UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-50119
IMAGE INNOVATIONS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Nevada 91-1898414
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
432 Park Avenue South, New York, New York 10022
(Address of principal executive offices)
(518) 589-9400
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during 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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 7, 2005, there were 25,216,000 shares of common stock issued and
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
2
IMAGE INNOVATIONS HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------
September 30, December 31,
2005 2004
(Unaudited)
- ----------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 150,216 $ 297,011
Accounts receivable net 1,612,453 3,491,029
Inventory 3,233,790 3,155,017
Intangible assets 1,014,400 --
Other current assets 63,296 147,283
- ----------------------------------------------------------------------------------------------
Total current assets 6,074,155 7,090,340
Property and Equipment, Net 364,069 411,166
- ----------------------------------------------------------------------------------------------
Total Assets $ 6,438,224 $ 7,501,506
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Demand loan H.E. Capital S.A $ 2,053,714 $ 1,085,541
Promissory notes 741,760 700,000
Accounts payable 1,044,727 266,059
Sales deposit 12,000
Accrued expenses 428,990 167,940
- ----------------------------------------------------------------------------------------------
Total current liabilities 4,281,191 2,219,540
- ----------------------------------------------------------------------------------------------
Contingencies and Commitments
Stockholders' Equity
Preferred Stock -- --
1,000,000 authorized preferred shares,
par value $.01
Nil shares issued and outstanding
Common Stock 25,166 24,910
50,000,000 authorized shares, par value $.001
25,166,000 shares issued and outstanding (December
2004 - 24,910,000)
Additional Paid in Capital 8,047,143 6,878,295
Accumulated Deficit (5,915,276)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 2,157,033 5,281,966
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 6,438,224 $ 7,501,506
==============================================================================================
See notes to Condensed Consolidated Financial Statements.
F-1
IMAGE INNOVATIONS HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------
For the Three For the Three For the Nine For the Nine
Months ended Months ended Months ended Months ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------
Revenues $ 397,487 $ 2,297,831 $ 910,104 $ 3,217,156
- ------------------------------------------------------------------------------------------------------
Cost of sales 271,950 1,110,105 480,508 1,680,938
- ------------------------------------------------------------------------------------------------------
Gross Profit 125,537 1,187,726 429,596 1,536,218
- ------------------------------------------------------------------------------------------------------
Expenses:
Consulting services 108,999 217,971 1,234,554 835,155
Depreciation and amortization 10,800 4,300 36,415 18,906
General and administration 133,247 134,361 340,343 331,838
Interest 250,140 32,143 316,582 46,900
Marketing and promotions 4,704 38,094 110,500 96,049
Payroll and compensation 359,962 256,658 959,454 708,048
Professional fees 111,592 106,234 634,521 184,434
Provision for doubtful accounts 400,000 -- 1,000,000 --
Travel and entertainment 29,757 95,547 91,264 223,226
- ------------------------------------------------------------------------------------------------------
Total Expenses 1,409,201 885,308 4,723,633 2,444,556
- ------------------------------------------------------------------------------------------------------
Net Income/(Loss) before Taxes (1,283,664) 302,418 (4,294,037) (908,338)
- ------------------------------------------------------------------------------------------------------
Provision for Income Taxes -- -- -- --
- ------------------------------------------------------------------------------------------------------
Net Income/(Loss) $ (1,283,664) $ 302,418 $ (4,294,037) $ (908,338)
======================================================================================================
Loss Per Common Share:
Basic and Diluted $ (0.05) $ 0.01 $ (0.17) $ (0.04)
Weighted Average number of Common Shares
Outstanding:
Basic 25,133,391 24,316,522 24,986,513 23,095,153
Diluted 25,133,391 27,745,000 24,986,513 23,095,153
See notes to Condensed Consolidated Financial Statements.
F-2
IMAGE INNOVATIONS HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders' Equity
From January 1, 2005 to September 30, 2005 (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Number Additional Accumulated Stockholders'
of Common Stock Amount Paid-In Capital Deficit Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2005 24,910,000 $ 24,910 $ 6,878,295 $(1,621,239) $ 5,281,966
- ----------------------------------------------------------------------------------------------------------------------------------
Common stock issued for services and to settle dispute 256,000 256 1,154,142 1,154,398
Options issued for services 14,706 14,706
Net Loss -- -- -- (4,294,037) (4,294,037)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 2005 25,166,000 $ 25,166 $ 8,047,143 $(5,915,276) $ 2,157,033
==================================================================================================================================
See notes to Condensed Consolidated Financial Statements.
