FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended 6/30/2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _____________ to
1mage Software, Inc.
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(Exact name of Registrant as specified in its charter)
0-12535
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(Commission File Number)
Colorado 84-0866294
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(State of Incorporation) (IRS Employer Identification Number)
6025 S. Quebec St. Suite 300 Englewood CO 80111
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(Address of principal executive offices)
(303) 694-9180
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(Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of August 15, 2005, there were 3,302,597 shares of the Registrant's Common
Stock outstanding.
Page 1
TABLE OF CONTENTS
PART I. Financial Information
Item 1 Financial Statements
Balance Sheets -June 30, 2005, and December 31, 2004............................................ 3
Statements of Operations -for three months ended June 30, 2005 and June 30, 2004................. 4
Statements of Operations -for six months ended June 30, 2005 and June 30, 2004.................. 5
Statements of Cash Flows -for six months ended June 30, 2005 and June 30, 2004 ................. 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.... 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk.............................. 11
Item 4 Controls and Procedures................................................................. 12
PART II. Other Information
Items 1-5....................................................................................... 13
Item 6 Exhibits ................................................................................ 13
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
1mage Software, Inc.
BALANCE SHEETS
Unaudited
June 30, December 31,
ASSETS 2005 2004
---------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,781 $ 50,503
Receivables:
Trade (less allowance: 2005, $3,750; 2004, $3,750) 194,486 81,851
Prepaid expenses and other current assets 7,348 2,033
Inventory 4,757 5,756
Employee advances 2,894 393
----------- -----------
Total current assets 221,266 140,536
PROPERTY AND EQUIPMENT, at cost, net 26,157 33,816
OTHER ASSETS:
Software development costs, net 655,381 680,613
Loan costs, net 3,848 8,649
Rent/security deposit 7,841 7,841
----------- -----------
TOTAL ASSETS $ 914,493 $ 871,455
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit-Bank $ 152,437 $ 172,300
Current portion of capital lease obligations 4,125 4,124
Deferred revenue 324,349 310,403
Accounts payable 126,518 60,002
Accrued liabilities 147,280 370,040
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Total current liabilities 754,709 916,869
----------- -----------
LONG-TERM OBLIGATIONS:
Capital lease obligations 3,388 5,311
Deferred rent 11,224 12,636
Line of credit-Related Parties, net of discount 405,827 197,772
----------- -----------
420,439 215,719
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SHAREHOLDERS' EQUITY:
Common stock, $.004 par value - 10,000,000 shares
authorized; shares outstanding: 2005 and 2004: 3,302,597 13,210 13,210
Additional paid-in capital 7,423,204 7,361,988
Accumulated deficit (7,697,069) (7,636,331)
----------- -----------
Total shareholders' equity (deficit) (260,655) (261,133)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 914,493 $ 871,455
=========== ===========
See Notes to Condensed Financial Statements
3
1mage Software, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
2005 2004
----------- -----------
REVENUE
System sales and software licenses $ 165,015 $ 93,434
Services and annual fees 224,789 240,488
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Total revenue 389,804 333,922
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COST OF REVENUE
System sales and software licenses 117,217 94,951
Services and annual fees 82,293 116,665
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Total cost of revenue 199,510 211,616
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GROSS PROFIT 190,294 122,306
% of Revenue 49% 37%
OPERATING EXPENSES:
Selling, general & administrative 207,823 378,552
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LOSS FROM OPERATIONS (17,529) (256,246)
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OTHER INCOME/(EXPENSE):
Interest expense (22,393) (9,800)
Interest income 3 31
Other income 31 101
----------- -----------
Total other income (expense) (22,359) (9,668)
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LOSS BEFORE INCOME TAXES (39,888) (265,914)
PROVISION FOR INCOME TAXES -- --
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NET LOSS $ (39,888) $ (265,914)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE:
$ (.01) $ (.08)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 3,302,597 3,300,125
=========== ===========
See Notes to Condensed Financial Statements
4
1mage Software, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30,
2005 2004
----------- -----------
REVENUE
System sales and software licenses $ 337,071 $ 249,441
Services and annual fees 458,874 528,225
----------- -----------
Total revenue 795,945 777,666
