UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-QSB
_______________
(Mark One)
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file Number: 000-30090
_______________
VISIPHOR CORPORATION
(Exact name of small business issuer as specified in its charter)
_______________
Canada |
| Not Applicable |
Suite 1100 4710 Kingsway
Burnaby, British Columbia
(Address of principal executive offices)
(604) 684-2449
(Issuer's telephone number)
_______________
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
As of August 8, 2005, 29,537,112 common shares of the Issuer were issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No[x]
VISIPHOR CORPORATION
FORM 10-QSB
For the Quarterly Period Ended June 30, 2005
INDEX
PART I | Financial Information | |
Item 1. | Financial Statements | 4 |
Item 2. | Managements Discussion and Analysis or Plan of Operation | 22 |
Item 3. | Controls and Procedures | 30 |
PART II | Other Information | |
Item 1. | Legal Proceedings | 31 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 |
Item 3. | Defaults Upon Senior Securities | 32 |
Item 4. | Submission of Matters to a Vote of Security Holders | 32 |
Item 5. | Other Information | 33 |
Item 6. | Exhibits | 34 |
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for statements of historical fact, certain information contained herein constitutes forward-looking statements, within Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). In some cases, you can identify the forward-looking statements by Visiphor Corporations (Visiphor or the Company) use of the words such as may, will, should, could, expect, plan, estimate, predict, potential, continue, believe, anticipate, intend, expect, or the negative or other variations of these words, or other comparable words or phrases. Forward-looking statements in this report include, but are not limited to, the Companys expectation that revenues will increase during 2005 when compared to those of 2004 and that such revenues will continue to increase and newly developed products and solutions continue to gain increasing customer acceptance; managements belief that increased revenues achieved as a result of the sale of products will more than offset increased technology development costs; the Companys ability to fund its operations in the future; the Companys expectations regarding its dispute with OSI Systems Inc. (OSI) and new contracts to be entered into the near future; the Companys future operating expense levels; the Companys ability to achieve break-even operations on an operating cash flow basis during the fourth quarter of 2005.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, but are not limited to the following: the Companys limited operating history; the Companys need for additional financing; the Companys history of losses; the Companys dependence on a small number of customers; risks involving new product development; competition; the Companys dependence on key personnel; risks involving lengthy sales cycles; dependence on marketing relationships; the Companys ability to protect its intellectual property rights; risks associated with exchange rate fluctuations; risks of software defects; risks associated with product liability; risks associated with the Imagis UK partnership; the Companys dispute with OSI; risks associated with the strategic alliance with Sanyo Semiconductor Company (Sanyo) and Intacta Technologies Inc. (Intacta) related to Zixsys, Inc. (Zixsys); the potential additional disclosure requirements for trades involving the issued common shares; the difficulty of enforcing civil liabilities against the Company or its directors or officers under United States federal securities laws; the volatility of the Companys share price; risks associated with certain shareholders exercising control over certain matters; and the other risks and uncertainties described in Exhibit 99.1 to this Quarterly Report.
Although the Company believes that expectations reflected in these forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, achievements or other future events. Moreover, neither the Company nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company is under no duty to update any of these forward-looking statements after the date of this report. You should not place undue reliance on these forward-looking statements.
All dollar amounts in this quarterly report are expressed in Canadian dollars, unless otherwise indicated.
3
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
The Companys financial statements for the three and six-month periods ended June 30, 2005 are included in response to Item 1 and have been compiled by the Companys management. The financial statements should be read in conjunction with Managements Discussion and Analysis or Plan of Operations (Part 1, Item 2) and other financial information included elsewhere in this Form 10-QSB.
VISIPHOR CORPORATION (formerly IMAGIS TECHNOLOGIES INC.) BALANCE SHEETS | ||||||||||||||
|
| June 30, (Unaudited) |
|
| December
31, |
| ||||||||
ASSETS | ||||||||||||||
Current assets |
|
|
|
|
|
| ||||||||
| Cash and cash equivalents | $ | 717,043 |
| $ 123,148 |
| ||||||||
| Accounts receivable |
| 863,238 |
|
| 358,300 |
| |||||||
Accrued revenue receivable | 59,522 | 27,000 | ||||||||||||
Prepaid expenses and deposits | 193,070 | 97,869 | ||||||||||||
|
|
| 1,832,873 |
|
| 606,317 |
| |||||||
| Equipment (note 4) |
| 381,126 |
|
| 208,624 |
| |||||||
Investment (note 5) | 1 | - | ||||||||||||
Intellectual property (note 6) | 1,888,867 | 2,550,960 | ||||||||||||
Other assets (note 7) | 23,997 | 76,434 | ||||||||||||
|
| $ | 4,126,864 |
| $ 3,442,335 |
| ||||||||
LIABILITIES AND SHAREHOLDERS DEFICIENCY |
|
|
|
|
| |||||||||
Current liabilities |
|
|
|
|
| |||||||||
| Accounts payable and accrued liabilities | $ | 1,181,086 | $ 1,120,978 |
| |||||||||
| Deferred revenue |
| 671,578 |
|
| 159,764 |
| |||||||
Capital lease obligations | 34,499 | 28,089 | ||||||||||||
|
|
| 1,887,163 |
|
| 1,308,831 |
| |||||||
Long-term liabilities | ||||||||||||||
Capital lease obligations | 65,590 | 24,913 | ||||||||||||
Shareholders' deficiency |
|
|
|
|
| |||||||||
| Share capital (note 9) |
| 29,713,819 |
| 26,230,920 |
| ||||||||
Special warrants (note 9) | - | 748,092 | ||||||||||||
Share Subscription (note 9) | - | 140,000 | ||||||||||||
| Contributed surplus |
| 2,135,596 |
|
| 1,648,402 |
| |||||||
| Deficit |
| (29,675,304) |
| (26,658,823) | |||||||||
|
|
| 2,174,111 |
|
| 2,108,591 |
| |||||||
|
| $ | 4,126,864 |
| $ 3,442,335 |
|
See accompanying notes to financial statements.
4
VISIPHOR CORPORATION (formerly IMAGIS TECHNOLOGIES INC.) (Unaudited Prepared by Management) | |||||||||||||||
| |||||||||||||||
Three-months ended June 30, | Six-months ended June 30, | ||||||||||||||
| 2005 | 2004 |
|
| 2005 |
|
| 2004 |
| ||||||
|
|
|
|
|
|
|
| ||||||||
Revenues: |
|
|
|
|
|
|
| ||||||||
| Software sales | $ | 733,726 | $ | 211,079 |
| $ | 965,084 |
| $ | 401,940 |
| |||
Support and services | 185,465 | 101,920 | 277,769 | 195,008 | |||||||||||
Other | 1,429 | 4,086 | 2,395 | 6,192 | |||||||||||
|
| 920,620 | 317,085 |
|
| 1,245,248 |
|
| 603,140 |
| |||||
|
|
|
|
|
|
|
|
| |||||||
Expenses: |
|
|
|
|
|
|
| ||||||||
| Administration | 792,812 | 576,308 |
|
| 1,239,143 |
|
| 1,510,792 |
| |||||
| Amortization | 412,731 | 388,460 |
|
| 794,740 |
|
| 775,932 |
| |||||
| Interest | 7,006 | 10,114 |
|
| 11,568 |
|
| 21,496 |
| |||||
| Sales and marketing | 426,790 | 276,167 |
|
| 856,466 |
|
| 476,009 |
| |||||
Professional Services | 260,301 | - | 260,301 | ||||||||||||
| Technology development | 447,964 | 253,440 |
|
| 823,345 |
|
| 516,124 |
| |||||
| Technical services | 135,309 | 72,349 |
|
| 276,168 |
|
| 144,341 |
| |||||
|
| 2,482,912 | 1,576,838 |
|
| 4,261,730 |
|
| 3,444,694 |
| |||||
|
|
|
|
|
|
|
|
| |||||||
Loss for the period | (1,562,291) | (1,259,753) |
| (3,016,481) |
| (2,841,554) | |||||||||
|
|
|
|
|
| ||||||||||
Deficit, beginning of period | (28,113,013) | (22,782,687) |
| (26,658,823) |
| (21,200,886) | |||||||||
|
|
|
|
|
|
|
| ||||||||
Deficit, end of period | $ | (29,675,304) | $ | (24,042,440) | $ | (29,675,304) | $ | (24,042,440) | |||||||
|
|
|
|
|
| ||||||||||
Loss per share basic and diluted | $ | (0.06) | $ | (0.09) | $ | (0.12) | $ | (0.25) | |||||||
Weighted average number of | 26,262,638 | 13,905,718 |
|
| 24,839,367 |
|
| 11,585,708 |
See accompanying notes to financial statements.
5
VISIPHOR CORPORATION (formerly IMAGIS TECHNOLOGIES INC.) (Unaudited Prepared by Management) | |||||||||||||||
| |||||||||||||||
Three-months ended June 30, | Six-months ended June 30, | ||||||||||||||
|
| 2005 | 2004 |
|
| 2005 |
|
| 2004 | ||||||
Cash provided by (used in): |
|
|
|
|
|
|
| ||||||||
Operations: | |||||||||||||||
| Loss for the period | $ | (1,562,291) | $ | (1,259,753) | $ | (3,016,481) | $ | (2,841,554) | ||||||
| Items not involving cash: |
|
|
|
| ||||||||||
|
| Amortization | 412,731 | 388,460 |
|
| 794,740 |
|
| 775,932 | |||||
|
| Stock-based compensation | 391,667 | 68,054 |
|
| 494,261 |
|
| 782,984 | |||||
Gain on settlement of accounts payable | - | - | (27,287) | ||||||||||||
| Changes in non-cash operating working capital: |
|
|
|
| ||||||||||
|
|
| Accounts receivable | (294,822) | (92,710) |
| (504,938) |
| 43,373 | ||||||
Accrued revenue receivable | 74,950 | - | (32,523) | - | |||||||||||
Prepaid expenses | (121,877) | 1,567 | (95,201) | 11,091 | |||||||||||
|
|
| Accounts payable and accrued liabilities | 113,034 | (159,978) |
| 60,109 |
|
| (189,737) | |||||
|
|
| Deferred revenue | (11,489) | 9,809 |
| 511,814 |
|
| 10,119 | |||||
| (998,097) | (1,044,551) |
|
| (1,788,221) |
| (1,435,079) | ||||||||
Investments: |
|
|
|
|
| ||||||||||
| Purchase of equipment | (163,186) | (10,770) |
|
| (186,776) |
| (10,770) | |||||||
|
|
|
|
|
| ||||||||||
Financing: |
|
|
| ||||||||||||
Issuance of common shares for cash | 1,929,263 | 1,243,150 | 2,789,488 | 1,603,150 | |||||||||||
Share subscriptions received | - | - | - | - | |||||||||||
Share issue costs | (128,975) | (54,000) | (201,746) | (69,000) | |||||||||||
| Capital lease repayments |
| (8,434) | (6,035) |
| (18,850) |
|
| (11,788) | ||||||
1,791,854 | 1,183,115 | 2,568,892 | 1,522,362 | ||||||||||||
Increase (decrease) in cash | 630,571 | 127,794 | 593,895 | (76,513) | |||||||||||
Cash and cash equivalents, beginning of period | 86,472 | 34,946 | 123,148 | 86,227 | |||||||||||
| Cash and cash equivalents, end of period | $ | 717,043 | $ | 162,740 |
| $ | 717,043 |
| $ | 162,740 |
6
VISIPHOR CORPORATION (formerly IMAGIS TECHNOLOGIES INC.) (Unaudited Prepared by Management) | ||||||||||||||
Three-months ended June 30, | Six-months ended June 30, | |||||||||||||
|
| 2005 | 2004 | 2005 |
| 2004 | ||||||||
Supplementary information and disclosures: |
|
|
|
| ||||||||||
| Issuance of common shares on conversion of special warrants | $ | 781,801 | $ | 51,789 | $ | 781,801 | $ | 898,024 | |||||
Issuance of common shares for settlement of debt | - | 688,404 | - | 688,404 | ||||||||||
Finders fee recorded on issuance of common shares on conversion of special warrants | 33,709 | 13,337 | 33,709 | 13,337 | ||||||||||
Issuance of warrants as financing costs | 51,548 | - | 51,548 | - | ||||||||||
Issuance of common shares as financing costs | 24,000 | - | 24,000 | - | ||||||||||
Equipment acquired under capital lease | 43,027 | - |
| 65,937 | - | |||||||||
Interest paid | 7,006 | 10,114 | 11,568 | 21,496 |
See accompanying notes to financial statements.
7
1.
Operations:
Imagis Technologies Inc. (the Company) was incorporated under the Company Act (British Columbia) on March 23, 1998. On July 6, 2005 the Company changed its name to Visiphor Corporation and continued under the Canada Business Corporation Act. The Company operates in a single segment, being the development and sale of software applications and solutions.
These financial statements have been prepared on a going concern basis which includes the assumption that the Company will be able to realize its assets and settle its liabilities in the normal course of business. At June 30, 2005, the Company had incurred a loss from operations of $3,016,481 and a deficiency in operating cash flow of $1,788,221. In addition, the Company has incurred significant operating losses and net utilization of cash in operations in all prior periods. At June 30, 2005, the Company has a working capital deficiency of $54,290. Accordingly, the Company will require continued financial support from its shareholders and creditors until it is able to generate sufficient cash flow from operations on a sustained basis. Failure to obtain ongoing support of its shareholders and creditors may make the going concern basis of accounting inappropriate, in which case the Companys assets and liabilities would need to be recognized at their liquidation values. These financial statements do not include any adjustment due to this going concern uncertainty.
2.
Significant accounting policies:
The Company prepares its financial statements in accordance with generally accepted accounting principles in Canada and, except as set out in Note 15, also complies, in all material respects, with accounting principles generally accepted in the United States. The financial statements reflect the following significant accounting policies:
(a)
Basis of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Briyante Software Corp. (Briyante), since the date of its acquisition on November 25, 2003. All material inter-Company accounts and transactions have been eliminated.
(b)
Cash equivalents:
The Company considers all highly liquid investments with a term to maturity of three-months or less when purchased to be cash equivalents. Investments having a term in excess of three-months but less than one year are classified as short-term investments.
(c)
Equipment:
Equipment is recorded at cost and is amortized over its estimated useful life on a straight-line basis at the following annual rates:
Asset Rate
Computer hardware
30%
Furniture and fixtures
20%
Software
100%
Telephone equipment
20%
Tradeshow equipment
20%
Leasehold improvements are amortized straight-line over the lesser of their lease term and estimated useful life.
8
2.
Significant accounting policies contd:
(d)
Intangible assets:
Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values. The cost of internally developed intangible assets includes direct development costs and overhead directly attributable to development activity. The cost incurred to enhance the service potential of an intangible asset is capitalized as betterment. Costs incurred in the maintenance of the service potential of an intangible asset are expensed as incurred.
Intangible assets with finite useful lives are amortized over their useful lives. The assets are amortized on a straight-line basis at the following annual rates, which are reviewed annually:
Asset
Term
Intellectual property
3 years
Patents
3 years
License
3 years
Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any.
(e)
Revenue recognition:
(i)
Software sales revenue:
The Company recognizes revenue consistent with Statement of Position 97-2, Software Revenue Recognition. In accordance with this Statement, revenue is recognized, except as noted below, when all of the following criteria are met; persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured. Cash received in advance of meeting the revenue recognition criteria is recorded as deferred revenue.
