U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
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Commission File No. 0-12471
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 9,361,178 shares of common stock
outstanding as of October 31, 1997.
Transitional Small Business Disclosure Format:
Yes No X
ITEM 1 FINANCIAL STATEMENTS
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------- ------ ----- -----
1997 1996 1997 1996
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REVENUE:
Licenses $ 190 $ 164 $2,126 $ 657
Services and maintenance 162 148 844 812
Hardware and other 231 456 892 960
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Total revenue 583 768 3,862 2,429
COST OF REVENUE:
Licenses 69 143 1,030 431
Services and maintenance 325 126 884 697
Hardware and other 245 314 745 724
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Total cost of revenue 639 583 2,659 1,852
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GROSS PROFIT (56) 185 1,203 577
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,708 1,205 4,383 2,806
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OPERATING LOSS (1,764) (1,020) (3,180)(2,229)
Other expense:
Interest and other 1 19 (4) (136)
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NET LOSS (1,763) (1,001) (3,184) (2,365)
Preferred stock dividends:
Imputed (Note 3) - - (833) -
Accrued (58) - (106) -
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NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $(1,821) $(1,001) $(4,123) $(2,365)
======== ======= ====== ========
NET LOSS PER COMMON SHARE $ (0.32) $(0.22) $ (0.79) $(0.59)
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COMMON SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE 5,769 4,639 5,194 4,035
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See notes to consolidated financial statements.
IMAGEMATRIX CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30,
1997
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ASSETS
Current assets
Cash $ 1,136
Accounts receivable,
net of allowance of $7 1,582
Unbilled revenues 1,214
Inventory 355
Prepaid expenses and other current assets 212
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Total current assets 4,499
Property and equipment at cost, less accumulated
depreciation of $345 470
Software development costs, net of accumulated
amortization of $230 185
Other assets, net of accumulated
amortization of $69 31
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TOTAL ASSETS $ 5,185
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other
accrued expenses $ 1,278
Deferred revenue 484
Other current liabilities 315
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Total current liabilities 2,077
Stockholders' equity
Preferred stock, no par value,
5,000,000 shares authorized,325,000 share
issued and outstanding (liquidation
preference of $325,000) 372
Common stock, no par value,
20,000,000 shares authorized,
8,935,120 shares issued and outstanding 10,584
Deferred compensation, net of accumulated
amortization of $87 (13)
Accumulated deficit (7,835)
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Total stockholders' equity 3,108
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,185
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See notes to consolidated financial statements.
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
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OPERATING ACTIVITIES
Net loss $ (3,184) $(2,365)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 338 244
Changes in operating assets and liabilities:
Accounts receivable (1,259) 523
Unbilled revenues (912) (504)
Inventory (230) 154
Prepaid expenses and other current assets (85) (135)
Accounts payable and accrued expenses 788 249
Deferred revenue and other
current liabilities 586 -
Other assets (27) (2)
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NET CASH USED BY OPERATING ACTIVITIES (3,985) (1,836)
INVESTING ACTIVITIES
Software development costs - (416)
Purchases of computer equipment and furniture (106) (405)
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NET CASH USED BY INVESTING ACTIVITIES (106) (821)
FINANCING ACTIVITIES
Issuance of preferred stock, net of
offering costs of $362 2,938 -
Issuance of common stock 465 6,329
Exercise of warrants 1,500 -
Repayment of notes payable - (2,644)
Repayment of amount due to principal stockholder - (38)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 4,903 3,647
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Net increase in cash and cash equivalents 812 990
Cash and cash equivalents at beginning of period 324 550
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,136 $1,540
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See notes to consolidated financial statements.
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/A for the year ended December 31, 1996. 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, 1997, may not be indicative of results that may be
expected for the year ending December 31, 1997.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from contracts for system sales that extend over a
period of time and are performed on a fixed-price basis are
recognized by applying the percentage of completion method. The
Company's basis for measuring the percent of completion is the
ratio of costs incurred to total estimated costs or labor costs
incurred to total estimated labor costs as appropriate. Revenues
from the sale of software licenses and hardware products are
recognized at the time of shipment unless significant future
obligations exist. Revenues from maintenance and support
contracts are recognized ratably over the terms of the related
contracts.