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COST OF REVENUE:
System sales and software licenses 228,917 197,216
Services and annual fees 168,381 254,716
----------- -----------
Total cost of revenue 397,298 451,932
----------- -----------
GROSS PROFIT 398,647 325,734
% Of Revenue 50% 42%
OPERATING EXPENSES:
Selling, general & administrative 407,866 727,821
----------- -----------
LOSS FROM OPERATIONS (9,219) (402,087)
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OTHER INCOME/(EXPENSE):
Interest income 402 113
Interest expense (51,983) (18,904)
Other income 62 101
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Total other income (expense) (51,519) (18,690)
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LOSS BEFORE INCOME TAXES (60,738) (420,777)
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET LOSS $ (60,738) $ (420,777)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE: $ (0.02) $ (0.13)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 3,302,597 3,293,860
=========== ===========
Diluted 3,302,597 3,293,860
=========== ===========
See Notes to Condensed Financial Statements
5
1mage Software, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (60,738) $ (420,777)
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 148,158 168,168
Amortization of deferred loan costs 4,801 --
Amortization of debt discount 24,469 --
Deferred revenue 13,946 (15,000)
Changes in assets and liabilities:
Receivables - trade (115,136) 97,475
Inventory 999 (4,368)
Prepaid expenses and other assets (5,315) 55,653
Deferred building rent (1,412) --
Accounts payable 66,516 (50,193)
Accrued liabilities (222,760) (21,148)
----------- -----------
Net cash used for operating activities (146,472) (190,190)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (4,563)
Additions to capitalized software (115,267) (128,284)
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Net cash used for investing activities (115,267) (132,847)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Addition/(Repayment) to the line of credit-Bank (19,863) 50,686
Additions to the line of credit- Related Party 244,802 159,000
Principal payments under capital lease obligations (1,922) (1,504)
Proceeds from exercise of stock options -- 6,443
----------- -----------
Net cash provided by financing activities 223,017 214,625
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (38,722) (108,412)
CASH AND CASH EQUIVALENTS, beginning of period 50,503 143,505
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 11,781 $ 35,093
=========== ===========
Supplemental Cash Flows Information
Beneficial conversion option associated with DEMALE line of
credit $ 61,216 $ --
Capital lease obligation incurred for equipment -- 1,993
See Notes to Condensed Financial Statements
6
1mage Software, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
GENERAL:
Management has elected to omit substantially all notes to the unaudited interim
financial statements. Reference should be made to the Company's annual report on
Form 10-K for the year ended December 31, 2004 as this report incorporates the
Notes to the Company's year-end financial statements. The condensed balance
sheet of the Company as of December 31, 2004 has been derived from the audited
balance sheet of the Company as of that date.
UNAUDITED INTERIM INFORMATION:
The unaudited interim financial statements contain all necessary adjustments
(consisting of only normal recurring adjustments), which, in the opinion of
Management, are necessary for a fair statement of the results for the interim
periods presented. The results of operations for the interim periods presented
are not necessarily indicative of those expected for the year.
Revenue Recognition - Revenue from the sale of software licenses, computer
equipment, and existing application software packages is recognized when the
software and computer equipment are shipped to the customer, remaining vendor
obligations are insignificant, there are no significant uncertainties about
customer acceptance and collectibility is probable. Revenue from related
services, including installation and software modifications, is recognized upon
performance of services. Maintenance revenue is recognized ratably over the
maintenance period.
Income Taxes - The Company follows the liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred income taxes are recorded based upon
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the underlying assets or liabilities are received or settled.
The Company has recorded a valuation allowance against the deferred tax assets
due to the uncertainty of ultimate realizability.
Earnings (Loss) Per Share - Earnings/ (Loss) per share is computed by dividing
net income (loss) by the weighted average number of common and equivalent shares
outstanding during the period. Outstanding stock options are treated as common
stock equivalents for purposes of computing diluted earnings per share. As the
Company incurred a net loss for the three and six months ended June 30, 2005 and
June 30, 2004, the outstanding stock options and stock purchase warrants were
antidilutive and have been excluded from the computation of diluted earnings per
share. The Company believes this meets the requirements of Paragraph 40 of SFAS
40.
