SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
or
TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[GRAPHIC OMITED]
IMAGING TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-0021693
(State or other jurisdiction of incorporation or organization) (IRS Employer ID No.)
17075 VIA DEL CAMPO
SAN DIEGO, CA 92127
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (858) 451-6120
Check 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 past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
The number of shares outstanding of the registrant's common stock as of February
12, 2003 was 144,073,122.
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31, 2002 (unaudited) and June 30, 2002 (audited) 3
Consolidated Statements of Operations
3 months ended December 31, 2002 and 2001 (unaudited) 4
6 months ended December 31, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows
6 months ended December 31, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 25
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 5. OTHER INFORMATION 27
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 28
CERTIFICATION 29
EXHIBITS 31
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DEC 31, 2002 JUN 30, 2002
(unaudited) (audited)
Current assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 177 $ 43
Accounts receivable, net of allowance for doubtful
accounts of $165 and $280. . . . . . . . . . . . . . . 343 629
Inventories, net. . . . . . . . . . . . . . . . . . . . . 12 151
Prepaid expenses and other current assets . . . . . . . . 21 33
----------------- ----------------
Total current assets . . . . . . . . . . . . . . . . 553 856
Property and Equipment, net. . . . . . . . . . . . . . . . . . 109 212
Workers' compensation deposit and other assets . . . . . . . . 239 112
----------------- ----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 901 $ 1,180
================= ================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Borrowings under bank notes payable . . . . . . . . . . . $ 3,195 $ 3,295
Short-term notes payable, including amounts due to
related parties. . . . . . . . . . . . . . . . . . . . 2,716 2,796
Convertible debentures. . . . . . . . . . . . . . . . . . 1,323 803
Accounts payable. . . . . . . . . . . . . . . . . . . . . 6,704 7,343
PEO payroll taxes and other payroll deductions. . . . . . 2,016 690
PEO accrued worksite employee . . . . . . . . . . . . . . 260 644
Other accrued expenses. . . . . . . . . . . . . . . . . . 6,375 6,036
----------------- ----------------
Total current liabilities. . . . . . . . . . . . . . 22,589 21,607
----------------- ----------------
Shareholders' deficiency
Series A convertible, redeemable preferred stock,
$1,000 par value, 7,500 shares authorized,
420.5 shares issued and outstanding. . . . . . . . . . 420 420
Common stock, $0.005 par value, 500,000,000 shares
authorized; 118,518,413 shares issued and outstanding
at December 31, 2002; 21,929,365 at June 30, 2002. . . 592 110
Common stock warrants . . . . . . . . . . . . . . . . . . 475 475
Paid-in capital . . . . . . . . . . . . . . . . . . . . . 80,453 79,492
Accumulated deficit . . . . . . . . . . . . . . . . . . . (103,628) (100,924)
----------------- ----------------
Total shareholders' deficiency . . . . . . . . . . . (21,688) (20,427)
----------------- ----------------
Total liabilities and shareholders' deficiency. . . . . . . . $ 901 $ 1,180
================= ================
See Notes to Consolidated Financial Statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2002 2001
Revenues
Sales of products. . . . . . . . . . . . . . . $ 94 $ 891
Software sales, licenses and royalties . . . . 41 145
PEO services . . . . . . . . . . . . . . . . . 2,139 7,074
-------------- -------------
2,274 8,110
-------------- -------------
Cost of revenues
Cost of products sold. . . . . . . . . . . . . 82 646
Cost of software sales, licenses and royalties 29 24
Cost of PEO services . . . . . . . . . . . . . 1,878 6,795
-------------- -------------
1,989 7,465
-------------- -------------
Gross profit. . . . . . . . . . . . . . . . . . . . 285 645
-------------- -------------
Operating
Selling, general, and administrative . . . . . 1,124 2,137
Research and development . . . . . . . . . . . - 64
-------------- -------------
1,124 2,201
-------------- -------------
Loss from operations. . . . . . . . . . . . . . . . (839) (1,556)
-------------- -------------
Other income (expense):
Interest and financing costs, net. . . . . . . (490) (298)
Extinguishment of debt . . . . . . . . . . . . 656 -
Other. . . . . . . . . . . . . . . . . . . . . 21 -
-------------- -------------
187 (298)
-------------- -------------
Loss before income taxes. . . . . . . . . . . . . . (652) (1,854)
Income tax expense. . . . . . . . . . . . . . . . . - -
-------------- -------------
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (652) $ (1,854)
============== =============
Loss per common share
Basic. . . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.19)
============== =============
Diluted. . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.19)
============== =============
Weighted average common shares. . . . . . . . . . . 66,284 9,952
============== =============
Weighted average common shares - assuming dilution. 66,284 9,952
============== =============
See Notes to Consolidated Financial Statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2002 2001
Revenues
Sales of imaging products . . . . . . . . . . $ 580 $ 1,764
Sales of software, licenses and royalties . . 179 350
PEO services. . . . . . . . . . . . . . . . . 4,961 7,074
------------- -------------
5,720 9,188
------------- -------------
Costs and expenses
Cost of products sold . . . . . . . . . . . . 317 1,214
Cost of software, licenses and royalties. . . 62 54
Cost of PEO services. . . . . . . . . . . . . 4,450 6,795
------------- -------------
4,829 8,063
------------- -------------
Gross profit . . . . . . . . . . . . . . . . . . . 891 1,125
------------- -------------
Operating
Selling, general, and administrative. . . . . 3,165 3,586
Research and development. . . . . . . . . . . - 136
------------- -------------
3,165 3,722
------------- -------------
Loss from operations . . . . . . . . . . . . . . . (2,274) (2,597)
------------- -------------
Other income (expense):
Interest and financing costs, net. . . . . . (1,111) (1,018)
Extinguishment of debt . . . . . . . . . . . 656 -
Other . . . . . . . . . . . . . . . . . . . . 25 -
------------- -------------
(430) (1,018)
------------- -------------
Loss before income taxes . . . . . . . . . . . . . (2,704) (3,615)
Income tax expense . . . . . . . . . . . . . . . . - -
------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . $ (2,704) $ (3,615)
============= =============
Loss per common share
Basic . . . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.39)
============= =============
Diluted . . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.39)
============= =============
Weighted average common shares . . . . . . . . . . 45,473 9,251
============= =============
Weighted average common shares - assuming dilution 45,473 9,251
============= =============
See Notes to Consolidated Financial Statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2002 2001
Cash flows from operating activities
Net income (loss). . . . . . . . . . . . . . . . . $ (2,704) $ (3,615)
Adjustments to reconcile net income (loss) to
net cash from operating activities
Depreciation and amortization . . . . . . . . 48 51
Writedown of fixed assets. . . . . . . . . . 55 -
Common stock issued for services . . . . . . 671 367
Amortization of debt discount. . . . . . . . 450 -
Value of services for exercise of warrants . 166 -
Value of warrants issued for services. . . . 70 -
Gain on extinguishments of debt. . . . . . . (656) -
Changes in operating assets and liabilities
Accounts receivable . . . . . . . . . . . 286 (1,418)
Inventories . . . . . . . . . . . . . . . 139 (827)
Prepaid expenses and other. . . . . . . . (115) (44)
Accounts payable and accrued expenses . . 857 1,961
PEO liabilities . . . . . . . . . . . . . 942 424
Other assets. . . . . . . . . . . . . . . - 2
------------------ ------------------
Net cash from (used by)
operating activities. . . . . . . 209 (3,099)
Cash flows from investing activities
Capital expenditures . . . . . . . . . . . . . . . - (56)
Cash investment in acquisitions. . . . . . . . . . - (250)
Other. . . . . . . . . . . . . . . . . . . . . . . - -
------------------ ------------------
Net cash from investing activities . . - (91)
------------------ ------------------
Cash flows from financing activities
Net borrowings under bank lines of credit. . . . . (100) (500)
Issuance of short-term notes payable . . . . . . . - 1,922
Warrant proceeds . . . . . . . . . . . . . . . . . - 66
Net proceeds from issuance of common stock . . . . 25 1,826
------------------ ------------------
Net cash from (used by) financing
activities . . . . . . . . . . . . (75) 3,314
------------------ ------------------
Net increase (decrease) in cash . . . . . . . . . . . 134 124
Cash, beginning of period . . . . . . . . . . . . . . 43 35
------------------ ------------------
Cash, end of period . . . . . . . . . . . . . . . . . $ 177 $ 159
================== ==================
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended September 30, 2002, the Company rescinded the
$70,000 conversion of convertible notes payable into common stock (See note 6)
During the three months ended December 31, 2002, the Company converted $80,000
of debt into 8,000,000 shares of common stock.
