MITK (Nasdaq) closed yest at 1.31...:
February 3, 1999
MITEK SYSTEMS INC (MITK)
Quarterly Report (SEC form 10-Q)
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION
The following cautionary statements are made pursuant to the Private Securities Litigation Reform Act of 1995 in order for the
Company to avail itself of the "safe harbor" provisions of that Act. The discussion and information in Management's' Discussion
and Analysis of Financial Condition and Result of Operations (the "MD&A") may contain both historical and forward-looking
statements. To the extent that MD&A contains forward-looking statements regarding the financial condition, operating results,
business prospects or any other aspect of the Company, please be advised that the Company's actual financial condition,
operating results and business performance may differ materially from that projected or estimated by the Company in
forward-looking statements. The Company has attempted to identify, in context, certain of the factors that it currently believes
may cause actual future experience and results to differ from the Company's current expectations. The difference may be
caused by a variety of factors, including but not limited to adverse economic conditions, general decreases in demand for
Company products and services, intense competition, including entry of new competitors, increased or adverse federal, state
and local government regulation, inadequate capital, unexpected costs, lower revenues and net income than forecast, price
increases for supplies, inability to raise prices, the risk of litigation and administrative proceedings involving the Company and its
employees, higher than anticipated labor costs, the possible fluctuation and volatility of the Company's operating results and
financial condition, adverse publicity and news coverage, inability to carry out marketing and sales plans, loss of key executives,
changes in interest rates, inflationary factors, and other specific risks that may be alluded to in this MD&A.
The Company developed a growth strategy for fiscal 1999 which focused on the elimination of non-core technologies,
enhancement of core strengths, and increased sales and marketing efforts to bring the Company's products to new applications
and markets. In particular, Mitek determined to expand into new markets by addressing the needs of new and different types of
customers with a variety of application specific solutions. Mitek also sought to broaden the use of its products with current
customers by identifying new and innovative applications of its existing technology. The Company doubled its sales force during
the first quarter of fiscal 1999 which significantly contributed to the strong sales performance in the quarter.
The Company believes that its results for the first quarter of fiscal 1999 ended December 31, 1998 are a result of the
successful implementation of that growth strategy. In the three months ending December 31, 1998, revenues were $2,210,000,
an increase of $904,000 or 69% over the $1,306,000 revenues in the same period last year. Gross margin for the quarter
ended December 31, 1998 was $1,788,000, an increase of $979,000 or 121% over the $809,000 gross margin in the same
period last year. The Company earned net income of $374,000 or $0.04 per share for the first quarter of fiscal 1999,
compared with a net (loss) of ($1,629,000) or ($0.14) per share for the first quarter of fiscal 1998 which included write-offs
taken by the Company, as previously reported.
The Company continued to maintain its cash position in the first quarter of fiscal 1999. At December 31, 1998 the Company
had $1.2 million in cash and cash equivalents as compared to $1.7 million on September 30, 1998. The Company retained its
$750,000 revolving and $250,000 equipment lines of credit. There were no borrowings under the lines of credit as of
December 31, 1998 or September 30, 1998.
During the first quarter of fiscal 1999 Mitek announced a significant relationship with International Business Machines (IBM).
IBM will license the CheckScript(TM) recognition engine from Mitek for use in IBM's ImagePlus Intelligent Forms Processing
Solution (IFP) for Windows NT. Mitek anticipates IBM's first order of CheckScript in early 1999. CheckScript is a registered
trademark of Parascript LLC.
The Company is pleased it experienced a growth in revenue and earnings in the first quarter of fiscal 1999 while maintaining a
positive cash position with no borrowings against its lines of credit. The Company will continue to work very closely with its
customers to meet their needs and the needs of their customers. The Company is looking for a continued upward trend in the
second quarter of fiscal 1999, with growth in most areas of the Company.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Comparison of Three Months Ended December 31, 1998 and 1997
Net Sales. Net sales for the three month period ended December 31, 1998 were $2,210,000, compared to $1,306,000 for
the same period in 1997, an increase of $904,000, or 69%. The increase was primarily attributable to penetrating target
markets and successfully executing the Company's growth plan.