7
Stock-Based Compensation - The Company has three stock-based employee
compensation plans. The Company accounts for these plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net income (loss), as reported $ (39,888) $(265,914) $ (60,738) $(420,777)
Less: Total stock-based employee
compensation cost determined under the
fair value based method, net of income
taxes (5,419) (5,806) (10,839) (11,613)
Pro forma net income (loss) $ (45,307) $(271,720) $ (71,577) $(432,390)
Earnings per share:
Basic and Diluted - as reported $ (0.01) $ (.08) $ (0.02) $ (.13)
Basic and Diluted - pro forma $ (0.01) $ (.08) $ (0.02) $ (.13)
Line of Credit - Related Party - On April 1, 2003, the Company entered into a
$300,000 revolving line-of-credit agreement (the "Agreement") with DEMALE, LLC,
an entity controlled by certain stockholders of the Company. The lender was
given the right to convert all or any portion of the unpaid principal and
interest owed under the line into shares of the Company's common stock at a
conversion price equal to 80% of the fair market value on that date. Effective
March 31, 2005, the Agreement was amended to increase the line of credit to
$500,000 and to extend the due date until June 30, 2007 or such earlier date as
is mutually agreed upon by the Company and DEMALE. The amendment also changed
the conversion price for the outstanding principal and interest on the line to
$.14 per share, or 80% of the fair market value on the date of the written
notice, whichever is lower. At June 30, 2005, there was $468,000 borrowed
against this line. The line is secured by substantially all of the Company's
assets but is subordinated to the bank line of credit, which holds a senior lien
on the same assets. Interest is accrued and payable quarterly at prime plus 1
1/2% (7.5% at June 30, 2005) but may not be less than 7%; therefore, at June 30,
2005, interest was being accrued at 7.5%.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
In the quarter ended June 30, 2005, 1mage Software, Inc. (the "Company")
generated $390,000 in revenue, a 17% increase from year ago levels. Sales of
software licenses increased 60% for the comparable quarters. Nevertheless, the
Company has not resumed the revenue levels it achieved prior to the termination
of its largest customer in April 2002. Revenues from the Company's new customers
since that time, which would have otherwise represented business growth, have
been used instead to sustain operations and to fund the expenses of its
litigation and arbitration with the former customer.
The Company's $40,000 net loss for the recent quarter and $61,000 loss for
the year to date, versus losses of $266,000 and $421,000, respectively, a year
ago, reflect the positive impact of the Company's increased revenue, reduced
costs of sales, and lower selling, general and administrative expenses. While
the Company is disappointed that it continues to fall short of profitability, it
continues to dedicate its efforts to the development of new customers and new
markets as the best means of achieving its objective of consistently profitable
operations and resulting financial stability.
The most pressing challenge faced by the Company today, however, continues to be
liquidity. Because the Company has extremely limited capital resources, namely
an expiring bank line of credit and a private line of credit from its
shareholders, it cannot sustain losses without an adverse effect on its
liquidity and operations. In order to meet this challenge, the Company continues
to enforce across the board pay cuts and has reduced its headcount to 13
employees.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2005 VERSUS JUNE 30, 2004
The Company reported revenue of $390,000 for the second quarter of 2005, a
$56,000 increase (17%) from $334,000 posted for the second quarter in 2004. This
increase was due to a $49,000 (60%) increase in revenue from software licenses,
a $22,000 (12%) decrease in annual license fee revenue, a $6,000 (11%) increase
in service revenue and a $23,000 (180%) increase in hardware revenue. Annual
license fee revenue of $163,000 for the second quarter was 12% lower than the
$185,000 reported in the preceding year due to the timing of revenue recognition
for certain customers. Gross profit for the three months ended June 30, 2005 was
$190,000 or 49% of revenue as compared to $122,000 or 37% of revenue for the
comparable quarter. In addition, costs of revenues decreased $12,000 (6%) and
selling, general & administrative expenses were lower by $171,000 (45%),
primarily due to decreases in nearly every category. Interest expense increased
$13,000 due to the recording of amortization of the debt discount. Consequently,
the Company posted a net loss of $40,000 or $(.01) per share, as compared to a
net loss of $266,000, or $(.08) per share, for the same quarter a year ago.