During the three months ended December 31, 2002, the Company issued 100,000
shares of common stock in connection with its acquisition of Dream Canvas
Technology, Inc.
See Notes to Consolidated Financial Statements
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Imaging
Technologies Corporation and Subsidiaries (the "Company" or "ITEC") have been
prepared pursuant to the rules of the Securities and Exchange Commission (the
"SEC") for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States of America. These consolidated financial
statements and notes herein are unaudited, but in the opinion of management,
include all the adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial position, results
of operations, and cash flows for the periods presented. These consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the years ended June 30,
2002, 2001 and 2000 included in the Company's Annual Report on Form 10-K filed
with the SEC. Interim operating results are not necessarily indicative of
operating results for any future interim period or for the full year.
NOTE 2. GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the three months ended
December 31, 2002, the Company experienced a net loss of $652,000 and as of
December 31, 2002, the Company had a negative working capital deficiency of
$22,036,000 and had a negative shareholders' deficiency of $21,688,000. In
addition, the Company is in default on certain note payable obligations and is
being sued by numerous trade creditors for nonpayment of amounts due. The
Company is also deficient in its payments relating to payroll tax liabilities.
These conditions raise substantial doubt about its ability to continue as a
going concern.
On August 20, 1999, at the request of Imperial Bank, the Company's primary
lender, the Superior Court of San Diego appointed an operational receiver who
took control of the Company's day-to-day operations on August 23, 1999. On June
21, 2000, in connection with a settlement agreement reached with Imperial Bank,
the Superior Court of San Diego issued an order dismissing the operational
receiver.
On October 21, 1999, Nasdaq notified the Company that it no longer complied with
the bid price and net tangible assets/market capitalization/net income
requirements for continued listing on The Nasdaq SmallCap Market. At a hearing
on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised public
interest concerns relating to the Company's financial viability. The Company's
common stock was delisted from The Nasdaq Stock Market effective with the close
of business on March 1, 2000. As a result of being delisted from The Nasdaq
SmallCap Market, shareholders may find it more difficult to sell common stock.
This lack of liquidity also may make it more difficult to raise capital in the
future. Trading of the Company's common stock is now being conducted
over-the-counter through the NASD Electronic Bulletin Board and covered by Rule
15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers
who recommend these securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share.
The Securities and Exchange Commission adopted regulations that generally define
a "penny stock" as any equity security that has a market price of less than
$5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or the Nasdaq and the issuer has
net tangible assets under $2,000,000, the equity security also would constitute
a "penny stock." Our common stock does constitute a penny stock because our
common stock has a market price less than $5.00 per share, our common stock is
no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000.
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. Furthermore, the ability of broker/dealers to sell our
common stock and the ability of shareholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
In order for the Company to continue in existence, it must obtain additional
funds to provide adequate working capital to finance operations, and begin to
generate positive cash flows from its operations. During the past two fiscal
years the Company has raised approximately $3 million through the issuance of
convertible debentures. The Company is currently in the process of filing a
registration statement to register shares underlying the convertible debentures.
In order for the Company to raise additional funds through a convertible
debenture, the Company must get a registration statement filed and declared
effective with the SEC. However, there can be no assurance that the Company
will be able to complete any additional debt or equity financings on favorable
terms or at all, or that any such financings, if completed, will be adequate to
meet the Company's capital requirements including compliance with the Imperial
Bank settlement agreement. Any additional equity or convertible debt financings
could result in substantial dilution to the Company's shareholders. If adequate
funds are not available, the Company may be required to delay, reduce or
eliminate some or all of its planned activities, including any potential mergers
or acquisitions. The Company's inability to fund its capital requirements would
have a material adverse effect on the Company. The Company is also looking at
making strategic acquisitions of companies that have positive cash flows.
Specifically, the Company has just recently acquired a controlling interest in
Quik Pix, Inc., a controlling interest in Greenland Corporation. The Company has
also reduced its personnel and moved its corporate office in an effort to reduce
operating costs. The financial statements do not include any adjustments that
might result from the outcome of this going concern uncertainty.
NOTE 3. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share ("Basic EPS") excludes dilution and is
computed by dividing net income (loss) available to common shareholders (the
"numerator") by the weighted average number of common shares outstanding (the
"denominator") during the period. Diluted earnings (loss) per common share
("Diluted EPS") is similar to the computation of Basic EPS except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. In addition, in computing the dilutive effect of convertible securities,
the numerator is adjusted to add back the after-tax amount of interest
recognized in the period associated with any convertible debt. The computation
of Diluted EPS does not assume exercise or conversion of securities that would
have an anti-dilutive effect on net earnings (loss) per share. The following is
a reconciliation of Basic EPS to Diluted EPS:
(in thousands)
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (NUMERATOR) AMOUNT
---------------- ----------- -----------
DECEMBER 31, 2001
Net loss. . . . . . . . $ (3,615)
Preferred dividends. (12)
----------------
Basic and diluted EPS . $ (3,617,) 9,251 $ (0.39)
================ =========== ===========
DECEMBER 31, 2002
Net loss. . . . . . . . $ (2,704)
Preferred dividends. (12)
----------------
Basic and diluted EPS . $ (2,716) 45,473 $ (0.06)
================ =========== ===========
NOTE 4. INVENTORIES
(in thousands). . . . . . . . DEC. 31, 2002 SEPT. 30, 2002
Inventories
Materials and suppliers. $ 2 $ 261
Finished goods . . . . . 10 165
---------------- ----------------
12 426
Less: inventory reserve . . . - (275)
---------------- ----------------
$ 12 $ 151
================ ================
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141
supersedes Accounting Principles Board ("APB") No. 16 and requires that any
business combinations initiated after June 30, 2001 be accounted for as a
purchase; therefore, eliminating the pooling-of-interest method defined in APB
16. The statement is effective for any business combination initiated after June
30, 2001 and shall apply to all business combinations accounted for by the
purchase method for which the date of acquisition is July 1, 2001 or later. The
Company has implemented this pronouncement and has concluded that the adoption
has no material impact to the financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
SFAS No. 142 addresses the initial recognition; measurement and amortization of
intangible assets acquired individually or with a group of other assets (but
not those acquired in a business combination) and addresses the amortization
provisions for excess cost over fair value of net assets acquired or
intangibles acquired in a business combination. The statement is effective
for fiscal years beginning after December 15, 2001, and is effective July 1,
2001 for any intangibles acquired in a business combination initiated after June
30, 2001. The Company has implemented this pronouncement and has concluded that
the adoption has no material impact to the financial statements.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company has implemented this pronouncement and has
concluded that the adoption has no material impact to the financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company has implemented this pronouncement and has concluded that
the adoption has no material impact to the financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", and an amendment of that Statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions-an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", which removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with Statements No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition,
this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
The requirements relating to acquisitions of financial institutions is effective
for acquisitions for which the date of acquisition is on or after October 1,
2002. The provisions related to accounting for the impairment or disposal of
certain long-term customer-relationship intangible assets are effective on
October 1, 2002. The adoption of this Statement did not have a material impact
to the Company's financial position or results of operations as the Company has
not engaged in either of these activities.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of Statement
148 are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations as the Company has not elected to change to the fair value
based method of accounting for stock-based employee compensation.
In May 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-14,
Accounting for Certain Sales Incentives. EITF Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives that a vendor voluntarily offers to customers (without charge), which
the customer can use in, or exercise as a result of, a single exchange
transaction. Sales incentives that fall within the scope of EITF Issue No. 00-14
include offers that a customer can use to receive a reduction in the price of a
product or service at the point of sale. The EITF changed the transition date
for Issue 00-14, concluding that a company should apply this consensus no later
than the company s annual or interim financial statements for the periods
beginning after December 15, 2001. In June 2001, the EITF issued EITF Issue No.
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor s Products, effective for periods beginning after
December 15, 2001. EITF Issue No. 00-25 addresses whether consideration from a
vendor to a reseller is (a) an adjustment of the selling prices of the vendor's
products and, therefore, should be deducted from revenue when recognized in the
vendor's statement of operations or (b) a cost incurred by the vendor for assets
or services received from the reseller and, therefore, should be included as a
cost or expense when recognized in the vendor s statement of operations. Upon
application of these EITFs, financial statements for prior periods presented for
comparative purposes should be reclassified to comply with the income statement
display requirements under these Issues. In September of 2001, the EITF issued
EITF Issue No. 01-09, Accounting for Consideration Given by Vendor to a Customer
or a Reseller of the Vendor's Products, which is a codification of EITF Issues
No. 00-14, No. 00-25 and No. 00-22 Accounting for Points and Certain Other
Time-or Volume-Based Sales Incentive Offers and Offers for Free Products or
Services to be Delivered in the Future. The Company has adopted these issues in
fiscal year 2002 and during the three months ended September 30, 2002 which did
not have a material impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
NOTE 6. CONVERTIBLE NOTES PAYABLE
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the Company sold to each of the purchasers
convertible promissory notes in the aggregate principal amount of $850,000
bearing interest at the rate of eight percent (8%) per annum, due December 12,
2003, each convertible into shares of the Company's common stock. Interest shall
be payable, at the option of the purchasers, in cash or shares of common stock.
