U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________.
Commission File No. 0-20747
ImageMatrix Corporation
-----------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1313108
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 S. Colorado Blvd. - Suite 500, Denver, Colorado 80246
(Address of principal executive offices) (Zip code)
(303) 399-3700
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
The small business issuer had 9,717,678 shares of common stock outstanding as of
November 10, 1998.
Transitional Small Business Disclosure Format:
Yes No X
--- ---
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ImageMatrix Corporation
Consolidated Statements of Operations
(in thousands, except per share data)
(UNAUDITED) (UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- ------------- --------------
Revenue:
Licenses $ 276 $ 190 $ 3,258 $ 2,126
Services and maintenance 158 162 1,022 844
Hardware and other 12 231 375 892
-------------- -------------- ------------- --------------
Total revenue 446 583 4,655 3,862
COST OF REVENUE:
Licenses 139 69 1,249 1030
Services and maintenance 616 325 2,437 884
Hardware and other 18 245 288 745
-------------- -------------- ------------- --------------
Total cost of revenue 773 639 3,974 2,659
Gross margin (327) (56) 681 1,203
Selling, general and administrative expenses 925 1,708 4,357 4,383
-------------- -------------- ------------- --------------
Operating loss (1,252) (1,764) (3,676) (3,180)
Other income(expense) (27) 1 (116) (4)
-------------- -------------- ------------- --------------
NET AND COMPREHENSIVE LOSS (1,279) (1,763) (3,792) (3,184)
Preferred stock dividends:
Imputed - - - (833)
Accrued (2) (58) (4) (106)
-------------- -------------- ------------- --------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(1,281) $(1,821) $(3,796) $(4,123)
============== ============== ============= ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $(0.13) $(0.32) $(0.39) $(0.79)
============== ============== ============= ==============
COMMON SHARES USED IN COMPUTING NET LOSS
PER COMMON SHARE 9,705 5,769 9,616 5,194
============== ============== ============= ==============
See notes to consolidated financial statements.
2
ImageMatrix Corporation
Consolidated Balance Sheet
(in thousands)
(UNAUDITED)
SEPTEMBER 30,
1998
-------------------------
ASSETS
Current assets
Cash $ 106
Restricted cash 38
Accounts receivable, net of allowance of $33 360
Unbilled revenues 582
Prepaid expenses and other current assets 189
-------------------------
Total current assets 1,275
Property and equipment at cost, less accumulated
depreciation of $604 257
Other assets 50
-------------------------
TOTAL ASSETS $ 1,582
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,929
Deferred revenue 50
Other current liabilities 403
-------------------------
Total current liabilities 2,382
Stockholders' equity
Preferred stock, no par value, 5,000,000 shares authorized,
100,000 shares issued and outstanding (liquidation preference 114
of $100,000)
Common stock, no par value, 20,000,000 shares authorized,
9,717,678 shares issued and outstanding 11,849
Accumulated deficit (12,763)
-------------------------
Total stockholders' equity (800)
-------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,582
=========================
See notes to consolidated financial statements.
3
IMAGEMATRIX CORPORATION
Consolidated Statement of Cash Flows
(in thousands)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
-------------- --------------
OPERATING ACTIVITIES
Net loss $(3,796) $(3,184)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 285 338
Changes in operating assets and liabilities:
Restricted cash (38) -
Accounts receivable 2,029 (1,259)
Unbilled revenues 330 (912)
Inventory 20 (230)
Prepaid expenses and other current assets 25 (85)
Accounts payable 1,310 788
Deferred revenue (917) 464
Other current liabilities 133 122
Other assets (50) (27)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (669) (3,985)
INVESTING ACTIVITIES
Purchases of computer equipment and furniture (12) (106)
-------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (12) (106)
FINANCING ACTIVITIES
Issuance of preferred stock, net of offering costs of $363 - 2,938
Issuance of common stock, net of offering costs of $36 - 465
Exercise of warrants 81 1,500
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 81 4,903
-------------- --------------
Net increase(decrease) in cash and cash equivalents (600) 812
Cash and cash equivalents at beginning of period 706 324
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 106 $ 1,136
============== ==============
See notes to consolidated financial statements.
