UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004 Commission File No. 000-26363
IPIX Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-2213841
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3160 Crow Canyon Road
San Ramon, California 94583
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (925) 242-4002
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 Exchange Act). Yes [ ] No [X]
15,695,106 shares of $0.001 par value common stock outstanding as of April 16,
2004.
1
IPIX CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
INDEX
PART I-- FINANCIAL INFORMATION............................................ 3
Item 1. Condensed Consolidated Financial Statements (unaudited)........ 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 17
Item 4. Controls and Procedures........................................ 17
PART II-- OTHER INFORMATION............................................... 18
Item 1. Legal Proceedings.............................................. 18
Item 2. Changes In Securities And Use Of Proceeds...................... 18
Item 3. Defaults Upon Senior Securities................................ 18
Item 4. Submission Of Matters To A Vote Of Security Holders............ 18
Item 5. Other Information.............................................. 18
Item 6. Exhibits And Reports On Form 8-K............................... 19
Signatures................................................................ 20
Exhibit Index............................................................. 21
2
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
IPIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2004
--------------------------
(1) (unaudited)
(In thousands)
ASSETS
Cash and cash equivalents......................................................................... $ 10,241 $ 6,981
Restricted short term investments................................................................. 1,100 1,100
Short term investments............................................................................ 331 331
Accounts receivable, net.......................................................................... 261 364
Inventory, net.................................................................................... 398 503
Prepaid expenses and other current assets......................................................... 1,523 1,760
----------- ------------
Total current assets........................................................................ 13,854 11,039
Computer hardware, software and other, net........................................................ 1,578 1,327
Restricted cash and other long term assets........................................................ 852 718
----------- ------------
Total assets................................................................................ $ 16,284 $ 13,084
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................................. $ 612 $ 402
Accrued liabilities............................................................................... 3,342 3,279
Deferred revenue.................................................................................. 76 69
Current portion of obligations under capital leases............................................... 608 390
----------- ------------
Total current liabilities................................................................... 4,638 4,140
Other long term liabilities....................................................................... 181 70
----------- ------------
Total liabilities........................................................................ 4,819 4,210
----------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock (Aggregate liquidation value: $23,716 in 2003 and $24,116 in 2004)................ 1 1
Common stock...................................................................................... 9 9
Class B common stock.............................................................................. -- --
Additional paid-in capital........................................................................ 515,186 515,805
Accumulated deficit............................................................................... (503,731) (506,941)
------------ -------------
Total stockholders' equity.................................................................. 11,465 8,874
----------- ------------
Total liabilities and stockholders' equity.................................................. $ 16,284 $ 13,084
=========== ============
----------------------
(1) The December 31, 2003 balances were derived from the audited financial
statements.
See accompanying notes to the unaudited condensed consolidated financial
statements.
3
IPIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
March 31,
-------------------------
2003 2004
-------------- ---------
(In thousands, except per share data) (unaudited)
Revenue:
Ad Technologies.................................................. $ 5,602 $ 246
InfoMedia........................................................ 784 474
Security......................................................... 5 2
--------- --------
Total revenue................................................. 6,391 722
--------- --------
Cost of revenue:
Ad Technologies.................................................. 1,782 678
InfoMedia........................................................ 338 297
Security......................................................... 4 1
--------- --------
Total cost of revenue......................................... 2,124 976
--------- --------
Gross profit (loss)........................................... 4,267 (254)
--------- ---------
Operating expenses:
Sales and marketing.............................................. 1,761 1,342
Research and development......................................... 1,260 925
General and administrative....................................... 829 693
--------- --------
Total operating expenses...................................... 3,850 2,960
--------- --------
Income (loss) from operations.................................... 417 (3,214)
Other............................................................ (49) 4
---------- --------
Net income (loss)................................................ 368 (3,210)
Preferred stock dividends........................................ (440) (400)
--------- --------
Net loss available to common stockholders........................ $ (72) $ (3,610)
========= ========
Loss per common share, basic and diluted ........................ $ (0.01) $ (0.41)
Weighted average common shares, basic and diluted................ 6,813 8,901
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
IPIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
------------------
2003 2004
-------- ----------
(In thousands) (unaudited)
Cash flows from operating activities:
Net income (loss)............................................................................................ $ 368 $ (3,210)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation................................................................................................. 936 289
Provision for doubtful accounts receivable................................................................... (2) --
Changes in operating assets and liabilities:
Accounts receivable....................................................................................... 1,342 (103)
Inventory................................................................................................. (46) (203)
Prepaid expenses and other current assets................................................................. (266) 118
Other long term assets.................................................................................... 40 134
Accounts payable.......................................................................................... 228 (210)
Accrued expenses.......................................................................................... 61 (174)
Deferred revenue.......................................................................................... 38 (7)
--------- -----------
Net cash provided by (used in) operating activities................................................. 2,699 (3,366)
--------- -----------
Cash flow from investing activities:
Purchases of computer hardware, software and other........................................................... (310) (38)
--------- -----------
Net cash used in investing activities.................................................................. (310) (38)
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock....................................................................... -- 362
Repayments of capital lease obligations...................................................................... (685) (218)
--------- -----------
Net cash provided by (used in) financing activities.................................................... (685) 144
--------- -----------
Effect of exchange rate changes on cash...................................................................... 5 --
--------- ----------
Net increase (decrease) in cash and cash equivalents......................................................... 1,709 (3,260)
Cash and cash equivalents, beginning of period............................................................... 3,020 10,241
--------- ----------
Cash and cash equivalents, end of period..................................................................... $ 4,729 $ 6,981
========= ===========
See accompanying notes to the unaudited condensed consolidated financial
statements
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
IPIX Corporation, formerly Internet Pictures Corporation, provides
mission-critical imaging solutions for commerce, communication and security
applications. The Company's solutions create, process and manage a rich variety
of media including still images, 360-degree by 360-degree immersive images and
video. In 2003, the Company's business units moved from being technology based
(Immersive Video Solutions, Transaction Services and Immersive Still Solutions)
to being market based in order to better serve the needs of its customers. The
Company is now organized into three market focused business units: Security, Ad
Technologies and InfoMedia, respectively. IPIX Security provides security and
surveillance products and services for commercial and governmental customers. Ad
Technologies focuses on the sale of complete solutions to customers who rely on
visual data to create effective directional advertising such as publishers of
newspaper classifieds, yellow page directories, on-line auctions, real estate
and autos classifieds. InfoMedia focuses on the sale of immersive still
technology licenses for the on-line real estate, travel and hospitality and
visual documentation markets.