At any time after the issuance of the notes, each note is convertible into such
number of shares of common stock as is determined by dividing (a) that portion
of the outstanding principal balance of the note as of the date of conversion by
(b) the lesser of (x) an amount equal to seventy percent (70%) of the average
closing bid prices for the three (3) trading days prior to December 12, 2000 and
(y) an amount equal to seventy percent (70%) of the average closing bid prices
for the three (3) trading days having the lowest closing bid prices during the
thirty (30) trading days prior to the conversion date. The Company has
recognized interest expense of $364,000 relating to the beneficial conversion
feature of the above notes. Additionally, the Company issued a warrant to each
of the purchasers to purchase 502,008 shares of the Company's common stock at an
exercise price equal to $1.50 per share. The purchasers may exercise the
warrants through December 12, 2005. During fiscal 2001, notes payable of
$675,000 was converted into the Company's common stock.
On July 26, 2001, the Company entered into a convertible note purchase agreement
with certain investors whereby the Company sold to the investors a convertible
debenture in the aggregate principal amount of $1,000,000 bearing interest at
the rate of eight percent (8%) per annum, due July 26, 2004, convertible into
shares of our common stock. Interest is payable, at the option of the investor,
in cash or shares of our common stock. The note is convertible into such number
of shares of our common stock as is determined by dividing (a) that portion of
the outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $1.30 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. Additionally, we issued a warrant to the investor to purchase
769,231 shares of our common stock at an exercise price equal to $1.30 per
share. The investor may exercise the warrant through July 26, 2006. In
accordance with EITF 00-27, the Company first determined the value of the note
and the fair value of the detachable warrants issued in connection with this
convertible debenture. The proportionate value of the note and the warrants is
$492,000 and $508,000, respectively. The value of the note was then allocated
between the note and the preferential conversion feature, which amounted to $0
and $492,000, respectively.
On September 21, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby we sold to the investor a convertible
promissory note in the aggregate principal amount of $300,000 bearing interest
at the rate of eight percent (8%) per annum, due September 21, 2004, convertible
into shares of our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note by (b) the conversion
price. The conversion price equals the lesser of (x) $0.532 and (y) 70% of the
average of the 3 lowest closing bid prices during the 30 trading days prior to
the conversion date. Additionally, we issued a warrant to the investor to
purchase 565,410 shares of our common stock at an exercise price equal to $0.76
per share. The investor may exercise the warrant through September 21, 2006. In
December 2001, $70,000 of this note was converted into 209,039 shares of common
stock and in the first quarter of fiscal 2003, the debenture holder requested
that the conversion be rescinded. The Company honored the request and shares
have been returned and the outstanding principal balance due under the note has
been increased to $300,000. In accordance with EITF 00-27, the Company first
determined the value of the note and the fair value of the detachable warrants
issued in connection with this convertible debenture. The proportionate value
of the note and the warrants is $106,000 and $194,000, respectively. The value
of the note was then allocated between the note and the preferential conversion
feature which amounted to $0 and $194,000, respectively.
On November 7, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby we sold to the investor a convertible
promissory note in the aggregate principal amount of $200,000 bearing interest
at the rate of eight percent (8%) per annum, due November 7, 2004, convertible
into shares of our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note by (b) the conversion
price. The conversion price equals the lesser of (x) $0.532 and (y) 70% of the
average of the 3 lowest closing bid prices during the 30 trading days prior to
the conversion date. Additionally, we issued a warrant to the investor to
purchase 413,534 shares of our common stock at an exercise price equal to $0.76
per share. The investor may exercise the warrant through November 7, 2006. In
accordance with EITF 00-27, the Company first determined the value of the note
and the fair value of the detachable warrants issued in connection with this
convertible debenture. The proportionate value of the note and the warrants is
$92,000 and $108,000, respectively. The value of the note was then allocated
between the note and the preferential conversion feature, which amounted to $0
and $92,000, respectively.
On January 22, 2002, the Company entered into a convertible note purchase
agreement with an investor whereby we sold to the investor a convertible
promissory note in the aggregate principal amount of $500,000 bearing interest
at the rate of eight percent (8%) per annum, due January 22, 2003, convertible
into shares of our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note by (b) the conversion
price. The conversion price equals the lesser of (x) $0.332 and (y) 70% of the
average of the 3 lowest closing bid prices during the 30 trading days prior to
the conversion date. Additionally, we issued a warrant to the investor to
purchase 3,313,253 shares of our common stock at an exercise price equal to
$0.332 per share. The investor may exercise the warrant through January 22,
2009. In accordance with EITF 00-27, the Company first determined the value of
the note and the fair value of the detachable warrants issued in connection with
this convertible debenture. The proportionate value of the note and the
warrants is $101,000 and $399,000, respectively. The value of the note was then
allocated between the note and the preferential conversion feature, which
amounted to $0 and $101,000, respectively.
All the convertible debentures are shown as a current liability in the
accompanying consolidated balance sheets since each debenture is convertible
into common stock at any time.
NOTE 7. STOCK ISSUANCES
Amendment To The Certificate Of Incorporation.
---------------------------------------------------
On September 28, 2001, the Company's shareholders authorized an amendment to the
Certificate of Incorporation to: (i) effect a stock combination (reverse split)
of the Company's common stock in an exchange ratio to be approved by the Board,
ranging from one (1) newly issued share for each ten (10) outstanding shares of
common stock to one (1) newly issued share for each twenty (20) outstanding
shares of common stock (the "Reverse Split"); and (ii) provide that no
fractional shares or scrip representing fractions of a share shall be issued,
but in lieu thereof, each fraction of a share that any shareholder would
otherwise be entitled to receive shall be rounded up to the nearest whole share.
There will be no change in the number of the Company's authorized shares of
common stock and no change in the par value of a share of Common Stock.
On August 9, 2002, the Company's board of directors approved and effected a 1
for 20 reverse stock split. All share and per share data have been
retroactively restated to reflect this stock split.
During the quarter ended December 31, 2002, the Company issued a total of
89,938,400 shares of common stock. Of the shares issued, 100,000 were issued to
complete the acquisition of Dream Canvas Technology, Inc. 53,000,000 were issued
to convert indebtedness. 4,000,000 were issued as employee compensation.
32,838,400 remaining shares were issued to consultants for legal and business
services. The shares were valued based on the fair value of the Company's stock
at the date the agreements were signed with employees, consultants, and debt
holders, which totaled $956,759. The issuances of common stock have not resulted
in a change of control of the Registrant.
During the quarter ended December 31, 2002, the Company issued 13,650,000
warrants to officers and directors. The Company has not recognized an expense as
a result of the issuance of these warrants as the warrants were issued to
officers and directors and the exercise price was equal to the fair market of
the Company's common stock at the date of issuance.
During the six months ended December 31, 2002, the Company issued 2,830,000
warrants to outside consultants. The Company recognized an expense of $70,198
for the fair value of the warrants. The Company used the Black-Scholes option
pricing model to value the warrants, with the following assumptions: (i) no
expected dividends; (ii) a risk-free rate of 3.5%; (iii) expected volatility of
179% and (iv) an expected life of .25 years.
NOTE 8. SEGMENT INFORMATION
During the period ended December 31, 2002, the Company managed and internally
reported the Company's business as three (3) reportable segments: (1) imaging
products and accessories; (2) imaging software; and (3) professional employer
organization
(in thousands). . . . . . PEO BUSINESS IMAGING PRODUCTS IMAGING SOFTWARE TOTAL
2002 2001 2002 2001 2002 2001 2002 2001
-------------- ----------------- ------------------ -------- ------ ----- -------- --------
Three months:
-------------------------
Revenues. . . . . . . . $ 2,139 $ 7,074 $ 94 $ 891 $ 41 $ 145 $ 2,274 $ 8,110
Cost of revenues. . . . 1,878 6,795 82 646 29 24 1,989 7,585
Operating expenses. . . 253 116 780 2,061 91 24 1,124 2,201
Operating profit (loss) 8 163 (768) (1,816) (79) 97 (839) (1,556)
Six months :
-------------------------
Revenues. . . . . . . . $ 4,961 $ 7,074 $ 580 $ 1,764 $ 179 $ 350 $ 5,720 $ 9,188
Cost of revenues. . . . 4,450 6,795 317 1,214 62 54 4,829 8,063
Operating expenses. . . 1,337 116 1,625 3,546 203 60 3,177 3,586
Operating profit (loss) (826) 163 (1,362) (2,996) (86) 236 (2,274) (4,871)
As of and during the period ended December 31, 2002, no customer accounted for
more than 10% of consolidated accounts receivable or total consolidated
revenues.
