined voting power of the Company's stock is not to be less than
110% of the fair market value of the Company's common stock as determined on the
date of the grant of the options.
Page
31
The 1996
Plan provides for the purchase of up to 2,000,000 shares of the Company's common
stock through incentive and non-qualified options. All options are
granted with an exercise price equal to the fair market value of the Company's
common stock at the grant date and for a term of not more than ten
years. Options granted to individuals owning in excess of 10% of the
Company's outstanding common stock must have a term of not more than five
years. The 1996 Plan terminated on October 30, 2006; however
options granted under the plan that were outstanding at such date remain in
effect until such options are exercised or expire. As of
September 30, 2008, options to purchase 5,000 shares of the Company's
common stock granted under the 1996 Plan were outstanding.
Under the
terms of the 1999 Plan, 2000 Plan, 2002 Plan and 2006 Plan, each of which
provides for the grant of incentive and non-qualified options: incentive stock
options are granted with an exercise price equal to the fair market value of the
Company's common stock at the grant date and for a term of not more than ten
years; non-qualified stock options may be granted with an exercise price of not
less than 85% of fair market value of the Company's common stock at the grant
date and for a term of not more than five years; and to date, the Company has
elected to grant non-qualified stock options under these plans with a three year
term.
The 1999
Plan provides for the purchase of up to 1,000,000 shares of the Company's common
stock. As of September 30, 2008, options to purchase 881,771
shares of the Company's common stock were outstanding and options to purchase up
to 11,358 shares of the Company's common stock were available for grant under
the 1999 Plan.
The 2000
Plan provides for the purchase of up to 1,000,000 shares of the Company's common
stock. As of September 30, 2008, options to purchase 683,455
shares of the Company's common stock were outstanding and options to purchase up
to 154,661 shares of the Company's common stock were available for grant under
the 2000 Plan.
The 2002
Plan provides for the purchase of up to 1,000,000 shares of the Company's common
stock. As of September 30, 2008, options to purchase 844,932
shares of the Company's common stock were outstanding and options to purchase up
to 122,013 shares of the Company's common stock were available for grant under
the 2002 Plan.
The 2006
Plan provides for the purchase of up to 1,000,000 shares of the Company's common
stock. As of September 30, 2008, options to purchase 925,000
shares of the Company's common stock were outstanding and options to purchase up
to 75,000 shares of the Company's common stock were available for grant under
the 2006 Plan.
|
4.
|
INCOME
TAXES
|
On
October 1, 2007, the Company adopted the provisions of FIN 48, which
clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax
return. Further, FIN 48 gives guidance regarding the recognition
of a tax position based on a "more likely than not" recognition threshold; that
is, evaluating whether the position is more likely than not of being sustained
upon examination by the appropriate taxing authorities, based on the technical
merits of the position. The adoption of FIN 48 did not impact the
Company's financial condition, results of operations or cash flows.
The
following table summarizes the activity related to our unrecognized tax
benefits:
|
Balance
at September 30, 2007
|
None
|
|
Increases
related to current year tax posistions
|
None
|
|
Expiration
of statue of limitation of the assessment of taxes
|
None
|
|
Other
|
None
|
|
Balance
at September 30, 2008
|
None
|
Page
32
For the
years ended September 30, 2008 and 2007 the provisions for income taxes
were as follows:
|
2008
|
2007
|
|||||||
|
Federal
- current
|
$ | - | $ | - | ||||
|
State
- current
|
2,800 | 800 | ||||||
|
Total
|
$ | 2,800 | $ | 800 | ||||
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, 2008 and 2007 are as follows:
|
2008
|
2007
|
|||||||
|
Deferred
tax assets (liabilities):
|
||||||||
|
Reserves
not currently deductible
|
$ | 18,000 | $ | 8,000 | ||||
|
Book
depreciation and amortization in excess of tax
|
2,000 | 25,000 | ||||||
|
Stock
based compensation
|
177,000 | 88,000 | ||||||
|
Research
credit carryforwards
|
44,000 | 66,000 | ||||||
|
AMT
credit carryforwards
|
69,000 | 69,000 | ||||||
|
Net
operating loss carryforwards
|
5,600,000 | 5,379,000 | ||||||
|
Capitalized
research and development costs
|
551,000 | 535,000 | ||||||
|
Uniform
capitalization
|
1,000 | 1,000 | ||||||
|
Other
|
259,000 | 302,000 | ||||||
|
Total
deferred assets
|
6,721,000 | 6,473,000 | ||||||
|
Valuation
allowance for net deferred tax assets
|
(6,721,000 | ) | (6,473,000 | ) | ||||
|
Total
|
$ | - | ||||||
We have
provided a valuation allowance against deferred tax assets recorded as of
September 30, 2008 and 2007 due to uncertainties regarding the realization
of such assets.