4
IMAGEMATRIX CORPORATION
Notes to Consolidated Financial Statements
NOTE 1 BASIS OF PRESENTATION
These statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-KSB for the year ended December
31, 1997. The accompanying financial statements have been prepared in
accordance with generally accepted auditing standards and in the opinion of the
Company's management, such financial statements include all adjustments
necessary to summarize fairly the Company's financial position and results of
operations. All adjustments made to the interim financial statements presented
are of a normal, recurring nature. The results of operations for the nine
months ended September 30, 1998 may not be indicative of results that may be
expected for the year ending December 31, 1998.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
On January 1, 1998, the Company adopted Statement of Position SOP 97-2,
"Software Revenue Recognition" which requires that revenue for licensing,
selling, leasing or otherwise marketing computer software be recognized when
certain criteria are met. The adoption of 97-2 did not have a material affect
on the results of operations.
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards 130, "Reporting Comprehensive Income" which establishes standards for
displaying comprehensive income, its components and accumulated balances. The
adoption of Statement 130 did not have a material effect on the results of
operations.
Software Development Costs
The Company recognizes software and system development expenses at the time of
occurrence for all software and system conceptual design, writing, programming,
and production prior to a Beta-site test at a customer site. Once a product has
been installed at a customer Beta-site and functionality and conceptual design
has been proved, the Company capitalizes all expenses associated with the
development of that software until general release to the public. If upon
review of the costs incurred during the period from initial Beta-site testing
until general release to the public the Company determines that the costs
incurred were immaterial, such costs will be expensed in that period. At
September 30, 1998, all capitalized software has been amortized.
NOTE 3 WARRANTS
During the second quarter of 1998, 1,500,000 of the warrants issued in
conjunction with the April 1997 sale of preferred stock were repriced from $2.00
to $1.00. In connection with the repricing of the warrants, the Company entered
into an agreement with the warrant holder pursuant to which, for each one share
purchased under the repriced warrants, the Company will issue the warrant holder
new warrants to purchase one share at an exercise price of $2.00 per share.
This agreement expired August 28, 1998. Subsequently, the Company repriced
150,000 of these warrants to $.55. During June 1998, 100,000 of the $.55
warrants were exercised and 100,000 shares of common stock were issued. Net
proceeds to the Company totaled $53,000. During July 1998, 50,000 of the $.55
warrants were exercised and the same number of shares of common stock were
issued. Net proceeds to the Company totaled $27,500. In connection with the
exercise of the warrants, the Company issued 150,000 warrants at an exercise
price of $2.00 per share, which expire one year from issuance.
NOTE 4 STOCK OPTIONS
In August 1998, the Board of Directors of the Company repriced the options held
by all employees. A total of 1,011,100 employee options ranging in exercise
price from $ 2.58 to $ 3.88 were repriced at $ .50 per share which was the
market value of the Company's common stock on the date of repricing.
5
NOTE 5 EMPLOYMENT AGREEMENTS
During the third quarter 1998, the Company entered into employment agreements
with certain key employees that provide for lump sum severance payments upon
termination of employment under certain circumstances or a change in control, as
defined. The agreements terminate one year from execution if the circumstances
do not occur. The maximum contingent liability under these agreements in such
event is approximately $500,000.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ImageMatrix Corporation (the Company) was incorporated in July 1995. The
Company designs, sells and installs document imaging and work flow systems which
improve productivity and customer service for health maintenance organizations
(HMOs), health insurance companies, third-party administrators (TPAs), workers
compensation organizations, dental providers and preferred provider
organizations. These organizations are collectively known as Managed Care
Organizations (MCOs). The Company's systems utilize the Company's proprietary
software as well as components manufactured by third party software, hardware
and peripheral vendors. The Company has developed a suite of software products
including CaptureMatrix TM, ClaimMatrix TM and ServiceMatrix TM. CaptureMatrix
TM is a document capture, storage and retrieval system. ClaimMatrix TM performs
imaging-based workflow claims processing. ServiceMatrix TM enables customer
service departments to resolve customer inquiries in a rapid, cost-efficient
manner.