NOTE 9. ACQUISITION AND SALE OF SUBSIDIARY
The Company completed the acquisition of Dream Canvas Technology, Inc. (DCT) in
October 2002 and paid the sum of $40,000 with the issuance of 100,000 shares of
its common stock. In December 2002 the Company sold DCT to Baseline Worldwide
Limited for $75,000 in cash. The Company reported this transaction on Form 8-K,
filed on December 19, 2002, which is incorporated by reference.
NOTE 10. EXTINGUISHMENT OF DEBT
During the period ended December 31, 2002, the Company reviewed its accounts
payable and determined that an amount of $656,000 was associated with unsecured
creditors who no longer consider such amounts currently due and payable.
Accordingly, management has elected to adjust its accounts payable and to
classify such adjustments as extinguishment of debt.
NOTE 11. SUBSEQUENT EVENTS
During the period from December 31, 2002 to February 7, 2003, the Company issued
25,952,568 shares of its common stock as payment for debt and payment to
consultants. 8,008,565 shares were issued for the conversion of $59,785 of debt
and $2,781 in accrued interest. Conversions of debt were made pursuant to the
Company's agreements for said conversions. The stock issued to consultants was
valued by multiplying the number of shares issued times the market value of the
Company's stock at the date the shares were issued. 12,500,000 restricted shares
were issued to certain individuals pursuant to the Share Acquisition Agreement
with Quik Pix, Inc.
On January 7, 2003, the Company completed the acquisition of shares,
representing controlling interest, of Greenland Corporation and Quik Pix, Inc.
The terms of the acquisitions were disclosed on Form 8-K filed January 21, 2003,
and incorporated by reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this Quarterly Report on Form 10-Q. The statements contained in this Report on
Form 10-Q that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, hopes, intentions or strategies regarding
the future. Forward-looking statements include statements regarding: future
product or product development; future research and development spending and our
product development strategies, and are generally identifiable by the use of
the words "may", "should", "expect", "anticipate", "estimates", "believe",
"intend", or "project" or the negative thereof or other variations thereon or
comparable terminology. Forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements (or industry results, performance or achievements)
expressed or implied by these forward-looking statements to be materially
different from those predicted. The factors that could affect our actual results
include, but are not limited to, the following: general economic and business
conditions, both nationally and in the regions in which we operate; competition;
changes in business strategy or development plans; our inability to retain key
employees; our inability to obtain sufficient financing to continue to expand
operations; and changes in demand for products by our customers.
OVERVIEW
Imaging Technologies Corporation develops and distributes imaging software
and distributes digital imaging products. The Company sells a range of imaging
products for use in graphics and publishing, digital photography, and other
niche business and technical markets. The Company's core technologies are
related to the design and development of software products that improve the
accuracy of color reproduction.
In November 2001, we embarked on an expansion program to provide more
services to help with tasks that have negatively impacted the business
operations of its existing and potential customers. To this end, the Company,
through strategic acquisitions, became a professional employer organization
("PEO").
ITEC now provides comprehensive personnel management services through its
wholly-owned SourceOne Group and EnStructure subsidiaries. Each of these
subsidiaries provides a broad range of services, including benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, and employer liability management to small and medium-sized
businesses.
In May 2002, ITEC entered into an agreement to acquire Dream Canvas, Inc.,
a Japanese corporation that has developed machines currently used for the
automated printing of custom stickers, popular in the Japanese consumer market.
The Company completed the acquisition of Dream Canvas Technology, Inc. (DCT) in
October 2002 and paid the sum of $40,000 with the issuance of 100,000 shares of
its common stock. In December 2002 the Company sold DCT to Baseline Worldwide
Limited for $75,000 in cash. The Company reported this transaction on Form 8-K,
filed on December 19, 2002, which is incorporated by reference. (Also see Note 9
to the Consolidated Financial Statements.)
In July 2002, ITEC entered into an agreement to acquire controlling
interest in Quik Pix, Inc. ("QPI"). QPI shares are traded on the National
Quotation Bureau Pink Sheets under the symbol QPIX. On January 7, 2003, the
Company completed the acquisition of shares, representing controlling interest,
of Quik Pix, Inc. The terms of the acquisitions were disclosed on Form 8-K filed
January 21, 2003, and incorporated by reference.
In August 2002, ITEC entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. On January 7, 2003, the Company completed
the acquisition of shares, representing controlling interest, of Greenland
Corporation. The terms of the acquisitions were disclosed on Form 8-K filed
January 21, 2003, and incorporated by reference.
The Company's business continues to experience operational and liquidity
challenges. Accordingly, year-to-year financial comparisons may be of limited
usefulness now and for the next several periods due to anticipated changes in
the Company's business as these changes relate to potential acquisitions of new
businesses, changes in product lines, and the potential for suspending or
discontinuing certain components of the business.
The Company's current strategy is: to expand its PEO business and to
commercialize its own technology, which is embodied in its ColorBlind Color
Management software and other products obtained through strategic acquisitions.
To successfully execute its current strategy, the Company will need to
improve its working capital position. The report of the Company's independent
auditors accompanying the Company's June 30, 2002 financial statements includes
an explanatory paragraph indicating there is a substantial doubt about the
Company's ability to continue as a going concern, due primarily to the decreases
in the Company's working capital and net worth. The Company plans to overcome
the circumstances that impact our ability to remain a going concern through a
combination of achieving profitability, raising additional debt and equity
financing, and renegotiating existing obligations.
Since the removal of the court appointed operational receiver in June 2000,
the Company has been able to reestablish relationships with some past customers
and distributors and to establish relationships with new customers.
Additionally, the Company has been working to reduce costs though the reduction
in staff, the suspension of certain research and development programs, such as
the design and manufacture of controller boards and printers, and the suspension
of product sales and marketing programs related to office equipment and services
in favor of a greater concentration on its PEO and imaging software businesses.
The Company began a program to reduce its debt through debt to equity
conversions. Management continues to pursue the acquisition of businesses that
will grow the Company's business.
There can be no assurance, however, that the Company will be able to
complete any additional debt or equity financings on favorable terms or at all,
or that any such financings, if completed, will be adequate to meet the
Company's capital requirements. Any additional equity or convertible debt
financings could result in substantial dilution to the Company's shareholders.
If adequate funds are not available, the Company may be required to delay,
reduce or eliminate some or all of its planned activities, including any
potential mergers or acquisitions. The Company's inability to fund its capital
requirements would have a material adverse effect on the Company. Also see
"Liquidity and Capital Resources." and "Risks and Uncertainties - Future Capital
Needs."
RESTRUCTURING AND NEW BUSINESS UNITS
From August 20, 1999 until June 21, 2000, the Company had been under the
control of an operational receiver appointed by the Court pursuant to litigation
between the Company and Imperial Bank. The litigation has been dismissed, and
Company management has reassumed control. Accordingly, Company management did
not have operational control for nearly all of fiscal 2000.
In July 2001, the Company suspended its printer controller development and
manufacturing operations in favor of selling products from other companies to
its customers.
In October 2002, the Company suspended its sales and marketing activities
associated with the distribution of office products, including printers,
scanners, plotters, and computer networking devices.
ACQUISITION AND SALE OF BUSINESS UNITS
In December 2000, the Company acquired all of the shares of
EduAdvantage.com, Inc., an internet sales organization that sells computer
hardware and software products to educational institutions and other customers
via its websites: www.eduadvantage.com and www.soft4u.com. During fiscal 2001,
the Company began integrating EduAdvantage operations. However, these operations
have not been profitable and management is evaluating the future of this
business unit.
In October 2001, the Company acquired certain assets, for stock, related to
the Company's office products and services business activities, representing
$250,000 of inventories, fixed assets, and accounts receivable. Management has
since suspended these operations in favor of concentrating on its software and
PEO businesses and the products and services offered by its recent acquisitions.
In November 2001, the Company acquired SourceOne Group, Inc. and operates
it as a wholly-owned subsidiary. SourceOne provides PEO services, including
benefits and payroll administration, health and workers' compensation insurance
programs, personnel records management, and employer liability management to
small and medium-sized businesses.