The net change in the total valuation
allowance for the year ended September 30, 2008 was an increase of approximately
$248,000. The net change in the total valuation allowance for the
year ended September 30, 2007 was a decrease of approximately
$158,000. In assessing the realizability of deferred tax assets, the
Company considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during periods in which those temporary differences become
deductible. The Company considers projected future taxable income and
planning strategies in making this assessment. Based on the level of
historical operating results and projections for the taxable income for the
future, the Company has determined that it is more likely than not that the
deferred tax assets will not be realized. Accordingly, the Company
has recorded a valuation allowance to reduce deferred tax assets to
zero. There can be no assurance that the Company will ever be able to
realize the benefit of some or all of the federal and state loss carryforwards
or the credit carryforwards, either due to ongoing operating losses or due to
ownership changes, which limit the usefulness of the loss
carryforwards.
As of
September 30, 2008, the Company has available net operating loss carryforwards
of approximately $15,000,000 for federal income tax purposes, which will start
to expire in 2018. The net operating loss carryforwards for state
purposes, which will begin to expire in 2008, are approximately
$8,000,000. As of September 30, 2008, the Company has available
federal research and development credit carryforwards of approximately $44,000
and alternative minimum tax credit carryforwards of approximately
$69,000. The research and development credits will start to expire in
2023. As of September 30, 2008, the Company has available California
research and development credit carryforwards of approximately
$22,000. The state research and development credits have no
expiration date.
Page
33
The
difference between the provision for income taxes and income taxes computed
using the U.S. federal income tax rate was as follows for the years ended
September 30:
|
2008
|
2007
|
|||||||
|
Amount
computed using statutory rate
|
$ | (260,000 | ) | $ | (132,000 | ) | ||
|
Net
change in valuation allowance for net deferred tax assets
|
248,000 | (377,000 | ) | |||||
|
Non-deductible
items
|
8,000 | 3,000 | ||||||
|
Expired
credit
|
33,000 | 529,000 | ||||||
|
Other
|
29,000 | - | ||||||
|
State
income tax
|
(55,200 | ) | (22,200 | ) | ||||
|
Provision
for income taxes
|
$ | 2,800 | $ | 800 | ||||
|
5.
|
COMMITMENTS
AND CONTINGENCIES
|
Legal
Matters
In the ordinary course of business, the
Company is at times subject to various legal proceedings. Management
is not aware of any legal proceedings or claims that it believes may have,
individually or in the aggregate, a material adverse effect on the Company's
business, financial condition, operating results, cash flow or
liquidity.
Employee
401(k) Plan
The
Company has a 401(k) plan that allows participating employees to contribute
up to 15% of their salary, subject to annual limits. The Board of
Directors may, at its sole discretion, approve matching contributions by the
Company. During fiscal 2008 and 2007, the Board of Directors did not
approve any Company matching contributions to the plan.
Leases
The
Company leases office space under a non-cancelable operating lease. The lease
costs are expensed on a straight-line basis over the lease term. In
September 2005, the Company signed a lease with an initial term of seven
years for a property located at 8911 Balboa Avenue, San Diego,
California. The lease was effective and binding on the parties as of
September 19, 2005; however, the term of the lease began on
December 9, 2005, which was the date on which certain improvements were
substantially complete. The Company may terminate the lease after the
48th calendar month following the commencement date; however, termination
requires certain penalties to be paid equal to two months of base rent and all
unamortized improvements and commissions. As of the date of this
report, the Company does not have any intent to terminate this
lease.
Page
34
Future
annual minimum rental payments payable under the lease are as
follows:
|
Operating Leases
|
||||
|
Year
ending September 30:
|
||||
|
2009
|
$ | 323,318 | ||
|
2010
|
332,874 | |||
|
2011
|
342,431 | |||
|
2012
|
351,987 | |||
|
2013
|
58,930 | |||
|
Thereafter
|
- | |||
|
Total
|
$ | 1,409,540 | ||
Rent
expense for operating leases for the years ended September 30, 2008 and
2007 totaled $324,911 and $326,304, respectively.
|
6.
|
RELATED
PARTY TRANSACTIONS
|
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.
In the
twelve months ended September 30, 2008, the Company realized revenue from
John Harland of approximately $228,000 for software licenses and $57,000 for
related software maintenance, compared to approximately $267,000 for software
licenses, $50,000 for related software maintenance and $680,000 for engineering
development services and for maintenance covering engineering development
services in revenue realized from John Harland during the twelve months ended
September 30, 2007. At September 30, 2008, there was
an outstanding accounts receivable balance of approximately $5,000 due from John
Harland, compared to a balance of approximately $203,000 at September 30,
2007.
|
7.
|
PRODUCT
REVENUES AND SALES CONCENTRATIONS
|
Product
Revenues
During
the twelve months ended September 30, 2008 and 2007, the Company's revenues
were derived primarily from its Character Recognition Product line.