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 have
been proved, the Company capitalizes all expenses associated with
the development of that software until general release to the
public. Immaterial costs incurred during this time are expensed
in that period.
Amortization of computer software development costs begins when
the product is available for use by customers. Amortization is
recorded using the greater of: (1) the amount computed using the
ratio of current product revenue to the total of current and
anticipated revenue or (2) the amount determined using the
straight-line method over two years. During second quarter 1997,
management of the Company reviewed the life used in this
calculation and determined that based upon the life and history
of the related products, a two year life more accurately reflects
the remaining life of the product. The impact of this change was
immaterial to the third quarter 1997 and the nine-months ended
September 30, 1997.
NOTE 3 PREFERRED STOCK
On April 14, 1997, the Company sold 3,300,000 shares of non-
voting, Series A Preferred Stock (Preferred Stock) for gross
proceeds of $3,300,000. In connection with the sale, the Company
agreed to pay commissions of $330,000 and issue warrants to
purchase 1,550,000 shares of Common Stock to certain placement
agents. Of the 1,550,000 warrants, 1,050,000 are exercisable at
$2.25 per share and 500,000 are exercisable at $3.00 per share.
All such warrants may be exercised for a period of three years
from the date of grant. The Preferred Stock yields a 7%
dividend, which the Company can elect to pay in cash or Common
Stock. Such amounts are accrued and are included in the other
current liabilities portion of the September 30, 1997 balance
sheet. The Preferred Stock can be converted into Common Stock at
the lesser of $2.25 per share or 75% of the average closing price
for the previous eight trading days prior to conversion. The
Company can decline to convert the shares and can instead redeem
the shares by payment of 125% of the purchase price paid by the
holders and accrued but unpaid dividends on that portion. As of
September 30, 1997, 2,975,000 shares of the 3,300,000 Preferred
Stock shares had been converted to Common Shares (see Note 5).
Recently a Securities and Exchange Commission interpretation was
published whereby net loss applicable to common stockholders must
reflect as a dividend the amount of any specified discount to the
market price of Common Stock into which the Preferred Stock is
convertible. Because the Preferred Stock described above
contains a conversion feature, the net loss applicable to common
stockholders for the nine-month period was increased by $833,000
for an imputed Preferred Stock dividend recognized upon issuance
of the Preferred Stock equivalent to the discount from 75% of the
fair market value of the Common Stock for the eight trading days
prior to April 14, 1997 times the number of common shares
reserved for conversion.
NOTE 4 WARRANTS
During the third quarter 1997, 1,500,000 of the warrants issued
in conjunction with the April 1997 sale of Preferred Stock were
repriced 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 100 shares purchased for $1.00
under the repriced warrants, the Company issued to the warrant
holder new warrants to purchase 70 shares at an exercise price of
$2.25 and 30 shares at an exercise price of $3.00. Subsequently,
the Company repriced these warrants to $2.00 per share. During
September 1997, 1,500,000 of $1.00 warrants were exercised and
1,500,000 shares of Common Stock were issued. Net proceeds to
the Company totaled $1,410,000. During October and November
1997, 506,500 of the $2.00 warrants were exercised and the same
number of shares of common stock were issued. Gross proceeds to
the Company totaled $1,013,000.
The Company also entered into an agreement whereby if the
1,500,000 $2.00 warrants are exercised before February 27, 1998,
new warrants will be issued up to 1,500,000, priced at $3.00
expiring July 31, 1998.
NOTE 5 COMMON STOCK
During the third quarter 1997, 2,975,000 shares of Preferred
Stock were converted into 2,512,286 shares of Common Stock.
During October 1997, 225,000 shares of Preferred Stock were
converted into 126,058 shares of Common Stock.
In January 1997, the Company sold 257,000 shares of Common Stock
at a price of $1.95 per share. Net proceeds to the Company
relating to this transaction totaled $465,000.
NOTE 6 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, EARNINGS PER SHARE, which is required to be
adopted for periods ending after December 15, 1997. At that
time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be
excluded. The expected impact of Statement No. 128 on these
quarters is not expected to be material.