9
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2005 VERSUS JUNE 30, 2004
The Company reported revenue of $796,000 for the six months ended June 30, 2005,
an increase of $18,000, or 2%, from the $778,000 reported for the first six
months in 2004. Software sales increased $37,000, or 17%. Gross profit for the
six months ended June 30, 2005 was $399,000 or 50% of revenue as compared to
$326,000 or 42% of revenue for the comparable year to date periods. Hardware
sales increased $50,000, or 194%, as a result of customers' varying needs for
equipment. Annual license fees decreased $26,000, or 7%. SG&A expenses of
$408,000 for the second quarter 2005 were $320,000 or 44% lower than $728,000
for the six months ended June 30, 2004, due to decreased salaries, legal
expenses, and travel costs. The Company reported a net loss of $61,000, or
$(.02) per share, for the six months ended June 30, 2005, as compared to a net
loss of $421,000, or $(.13) per share, for the same period one year ago.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents of $12,000 decreased approximately
$39,000 during the six months ended June 30, 2005 as compared to December 31,
2004. During 2005, the Company used cash of $115,000 for deferred development
expenses. The Company had a working capital deficit of $533,000 as of June 30,
2005, versus working capital deficit of $776,000 as of December 31, 2004 and a
working capital deficit of $399,000 as of June 30, 2004. Included in current
liabilities is $324,000 for Deferred Revenue, which represents payments on
annual maintenance contracts.
The Company had drawn $152,000 on its bank line of credit on June 30, 2005. The
$152,000 bank line matures on August 15, 2005 and is collateralized by all
accounts receivable and general intangibles of the Company. There can be no
assurance that the Company will be able to obtain a further extension from the
bank or that it will be able to locate alternative sources of capital to pay the
entire remaining principal when it falls due on August 15, 2005.
The Company had drawn $468,00 on its line of credit with DEMALE, a related
party, on June 30, 2005. This private line of credit has a limit of $500,000,
expires in June 2007 and is secured by a second lien on the same assets as the
bank line of credit.
In April 2005, the Company filed an appeal from the U.S. district court's
judgment confirming the award against the Company in the arbitration brought by
the Company against its former customer, Reynolds and Reynolds, Inc. The appeal
to the United States Court of Appeals for the Tenth Circuit required the Company
to file a cash bond for $180,000.
The Company receives its revenues from software licenses, recurring annual
maintenance/license fees, consulting services and minimal hardware sales.
Notwithstanding the burdens and unprecedented hardships imposed by the Reynolds
arbitration award and judgment, the Company expects that its continued
relationship with DEMALE, and the cash flows generated from current operations,
will be sufficient to meet its immediate needs for working capital. Moreover,
the long-term availability of new capital to the Company remains uncertain.
The Company has no material commitments for capital expenditures for 2005
Forward Looking Statements
Some of the statements made herein that are not historical facts may be
considered "forward looking statements," including but not limited to the
statements made in the Overview section of this Management's Discussion and
Analysis. All forward-looking statements are, of course, subject to varying
levels of uncertainty. In particular, statements which suggest or predict future
events or state the Company's expectations or assumptions as to future events
may prove to be partially or entirely inaccurate, depending on any of a variety
of factors, such as adverse economic conditions, a variety of internal and
external factors that could affect the willingness of our line of credit lender
to lend us additional funds or grant extensions for the repayment of existing
debt, new technological developments, competitive developments, competitive
pressures, changes in the management, personnel, financial condition or business
objectives of one or more of the Company's customers, increased governmental
regulation or other actions affecting the Company or its customers as well as
other factors.