F-3
IMAGE INNOVATIONS HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------
For the Nine For the Nine
Months ended Months ended
September 30, September 30,
2005 2004
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------
Operating
Activities
Net Loss $ (4,294,037) $ (908,338)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 36,415 18,906
Allowance for doubtful accounts 1,000,000 --
Common stock and options issued for services 1,169,104 1,166,020
Common stock issued for repayment of H.E. Capital demand loan -- 1,300,000
Retirement of fixed assets 23,137 --
Changes in operating assets and liabilities
Accounts receivable 878,576 (2,351,031)
Inventory (78,773) (407,747)
Other current assets 83,987 (555,882)
Accounts payable 778,668 272,060
Sales deposit 12,000 --
Accrued expenses 261,050 --
- ---------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (129,873) (1,466,012)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activity:
Purchase of intangible assets (1,014,400) --
Purchase of property and equipment (12,455) (387,820)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,026,855) (387,820)
Cash flows from financing activities:
Proceeds from promissory note - net 968,173 910,012
Proceeds from demand notes 41,760 800,000
Proceeds from sale of stock and warrants -- 275,000
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,009,933 1,985,012
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash (146,795) 131,180
- ---------------------------------------------------------------------------------------------------------------
Cash at beginning of period 297,011 273,111
- ---------------------------------------------------------------------------------------------------------------
Cash at end of period $ 150,216 $ 404,291
- ---------------------------------------------------------------------------------------------------------------
Non cash financing activities:
Common stock issued for inventory $ -- $ 3,015,279
Common stock and options issued for services $ 1,169,104 $ 752,475
Common stock and warrants issued to settle debt $ -- $ 400,000
Common stock ssued for repayment of H.E. Capital demand loan $ -- $ 1,300,000
Stock based compensation $ -- $ 4,783
Stock options/warrants issued for services $ -- $ 324,485
Stock issued for corporate development services $ -- $ 836,752
See notes to Condensed Consolidated Financial Statements.
F-4
IMAGE INNOVATIONS HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements For the three months and
nine months ended September 30, 2005 and 2004
- --------------------------------------------------------------------------------
1. Basis of Preparation and Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and the instructions
to Form 10-QSB and Item 310(b) of Regulation S-B promulgated under the
Securities Exchange Act of 1934. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
annual financial statements and reflect all adjustments necessary to
present fairly the financial position as of September 30, 2005 and the
results of operations and cash flows for the three months and nine months
ended September 30, 2005 and 2004.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to the Securities and Exchange Commission's rules and
regulations. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2004.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
2. Liquidity:
The Company has sustained net operating losses over the past two years.
During 2004 the Company exited the development stage. Management is
continuing to develop its fine art celebrity memorabilia business and is
pursuing additional capital to continue this endeavor. The Company
anticipates issuing equity securities and or arranging additional debt
financing to meet working capital requirements and to fund development
costs in connection with its business. If the Company is unable to
generate cash through the issuance of debt or equity, or is unable to
collect its outstanding receivables, or sell its current inventory, it may
be unable to meet its current obligations as they come due.
3. Inventory
Inventory is valued at the lower of cost or net realizable value and is
determined on the first-in, first-out method. Inventory consists of
finished goods and work in progress. The fine art celebrity memorabilia
inventory is valued using job costing, and the Company commissions an
annual year-end appraisal of its inventory to validate the carrying value.
At September 30, 2005, inventory consisted of approximately $3,233,000 in
fine art celebrity memorabilia.
4. Stock-based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share
Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. The new
standard allows for two transition alternatives, either the
modified-prospective method or the modified-retrospective method. The
Company has not selected a transition method or determined the impact that
adopting SFAS 123(R) will have on its results of operations. On April 14,
2005, the Securities and Exchange Commission announced that the effective
date of SFAS 123R will be deferred until January 1, 2006 for calendar year
companies. The Company anticipates adopting the prospective method of SFAS
123R in the first quarter of fiscal 2006. The effect of this pronouncement
on the Company for the three and nine month periods ended September 30,
2005 and 2004 is reflected in the tables below.
F-5
IMAGE INNOVATIONS HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements For the three months and
nine months ended September 30, 2005 and 2004
- --------------------------------------------------------------------------------
The Company has elected to apply APB Opinion No 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its
stock options and has adopted the disclosure-only provisions of SFAS 123.
If the Company had elected to recognize compensation cost based on the
fair value of the options granted at the grant date as prescribed by SFAS
123, the Company's net loss and net loss per common share for the three
and nine month periods ended September 30, 2005 and 2004 would have been
as follows:
- ------------------------------------------------------------------------------------------------------------
Three months ended
September 30, 2005 September 30, 2004
- ------------------------------------------------------------------------------------------------------------
Net income/(loss) for the period, as reported $ (1,283,664) 302,418
Add: Stock based compensation included in net loss 1,125,000 --
Deduct: Total stock based employee compensation expense determined under
fair value based methods for all awards (1,125,000) (114,633)
- ------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (1,283,664) $ 187,785
============================================================================================================
Basic and diluted net loss per share as reported $ (0.05) $ 0.01
Pro forma basic and diluted net loss per share $ (0.05) $ 0.01
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Nine months ended
September 30, 2005 September 30, 2004
- ------------------------------------------------------------------------------------------------------------
Net loss for the period, as reported $(4,294,037) (908,338)
Add: Stock based compensation included in net loss 1,169,104 --
Deduct: Total stock based employee compensation expense determined under
fair value based methods for all awards (2,095,170) (483,802)
- ------------------------------------------------------------------------------------------------------------
Pro forma net loss $(5,220,103) $(1,392,140)
============================================================================================================
Basic and diluted net loss per share as reported $ (0.17) $ (0.04)
Pro forma basic and diluted net loss per share $ (0.21) $ (0.06)
- ------------------------------------------------------------------------------------------------------------
5. Loss per Common Share
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed as net income (loss) available to
common shareholders divided by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur from common shares issuable through
stock options and warrants. In the three and nine months ended September
30, 2005, potential common stock issuable amounting to approximately
2,604,000 shares has not been included in the computation of diluted loss
per share for the three and nine months ended September 30, 2005, as the
effect would be antidilutive. In 2004 potential common stock issuable
amounting to approximately 2,635,000 shares has not been included in the
computation of diluted loss per share for the three and nine months ended
September 30, 2004, as the effect would be antidilutive as well.