When a software product requires significant production, modification or customization, the Company generally accounts for the arrangement using the percentage-of-completion method of contract accounting. Progress to completion is measured by the proportion that activities completed are to the activities required under each arrangement. When the current estimate on a contract indicates a loss, a provision for the entire loss on the contract is made. In circumstances where amounts recognized as revenue under such arrangements exceeds the amount invoiced, the difference is recorded as accrued revenue receivable.
9
2.
Significant accounting policies contd:
When software is sold under contractual arrangements that include post contract customer support (PCS), the elements are accounted for separately if vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements. VSOE is identified by reference to renewal arrangements for similar levels of support covering comparable periods. If such evidence does not exist, revenue on the completed arrangement is deferred until the earlier of (a) VSOE being established or (b) all of the undelivered elements are delivered or performed, with the following exceptions: if the only undelivered element is PCS, the entire fee is recognized ratably over the PCS period, and if the only undelivered element is service, the entire fee is recognized as the services are performed.
The Company provides for estimated returns and warranty costs, which to date have been nominal, on recognition of revenue.
(ii)
Support and services revenue:
Up front payments for contract support and services revenue is deferred and is amortized to revenue over the period that the support and services are provided.
(f)
Use of estimates:
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates. Areas of significant estimate include but are not limited to valuation of accounts receivable; amortization periods of equipment, intellectual property and other assets; valuation of intellectual property; fair value inputs for calculation of stock-based compensation; and the valuation allowance of future income tax assets.
(g)
Foreign currency:
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet date. Revenues and expenses are translated using rates in effect at the time of the transactions. Foreign exchange gains and losses are included in expenses and are insignificant for all periods presented.
(h)
Income taxes:
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of substantive enactment. To the extent that it is not considered to be more likely than not that a deferred tax asset will be realized, a valuation allowance is provided.
(i)
Stock-based compensation:
The Company has a stock-based compensation plan, which is described in note 9. Subsequent to January 1, 2003, the Company accounts for all stock-based payments to employees and non-employees using the fair value based method. Under the fair value based method, stock-based payments are measured at the fair value of the equity instruments issued.
The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is compete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date.
10
2.
Significant accounting policies contd:
Under the fair value based method, compensation cost attributable to employee awards is measured at fair value at the grant date and recognized over the vesting period. Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at intrinsic value and recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. For awards that vest at the end of the vesting period, compensation cost is recognized on a straight-line basis; for awards that vest on a graded basis, compensation cost is recognized on a pro-rata basis over the vesting period.
Prior to January 1, 2003, the Company followed the settlement method of accounting for employee stock options. The fair value method was used for non-employee grants made in the year ended December 31, 2002 and the settlement method for grants made prior to that date. Had compensation expense associated with employee stock options awarded prior to January 1, 2003 been determined in accordance with the fair value method, the Companys net loss and net loss per share for the six-month periods ended June 30, 2005 and 2004, would have been adjusted to the pro forma amounts indicated below:
Six-months ended June 30, | |||
| 2005 | 2004 | |
|
|
| |
Net loss as reported | $ | (3,016,481) | (2,841,554) |
Net loss pro forma | $ | (3,016,481) | (3,868,320) |
| |||
Net loss per share as reported | $ | (0.12) | (0.25) |
Net loss per share pro forma | $ | (0.12) | (0.34) |
The pro forma amounts exclude the effect of stock options granted prior to January 1, 2002. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs: volatility 62%, risk free interest rate 5%, option term 5 years, and dividend yield nil.
(j)
Loss per share:
Loss per share is calculated using the weighted average number of shares outstanding during the reporting period. This average includes common shares issued in a reporting period from their date of issuance. Diluted per share amounts are calculated by the treasury stock method whereby the assumed proceeds of dilutive exercisable instruments are applied to repurchase common shares at the average market price for the period. The resulting net issuance is included in the weighted average number for purposes of the diluted per share calculation. As all outstanding shares and warrants are anti-dilutive, there is no difference between basic and diluted loss per share.
(k)
Comparative figures:
Certain comparative figures have been reclassified to conform to the presentation adopted in the current quarter.
11
3.
Change in accounting for stock-based compensation:
Prior to January 1, 2003, the Company applied the fair value based method of accounting prescribed by CICA Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments; only to non-employee awards made on or after January 1, 2002 and to employee stock appreciation rights, and applied the settlement method of accounting to employee stock options. Under the settlement method, any consideration paid by employees on the exercise of stock options or purchase of stock is credited to share capital and no compensation expense was recognized.
The CICA Accounting Standards Board amended CICA Handbook Section 3870 Stock-based Compensation and Other Stock-based Payments to require entities to account for employee stock options using the fair value based method, beginning January 1, 2004, with early adoption encouraged. The Company has elected to apply fair value accounting for all employee stock options granted on or after January 1, 2003 and, in accordance with one of the transitional options permitted under amended Section 3870, has accounted for this change prospectively.
4.
Equipment:
Accumulated
Net book
At June 30, 2005
Cost
amortization
value
Computer hardware
$
494,523
$
357,560
$
136,963
Leasehold Improvements
135,454
-
135,454
Furniture and fixtures
158,780
80,790
77,990
Software
146,404
135,806
10,598
Telephone Equipment
6,761
2,162
4,599
Tradeshow Equipment
64,897
49,375
15,522
$
1,006,819
$
625,693
$
381,126
Accumulated
Net book
At December 31, 2004
Cost
amortization
value
Computer hardware
$
412,691
$
308,506
$
104,185
Furniture and fixtures
134,886
68,500
66,386
Software
134,871
122,199
12,672
Telephone Equipment
6,761
1,485
5,276
Tradeshow Equipment
64,897
44,792
20,105
Leasehold Improvements
734
734
-
$
754,840
$
546,216
$
208,624
12
5.
Investment
On July 31, 2004 the Company entered into an agreement with a United Kingdom (UK) Company to form a jointly owned subsidiary, Imagis Technologies UK Limited (Imagis UK). Imagis UK is the exclusive distributor of Visiphors software products in the UK and a non-exclusive distributor on a world-wide basis. The Company owns a 25% interest in Imagis UK in consideration of the grant of UK exclusivity, and the UK Company has committed to provide £500,000 (approximately $1.25 million) over the next two years to support the initial start-up costs of Imagis UK in consideration for a 75% ownership interest in Imagis UK. The Companys initial investment in Imagis UK has been recorded at a nominal amount of $1 and the Companys share of Imagis UKs income will be accounted for on an equity accounted basis. Imagis UKs operations are in the start-up phase and there has been no significant gain or loss to date.
6.
Intellectual property:
Accumulated
Net book
At June 30, 2005
Cost
amortization
value
Intellectual property
$
3,972,552
$
2,083,685
$
1,888,867
Accumulated
Net book
At December 31, 2004
Cost
amortization
value
Intellectual property
$
3,972,552
$
1,421,592
$
2,550,960
7.
Other assets:
Accumulated
Net book
At June 30, 2005
Cost
amortization
value
Patents
$
78,227
$
60,844
$
17,383
License
236,395
229,781
6,614
$
314,622
$
290,625
$
23,997
Accumulated
Net book
At December 31, 2004
Cost
amortization
value
Patents
$
78,227
$
47,806
$
30,421
License
236,395
190,382
46,013
$
314,622
$
238,188
$
76,434
13
8.
Capital lease obligations:
2005
2004
2005, including buy-out options
$
28,554
$ 34,836
2006, including buy-out options
41,343
14,784
2007, including buy-out options
41,489
14,931
2008, including buy-out options
14,508
-
125,894
64,551
Implicit interest portion
(25,805)
(11,549)
100,089
53,002
Current portion of capital lease obligations
34,499
28,089
Long-term portion of capital lease obligations
$
65,590
$
24,913
9.
Share capital:
(a)
Authorized:
100,000,000 common shares without par value
50,000,000 preferred shares without par value, non-voting, issuable in one or more series
(b)
Issued
Number
of shares Amount
Balance, December 31, 2003
8,845,157
$
21,528,421
Issued during year for cash:
Private Placement
7,938,208
2,782,289
Special Warrants exercised
1,169,741
907,985
Issued in settlement of accounts payable
2,654,675
1,019,562
Issued for acquisition of intellectual property
187,500
75,000
Share issuance costs
-
(82,337)
Balance, December 31, 2004
20,795,281
26,230,920
Issued during period for cash:
Private Placements
7,107,785
2,700,225
Options exercised
205,228
84,363
Warrants exercised
305,000
144,900
Special Warrants exercised
1,007,151
781,802
Fair value of options exercised
-
58,613
Share issuance costs
- (311,004)
Issuance of shares as share issuance cost 60,000 24,000
Balance, June 30, 2005
29,480,445
$
29,713,819
14
9.
Share capital contd:
(c)
Special warrants:
During October and November 2003, the Company sold a total of 9,796,087 special warrants (the Special Warrants) at $0.1725 per Special Warrant in a series of four tranches. Cash proceeds of $899,075 less commissions of $39,757 were received for the sale of 5,212,029 Special Warrants and 4,584,058 Special Warrants were issued in settlement of $790,750 in debt. Each Special Warrant was exercisable, for no additional consideration, into units consisting of 0.2222 common shares and 0.2222 share purchase warrants, with the exception of 1,002,899 Special Warrants issued to insiders of the Company. The units issued to insiders of the Company were exercisable into 0.2222 common shares with no share purchase warrant. Each whole warrant entitled the holder for two years from the date of issue of the Special Warrants to acquire one additional common share at an exercise price of $1.04 per share in the first year and $1.14 per share in the second year. The Special Warrants were convertible at the holders option at any time for an eighteen month period and converted automatically at the end of the eighteen months. The Company was not required to meet any conditions prior to conversion. Finders fees of $39,758 cash and 38,641 in brokers warrants exercisable at $1.04 per share were paid. The brokers warrants were exercisable until October 30, 2004 and have been recorded at the fair value as at the date of issue of $7,327 as a reduction in the proceeds of the Special Warrants and an increase in contributed surplus. As at June 30, 2005, 2,176,907 units have been issued on conversion of all the Special Warrants which resulted in the issuance of 2,176,907 common shares and 2,176,907 share purchase warrants.
(d)
Warrants:
At December 31, 2004, and June 30, 2005, the following warrants were outstanding:
- | -- | ||||||
December 31, | Issued | Exercised | Expired | June 30, | Exercise | ||
2004 | - | - | - | 2005 | price | Expiry date | |
64,412 |
- |
- |
|
64,412 |
$1.14 |
September 30, 2005 |
|
|
128,824 |
- |
- |
- |
128,824 |
$1.14 |
October 10, 2005 |
- |
386,473 |
- |
- |
386,473 |
$1.14 |
October 14, 2005 |
|
311,079 |
- |
- |
- |
311,079 |
$0.64 |
October 30, 2005 |
|
- |
397,811 |
- |
- |
397,811 |
$1.14 |
October 30, 2005 |
|
976,522 |
- |
- |
- |
976,522 |
$1.14 |
October 31, 2005 |
|
359,850 |
- |
- |
- |
359,850 |
$0.64 |
November 20, 2005 |
|
4,007,875 |
- |
(125,000) |
- |
3,882,875 |
$0.50 |
April 28, 2005 |
|
|
|
|
|
|
or at $0.75 |
April 28, 2006 |
|
226,584 |
- |
- |
- |
226,584 |
$0.50 |
April 29, 2005 |
|
|
|
|
|
|
or at $0.75 |
April 29, 2006 |
|
166,700 |
- |
(80,000) |
- |
86,700 |
$0.53 |
May 20, 2005 |
|
|
|
|
|
|
or at $0.75 |
May 20, 2006 |
|
|
2,505,000 |
- |
- |
2,505,000 |
$0.55 |
May 24, 2006 |
|
187,500 |
- |
- |
- |
187,500 |
$0.40 |
November 29, 2005 |
|
|
|
|
|
|
or at $0.50 |
November 29, 2006 |
|
3,930,333 |
- |
(100,000) |
- |
3,830,333 |
$0.40 |
November 30, 2005 |
|
|
|
|
|
|
or at $0.50 |
November 30, 2006 |
|
946,166 |
- |
- |
- |
946,166 |
$0.45 |
December 31, 2005 |
|
|
|
|
|
|
or at $0.55 |
December 31, 2006 |
|
- |
2,857,785 |
- |
- |
2,857,785 |
$0.45 |
January 11, 2006 |
|
|
|
|
|
|
or at $0.55 |
January 11, 2007 |
|
- | - | - | - | - | - | -- | - |
11,305,845 | 6,147,069 | (305,000) | - | 17,147,914 | - | - |
15
9.
Share capital contd:
(e)
Options:
The Company has a stock option plan that was approved at the Companys annual general meeting of shareholders on June 17, 2005. Under the terms of the plan the Company may reserve up to 5,889,756 common shares for issuance under the plan. The Company has granted stock options to certain employees, directors, advisors, and consultants. These options are granted for services provided to the Company. All options granted prior to November 25, 2003; expire five years from the date of grant with the exception of 22,222 options issued during 2002 to a consultant that expired two years from the date of grant. All options granted subsequent to November 25, 2003, expire 3 years from the date of the grant. All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant. On November 25, 2003, all stock options along with the Companys outstanding shares were consolidated on a 1 new option for 4.5 old basis. During the year ended December 31, 2004 all options outstanding as at December 31, 2003 were repriced to $0.78. For options that were granted prior to the adoption of the fair value based method, the fair value of the award was remeasured at the date of modification, and the full amount of the fair value was recorded as the compensation cost to the extent that vesting has occurred at December 31, 2004.
For options issued in 2003 and previously accounted for under the fair value method, modification accounting is applied. Under modification accounting the Company recorded additional expense equal to the difference between the fair value of the original award on the date of the reprising, and the fair value of the modified award also on the date of the reprising.
A summary of the status of the Companys stock options at June 30, 2005, and December 31, 2004 (giving retroactive effect to the share consolidation), and changes during the periods ended on those dates are presented below:
June 30, 2005 December 31, 2004
Weighted average
Weighted average
Shares
exercise price
Shares
exercise price
Outstanding, beginning of period
3,092,334
$ 0.61
770,294
$ 5.26
Repriced to $0.78
-
-
(4.48)
Granted
2,503,396
0.75
2,690,925
0.58
Exercised
(205,228)
0.41
-
-
Cancelled
(107,332)
0.71
(368,885)
0.78
Outstanding, end of period
5,283,170
$ 0.68
3,092,334
$ 0.61
16
9.