RESULTS OF OPERATIONS
REVENUE
Total revenue for the quarter ended September 30, 1998, was $446,000 a decrease
of 24% or $137,000 over the same period in 1997; total revenue for the nine-
month period ending September 30, 1998 was $4,655,000, an increase of 21% or
$793,000 over the same period in 1997. The increase for the nine months ended
September 30, 1998 is primarily the result of an increase in transaction size in
1998, while the decrease in the third quarter is primarily due to fewer closed
contracts in the quarter. As yet, the Company does not believe that it is in a
position to reliably predict continued quarterly or annual growth. Further, the
Company believes that it will continue to experience significant quarterly
variations in revenue, either positively or negatively, until the number of
sales increases to the point where the presence or absence of a larger order, or
the timing of revenue recognition, will not significantly impact revenues from
period to period.
LICENSES REVENUE
Revenue from the sale of software licenses (including third party software) for
the nine months ended September 30, 1998 increased to $3,258,000 from $2,126,000
in 1997, an increase of $1,132,000 or 53%. For the three months ended September
30, 1998 revenue from sales of software licenses increased to $276,000 from
$190,000 in 1997, a decrease of $86,000 or 45%. The increase over the nine-month
period is the result of a smaller number of larger transactions for the
Company's proprietary and third party software.
SERVICES AND MAINTENANCE REVENUE
Revenue from services and maintenance for the nine months ended September 30,
1998 increased to $1,022,000 from $844,000 in 1997, an increase of $178,000 or
21%. For the three months ended September 30, 1998 revenue from services and
maintenance decreased to $158,000 from $162,000 in 1997, a decrease of $4,000 or
3%. The Company typically performs implementation services in conjunction with
the sale of software licenses and the increase is a result of the overall
increase in license revenue discussed above.
6
HARDWARE AND OTHER REVENUE
Revenue from the sale of hardware and other for the nine months ended September
30, decreased to $375,000 in 1998 from $892,000 in 1997, a decrease of $517,000
or 58%. For the three months ended September 30, 1998 revenue from sales of
hardware and other decreased to $12,000 from $231,000 in 1997, a decrease of
$219,000 or 95%. The decrease is primarily due to fewer contracts including
hardware in 1998.
COST OF REVENUE
Cost of licenses revenue
Cost of licenses includes third party software costs and amortization of
capitalized software. Costs of licenses, for the nine months ended September 30,
increased from $1,030,000 in 1997 to $1,249,000 1998, an increase of $219,000 or
21%. For the three months ended September 30, cost of licenses increased $70,000
or 101%, from $69,000 in 1997 to $139,000 in 1998. Gross margin on license sales
increased from 52% to 62% for the nine-month period ending September 30, 1997
and 1998, respectively. The increase in gross margin over the nine-month period
is primarily a result of the software development costs becoming fully amortized
in the first quarter of 1998. Gross margin on license sales decreased from 64%
to 50% for the three-month period ending September 30, 1997 and 1998,
respectively. The decrease in margin during the three-month period is primarily
due to an increase in sales of third party software, which has a lower gross
margin.
COST OF SERVICES AND MAINTENANCE REVENUE
Cost of services and maintenance revenue includes the personnel and related
overhead costs for installation, training and customer support services combined
with fees paid to third party contractors. Costs of services and maintenance,
for the nine months ended September 30 increased from $884,000 in 1997 to
$2,437,000 1998, an increase of $1,553,000 or 176%. For the three months ended
September 30, cost of services and maintenance increased $291,000 or 90%, from
$325,000 in 1997 to $616,000 in 1998. Gross margin on services and maintenance
revenue decreased from (5)% to (138)% for the nine-month period ending September
30, 1997 and 1998, respectively. Additionally, gross margin on services and
maintenance revenue decreased from (100)% to (290)% for the three-month period
ending September 30, 1997 and 1998, respectively. Several items continue to
adversely impact gross margin in this revenue category, primarily third party
subcontractor costs and longer than anticipated implementation periods.