F-6
IMAGE INNOVATIONS HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements For the three months and
nine months ended September 30, 2005 and 2004
- --------------------------------------------------------------------------------
6. Reclassification
For comparability, certain 2004 amounts have been reclassified, where
appropriate, to conform to the financial presentation used in 2005.
7. Promissory Note
A promissory note in the principal amount of $800,000 was issued to Coach
Capital LLC on April 27, 2004 and was due on October 27, 2004. The note
bears interest monthly at the rate of 18% per annum. At September 30,
2005, the Company had repaid $100,000 of the principal amount. The
remaining balance of $700,000 is past due, and the Company is negotiating
repayment terms with the lender. The loan is secured by a first lien
against all the assets of the Company. The note is continuing to accrue
interest at the rate of 18% per annum. Accrued interest amounting to
approximately $89,000 is included in accrued expenses in the accompanying
balance sheet.
On October 7, 2005, the Board of Directors approved the issuance of 50,000
restricted common shares in exchange for Coach Capital not calling the
loan prior to October 31, 2005 and Coach Capital committing to releasing
the Company from the negative covenant concerning the grant of assets and
undertaking of the Company or its subsidiaries prior to October 31, 2005.
The Company intends to repay the loan, or develop a repayment program
acceptable to Coach Capital, out of the proceeds of the financing that the
Company is presently negotiating.
The share price when the shares were issued on November 3, 2005 was $4.25,
which produced a charge against income for accounting purposes of $212,500
in the third fiscal quarter of 2005.
In July 2005, an officer loaned the Company $34,822 with no interest and
no fixed repayment terms.
In February 2005, an officer loaned the Company approximately $7,000 with
no interest and no fixed repayment terms.
8. Commitments and Contingencies
a) As previously disclosed in the Company's SEC filings, on January 31,
2005 and February 8, 2005, the Company's former Chief Executive
Officer, Alain Kardos, who resigned as a Director from the Company
on February 3, 2004, filed actions in the Supreme Court of British
Columbia, naming the Company, its subsidiaries, Derick Sinclair, the
Company's Chief Financial Officer, and H.E. Capital S.A. ("H.E.
Capital") as defendants. Mr. Kardos alleged (i) that the defendants
wrongfully refused or neglected to return to him two certificates
representing 700,000 shares of the Company's common stock (the
"Certificates", "Certificate", and "Shares", respectively) and (ii)
that he was wrongfully dismissed from his position as an officer and
employee of the Company and its Image Innovations subsidiary on
October 21, 2004. Mr. Kardos sought a declaration that the Shares
and Certificates were his property; an injunction restraining and
enjoining the defendants, and their directors, officers, employees,
servants, agents and contractors, or others with knowledge of the
F-7
IMAGE INNOVATIONS HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements For the three months and
nine months ended September 30, 2005 and 2004
- --------------------------------------------------------------------------------
injunction, from directly or through any other person, selling,
disposing of or in way dealing with the Shares or Certificates
without the consent of Mr. Kardos; an order for the delivery by the
defendants to Mr. Kardos of the Certificates; and damages for their
detention and/or conversion. In respect of the wrongful termination
action, Mr. Kardos sought damages in respect of inadequate notice,
an extended notice period, general and special damages and costs.
On March 25, 2005, Mr. Kardos filed a third party complaint in the
United States District Court for the District of Nevada, naming the
Company, its subsidiaries, Mr. Sinclair and H.E. Capital, as third
party defendants, with substantially the same claims and requested
relief as described above.
The matter has been settled pursuant to a Settlement Agreement and
Mutual Release of Claims dated November 4, 2005, by and among the
Company, its subsidiaries, H.E. Capital, Mr. Sinclair, and Mr.
Kardos (the "Settlement Agreement"). The Company is not required to
make any payments in connection with the Settlement Agreement, and
pursuant thereto, is released from all claims. Under the Settlement
Agreement, H.E. Capital has agreed to deposit the Shares into escrow
and purchase the same at specified times at an amount agreed by
Kardos and H.E. Capital. Mr. Kardos' claim in respect of the alleged
wrongful termination has been dismissed with no payments required to
be made by any party.
b) Effective January 2005, the Company signed a three-year contract
with NFL quarterback Peyton Manning. Pursuant to the agreement, the
Company will commission portraits of Mr. Manning as well as have
exclusive rights with respect to Mr. Manning's signature on specific
memorabilia to be distributed by the Company as well as certain
non-exclusive appearance rights. Under the agreement, the Company
has agreed to pay Mr. Manning's company, Pey Dirt, Inc., royalties
as specified in the agreement, subject to aggregate minimum royalty
payments of $2.5 million over the term of the contract of which the
first $1.25 million was paid in the first quarter of 2005. A second
payment of $625,000 is due on December 20, 2005 for the 2006
contract year and the final payment is due on December 20, 2006 for
the 2007 contract year.
The first payment of $1.25 million has been accounted for as an
intangible asset net of $255,600 of expenses and capitalized costs
as of September 30, 2005. Expenses and capitalized costs are
allocated as Mr. Manning performs services, as required by the
agreement. For the nine months ended September 30, 2005, $255,600
has been included in expenses and capitalized costs.
9. Significant Customers
For the three months ended September 30, 2005 and 2004, four customers
generated 92% of the Company's revenues and seven customers generated 87%
of the Company's revenues, respectively. For the nine months ended
September 30, 2005 and 2004, four customers generated 95% of the Company's
revenues and seven customers generated 83% of the Company's revenues,
respectively.