In March 2002, ITEC acquired all of the outstanding shares of EnStructure,
Inc. ("EnStructure), a PEO company, for restricted common stock of the Company.
The purchase price may be increased or decreased based upon EnStructure's
representations of projected revenues and profits, which are defined in the
acquisition agreement, which was exhibited as part of the Company's Form 8-K,
dated March 28, 2002. EnStructure is operated as a wholly-owned subsidiary.
In May 2002, ITEC entered into an agreement to acquire Dream Canvas, Inc.,
a Japanese corporation that has developed machines currently used for the
automated printing of custom stickers, popular in the Japanese consumer market.
The Company completed the acquisition of Dream Canvas Technology, Inc. (DCT) in
October 2002 and paid the sum of $40,000 with the issuance of 100,000 shares of
its common stock. In December 2002 the Company sold DCT to Baseline Worldwide
Limited for $75,000 in cash. The Company reported this transaction on Form 8-K,
filed on December 19, 2002,. (Also see Note 9 to the Consolidated Financial
Statements.)
In July 2002, ITEC entered into an agreement to acquire controlling
interest in Quik Pix, Inc. ("QPI"). QPI shares are traded on the National
Quotation Bureau Pink Sheets under the symbol QPIX. On January 7, 2003, the
Company completed the acquisition of shares, representing controlling interest,
of Quik Pix, Inc. The terms of the acquisitions were disclosed on Form 8-K filed
January 21, 2003.
In August 2002, ITEC entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. On January 7, 2003, the Company completed
the acquisition of shares, representing controlling interest, of Greenland
Corporation. The terms of the acquisitions were disclosed on Form 8-K filed
January 21, 2003
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to allowance for doubtful accounts, value of intangible assets and valuation of
non-cash compensation. Management bases its estimates and judgments on
historical experiences and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of the Company's financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources,
primarily allowance for doubtful accounts and estimated fair value of equity
instruments used for compensation. These accounting policies are described at
relevant sections in this discussion and analysis and in the notes to the
consolidated financial statements included in our Annual Report on Form l0-K for
the fiscal year ended June 30, 2002.
RESULTS OF OPERATIONS NET REVENUES
Revenues were $2.3 million and $8.1 million for the three-month period
ended December 31, 2002 and 2002, respectively, a decrease of $5.8 million or
72%. Revenues were $5.7 million and $9.2 million for the six-month period ended
December 31, 2002 and 2001, respectively, a decrease of $3.5 million or 38%. The
decrease in revenues was due primarily to changes in the customer structure of
the Company's PEO activities in SourceOne Group (SOG). Since the acquisition of
SOG, the Company has lost several customers due to changes in rates for
services, particularly workers' compensation insurance. Additionally, management
elected to terminate certain customers due to profitability concerns. New
customers are anticipated pursuant to signed agreements, which will begin to
produce revenues in the third quarter of the current fiscal year. Additional PEO
contracts are being negotiated by ExpertHR, a wholly-owned subsidiary of
Greenland Corporation, controlling interest of which was acquired by the Company
in January 2003.
Sales of imaging products were $94 thousand and $891 thousand for the
three-month period ended December 31, 2002 and 2001, respectively, a decrease of
$797 thousand or 90%. Sales of imaging products were $580 thousand and $1.8
million for the six-month period ended December 31, 2002 and 2001, respectively,
a decrease of $1.2 million or 68%. The decrease in product sales from the
reported periods of 2002 to 2001 was due to the suspension of sales and
marketing activities associated with the resale of office products, including
copiers, printers, and network solutions. In October 2002, the Company laid-off
most of the employees associated with these activities in order to reduce costs.
The Company's lack of sufficient working capital has had, and may continue to
have, a negative adverse effect on product sales.
The Company had sales software sales, licensing fees, and royalties for the
three-month period ended December 31, 2002 and 2001 of $41 thousand and $145
thousand, respectively. Software revenues fell by $104 thousand (72%). For the
six-month period ended December 31, 2002 and 2001, software sales, licensing
fees, and royalties were $179 thousand and $350 thousand, respectively, a
decrease of $171 thousand (49%). The reduction in software revenues was due to
the Company's lack of sufficient working capital to support sales and marketing
activities. Royalties from the licensing of ColorBlind source code are
insignificant and are reported as part of software sales.
COST OF PRODUCTS SOLD
Cost of products sold were $82 (87% of product sales) and $646 thousand
(73% of product sales) for the three-month period ended December 31, 2002 and
2001, respectively. For the six-month period ended December 31, 2002 and 2001,
cost of products sold were $317 thousand (55% of product sales) and $1.2 million
(67% of product sales), respectively.
The decrease in margins is primarily due to price reductions to customers
on products sold by the Company in the periods reported. The Company has
concentrated on sales of its ColorBlind software rather than on office products.
The Company suspended its sales and marketing efforts on behalf of office
products and services in October 2002 due to shortages of working capital.
Cost of software, licenses and royalties were $29 thousand (71%) and $24
thousand (17%) for the three-month period ended December 31, 2002 and 2001,
respectively. Such costs were $62 thousand (35%) and $54 thousand (16%) for the
six-month period ended December 31, 2002 and 2001, respectively. The decrease in
margin was due primarily to production and manufacturing costs associated with
new versions of ColorBlind software that have been released since the beginning
of the current fiscal year.
Cost of PEO services were $1.9 million (91%) and $6.8 million (96%) for the
period ended December 31, 2002 and 2001, respectively. The increase in margin is
primarily due to the cancellation of several unprofitable clients.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three-month period
ended December 31, 2002 and 2001, respectively, were $1.1 million and $2.1
million. Selling, general and administrative expenses for the six-month period
ended December 31, 2002 and 2001, respectively, were $3.2 million and $3.6
million.
Selling, general and administrative expenses have consisted primarily of
salaries and commissions of sales and marketing personnel, salaries and related
costs for general corporate functions, including finance, accounting, facilities
and legal, advertising and other marketing related expenses, and fees for
professional services. For the three-month period ended December 31, 2002, the
selling, general, and administrative expenses decreased $1 million (48%) from
the year-earlier period due to reductions in staff, suspension of certain
operations that have been unprofitable due to limited working capital, and a
move to smaller facilities to house corporate offices. For the six-month period
ended December 31, 2002 and 2001, the Company reduced selling, general, and
administrative expenses $400 thousand (11%) due primarily to reductions in
personnel, which were associated with the Company's sales and marketing of
office products and services, which have been suspended.
RESEARCH AND DEVELOPMENT
There were no research and development costs for the three-month and
six-month periods ended December 31, 2002. Research and development costs were
$64 thousand for the prior year three-month period. For the six-month period
ended December 31, 2001, research and development costs were $136 thousand.
The Company had been reducing its research and development costs during the
past several quarters. It has suspended most of its engineering and licensing
activities associated with OEM printer products and has re-directed its research
and development costs toward the support of its ColorBlind software products.
The Company released the latest versions of its ColorBlind software in the first
quarter of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through
cash generated from operations, debt financing, and from the sale of equity
securities. Additionally, in order to facilitate its growth and future
liquidity, the Company has made some strategic acquisitions.
As a result of some of the Company's financing activities, there has been a
significant increase in the number of issued and outstanding shares. During the
three-months period ended December 31 2002, the Company issued an additional
87.9 million shares. During the six-month period ended December 31, 2002, the
Company issued an additional 95.7 million shares. These shares of common stock
were issued primarily for raising capital, for corporate expenses in lieu of
cash, and for acquisitions.
During the quarter ended December 31, 2002, ITEC issued 8,000,000 common
shares to holders of notes payable at an average conversion price of $0.01 per
share. In addition, ITEC also converted $500,000 of indebtedness into
45,000,000 common shares.
As of December 31, 2002, the Company had negative working capital of $22.0
million, a decrease of approximately $1.3 million (6%) in working capital as
compared to June 30, 2002. This decrease was due primarily to (1) reduced
current assets, including accounts receivable and inventories, which were
associated with the Company's suspended office products sales and distribution
activities; and (2) increased accrued expenses, which are associated with the
Company's PEO business.
Net cash provided by operating activities was $209 thousand for the
six-month period ended December 31, 2002 compared to net cash used by operating
activities of $3.1 million for the year-earlier period, a decrease of $3.3
million, due primarily to reduced overall operating expenditures.
No cash was used in investing activities during the six-month period ended
December 31, 2002. Net cash used in investing activities was $91 thousand during
the six-month period ended December 31, 2001 The change was due primarily to the
Company's cash investment for the SourceOne Group acquisition in the prior year.