Below is
a summary of the revenues by product lines:
|
Twelve Months Ended September 30,
|
||||||||
|
Revenue
|
2008
|
2007
|
||||||
|
Recognition
toolkits
|
$ | 3,396,000 | $ | 3,108,000 | ||||
|
Document
and imaging processing solutions
|
- | 50,000 | ||||||
|
Professional
services, maintenance and other
|
1,833,000 | 2,412,000 | ||||||
|
Total
revenue
|
$ | 5,229,000 | $ | 5,570,000 | ||||
Page
35
The
Company sells its products primarily to original equipment manufacturers, system
integrators and resellers who ultimately sell to depository
institutions. For the twelve months ended September 30, 2008 and
2007, the Company had the following sales concentrations:
|
Twelve Months Ended September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Customers
to which sales were in excess of 10% of total sales:
|
||||||||
|
Number
of customers
|
2 | 2 | ||||||
|
Aggregate
percentage of sales
|
31.0 | % | 32.0 | % | ||||
Sales to
customers in excess of 10% of total sales were approximately $1,622,000 and
$1,751,000 for the twelve months ended September 30, 2008 and
2007. The balance of accounts receivable from customers with sales in
excess of 10% of total sales was approximately $402,000 as of September 30,
2008, compared to $237,000 as of September 30, 2007.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Under the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period
covered by this report. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act , means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures also include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the design and
operation of the Company’s disclosure controls and procedures are effective as
of the year ended September 30, 2008.
Management's
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. The Company’s internal control over financial reporting is
intended to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles, generally accepted in the United States
of America.
The
Company’s management has used the framework set forth in the report entitled
Internal Control—Integrated Framework published by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission to evaluate the effectiveness of
the Company’s internal control over financial reporting. The
Company’s management has concluded that the Company’s internal control over
financial reporting was effective as of September 30, 2008.
Page
36
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us to provide only
management's report in this annual report.
Changes
in Internal Control over Financial Reporting
The
Company has not made any changes in its 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 year ended
September 30, 2008 that have materially affected, or are reasonably likely
to materially affect, its internal control over financial
reporting.
|
ITEM 9B.
|
OTHER INFORMATION.
|
None.
PART
III
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Pursuant
to our Bylaws, the Board of Directors has fixed the number of authorized
directors at seven. The members of the Board of Directors serve until
the next annual meeting of stockholders and until their successors have been
elected. The officers serve at the pleasure of the Board of
Directors. The following table includes the names and certain
information about our current directors and executive officers.
|
Name
|
Age
|
Position
|
||
|
John
M. Thornton
|
76
|
Chairman
of the Board
|
||
|
James
B. DeBello
|
50
|
Chief
Executive Officer, Director
|
||
|
Tesfaye
Hailemichael
|
59
|
Chief
Financial Officer
|
||
|
Michael
W. Bealmear (1) (2) (3)
|
61
|
Director
|
||
|
Vinton
P. Cunningham (2)
|
72
|
Director
|
||
|
Gerald
I. Farmer, Ph. D. (1) (2) (3)
|
74
|
Director
|
||
|
Sally
B. Thornton
|
74
|
Director
|
||
|
William
P. Tudor (1)
|
62
|
Director
|
|
(1)
|
Member
of the Compensation Committee of the Board of Directors
|
|
(2)
|
Member
of the Audit Committee of the Board of
Directors
|
|
(3)
|
Member
of the Nominating & Corporate Governance Committee of the Board
of Directors
|
John M.
Thornton. Mr. Thornton has been a director of Mitek since
March 1986. He was appointed Chairman of the Board as of
October 1, 1987 and served as President from May 1991 to July 1991, as
Chief Executive Officer from May 1991 to February 1992 and again as Chief
Executive Officer and Chief Financial Officer from September 1998 to
May 2003, when he resigned from his positions as President and Chief
Executive Officer. He resigned from his position as Chief Financial
Officer in May 2005. He continues to serve as Chairman of the
Board. From 1976 through 1988, Mr. Thornton served as Chairman
and Vice Chairman of the Board at Micom Systems,
Inc. Mr. Thornton is also Chairman of the Board of Thornton
Winery Corporation in Temecula, California.
Page
37
James B.
DeBello. Mr. DeBello has been a director of Mitek since
November 1994. He has been President and Chief Executive Officer
of Mitek since May 2003. Previously he was Chief Executive
Officer of AsiaCorp Communications, Inc., a wireless data infrastructure and
software company, from July 2001 to May 2003. He was
Venture Chief Executive Officer for IdeaEdge Ventures, Inc., a venture capital
company, from June 2000 to June 2001. From May 1999 to
May 2000 he was President, Chief Operating Officer and a member of the
Board of Directors of CollegeClub.com, an Internet company. From
November 1998 to April 1999 he was Chief Operating Officer of
WirelessKnowledge, Inc., a joint venture company formed between Microsoft and
Qualcomm, Inc. Before that, from November 1996 to
November 1998, Mr. DeBello held positions as Vice President, Assistant
General Manager and General Manager of Qualcomm, Inc.'s Eudora Internet Software
Division, and Vice President of Product Management of Qualcomm, Inc.'s
Subscriber Equipment Division. Mr. DeBello holds a B.A., magna
cum laude and MBA from Harvard Business School and was a Rotary Scholar at the
University of Singapore where he studied economics and Chinese.
Tesfaye
Hailemichael. 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 and Director 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.
Michael W.