Share capital contd:
The following table summarizes information about stock options outstanding at June 30, 2005:
Options outstanding | Options exercisable | ||||||||||||||
| |||||||||||||||
Number | Number | ||||||||||||||
outstanding | Weighted | Weighted | exercisable, | Weighted | |||||||||||
June 30, | remaining | average | June 30, | average | |||||||||||
Exercise price | 2005 | contractual life | exercise price | 2005 | exercise price | ||||||||||
| |||||||||||||||
$0.33 | 69,999 | 2.46 | $0.33 | - | - | ||||||||||
$0.34 | 33,333 | 2.36 | $0.34 | 6,667 | $ 0.34 | ||||||||||
$0.35 | 10,333 | 2.47 | $0.35 | 1,667 | $0.35 | ||||||||||
$0.36 | 44,072 | 2.62 | $0.36 | 11,482 | $0.36 | ||||||||||
$0.38 | 3,333 | 2.54 | $0.38 | - | - | ||||||||||
$0.39 | 105,000 | 2.77 | $0.39 | 35,000 | $0.39 | ||||||||||
$0.40 | 1,054,369 | 2.15 | $0.40 | 293,978 | $0.40 | ||||||||||
$0.41 | 13,000 | 1.98 | $0.41 | 7,000 | $0.41 | ||||||||||
$0.45 | 5,000 | 1.92 | $0.45 | - | - | ||||||||||
$0.50 | 20,000 | 2.80 | $0.50 | 6,667 | $0.50 | ||||||||||
$0.55 | 10,000 | 1.85 | $0.55 | 6,667 | $0.55 | ||||||||||
$0.56 | 21,166 | 2.88 | $0.56 | 4,500 | $0.56 | ||||||||||
$0.57 | 27,999 | 2.91 | $0.57 | - | - | ||||||||||
$0.66 | 152,222 | 1.68 | $0.66 | 101,486 | $0.66 | ||||||||||
$0.78 | 1,513,780 | 1.51 | $0.78 | 1,132,983 | $0.78 | ||||||||||
$0.79 | 2,199,564 | 2.99 | $0.79 | 733,201 | $0.79 | ||||||||||
| |||||||||||||||
5,283,170 | 2.33 | $0.68 | 2,341,298 | $0.72 | |||||||||||
|
The weighted average fair value of employee stock options granted during the period ended June 30, 2005 was $0.75 (2004: $0.76) per share purchase option. The weighted average fair value of employee stock options repriced during the period ended June 30, 2005 was $Nil (2004: $0.52) per share purchase option as at the date of the reprice. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs: volatility - 56%; risk free interest rate - 5%; option term - 3 years; and dividend yield - nil. The total compensation expense of $494,259 has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.
10.
Related party transactions not disclosed elsewhere are as follows:
At June 30, 2005, accounts payable and accrued liabilities included $336,395 (at December 31, 2004 - $284,759) owed by the Company to directors and officers and companies controlled by directors and officers of the Company. These amounts are unsecured, non-interest bearing and payable on demand. At June 30, 2005, accounts payable and accrued liabilities included $306,350 (at December 31, 2004 - $300,500) owed by the Company to companies formerly related by virtue of having a director or officer in common with the Company.
17
11.
Commitments:
The Company is committed to the following operating lease payments over the next four years:
Year Equipment Building Total
2005
$
28,554
$
52,365
$
80,919
2006
41,343
248,885
290,228
2007
41,489
202,900
244,389
2008
14,508
202,900
217,408
$
125,894
$
707,050
$
832,944
The lease for The Companys head office expired on June 30, 2005 and new premises were obtained under a sublease. The terms of the sublease are for 10,938 square feet for the period of August 1, 2005 to December 30, 2009. The monthly rent is $16,908.33 with rent abatement for the first three-months and a partial payment of $4,800 for November 2005.
On July 8, 2002, the Company entered into the following agreements with OSI:
i.
Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products The Company agreed to commit a minimum of $250,000 to develop these products and operate this group.
ii.
Software Developer Services Agreement. Under this agreement, the Company agreed to engage the services of software engineers and equipment in OSIs software development facility in Hyderabad, India. The Company agreed to pay to OSI a minimum of $250,000 during the term of the agreement, which expires on June 30, 2003, provided that if the aggregate amount paid to OSI on such date was less than $250,000, the agreement can be extended for six-months.
iii.
Joint Venture Letter of Intent. Under this letter of intent, upon OSIs establishment of a Brazilian entity to oversee marketing, sales, service and assembly and marketing of OSIs products, in Brazil and the establishment of an office in Brazil, Visiphor would invest $250,000 for a 20% equity ownership in that entity.
On March 20, 2003 the above agreements were amended as follows:
i.
the strategic alliance agreement to develop and market integrated airport and security products with OSI was extended to July 8, 2004. The expenditure commitment was reduced to a minimum of $125,000 on product development and the operation of an Airport Security Group to market the products. As at December 31, 2004, the Company incurred $48,350 in expenditures on product development.
ii.
the agreement to engage OSI to provide software development services was extended to December 31, 2004. The expenditure commitment has been reduced to a minimum of $125,000, based on hourly rates charged at 85% of fair market value.
iii.
The Company agreed to pay OSI a management fee of $250,000 on or before March 20, 2004.
On January 27, 2005 the Company received a Notice of Demand from OSI for $500,000 alleging that the Company was in default under the terms of these agreements. The Company believes that OSI acted in bad faith and, as a result, the Company was unable to meet the terms of these agreements. The parties have agreed to refer this matter to the American Arbitration Association for resolution. While the Company believes that it has not defaulted under the terms of these agreements, there can be no assurance that this dispute will be resolved in the Companys favour and that the Company will not be required to pay the full or partial amount of such demand to OSI upon resolution of this dispute.
18
12.
Financial instruments and risk management:
(a)
Fair values:
The fair value of the Companys financial instruments, represented by cash, accounts receivable, accounts payable and accrued liabilities, approximates their carrying values due to their ability to be promptly liquidated or their immediate or short term to maturity. Based on current interest rates relative to those implicit in the leases, the fair value of capital lease obligations is estimated to not be materially different from their carrying values.
(b)
Credit risk:
The Company is exposed to credit risk only with respect to uncertainty as to timing and amount of collectibility of accounts receivable. The Companys maximum credit risk is the carrying value of accounts receivable.
(c)
Foreign currency risk:
Foreign currency risk is the risk to the Companys earnings that arises from fluctuations in foreign currency exchange rates, and the degree of volatility of these rates. Management has not entered into any foreign exchange contracts to mitigate this risk.
13.
Segmented information:
The Company operates in a single segment, the development and sale of software. Management of the Company makes decisions about allocating resources based on this one operating segment.
Substantially all revenue is derived from sales to customers located in Canada, the United States, the United Kingdom and Saudi Arabia. Geographic information is as follows:
2005
2004
Canada
$
45,879
$
101,283
United States
1,175,955
100,495
United Kingdom
23,232
318,918
Saudi Arabia
-
48,729
Other
182
33,715
$
1,245,248
$
603,140
Substantially all of the Companys fixed assets are in Canada.
Major customers, representing 10% or more of total revenue are:
2005
2004
Customer A
$
497,666
$
-
Customer B
273,632
-
Customer C
4,904
150,168
Customer D
-
98,142
19
14.
Subsequent events:
Subsequent to June 30, 2005:
Effective July 6, 2005 the Company changed its name from Imagis Technologies Inc. to Visiphor Corporation. The Company continued under the Canada Business Corporation Act and there was no change in the share capital structure of the Company. In conjunction with the official name change, the Company adopted the following new stock symbols, which came into effect at market openings:
TSX-Venture: VIS (effective July 6, 2005)
OTCBB:
VISRF (effective July 7, 2005)
15.
United States generally accepted accounting principles:
These financial statements have been prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP) which differ in certain respects with accounting principles generally accepted in the United States (U.S. GAAP). Material issues that could give rise to measurement differences to these consolidated financial statements are as follows:
(a)
Stock-based compensation:
As described in note 9, the Company has granted stock options to certain employees, directors, advisors, and consultants. These options are granted for services provided to the Company. For options issued subsequent to December 31, 2001, the Company amortizes the expense of all options issued to non-employees based on the Black-Scholes model under Canadian GAAP. For U.S. GAAP purposes, an enterprise recognizes or, at its option, discloses the impact of the fair value of stock options and other forms of stock-based compensation in the determination of income. The Company has elected under U.S. GAAP to continue to measure compensation cost for stock options granted to employees prior to January 1, 2003 by the intrinsic value method. Options granted to non employees prior to January 1, 2002, are required to be measured and recognized at their fair value as the services are provided and the options are earned. In addition, during the year ended December 31, 2001 and 2002, the Company repriced certain options and consequently, in accordance with the intrinsic value method under U.S. GAAP, such options are accounted for as variable options and net increases in the underlying common shares market price since the repricing date are recognized as compensation cost until the options are exercised, expire or forfeited.
(b)
Beneficial conversion option:
During the year ended December 31, 2000, the Company issued convertible debentures with detachable warrants attached. For Canadian GAAP purposes, the issuance was considered to be of a compound debt and equity instrument and the proceeds were allocated between the two elements based on their relative fair values. For U.S. GAAP purposes, the consideration received was allocated between the debt and warrants resulting in a beneficial conversion option as the fair value of the shares issuable on conversion of the debt is in excess of the value at which such shares would be issuable based on the reduced carrying value of the debt element. This beneficial conversion option was amortized over the period to the first conversion date.
(c)
Warrant issuance for services:
During the year ended December 31, 2000, the Company issued 200,000 warrants having an exercise price of $3.50 each for services rendered. In accordance with the Companys accounting policies, at that time, for Canadian GAAP purposes no value has been assigned to these warrant issuances. For U.S. GAAP purposes, the fair value of these warrants would be determined based on an option pricing model and recognized as the services are provided.
20
15.
United States generally accepted accounting principles contd:
The effect of these accounting differences on deficit, net loss, loss per share and future income taxes under United States accounting principles are as follows:
Six-months ended
June 30, June 30,
2005 2004
Deficit, Canadian GAAP
$
(29,675,304)
$
(24,042,440)
Cumulative stock-based compensation (a)
(1,380,198)
(1,371,448)
Beneficial conversion options (b)
(208,200)
(208,200)
Warrants issued for services (c)
(722,000)
(722,000)
Deficit, U.S. GAAP
$
(31,985,702)
$
(26,344,088)
Loss for the period, Canadian GAAP
$
(3,016,481)
$
(2,841,554)
Stock-based compensation
-
(26,250)
Loss for the period, U.S. GAAP
$
(3,016,481)
$
(2,867,804)
Loss per share, U.S. GAAP basic and diluted
$
(0.12)
$ (0.25)
21
Item 2. Managements Discussion and Analysis or Plan of Operation
About Visiphor
Visiphor develops and markets software that simplifies, accelerates, and economizes the process of connecting existing, disparate databases, enhanced as appropriate with biometric facial recognition technology. The combination of these technologies enables information owners to share data securely with external stakeholders and software systems using any combination of text or imagery. This includes searching disconnected data repositories for information about an individual using only a facial image. This allows organizations to quickly create regional information sharing networks using any combination of text or imagery.
Using industry standard Web services and XML, Visiphor delivers a secure and economical approach to true, real-time application interoperability. Production deployments of the Companys core integration technology the Briyante Integration Environment (BIE) have demonstrated remarkable reductions in the time and risk associated with implementing and supporting integrated access to physically and technologically disparate computers. The Company believes that BIE has the capability to be utilized in a variety of vertical markets such as health care, financial services, government services and telecommunications.
Overview
The Companys Business
The Company derives a substantial portion of its revenues, and it expects to derive a substantial portion of its revenues in the near future, from sales of its software to a limited number of customers. Additional revenues are achieved through the implementation and customization of this software as well as from the support, training, and ongoing maintenance that results from each software sale. The Companys success will depend significantly upon the timing and size of future purchase orders from its largest customers as well as from the ability to maintain relationships with its existing installed customer base.
Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and the provision of specific services. The Company generally recognizes total revenue for software and services associated with a contract using percentage of completion method based on the total costs incurred over the total estimated costs to complete the contract.
The Companys revenue is dependent, in large part, on contracts from a limited number of customers. As a result, any substantial delay in the Companys completion of a contract, the inability of the Company to obtain new contracts or the cancellation of an existing contract by a customer could have a material adverse effect on the Companys results of operations. The loss of certain contracts could have a material adverse effect on the Companys business, financial condition, operating results and cash flows. As a result of these and other factors, the Companys results of operations have fluctuated in the past and may continue to fluctuate from period-to-period.
Recent world events and concerns regarding security have increased awareness of and interest in products that have law enforcement or other security applications, including certain of the products and services offered by Visiphor. There can be no assurance, however, that such trends will continue or will result in increased sales of the Companys products and services.
Critical Accounting Polices
Critical accounting policies are those that management believes are both most important to the portrayal of the Companys financial conditions and results, and that require difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effects of matters that involve uncertainty.
Visiphor believes the critical accounting policies it uses in preparation of its financial statements are as follows:
22
Revenue recognition
(i)
Software sales revenue:
The Company recognizes revenue consistent with Statement of Position 97-2, Software Revenue Recognition. In accordance with this Statement, revenue is recognized, except as noted below, when all of the following criteria are met: persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured. Funds received in advance of meeting the revenue recognition criteria are recorded as deferred revenue.
When a software product requires significant production, modification or customization, the Company generally accounts for the arrangement using the percentage-of-completion method of contract accounting. Progress to completion is measured by the proportion that activities completed are to the activities required under each arrangement. When the current estimate on a contract indicates a loss, a provision for the entire loss on the contract is made.
When software is sold under contractual arrangements that include post-contract customer support (PCS), the elements are accounted for separately if vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements. VSOE is identified by reference to renewal arrangements for similar levels of support covering comparable periods. If such evidence does not exist, revenue on the completed arrangement is deferred until the earlier of (a) VSOE being established or (b) all of the undelivered elements are delivered or performed, with the following exceptions: if the only undelivered element is PCS, the entire fee is recognized ratably over the PCS period, and if the only undelivered element is service, the entire fee is recognized as the services are performed.
The Company provides for estimated returns and warranty costs, which to date have been nominal, on recognition of revenue.
(ii)
Support and services revenue:
Contract support and services revenue is deferred and is amortized to revenue ratably over the period that the support and services are provided.
Intangible Assets:
Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values. The cost of internally developed intangible assets includes direct development costs and overhead directly attributable to development activity. The cost incurred to enhance the service potential of an intangible asset is capitalized as betterment. Costs incurred in the maintenance of the service potential of an intangible asset are expensed as incurred.
Intangible assets with finite useful lives are amortized over their useful lives. The assets are amortized on a straight-line basis at the following annual rates, which are reviewed annually:
Asset
Rate
Intellectual property
33.3%
Patents
33.3%
License
33.3%
Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any.
23
Use of estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates. Areas for significant estimate include but are not limited to valuation of accounts receivable; amortization periods for equipment, intellectual property and other assets; valuation of intellectual property; fair value inputs for calculation of stock-based compensation; and the valuation allowance of future income tax assets.
Stock-based compensation
The Company accounts for all stock-based payments to employees and non-employees using the fair value based method.
Under the fair value based method, stock-based payments are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is compete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date.
Under the fair value based method, compensation cost attributable to employee awards is measured at fair value at the grant date and recognized over the vesting period. Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at intrinsic value and recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. For awards that vest at the end of the vesting period, compensation cost is recognized on a straight-line basis; for awards that vest on a graded basis, compensation cost is recognized on a pro-rata basis over the vesting period.
Results of Operations for the three-month period and six-month period ended June 30, 2005 compared to the three-month period and six-month period ended June 30, 2004:
Revenues
Visiphors total revenues increased 190% to $920,620 for the three-month period ended June 30, 2005 compared to $317,085 during the same period of the prior year. The year to date revenues increased 106% to $1,245,248 over the prior year level of $603,140.
Revenues from the Companys software products rose 248% to $733,726 for the current three-month period as compared to $211,079 for 2004. Software revenues increased by 140% to $965,084 for the year over the prior years level of $401,940. This growth was seen in the Companys core product lines of BIE and biometrics.
Support and services revenues were 82% greater at $185,465 for the three-month period ended June 30, 2005 than in 2004 of $101,920. Support and services revenues for the year to date increased 42% to $277,769 over the prior year level of $195,008. The support and services revenues increased as a result of additional sales of software providing increased levels of customization, installation, and support contracts.