IPIX's extensive intellectual property covers patents for immersive imaging,
video and surveillance applications.
The accompanying unaudited condensed consolidated financial statements include
the accounts of IPIX Corporation and its wholly-owned subsidiaries, Interactive
Pictures Corporation, Interactive Pictures UK Limited, Internet Pictures
(Canada), Inc. and PW Technology, Inc. The consolidation of these entities will
collectively be referred to as the Company or IPIX. All significant intercompany
balances and transactions have been eliminated. The Company has ceased
operations in its Canadian and United Kingdom subsidiaries and is in the process
of liquidation of these two subsidiaries.
We have prepared these financial statements, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. The unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in our audited financial statements as of and for the year ended
December 31, 2003.
The information furnished reflects all adjustments which management believes are
necessary for a fair presentation of our financial position as of March 31, 2004
and the results of our operations for the three month period ended March 31,
2003 and 2004 and our cash flows for the three month period ended March 31, 2003
and 2004. All such adjustments are of a normal recurring nature. The results of
operations for the three month period ended March 31, 2003 and 2004 are not
necessarily indicative of the results to be expected for the respective full
years.
2. GOING CONCERN CONSIDERATIONS
The accompanying financial statements have been presented in accordance with
generally accepted accounting principles, which assume the continuity of the
Company as a going concern. During the quarter ended March 31, 2004 and in the
prior fiscal years, the Company has experienced, and continues to experience,
certain going concern issues related to cash flow and profitability.
During 2003, the Company changed its relationship with its largest customer,
eBay, which represented 87% of revenue for the year ended December 31, 2003.
eBay licensed technology from the Company that had previously been used by the
Company to provide eBay with recurring services. After 2003, the Company no
longer provides any services to eBay. As a result, the Company has a limited
operating history as it is operating in 2004 and upon which an evaluation of its
business and prospects may be made. In addition, the Company is subject to
generally prevailing economic conditions and, as such, the Company's operating
results in 2004 will be dependent upon its ability to provide quality products
and services, the success of its customers and the appropriations processes of
various commercial and governmental entities.
Management believes, however, that the Company has sufficient cash resources to
meet its funding needs through at least the next twelve months. The Company
finished the first quarter of 2004 with approximately $9.0 million in cash
reserves (cash and cash equivalents of $6.98 million, short-term restricted
investments of $1.10 million, long-term restricted cash of $0.63 million and
short-term investments of $0.33 million) and in April 2004, the Company
generated approximately $8 million in cash from the sale of its common stock, as
further described in Note 14. The Company has three business units all at
6
different stages in their development. Management expects to continue to make
significant investments in the development, sale and marketing of new products
for the security market and in the image management business, which may consume
some of the Company's cash reserves.
3. CASH, CASH EQUIVALENTS AND RESTRICTED SHORT TERM INVESTMENTS
We consider all highly liquid debt instruments with a remaining maturity at date
of purchase of three months or less to be cash equivalents.
At March 31, 2004, we had a $1.4 million short term investment which matures on
June 19, 2004, $1.1 million of which has been provided as collateral for certain
capital lease obligations and, accordingly, classified as restricted short term
investments. We will renew the investment for successive short term periods
until the capital lease obligation restrictions are removed.
4. EQUITY
During the three months ended March 31, 2004, we issued 442,144 shares of common
stock upon exercise of stock options. The total proceeds to the Company from the
option exercises will be $0.6 million, of which $0.3 million was recorded in
other current assets and received by us on April 1, 2004.
5. INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is computed by dividing net income (loss)
available to common stockholders for the period by the weighted average number
of shares of common stock outstanding. Net income (loss) available to common
stockholders is calculated as the net income (loss) less cumulative preferred
stock dividends for the period. If dilutive, the participation right of the
preferred stock is reflected in the calculation of basic income (loss) per share
using the "if converted" method or the "two class method," if more dilutive.
Diluted income (loss) per common share is computed by dividing net income (loss)
for the period by the weighted average number of shares of common stock
outstanding plus, if dilutive, potential common stock outstanding during the
period.
The following table sets forth the computation of basic and dilutive loss per
common share for the periods indicated:
Three months ended
March 31,
-----------------------
(In thousands, except per share) 2003 2004
----------- ----------
(unaudited)
NUMERATOR:
Net income (loss).................................................... $ 368 $ (3,210)
Preferred stock dividends............................................ (440) (400)
----------- ---------
Net loss available to common stockholders............................ $ (72) $ (3,610)
=========== =========
DENOMINATOR:
Weighted average shares outstanding-- Basic and diluted........... 6,813 8,901
=========== =========
LOSS PER COMMON SHARE, BASIC AND DILUTED............................. $ (0.01) $ (0.41)
=========== =========
The following table sets forth potential common shares that are not included in
the diluted net loss per common share calculation because to do so would be
antidilutive for the three month periods ended March 31, 2003 and 2004 as a
result of the net loss available to common shareholders:
(Shares in thousands) 2003 2004
------------ ------------
Stock options.......................................................................... 12 888
Convertible preferred stock............................................................ 10,267 10,970
Warrants............................................................................... -- 195
7
Not included in the table above, were the following rights to purchase common
stock where the average exercise price was greater than the average common share
price during the period and accordingly excluded from diluted net earnings per
common share for the three month periods ended March 31, 2003 and 2004:
(Shares in thousands)
2003 2004
--------- ---------
Average share price of common stock........................................ $ 1.07 $ 2.55
Stock options:
Average exercise price of options....................................... $ 7.03 $ 18.78
Shares excluded......................................................... 3,218 887
Series B Warrants (exercise price $2.17)................................... 1,381 --
Series B Warrants (exercise price $4.34)................................... 921 921
Common Warrants (average exercise price $165.33)........................... 170 137
6. RESTRUCTURING AND OTHER
During the three months ended March 31, 2004, $0.1 million of payments were made
against the Company's restructuring accrual. No additions were made to the
accrual during the quarter ended March 31, 2004. At March 31, 2004 the remaining
balance in the restructuring accrual was $0.3 million.