Bealmear. Mr. Bealmear has been a director of Mitek since
April 2004. He has been President and Chief Executive Officer of
Hyperroll since 2004. He was EVP and President of Worldwide
Operations at Sybase, Inc. from 2002 to 2004. From 2001 to 2000 he
was CEO at Convansys, Inc., from 1999 to 2000 he was CEO at Spear Technologies,
and from 1997 to 1998 he was EVP at Cadence Design Systems.
Vinton P.
Cunningham. Mr. Cunningham has been a director of Mitek
since May 2005. Retired since 2002, he served as Sr.
Vice-President-Finance of EdVision Corporation from 1993 to
2002. Mr. Cunningham was Chief Operating Officer and Chief
Financial Officer of Founders Club Golf Company from 1990 to 1993. He
was Vice President-Finance of Amcor Capital, Inc. from 1985 to
1990. Mr. Cunningham was Chief Financial Officer and Treasurer
of Superior Farming Company, a wholly owned subsidiary of Superior Oil Company,
from 1981 to 1985.
Gerald I.
Farmer. Dr. Farmer has been a director of Mitek since
May 1994. He was Executive Vice President of Mitek from
November 1992 until June 1997. Before joining Mitek, from
January 1987 to November 1992, Dr. Farmer was Executive Vice
President of HNC Software, Inc. He has held senior management
positions with IBM Corporation, Xerox, SAIC and Gould Imaging and
Graphics.
Sally B.
Thornton. Ms. Thornton has been a director of Mitek since
April 1988. She has been a private investor for more than 40
years. She served as a director of Micom Systems, Inc. from 1976 to
1988. From 1987 until 1996 she served as Chairman of Medical
Materials, Inc, a composite plastics manufacturer. Ms. Thornton
is on the Board of Directors of Thornton Winery Corporation in Temecula,
California. She has been a Trustee of the Sjorgren's Syndrome
Foundation in New York and Stephens College in
Missouri. Ms. Thornton is also a Life Trustee of the
San Diego Museum of Art. Ms. Thornton is the spouse of John
M. Thornton, Chairman of the Board.
William P.
Tudor. Mr. Tudor has been a director of Mitek since
September 2004. He is President of Parent
Tutor. Prior to that, he was Executive Vice President of Scantron
Corporation from July 2002 to July 2005. He was Chief
Executive Officer of EdVision from June 1990 to
July 2002.
Page
38
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a) of
the Securities Exchange Act of 1934 requires our officers and directors and
persons who own more than 10% of a registered class of our equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10%
stockholders are required by Securities and Exchange Commission regulations to
furnish us with copies of all Section 16(a) forms they
file. Based solely on a review of Forms, 3, 4, and 5 and amendments
thereto furnished to us, we are not aware of any director, officer or beneficial
owner of 10% of our common stock that failed to file on a timely basis as
disclosed on the above forms, reports required by Section 16(a) of the
Securities Exchange Act of 1934, as amended, during fiscal year 2008, except
that Messrs. Bealmear, Cunningham, Farmer and Tudor each failed to file a
timely Form 4 to reflect option grants made on December 4,
2007.
Code
of Ethics
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.miteksystems.com,
under the Company tab. We will provide a copy of the Finance Code of
Ethics, free of charge, to any stockholder upon written request to our Corporate
Secretary at Mitek Systems, Inc., 8911 Balboa Ave., Suite B,
San Diego, CA 92123. 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 or Chief Financial Officer
that requires disclosure under applicable SEC rules, we intend to disclose the
nature of such amendment or waiver on our website.
Audit
Committee and Audit Committee Financial Expert
We have
an audit committee established in accordance with
Section 3(a)(58)(a) of the Exchange Act. The members of the
audit committee include Messrs. Bealmear, Cunningham and
Farmer. The Board of Directors has determined that Mr. Cunningham is
an "audit committee financial expert" and "independent" as defined under
applicable SEC and NASDAQ Marketplace rules.
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
The
following table shows the compensation we paid to our chief executive officer
and other executive officers who served as such at the end of fiscal 2008 and
received annual compensation over $100,000. We may refer to our
executive officers identified in the table below as our "named executive
officers" elsewhere in this report.
|
Summary Compensation Table
|
|||||||||||||||||
|
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards
($)(1)
|
Total
Compensation
($)
|
||||||||||||
|
James
B. DeBello
|
2008
|
$ | 333,497 | — | $ | 70,325 | $ | 403,822 | |||||||||
|
President
& Chief Executive Officer
|
2007
|
$ | 332,174 | — | $ | 63,517 | $ | 395,691 | |||||||||
|
Tesfaye
Hailemichael
|
2008
|
$ | 186,915 | — | $ | 27,483 | $ | 214,398 | |||||||||
|
Chief
Financial Officer
|
2007
|
$ | 181,191 | — | $ | 22,564 | $ | 203,755 | |||||||||
|
(1)
|
Represents
the dollar amount recognized for financial statement report purposes with
respect to the fiscal year in accordance with SFAS
123(R). Please see "NOTE 3. ACCOUNTING FOR STOCK BASED
COMPENSATION," to our financial statements included in this report for the
relevant assumptions used to determine the valuation of our option
awards.