Visiphor expects that revenues will increase in subsequent quarters of 2005 when compared to those of 2004 and will continue to increase as the Companys current and newly developed products and solutions continue to gain increasing customer acceptance. The Companys deferred revenues at June 30, 2005 were $671,578, which combined with revenues to date for the year of $1,245,248 represents sales of $1,916,826 through the second quarter of this fiscal year. In addition, the Company received orders for further sales totalling approximately $1,800,000 that are not yet reflected in its financial statements, that if completed would result in total year to date sales of approximately $3,800,000. There can be no assurance however that all of the Companys sales characterized as deferred revenue in its unaudited financial statements through the period ended June 30, 2005 will later be booked as revenue in future periods. Further, there can be no assurance that all orders for further sales received to date till result in actual future revenues to the Company. See Policies on page 23 of this quarterly report.
Other revenues for the three-month period ended June 30, 2004 were $1,429, whereas revenues of $4,086 were earned in the prior year. Other revenues declined by 61% for the year to date to $2,395 compared to $6,192 for 2004. These revenues were primarily earned through interest revenue and the sale of computer supplies.
24
Operating Costs
Operating expenses totalled $2,482,912 for the three-month period ended June 30, 2005, which is 56% greater than the 2004 operating expenses of $1,576,838. The 2005 expenses include stock-based compensation of $391,667 due to Visiphors employee stock option plan and $412,731 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2005 operating expenses total $1,678,513. The 2004 expenses include stock-based compensation of $68,054 and amortization of $388,460, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these items, the operating expenses for 2004 were $1,120,324. The difference of $558,189 between 2005 and 2004 represents a 50% increase in operating expenses over the prior period. The increased costs over the prior year are due to hiring additional staff in all departments to increase sales, continue product development, and meet the increased demand for Visiphors products and services.
Operating expenses totalled $4,261,730 for the six-month period ended June 30, 2005, which is 24% greater than the 2004 operating expenses of $3,444,694. The 2005 expenses include stock-based compensation of $494,261 due to Visiphors employee stock option plan and $794,740 in amortization, which includes $645,426 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2005 operating expenses total $2,972,730. The 2004 expenses include stock-based compensation of $782,984 and amortization of $775,932. Excluding these items, the operating expenses for 2004 were $1,885,778. The difference of $1,086,953 between 2005 and 2004 represents a 58% increase in operating expenses over the prior year. The increased costs over the prior period resulted from significant increases in staffing and related costs. Staff levels have increased from 35 at January 1, 2005 to 53 at June 30, 2005. The current operating expense level is approximately $5,900,000 per year and may increase if additional resources are required to meet sales demands.
Administration
Administrative costs for the three-month period ended June 30, 2005 were $792,812, which is 38% greater than for 2004 of $576,308. These costs include a stock-based compensation charge of $199,926 in 2005 and $68,054 in 2004. Excluding these charges, the administrative costs were $592,886 in 2005 versus $508,254 in 2004, which represents a 17% increase. This increase was due to the addition of staff including a shareholder relations employee and related expenses. Administrative costs include staff salaries and related benefits and travel, stock based compensation, consulting and professional fees, facility and support costs, shareholder, regulatory and shareholder relations costs.
Administrative costs for the six-months ended June 30, 2005 were $1,239,143, which is 18% less than for 2004 of $1,510,792. These costs include the stock-based compensation charge of $268,308 in 2005 and $782,984 in 2004. Excluding these charges, the administrative costs were $970,835 in 2005 versus $727,808 in 2004, which represents a 33% increase. The current level of administrative cost is expected to remain the same for the balance of 2005.
Interest and Amortization
The interest expense for the three-month period ended June 30, 2005 of $7,006, which is 31% less than for 2004 of $10,114, is primarily due to interest charged on equipment leases and various supplier accounts. The amortization expense of $412,731 for 2005 is consistent with 2004 of $388,460 and is primarily due to amortization of the acquisition of the intellectual property of Briyante.
The decrease in interest expense of $9,928 for the six-months ended June 30, 2005 over the prior year level is primarily due to a reduction in outstanding leases. The amortization expense of $794,740 for 2005 is comparable to the 2004 expense of $775,932 and is primarily due to the acquisition of the intellectual property of Briyante.
Sales and Marketing
Sales and marketing expenses for the three-month period ended June 30, 2005 were $426,790 compared to $276,167 during the same period last year, which represents an increase of 55%. These costs include a stock-based compensation charge of $46,839 in 2005. Excluding this charge, the sales and marketing costs were $379,950 in 2005, which represents a 38% increase over 2004.
Sales and marketing expenses for the six-month period ended June 30, 2005 were $856,466 and were 80% greater than in 2004 of $476,009. These costs include a stock-based compensation charge of $65,212 in 2005. Excluding
25
this charge, the sales and marketing costs were $791,254 in 2005, which represents a 66% increase over 2004. Visiphor significantly increased the size of its marketing team in the latter half of 2004 and in 2005.
Technology Development
The technology development expenses for the three-month period ended June 30, 2005 were $447,964 which is 77% greater than the 2004 costs of $253,440. Technology development expenses include a stock-based compensation charge of $86,133 in 2005. Excluding this the 2005 expense is $361,831 which is 43% higher than 2004.
The technology development expenses for the six-month period ended June 30, 2005 were $823,345, which is 60% higher than the 2004 costs of $516,124. The 2005 costs include a stock-based compensation charge of $97,261. Excluding this charge, the costs were $726,084 in 2005, which represents a 41% increase over 2004. This increase was primarily due to hiring additional staff and the associated costs required to maintain our enhancement of existing products and new product development. Management expects that the increased revenues achieved as a result of the sale of products will more than offset the increased costs. Management believes that continuing to invest in technology advancements is crucial to the future success of Visiphor.
Technical Services
Costs for the technical services group for the three-month period ended June 30, 2005 were $135,309, which is 87% greater than the 2004 costs of $72,349. These costs include a stock-based compensation charge of $6,624 in 2005. Excluding this charge, the technology services costs were $128,685 in 2005, which represents a 78% increase over 2004. The increase is due to the hiring of staff and associated costs to meet the support requirements for the sales orders described above.
Costs for the technical services group for the six-month period ended June 30, 2005 were $276,168, which is 91% greater than the 2004 costs of $144,341. These costs include a stock-based compensation charge of $11,333 in 2005. Excluding this charge, the technology services costs were $264,835 in 2005, which represents a 83% increase over 2004. The technical services group conducts quality assurance testing and provides clients with any technical support they may require under annual support contracts, and includes primarily costs for salaries, facilities and travel. Costs for future quarters will be dependent on the sales levels achieved by the Company.
Professional Services
Costs for the professional services group for the three-month period ended June 30, 2005 were $260,301. These costs include a stock-based compensation charge of $52,145. Excluding this charge, the professional services costs were $208,156. Professional services is a new department that was initiated in the second quarter of 2005 consequently there are no comparative figures. The professional services group is responsible for the installation of Visiphors products and training of Visiphors customers and business partners in the use of our products. The costs include salaries, travel and general overhead expenses. Costs for future quarters will be dependent on the sales levels achieved by the Company.
Net Loss for the Period
The Company's current net loss on a monthly basis is $500,000. Management believes that providing cash operating expense information may be helpful to investors with respect to the Company's results of operations, because it excludes certain non-cash amortization amounts that the Company has incurred primarily as a result of its acquisition of certain intellectual property of Briyante that prevents an accurate period-to-period comparison as well as stock-based compensation that does not require cash payments. When excluding such expenses, the Company's current rate of loss on a cash operating expense basis is $288,000 per month.
Overall, the Company incurred a net loss for the three-month period ended June 30, 2005 of $1,562,291, or $0.06 per share, which is 24% higher than the net loss incurred during the three-months ended June 30, 2004 of $1,259,753, or $0.09 per share. Adjusting the loss to take into account the non-cash expenses described above, the losses become $757,893 for 2005 and $803,239 for 2004, representing a 6% decline.
The Company incurred a net loss for the six-month period ended June 30, 2005 of $3,016,481 or $0.12 per share, which is 6% larger than the net loss incurred during the period ended June 30, 2004 of $2,841,554 or $0.25 per share. Adjusting the loss to take into account the non-cash items described above, the losses become $1,727,482 for 2005 and $1,282,638 for 2004, representing a 35% increase.
26
The Company has received significant sales orders during the final quarter of 2004 and the first half of 2005; however, installation of a number of these contracts did not commence until 2005 and the revenue will not be recognised until the third and fourth quarters of 2005.
In the Company's most recent Form 10-KSB, management stated that it believed that the Company would be able to achieve break-even operations on an EBITDA basis during the second and third quarters of 2005. Due to the timing of the completion of existing contracts and its effect upon the recognition of revenue, management is revising this estimate. After excluding the Company's quarterly amortization expenses of $413,000 primarily associated with the Briyante acquisition and any stock-based compensation expense associated with granting options, management believes that it will achieve break-even operations on a cash operating basis during the fourth quarter of 2005.
Summary of Quarterly Results
| Q2-2005 | Q1-2005 | Q4-2004 | Q3 2004 | Q2 - 2004 | Q1 - 2004 | Q4 - 2003 | Q3 - 2003 | |
Total Revenue | $ | 920,620 | 324,628 | 327,016 | 102,814 | 317,085 | 286,055 | 263,793 | 496,612 |
Loss | (1,562,291) | (1,454,190) | (1,270,180) | (1,346,203) | (1,259,753) | (1,581,801) | (959,283) | (694,042) | |
Net loss per share | (0.06) | (0.06) | (0.08) | (0.09) | (0.09) | (0.14) | (0.15) | (0.15) |
The Companys changes in its net losses per quarter fluctuate according to the volume of sales. As the Company currently has a small number of customers generating the majority of its revenues, there is no consistency from one quarter to the next and past quarterly performance is not considered to be indicative of future results. The Company had significantly reduced its operating expenses during the period from Q3 2002 through Q3 2003, which also has a large impact on the comparative loss figures. In the latter part of 2004 and in 2005, the Company hired additional staff to meet the demands of the sales orders described above, causing a significant increase in expense levels. The Company is not aware of any significant seasonality affecting its sales.
Liquidity and Capital Resources
The Companys cash on hand at the beginning of the three-month period ended June 30, 2005 aggregated $86,472. During the period, the Company received additional net funds of $1,571,024 from a private placement that closed in May. Due to an increase in the Companys stock price, the Company also received proceeds of $84,363 from the exercise of options and $144,900 from the exercise of warrants.
The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,562,291, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $998,097. The Company also repaid capital leases of $8,434 and purchased capital assets of $163,186, overall the Companys cash position increased by $630,571 to $717,043 at June 30, 2005.
The Companys cash on hand at the beginning of the six-month period ended June 30, 2005 aggregated $123,148. During the period, the Company received additional net funds of $2,358,479 from two private placements. Due to an increase in the Companys stock price the Company also received proceeds of $84,363 from the exercise of options and $144,900 from the exercise of warrants.
The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $3,016,481, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $1,788,221. The Company also repaid capital leases of $18,850 and purchased capital assets of $186,776. Overall, the Companys cash position increased by $593,895 to $717,043 at June 30, 2005.
The Company experienced unexpected delays in concluding certain contract negotiations; consequently, completion of the associated software installations were delayed. As a result of this delayed collection of revenues, management decided to seek additional financing in order to maintain its current level of operations.
In January 2005, the Company completed a private placement consisting of 2,857,785 units at $0.35 per unit. Each unit consisted of one common share and one common share purchase warrant. Each warrant entitles the holder to acquire one additional common share at an exercise price of $0.45 until January 11, 2006 or at $0.55 from January 12, 2006 until January 11, 2007. The common shares and warrants were subject to a four-month hold period that expired on May 10, 2005. Finders fees of $72,771 in cash were paid on a portion of the private placement
27
conducted outside the United States. The total net proceeds to Visiphor were $927,454, including $140,000 included in share subscriptions at December 31, 2004.
In May 2005, the Company completed a private placement consisting of 4,250,000 units at $0.40 per unit. Each unit consisted of one common share and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one additional common share at an exercise price of $0.55 until May 24, 2006. The common shares and warrants were subject to a four-month hold period that expired on September 24, 2005. Finders fees of $128,976 in cash were paid on a portion of the private placement conducted outside the United States. In connection with this private placement The Company issued 60,000 units as a corporate finance fee on the same terms as the units described above with the exception that the common shares and warrants shares are subject to a twelve-month hold period that expires on May 24, 2006. The Company also granted 350,000 brokers warrants exercisable at a price of $0.55 until May 24, 2006. The brokers warrant shares are subject to a four month hold period which expires on September 24, 2005. The total net proceeds to Visiphor were $1,571,024.
During the final quarter of 2004, the Company was awarded a contract with PRIME Corp. of British Columbia, Canada to deploy the Visiphor flagship InForce Arrest and Booking (InForce AB) software as an integrated component of the province-wide Police Records Information Management Environment (PRIME-BC). This contract will result in revenues to the Company in excess of $800,000. The Company has received $488,251 as at June 30, 2005, which is recorded in deferred revenue, revenues from this contract will likely be recorded in the third and fourth quarters of 2005.
In April 2005, the Company signed a $780,500 contract with King County of Washington to supply an expansion of the RAIN (Regional Automated Information Network) project for the Countys law enforcement agencies. This project will expand RAINs capabilities and benefits to over 3000 officers across 23 independent police jurisdictions responsible for protecting over 1.7 million citizens. Revenues of $343,541 from this contract were recognized in the second quarter of 2005, the remainder will likely be recognized during the third and fourth quarters of 2005.
In June 2005, the Company signed a contract in excess of Cdn$350,000 with the Department of Homeland Security (DHS). The contract was received on behalf of the DHS Metadata Center of Excellence. The software will be used to design and deploy a metadata (data describing data) repository and a federal query information sharing capability. The Company has recognized $237,583 in revenue as at June 30, 2005, the remainder will likely be recognized during the third and fourth quarters of 2005.
The Company also has received other orders with certain agencies in the United States that total an additional approximately $1,000,000, the amounts due under these contracts are expected to be received by the Company in the third and fourth quarters of 2005. There can be no assurance however that all of such orders will result in actual revenues to the Company.
The Company believes it has cash sufficient to fund its operations through August 31, 2005. The Company also has accounts receivable as at the date of this report of $747,000. The Company believes that the accounts receivable combined with the orders described above if completed will generate cash sufficient to fund its operations through December 31, 2005. If the accounts receivable are not collected, certain of the contracts are not completed, or no further sales are received the Company may need to raise additional funds through private placements of its securities or seek other forms of financing. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all. If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.
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Contractual Obligations
The Company is committed to the following operating lease payments over the next four years:
Year Equipment Building Total
2005
$
28,554
$
52,365
$
80,919
2006
41,343
248,885
290,228
2007
41,489
202,900
244,389
2008
14,508
202,900
217,408
$
125,894
$
707,050
$
832,944
The lease for The Companys head office expired on June 30, 2005 and new premises were obtained under a sublease. The terms of the sublease are for 10,938 square feet for the period of August 1, 2005 to December 30, 2009. The monthly rent is $16,908.33 with rent abatement for the first three-months and a partial payment of $4,800 for November 2005.
On January 27, 2005 the Company received a Notice of Demand from OSI for $500,000 alleging that the Company was in default under the terms of three agreements. The Company believes that OSI acted in bad faith and, as a result, the Company was unable to meet the terms of these agreements. The parties have agreed to refer this matter to the American Arbitration Association for resolution. While the Company believes that it has not defaulted under the terms of these agreements, there can be no assurance that this dispute will be resolved in the Companys favour and that the Company will not be required to pay the full or partial amount of such demand to OSI upon resolution of this dispute.