7. STOCK-BASED COMPENSATION -- FAIR VALUE DISCLOSURES
We comply with the disclosure provisions of Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation" ("FAS 123"). We have elected, however, to continue accounting for
stock-based compensation issued to employees using Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Under APB 25, compensation expense is based on the difference, if any, on the
date of grant, between the fair value of our stock and the exercise price of the
option. Stock and other equity instruments issued to non-employees have been
accounted for in accordance with FAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods, or Services," and have been
valued using the Black-Scholes model.
Pro forma information regarding our net income (loss) is required by FAS 123 and
FAS 148 "Accounting for Stock-Based Compensation, Transition and Disclosure",
and has been determined as if we had accounted for the stock options under the
fair value method of FAS 123.
The computations for pro forma basic and diluted loss per share follow:
Three months ended
March 31,
-----------------------
(In thousands, except per share data) 2003 2004
---------- -----------
(unaudited)
-----------------------
Net loss available to common stockholders............................ $ (72) $ (3,610)
Less total stock-based employee compensation expense
determined under fair value based methods for all awards.........
(442) (287)
---------- ---------
Adjusted net loss available to common stockholders................... $ (514) $ (3,897)
========== =========
Basic and diluted loss per common share:
Net loss available to common stockholders before pro forma charges.. $ (0.01) $ (0.41)
Net effect of pro forma charges..................................... (0.06) (0.03)
---------- ---------
Adjusted net loss per common share available to common stockholders.... $ (0.07) $ (0.44)
========== =========
Grants under the Employee Stock Purchase Plan ("ESPP") have a look-back feature
and a 15% discount and accordingly under FAS 123 would have had compensation
expense calculated as a result. The fair value disclosure associated with the
ESPP grants is included in the fair value pro-forma information above.
8
8. COMMITMENTS AND CONTINGENCIES
Commitments
The table below shows our contractual obligations as of March 31, 2004:
(In thousands) Payments Due by Period
-----------------------------------------------------
Remainder
Total of 2004 2005 2006 2007
-------- ------------ ------- -------- -------
Capital leases...................................................... $ 396 $ 396 $ -- $ -- $ --
Operating leases.................................................... 2,360 757 768 771 64
-------- ------------ ------- -------- -------
Total............................................................... $ 2,756 $ 1,153 $ 768 $ 771 $ 64
======== ============ ======= ======== =======
At March 31, 2004, the Company had $0.6 million of its cash deposits restricted
as collateral on a letter of credit for certain co-location facility leases
expiring in 2005 and, accordingly, classified as long term restricted cash; In
addition, the Company has prepaid $0.7 million of its obligations to the
co-location facility.
Contingencies
On November 15, 2002, a First Amended Consolidated Complaint for violation of
federal securities laws was filed against Homestore.com, Inc. ("Homestore") by
the California Teachers' Retirement System ("CalSTRS"). The Complaint is a class
action lawsuit filed on behalf of stockholders of Homestore which flows from
alleged misstatements and omissions made by Homestore and the other named
defendants, which include us. The Complaint alleges that during 2001, Homestore
and IPIX entered into fraudulent reciprocal transactions intended to
artificially bolster and maintain Homestore's and our respective stock prices.
The Complaint alleges that Homestore's public statements with respect to these
transactions are attributable to us and violate Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. We joined with other co-defendants and filed a
joint motion to dismiss, alleging that the Complaint fails to state a claim upon
which relief may be granted, among other things. On March 7, 2003, the United
States District Court for the District of Central California granted our motion
to dismiss, with prejudice. On April 7, 2004, the California Teachers'
Retirement System filed a notice of appeal with the United States Court of
Appeals for the Ninth Circuit appealing the dismissal of the First Amended
Consolidated Complaint for violation of federal securities laws filed against
Homestore.com, Inc, us and the other named defendants.
In June 2003, we filed a lawsuit against Ford Oxaal and Minds-Eye-View, Inc. in
the United States District Court for the Eastern District of Tennessee alleging
patent infringement of certain patents and other causes of action. The
defendants in the lawsuit have filed counterclaims against the Company in their
response to our action. The litigation is in the pre trial motion stage at the
current time.
We are not currently a party to any other legal proceedings the adverse outcome
of which, individually or in the aggregate, we believe could have a material
adverse effect on our business, financial condition, results of operations or
cash flows.
Indemnification Provisions
During the ordinary course of business, in certain limited circumstances, the
Company has included indemnification provisions within certain of its contracts.
Pursuant to these agreements, the Company will indemnify, hold harmless and
agree to reimburse the indemnified party for losses suffered or incurred by the
indemnified party, generally parties with which the Company has commercial
relations, in connection with certain intellectual property infringement claims
by any third party with respect to the Company's products and services. To date,
the Company has not incurred any costs in connection with such indemnification
clauses.
9. SEGMENTS
We currently have three reportable segments. The accounting policies of the
segments are the same as those of the Company. Management evaluates the
performance of the segments and allocates resources to them based on evaluations
of the segment's revenues and gross profit. There are no inter-segment revenues.
We do not make allocations of corporate costs to the individual segments and do
not identify separate assets of the segments in making decisions regarding the
performance or the allocation of resources to them.