|
Page
39
Outstanding
Equity Awards at Fiscal Year-End
The
following table presents the outstanding equity awards held by each of the named
executive officers as of the September 30, 2008. The only
outstanding equity awards are stock options. All options we granted
to our named executive officers during our fiscal year ended September 30,
2008, vest monthly over a three-year period and have ten-year terms, subject to
earlier termination on the occurrence of certain events related to termination
of employment. In addition, the full vesting of options is
accelerated if there is a change in control of the Company.
|
Option Awards
|
||||||||||||||||||
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity
Incentive
Plan Awards
Number of
Securities
Underlying
Unexercised
Unearned
Options
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
|||||||||||||
|
James
B. DeBello
|
400,000 | - | - | $ | 1.06 |
05/19/13
|
||||||||||||
| 400,000 | - | - | $ | 0.50 |
11/17/14
|
|||||||||||||
| 97,196 | 2,804 | - | $ | 0.80 |
10/19/15
|
|||||||||||||
| 94,419 | 5,581 | - | $ | 0.82 |
11/18/15
|
|||||||||||||
| 150,000 | - | - | $ | 1.10 |
07/10/16
|
|||||||||||||
| 125,000 | 325,000 | - | $ | 0.35 |
12/04/17
|
|||||||||||||
|
Tesfaye
Hailemichael
|
150,000 | - | - | $ | 0.75 |
05/23/15
|
||||||||||||
| 24,290 | 710 | - | $ | 0.80 |
10/19/15
|
|||||||||||||
| 100,000 | - | - | $ | 1.10 |
07/10/16
|
|||||||||||||
| 41,660 | 108,340 | - | $ | 0.35 |
12/04/17
|
|||||||||||||
Option
Exercises and Stock Vested at Fiscal Year End
During
the fiscal year ended September 30, 2008, no stock options were exercised by any
named executive officer.
Pension
Benefits
We do not
have any defined benefit plans at this time.
Nonqualified
Deferred Compensation
None of
our named executive officers participate in or have account balances in
non-qualified defined contribution plans or other deferred compensation
plans.
Employment
Arrangements and Change in Control Arrangements
The stock
option agreements of our named executive officers provide that, generally, in
case of a change of control, the option will be assumed or an equivalent option
or right substituted by the successor corporation or a parent or subsidiary of
the successor corporation. If the successor corporation refuses to
assume or substitute for the option, then immediately before and contingent on
the consummation of the change in control, the optionee will fully vest in and
have the right to exercise his or her options.
Page
40
As of
September 30, 2008, the value of the unvested, in-the-money options of our
named executive officers that would accelerate upon a change of control, based
on the difference between the closing bid price on the last trading day of the
year of $0.28 per share and the exercise price of the respective options, was as
follows:
|
Name
|
Option Value as of
September 30, 2008
|
|||
| $ | - | |||
|
Tesfaye
Hailemichael
|
$ | - | ||
Director
Compensation
Our
Chairman receives $2,250 and all of our other non-employee directors received
$1,500 for each regularly scheduled Board meeting attended in person and $500
per meeting attended by phone. In addition, they received $500 for
each regularly scheduled committee meeting. We reimbursed our
directors for their reasonable expenses incurred in attending meetings of our
Board of Directors. The members of the Board are eligible for
reimbursement of expenses incurred in connection with their service on the
Board.
The
following table provides director compensation information for the year ended
September 30, 2008.
|
Name
|
Fees Earned
or Paid in
Cash ($)
|
Option Awards
($)(1)
|
All Other
Compensation
($)
|
Total
Compensation
($)
|
||||||||||||
|
John
M. Thornton(2)
|
$ | 9,500 | $ | 6,067 | $ | - | $ | 15,567 | ||||||||
|
Michael
W. Bealmear(2)
|
$ | 8,000 | $ | 3,336 | $ | - | $ | 11,336 | ||||||||
|
Vinton
P. Cunningham(2)
|
$ | 8,000 | $ | 3,336 | $ | - | $ | 11,336 | ||||||||
|
Gerald
I. Farmer(2)
|
$ | 8,500 | $ | 3,336 | $ | - | $ | 11,836 | ||||||||
|
Sally
B. Thornton(2)
|
$ | 6,500 | $ | 3,336 | $ | - | $ | 9,836 | ||||||||
|
William
P. Tudor(2)
|
$ | 7,000 | $ | 3,336 | $ | - | $ | 10,336 | ||||||||
|
(1)
|
Represents
the dollar amount recognized for financial statement report purposes with
respect to the fiscal year in accordance with SFAS
123(R). Please see "NOTE 3. ACCOUNTING FOR STOCK BASED
COMPENSATION," to our financial statements included in this report for the
relevant assumptions used to determine the valuation of our option
awards.