Off-Balance Sheet Arrangements
At June 30, 2005 the Company did not have any off-balance sheet arrangements.
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Item 3. Controls and Procedures
Under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Operating Officer and Vice-President, Finance, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) of the end of the period covered by this report (the Evaluation Date). Based upon that evaluation, the Chief Executive Officer and Chief Operating Officer and Vice-President, Finance concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or its consolidated subsidiaries) required to included in the Companys periodic filings with the SEC.
During the quarter ended June 30, 2005, there was no significant change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
The Companys management, including the Chief Executive Officer and Chief Operating Officer and Vice President, Finance, does not expect that the Companys disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
30
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Except as disclosed below, the Company is not a party to any legal proceedings as of the date of this report the adverse outcome of which in managements opinion, individually or in the aggregate, would have a material effect on the Companys result of operations or financial position.
On July 8, 2002, the Company entered into the following agreements with OSI:
i.
Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products The Company agreed to commit a minimum of USD$250,000 to develop these products and operate this group.
ii.
Software Developer Services Agreement. Under this agreement, the Company agreed to engage the services of software engineers and equipment in OSIs software development facility in Hyderabad, India. The Company agreed to pay to OSI a minimum of USD$250,000 during the term of the agreement, which expired on June 30, 2003, provided that if the aggregate amount paid to OSI on such date was less than USD$250,000, the agreement could be extended for six-months.
iii.
Joint Venture Letter of Intent. Under this letter of intent, upon OSIs establishment of a Brazilian entity to oversee marketing, sales, service and assembly and marketing of OSIs products in Brazil and the establishment of an office in Brazil, Visiphor would invest USD$250,000 for a 20% equity ownership in that entity.
On March 20, 2003 the above agreements were amended as follows:
i.
The strategic alliance agreement to develop and market integrated airport and security products with OSI was extended to July 8, 2004. The expenditure commitment was reduced to a minimum of USD$125,000 on product development and the operation of an Airport Security Group to market the products. As at December 31, 2004, the Company incurred USD$48,350 in expenditures on product development.
ii.
The agreement to engage OSI to provide software development services was extended to December 31, 2004. The expenditure commitment has been reduced to a minimum of USD$125,000, based on hourly rates charged at 85% of fair market value.
iii.
The Company agreed to pay OSI a management fee of USD$250,000 on or before March 20, 2004.
On January 27, 2005 the Company received a Notice of Demand from OSI for $500,000 alleging that the Company was in default under the terms of these agreements. The Company believes that OSI acted in bad faith and, as a result, the Company was unable to meet the terms of these agreements. The parties have agreed to refer this matter to the American Arbitration Association for resolution. While the Company believes that it has not defaulted under the terms of these agreements, there can be no assurance that this dispute will be resolved in the Companys favour and that the Company will not be required to pay the full or partial amount of such demand to OSI upon resolution of this dispute.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company issued 205,228 common shares upon the exercise of stock options by 33 persons in private transactions outside the United States that resulted in gross proceeds to the Company of $84,363.20. The options were exercised on the following dates for the following amounts: May 27, 2005 options were exercised to purchase 8,334 common shares resulting in gross proceeds to the Company of $2,866.90; June 1, 2005 options were exercised to purchase 8,149 common shares resulting in gross proceeds to the Company of $3,200.32; June 16, 2005 options were exercised to purchase 105,336 common shares resulting in gross proceeds to the Company of $41,527.90; June 17, 2005 options were exercised to purchase 51,745 common shares resulting in gross proceeds to the Company of $24,102.48 and June 29, 2005 options were exercised to purchase 31,664 common shares resulting in gross proceeds to the Company of $12,665.60. The common shares were issued in reliance upon an exclusion from registration available under Regulation S (Regulation S) promulgated under the Securities Act of 1933, as amended (the Securities Act).
31
The Company issued 305,000 common shares upon the exercise of warrants by three persons in private transactions outside the United States resulting in gross proceeds to the Company of $144,900. The warrants were exercised on the following dates for the following amounts: April 26, 2005 warrants to purchase 50,000 common shares were exercised resulting in gross proceeds to the Company of $25,000; May 3, 2005 warrants to purchase 75,000 common shares were exercised resulting in gross proceeds to the Company of $37,500; May 27, 2005 warrants to purchase 80,000 common shares were exercised resulting in gross proceeds to the Company of $42,400 and June 17, 2005 warrants to purchase 100,000 common shares were exercised resulting in gross proceeds to the Company of $40,000. The common shares were issued in reliance upon an exclusion from registration available under Regulation S.
Item 3. Defaults Upon Senior Securities
None
Item 4.
Submission of Matters to a Vote of Security Holders
Visiphor Corporation held an Annual General and Extraordinary Meeting of Shareholders at 1100 4710 Kingsway, Burnaby, British Columbia, V5H 4V2, on Friday, June 17, 2005, at 10:00 a.m. for the following purposes:
1.
To receive and consider the report of the directors of the Company.
2.
To receive and consider the audited financial statements of the Company for the period ending December 31, 2004 together with auditors reports thereon.
3.
To fix the number of directors of the Company at seven.
4.
To elect directors for the ensuing year.
5.
To appoint an auditor of the Company for the ensuing year and to authorize the directors to fix the auditors remuneration.
6.
To consider, and if thought advisable, to approve a share option plan (the 2005 Plan) to increase the number of shares issuable under the share option plan of the Company.
7.
To consider, and if thought advisable, to continue the Company under the jurisdiction of the Canada Business Corporations Act under the name Visiphor Corporation or, if the continuation is not implemented, to change the Companys name to Visiphor Software Corporation.
8.
To transact such other business as may properly come before the meeting or any adjournment thereof.
(b)
The directors whose term of office as a director continued after the meeting are Oliver Buck Revell, Roy Davidson Trivett, Clyde Farnsworth, Keith Kretschmer, Al Kassam, Norman Inkster, and Michael C. Volker.
(c)
There were 127 shareholders holding 7,784,897 common shares represented in person or by proxy at the meeting, representing 31.41% of the 24,785,217 issued and outstanding Common Shares, which constituted a quorum.
To approve all of the directors at the meeting, the number of votes for each director were:
For: 5,606,472
Against: 0
Votes Cast (Non-Insiders) For: 72.18%
Against: 0.00%
Totals: 7,784,897 Withheld: 17,156 Absentions: Nil
Excluding Insiders: Nil
Broker Non-Votes: Nil
To set the number of directors at seven:
For: 5,603,434
Against: 13,273
Votes Cast (Non-Insiders) For: 72.06%
Against: 0.17%
Totals: 7,784,897
Withheld: 8,432
Absentions: Nil
Excluding Insiders: Nil
Broker Non-Votes: Nil
To pass an ordinary resolution of disinterested shareholders to approve the amendment to the Companys Stock Option Plan
For: 3,743,469
Against: 1,241,659 Votes Cast (Non-Insiders) For: 75.09%
Against:24.91%
Totals: 6,801,583 Withheld: 98,187 Absentions: Nil
Excluding Insiders: 1,718,268 Broker Non-Votes: Nil
To appoint and remunerate KPMG LLP, Chartered Accountants:
For: 5,608,001
Against: 3,887
Votes Cast (Non-Insiders) For: 72.17%
Against: 0.05%
Totals: 7,784,897
Withheld: 12,584
Absentions: Nil
Excluding Insiders: 1,333
Broker Non-Votes: Nil
32
To continue the Company under the jurisdiction of the Canada Business Corporations Act under the name Visiphor Corporation or, if the continuation is not implemented, to change the Companys name to Visiphor Software Corporation:
For: 3,756,943
Against: 135,592
Votes Cast (Non-Insiders) For: 62.08%
Against: 2.24%
Totals: 7,784,897
Withheld: 13,761
Absentions: Nil
Excluding Insiders: 13,761 Broker Non-Votes: Nil
Item 5. Other Information
None
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Item 6. Exhibits
The following exhibits are filed (or incorporated by reference herein) as part of this Form 10-QSB:
3.1(1) | Articles of Incorporation | |
3.2(8) | Bylaws | |
4.1(1) | Shareholder Agreement dated February 23, 1999 among the original shareholders and the Former Imagis Shareholders | |
4.2(3) | Registration rights agreement dated July 8, 2002 between Imagis and OSI | |
10.1(2)* | Visiphor Corporation 2000 Stock Option Plan | |
10.2(3) | Subscription Agreement dated July 8, 2002 between Imagis and OSI | |
10.3(3) | Letter of Intent dated July 8, 2002 between Imagis and OSI | |
10.4(3) | Product Development and Marketing Agreement dated July 8, 2002 between Imagis and OSI | |
10.5(3) | Software Developer Services Agreement dated July 8, 2002 between Imagis and OSI | |
10.6(4) | Agreement to amend the terms of Item 10.9 dated October 8, 2002 | |
10.7(4) | Agreement to amend the terms of Item 10.9 and 10.10 dated October 9, 2002 | |
10.8(5) | Revolving Line of Credit dated February 23, 2003 between Imagis and Altaf Nazerali | |
10.9(5) | Amended and Restated Loan Agreement: Revolving Line of Credit dated April 15, 2003 between Imagis and Altaf Nazerali | |
10.10(5) | General Security Agreement dated April 15, 2003 between Imagis and Altaf Nazerali | |
10.11(5) | Grid Promissory Note dated February 21, 2003 between Imagis and Altaf Nazerali | |
10.12(5) | Grid Promissory Note Amended and Restated dated April 15, 2003 between Imagis and Altaf Nazerali | |
10.13(5) | Source Code License Agreement dated April 15, 2003 between Imagis and Altaf Nazerali | |
10.14(5) | Source Code Escrow Agreement dated April 15, 2003 between Imagis and Altaf Nazerali | |
10.15(6) | Debenture Agreement between the Company and 414826 B.C. Ltd dated May 30, 2003 | |
10.16 (7)* | Consulting Agreement dated July 15, 2003 between Imagis and Roy Trivett | |
31.1 | Section 302 Certification | |
31.2 | Section 302 Certification | |
32.1 | Section 906 Certification | |
32.2 | Section 906 Certification | |
99.1 | Risk Factors | |
99.2 | Form 51-9Form 51-901F as required by the British Columbia Securities Commission | |
* Indicates a management contract or compensatory plan or arrangement
(1)
Previously filed as part of Imagis Registration Statement on Form 10-SB (File No. 000-30090).
(2)
Previously filed as part of Imagis Annual Report on Form 10-KSB for the year ended December 31, 2000.
(3)
Previously filed as part of Imagis Current Report on Form 8-K filed on December 19, 2002.
(4)
Previously filed as part of Imagis Annual Report on Form 10-KSB for the year ended December 31, 2002.
(5)
Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended March 31, 2003.
(6)
Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended June 30, 2003.
(7)
Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended September 30, 2003.
(8)
Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended June 30, 2004.
34
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VISIPHOR CORPORATION
Date: August 8, 2005
/s/ Wayne Smith
Wayne Smith
Vice President Finance, Chief Operating Officer
(Principal Financial and Accounting Officer and Duly Authorized Officer)
35
Exhibit 31.1
CERTIFICATION
I, Wayne Smith, certify that:
1.
I have reviewed this quarterly report on Form 10-QSB of Visiphor Corporation;
2.
Based on my knowledge, this 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 report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4.
The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(b)
Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5.
The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: August 8, 2005
/s/ Wayne Smith
Wayne Smith
Chief Operating Officer and Vice-President Finance
(Principal Financial and Accounting Officer)
Exhibit 31.2
CERTIFICATION
I, Roy Trivett, certify that:
1.
I have reviewed this quarterly report on Form 10-QSB of Visiphor Corporation;
2.
Based on my knowledge, this 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 report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4.
The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)
Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5.
The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: August 8, 2005
/s/ Roy Trivett
Roy Trivett
Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Visiphor Corporation (the Company) on Form 10-QSB for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Wayne Smith, Chief Operating Officer and Vice-President Finance of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Wayne Smith (Principal Financial and Accounting Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Visiphor Corporation (the Company) on Form 10-QSB for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Roy Trivett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Roy Trivett (Principal Executive Officer) |
Exhibit 99.1
Risk Factors
The price of the Companys common shares is subject to the risks and uncertainty inherent in the Companys business. You should consider the following factors as well as other information set forth in the Quarterly Report to which this exhibit is attached, in connection with any investment in the Companys common shares. If any of the events described below as risks occur, the Companys business, results of operations and financial condition could be adversely affected. In such cases, the price of the Companys common shares could decline, and you could lose all or part of your investment.
Limited Operating History; History of Losses
The Company commenced operations in March 1998 and, therefore, has only a limited operating history upon which an evaluation of its business and prospects can be based. The Company and its predecessors incurred net losses of $5,457,937 and $4,058,857 in the years ended December 31, 2004 and December 31, 2003, respectively and $3,016,481 for the six-month period ended June 30, 2005. The Company has never been profitable and there can be no assurance that, in the future, the Company will be profitable on a quarterly or annual basis.
In view of the rapidly evolving nature of the Companys business and markets and limited operating history, the Company believes that period-to-period comparisons of financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
The Report of the Independent Registered Public Accounting Firm on the Companys December 31, 2004 Financial Statements includes an explanatory paragraph that indicates the financial statements are affected by conditions and events that cast substantial doubt on the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Need for Additional Financing
The Company believes it has cash sufficient to fund its operations through August 31, 2005. The Company also has accounts receivable as at the date of this report of $747,000. The Company believes that the accounts receivable combined with the orders described above if completed will generate cash sufficient to fund its operations through December 31, 2005. If the accounts receivable are not collected, certain of the contracts are not completed, or no further sales are received the Company may need to raise additional funds through private placements of its securities or seek other forms of financing. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all. If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.
Potential Fluctuations in Quarterly Financial Results
The Companys financial results may vary from quarter-to-quarter based on factors such as the timing of significant orders and contract completions. The Companys revenues are not predictable with any significant degree of certainty and future revenues may differ from historical patterns. If customers cancel or delay orders, it can have a material adverse impact on the Companys revenues and results of operations from quarter-to-quarter. Because the Companys results of operations may fluctuate from quarter-to-quarter, you should not assume that you could predict results of operations in future periods based on results of operations in past periods.
Even though the Companys revenues are difficult to predict, it bases its expense levels in part on future revenue projections. Many of the Companys expenses are fixed, and it cannot quickly reduce spending if revenues are lower than expected. This could result in significantly lower income or greater loss than the Company anticipates for any given period. The Company will react accordingly to minimize any such impact.
New Product Development
The Company expects that a significant portion of its future revenue will be derived from the sale of newly introduced products and from enhancement of existing products. The Companys success will depend, in part, upon its ability to enhance its current products and to install such products in end-user applications on a timely and cost-effective basis. In addition, the Company must develop new products that meet changing market conditions, including changing customer needs, new competitive product offerings and enhanced technology. There can be no assurance that the Company will be successful in developing and marketing - on a timely and cost-effective basis - new products and enhancements that respond to such changing market conditions. If the Company is unable to anticipate or adequately respond on a timely or cost-effective basis to changing market conditions, to develop new software products and enhancements to existing products, to correct errors on a timely basis or to complete products currently under development, or if such new products or enhancements do not achieve market acceptance, the Companys business, financial condition, operating results and cash flows could be materially adversely affected. In light of the difficulties inherent in software development, the Company expects that it will experience delays in the completion and introduction of new software products.