9
Information about the reported segments is as follows:
Three months ended
March 31,
-------------------------
(In thousands) 2003 2004
------------- -----------
Revenue:
Ad Technologies............................................. $ 5,602 $ 246
InfoMedia................................................... 784 474
Security.................................................... 5 2
-------- ---------
Total.......................................................... $ 6,391 $ 722
======== =========
Gross profit (loss):
Ad Technologies............................................. $ 3,820 $ (432)
InfoMedia................................................... 446 177
Security.................................................... 1 1
-------- ---------
Total.......................................................... $ 4,267 $ (254)
======== =========
10. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities ("VIE"), an Interpretation of ARB No. 51" ("FIN 46") and in December
2003, issued a revised interpretation (FIN 46-R). FIN No. 46, as revised,
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN 46-R
are effective immediately for all arrangements entered into after January 31,
2003. For arrangements entered into prior to February 1, 2003, we adopted the
provisions of FIN 46-R in the first quarter of 2004. The adoption of FIN 46-R
did not have a significant effect on our financial position or results of
operations.
11. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to a concentration of credit
risk consist of cash, cash equivalents, short term investments and accounts
receivable. Cash, cash equivalents and short term investments are deposited with
high quality financial institutions. Our accounts receivable are derived from
revenue earned from customers located in the U.S. and abroad. We perform ongoing
credit evaluations of our customers' financial condition and we do not require
collateral from our customers.
The following table summarizes the revenue from customers in excess of 10% of
total revenues:
Three months ended
March 31,
--------------------
2003 2004
-------- --------
Homestore............................................................... 4% 13%
General Dynamics........................................................ 0% 13%
eBay.................................................................... 84% 0%
At March 31, 2004, General Dynamics and Homestore represented 26% and 19% of
accounts receivable, respectively. At December 31, 2003, Homestore represented
22% of accounts receivable, while eBay and General Dynamics were both 0% of
accounts receivable.
12. LIQUIDATION PREFERENCE AND PREFERRED STOCK DIVIDENDS
On September 26, 2001, Image Investor Portfolio, a separate series of Memphis
Angels, LLC ("Image") and certain strategic investors completed the purchase of
1,115,080 shares of the Series B Preferred Stock for total consideration of
$22.3 million. Each share of the Series B Preferred Stock is convertible into
approximately 9.2 shares of our Common Stock and is entitled to vote on matters
submitted to holders of Common Stock on an as-converted basis. At any time that
the holders of the Series B Preferred Stock hold more than 50% of our voting
stock, a voluntary liquidation, dissolution or winding up of the Company must be
approved by at least five of the seven members of our board of directors.
10
Holders of Series B Preferred Stock, in preference to holders of any other
series of Preferred Stock and in preference to the holders of Common Stock
(collectively, "Junior Securities"), accrue dividends at the rate of eight
percent (8%) of the price paid per annum on each outstanding share of Series B
Preferred Stock ("Series B Dividends"). The Series B Dividends are cumulative,
accrue daily and shall be payable, when and if declared by the Board, upon
conversion or as an accretion to the Liquidation Preference, as defined below.
Accrued Series B Dividends may be paid in cash or common stock, at the election
of the Series B Preferred stockholder. Holders of Series B Preferred Stock
participate on an as-if converted basis in any common stock dividends.
Upon any liquidation event, before any distribution or payment shall be made to
the holders of any Junior Securities, the holders of Series B Preferred Stock
shall be entitled to be paid out of the assets of the Company legally available
for distribution, or the consideration received in such Transaction, an amount
per share of Series B Preferred Stock equal to the price paid plus all accrued
and unpaid Series B Dividends for each share of Series B Preferred Stock held by
them (the "Liquidation Preference"). If, upon any such liquidation event, the
assets of the Company are insufficient to make payment in full to all holders of
Series B Preferred Stock of the Liquidation Preference, then such assets shall
be distributed among the holders of Series B Preferred Stock at the time
outstanding, ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.
As of March 31, 2004, 1,003,830 shares of Series B Preferred Stock remain
outstanding and the Liquidation Preference was $24.1 million, which includes the
$3.6 million in accrued dividends in arrears on the Series B Preferred Stock
which have not been declared to be paid. See Note 14.
13. RELATED PARTY TRANSACTIONS
Transactions with eBay, Inc.
Pursuant to an agreement dated April 19, 2000, as amended, the Company provided
to eBay, Inc., which as last reported by eBay, beneficially owns more than 10%
of the Company's common stock, image management services to eBay's on-line
auction Web sites. Pursuant to that agreement, the Company issued eBay a warrant
to purchase 60,000 shares of common stock at an exercise price of $203.80 per
share. The warrant expires on April 19, 2010. Under this agreement, as amended,
the Company generated revenue of $5.4 million for the quarter ended March 31,
2003. As announced in June 2003, the Company amended the then current commercial
agreement with eBay to include a one-time $8.0 million license fee from eBay for
IPIX Rimfire technology and other services. The Company no longer provides any
products or services to eBay.
During April 2000, the Company entered into an agreement to provide visual
content services to eBay under which the Company was required to pay marketing
fees to eBay of $16.0 million over a two-year period. As of September 26, 2001,
the Company had paid $9.5 million of the $16.0 million commitment and agreed to
extend the additional $6.5 million of payments through September 2003. In
accordance with EITF 01-09, $0.5 million of these fees was offset against
revenue which amount represented the excess over the fair value of the benefit
received during the quarter ended March 31, 2003.
In 2001 and 2002, the Company sold to eBay, and eBay leased back to the Company,
certain computer equipment utilized to provide image management services to eBay
and other customers. The purchase price for the equipment was approximately $5.3
million. The transactions resulted in no gain or loss to the Company. In the
quarter ended March 31, 2003, the Company paid $0.5 million pursuant to these
lease agreements. In 2003, the Company returned the underlying equipment, with a
net carrying amount of $0.9 million, associated with these lease obligations and
eBay forgave the remaining balances due of $1.1 million.
14. SUBSEQUENT EVENTS
On April 5, 2004, the Company entered into a private stock purchase agreement to
sell common stock to institutional investors raising net proceeds of
approximately $5 million. The agreement includes additional investment rights.