NOTE 7 SIGNIFICANT CONTRACT ADJUSTMENT
As part of the 1997 year end financial statement closing process,
the Company reviewed its revenue recognition calculations under
the percentage of completion method. Historically, the Company
has measured progress to completion on a ratio of costs incurred
to total estimated costs. It determined, however, with respect
to its largest contract in process, that a calculation based on
labor costs would most accurately reflect progress to completion.
As a result, the Company recorded deferred revenue on this
contract of $441,000 at September 30, 1997. The changes
resulting from this adjustment have been recorded and reflected
in the accompanying unaudited financial statements.
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) was
released on June 30, 1997 and enables customer service
departments to process customer inquiries in a rapid, cost-
efficient manner.
RESULTS OF OPERATIONS
REVENUE
Total revenue for the quarter ended September 30, 1997, was
$583,000 a decrease of $185,000 or 24.1% over the $768,000
reported for the same 1996 period. For the nine months ended
September 30, 1997, total revenue was $3,862,000 compared to
$2,429,000 for the nine months ended September 30, 1996; an
increase of $1,433,000 or 59.0%.
In the first nine months of 1997, the Company has experienced
revenue growth of 59.0% when compared to the same period in 1996.
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 system sales increases to the
point where the presence or absence of a larger order, or the
timing of revenue recognition of portions of such orders, will
not significantly impact revenues from period to period.
Sales to the MCO industry increased $281,000 or 157.9% from
$178,000 in third quarter 1996 to $459,000 in the 1997 period.
The year-to-date period exhibited an increase of $2,702,000 or
330.3% from $818,000 in 1996 to $3,520,000 in 1997. For the
quarter and nine months ended September 30, 1997, sales to the
MCO industry as a percent of total revenue were 78.7% and 91.1%,
respectively. For the same periods in 1996, these sales
represented 23.2% and 33.7%, respectively, of total revenue.
Management believes that the growth in sales to the MCO industry
is the result of the Company's extensive selling efforts in that
market.
LICENSES REVENUE
For the quarter ended September 30, 1997, revenue from the sale
of software licenses (including third party software) rose from
$164,000 to $190,000; an increase of $26,000 or 15.8%. For the
nine months ended
September 30, 1997, revenue from the sale of software licenses
increased 223.6% or $1,469,000 to $2,126,000 over the $657,000
reported in the same period during 1996. For the nine months
ended September 30, 1997, the single largest contributing factor
to these increases is the growth in sales volume of the Company's
proprietary software and third party software licenses. During
third quarter 1997, the Company entered into $4,155,000 of new
contracts compared to $665,000 in the third quarter of 1996. The
Company did not recognize revenue on the largest contract entered
into during the third quarter of 1997 as described more fully in
Note 7 to the financial statements. The majority of the related
revenue on these new contracts will be recorded throughout 1998.
SERVICES AND MAINTENANCE REVENUE
For the three-month and nine-month periods ended September 30,
1997, revenue from services and maintenance increased slightly
over that reported in the 1996 periods. During 1997, revenue
related to services increased due to the addition of customers
discussed above. However, this increase was offset partially by
a decrease in maintenance revenue. The decline in that revenue
was caused by the Company's focus during 1997 on sales of its
proprietary software and the subsequent discontinuance of
maintenance agreements on non-proprietary software sales.
HARDWARE AND OTHER REVENUE
Revenue related to hardware and other declined in both the third
quarter and the nine-month period ended September 30, 1997 when
compared to the 1996 results. The decrease in 1997 related
primarily to the shift in sales focus from systems integration
where hardware was a sizable portion of the revenue to the
Company's proprietary software where hardware becomes a less
significant portion.
GROSS PROFIT
Gross profit for the three-months ended September 30, 1997
decreased $241,000 to negative $56,000 from $185,000 recorded in
the same 1996 period. For the nine-month period, gross profit
rose to $1,203,000 in 1997 from $577,000 in 1996; an increase of
$626,000 or 108.5%. The decrease experienced in third quarter
1997 when compared to third quarter 1996 relates to the fact
that, although contracts were entered into during third quarter
1997, no significant revenue was recorded as described in Note 7.