10
Selected Financial Data
In thousands, except for per share data:
----------------------------------------------------------------
For the Three-Month Periods Ended June 30,
----------------------------------------------------------------
Increase (decrease)
----------------------------
2005 2004 Dollars Percent
---------- ---------- ---------- ----------
Statement of Operations
Net Sales 390 334 56 17%
Cost of Sales 200 212 (12) -6%
Gross Profit 190 122 68 56%
Gross Profit (as a % of Net Sales) 49% 37% 12%
Selling, General & Admin expenses 208 378 (170) -45%
Other (Income)/Expense 22 10 12 120%
Income (Loss) before Income Taxes (40) (266) 226 -85%
Net Income (Loss) (40) (266) 226 -85%
Net Income (Loss) Per Share (0.01) (0.08) 7% -85%
Weighted Average Number of Outstanding Shares:
Basic 3,302,597 3,300,125 57,670 2%
Fully Diluted 3,302,597 3,300,125 57,670 2%
---------- ---------- ---------- ----------
Balance Sheet
Working Capital/(Deficit) (533) (399) (134) 34%
Total Assets 914 1,383 (469) -34%
Long Term Obligations 420 7 413 5819%
Total Stockholders Equity(Deficit) (261) 375 (636) -170%
---------- ---------- ---------- ----------
-------------------------------------------------------------
For the Six-Month Periods Ended June 30,
-------------------------------------------------------------
Increase (decrease)
-------------------------
2005 2004 Dollars Percent
---------- ---------- ---------- -------
Statement of Operations
Net Sales 796 778 18 2%
Cost of Sales 397 452 (55) -12%
Gross Profit 399 326 73 22%
Gross Profit (as a % of Net Sales) 50% 42% 8%
Selling, General & Admin expenses 408 728 (320) -44%
Other (Income)/Expense 52 19 33 174%
Income (Loss) before Income Taxes (61) (421) 360 -86%
Net Income (Loss) (61) (421) 360 -86%
Net Income (Loss) Per Share (0.02) (0.13) 11% -86%
Weighted Average Number of Outstanding Shares:
Basic 3,302,597 3,293,860 105,535 3%
Fully Diluted 3,302,597 3,293,860 98,647 3%
---------- ---------- ---------- -------
Balance Sheet
Working Capital/(Deficit) (533) (399) (134) 34%
Total Assets 914 1,383 (469) -34%
Long Term Obligations 420 7 413 5825%
Total Stockholders Equity(Deficit) (261) 375 (635) -170%
---------- ---------- ---------- -------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Inapplicable
11
Item 4. Controls and Procedures
Internal Controls
As of the end of the period reported on in this report, the company has
undertaken an evaluation under the supervision and with the participation of
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective, at the reasonable assurance level, with respect to
the recording, processing, summarizing and reporting, within the time periods
specified in the SEC's rules and forms, of information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act.
The Chief Executive Officer and Chief Financial Officer concluded that
disclosure controls and procedures are also effective for the purpose of
ensuring that information required to be disclosed in reports filed or submitted
under the Exchange Act is accumulated and communicated to management to allow
timely decisions regarding the required disclosures.
There have been no significant changes in the Company's internal controls during
the quarter ended June 30, 2005, or in other factors that could significantly
affect internal controls subsequent to the date of the evaluation described
above.
12
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In April 2005, the Company filed an appeal from the district
court's judgment confirming the award against the Company in the
Reynolds and Reynolds arbitration. The appeal was filed with the
United States Court of Appeals for the Tenth Circuit and required
the Company to file a $180,000 cash bond pending appeal.
Item 2. Changes in Securities and Use of Proceeds Inapplicable
Item 3. Defaults Upon Senior Securities Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders Inapplicable
Item 5. Other Information Inapplicable
Item 6. Exhibits
Exhibit Table
31.1 Certificate of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certificate of CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1mage Software, Inc.
(Registrant)
Date: 8/15/2005 /s/ David R. DeYoung
------------------------------
David R. DeYoung
President, Principal and Chief
Executive Officer
Date: 8/15/2005 /s/ Mary Anne DeYoung
------------------------------
Mary Anne DeYoung
Vice President, Finance and
Principal Financial Officer
13