The proceeds are in exchange for 909,090 shares of the Company's unregistered
common stock and additional investment rights to purchase 888,180 shares. The
shares were sold at $5.50 per share. The additional investment rights have an
exercise price of $6.05 per share. The additional investment rights are
immediately exercisable and expire 90 trading days after a registration
statement relating to the resale of the shares has been declared effective by
the SEC. If exercised fully, the additional investment rights would provide the
Company with approximately an additional $5.3 million in proceeds. The common
stock and the additional rights to purchase common stock under this private
transaction have not been registered under the Securities Act of 1933, as
amended, and may not be offered or sold in the United States without a
11
registration statement or exemption from registration. The Company has agreed to
file a registration statement relating to the resale of the shares. The
Company's Current Report on Form 8-K, filed with the SEC on April 7, 2004,
provides a description of this transaction and copies of the executed documents.
From April 1, 2004 through April 16, 2004, we issued 782,458 million shares of
common stock upon exercise of stock options. The total proceeds to the Company
from the option exercises were $2.9 million, plus $0.3 million from March 2004
exercises which was received by us on April 1, 2004.
On April 13, 2004, certain investors converted 470,635 shares of Series B
Preferred Stock into 4,333,371 shares of common stock in accordance with the
conversion terms of the preferred stock. In conjunction with the conversion we
issued them 535,314 shares of common stock for dividends accrued through the
date of conversion as required under the terms of the preferred stock. The
Company did not receive any proceeds from the conversions.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to our results of
operations and our financial condition together with our consolidated
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K. Historical results and percentage relationships set forth
in the statement of operations, including trends which might appear, are not
necessarily indicative of future operations.
OVERVIEW
Our Business
Over the past few years, we have restructured the Company around our higher
gross margin businesses. We are now organized into three business units: IPIX
Security, IPIX Ad Technologies and IPIX InfoMedia.
o IPIX Security provides security and surveillance products and services
for commercial and governmental customers.
o IPIX Ad Technologies focuses on the sale of complete solutions to
customers who rely on visual data to create effective directional
advertising such as publishers of newspaper classifieds, yellow page
directories, on-line auctions, real estate and autos classifieds.
o IPIX InfoMedia focuses on the sale of immersive still technology
licenses for the on-line real estate, travel and hospitality and
visual documentation markets.
Business Trends and Conditions
At the end of the first quarter of 2004, our Security business unit launched a
new family of Full-360 degree camera systems. These new camera systems will
generate revenues from their sale primarily to distributors. The cost of sales
for the sale of camera equipment is generally expected to be 40% to 60% of
related revenues. We continue to develop additional products for the security
and surveillance market.
Substantially all of our recurring revenue in the past was derived from
transaction fees generated by our Ad Technologies business unit. In particular,
eBay represented approximately 84% of total revenue for the quarter ended March
31, 2003. We no longer provide any products or services to eBay as of November
1, 2003. We continue to diversify and add additional Ad Technologies' customers
and are currently targeting image management for publications, on-line and
in-print classified advertising and other business opportunities.
Our immersive technology used by the InfoMedia business unit primarily generates
revenues in two ways: licenses of software and the sale of camera equipment. In
the past, we utilized "keys" to license our InfoMedia technology to capture and
save a single immersive image. With the launch of Interactive Studios in the
first quarter of 2004, we now offer time-based seat or user licenses which
permit an unlimited number of immersive images to be captured and saved within a
specific time period, usually a year. We sell our immersive products and
services primarily into the real estate, travel and hospitality and visual
documentation markets. The cost of sales for our licenses is low in proportion
to the related revenue. The cost of sales for the sale of camera equipment has
generally been 50% to 75% of related revenues. We continue to develop our
immersive imaging business for the security and surveillance market.
12
We also provide professional services to customers that request specific
customizations or integrations of our products and services. Providing
professional services is labor intensive, and our cost of sales for professional
service tends to be 40% to 60% of revenues.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to revenue
recognition, uncollectible receivables and other long-lived assets and
contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements: revenue recognition; valuation allowances, specifically
the allowance for doubtful accounts; and other long-lived assets; and
significant accruals. We believe that full consideration has been given to all
relevant circumstances that we may be subject to, and our financial statements
accurately reflect management's best estimate of the results of operations,
financial position and cash flows for the periods presented.
Management has discussed the development and selection of the following critical
accounting policies, estimates and assumptions with the Audit Committee of our
Board of Directors and the Audit Committee has reviewed these disclosures. We
believe the following represent our critical accounting policies:
Revenue Recognition
We recognize revenue in accordance with SOP 97-2, "Software Revenue Recognition"
and Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements." We derive revenue from product sales and services we provide to
customers. Product revenue includes InfoMedia hardware and licenses, IPIX
Security hardware and licenses, as well as Ad Technology license revenue.
Service revenues are primarily from transactions where a seller uses IPIX image
management products to enhance their on-line offering.
Product revenue is recognized upon shipment or delivery provided there are no
uncertainties surrounding product acceptance, persuasive evidence of an
arrangement exists, there are no significant vendor obligations, the fees are
fixed or determinable and collection is reasonably assured. Initial license fees
are recognized when a contract exists, the fee is fixed or determinable,
software delivery has occurred and collection of the receivable is reasonably
assured. If there are continuing obligations, then license fees are recognized
ratably over the life of the contract.
Transaction hosting revenues are recognized ratably as transactions are
performed provided there was persuasive evidence of an arrangement, the fee was
fixed or determinable and collection of the resulting receivable was reasonably
assured. Revenues generated from professional services are recognized as the
related services are performed. When such professional services are combined
with on-going transaction services or are deemed to be essential to the
functionality of the delivered software product, revenue from the entire
arrangement is recognized while the transaction services are performed, on a
percentage of completion method or not until the contract is completed in
accordance with SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts," and ARB No. 45, "Long-Term Construction-Type
Contracts." Reimbursements received for out-of-pocket expenses incurred are
characterized as revenue in the statement of operations.