The increases in the year-to-date period were the result of
additional sales of the Company's proprietary software and third
party software in 1997 compared to 1996.
The Company sells its products via contracts for either complete
systems or individual components. In the case of complete
systems, the Company uses the percentage of completion
methodology for recognizing revenue. Under this scenario,
recognized revenues at any one time reflect the overall gross
profit of the total system sale. In the case of individual
component sales, revenue is recognized upon shipment of the
component to the customer. Under this method, gross profit can
fluctuate depending upon the timing of the shipment of the
components and the related gross profit on those components.
GROSS MARGIN
Gross margin (gross profit as a percent of sales) for the three
months ended September 30, 1997 declined to negative 9.6% from
24.1%. This decline related to the lack of revenue recorded in
third quarter 1997 as described above. Additionally, longer than
anticipated project installations continued in the third quarter
further impacting gross margin.
Gross margin for the nine-months ended September 30, 1997 was
31.1% compared to 23.8% in the 1996 period. This favorable
change was caused by added sales of the Company's proprietary
software during 1997. Once again, this increase was offset, in
part, by the extended installation time lines as discussed above.
Management of the Company feels that it has made significant
progress towards reducing the installation timelines by adding
experienced project managers. Management believes that this
effort, in combination with the completion of more installations,
should address the primary issues related to this area.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
In the third quarter of 1997, selling, general and administrative
costs rose $503,000 or 41.7% from $1,205,000 in third quarter of
1996 to $1,708,000. These same costs increased $1,577,000 or
56.2% from $2,806,000 in the first nine months of 1996 compared
to $4,383,000 in the same 1997 period. Contributing the most to
the increase in both periods was the absence of capitalizable
research and development projects in 1997. This absence caused
these costs to increase $247,000 in the third quarter 1997 and
$594,000 in the first nine months of 1997. Additionally, selling
expenses rose $257,000 in the third quarter 1997 and $880,000 in
the first nine months of 1997 over 1996 levels due to the
expansion in late 1996 of the sales force and costs associated
with related office space.
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. Internally generated liquidity is measured by operating
cash flow as discussed below and working capital. At September
30, 1997, net working capital was $2,422,000. In addition, the
Company received gross proceeds of $1,013,000 and $1,500,000 in
October/November 1997 and September 1997, respectively, from
the exercise of warrants and $3,300,000 in the second quarter of 1997
from the sale of 3,300,000 shares of non-voting, Series A
Preferred Stock (Preferred Stock). The Company believes that the
cash generated from the sale of the Preferred Stock, the exercise
of the warrants and its $2,000,000 line of credit (whereby the
Company is allowed to borrow up to 80% of approved accounts
receivable balances) is sufficient to finance its short-term
working capital needs for the next six months. At September 30,
1997, $373,000 was outstanding under the line of credit.
The Company's short-term and long-term capital requirements will
depend on many factors, including, but not limited to, product
revenues from operations, gross profit levels, 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, or are not available on terms
acceptable to the Company, 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. The Company
believes that with improved project management personnel and
increased installation and project management experience, it can
shorten the installation time lines, reduce unbilled revenue
balances and thereby reduce working capital needs. However,
there can be no assurance that this will occur.
Net cash used in operating activities during the nine months
ended September 30, 1997 was $3,985,000. Contributing to this
usage was the loss experienced during the first nine months of
1997 and the increase in accounts receivable and unbilled revenue
related to the increase in sales volume. These increases were
offset partially by an increase in accounts payable and deferred
revenue and other current liabilities.
"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
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 ClaimMatrixT and
ServiceMatrixT system, the success of the Company in increasing
ClaimMatrixT and ServiceMatrixT 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
variablity of quarterly operations, the risk that the Company
will not achieve profitability and those risks and uncertainties
discussed more completely in the Company's Form 10-KSB/A for the
year ended December 31, 1996 and the Company's Form S-3
Registration Statement filed October 3, 1997.
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: April 29, 1998 By: /s/ Gerald E.Henderson
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Gerald E. Henderson, Chief Executive
Officer (Principal Executive
Officer)
Date: April 29, 1998 By: /s/ Cathy A. Lewis
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Cathy A. Lewis, Controller and
Secretary (Principal
Accounting Officer)