Lengthy Sales Cycles
The purchase of any of the Companys software systems is often an enterprise-wide decision for prospective customers and requires the Company (directly or through its business partners) to engage in sales efforts over an extended period of time and to provide a significant level of education to prospective customers regarding the use and benefits of such systems. In addition, an installation generally requires approval of a governmental body such as municipal, county or state government, which can be a time-intensive process and require months before a decision to be made. Due in part to the significant impact that the application of the Companys products has on the operations of a business and the significant commitment of capital required by such a system, potential customers tend to be cautious in making acquisition decisions. As a result, the Companys products generally have a lengthy sales cycle ranging from six (6) to twelve (12) months. Consequently, if sales forecast from a specific customer for a particular quarter are not realized in that quarter, the Company may not be able to generate revenue from alternative sources in time to compensate for the shortfall. The loss or delay of a large contract could have a material adverse effect on the Companys quarterly financial condition, operating results and cash flows. Moreover, to the extent that significant contracts are entered into and required to be performed earlier than expected, the Companys future operating results may be adversely affected.
Dependence on a Small Number of Customers
The Company derives a substantial portion of its revenues, and it expects to continue to derive a substantial portion of its revenues in the near future, from sales to a limited number of customers. Unless and until the Company further diversifies and expands its customer base, the Companys success will depend significantly upon the timing and size of future purchase orders, if any, from its largest customers, as well as their product requirements, financial situation, and, in particular, the successful deployment of services using the Companys products. The loss of any one or more of these customers, significant changes in their product requirements, or delays of significant orders could have a material adverse affect upon the Companys business, operating results and financial condition.
Dependence on Key Personnel
The Companys performance and future operating results are substantially dependent on the continued service and performance of its senior management and key technical and sales personnel. The Company may need to hire a number of technical and sales personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical, sales and managerial employees or that it will be able to attract or retain highly qualified technical and managerial personnel in the future.
The loss of the services of any of the Companys senior management or other key employees or the inability to attract and retain the necessary technical, sales and managerial personnel could have a material adverse effect upon its business, financial condition, operating results and cash flows. With the exception of one key software developer, the Company does not currently maintain key man insurance for any senior management or other key employees.
2
Dependence on Marketing Relationships
The Companys products are primarily marketed by its business partners. The Companys existing agreements with business partners are nonexclusive and may be terminated by either party without cause at any time. Such organizations are not within the control of the Company, are not obligated to purchase products from the Company and may also represent and sell competing products. There can be no assurance that the Companys existing business partners will continue to provide the level of services and technical support necessary to provide a complete solution to its customers or that they will not emphasize their own or third-party products to the detriment of the Companys products. The loss of these business partners, the failure of such parties to perform under agreements with the Company or the inability of the Company to attract and retain new business with the technical, industry and application experience required to market the Companys products successfully could have a material adverse effect on the Companys business, financial condition, operating results and cash flows.
Additionally, with respect to most sales, the Company supplies products and services to a customer through a third-party supplier acting as a project manager or systems integrator. In such circumstances, the Company has a sub-contract to supply its products and services to the customer through the prime contractor. In these circumstances, the Company is at risk that situations may arise outside of its control that could lead to a delay, cost over-run or cancellation of the prime contract which could also result in a delay, cost over-run or cancellation of the Companys sub-contract. The failure of a third-party supplier to supply its products and services or perform its contractual obligations to the customer in a timely manner could have a material adverse effect on the Companys financial condition, results of operations and cash flows
Competition
The markets for the Companys products are highly competitive. Numerous factors affect the Companys competitive position, including supplier competency, product functionality, performance and reliability of technology, depth and experience in distribution and operations, ease of implementation, rapid deployment, customer service and price.
Certain of the Companys competitors have substantially greater financial, technical, marketing and distribution resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changing customer requirements, or to devote greater resources to the development and distribution of existing products. There can be no assurance that the Company will be able to compete successfully against current or future competitors or alliances of such competitors, or that competitive pressures faced by it will not materially adversely affect its business, financial condition, operating results and cash flows.
Proprietary Technology
The Companys success will be dependent upon its ability to protect its intellectual property rights. The Company relies principally upon a combination of copyright, patent and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain its rights. The source codes for the Companys products and technology are protected both as trade secrets and as unpublished copyrighted works. As part of its confidentiality procedures, the Company enters into nondisclosure and confidentiality agreements with each of its key employees, consultants, distributors, customers and corporate partners, to limit access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the Companys efforts to protect its intellectual property rights will be successful. Despite the Companys efforts to protect its intellectual property rights, unauthorized third-parties, including competitors, may be able to copy or reverse engineer certain portions of the Companys software products, and use such copies to create competitive products.
Policing the unauthorized use of the Companys products is difficult, and, while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to continue. In addition, the laws of certain countries in which the Companys products are or may be licensed do not protect its products and intellectual property rights to the same extent as do the laws of Canada and the United States. As a result, sales of products by the Company in such countries may increase the likelihood that its proprietary technology is infringed upon by unauthorized third parties.
3
In addition, because third parties may attempt to develop similar technologies independently, the Company expects that software product developers will be increasingly subject to infringement claims as the number of products and competitors in the Companys industry segments grow and the functionality of products in different industry segments overlaps. There can be no assurance that third parties will not bring infringement claims (or claims for indemnification resulting from infringement claims) against the Company with respect to copyrights, trademarks, patents and other proprietary rights. Any such claims, whether with or without merit, could be time consuming, result in costly litigation and diversion of resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. A claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology could have a material adverse effect on its business, financial condition, operating results and cash flows.
Exchange Rate Fluctuations
Because the Companys reporting currency is the Canadian dollar, its operations outside Canada face additional risks, including fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. The Company does not currently engage in hedging activities or enter into foreign currency contracts in an attempt to reduce the Companys exposure to foreign exchange risks. In addition, to the extent the Company has operations outside Canada, it is subject to the impact of foreign currency fluctuations and exchange rate charges on the Companys reporting in its financial statements of the results from such operations outside Canada. Since such financial statements are prepared utilizing Canadian dollars as the basis for presentation, results from operations outside Canada reported in the financial statements must be restated into Canadian dollars utilizing the appropriate foreign currency exchange rate, thereby subjecting such results to the impact of currency and exchange rate fluctuations.
Risk of Software Defects
Software products as complex as those offered by the Company frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite product testing, the Company has in the past released products with defects in certain of its new versions after introduction and experienced delays or lost revenue during the period required to correct these errors. The Company regularly introduces new versions of its software. There can be no assurance that, despite testing by the Company and its customers, defects and errors will not be found in existing products or in new products, releases, versions or enhancements after commencement of commercial shipments. Any such defects and errors could result in adverse customer reactions, negative publicity regarding the Company and its products, harm to the Companys reputation, loss or delay in market acceptance or required product changes, any of which could have a material adverse effect upon its business, results of operations, financial condition and cash flows.
Product Liability
The license and support of products by the Company may entail the risk of exposure to product liability claims. A product liability claim brought against the Company or a third-party that the Company is required to indemnify, whether with or without merit, could have a material adverse effect on the Companys business, financial condition, operating results and cash flows.
Imagis UK Partnership
On July 31, 2004, the Company entered into an agreement with Centrom Limited (Centrom) of the United Kingdom to form a jointly owned subsidiary Company Imagis Technologies UK Limited (Imagis UK). Imagis UK, a subsidiary of Centrom Limited, will be the exclusive distributor of Visiphors software products in the UK and a non-exclusive distributor on a world-wide basis. Visiphor owns a 25% interest in Imagis UK in consideration of the grant of UK exclusivity, and Centrom has committed to provide £500,000 (approximately $1.25 million) over the next two years to support the initial start-up costs of Imagis UK in consideration of a 75% ownership. Centroms commitment will be met through a combination of cash and services, with the services portion to be provided at Centroms cost without any mark-up. Included in the £500,000 commitment is a non-refundable advance licensing payment of £60,000 (approximately $150,000) which has been paid, representing an initial sales commitment by Imagis UK of approximately $250,000.
There can be no assurance that the relationships with Imagis UK and Centrom will prove to be successful in the future or will result in any material revenue for the Company.
4
Dispute with OSI
On July 8, 2002, the Company entered into the following agreements with OSI:
i.
Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products The Company agreed to commit a minimum of USD$250,000 to develop these products and operate this group.
ii.
Software Developer Services Agreement. Under this agreement, the Company agreed to engage the services of software engineers and equipment in OSIs software development facility in Hyderabad, India. The Company agreed to pay to OSI a minimum of USD$250,000 during the term of the agreement, which expired on June 30, 2003, provided that if the aggregate amount paid to OSI on such date was less than USD$250,000, the agreement could be extended for six-months.
iii.
Joint Venture Letter of Intent. Under this letter of intent, upon OSIs establishment of a Brazilian entity to oversee marketing, sales, service and assembly and marketing of OSIs products; in Brazil and the establishment of an office in Brazil, Imagis would invest USD $250,000 for a 20% equity ownership in that entity.
On March 20, 2003 the above agreements were amended as follows:
i.
The strategic alliance agreement to develop and market integrated airport and security products with OSI was extended to July 8, 2004. The expenditure commitment was reduced to a minimum of USD$125,000 on product development and the operation of an Airport Security Group to market the products. As at December 31, 2004, the Company has incurred USD$48,350 in expenditures on product development.
ii.
The agreement to engage OSI to provide software development services was extended to December 31, 2004. The expenditure commitment has been reduced to a minimum of USD$125,000, based on hourly rates charged at 85% of fair market value.
iii.
The Company agreed to pay OSI a management fee of USD$250,000 on or before March 20, 2004
On January 27, 2005 the Company received a Notice of Demand from OSI for USD$500,000 alleging that the Company was in default under the terms of these agreements. The Company believes that OSI acted in bad faith and, as a result, the Company was unable to meet the terms of these agreements. The parties have agreed to refer this matter to the American Arbitration Association for resolution. While the Company believes that it has not defaulted under the terms of these agreements, there can be no assurance that this dispute will be resolved in the Companys favour and that the Company will not be required to pay the full or partial amount of such demand to OSI upon resolution of this dispute.
Strategic Alliance with Sanyo and Intacta to form Zixsys (formerly known as SecurityART Inc.)
During the second quarter of 2002, the Company entered into a strategic alliance agreement with Sanyo and Intacta to form Zixsys. Zixsys will integrate the hardware and software technologies of all three companies and thereafter market security products for use in airports, buildings, laboratories, document authentication and verification for passports, visas and ID cards. During the quarter ended September 30, 2002 Imagis acquired the rights to Intactas royalties payable under the strategic alliance agreement for consideration of $150,000. During fourth quarter ended December 31, 2002, the Company acquired all patents held by Intacta outside the United States in consideration of $50,000. There can be no assurance that the relationship with Zixsys or the integration of technologies with Zixsys will prove to be successful in the future or will result in any material revenue for the Company.
Volatility of the Company's Share Price
The Companys share price has fluctuated substantially since the Companys common shares were listed for trading on the TSX Venture Exchange and quoted on the Over-The-Counter Bulletin Board (OTCBB). The trading price of the Companys common shares is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, announcements of technological innovations, strategic alliances or new products by the Company or its competitors, general conditions in the securities industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price for many companies in industries similar or related to the Company and have been unrelated to the operating performance of these companies. These market fluctuations may adversely affect the market price of the Companys common shares.
5
Certain Shareholders May Exercise Control over Matters Voted Upon by the Company's Shareholders
Certain of the Companys officers, directors and entities affiliated with the Company together beneficially owned a significant portion of the Companys outstanding common shares as of June 30, 2005. While these shareholders do not hold a majority of the Companys outstanding common shares, they will be able to exercise significant influence over matters requiring shareholder approval, including the election of directors and the approval of mergers, consolidations and sales of the Companys assets. This may prevent or discourage tender offers for the Companys common shares.
Additional Disclosure Requirements Imposed on Penny Stock Trades
If the trading price of Visiphors common shares is less than $5.00 per share, trading in its common shares may be subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock. Such additional disclosure includes, but is not limited to, U.S. broker-dealers delivering to customers certain information regarding the risks and requirements of investing in penny stocks, the offer and bid prices for the penny stock and the amount of compensation received by the broker-dealer with respect to any proposed transaction. The additional burdens imposed upon broker-dealers may discourage broker-dealers from effecting transactions in Visiphors common shares, which could reduce the liquidity of Visiphors common shares and thereby have a material adverse effect on the trading market for such securities.
Enforcement of Civil Liabilities
Visiphor is a corporation incorporated under the laws of Canada. A number of the Companys directors and officers reside in Canada or outside of the United States. All or a substantial portion of the assets of such persons are or may be located outside of the United States. It may be difficult to effect service of process within the United States upon the Company or upon such directors or officers or to realize in the United States upon judgments of United States courts predicated upon civil liability of the Company or such persons under United States federal securities laws. The Company has been advised that there is doubt as to whether Canadian courts would (i) enforce judgments of United States courts obtained against the Company or such directors or officers predicated solely upon the civil liabilities provisions of United States federal securities laws, or (ii) impose liability in original actions against the Company or such directors and officers predicated solely upon such United States laws. However, a judgment against the Company predicated solely upon civil liabilities provisions of such United States federal securities laws may be enforceable in Canada if the United States court in which such judgment was obtained has a basis for jurisdiction in that matter that would be recognized by a Canadian court.
6
Exhibit 99.2
BC FORM 51-102F1
QUARTERLY REPORT
ISSUER DETAILS:
Name of Issuer | VISIPHOR CORPORATION |
For Quarter Ended | June 30, 2005 |
Date of Report | August 8, 2005 |
Issuer Address | 1100 4710 Kingsway Burnaby, British Columbia V5H 4M2 |
Issuer Fax Number | (604) 684-9314 |
Issuer Telephone Number | (604) 684-2449 |
Contact Name | Wayne Smith |
Contact Position | Vice President Finance |
Contact Telephone Number | (604) 684-2449 |
Contact Email Address | wayne.smith@visiphor.com |
Web Site Address | www.visiphor.com |
CERTIFICATE
THE THREE SCHEDULES REQUIRED TO COMPLETE THIS REPORT ARE ATTACHED AND THE DISCLOSURE CONTAINED THEREIN HAS BEEN APPROVED BY THE BOARD OF DIRECTORS. A COPY OF THIS REPORT WILL BE PROVIDED TO ANY SHAREHOLDER WHO REQUESTS IT.
Clyde Farnsworth Name of Director | /s/Clyde Farnsworth Sign (typed) | 05/08/08 Date Signed (YY/MM/DD) |
Roy Trivett Name of Director | /s/ Roy Trivett Sign (typed) | 05/08/08 Date Signed (YY/MM/DD) |
Supplementary Information to the Financial Statements
Managements Discussion and Analysis
As at August 8, 2005
Forward-looking information
Except for statements of historical fact, certain information contained herein constitutes forward-looking statements, within Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). In some cases, you can identify the forward-looking statements by Visiphor Corporations (Visiphor or the Company) use of the words such as may, will, should, could, expect, plan, estimate, predict, potential, continue, believe, anticipate, intend, expect, or the negative or other variations of these words, or other comparable words or phrases. Forward-looking statements in this report include, but are not limited to, the Companys expectation that revenues will increase during 2005 when compared to those of 2004 and that such revenues will continue to increase and newly developed products and solutions continue to gain increasing customer acceptance; managements belief that increased revenues achieved as a result of the sale of products will more than offset increased technology development costs; the Companys ability to fund its operations in the future; the Companys expectations regarding its dispute with OSI Systems Inc. (OSI) and new contracts to be entered into the near future; the Companys future operating expense levels; the Companys ability to achieve break-even operations on an operating cash flow basis during the fourth quarter of 2005.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, but are not limited to the following: the Companys limited operating history; the Companys need for additional financing; the Companys history of losses; the Companys dependence on a small number of customers; risks involving new product development; competition; the Companys dependence on key personnel; risks involving lengthy sales cycles; dependence on marketing relationships; the Companys ability to protect its intellectual property rights; risks associated with exchange rate fluctuations; risks of software defects; risks associated with product liability; risks associated with the Imagis UK partnership; the Companys dispute with OSI; risks associated with the strategic alliance with Sanyo Semiconductor Company (Sanyo) and Intacta Technologies Inc. (Intacta) related to Zixsys, Inc. (Zixsys); the potential additional disclosure requirements for trades involving the issued common shares; the difficulty of enforcing civil liabilities against the Company or its directors or officers under United States federal securities laws; the volatility of the Companys share price; risks associated with certain shareholders exercising control over certain matters; and the other risks and uncertainties described in Exhibit 99.1 to this Quarterly Report.