Net cash used by financing activities was $75 thousand for the six-month
period ended December 31, 2002 compared to net cash from financing activities of
$3.3 million in the year-earlier period, a decrease of $3.4 million (103%). The
decrease is related primarily to the issuance of notes payable and common stock,
which have been used to finance continuing operations.
The Company has no material commitments for capital expenditures. The Company's
5% convertible preferred stock (which ranks prior to the Company's common
stock), carries cumulative dividends, when and as declared, at an annual rate of
$50.00 per share. The aggregate amount of such dividends in arrears at December
31, 2002, was approximately $342 thousand.
The Company's capital requirements depend on numerous factors, including market
acceptance of the Company's products and services, the resources the Company
devotes to marketing and selling its products and services, and other factors.
The report of the Company's independent auditors accompanying the Company's June
30, 2002 financial statements includes an explanatory paragraph indicating there
is a substantial doubt about the Company's ability to continue as a going
concern, due primarily to the decreases in the Company's working capital and net
worth. (Also see Note 2 to the Consolidated Financial Statements.)
RISKS AND UNCERTAINTIES
IF WE ARE UNABLE TO SECURE FUTURE CAPITAL, WE WILL BE UNABLE TO CONTINUE
OUR OPERATIONS.
Our business has not been profitable in the past and it may not be
profitable in the future. We may incur losses on a quarterly or annual basis for
a number of reasons, some within and others outside our control. See "Potential
Fluctuation in Our Quarterly Performance." The growth of our business will
require the commitment of substantial capital resources. If funds are not
available from operations, we will need additional funds. We may seek such
additional funding through public and private financing, including debt or
equity financing. Adequate funds for these purposes, whether through financial
markets or from other sources, may not be available when we need them. Even if
funds are available, the terms under which the funds are available to us may not
be acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
the Company's June 30, 2002 financial statements includes an explanatory
paragraph indicating there is a substantial doubt about the Company's ability to
continue as a going concern, due primarily to the decreases in our working
capital and net worth. The Company plans to overcome the circumstances that
impact our ability to remain a going concern through a combination of increased
revenues and decreased costs, with interim cash flow deficiencies being
addressed through additional equity financing.
IF OUR QUARTERLY PERFORMANCE CONTINUES TO FLUCTUATE, IT MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS.
Our quarterly operating results can fluctuate significantly depending on a
number of factors, any one of which could have a negative impact on our results
of operations. The factors include: the timing of product announcements and
subsequent introductions of new or enhanced products by us and by our
competitors, the availability and cost of products and/or components, the timing
and mix of shipments of our products, the market acceptance of our new products
and services, seasonality, changes in our prices and in our competitors' prices,
the timing of expenditures for staffing and related support costs, the extent
and success of advertising, research and development expenditures, and changes
in general economic conditions.
We may experience significant quarterly fluctuations in revenues and
operating expenses as we introduce new products and services. Accordingly, any
inaccuracy in our forecasts could adversely affect our financial condition and
results of operations. Demand for our products and services could be adversely
affected by a slowdown in the overall demand for imaging products and/or PEO
services. Our failure to complete shipments during a quarter could have a
material adverse effect on our results of operations for that quarter. Quarterly
results are not necessarily indicative of future performance for any particular
period.
THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS FLUCTUATED
SIGNIFICANTLY.
Our stock price could fluctuate significantly in the future based upon any
number of factors such as: general stock market trends, announcements of
developments related to our business, fluctuations in our operating results, a
shortfall in our revenues or earnings compared to the estimates of securities
analysts, announcements of technological innovations, new products or
enhancements by us or our competitors, general conditions in the markets we
serve, general conditions in the worldwide economy, developments in patents or
other intellectual property rights, and developments in our relationships with
our customers and suppliers.
In addition, in recent years the stock market in general, and the market
for shares of technology and other stocks have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Similarly, the market price of our common stock may
fluctuate significantly based upon factors unrelated to our operating
performance.
SINCE OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES THAN
WE DO, WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES.
The markets for our products and services are highly competitive and
rapidly changing. Some of our current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than we do. Our ability to compete in our markets depends on a number
of factors, some within and others outside our control. These factors include:
the frequency and success of product and services introductions by us and by our
competitors, the selling prices of our products and services and of our
competitors' products and services, the performance of our products and of our
competitors' products, product distribution by us and by our competitors, our
marketing ability and the marketing ability of our competitors, and the quality
of customer support offered by us and by our competitors.
A key element of our strategy is to provide competitively priced, quality
products and services. We cannot be certain that our products and services will
continue to be competitively priced. We have reduced prices on certain of our
products in the past and will likely continue to do so in the future. Price
reductions, if not offset by similar reductions in product costs, will reduce
our gross margins and may adversely affect our financial condition and results
of operations.
The PEO industry is highly fragmented. While many of our competitors have
limited operations, there are several PEO companies equal or substantially
greater in size than ours. We also encounter competition from "fee-for-service"
companies such as payroll processing firms, insurance companies, and human
resources consultants. The large PEO companies have substantially more resources
than us and provide a broader range of resources than we do.
IF WE ACQUIRE COMPLEMENTARY BUSINESSES, WE MAY NOT BE ABLE TO EFFECTIVELY
INTEGRATE THEM INTO OUR CURRENT OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR
OVERALL FINANCIAL PERFORMANCE.
In order to grow our business, we may acquire businesses that we believe
are complementary. To successfully implement this strategy, we must identify
suitable acquisition candidates, acquire these candidates on acceptable terms,
integrate their operations and technology successfully with ours, retain
existing customers and maintain the goodwill of the acquired business. We may
fail in our efforts to implement one or more of these tasks. Moreover, in
pursuing acquisition opportunities, we may compete for acquisition targets with
other companies with similar growth strategies. Some of these competitors may be
larger and have greater financial and other resources than we do. Competition
for these acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition. Our overall financial performance will be materially and adversely
affected if we are unable to manage internal or acquisition-based growth
effectively. Acquisitions involve a number of risks, including: integrating
acquired products and technologies in a timely manner, integrating businesses
and employees with our business, managing geographically-dispersed operations,
reductions in our reported operating results from acquisition-related charges
and amortization of goodwill, potential increases in stock compensation expense
and increased compensation expense resulting from newly-hired employees, the
diversion of management attention, the assumption of unknown liabilities,
potential disputes with the sellers of one or more acquired entities, our
inability to maintain customers or goodwill of an acquired business, the need to
divest unwanted assets or products, and the possible failure to retain key
acquired personnel.
Client satisfaction or performance problems with an acquired business could
also have a material adverse effect on our reputation, and any acquired business
could significantly under perform relative to our expectations. We cannot be
certain that we will be able to integrate acquired businesses, products or
technologies successfully or in a timely manner in accordance with our strategic
objectives, which could have a material adverse effect on our overall financial
performance.
In addition, if we issue equity securities as consideration for any future
acquisitions, existing stockholders will experience ownership dilution and these
equity securities may have rights, preferences or privileges superior to those
of our common stock.
IF WE ARE UNABLE TO DEVELOP AND/OR ACQUIRE NEW PRODUCTS IN A TIMELY MANNER,
WE MAY EXPERIENCE A SIGNIFICANT DECLINE IN SALES AND REVENUES, WHICH MAY HURT
OUR ABILITY TO CONTINUE OPERATIONS.
The markets for our products are characterized by rapidly evolving technology,
frequent new product introductions and significant price competition.
Consequently, short product life cycles and reductions in product selling prices
due to competitive pressures over the life of a product are common. Our future
success will depend on our ability to continue to develop new versions of our
ColorBlind software, and to acquire competitive products from other
manufacturers. We monitor new technology developments and coordinate with
suppliers, distributors and dealers to enhance our products and to lower costs.
If we are unable to develop and acquire new, competitive products in a timely
manner, our financial condition and results of operations will be adversely
affected.
IF THE MARKET'S ACCEPTANCE OF OUR PRODUCTS CEASES TO GROW, WE MAY NOT GENERATE
SUFFICIENT REVENUES TO CONTINUE OUR OPERATIONS.
The markets for our products are relatively new and are still developing. We
believe that there has been growing market acceptance for color printers, color
management software and supplies. We cannot be certain, however, that these
markets will continue to grow. Other technologies are constantly evolving and
improving. We cannot be certain that products based on these other technologies
will not have a material adverse effect on the demand for our products. If our
products are not accepted by the market, we will not generate sufficient
revenues to continue our operations.
IF WE ARE FOUND TO BE INFRINGING ON A COMPETITOR'S INTELLECTUAL PROPERTY
RIGHTS OR IF WE ARE REQUIRED TO DEFEND AGAINST A CLAIM OF INFRINGEMENT, WE MAY
BE REQUIRED TO REDESIGN OUR PRODUCTS OR DEFEND A LEGAL ACTION AT SUBSTANTIAL
COSTS TO US.