Gross Margin. Gross margin for the three month period ended December 31, 1998 was $1,788,000, compared to $809,000
for the same period in 1997, an increase of $979,000 or 121%. Stated as a percentage of net sales, gross margin increased to
81% for the three month period ended December 31, 1998 compared to 62% for the same period in 1997. Goodwill and
license amortization charged to cost of sales was $50,000 (2% of net sales) for the three months ended December 31, 1998
and $147,000 (11% of net sales) for the same period in 1997. The increase in gross margin resulted primarily from increased
sales, changes in product mix, and a decrease in goodwill and license amortization charged to cost of sales. The increase in
gross margin stated as a percentage of sales resulted primarily from product mix and decreased goodwill and license
amortization charged to cost of sales.
OPERATIONS. Operations expenses for the three month period ended December 31, 1998 were $126,000, compared to
$101,000 for the same period in 1997, an increase of $25,000 or 25%. Stated as a percentage of net sales, operations
expenses decreased to 6% for the three month period ended December 31, 1998, compared to 8% for the same period in
1997. The increase in expenses is primarily attributable to staff additions, while the decrease in the percentage of net sales is
primarily attributable to increased revenues
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three month period ended December 31,
1998 were $507,000, compared to $378,000 for the same period in 1997, an increase of $129,000 or 34%. Stated as a
percentage of net sales, general and administrative expenses decreased to 23% for the three month period ended December
31, 1998, compared to 29% for the same period in 1997. The increases in expenses for the three months were primarily
attributable to costs associated with outside professional services, legal fees and staff additions, while the decrease in the
percentage of net sales is primarily attributable to increased revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three month period ended December 31,
1998 were $295,000, compared to $453,000 for the same period in 1997, a decrease of $158,000 or 35%. The amounts for
the three months ended December 31, 1998 and 1997 do not include $19,000 and $116,000, respectively, that was spent on
research and development related contract development and charged to cost of sales. Research and development expenses
before charges to cost of sales were $314,000 and $569,000 for the three months ended December 31, 1998 and 1997,
respectively. The decrease in expenses are the result of engineering staff reductions and the elimination of certain engineering
projects. Stated as a percentage of net sales, research and development expenses before charges to cost of goods sold
decreased to 14% for the three month period ended December 31, 1998, compared to 44% for the same period in 1997. The
decrease as a percentage of net sales for the three month period is primarily attributable to both the decrease in absolute dollar
expenditures as well as the increase in revenues.
SELLING AND MARKETING. Selling and marketing expenses for the three month period ended December 31, 1998 were
$496,000, compared to $538,000 for the same period in 1997, a decrease of $42,000 or 8%. Stated as a percentage of net
sales, selling and marketing expenses decreased to 22% from 41% for the same period in 1997. The decrease in expenses and
in the percentage of net sales are primarily attributable to the termination of marketing efforts on certain products and related
staff reductions, and the increase in revenues. However, sales staff was increased again in the quarter substantially over the
previous quarter ended September 30, 1998.
OTHER CHARGES. For the three month period ended December 31, 1997, other charges totaling $689,000 consist of
several non-recurring charges to operations. The charges consist of the following components:
Goodwill impairment In June 1997 the Company purchased substantially all of the assets of Technology Solutions, Inc., a
software developer and solution provider of document image processing systems. One of the key employees of the Company,
a former principle of Technology Solutions, Inc., opted to resign his employment. The unexpected departure, in the opinion of
management, would detrimentally impact the future cash flows of the Company. The Company determined the fair value of the
goodwill by evaluating the expected future net cash flows (undiscounted and without interest charges), in accordance with FAS
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. The evaluation indicated the carrying value of the goodwill exceeded its fair value, resulting in an
impairment loss of $293,000. See Note 3.