Where multiple elements exist in an arrangement, the arrangement fee is
allocated to the different elements based upon verifiable objective evidence of
the fair value of the elements, as governed under EITF 00-21, which is codified
in SEC Staff Accounting Bulletin No. 104 "SAB 104." Multiple element
arrangements primarily involve an arrangement with professional services and
transaction hosting. Revenue is recognized as each element is earned, namely
upon completion of the services, provided that the fair value of the undelivered
element(s) has been determined, the delivered element has stand-alone value,
there is no right of return on delivered element(s), and we are in control of
delivery of the undelivered element(s).
Royalties derived from desktop imaging products were recognized as revenues upon
receipt of the royalty sell-through reports from customers, which are generally
in the quarter following the quarter in which the sale by the customer took
place.
13
Payments received in advance are initially recorded as deferred revenue and
recognized ratably as obligations are fulfilled.
Allowances for Doubtful Accounts
Significant management judgments and estimates must be made and used in
connection with establishing the doubtful account allowances in any accounting
period. Management specifically analyzes accounts receivable and historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. Material differences could result in the
amount and timing of expense recorded if management had different judgment or
utilized different estimates.
Goodwill
During the fourth quarter of 2003, certain events, including the end of the
agreement with eBay, led the Company to perform an impairment review of
goodwill. The eBay agreement ended in November 2003 and was the primary source
of cash flows for the technology associated with goodwill in the Ad Technologies
business unit. This review indicated that goodwill was being carried at amounts
in excess of the fair value based on estimated discounted future cash flows of
the Ad Technologies business unit. As a result, an impairment charge was
recorded to expense in the year ended December 31, 2003. No balance remains in
goodwill.
Significant Accruals, including Restructuring Charges and Sales Tax
We recorded restructuring charges associated with vacated facilities. The key
assumptions associated with these charges include the timing and amount of
sub-lease income. In addition, in establishing and providing for sales tax
accruals, we make judgments based on the actual tax laws and guidance. While
management believes that its judgments and interpretations regarding tax
liabilities are appropriate, significant differences in actual experience may
materially affect our future financial results.
RESTRUCTURING ACTIONS
During the three months ended March 31, 2004, $0.1 million of payments were made
against the Company's restructuring accrual. No additions were made to the
accrual during the quarter ended March 31, 2004. At March 31, 2004 the remaining
balance in the restructuring accrual was $0.3 million.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percent
relationship to total revenues of select items in our statements of operations.
Three months ended
March 31,
2003 2004
------- -------
Revenue:
Ad Technologies................................................... 87.6% 34.1%
InfoMedia......................................................... 12.3 65.6
Security.......................................................... 0.1 0.3
------- -------
Total revenue........................................................ 100.0 100.0
------- -------
Cost of revenue:
Ad Technologies................................................... 27.9 93.9
InfoMedia......................................................... 5.3 41.1
Security.......................................................... 0.1 0.2
------- --------
Total cost of revenue................................................ 33.3 135.2
------- -------
Gross profit......................................................... 66.7 (35.2)
------- -------
Operating expenses:
Sales and marketing............................................... 27.6 185.9
Research and development.......................................... 19.7 128.1
General and administrative........................................ 13.0 96.0
------- -------
Total operating expenses............................................. 60.3 410.0
------- -------
Income (loss) from operations........................................... 6.4 (445.2)
Other................................................................... (0.7) 0.6
------- --------
Net income (loss)....................................................... 5.7% (444.6)%
======= ========
14
Quarter Ended March 31, 2003 Compared to the Quarter Ended March 31, 2004
Three months ended
March 31,
-------------------
Percent
(Dollars in thousands) 2003 2004 Difference Change
--------- --------- ---------- --------
Revenue:
Ad Technologies.......................................................... $ 5,602 $ 246 $ (5,356) (96)%
InfoMedia................................................................ 784 474 (310) (40)
Security................................................................. 5 2 (3) (60)
--------- -------- ---------- -------
Total revenue............................................................... 6,391 722 (5,669) (89)
--------- -------- ---------- -------
Cost of revenue:
Ad Technologies.......................................................... 1,782 678 (1,104) (62)
InfoMedia................................................................ 338 297 (41) (12)
Security................................................................. 4 1 (3) (75)
--------- -------- ---------- -------
Total cost of revenue....................................................... 2,124 976 (1,148) (54)
--------- -------- --------- ------
Gross profit................................................................ 4,267 (254) (4,521) (106)
--------- --------- ---------- -------
Operating expenses:
Sales and marketing...................................................... 1,761 1,342 (419) (24)
Research and development................................................. 1,260 925 (335) (27)
General and administrative............................................... 829 693 (136) (16)
--------- -------- --------- ------
Total operating expenses.................................................... 3,850 2,960 (890) (23)
--------- -------- --------- ------
Income (loss) from operations.................................................. 417 (3,214) (3,631) (871)
Other.......................................................................... (49) 4 53 108
--------- -------- --------- ------
Net Income (loss).............................................................. $ 368 $ (3,210) $ (3,578) (972)%
========= ======== ========= ======
Revenue.
Ad Technologies: Decreased in the quarter ended March 31, 2004 over the
quarter ended March 31, 2003 due to decreased volumes of images
processed, primarily related to the change in relationship with eBay as
of November 2003.
InfoMedia: During the first quarter of 2003, InfoMedia recognized $0.3
million in royalties while in the first quarter of 2004 the group
recognized virtually no royalty revenues. In February 2004, InfoMedia
launched Interactive Studios to eventually replace the sale of one-use
keys, which generated royalty income in 2003.
Security: At the end of the first quarter of 2004, the Security business
unit launched its new family of Full-360 degree security cameras. Prior
to this launch, the Security group had primarily been developing the
products and testing them in field beta trials.
Cost of Revenue.
Ad Technologies: Cost of revenue consists of our direct expenses
associated with the processing, hosting and distribution of digital
content. With the reduced volumes of images to process during the first
quarter of 2004 relative to the first quarter of 2003, the Ad
Technologies business unit decreased depreciation expense by reducing
the capital committed to image processing ($0.6 million), lowered its
purchase of bandwidth and managed care services from third party
co-location facilities ($0.2 million) and reduced the number of
personnel and other expenses incurred in the management of the network
($0.3 million). Gross profit in the first quarter of 2004 was negative
because of fixed costs associated with the running and management of
the network.