F-8
IMAGE INNOVATIONS HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements For the three months and
nine months ended September 30, 2005 and 2004
- --------------------------------------------------------------------------------
The Company's top five customers represent 98% of the total accounts
receivable of the Company at September 30, 2005.
10. Related Party Transactions
Image Sports & Entertainment, Inc. pays $2,850 per month to an officer of
the Company for rent of office space in Tannersville, New York. Included
in the accompanying statement of operations was approximately $9,000 and
$26,000 of rent expense, respectively, for the three and nine months ended
September 30, 2005.
11. Stockholders Equity
On July 12, 2005, the Company issued 250,000 restricted common shares
valued at $4.50 a share to settle the dispute between the Company and
Constellation Capital, which resulted in a charge against income of
$1,125,000.
12. Recent events
On July 19, 2005, the Company signed an Exclusive Investment Banking
Agreement with GunnAllen Financial Inc. The agreement provides that
GunnAllen will assist Image in identifying sources of new equity
financing, potential business combination transactions and other capital
assistance. In July 2005, the Company paid GunnAllen $25,000 under the
terms of the agreement. GunnAllen continues to work with the Company in
identifying sources of new equity financing, potential business
combination transactions and other capital assistance.
On July 25, 2005, the Company signed a Letter of Intent to acquire a 51%
interest in Livve Licensing Group, Inc. ("Livve"), a manufacturer of
cause-related products and artifacts. Under the terms of the proposed
transaction, the Company will acquire 51% of the outstanding capital stock
of Livve in exchange for $150,000 in cash and the issuance to the
shareholders of Livve of shares of the Company's common stock having a
value of $200,000. In addition to the consideration for the acquisition,
the Company will make available to Livve up to $200,000 in working
capital, whether by loan, bank facility or letter of credit. On August 2,
2005, the Company loaned Livve $60,000 as part of this facility. This
amount is included in other current assets in the accompanying balance
sheet. There can be no assurance that the proposed acquisition will be
consummated.
On August 8, 2005, the Company signed a Letter of Intent to acquire Gold
Solutions, Inc., a financial services start-up that plans to offer a range
of novel monetary services to owners of gold, valuable collectible coins
and other precious metals. After consideration, the Company has elected
not to proceed with the proposed acquisition at the present time.
F-9
Item 2. Management's Discussion and Analysis or Plan of Operation.
Cautionary Note Regarding Forward-Looking Statements
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Image Innovations Holdings
Inc. (the "Company") is hereby providing cautionary statements identifying
important factors that could cause our actual results to differ materially from
those projected in forward-looking statements (as such term is defined in the
Reform Act) made by or on behalf of the Company herein, in other filings made by
the Company with the Securities and Exchange Commission, in press releases or
other writings, or orally, whether in presentations, in response to questions or
otherwise. Any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will result," "are expected to," "anticipated," "plans," "intends," "will
continue," "estimated," and "projection") are not historical facts and may be
forward-looking; accordingly, such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual results
or performance of the Company to be materially different from any future results
or performance expressed or implied by such forward-looking statements. Such
known and unknown risks, uncertainties and other factors include, but are not
limited to, the following:
(i) history of operating losses;
(ii) competition in the marketplace;
(iii) dependence on current management and future ability to obtain
qualified management personnel;
(iv) risks associated with expansion into additional markets where the
Company does not have a presence or significant market penetration;
(v) the effect of economic conditions in the United States generally on
the Company's business;
(vi) the failure to manage growth properly and integrate acquired assets
and operations successfully;
(vii) the ability to secure outside financing at rates or on terms
acceptable to the Company;
(viii) other factors which are described in further detail in the
Company's Annual Report on Form 10-KSB for the year ended December
31, 2004 and in other filings by the Company with the Securities and
Exchange Commission.
The Company cautions that the factors described above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Any forward-looking statement
speaks only as of the date on which such statement is made, and the Company
undertakes no obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for management to predict all of such
factors. Further, management cannot assess the impact of each such factor on the
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
3
Overview
Image Innovations Holdings Inc., a Nevada corporation (the "Company", "our",
"us" or "we"), is in the business of selling high- and medium-value sports and
entertainment celebrity artwork and collectibles, and has been in the business
of selling low-cost consumer items branded under license with the logos of
professional sport leagues and teams. The Company has three wholly-owned
subsidiaries (collectively referred to as "Image Group"), as follows:
o Image Innovations Sports & Entertainment Inc., a Delaware corporation
("ISE"), sells celebrity artwork and collectibles through a targeted
distribution network in the growing, multi-billion dollar industry of
artwork collectibles. ISE has retained well-known artists, such as Carlo
Beninati and Doug London, to create celebrity artwork for sale and
distribution.
o Image Innovations Inc., a Delaware corporation ("Image Innovations"), has
been in the business of creating, sourcing and marketing a wide variety of
relatively low-cost electronic products by endorsing them with the brand
logos of sports teams and leagues and/or other recognized trademarks. This
portion of our business has been substantially curtailed in 2005 and we
are currently reviewing the same to determine the extent to which such
business activities should be continued, if at all. In the event that we
determine to continue these operations, it is likely that they will be
consolidated into the operations of ISE.
o Imaging Innovations Sports and Entertainment Inc. , a New York corporation
("Imaging"), was incorporated to acquire a warehouse and storage facility
in Tannersville, New York, located near ISE's existing facility in
Tannersville. Both ISE and Image Innovations operate their fulfillment
centers from this facility. The facility is approximately 9,000 square
feet.