We currently hold no patents. Our software products, hardware designs, and
circuit layouts are copyrighted. However, copyright protection does not prevent
other companies from emulating the features and benefits provided by our
software, hardware designs or the integration of the two. We protect our
software source code as trade secrets and make our proprietary source code
available to OEM customers only under limited circumstances and specific
security and confidentiality constraints.
Competitors may assert that we infringe their patent rights. If we fail to
establish that we have not violated the asserted rights, we could be prohibited
from marketing the products that incorporate the technology and we could be
liable for damages. We could also incur substantial costs to redesign our
products or to defend any legal action taken against us. We have obtained U.S.
registration for several of our trade names or trademarks, including: PCPI,
NewGen, ColorBlind, LaserImage, ColorImage, ImageScript and ImageFont. These
trade names are used to distinguish our products in the marketplace.
IF OUR DISTRIBUTORS REDUCE OR DISCONTINUE SALES OF OUR PRODUCTS, OUR
BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our products are marketed and sold through a distribution channel of value
added resellers, manufacturers' representatives, retail vendors, and systems
integrators. We have a network of dealers and distributors in the United States
and Canada, in the European Community and on the European Continent, as well as
a growing number of resellers in Africa, Asia, the Middle East, Latin America,
and Australia. We support our worldwide distribution network and end-user
customers through operations headquartered in San Diego. As of February 7, 2002,
we directly employed 6 individuals involved in marketing and sales activities.
A portion of our sales are made through distributors, which may carry
competing product lines. These distributors could reduce or discontinue sales
of our products, which could adversely affect us. These independent distributors
may not devote the resources necessary to provide effective sales and marketing
support of our products. In addition, we are dependent upon the continued
viability and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique factors
affecting our markets.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES, AND WORKERS'
COMPENSATION RATES WILL HAVE A SIGNIFICANT EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Health insurance premiums, state unemployment taxes, and workers' compensation
rates are, in part, determined by our SourceOne subsidiary's claims experience,
and comprise a significant portion of SourceOne's direct costs. We employ risk
management procedures in an attempt to control claims incidence and structure
our benefits contracts to provide as much cost stability as possible. However,
should we experience a large increase in claims activity, the unemployment
taxes, health insurance premiums, or workers' compensation insurance rates we
pay could increase. Our ability to incorporate such increases into service fees
to clients is generally constrained by contractual agreements with our clients.
Consequently, we could experience a delay before such increases could be
reflected in the service fees we charge. As a result, such increases could have
a material adverse effect on our financial condition or results of operations.
WE CARRY SUBSTANTIAL LIABILITY FOR WORKSITE EMPLOYEE PAYROLL AND BENEFITS COSTS.
Under our client service agreements, we become a co-employer of worksite
employees and we assume the obligations to pay the salaries, wages, and related
benefits costs and payroll taxes of such worksite employees. We assume such
obligations as a principal, not merely as an agent of the client company. Our
obligations include responsibility for (a) payment of the salaries and wages for
work performed by worksite employees, regardless of whether the client company
makes timely payment to SourceOne of the associated service fee; and (2)
providing benefits to worksite employees even if the costs incurred by the
SourceOne to provide such benefits exceed the fees paid by the client company.
If a client company does not pay us, or if the costs of benefits provided to
worksite employees exceed the fees paid by a client company, our ultimate
liability for worksite employee payroll and benefits costs could have a material
adverse effect on the Company's financial condition or results of operations.
AS A MAJOR EMPLOYER, OUR OPERATIONS ARE AFFECTED BY NUMEROUS FEDERAL, STATE, AND
LOCAL LAWS RELATED TO LABOR, TAX, AND EMPLOYMENT MATTERS.
By entering into a co-employer relationship with employees assigned to work at
client company locations, we assume certain obligations and responsibilities or
an employer under these laws. However, many of these laws (such as the Employee
Retirement Income Security Act ("ERISA") and federal and state employment tax
laws) do not specifically address the obligations and responsibilities of
non-traditional employers such as PEOs; and the definition of "employer" under
these laws is not uniform. Additionally, some of the states in which we operate
have not addressed the PEO relationship for purposes of compliance with
applicable state laws governing the employer/employee relationship. If these
other federal or state laws are ultimately applied to our PEO relationship with
our worksite employees in a manner adverse to the Company, such an application
could have a material adverse effect on the Company's financial condition or
results of operations.
While many states do not explicitly regulate PEOs, 21 states have passed laws
that have licensing or registration requirements for PEOs, and several other
states are considering such regulation. Such laws vary from state to state, but
generally provide for monitoring the fiscal responsibility of PEOs and, in some
cases, codify and clarify the co-employment relationship for unemployment,
workers' compensation, and other purposes under state law. There can be no
assurance that we will be able to satisfy licensing requirements of other
applicable relations for all states. Additionally, there can be no assurance
that we will be able to renew our licenses in all states.
THE MAINTENANCE OF HEALTH AND WORKERS' COMPENSATION INSURANCE PLANS THAT COVER
WORKSITE EMPLOYEES IS A SIGNIFICANT PART OF OUR BUSINESS.
The current health and workers' compensation contracts are provided by vendors
with whom we have an established relationship, and on terms that we believe to
be favorable. While we believe that replacement contracts could be secured on
competitive terms without causing significant disruption to our business, there
can be no assurance in this regard.
OUR STANDARD AGREEMENTS WITH PEO CLIENTS ARE SUBJECT TO CANCELLATION ON 60-DAYS
WRITTEN NOTICE BY EITHER THE COMPANY OR THE CLIENT.
Accordingly, the short-term nature of these agreements make us vulnerable to
potential cancellations by existing clients, which could materially and
adversely affect our financial condition and results of operations.
Additionally, our results of operations are dependent, in part, upon our ability
to retain or replace client companies upon the termination or cancellation of
our agreements.
A NUMBER OF LEGAL ISSUES REMAIN UNRESOLVED WITH RESPECT TO THE CO-EMPLOYMENT
AGREEMENT BETWEEN A PEO AND ITS WORKSITE EMPLOYEES, INCLUDING QUESTIONS
CONCERNING THE ULTIMATE LIABILITY FOR VIOLATIONS OF EMPLOYMENT AND
DISCRIMINATION LAWS.
Our client service agreement establishes a contractual division of
responsibilities between the Company and our clients for various personnel
management matters, including compliance with and liability under various
government regulations. However, because we act as a co-employer, we may be
subject to liability for violations of these or other laws despite these
contractual provisions, even if we do not participate in such violations.
Although our agreement provides that the client is to indemnify the Company for
any liability attributable to the conduct of the client, we may not be able to
collect on such a contractual indemnification claim, and thus may be responsible
for satisfying such liabilities. Additionally, worksite employees may be deemed
to be agents of the Company, subjecting us to liability for the actions of such
worksite employees.
IF ALL OF THE LAWSUITS CURRENTLY FILED WERE DECIDED AGAINST US AND/OR ALL
THE JUDGMENTS CURRENTLY OBTAINED AGAINST US WERE TO BE IMMEDIATELY COLLECTED, WE
WOULD HAVE TO CEASE OUR OPERATIONS.
On or about October 7, 1999, the law firms of Weiss & Yourman and Stull,
Stull & Brody made a public announcement that they had filed a lawsuit against
us and certain current and past officers and/or directors, alleging violation of
federal securities laws during the period of April 21, 1998 through October 9,
1998. On or about November 17, 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. On January 31, 2003, we executed a Stipulation of
Settlement, and the matter will be closed pending the distribution of the
settlement to the plaintiffs. The defense of this action was tendered to our
insurance carriers.
Throughout fiscal 2000, 2001, and 2002, and through the date of this
filing, approximately fifty trade creditors have made claims and/or filed
actions alleging the failure of us to pay our obligations to them in a total
amount exceeding $3 million. These actions are in various stages of litigation,
with many resulting in judgments being entered against us. Several of those who
have obtained judgments have filed judgment liens on our assets. These claims
range in value from less than one thousand dollars to just over one million
dollars, with the great majority being less than twenty thousand dollars.
Should we be required to pay the full amount demanded in each of these claims
and lawsuits, we may have to cease our operations. However, to date, the
superior security interest held by Imperial Bank has prevented nearly all of
these trade creditors from collecting on their judgments.
IF OUR OPERATIONS CONTINUE TO RESULT IN A NET LOSS, NEGATIVE WORKING
CAPITAL AND A DECLINE IN NET WORTH, AND WE ARE UNABLE TO OBTAIN NEEDED FUNDING,
WE MAY BE FORCED TO DISCONTINUE OPERATIONS.