|
|
(2)
|
The
outstanding equity awards held by each of our directors as
of September 30, 2008 is as
follows:
|
|
John
M. Thornton, 165,000 shares;
|
|
|
Michael
W. Bealmear, 55,000 shares;
|
|
|
Vinton
P. Cunningham, 55,000 shares;
|
|
|
Gerald
I. Farmer, 55,000 shares;
|
|
|
Sally
B. Thornton, 55,000 shares; and
|
|
|
William
P. Tudor, 55,000 shares.
|
|
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
The
following table presents information concerning the beneficial ownership of the
shares of our common stock as of December 31, 2008, by:
|
|
·
|
each
person we know to be the beneficial owner of 5% of more of our outstanding
shares of common stock,
|
|
|
·
|
each
of our named executive officers and current directors,
and
|
|
|
·
|
all
of our current executive officers and directors as a
group.
|
Page
41
We have
determined beneficial ownership in accordance with the rules of the SEC. Except
as indicated by the footnotes below, we believe, based on the information
furnished to us, that the persons and entities named in the table below have
sole voting and investment power with respect to all shares of common stock that
they beneficially own, subject to applicable community property
laws.
Applicable
percentage ownership is based on 16,751,137 shares of common stock outstanding
on December 31, 2008. In computing the number of shares of
common stock beneficially owned by a person and the percentage ownership of that
person, we deemed as outstanding shares of common stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of December 31, 2008. We did not deem these
shares outstanding, however, for the purpose of computing the percentage
ownership of any other person.
Except as
indicated by the footnotes below, the business address for each of these
stockholders is c/o Mitek Systems, Inc., 8911 Balboa Ave., Suite B,
San Diego, CA 92123.
|
Name of Beneficial Owner or Identify of Group
|
Number of shares of
common stock
Beneficially Owned
|
Percent
of Class
|
||||||
|
Directors and Executive
Officers
|
||||||||
|
John
M. and Sally B. Thornton (1)
|
2,804,959 | 16.64 | % | |||||
|
James
B. DeBello (2)
|
1,337,500 | 7.39 | % | |||||
|
Tesfaye
Hailemichael (3)
|
337,490 | 1.97 | % | |||||
|
William
P. Tudor (4)
|
75,000 | * | ||||||
|
Michael
W. Bealmear (5)
|
40,000 | * | ||||||
|
Vinton
P. Cunningham (6)
|
40,000 | * | ||||||
|
Gerald
I. Farmer (7)
|
40,000 | * | ||||||
|
Directors
and Executive Officers as a Group (eight individuals)(8)
|
4,674,949 | 25.01 | % | |||||
|
Five Percent Stockholders
|
||||||||
|
John
M. and Sally B. Thornton (1)
|
2,804,959 | 16.64 | % | |||||
|
John
Harland Company (9)
|
2,464,284 | 14.43 | % | |||||
|
Prescott
Group Capital Management LLC (10)
|
1,666,985 | 9.95 | % | |||||
|
White
Pine Capital, LLC (11)
|
1,544,825 | 9.22 | % | |||||
|
Isaac
and Frieda Schlesinger (12)
|
1,000,000 | 5.97 | % | |||||
|
Laurus
Master Fund Ltd. (13)
|
1,061,000 | 5.96 | % | |||||
|
*
|
Less
than 1%.
|
|
(1)
|
John
M. Thornton and Sally B. Thornton, husband and wife, are trustees of a
family trust, and are each directors of the Company. Includes
105,000 shares of common stock subject to
options.
|
|
(2)
|
Consists
of 1,337,500 shares of common stock subject to
options.
|
|
(3)
|
Consists
of 337,490 shares of common stock subject to
options.
|
|
(4)
|
Includes
40,000 shares of common stock subject to
options.
|
|
(5)
|
Consists
of 40,000 shares of common stock subject to
options.
|
|
(6)
|
Consists
of 40,000 shares of common stock subject to
options.
|
|
(7)
|
Consists
of 40,000 shares of common stock subject to
options.
|
|
(8)
|
Includes
1,939,990 shares of common stock subject to
options.
|
|
(9)
|
Based
solely on Schedule 13G filed by the beneficial owner with the SEC on
May 13, 2005. The stockholder's address is 2939 Miller Road, Decatur,
Georgia 30035.
|
|
(10)
|
Based
solely on Schedule 13G/A filed by the beneficial owner with the SEC
on February 14, 2008. This stockholder's address is 1924
South Utica, Suite 1120, Tulsa, OK
74104-6529.
|
|
(11)
|
Based
solely on Schedule 13G/A filed by the beneficial owner with the SEC
on February 12, 2008. This stockholder's address is 60
South 6th Street, Suite 2530 Minneapolis,
MN 55402.
|
|
(12)
|
Based
solely on Schedule 13G/A filed by the beneficial owner with the SEC on
March 6, 2008. Consists of 1,000,000 shares of common stock as
to which Isaac Schlesinger and Frieda Schlesinger have shared voting and
dispositive power. This stockholder's address is c/o Bishop, Rosen &
Co, Inc., 100 Broadway 16th Floor, New York, NY
10005.
|
Page
42
|
(13)
|
Consists
of 1,061,000 shares of common stock issuable upon exercise of
warrants.
|
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Related
Transactions
Except as
noted below, there have been no related party transactions with any of our
directors, executive officers or five percent stockholders in the last three
fiscal years:
John H.