Current Developments
Celebrity Endorsement Agreement
Effective January 2005, ISE signed a three-year contract with Peyton Manning, a
leading NFL quarterback, who ranks among the highest-achieving quarterbacks in
NFL history. Pursuant to the agreement, ISE will commission portraits of Mr.
Manning as well as have exclusive rights with respect to Mr. Manning's signature
on specific memorabilia to be distributed by ISE as well as certain
non-exclusive appearance rights. Under the agreement, ISE has agreed to pay Mr.
Manning's company, Pey Dirt, Inc., royalties as specified in the agreement,
subject to aggregate minimum royalty payments of $2.5 million, of which the
first $1.25 million was paid in the first quarter of 2005.
Potential Acquisition of Art Company and Agreement with Cruise Ship Line
The Company has executed a letter of intent for the acquisition of Fine Art
Wholesalers, Inc. and its associated companies (collectively, "Fine Art"). Fine
Art is a privately-owned art company that supplies art for sale through the
cruise-line industry. The Company believes that the synergy between ISE and Fine
Art will have the potential to augment the revenue base of ISE, while Fine Art's
reputation will enhance the Image Group in the fields of art and sport. Although
negotiations for definitive documentation are proceeding, there can be no
assurance that this transaction will be consummated. Moreover, even in the event
that we execute definitive documentation in respect of the proposed acquisition
of Fine Art, consummation of the transaction will likely be subject to various
customary closing conditions, including the auditing of Fine Art's past and
current financial statements for the periods mandated under SEC regulations.
In contemplation of the consummation of the transaction, we have entered into a
tripartite six-year concession agreement with Fine Art and Norwegian Cruise Line
("NCL"), pursuant to which Fine Art has been granted the exclusive right to
conduct art auctions on board NCL's thirteen passenger vessels. In accordance
with the concession agreement, we have agreed to guarantee Fine Art's financial
commitments to NCL and have agreed to provide an $8 million letter of credit in
support of the guarantee. The concession agreement provides a representation by
Fine Art that the letter of credit be in place prior to the signing of the
agreement. At this time, notwithstanding the execution of the agreement by all
parties, we have not secured the letter of credit, although we are progressing
with negotiations with a well-established financial institution for the
provision of funds to the Company that will enable us, inter alia, to provide
the letter of credit. Pending completion of these negotiations, there can be no
assurance that we will be able to close this financing, and there can thus be no
assurance that we will be able to provide the letter of credit on a timely
basis, if at all.
4
Gold Solutions
We previously entered into a Letter of Intent to acquire the outstanding share
capital of Gold Solutions, Inc., a start-up company with an agreement with
MasterCard to provide credit cards to owners of gold bullion, gold coins and
gradable collectible coins. After consideration, the Company has elected not to
proceed with the proposed acquisition at the present time.
Livve Licensing Group
We have entered into a Letter of Intent to acquire a 51% interest in the Livve
Licensing Group, Inc ("Livve"), a manufacturer of cause-related products and
artifacts. The consideration for the acquisition of the 51% interest will be
$150,000 in cash and $200,000 of shares of our common stock. There can be no
assurance that the proposed acquisition will be consummated. In August 2005, in
anticipation of the closing of this transaction and to enable Livve to place
certain purchase orders, we advanced Livve the sum of $60,000. Pending
consummation of the acquisition, this loan has been personally guaranteed by the
principals of Livve.
Operating Results
Results of Operations for the Three and Nine Months Ended September 30, 2005 as
Compared with the Three and Nine Months Ended September 30, 2004.
Revenue
Our revenue, gross margin and overhead expenses for the three and nine month
periods ended September 30, 2005 are summarized as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
----------- ----------- ----------- -----------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenue ISE $ 199,658 $ 2,057,133 $ 715,674 $ 2,943,823
Revenue Image Innovations 197,829 240,698 194,430 273,333
----------- ----------- ----------- -----------
Total Revenue $ 397,487 $ 2,297,831 $ 910,104 $ 3,217,156
Gross Profit ISE $ 50,760 $ 1,213,365 $ 440,021 1,540,602
Gross Profit Image Innovations 74,777 (25,639) (10,425) (4,384)
----------- ----------- ----------- -----------
Total Gross Profit $ 125,537 $ 1,187,726 $ 429,596 $ 1,536,218
Revenue was $397,487 for the three months ended September 30, 2005 as compared
with $2,297,831 for the three months ended September 30, 2004. Revenue for the
nine months ended September 30, 2005 was $910,104 as compared with $3,217,823
for the nine months ended September 30, 2004. The decline in revenues over last
year is due to a shortage of liquid resources and a reduction in orders from our
principal customers.
5
ISE produced revenue for the three months ended September 30, 2005 of $199,658,
as compared with revenue of $2,057,133 for the three months ended September 30,
2004, and gross profits during such period of $50,760, as compared with gross
profits of $1,213,365 during the three months ended September 30, 2004. ISE's
revenue for the nine months ended September 30, 2005 were $715,674, as compared
with $2,943,823 for the nine months ended September 30, 2004. ISE's main market
is the cruise line industry. The decline in revenue from the relevant periods of
2004 to 2005 is principally attributable to a shortage of liquid resources
combined with a reduction in purchase orders with our principal customers within
that industry.
Image Innovations produced revenue for the three months ended September 30, 2005
of $197,829 as compared with revenue of $240,698 for the three months ended
September 30, 2004, and gross profits during such period of $74,777, as compared
with gross loss of $25,639 during the three months ended September 30, 2004.