Although the Company believes that expectations reflected in these forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, achievements or other future events. Moreover, neither the Company nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company is under no duty to update any of these forward-looking statements after the date of this report. You should not place undue reliance on these forward-looking statements.
About Visiphor
Visiphor develops and markets software that simplifies, accelerates, and economizes the process of connecting existing, disparate databases, enhanced as appropriate with biometric facial recognition technology. The combination of these technologies enables information owners to share data securely with external stakeholders and software systems using any combination of text or imagery. This includes searching disconnected data repositories for information about an individual using only a facial image. This allows organizations to quickly create regional information sharing networks using any combination of text or imagery.
Using industry standard Web services and XML, Visiphor delivers a secure and economical approach to true, real-time application interoperability. Production deployments of the Companys core integration technology the Briyante Integration Environment (BIE) have demonstrated remarkable reductions in the time and risk associated with implementing and supporting integrated access to physically and technologically disparate computers. The Company believes that BIE has the capability to be utilized in a variety of vertical markets such as health care, financial services, government services and telecommunications.
2
Overview
The Companys Business
The Company derives a substantial portion of its revenues, and it expects to derive a substantial portion of its revenues in the near future, from sales of its software to a limited number of customers. Additional revenues are achieved through the implementation and customization of this software as well as from the support, training, and ongoing maintenance that results from each software sale. The Companys success will depend significantly upon the timing and size of future purchase orders from its largest customers as well as from the ability to maintain relationships with its existing installed customer base.
Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and the provision of specific services. The Company generally recognizes total revenue for software and services associated with a contract using percentage of completion method based on the total costs incurred over the total estimated costs to complete the contract.
The Companys revenue is dependent, in large part, on contracts from a limited number of customers. As a result, any substantial delay in the Companys completion of a contract, the inability of the Company to obtain new contracts or the cancellation of an existing contract by a customer could have a material adverse effect on the Companys results of operations. The loss of certain contracts could have a material adverse effect on the Companys business, financial condition, operating results and cash flows. As a result of these and other factors, the Companys results of operations have fluctuated in the past and may continue to fluctuate from period-to-period.
Recent world events and concerns regarding security have increased awareness of and interest in products that have law enforcement or other security applications, including certain of the products and services offered by Visiphor. There can be no assurance, however, that such trends will continue or will result in increased sales of the Companys products and services.
Critical Accounting Polices
Critical accounting policies are those that management believes are both most important to the portrayal of the Companys financial conditions and results, and that require difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effects of matters that involve uncertainty.
Visiphor believes the critical accounting policies it uses in preparation of its financial statements are as follows:
Revenue recognition
(iii)
Software sales revenue:
The Company recognizes revenue consistent with Statement of Position 97-2, Software Revenue Recognition. In accordance with this Statement, revenue is recognized, except as noted below, when all of the following criteria are met: persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured. Funds received in advance of meeting the revenue recognition criteria are recorded as deferred revenue.
When a software product requires significant production, modification or customization, the Company generally accounts for the arrangement using the percentage-of-completion method of contract accounting. Progress to completion is measured by the proportion that activities completed are to the activities required under each arrangement. When the current estimate on a contract indicates a loss, a provision for the entire loss on the contract is made.
When software is sold under contractual arrangements that include post-contract customer support (PCS), the elements are accounted for separately if vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements. VSOE is identified by reference to renewal arrangements for similar levels of support covering comparable periods. If such evidence does not exist, revenue on the completed arrangement is deferred until the earlier of (a) VSOE being established or (b) all of the undelivered elements are delivered or performed, with the following exceptions: if the only undelivered element is PCS, the entire fee is recognized ratably over the PCS period, and if the only undelivered element is service, the entire fee is recognized as the services are performed.
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The Company provides for estimated returns and warranty costs, which to date have been nominal, on recognition of revenue.
(iv)
Support and services revenue:
Contract support and services revenue is deferred and is amortized to revenue ratably over the period that the support and services are provided.
Intangible Assets:
Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values. The cost of internally developed intangible assets includes direct development costs and overhead directly attributable to development activity. The cost incurred to enhance the service potential of an intangible asset is capitalized as betterment. Costs incurred in the maintenance of the service potential of an intangible asset are expensed as incurred.
Intangible assets with finite useful lives are amortized over their useful lives. The assets are amortized on a straight-line basis at the following annual rates, which are reviewed annually:
Asset
Rate
Intellectual property
33.3%
Patents
33.3%
License
33.3%
Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any.
Use of estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates. Areas for significant estimate include but are not limited to valuation of accounts receivable; amortization periods for equipment, intellectual property and other assets; valuation of intellectual property; fair value inputs for calculation of stock-based compensation; and the valuation allowance of future income tax assets.
Stock-based compensation
The Company accounts for all stock-based payments to employees and non-employees using the fair value based method.
Under the fair value based method, stock-based payments are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is compete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date.
Under the fair value based method, compensation cost attributable to employee awards is measured at fair value at the grant date and recognized over the vesting period. Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at intrinsic value and recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. For awards that vest at the end of the vesting period, compensation cost is recognized on a straight-line basis; for awards that vest on a graded basis, compensation cost is recognized on a pro-rata basis over the vesting period.
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Results of Operations for the three-month period and six-month period ended June 30, 2005 compared to the three-month period and six-month period ended June 30, 2004:
Revenues
Visiphors total revenues increased 190% to $920,620 for the three-month period ended June 30, 2005 compared to $317,085 during the same period of the prior year. The year to date revenues increased 106% to $1,245,248 over the prior year level of $603,140.
Revenues from the Companys software products rose 248% to $733,726 for the current three-month period as compared to $211,079 for 2004. Software revenues increased by 140% to $965,084 for the year over the prior years level of $401,940. This growth was seen in the Companys core product lines of BIE and biometrics.
Support and services revenues were 82% greater at $185,465 for the three-month period ended June 30, 2005 than in 2004 of $101,920. Support and services revenues for the year to date increased 42% to $277,769 over the prior year level of $195,008. The support and services revenues increased as a result of additional sales of software providing increased levels of customization, installation, and support contracts.
Visiphor expects that revenues will increase in subsequent quarters of 2005 when compared to those of 2004 and will continue to increase as the Companys current and newly developed products and solutions continue to gain increasing customer acceptance. The Companys deferred revenues at June 30, 2005 were $671,578, which combined with revenues to date for the year of $1,245,248 represents sales of $1,916,826 through the second quarter of this fiscal year. In addition, the Company received orders for further sales totalling approximately $1,800,000 that are not yet reflected in its financial statements, that if completed would result in total year to date sales of approximately $3,800,000. There can be no assurance however that all of the Companys sales characterized as deferred revenue in its unaudited financial statements through the period ended June 30, 2005 will later be booked as revenue in future periods. Further, there can be no assurance that all orders for further sales received to date till result in actual future revenues to the Company.
Other revenues for the three-month period ended June 30, 2004 were $1,429, whereas revenues of $4,086 were earned in the prior year. Other revenues declined by 61% for the year to date to $2,395 compared to $6,192 for 2004. These revenues were primarily earned through interest revenue and the sale of computer supplies.
Operating Costs
Operating expenses totalled $2,482,912 for the three-month period ended June 30, 2005, which is 56% greater than the 2004 operating expenses of $1,576,838. The 2005 expenses include stock-based compensation of $391,667 due to Visiphors employee stock option plan and $412,731 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2005 operating expenses total $1,678,513. The 2004 expenses include stock-based compensation of $68,054 and amortization of $388,460, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these items, the operating expenses for 2004 were $1,120,324. The difference of $558,189 between 2005 and 2004 represents a 50% increase in operating expenses over the prior period. The increased costs over the prior year are due to hiring additional staff in all departments to increase sales, continue product development, and meet the increased demand for Visiphors products and services.
Operating expenses totalled $4,261,730 for the six-month period ended June 30, 2005, which is 24% greater than the 2004 operating expenses of $3,444,694. The 2005 expenses include stock-based compensation of $494,261 due to Visiphors employee stock option plan and $794,740 in amortization, which includes $645,426 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2005 operating expenses total $2,972,730. The 2004 expenses include stock-based compensation of $782,984 and amortization of $775,932. Excluding these items, the operating expenses for 2004 were $1,885,778. The difference of $1,086,953 between 2005 and 2004 represents a 58% increase in operating expenses over the prior year. The increased costs over the prior period resulted from significant increases in staffing and related costs. Staff levels have increased from 35 at January 1, 2005 to 53 at June 30, 2005. The current operating expense level is approximately $5,900,000 per year and may increase if additional resources are required to meet sales demands.
Administration
Administrative costs for the three-month period ended June 30, 2005 were $792,812, which is 38% greater than for 2004 of $576,308. These costs include a stock-based compensation charge of $199,926 in 2005 and $68,054 in 2004. Excluding these charges, the administrative costs were $592,886 in 2005 versus $508,254 in 2004, which represents a 17% increase. This increase was due to the addition of staff including a shareholder relations employee and related expenses. Administrative costs include staff salaries and related benefits and travel, stock based compensation, consulting and professional fees, facility and support costs, shareholder, regulatory and shareholder relations costs.
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Administrative costs for the six-months ended June 30, 2005 were $1,239,143, which is 18% less than for 2004 of $1,510,792. These costs include the stock-based compensation charge of $268,308 in 2005 and $782,984 in 2004. Excluding these charges, the administrative costs were $970,835 in 2005 versus $727,808 in 2004, which represents a 33% increase. The current level of administrative cost is expected to remain the same for the balance of 2005.
Interest and Amortization
The interest expense for the three-month period ended June 30, 2005 of $7,006, which is 31% less than for 2004 of $10,114, is primarily due to interest charged on equipment leases and various supplier accounts. The amortization expense of $412,731 for 2005 is consistent with 2004 of $388,460 and is primarily due to amortization of the acquisition of the intellectual property of Briyante.
The decrease in interest expense of $9,928 for the six-months ended June 30, 2005 over the prior year level is primarily due to a reduction in outstanding leases. The amortization expense of $794,740 for 2005 is comparable to the 2004 expense of $775,932 and is primarily due to the acquisition of the intellectual property of Briyante.
Sales and Marketing
Sales and marketing expenses for the three-month period ended June 30, 2005 were $426,790 compared to $276,167 during the same period last year, which represents an increase of 55%. These costs include a stock-based compensation charge of $46,839 in 2005. Excluding this charge, the sales and marketing costs were $379,950 in 2005, which represents a 38% increase over 2004.
Sales and marketing expenses for the six-month period ended June 30, 2005 were $856,466 and were 80% greater than in 2004 of $476,009. These costs include a stock-based compensation charge of $65,212 in 2005. Excluding this charge, the sales and marketing costs were $791,254 in 2005, which represents a 66% increase over 2004. Visiphor significantly increased the size of its marketing team in the latter half of 2004 and in 2005.
Technology Development
The technology development expenses for the three-month period ended June 30, 2005 were $447,964 which is 77% greater than the 2004 costs of $253,440. Technology development expenses include a stock-based compensation charge of $86,133 in 2005. Excluding this the 2005 expense is $361,831 which is 43% higher than 2004.
The technology development expenses for the six-month period ended June 30, 2005 were $823,345, which is 60% higher than the 2004 costs of $516,124. The 2005 costs include a stock-based compensation charge of $97,261. Excluding this charge, the costs were $726,084 in 2005, which represents a 41% increase over 2004. This increase was primarily due to hiring additional staff and the associated costs required to maintain our enhancement of existing products and new product development. Management expects that the increased revenues achieved as a result of the sale of products will more than offset the increased costs. Management believes that continuing to invest in technology advancements is crucial to the future success of Visiphor.
Technical Services
Costs for the technical services group for the three-month period ended June 30, 2005 were $135,309, which is 87% greater than the 2004 costs of $72,349. These costs include a stock-based compensation charge of $6,624 in 2005. Excluding this charge, the technology services costs were $128,685 in 2005, which represents a 78% increase over 2004. The increase is due to the hiring of staff and associated costs to meet the support requirements for the sales orders described above.
Costs for the technical services group for the six-month period ended June 30, 2005 were $276,168, which is 91% greater than the 2004 costs of $144,341. These costs include a stock-based compensation charge of $11,333 in 2005. Excluding this charge, the technology services costs were $264,835 in 2005, which represents a 83% increase over 2004. The technical services group conducts quality assurance testing and provides clients with any technical support they may require under annual support contracts, and includes primarily costs for salaries, facilities and travel. Costs for future quarters will be dependent on the sales levels achieved by the Company.
Professional Services
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Costs for the professional services group for the three-month period ended June 30, 2005 were $260,301. These costs include a stock-based compensation charge of $52,145. Excluding this charge, the professional services costs were $208,156. Professional services is a new department that was initiated in the second quarter of 2005 consequently there are no comparative figures. The professional services group is responsible for the installation of Visiphors products and training of Visiphors customers and business partners in the use of our products. The costs include salaries, travel and general overhead expenses. Costs for future quarters will be dependent on the sales levels achieved by the Company.
Net Loss for the Period
The Company's current net loss on a monthly basis is $500,000. Management believes that providing cash operating expense information may be helpful to investors with respect to the Company's results of operations, because it excludes certain non-cash amortization amounts that the Company has incurred primarily as a result of its acquisition of certain intellectual property of Briyante that prevents an accurate period-to-period comparison as well as stock-based compensation that does not require cash payments. When excluding such expenses, the Company's current rate of loss on a cash operating expense basis is $288,000 per month.
Overall, the Company incurred a net loss for the three-month period ended June 30, 2005 of $1,562,291, or $0.06 per share, which is 24% higher than the net loss incurred during the three-months ended June 30, 2004 of $1,259,753, or $0.09 per share. Adjusting the loss to take into account the non-cash expenses described above, the losses become $757,893 for 2005 and $803,239 for 2004, representing a 6% decline.
The Company incurred a net loss for the six-month period ended June 30, 2005 of $3,016,481 or $0.12 per share, which is 6% larger than the net loss incurred during the period ended June 30, 2004 of $2,841,554 or $0.25 per share. Adjusting the loss to take into account the non-cash items described above, the losses become $1,727,482 for 2005 and $1,282,638 for 2004, representing a 35% increase.
The Company has received significant sales orders during the final quarter of 2004 and the first half of 2005; however, installation of a number of these contracts did not commence until 2005 and the revenue will not be recognised until the third and fourth quarters of 2005.
In the Company's most recent Form 10-KSB, management stated that it believed that the Company would be able to achieve break-even operations on an EBITDA basis during the second and third quarters of 2005. Due to the timing of the completion of existing contracts and its effect upon the recognition of revenue, management is revising this estimate. After excluding the Company's quarterly amortization expenses of $413,000 primarily associated with the Briyante acquisition and any stock-based compensation expense associated with granting options, management believes that it will achieve break-even operations on a cash operating basis during the fourth quarter of 2005.