For several recent periods, up through the present, we had a net loss,
negative working capital and a decline in net worth, which raises substantial
doubt about our ability to continue as a going concern. Our losses have resulted
primarily from an inability to achieve revenue targets due to insufficient
working capital. Our ability to continue operations will depend on positive cash
flow, if any, from future operations and on our ability to raise additional
funds through equity or debt financing. Although we have reduced our work force
and suspended some of our operations, if we are unable to achieve the necessary
product sales or raise or obtain needed funding, we may be forced to discontinue
operations.
IF AN OPERATIONAL RECEIVER IS REINSTATED TO CONTROL OUR OPERATIONS, WE MAY
NOT BE ABLE TO CARRY OUT OUR BUSINESS PLAN.
On August 20, 1999, at the request of Imperial Bank, our primary lender,
the Superior Court, San Diego appointed an operational receiver to us. On August
23, 1999, the operational 65receiver took control of our day-to-day operations.
On June 21, 2000, the Superior Court, San Diego issued an order dismissing the
operational receiver as a part of a settlement of litigation with Imperial Bank
pursuant to the Settlement Agreement effective as of June 20, 2000. The
Settlement Agreement requires that we make monthly payments of $150,000 to
Imperial Bank until the indebtedness is paid in full. However, in the future,
without additional funding sufficient to satisfy Imperial Bank and our other
creditors, as well as providing for our working capital, there can be no
assurances that an operational receiver may not be reinstated. If an operational
receiver is reinstated, we will not be able to expand our products nor will we
have complete control over sales policies or the allocation of funds.
The penalty for noncompliance of the Settlement Agreement is a stipulated
judgment that allows Imperial Bank to immediately reinstate the operational
receiver and begin liquidation proceedings against us. We are currently meeting
the monthly amount of $150,000 as stipulated by the Settlement Agreement with
Imperial Bank. However, the monthly payments have been reduced to $100,000
through January of 2002.
THE DELISTING OF OUR COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET HAS MADE
IT MORE DIFFICULT TO RAISE FINANCING, AND THERE IS LESS LIQUIDITY FOR OUR COMMON
STOCK AS A RESULT.
The Nasdaq SmallCap Market and Nasdaq Marketplace Rules require an issuer
to evidence a minimum of $2,000,000 in net tangible assets, a $35,000,000 market
capitalization or $500,000 in net income in the latest fiscal year or in two of
the last three fiscal years, and a $1.00 per share bid price, respectively. On
October 21, 1999, Nasdaq notified us that we no longer complied with the bid
price and net tangible assets/market capitalization/net income requirements for
continued listing on The Nasdaq SmallCap Market. At a hearing on December 2,
1999, a Nasdaq Listing Qualifications Panel also raised public interest concerns
relating to our financial viability. While the Panel acknowledged that we were
in technical compliance with the bid price and market capitalization
requirements, the Panel was of the opinion that the continued listing of our
common stock on The Nasdaq Stock Market was no longer appropriate. This
conclusion was based on the Panel's concerns regarding our future viability. Our
common stock was delisted from The Nasdaq Stock Market effective with the close
of business on March 1, 2000. As a result of being delisted from The Nasdaq
SmallCap Market, stockholders may find it more difficult to sell our common
stock. This lack of liquidity also may make it more difficult for us to raise
capital in the future.
Trading of our common stock is now being conducted over-the-counter through
the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
The Securities and Exchange Commission adopted regulations that generally
define a "penny stock" as any equity security that has a market price of less
than $5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or the Nasdaq and the issuer has
net tangible assets under $2,000,000, the equity security also would constitute
a "penny stock." Our common stock does constitute a penny stock because our
common stock has a market price less than $5.00 per share, our common stock is
no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000.
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. Furthermore, the ability of broker/dealers to sell our
common stock and the ability of stockholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about October 7, 1999, the law firms of Weiss & Yourman and Stull,
Stull & Brody made a public announcement that they had filed a lawsuit against
us and certain current and past officers and/or directors, alleging violation of
federal securities laws during the period of April 21, 1998 through October 9,
1998. On or about November 17, 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. On January 31, 2003, we entered into a Stipulation
of Settlement with the plaintiffs. We agreed to pay the plaintiffs 5,000,000
shares of common stock and a $200,000 cash payment (to be paid by our insurance
carriers). The defense of this action has been tendered to our insurance
carriers.
On August 22, 2002, the Company was sued by its former landlord, Carmel
Mountain #8 Associates, L.P. or past due rent on its former facilities at 15175
Innovation Drive, San Diego, CA 92127.
The Company is also a party to a lawsuit filed by Symphony Partners, L.P.
related to its acquisition of SourceOne Group, LLC. We have hired counsel to
represent us in this action and believe that the claims against the Company are
without merit.
The Company is one of dozens of companies sued by The Massachusetts
Institute of Technology, et.al, `related to a patent held by the plaintiffs that
may be related to part of the Company's ColorBlind software. We believe that any
amounts due in royalties or otherwise to the plaintiffs by the Company, should
the Company be in violation of said patent, would not be material.
Throughout fiscal 2000, 2001, and 2002, and through the date of this
filing, approximately fifty trade creditors have made claims and/or filed
actions alleging the failure of us to pay our obligations to them in a total
amount exceeding $3 million. These actions are in various stages of litigation,
with many resulting in judgments being entered against us. Several of those who
have obtained judgments have filed judgment liens on our assets. These claims
range in value from less than one thousand dollars to just over one million
dollars, with the great majority being less than twenty thousand dollars.
Furthermore, from time to time, the Company may be involved in litigation
relating to claims arising out of its operations in the normal course of
business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Common Stock Warrants
-----------------------
The Company, from time-to-time, grants warrants to employees, directors,
outside consultants and other key persons, to purchase shares of the Company's
common stock, at an exercise price equal to no less than the fair market value
of such stock on the date of grant.
In the first quarter ended December 31, 2002, the Company issued warrants
to directors and certain officers to purchase up to 13,650,000 shares of its
common stock at an exercise price equal to $0.015 per share. The value of these
warrants is estimated at $204,750.
There were no exercises of warrants during the period ended December 31,
2002.
Stock Split
------------
On August 9, 2002, the Company's board of directors approved and effected a
1 for 20 reverse stock split. All share and per share data have been
retroactively restated to reflect this stock split.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
10(a) Acquisition Agreement, dated December 13, 2002, between the
Company and Baseline Worldwide, Ltd., incorporated by reference to Exhibit 99.3
of Form 8-K, dated December 19, 2002.
10(b) Secured Promissory Note in the amount of $2,250,000 issued by the
Company to Greenland Corporation, dated January 7, 2003, incorporated by
reference to Exhibit 99.1 of Form 8-K dated January 21, 2003.
10(c) Security Agreement, dated January 7, 2003 between the Company and
Greenland Corporation, incorporated by reference to Exhibit 99.2 of Form 8-K
dated January 21, 2003.
10(d) Agreement to Acquire Shares, dated August 9, 2002 between the
Company and Greenland Corporation, incorporated by reference to Exhibit 99.3 of
Form 8-K dated January 21, 2003.
10(e) Closing Agreement, dated January 7, 2003, between the Company and
Greenland Corporation, incorporated by reference to Exhibit 99.4 of Form 8-K
dated January 21, 2003.
10(f) Share Acquisition Agreement, dated June 12, 2002, between the
Company and Quik Pix, Inc., incorporated by reference to Exhibit 99.5 of Form
8-K dated January 21, 2003.
10(g) Closing Agreement, dated July 23, 2002 between the Company and
Quik Pix, Inc., incorporated by reference to Exhibit 99.6 of Form 8-K dated
January 21, 2003.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350), included in this filing.
(b) Reports on Form 8-K
----------------------
Form 8-K filed on December 19, 2002 related to the sale of Dream Canvas, Inc.
Form 8-K filed on January 21, 2003 related to the acquisition of shares of
Greenland Corporation and Quik Pix, Inc.
SIGNATURES
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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.
Dated: February 19, 2002
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /S/ Brian Bonar
_____________________________________
Brian Bonar
Chairman and Chief Executive Officer
Principal Accounting Officer
CERTIFICATION
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I, Brian Bonar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imaging Technologies
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 certifying officers are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's certifying officers have disclosed, based on our most recent
evaluation, 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 controls
which could 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; and
6. The registrant's certifying officers have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 19, 2003
/s/ Brian Bonar
_______________________________
Brian Bonar
Chief Executive Officer
Principal Accounting Officer