Revenue for the nine months ended September 30, 2005 was $194,430 as compared
with $273,333 for the nine months ended September 30, 2004. The business of
Image Innovations has been substantially curtailed in 2005 and we are currently
reviewing the same to determine the extent to which such business activities
should be continued, if at all. In the event that we determine to continue these
operations, it is likely that they will be consolidated into the operations of
ISE.
Expenses
We incurred total expenses of $1,409,201 for the three months ended September
30, 2005 as compared with $885,308 for the same period in 2004. Total expenses
were $4,723,633 for the nine months ended September 30, 2005 as compared with
$2,444,556 for the nine months ended September 30, 2004. The increase in
expenses in 2005 resulted from the $1.1 million charge to settle the dispute
over consulting services and fees, the establishment of a $1 million provision
for bad debts and an approximately $212,000 charge related to a settlement with
a lender.
Our combined payroll and consulting expenses were $468,961 for the three months
ended September 30, 2005, compared with $474,629 for the three months ended
September 30, 2004. Payroll and consulting expenses were $2,194,008 for the nine
months ended September 30, 2005 as compared with $1,543,203 for the nine months
ended September 30, 2004. Our payroll and consulting expenses decreased by
$5,668 compared with the three months ended September 30, 2004. In 2004, the
Company incurred one-time consulting fees totalling $835,000 with various
consultants related to the establishment and development of its business in
2004. The Company has reduced its number of consultants, the principal factor in
reducing consulting expenses. However, the Company has incurred a one time
charge of $1.1 million in 2005 to settle a dispute over consulting services and
fees related to fiscal year 2004. The Company has also reduced payroll expenses
in Image Innovations by reducing staff and closing the Vancouver office. The
Company employs twelve full time equivalent staff.
Included in consulting expenses in our third quarter is a credit for $75,000
related to the settlement with Constellation Capital reported in the second
quarter. On July 13, 2005, the Company issued 250,000 restricted shares of
common stock to settle the dispute between the Company and Constellation
Capital. The costs associated with issuing the shares were estimated and
recorded in the second quarter of 2005 when the settlement was reached. The
actual cost incurred during this quarter when the shares were issued was $75,000
lower than estimated. Pursuant to the Company's consulting agreement with
Constellation, whereby Constellation was to provide consulting services
(including corporate planning and marketing strategies, identification and
assistance with respect to merger and acquisition opportunities, conducting of
market and research activities, and assistance with new business development
activities), Constellation was to receive warrants to purchase a total of
2,500,000 shares of common stock at prices ranging from $3.50 to $4.50 per
share. Under the terms of the settlement agreement, no warrants will be issued
to Constellation.
6
General and administrative expenses were $133,247 for the three months ended
September 30, 2005, as compared with $134,361 for the three months ended
September 30, 2004. General and administrative expenses were $340,343 for the
nine months ended September 30, 2005 as compared with $331,838 for the nine
months ended September 30, 2004. General and administrative expenses include
insurance, rent for our Tannersville, New York office, utilities, software
licences, communications, including telephone and internet, postage and office
supplies.
The Company established a bad debts provision of $1,000,000 for 2005, with
$400,000 expenses in this quarter, as compared with no provision for bad debts
in 2004.
Interest expenses were $250,140 for the three months ended September 30, 2005,
as compared with $32,133 for the three months ended September 30, 2004. Interest
expenses were $316,582 for the nine months ended September 30, 2005, as compared
with $46,900 for the nine months ended September 30, 2004. The significant
increase in interest expense is principally attributable to an accounting
finance charge arising from the issuance of 50,000 shares of common stock to
Coach Capital LLC in connection with the existing loan agreement with Coach
Capital, as more fully described in "Liquidity and Capital Resources" below.
Marketing and promotional expenses were $4,704 for the three months ended
September 30, 2005, as compared with $38,094 for the three months ended
September 30, 2004. Marketing and promotional expenses were $110,500 for the
nine months ended September 30, 2005, as compared with $96,049 for the nine
months ended September 30, 2004. In 2005, ISE hosted events and participated in
trade shows, the significant of which related to events with Peyton Manning and
the Art Expo held in New York. Lower marketing expenses in the third quarter are
due to reduced marketing activity in the quarter. Marketing expenses are
expected to increase as the Company implements its corporate strategy.
We incurred professional fees of $111,592 for the three months ended September
30, 2005, as compared with $106,234 for the three months ended September 30,
2004. Professional fees were $634,521 for the nine months ended September 30,
2005, as compared with $184,434 for the nine months ended September 30, 2004.
The increase is related to the continued development of the Company as we employ
legal, accounting and other professionals as well as an incurrence of
approximately $75,000 in the lawsuit brought against it by our former chief
executive officer.
We incurred travel and entertainment expenses of $29,757 for the three months
ended September 30, 2005, as compared with $95,547 for the three months ended
September 30, 2004. Travel and entertainment expenses were $91,264 for the nine
months ended September 30, 2005, as compared with $223,226 for the nine months
ended September 30, 2004. Travel expenses principally relate to attendance at
trade shows, establishing and maintaining contacts for our distribution network,
visiting customers, and coordinating and attending the signings of our
memorabilia and limited edition fine art creations by celebrities and our
artists. Travel in the third quarter of 2005 was reduced in response to lower
revenues.
We anticipate that our operating expenses will increase as we carry out our plan
of operations for continued growth.