Harland Company beneficially owns more than five percent of our outstanding
common stock. During the twelve months ended September 30, 2008,
we realized revenue of approximately $285,000 from transactions between us and
John H. Harland Company and its subsidiary, Harland Financial Solutions
(collectively "John Harland"). During the twelve months ended
September 30, 2007, we realized revenue of $997,000 from transactions
between us and John Harland. At September 30, 2008, there
was an outstanding accounts receivable balance of approximately $5,000 due from
John Harland, compared to a balance of approximately $203,000 at
September 30, 2007.
Director
Independence
Our board
of directors has determined that each of Messrs. Bealmear, Cunningham,
Farmer and Tudor are "independent" under the criteria established by the NASDAQ
Marketplace Rules for independent board members. In addition, our
board of directors has determined that the members of our audit committee meet
the additional independence criteria required for audit committee
membership.
PART
IV
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Audit
Fees
The fees
for professional services rendered for the audit of our financial statements for
each of the fiscal years ended September 30, 2008 and September 30,
2007, and the reviews of the financial statements included in our Quarterly
Reports on Form 10-Q (or 10-QSB) or services normally provided by the
independent auditors in connection with statutory or regulatory filings or
engagements, were approximately $140,500 to Mayer Hoffman McCann P.C. for fiscal
2008 and approximately $133,000 to Mayer Hoffman McCann P.C. and approximately
$70,000 to Stonefield Josephson Inc. for a total of $203,000 for fiscal
2007.
Audit
Related Fees
There
were no audit related fees for the fiscal years ended September 30, 2008 or
September 30, 2007.
There
were no fees for tax compliance, tax advice or tax planning billed or expected
to be billed by our independent auditors for the fiscal years ended
September 30, 2008 or September 30, 2007.
All
Other Fees
Other
than described above, there were no other fees paid to our independent
auditors.
Page
43
Independence
The Audit
Committee of our Board of Directors believes there were no services provided by
our independent auditors which would affect their independence.
Pre-Approval
Policies
In
accordance with the Audit Committee Charter, the Audit Committee of our Board of
Directors has established policies and procedures by which it approves in
advance any audit and permissible non-audit services to be provided by our
independent auditors. Under these procedures, prior to the engagement of the
independent auditor for pre-approved services, requests or applications for the
auditors to provide services must be submitted to the Audit Committee and must
include a detailed description of the services to be rendered. Our chief
financial officer and the independent auditors must ensure that the independent
auditors are not engaged to perform the proposed services unless those services
are within the list of services that have received the Audit Committee's
pre-approval and must cause the Audit Committee to be informed in a timely
manner of all services rendered by the independent auditors and the related
fees.
Each
request or application must include:
|
|
·
|
a
recommendation by our chief financial officer as to whether the Audit
Committee should approve the request or application;
and
|
|
|
·
|
a
joint statement of our chief financial officer and the independent
auditors as to whether, in their view, the request or application is
consistent with the SEC's and the requirements for auditor independence of
the Public Company Accounting Oversight Board
("PCAOB").
|
The Audit
Committee also will not permit the independent auditors to be engaged to provide
any services to the extent that the SEC has prohibited the provision of those
services by independent auditors, which generally include:
|
|
·
|
bookkeeping
or other services related to accounting records or financial
statements;
|
|
|
·
|
financial
information systems design and
implementation;
|
|
|
·
|
appraisal
or valuation services, fairness opinions or contribution-in-kind
reports;
|
|
|
·
|
actuarial
services;
|
|
|
·
|
internal
audit outsourcing services;
|
|
|
·
|
management
functions;
|
|
|
·
|
human
resources;
|
|
|
·
|
broker-dealer,
investment adviser or investment banking
services;
|
|
|
·
|
legal
services;
|
|
|
·
|
expert
services unrelated to the audit;
and
|
|
|
·
|
any
service that the PCAOB determines is not
permissible.
|
Page
44
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
|
(a)
|
The
following documents are filed as part of this
report:
|
|
|
(1)
|
Financial
Statements:
|
Reports
of Independent Registered Public Accounting Firm
Balance
Sheet as of September 30, 2008 and 2007
Statements
of Operations for the years ended September 30, 2008 and 2007
Statements
of Cash Flows for the years ended September 30, 2008 and 2007
Statements
of Stockholders' Equity for the years ended September 30, 2008 and
2007
Notes to
Financial Statements
|
|
(2)
|
Financial
Statement Schedule:
|
None.
|
|
(3)
|
Exhibits.
|
See
subsection (b) below.
|
|
(b)
|
Exhibits.