InfoMedia: Cost of revenues consists of the costs of the digital camera
and related components included in an InfoMedia kit. Cost of revenue
declined in the first quarter of 2004 relative to 2003, primarily due
to fewer kit sales. Cost of revenue as a percent of revenue increased
from 43% in the first quarter of 2003 to 63% in the first quarter of
2004 primarily because in the first quarter of 2003 the group
recognized $0.3 million of royalties, which have no cost of revenues,
where as in first quarter 2004 the group recognized virtually no
royalty revenues. The remaining difference in cost of revenues between
the quarters is related to product mix of the types of camera kits
sold.
15
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
for marketing, sales and business development personnel. Sales and marketing
expenses also include commissions and related benefits for sales personnel and
consultants, traditional advertising and promotional expenses. Sales and
marketing expenses decreased in the quarter ended March 31, 2004 over the
quarter ended March 31, 2003, primarily due to the changed relationship with
eBay ($0.5 million) offset by an increase in growth of sales and marketing
activities in our Security business unit ($0.1 million).
Research and Development. Research and development expenses consist primarily of
personnel costs related to building and enhancing our digital media
infrastructure and immersive imaging technology. Research and development
expenses decreased in the quarter ended March 31, 2004 over the quarter ended
March 31, 2003, due to the result of the changed relationship with eBay ($0.4
million), offset by an increase in growth of research and development of our new
family of Full-360 degree security cameras ($0.1 million).
General and Administrative. General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff, fees for outside professional services and other costs associated with
being a public company. General and administrative expenses decreased in the
quarter ended March 31, 2004 over the quarter ended March 31, 2003, due to the
decrease in personnel costs and outside professional services.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through our registered public
offerings, the private placements of capital stock, a convertible debenture, a
convertible promissory note and warrant and option exercises. At March 31, 2004,
we had $9.0 million of cash, restricted cash and short term investments, of
which $1.7 million was restricted.
Summary Consolidated Cash Flow Data
Three months ended
March 31,
----------------------
(In thousands) 2003 2004
----------- ---------
Net cash provided by (used in) operating activities............... $ 2,699 $ (3,366)
Net cash used in investing activities............................. (310) (38)
Net cash provided by (used in) financing activities............... (685) 144
Effect of exchange rate changes on cash........................... 5 --
--------- --------
Net increase (decrease) in cash and cash equivalents.............. 1,709 (3,260)
Cash and cash equivalents, beginning of period.................... 3,020 10,241
--------- --------
Cash and cash equivalents, end of period.......................... $ 4,729 $ 6,981
========= ========
Cash flows from operating activities in the first quarter of 2004, reflects net
loss of $3.2 million, compared to a net income of $0.4 million the first quarter
of 2003. Our net income for the three months ended March 31, 2003 included $0.9
million of non-cash depreciation charges, whereas the three months ended March
31, 2004 included $0.3 million of such charges. During the first quarter of
2003, the Company had positive net cash flows from working capital of $1.4
million, primarily as a result of accounts receivable collections in early 2003.
During the first quarter of 2004, the Company invested $0.5 million in
additional working capital for its three business units.
Net cash used in investing activities in the first quarter of 2004 and 2003 was
primarily related to the acquisition of computer software and hardware. We do
not currently expect any significant acquisitions of computer hardware and
software throughout the remainder of 2004.
Net cash provided by financing activities in the first quarter of 2004 was
primarily related to $0.4 million of proceeds from the exercise of stock
options, net of $0.2 million of payments made on capital lease obligations. Net
cash used in financing activities in the first quarter of 2003 related to
payments on capital lease obligations. The capital lease payments in 2003 were
larger than in 2004 because in the fourth quarter of 2003, the Company returned
equipment under lease from eBay in exchange for the retirement of the remaining
obligations under the leases.
During the quarter ended March 31, 2004 and in the prior fiscal years, the
Company has experienced, and continues to experience, certain going concern
issues related to cash flow and profitability. As discussed in Note 14, in April
2004, the Company has generated approximately $8 million in cash from the sale
16
of its common stock. In addition, the Company believes that it will improve its
cash flow through the sale of new products launched in the first quarter of 2004
in the Security and InfoMedia business units.
During 2003, the Company changed its relationship with its largest customer,
eBay, which represented 87% of revenue for the year ended December 31, 2003.
eBay licensed technology from the Company that had previously been used by the
Company to provide eBay with recurring services. After 2003, the Company no
longer provides any services to eBay. As a result, the Company has a limited
operating history as it will operate in 2004 and upon which an evaluation of its
business and prospects may be made. In addition, the Company is subject to
generally prevailing economic conditions and, as such, the Company's operating
results in 2004 will be dependent upon its ability to provide quality products
and services, the success of its customers and the appropriations processes of
various commercial and governmental entities.
Management believes, however, that the Company has sufficient cash resources to
meet its funding needs through at least the next twelve months. The Company
finished the first quarter of 2004 with approximately $9.0 million in cash
reserves (cash and cash equivalents of $6.98 million, short-term restricted
investments of $1.10 million, long-term restricted cash of $0.63 million and
short-term investments of $0.33 million) and in April 2004, the Company
generated approximately $8 million in cash from the sale of its common stock, as
further described in Note 14. The Company has three business units all at
different stages in their development. Management expects to continue to make
significant investments in the development, sale and marketing of new products
for the security market and in the image management business, which may consume
some of the Company's cash reserves.
Management's focus is to manage our cash requirements and focus our operations
on revenue generation and controlled spending. Our long-term strategy remains
unchanged. We will continue to invest in research and development for our
Security and image management products and will in the expansion of our Security
distribution channel and the offline publications and online classified
advertising businesses.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities ("VIE"), an Interpretation of ARB No. 51" ("FIN 46") and in December
2003, issued a revised interpretation (FIN 46-R). FIN No. 46, as revised,
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN 46-R
are effective immediately for all arrangements entered into after January 31,
2003. For arrangements entered into prior to February 1, 2003, we adopted the
provisions of FIN 46-R in the first quarter of 2004. The adoption of FIN 46-R
did not have a significant effect on our financial position or results of
operations.