Net Loss
We incurred a net loss of $1,283,664 for the three months ended September 30,
2005, as compared with net income of $302,418 for the three months ended
September 30, 2004. We incurred a net loss of $4,294,037 for the nine months
ended September 30, 2005 as compared with a net loss of $908,338 for the nine
months ended September 30, 2004. The losses incurred in 2005 are directly
attributable to the reduction in our revenues
7
Liquidity and Capital Resources
We had cash and cash equivalents of $150,216 as of September 30, 2005, compared
with $297,011 as of December 31, 2004. We had working capital of approximately
$1.8 million as of September 30, 2005, compared with $4.9 million as of December
31, 2004. The approximately $3.1 million decrease in working capital is
attributable to: An approximately $1.1 million increase in accounts payable and
accrued liabilities; an increase of approximately $1 million in notes payable;
an approximately $1.9 million decrease in accounts receivable; an approximately
$100,000 increase in inventory; and an approximately $100,000 increase in cash.
This was partially offset by an approximately $1 million increase in intangible
assets in respect of the Peyton Manning contract and an approximately $100,000
decrease in other assets.
We anticipate that we will require a minimum of $5 million over the next twelve
months in order to continue our operations as presently contemplated, excluding
funds required to finance the NCL letter of credit or the Fine Art acquisition.
The amounts required are still under negotiation. Our ability to generate
revenue will depend on our ability to obtain financing to fund our operations
and our success in expanding our business. The Company is currently negotiating
with a well-established financial institution for the provision of substantial
funds to the Company that will enable us, inter alia, to finance the NCL letter
of credit, the cash element of the Fine Art acquisition and the ongoing
requirements of our existing operations. Pending completion of the negotiations,
no definitive documentation has been executed in connection with such financing
and there can be no assurance that we will be able to agree to definitive terms.
In the event that we are unable to secure this or other financing on acceptable
terms and in a timely manner, we may be compelled to cease or significantly
curtail our operations, or alternatively, seek protection in bankruptcy.
Historically, the Company has been financed primarily by loans from related
parties. The planned expansion of the business will require new equity capital,
long-and short-term debt and the provision of third-party bonding for the
Company's operational performance obligations. The cost of such financing will
be determined in part by our stock price and in part by third party assessment
of our operating prospects.
The Company has sustained net operating losses over the past two years. During
2004, the Company exited the development stage. Management is continuing to
develop its celebrity memorabilia business and is pursing additional capital to
continue this endeavor. The Company anticipates issuing equity securities and or
arranging additional debt financing to meet working capital requirements and to
fund development costs in connection with this business. If the Company is
unable to generate cash through the issuance of debt or equity, or is unable to
collect its outstanding receivables, or sell its current inventory, it may be
unable to meet its current obligations as they come due.
The Company operates subject to normal manufacturing financial profiles, except
that the nature of its product development requires it to build and accumulate
significant inventories. Similarly, its contractual arrangements with its sports
celebrities require it to make advance royalty payments in order to secure
agreements with such persons. Our ability to retain new sports personalities is
therefore subject to availability of funds.
As a young business with a limited history and a small equity capital base, the
Company has not yet been able to establish a high credit rating. As the
Company's operations grow in size and as new equity is introduced into the
business, we expect that we will be able to establish a higher credit rating,
although there can be no assurance that this will be achieved.
The Company has based its anticipated liquidity requirements on its operating
experience to date and on the business opportunities and negotiations in which
it is currently engaged. This liquidity requirement could be adversely affected
by various events outside the Company's control, such as an interruption in the
operations of the cruise line industry or the failure of, or any difficulties
suffered by, any of its customers. The Company intends to develop a spread of
distribution channels and customers to mitigate the effect on its liquidity of
any individual adverse factor.
8
Loan Agreement with Coach Capital
We entered into a loan agreement on April 27, 2004 with Coach Capital LLC
pursuant to which we borrowed $800,000 for a six-month term. Under the loan
agreement, we agreed to pay interest on the principal amount borrowed at the
rate of 10% per annum payable monthly for the first four months of the term and
at the rate of 18% per annum thereafter. We also agreed to pay a loan fee of
$8,000. Further, we have agreed to grant a first lien against our assets as well
as the assets of ISE, and have agreed not to grant any additional liens against
such assets without the prior written consent of Coach Capital. As of September
30, 2005, the Company had repaid $100,000 of the principal amount of such loan;
the remaining $700,000 was past due and the Company is negotiating repayment
terms with the lender. The Company is continuing to accrue interest at the rate
of 18% per annum.
On October 7, 2005, the Board of Directors approved the issuing of 50,000
restricted shares of common stock, effective June 10, 2005, in exchange for
Coach Capital agreeing not to call the loan prior to October 31, 2005 and
committing to releasing the Company from the negative covenant concerning the
grant of assets and undertaking of the Company or its subsidiaries prior to
October 31, 2005.
The Company intends to repay the loan, or develop a repayment program acceptable
to Coach Capital, out of the proceeds of the financing that we are negotiating
in connection with the acquisition of Fine Art.
Financing by H.E. Capital
We have been largely dependent upon H.E. Capital S.A. ("HE Capital") to fund the
business of the Company to date. HE Capital entered into a loan agreement with
the Company dated January 14, 2003 ("the Loan Agreement") and has since entered
into various amendments increasing the amount available to be advanced under the
Loan Agreement to $5 million. Under the terms of the Loan Agreement, the loans
accrue interest at a rate of 9% per annum and are repayable upon demand. The
loans were secured by a general security agreement granted by the Company
against all of its assets. HE Capital consented to the Coach Capital loan and
its security interest is subordinated to the Coach Capital security interest.