COST OF HARDWARE AND OTHER REVENUE
Cost of hardware and other revenue primarily consists of third party hardware
sold to proprietary software customers. Costs of hardware and other for the nine
months ended September 30, decreased from $745,000 in 1997 to $288,000 1998, a
decrease of $457,000 or 61%. For the three months ended September 30, cost of
hardware and other decreased $227,000 or 93%, from $245,000 in 1997 to $18,000
in 1998. Gross margin on hardware and other revenue decreased from 6% to (50)%
and increased from 16% to 23% for the three and nine-month period ending
September 30, 1997 and 1998, respectively. The change is primarily a result of
lower margin realized due to trailing costs incurred on existing projects.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
In the third quarter of 1998, selling, general and administrative costs
decreased $783,000 or 46% from $1,708,000 in third quarter of 1997 to $925,000
in the same period in 1998. These same costs decreased $26,000 or 1% from
$4,383,000 in the first nine months of 1997 compared to $4,375,000 in the same
period in 1998. The decrease is primarily due to administrative cost reductions
implemented in the second quarter 1998.
INTEREST EXPENSE
Interest expense was $100,000 for the nine-month period ended September 30, 1998
compared to $8,000 for the nine-month period ended September 30, 1997. The
increase is due to additional debt outstanding in 1998 compared to the same
period in 1997.
7
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is generated from both internal and external sources and
is used to fund short-term working capital needs. At September 30, 1998, the
Company has a working capital deficit of $1,107,000. Historically, the Company
has raised over $15 million in gross proceeds by selling its Common and
Preferred Stock. However, the Company believes that its access to the capital
markets is currently very limited. There can be no assurance that the Company
will be able to raise the necessary capital to sustain operations.
At September 30, 1998, $183,000 was outstanding under the line of credit. At
November 10, 1998, $213,000 was outstanding.
The Company's short-term and long-term capital requirements will depend on many
factors, including, but not limited to, product revenues from operations,
working capital requirements, research and development expenses, capital
expenditures, successful project management, timely system installations and
variability of quarterly operations. The Company's market development efforts
are still relatively young and changes in the anticipated business development
of the Company which extend the Company's time to achieve profitability could
cause the Company to issue debt, additional equity or a combination thereof.
There can be no assurance that additional financing will be available, or, if
available, the terms of such financing will be favorable to the Company or its
shareholders without substantial dilution of their ownership rights. If
adequate funds are not available in the near term, the Company may be required
to curtail its operations significantly, forego market opportunities, or obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish material rights to certain of its technologies or
potential markets.
Net cash used in operating activities for the six months ended September 30,
1998 was $669,000. Contributing to this usage is the loss experienced during
the first nine months of 1998 and the decrease in deferred revenue. These
decreases were offset partially by a decrease in accounts receivable and an
increase in accounts payable and other current liabilities.
YEAR 2000 ISSUE
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date sensitive. Any of the Company's programs that
recognize a date using "00" as 1900 rather than the year 2000 could result in
errors or systems failures. The Company utilizes a number of computer programs
across its entire operation. The Company has not completed its assessment, but
currently believes that costs of addressing this issue will not have a material
adverse impact on the Company's financial position. However, if the Company and
third parties upon which it relies are unable to address this issue in a timely
manner, it could result in material financial risk to the Company. In order to
assure that this does not occur, the Company plans to devote all resources
required to resolve any significant year 2000 issues in a timely manner.
8
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this report which are not historical facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements, including, but not limited to, the risk
that the Company will not be able to raise sufficient new capital to maintain
operations, the risk that the market for imaging-based claims processing may not
develop as expected, the degree of success of the Company's market initiatives,
expansion of sales in the MCO industry, the success of the Company in
forecasting demand for the ClaimMatrix(TM) and ServiceMatrix(TM) system, the
success of the Company in increasing ClaimMatrix(TM) and ServiceMatrix(TM)
system sales as a percentage of overall revenues to increase gross profit
margins and decrease general, administration and sales costs as a percentage of
overall gross profit, the risk that the Company will not be able to achieve
pricing levels or installation time lines sufficient to increase gross margins,
the risk that the long length of the Company's sales cycle could delay revenues,
the risk of variability of quarterly operations and those risks and
uncertainties discussed more completely in the Company's Form 10-KSB for the
year ended December 31, 1997, the Company's Form S-3 Registration Statement
dated August 8, 1997 and the Company's 10QSB for the quarter ended June 30,
1998.
