10QSB 1 plang608.txt 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ . Commission file number 0-14273 PLANGRAPHICS, INC. ------------------ (Exact name of small business issuer as specified in its charter) COLORADO 84-0868815 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 112 East Main Street Frankfort, KY 40601 ------------------- (Address of principal executive offices) (Zip Code) Administrative Office at 1940 South Parker Road, #533 Parker, CO 80134 (720) 851-0716 -------------- (Registrant's telephone number, including area code) ------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the small business issuer is a shell company (as defined in Exchange Act Rule 12b-2) Yes [ ] No [X] 99,158,706 shares of common stock (no par value) were outstanding as of August 8, 2008. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-QSB and the information incorporated by reference may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as "may," "believe," "plan," "will," "anticipate," "estimate," "expect," "intend," and other phrases of similar meaning. Known and unknown risks, uncertainties and other factors could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Forward-looking statements include, but are not limited to, statements in this Form 10-QSB regarding: o availability of working capital to meet our immediate cash and liquidity needs; o our ability to raise funds through debt and equity financing; o estimates regarding our financing needs; o our prospects for growth; o our ability to reduce costs and expenses o the collectibility of our accounts receivable; o cancellation of our contracts and order assignments; o the continuation of our relationship with the City of New York and other key clients; o the increase in competition and our ability to compete effectively; o our ability to take advantage of spatial information technology markets; o the strength of our technical expertise and customer service; o the potential fluctuation of the market price of our stock; o the ability of information technology to benefit from geospatial capabilities within their technologies; o the potential gross profit margin in information technology; o the projections regarding our financial results for fiscal years ("FY") 2007 and 2008; o fluctuations in exchange rates; o the impact of recent accounting pronouncements; and o the availability and affordability of alternative lease facilities. Although we believe that the expectations that we express in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct or will be accomplished in the time frame we contemplate. Our actual results could be materially different from our expectations, including the following: o We may continue to experience significant liquidity issues and may not overcome the underlying causes; o we may not be able to obtain needed financing for operations or diversification; o we may not achieve continued profitability; o we may experience work stoppages by subcontractors due to our late payments; o we may lose customers or fail to grow our customer base; o we may fail to compete successfully with existing and new competitors; o we may not find an adequate market for our goods and services in the current economic environment; o we may not adequately anticipate and respond to technological developments impacting information services and technology; and o we may issue a substantial number of shares of our common stock upon exercise of options and warrants to fund diversification efforts, thereby causing dilution in the value of your investment; This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included elsewhere in this report. These factors are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements included in our Annual Report for the year ended September 30, 2007, (filed with the SEC on Form 10-KSB) under the caption "Item 1. Business - Risk Factors" beginning on page 8, and our other Securities and Exchange Commission filings, and our press releases. 2 Table of Contents Part I Financial Information 4 Item 1. Consolidated Financial Statements (Unaudited) 4 Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Cash Flows 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management Discussion and Analysis 13 Item 3. Controls and Procedures 18 Part II Other Information 19 Item 1. Legal Proceedings 19 Item 6. Exhibits 19 Signature Page 20 Exhibits 21 3
Part I Financial Information Item 1. Financial Statements PLANGRAPHICS, INC. CONSOLIDATED BALANCE SHEETS June 30, 2008 September 30, 2007 (Unaudited) (Derived from audited financial statements) ASSETS CURRENT ASSETS Cash and cash equivalents Cash $ 1,081 $ 36,711 Restricted cash -- 41,931 ------------ ------------ 1,081 78,642 Accounts receivable, less allowance for doubtful accounts of $19,825 and $0 for June 30, 2008 and September 30, 2007, 715,912 1,074,944 respectively Prepaid expenses and other 47,265 30,362 ------------ ------------ Total current assets 764,258 1,183,948 ------------ ------------ PROPERTY AND EQUIPMENT Equipment and furniture 371,117 367,515 Less accumulated depreciation and amortization (347,539) (337,837) ------------ ------------ 23,578 29,678 ------------ ------------ OTHER ASSETS Software development costs, net of accumulated amortization $795,842 and $657,967 at June 30, 2008 and September 30, 205,762 284,932 2007, respectively Other 5,910 10,518 ------------ ------------ 211,672 