As of September 30, 2005, HE Capital had advanced $2,053,714 to the Company, as
compared with $1,085,716 at September 30, 2004. On March 25, 2004, we repaid
$400,000 owing to HE Capital at that time by the issuance of shares and share
purchase warrants. HE Capital agreed to cancel, surrender and forgive all
interest accrued on the indebtedness of $400,000 that was converted into shares
and share purchase warrants. On September 30, 2004, we repaid $900,000 to HE
Capital when it exercised 600,000 warrants it acquired in December 2003 to
purchase shares of our common stock at an exercise price of $1.50 per share. In
connection with such exercise, HE Capital agreed to cancel, surrender and
forgive all interest accrued on the $900,000 of indebtedness.
Certain individuals served as officers and/or directors of both HE Capital and
the Company from the date of the Company's acquisition of Image Innovations Inc.
until such individuals resigned their positions with the Company on February 24,
2004.
There is no assurance that HE Capital will advance any additional amounts to us
in order to continue to fund our business or that it will not otherwise demand
repayment of amounts owed thereto by the Company.
Cash Flows
We used cash of $595,539 in connection with operating activities during the
three months ended September 30, 2005, compared with $93,093 for the three
months ended September 30, 2004. We used cash of $129,873 in connection with
operating activities during the nine months ended September 30, 2005, as
compared with $1,466,012 for the nine months ended September 30, 2004.
9
Critical Accounting Policies
The Company's management makes a number of significant estimates, assumptions
and judgments in connection with the preparation of its financial statements.
See "Management's Discussion and Analysis or Plan of Operation - Critical
Accounting Policies" in our Form 10-KSB for the fiscal year ended December 31,
2004 for a detailed discussion of the estimates and judgments necessary in our
accounting for revenue recognition, inventory and stock-based transactions.
Item 3. Controls and Procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report (the "Evaluation Date"). Based upon that evaluation, our management
concluded that our disclosure controls and procedures were not as effective as
they should be with respect to timely alerting management to material
information required to be included in our periodic SEC filings. Specifically,
our internal reporting processes and procedures did not ensure that full,
accurate and timely disclosure of matters required to be reported to the SEC in
our periodic filings were made. Nevertheless, our management has determined that
all matters required to be disclosed in this report have been reported. We are
in the process of diligently developing processes and procedures to assure full,
accurate and timely disclosure in the current fiscal year, with the expectation
of establishing effective disclosure controls and procedures as soon as
reasonably practicable.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
As previously disclosed, on January 31, 2005 and February 8, 2005, the Company's
former Chief Executive Officer, Alain Kardos, who resigned as a Director from
the Company on February 3, 2004, filed actions in the Supreme Court of British
Columbia, naming the Company, its subsidiaries, Derick Sinclair, the Company's
Chief Financial Officer, and H.E. Capital as defendants. Mr. Kardos alleged (i)
that the defendants wrongfully refused or neglected to return to him two
certificates representing 700,000 shares of the Company's common stock (the
"Certificates", "Certificate", and "Shares", respectively) and (ii) that he was
wrongfully dismissed from his position as an officer and employee of the Company
and its Image Innovations subsidiary on October 21, 2004. Mr. Kardos sought a
declaration that the Shares and Certificates were his property; an injunction
restraining and enjoining the defendants, and their directors, officers,
employees, servants, agents and contractors, or others with knowledge of the
injunction, from directly or through any other person, selling, disposing of or
in way dealing with the Shares or Certificates without the consent of Mr.
Kardos; an order for the delivery by the defendants to Mr. Kardos of the
Certificates; and damages for their detention and/or conversion. In respect of
the wrongful termination action, Mr. Kardos sought damages in respect of
inadequate notice, an extended notice period, general and special damages and
costs.
On March 25, 2005, Mr. Kardos filed a third party complaint in the United States
District Court for the District of Nevada, naming the Company, its subsidiaries,
Mr. Sinclair and H.E. Capital, as third party defendants, with substantially the
same claims and requested relief as described above.
The matter has been settled pursuant to a Settlement Agreement and Mutual
Release of Claims dated November 4, 2005, by and among the Company, its
subsidiaries, H.E. Capital, Mr. Sinclair, and Mr. Kardos (the "Settlement
Agreement"). The Company is not required to make any payments in connection with
the Settlement Agreement, and pursuant thereto, is released from all claims.
Under the Settlement Agreement, H.E. Capital has agreed to deposit the Shares
into escrow and purchase the same at specified times at an amount agreed by
Kardos and H.E. Capital. Mr. Kardos' claim in respect of the alleged wrongful
termination has been dismissed with no payments required to be made by any
party.
10
Item 6. Exhibits.
Exhibit
Number
------
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a)
or Rule 15d-14(a).
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a)
or Rule 15d-14(a).
32.1 Certification of Chief Executive Officer required by Rule 13a-14(b)
or 18 U.S.C. 1350.
32.2 Certification of Chief Financial Officer required by Rule 13a-14(b)
or 18 U.S.C. 1350.
11
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 14, 2005
IMAGE INNOVATIONS HOLDINGS INC.
(Registrant)
By: /s/ Michael Preston
-----------------------
Michael Preston
Chief Executive Officer
By: /s/ Derick Sinclair
-----------------------
Derick Sinclair
Chief Financial Officer
12