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBITS:
3.1 Amended and Restated Articles of Incorporation. (1).
3.2 Bylaws of Registrant. (1).
3.3 Articles of Amendment to Articles of Incorporation, creating Series A
Convertible Preferred Stock. (2).
4.1 Form of Certificate for Shares of Common Stock. (1).
4.2 Form of Warrant Agreement and Redeemable Warrant. (1).
4.3 Form of Stock Purchase Warrant A. (2).
4.4 Form of Stock Purchase Warrant B. (2).
10.1 Employment Agreement dated December 29, 1995 by and between
ImageMatrix Corporation and Gerald E. Henderson. (1).
10.2 Severance Agreement dated December 29, 1995 by and between
ImageMatrix Corporation and Dennis C. Hefter. (1).
10.3 Letter Agreement dated December 21, 1995 by and between ImageMatrix
Corporation and Blair W. McNea. (1).
10.4 ImageMatrix Corporation Founders and Consultants Stock Option Plan.
(1).
9
10.5 ImageMatrix Corporation 1996 Stock Option Plan. (1).
10.6 ImageMatrix Corporation Stock Option Plan for Non-Employee Directors.
(1).
10.7 Asset Purchase Agreement dated August 30, 1995 by and among
Documatrix Acquisition Corporation, Random Access, Inc. and Gerald E.
Henderson. (1).
10.8 Authorized Reseller Agreement dated February 21, 1996 by and between
ImageMatrix Corporation and Optika Imaging Systems, Inc. (1).
10.9 Reseller Agreement dated January 8, 1996 by and between ImageMatrix
Corporation and FileNet Corporation. (1).
10.10 Asset Purchase Agreement dated February 15, 1995 by and among Random
Access, Inc., Documatrix Corporation and Gerald E. Henderson. (1).
10.11 Change in Terms Agreement dated December 27, 1995 by and among Bank
One Colorado, N.A., Gerald E. Henderson, Carolyn Lee Henderson and
Documatrix Corporation, as amended by Change in Terms Agreement dated
February 29, 1996 by and among Bank One Colorado, N.A., Gerald E.
Henderson, Carolyn Lee Henderson, Documatrix Corporation and
ImageMatrix Corporation. (1).
10.12 Form of Securities Purchase Agreement dated April 14, 1997. (2).
10.13 Warrant Exercise Agreement dated September 4, 1997 by and between
ImageMatrix Corporation and Mueller Trading LP of Lakewood. (3)
10.14 Warrant Exercise Agreement dated October 24, 1997 by and between
ImageMatrix Corporation and Mueller Trading LP of Lakewood. (3)
10.15 Agreement dated October 27, 1997 by and between ImageMatrix
Corporation and Treuhand, Inc. (4)
10.16 Bonus and Escrow Agreement dated July 28, 1998 by and between
ImageMatrix Corporation and Mark H. Reinig. (5)
10.17 Option Agreement dated July 1, 1998 by and between ImageMatrix
Corporation and Dennis Hefter.
27 Financial Data Schedule.
- ---------------------------------
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(1) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (File No. 333-1990).
(2) Incorporated by reference from the Registrant's Form 10-QSB for the quarter
ended March 31, 1997.
(3) Incorporated by reference from the Registrant's Form 10-QSB for the quarter
ended September 30, 1997.
(4) Incorporated by reference from the Registrant's Form 10-KSB for the year
ended December 31, 1997.
(5) Incorporated by reference from the Registrant's Form 10-QSB for the quarter
ended June 30, 1998.
(B) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the quarter ended
September 30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IMAGEMATRIX CORPORATION
Date: November 10, 1998 By: /s/ Gerald E.Henderson
-------------------------------------
Gerald E. Henderson, Chief Executive
Officer (Principal Executive Officer)
Date: November 10, 1998 By: /s/ Richard L. Barich
-------------------------------------
Richard L. Barich, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
11