The exhibits set forth in the Exhibit Index following the signature
page of this report are filed as part of this Annual Report on Form
10-K.
|
Page
45
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
|
January
13, 2009
|
MITEK
SYSTEMS, INC.
|
||
|
|
By:
|
/s/
James B. De Bello
|
|
|
James
B. DeBello
President,
Chief Executive Officer
(Principal
Executive Officer)
|
|||
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
severally constitutes and appoints James B. DeBello and Tesfaye Hailemichael,
and each of them, his or her true and lawful agent and attorney-in-fact, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
report, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Commission, granting unto said attorney-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that each
said attorneys-in-fact and agents or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Chairman
of the Board of Directors and Director
|
January 13,
2009
|
|||
|
John
M. Thornton
|
||||
|
/s/
James B. DeBello
|
President,
Chief Executive Officer (Principal Executive Officer)
|
January 13,
2009
|
||
|
James
B. DeBello
|
and
Director
|
|||
|
/s/
Tesfaye Hailemichael
|
Chief
Financial Officer (Principal Financial Officer)
|
January 13,
2009
|
||
|
Tesfaye
Hailemichael
|
||||
|
/s/
Michael W. Bealmear
|
Director
|
January 13,
2009
|
||
|
Michael
W. Bealmear
|
||||
|
/s/
Vinton P. Cunningham
|
Director
|
January 13,
2009
|
||
|
Vinton
P. Cunningham
|
||||
|
/s/
Gerald I. Farmer
|
Director
|
January 13,
2009
|
||
|
Gerald
I. Farmer
|
||||
|
/s/
Sally B. Thornton
|
Director
|
January 13,
2009
|
||
|
Sally
B. Thornton
|
||||
|
/s/
William P. Tudor
|
Director
|
January 13,
2009
|
||
|
William
P. Tudor
|
Page
46
EXHIBIT
INDEX
|
Exhibit No.
|
Description
|
Incorporated
by Reference from Document
|
|||
|
3.1
|
Certificate
of Incorporation of Mitek Systems, Inc.
|
(1)
|
|||
|
3.2
|
Bylaws
of Mitek Systems, Inc
|
(1)
|
|||
|
10.1
|
Mitek
Systems, Inc. 1996 Stock Option Plan.
|
(2)
|
|||
|
10.2
|
Mitek
Systems, Inc. 1999 Stock Option Plan.
|
(3)
|
|||
|
10.3
|
Mitek
Systems, Inc. 2000 Stock Option Plan.
|
(4)
|
|||
|
10.4
|
Mitek
Systems, Inc. 2002 Stock Option Plan.
|
(5)
|
|||
|
10.5
|
Mitek
Systems, Inc. 2006 Stock Option Plan.
|
(6)
|
|||
|
10.6
|
Mitek
Systems, Inc. 401(k) Savings Plan
|
(7)
|
|||
|
23.1
|
Consent
of Mayer Hoffman McCann P.C.
|
Filed
herewith
|
|||
|
24.1
|
Power
of Attorney
|
Incorporated
by reference from the signature page of this report
|
|||
|
31.1
|
Certification
of Periodic Report by the Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
|
Filed
herewith
|
|||
|
31.2
|
Certification
of Periodic Report by the Chief Financial Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
|
Filed
herewith
|
|||
|
32.1
|
Certification
of Periodic Report by the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
Filed
herewith
|
|||
|
32.2
|
Certification
of Periodic Report by the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
Filed
herewith
|
|
(1)
|
Incorporated
by reference to the exhibits to the Company’s 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 S-8 originally filed with the SEC on March 21,
1997.
|
|
(3)
|
Incorporated
by reference to the exhibits to the Company’s Registration Statement on
Form S-8 originally filed with the SEC on June 11,
1999.
|
|
(4)
|
Incorporated
by reference to the exhibits to the Company’s Registration Statement on
Form S-8 originally filed with the SEC on March 30,
2001.
|
|
(5)
|
Incorporated
by reference to the exhibits to the Company’s Registration Statement on
Form S-8 originally filed with the SEC on July 7,
2003.
|
|
(6)
|
Incorporated
by reference to the exhibits to the Company’s Registration Statement on
Form S-8 originally filed with the SEC on May 3,
2006.
|
|
(7)
|
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.
|
Page
47
SUPPLEMENTAL
INFORMATION
CORPORATE
OFFICE
Mitek
Systems, Inc.
8911
Balboa Ave, Suite B
San Diego,
California 92123
(858)
503-7810
CORPORATE
OFFICERS
James B.
DeBello, President and Chief Executive Officer
Tesfaye
Hailemichael, Chief Financial Officer
TRANSFER
AGENT
Mellon
Investor Services LLC
480
Washington Blvd., Jersey City, NJ 07310-1900
www.mellon.com
AUDITORS
Mayer
Hoffman McCann, P.C.
10616
Scripps Summit Court, San Diego, California 92131
DIRECTORS
John M.
Thornton, Chairman of the Board
Sally B.
Thornton, Investor
Michael
W. Bealmear (1) (2) (3)
James B.
DeBello, President, Chief Executive Officer
Gerald I.
Farmer, Ph.D. (1) (2) (3)
William
P. Tudor (1)
Vinton P.
Cunningham (2)
NOTES
(1) Compensation
Committee
(2) Audit
Committee
(3) Nominating &
Corporate Governance 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., 8911 Balboa Ave., Suite B, San Diego, California 92123,
phone (858) 503-7810.