INFLATION
Inflation has not had a significant impact on our operations to date.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2004, we had $9.0 million of cash, cash equivalents, short-term
and long-term restricted cash and short-term investments. Our interest income is
sensitive to changes in the general level of United States interest rates,
particularly since the majority of our investments are in short-term
instruments. Due to the nature of our short-term investments, we concluded that
we do not have material market risk exposure.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14(c)) as of the end of the period covered by this
quarterly report. Based on that evaluation, the chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures are effective to ensure that material information relating to the
Company and our consolidated subsidiaries is made known to such officers by
others within these entities, particularly during the period for which this
quarterly report was prepared, in order to allow timely decisions regarding
required disclosure.
17
(b) Changes in Internal Controls. There have not been any significant changes in
our internal controls or in other factors during the period covered by this
quarterly report that materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.
FORWARD-LOOKING STATEMENTS
This quarterly report contains statements about future events and expectations
which are characterized as forward-looking statements. Forward-looking
statements are based on our management's beliefs, assumptions and expectations
of our future economic performance, taking into account the information
currently available to them. These statements are not statements of historical
fact. Forward-looking statements involve risks and uncertainties that may cause
our actual results, performance or financial condition to be materially
different from the expectations of future results, performance or financial
condition we express or imply in any forward-looking statements. Factors that
could contribute to these differences include those discussed in "Risk Factors"
of our annual report on Form 10-K filed with the SEC on March 31, 2004.
The words "believe", "may", "will", "should", "anticipate", "estimate",
"expect", "intends", "objective" or similar words or the negatives of these
words are intended to identify forward-looking statements. We qualify any
forward-looking statements entirely by these cautionary factors.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
See Item 3, Legal Proceedings in our Annual Report on Form 10-K. On April 7,
2004, the California Teachers' Retirement System filed a notice of appeal with
the United States Court of Appeals for the Ninth Circuit appealing the dismissal
of the First Amended Consolidated Complaint for violation of federal securities
laws filed against Homestore.com, Inc, us and the other named defendants.
Item 2. Changes In Securities And Use Of Proceeds
On April 5, 2004, pursuant to a Securities Purchase Agreement, the Company sold
909,090 shares of common stock and additional investment rights to purchase
888,180 in a private unregistered offering to institutional investors. The per
share offering price was $5.50, and the offering raised net proceeds of
approximately $5 million. The additional investment rights have an exercise
price of $6.05 per share. The Company has agreed to file a registration
statement relating to the resale of the shares. The additional investment rights
are immediately exercisable and expire 90 trading days after the registration
statement relating to the resale of the shares has been declared effective by
the SEC. If exercised fully, the additional investment rights would provide the
Company with approximately an additional $5.3 million in proceeds. The offering
was conducted pursuant to the exemption from registration set forth in Section
4(2) of the Securities Act of 1933, as amended, and other applicable exemptions
set forth in the Securities Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Item 5. Other Information
None.
18
Item 6. Exhibits And Reports On Form 8-K
Exhibits
Exhibit Exhibit Description
Number -------------------
-------
4 Form of Additional Investment Right dated as of April 4, 2004 by
and between the Registrant and the Purchasers thereto, filed as
Exhibit 4 to the Company's Current Report on Form 8-K filed on
April 7, 2004, is hereby incorporated herein by reference.
10 Securities Purchase Agreement dated as of April 4, 2004 by and
between the Registrant and the Purchasers thereto, filed as
Exhibit 10 to the Company's Current Report on Form 8-K filed on
April 7, 2004, is hereby incorporated herein by reference.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer
Reports On Form 8-K
The Company filed the following Current Reports on Form 8-K during the quarter
ended March 31, 2004:
Date Filed Event Reported
---------- --------------
February 10, 2004.... Item 5. Resignation of Thomas M. Garrott as a Director
of the Registrant.
March 9, 2004........ Items 7 and 12. Earnings release regarding financial
results for the quarter and year ended December
31, 2003.
March 18, 2004....... Item 5. Resignation of Greg Daily as a Director of
Registrant.
19
IPIX CORPORATION
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.
DATE: April 19, 2004 IPIX CORPORATION
(Registrant)
/s/ Paul Farmer
-------------------------
Paul Farmer
Authorized Officer
Chief Financial Officer and
Chief Accounting Officer
20
IPIX CORPORATION
INDEX TO EXHIBITS FOR FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2004
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
4 Form of Additional Investment Right dated as of
April 4, 2004 by and between the Registrant and
the Purchasers thereto, filed as Exhibit 4 to the
Company's Current Report on Form 8-K filed on April
7, 2004, is hereby incorporated herein by
reference.
10 Securities Purchase Agreement dated as of April 4,
2004 by and between the Registrant and the
Purchasers thereto, filed as Exhibit 10 to the
Company's Current Report on Form 8-K filed on
April 7, 2004, is hereby incorporated herein by
reference.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
32 Section 1350 Certification of Chief Executive
Officer and Chief Financial Officer
21
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
I, Donald Strickland, the President and Chief Executive Officer of IPIX
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IPIX Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
22
Date April 19, 2004
/s/ Donald Strickland
------------------------------
Donald Strickland
President and Chief Executive Officer
23
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
I, Paul Farmer, Chief Financial Officer of IPIX Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IPIX Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
and
24
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
Date April 19, 2004
/s/ Paul Farmer
--------------------------
Paul Farmer
Chief Financial Officer
25
Section 1350 Certifications
Exhibit 32
In connection with the Quarterly Report of IPIX Corporation and its
wholly-owned subsidiaries (collectively, the "Company") on Form 10-Q for the
period ending March 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), we, Donald Strickland and Paul
Farmer, the Chief Executive Officer and Chief Financial Officer, respectively,
of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Donald Strickland
------------------------
Donald Strickland
Chief Executive Officer
April 19, 2004
/s/ Paul Farmer
------------------------
Paul Farmer
Chief Financial Officer
April 19, 2004
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
26