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Summary of Quarterly Results
| Q2-2005 | Q1-2005 | Q4-2004 | Q3 2004 | Q2 - 2004 | Q1 - 2004 | Q4 - 2003 | Q3 - 2003 | |
Total Revenue | $ | 920,620 | 324,628 | 327,016 | 102,814 | 317,085 | 286,055 | 263,793 | 496,612 |
Loss | (1,562,291) | (1,454,190) | (1,270,180) | (1,346,203) | (1,259,753) | (1,581,801) | (959,283) | (694,042) | |
Net loss per share | (0.06) | (0.06) | (0.08) | (0.09) | (0.09) | (0.14) | (0.15) | (0.15) |
The Companys changes in its net losses per quarter fluctuate according to the volume of sales. As the Company currently has a small number of customers generating the majority of its revenues, there is no consistency from one quarter to the next and past quarterly performance is not considered to be indicative of future results. The Company had significantly reduced its operating expenses during the period from Q3 2002 through Q3 2003, which also has a large impact on the comparative loss figures. In the latter part of 2004 and in 2005, the Company hired additional staff to meet the demands of the sales orders described above, causing a significant increase in expense levels. The Company is not aware of any significant seasonality affecting its sales.
Liquidity and Capital Resources
The Companys cash on hand at the beginning of the three-month period ended June 30, 2005 aggregated $86,472. During the period, the Company received additional net funds of $1,571,024 from a private placement that closed in May. Due to an increase in the Companys stock price, the Company also received proceeds of $84,363 from the exercise of options and $144,900 from the exercise of warrants.
The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,562,291, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $998,097. The Company also repaid capital leases of $8,434 and purchased capital assets of $163,186, overall the Companys cash position increased by $630,571 to $717,043 at June 30, 2005.
The Companys cash on hand at the beginning of the six-month period ended June 30, 2005 aggregated $123,148. During the period, the Company received additional net funds of $2,358,479 from two private placements. Due to an increase in the Companys stock price the Company also received proceeds of $84,363 from the exercise of options and $144,900 from the exercise of warrants.
The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $3,016,481, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $1,788,221. The Company also repaid capital leases of $18,850 and purchased capital assets of $186,776. Overall, the Companys cash position increased by $593,895 to $717,043 at June 30, 2005.
The Company experienced unexpected delays in concluding certain contract negotiations; consequently, completion of the associated software installations were delayed. As a result of this delayed collection of revenues, management decided to seek additional financing in order to maintain its current level of operations.
In January 2005, the Company completed a private placement consisting of 2,857,785 units at $0.35 per unit. Each unit consisted of one common share and one common share purchase warrant. Each warrant entitles the holder to acquire one additional common share at an exercise price of $0.45 until January 11, 2006 or at $0.55 from January 12, 2006 until January 11, 2007. The common shares and warrants were subject to a four-month hold period that expired on May 10, 2005. Finders fees of $72,771 in cash were paid on a portion of the private placement conducted outside the United States. The total net proceeds to Visiphor were $927,454, including $140,000 included in share subscriptions at December 31, 2004.
In May 2005, the Company completed a private placement consisting of 4,250,000 units at $0.40 per unit. Each unit consisted of one common share and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one additional common share at an exercise price of $0.55 until May 24, 2006. The common shares and warrants were subject to a four-month hold period that expired on September 24, 2005. Finders fees of $128,976 in cash were paid on a portion of the private placement conducted outside the United States. In connection with this private placement The Company issued 60,000 units as a corporate finance fee on the same terms as the units described above with the exception that the common shares and warrants shares are subject to a twelve-month hold period that expires on May 24, 2006. The Company also granted 350,000 brokers warrants exercisable at a
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price of $0.55 until May 24, 2006. The brokers warrant shares are subject to a four month hold period which expires on September 24, 2005. The total net proceeds to Visiphor were $1,571,024.
During the final quarter of 2004, the Company was awarded a contract with PRIME Corp. of British Columbia, Canada to deploy the Visiphor flagship InForce Arrest and Booking (InForce AB) software as an integrated component of the province-wide Police Records Information Management Environment (PRIME-BC). This contract will result in revenues to the Company in excess of $800,000. The Company has received $488,251 as at June 30, 2005, which is recorded in deferred revenue, revenues from this contract will likely be recorded in the third and fourth quarters of 2005.
In April 2005, the Company signed a $780,500 contract with King County of Washington to supply an expansion of the RAIN (Regional Automated Information Network) project for the Countys law enforcement agencies. This project will expand RAINs capabilities and benefits to over 3000 officers across 23 independent police jurisdictions responsible for protecting over 1.7 million citizens. Revenues of $343,541 from this contract were recognized in the second quarter of 2005, the remainder will likely be recognized during the third and fourth quarters of 2005.
In June 2005, the Company signed a contract in excess of Cdn$350,000 with the Department of Homeland Security (DHS). The contract was received on behalf of the DHS Metadata Center of Excellence. The software will be used to design and deploy a metadata (data describing data) repository and a federal query information sharing capability. The Company has recognized $237,583 in revenue as at June 30, 2005, the remainder will likely be recognized during the third and fourth quarters of 2005.
The Company also has received other orders with certain agencies in the United States that total an additional approximately $1,000,000, the amounts due under these contracts are expected to be received by the Company in the third and fourth quarters of 2005. There can be no assurance however that all of such orders will result in actual revenues to the Company.
The Company believes it has cash sufficient to fund its operations through August 31, 2005. The Company also has accounts receivable as at the date of this report of $747,000. The Company believes that the accounts receivable combined with the orders described above if completed will generate cash sufficient to fund its operations through December 31, 2005. If the accounts receivable are not collected, certain of the contracts are not completed, or no further sales are received the Company may need to raise additional funds through private placements of its securities or seek other forms of financing. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all. If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.
Contractual Obligations
The Company is committed to the following operating lease payments over the next four years:
Year Equipment Building Total
2005
$
28,554
$
52,365
$
80,919
2006
41,343
248,885
290,228
2007
41,489
202,900
244,389
2008
14,508
202,900
217,408
2009
-
202,900
202,900
$
125,894
$
909,950
$
1,035,844
The lease for The Companys head office expired on June 30, 2005 and new premises were obtained under a sublease. The terms of the sublease are for 10,938 square feet for the period of August 1, 2005 to December 30, 2009. The monthly rent is $16,908.33 with rent abatement for the first three-months and a partial payment of $4,800 for November 2005.
On January 27, 2005 the Company received a Notice of Demand from OSI for $500,000 alleging that the Company was in default under the terms of three agreements. The Company believes that OSI acted in bad faith and, as a result, the Company was unable to meet the terms of these agreements. The parties have agreed to refer this matter to the American Arbitration Association for resolution. While the Company believes that it has not defaulted under the terms of these agreements, there can be no assurance that this dispute will be resolved in the Companys favour
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and that the Company will not be required to pay the full or partial amount of such demand to OSI upon resolution of this dispute.
Off-Balance Sheet Arrangements
At June 30, 2005 the Company did not have any off-balance sheet arrangements.
Transactions with Related Parties
At June 30, 2005, accounts payable and accrued liabilities included $336,395 (at December 31, 2004 - $284,759) owed by the Company to directors and officers and companies controlled by directors and officers of the Company. These amounts are unsecured, non-interest bearing and payable on demand. At June 30, 2005, accounts payable and accrued liabilities included $306,350 (at December 31, 2004 - $300,500) owed by the Company to companies formerly related by virtue of having a director or officer in common with the Company.
Other Management Discussion & Analysis Requirements
i.
Additional information relating to the Company, including the Companys Annual Information Form, is on available on SEDAR at www.sedar.com.
ii.
Share Capital at August 8, 2005
(a)
Authorized:
100,000,000 common shares without par value
50,000,000 preferred shares without par value, non-voting, issuable in one or more series
(b)
Issued
Number
of shares Amount
Balance, December 31, 2003
8,845,157
$
21,528,421
Issued during year for cash:
Private Placement
7,938,208
2,782,289
Special Warrants exercised
1,169,741
907,985
Issued in settlement of accounts payable
2,654,675
1,019,562
Issued for acquisition of intellectual property
187,500
75,000
Share issuance costs
-
(82,337)
Balance, December 31, 2004
20,795,281
26,230,920
Issued during period for cash:
Private Placements
7,107,785
2,700,225
Options exercised
211,895
86,630
Warrants exercised
355,000
167,400
Fair value of options exercised
-
58,613
Special Warrants exercised
1,007,151
781,802
Share issuance costs - (311,004)
Issuance of shares as share issuance cost
60,000
24,000
Balance, August 8, 2005
29,537,112
$
29,738,586
10
(c)
Special warrants:
During October and November 2003, the Company sold a total of 9,796,087 special warrants (the Special Warrants) at $0.1725 per Special Warrant in a series of four tranches. Cash proceeds of $899,075 less commissions of $39,757 were received for the sale of 5,212,029 Special Warrants and 4,584,058 Special Warrants were issued in settlement of $790,750 in debt. Each Special Warrant was exercisable, for no additional consideration, into units consisting of 0.2222 common shares and 0.2222 share purchase warrants, with the exception of 1,002,899 Special Warrants issued to insiders of the Company. The units issued to insiders of the Company were exercisable into 0.2222 common shares with no share purchase warrant. Each whole warrant entitled the holder for two years from the date of issue of the Special Warrants to acquire one additional common share at an exercise price of $1.04 per share in the first year and $1.14 per share in the second year. The Special Warrants were convertible at the holders option at any time for an eighteen month period and converted automatically at the end of the eighteen months. The Company was not required to meet any conditions prior to conversion. Finders fees of $39,758 cash and 38,641 in brokers warrants exercisable at $1.04 per share were paid. The brokers warrants were exercisable until October 30, 2004 and have been recorded at the fair value as at the date of issue of $7,327 as a reduction in the proceeds of the Special Warrants and an increase in contributed surplus. As at June 30, 2005, 2,176,907 units have been issued on conversion of all the Special Warrants which resulted in the issuance of 2,176,907 common shares and 2,176,907 share purchase warrants.
(d)
Warrants:
At December 31, 2004, and August 8, 2005, the following warrants were outstanding:
December 31, August 8, Exercise
2004 Issued Exercised Expired 2005 price Expiry date
64,412
-
-
64,412
$1.14
September 30, 2005
128,824 - - - 128,824 $1.14 October 10, 2005
-
386,473
-
-
386,473
$1.14
October 14, 2005
311,079
-
-
-
311,079
$0.64
October 30, 2005
-
397,811
-
-
397,811
$1.14
October 30, 2005
976,522
-
-
-
976,522
$1.14
October 31, 2005
359,850
-
-
-
359,850
$0.64
November 20, 2005
4,007,875
-
(125,000)
-
3,882,875
$0.50
April 28, 2005
or at $0.75
April 28, 2006
226,584
-
-
-
226,584
$0.50
April 29, 2005
or at $0.75
April 29, 2006
166,700
-
(80,000)
-
86,700
$0.53
May 20, 2005
or at $0.75
May 20, 2006
2,505,000
-
-
2,505,000
$0.55
May 24, 2006
187,500
-
-
-
187,500
$0.40
November 29, 2005
or at $0.50
November 29, 2006
3,930,333
-
(100,000)
-
3,830,333
$0.40
November 30, 2005
or at $0.50
November 30, 2006
946,166
-
-
-
946,166
$0.45
December 31, 2005
or at $0.55
December 31, 2006
-
2,857,785
(50,000)
-
2,807,785
$0.45
January 11, 2006
or at $0.55
January 11, 2007
11,305,845
6,147,069
(355,000)
-
17,097,914
(e)
Options:
The Company has a stock option plan that was approved at the Companys annual general meeting of shareholders on June 17, 2005. Under the terms of the plan the Company may reserve up to 5,889,756 common shares for issuance under the plan. The Company has granted stock options to certain employees, directors, advisors, and consultants. These options are granted for services provided to the Company. All options granted prior to November 25, 2003; expire five years from the date of grant with the exception of 22,222 options issued during 2002 to a consultant that expired two years from the date of grant. All options
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granted subsequent to November 25, 2003, expire 3 years from the date of the grant. All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant. On November 25, 2003, all stock options along with the Companys outstanding shares were consolidated on a 1 new option for 4.5 old basis. During the year ended December 31, 2004 all options outstanding as at December 31, 2003 were repriced to $0.78. For options that were granted prior to the adoption of the fair value based method, the fair value of the award was remeasured at the date of modification, and the full amount of the fair value was recorded as the compensation cost to the extent that vesting has occurred at December 31, 2004.
For options issued in 2003 and previously accounted for under the fair value method, modification accounting is applied. Under modification accounting the Company recorded additional expense equal to the difference between the fair value of the original award on the date of the reprising, and the fair value of the modified award also on the date of the reprising.
A summary of the status of the Companys stock options at August 8, 2005, and December 31, 2004 (giving retroactive effect to the share consolidation), and changes during the periods ended on those dates are presented below:
August 8, 2005 December 31, 2004
Weighted average
Weighted average
Shares
exercise price
Shares
exercise price
Outstanding, beginning of period
3,092,334
$ 0.61
770,294
$ 5.26
Repriced to $0.78
-
-
(4.48)
Granted
2,573,396
0.75
2,690,925
0.58
Exercised
(211,895)
0.41
-
-
Cancelled
(129,995)
0.71
(368,885)
0.78
Outstanding, end of period
5,323,840
$ 0.68
3,092,334
$ 0.61
The following table summarizes information about stock options outstanding at August 8, 2005:
Options outstanding Options exercisable
Number
Number
outstanding
Weighted
Weighted
exercisable,
Weighted
August 8,
remaining
average
August 8,
average
Exercise price
2005
contractual life
exercise price
2005
exercise price
$0.33
69,999
2.46
$0.33
-
-
$0.34
13,333
2.36
$0.34
-
-
$0.35
10,333
2.47
$0.35
1,667
$0.35
$0.36
44,072
2.62
$0.36
11,482
$0.36
$0.38
3,333
2.54
$0.38
-
-
$0.39
105,000
2.77
$0.39
35,000
$0.39
$0.40
1,054,369
2.15
$0.40
293,978
$0.40
$0.41
13,000
1.98
$0.41
7,000
$0.41
$0.45
5,000
1.92
$0.45
-
-
$0.50
20,000
2.80
$0.50
6,667
$0.50
$0.55
10,000
1.85
$0.55
6,667
$0.55
$0.56
21,166
2.88
$0.56
4,500
$0.56
$0.57
27,999
2.91
$0.57
-
-
$0.65
25,000
2.99
$0.65
8,334
$0.65
$0.66
182,222
1.68
$0.66
111,486
$0.66
$0.67
15,000
2.99
$0.67
5,000
$0.67
$0.78
1,504,450
1.51
$0.78
1,123,653
$0.78
$0.79
2,199,564
2.99
$0.79
733,203
$0.79
5,323,840
2.33
$0.68
2,348,637
$0.72
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The weighted average fair value of employee stock options granted during the period ended August 8, 2005 was $0.75 (2004: $0.76) per share purchase option. The weighted average fair value of employee stock options repriced during the period ended June 30, 2005 was $Nil (2004: $0.52) per share purchase option as at the date of the reprice. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs: volatility - 56%; risk free interest rate - 5%; option term - 3 years; and dividend yield - nil. The total compensation expense of $494,259 has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.
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