License Fee impairment In April, 1997 the Company entered into an exclusive software licensing agreement with Parascript
LLC. In December 1997, Parascript notified the Company of its dissatisfaction with the Company's progress in marketing the
software affected by the license agreement, along with an assertion that the Company had committed material breach of
contract. The Company has strongly and vigorously denied the claims. A proposed solution to the dispute by Parascript
included converting the Company's software license from exclusive to non-exclusive. In addition, the Company over-estimated
the availability and the performance of the product and anticipated prices for the software affected by the agreement. The
adversarial condition of the relationship coupled with the decreased expectations, in the opinion of management, would
detrimentally impact the future cash flows of the Company. The Company determined the fair value of the goodwill represented
by the license fee paid for the exclusive license by evaluating the expected future net cash flows (undiscounted and without
interest charges), in accordance with FAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The evaluation indicated the carrying value of the goodwill
exceeded the fair value, resulting in an impairment loss of $196,000. The Company and Parascript reworked their licensing and
cross investment agreement in October 1998. See Note 4.
The Company traditionally sold its QuickStrokes Application Programmer Interface products with various acceleration
hardware boards. Decreasing prices coupled with the higher speeds of general hardware have rapidly altered the market need
for these acceleration boards. The largest customer utilizing these acceleration boards informed the Company of its intent to
discontinue the offering of these products in the domestic market. As a result, the Company has recorded a reserve for
inventory obsolescence in the amount of $200,000 during the three months ended December 31, 1997.
INTEREST INCOME. Interest income for the three month period ended December 31,1998 was $10,000, compared to
interest income of $21,000 for the same period in 1997, a decrease of $11,000 or 50%. Interest income was generated from
invested funds received from the secondary public offering in the quarter ended December 31, 1996, combined with no bank
borrowings in the quarters ended December 31, 1998 and 1997. The decline in interest income reflects the use of invested
funds.
OTHER EXPENSES NET. Other expense -net for the three months ended December 31, 1997 results from reserves for an
employee related law-suit ($134,000) and certain executive recruiting and relocations costs pursuant an executive employment
agreement ($166,000).
LIQUIDITY AND CAPITAL
The Company has financed its cash needs primarily from increased profits in the third and fourth quarters of fiscal 1998 and the
first quarter of fiscal 1999, collection of accounts and notes receivable, and execution of operations within budget.
Net cash used by operating activities during the year ended December 31, 1998 was $532,000. The primary use of cash from
operating activities was an increase in accounts receivable of $728,000 and a decrease in accounts payable and accrued
expenses of $340,000. The primary source of cash from operating activities was net income of $374,000 plus depreciation and
amortization of $79,000. Higher receivables resulted primarily from increased sales. The decrease in accounts payable and
accrued expenses resulted primarily from payment for litigation settlements.
The Company's working capital and current ratio was $2,889,000 and 2.97 at December 31, 1998, and $2,517,000 and 2.4
at September 30, 1998. At December 31, 1998, total liabilities to equity ratio was .40 to 1 compared to .43 to 1 at September
30, 1998. As of December 31, 1998, total liabilities were less by $340,000 than on September 30, 1998 .
In June 1998, the Company obtained an increase in its working capital line of credit from its bank from $400,000 to $750,000.
The line of credit expires on June 8, 1999 and interest is payable at prime plus 1.5 percentage points. In addition, the Company
obtained an equipment credit line in the amount of $250,000 under similar terms and conditions. There were no borrowings
under the working capital or equipment lines of credit as of December 31, 1998 or September 30, 1998. The Company
believes that together with existing cash, credit available under the credit lines, and cash generated from operations, funds will
be sufficient to finance its operations for the next twelve months. All cash in excess of working capital requirements will be kept
in short term, investment grade securities.
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