295,450 ------------ ------------ Total assets $ 999,508 $ 1,509,076 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Mandatory redeemable Series A preferred stock, $0.001 par value, 500 shares issued and outstanding at June 30, 2008 and September 30, 2007 $ 500,000 $ 500,000 Notes payable - current maturities 42,650 182,786 Accounts payable 2,721,229 2,558,265 Accrued payroll costs 200,601 304,366 Accrued expenses 364,663 367,217 Deferred revenue and prebillings 240,806 351,974 ------------ ------------ Total current liabilities 4,069,949 4,264,608 Notes payable - long-term, less current maturities -- 34,541 ------------ ------------ Total liabilities 4,069,949 4,299,149 ------------ ------------ STOCKHOLDERS' DEFICIT Common stock, no par value, 2,000,000,000 shares authorized, 99,158,706 and 97,214,418 shares issued and outstanding 20,706,005 20,697,839 Accumulated deficit (23,776,446) (23,487,912) ------------ ------------ Total Stockholders' Deficit (3,070,441) (2,790,073) ------------ ------------ Total liabilities and stockholder's deficit $ 999,508 $ 1,509,076 ============ ============ See accompanying notes to unaudited consolidated financial statements 4 PLANGRAPHICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Nine months ended Three months ended ---------------------------- ---------------------------- 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Revenues $ 2,942,492 $ 3,339,735 $ 872,437 $ 1,043,946 Costs and expenses Direct contract costs 1,738,745 1,804,031 491,383 532,631 Salaries and employee benefits 830,131 961,209 258,129 282,524 General and administrative expenses 433,032 376,931 142,489 76,928 Marketing expenses 14,498 19,788 7,438 5,021 Other operating expenses 167,403 74,697 54,316 52,871 ------------ ------------ ------------ ------------ Total costs and expenses 3,183,809 3,236,656 953,755 949,975 ------------ ------------ ------------ ------------ Operating income (loss) (241,317) 103,079 (81,318) 93,971 ------------ ------------ ------------ ------------ Other income and (expense): Other income 63,365 62,074 19,985 23,427 Interest expense (110,582) (138,952) (18,561) (45,194) ------------ ------------ ------------ ------------ (47,217) (76,878) 1,424 (21,767) ------------ ------------ ------------ ------------ Net income (loss) $ (288,534) $ 26,201 $ (79,894) $ 72,204 ============ ============ ============ ============ Basic and diluted income (loss) per common share $ (0.003) $ 0.000 $ (0.001) $ 0.001 ============ ============ ============ ============ Weighted average number of shares of common stock outstanding - basic and diluted 97,308,032 97,214,418 97,495,260 97,214,418 ============ ============ ============ ============ See accompanying notes to unaudited consolidated financial statements 5 PLANGRAPHICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended June 30, 2008 2007 --------- --------- Cash flows provided by operating activities: Net income (loss) $(288,534) $ 26,201 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 147,578 167,716 Allowance for doubtful accounts 19,825 -- Changes in operating assets and liabilities Accounts receivable 339,207 414,076 Prepaid expenses and other (16,903) 32,240 Other assets 4,608 (929) Accounts payable 162,964 108,185 Accrued expenses (98,154) (202,397) Deferred revenue and prebillings (111,167) (335,745) --------- --------- Net cash provided by operating activities 159,424 209,347 --------- --------- Cash flows used in investing activities: Purchases of equipment (3,602) (13,383) Software developed for future use (58,706) (67,875) --------- --------- Net cash used in investing activities (62,308) (81,258) --------- --------- Cash flows used in financing activities: Payments on debt (174,677) (69,734) --------- --------- Net cash used in financing activities (174,677) (69,734) --------- --------- Net increase (decrease) in cash (77,561) 58,355 Cash and cash equivalents at beginning of year 78,642 1,895 --------- --------- Cash and cash equivalents at end of period $ 1,081 $ 60,250 ========= ========= See accompanying notes to unaudited consolidated financial statements 6
PLANGRAPHICS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) Consolidated Financial Statements The summary of our significant accounting policies is incorporated herein by reference to our annual report of September 30, 2007, on Form 10-KSB filed with the Securities and Exchange Commission. Readers are also herewith advised to read the going concern statement in the report of our Independent Registered Accounting Firm and also the liquidity caution in Note B in our financial statements for the period ended September 30, 2007. The accompanying unaudited consolidated financial statements in this report have been presented on the going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. While we secured an improved factoring agreement for accounts receivable during 2007 that has been extended through December 31, 2008, our viability as a going concern is dependent upon our ability to maintain and increase profitable operations through increased sales and the higher profit margins received from Xmarc sales. During the fiscal years of 1998 through 2007 we have experienced significant operating losses with corresponding reductions in working capital and stockholders' equity. We do not currently have any external financing in place to support operating cash flow requirements. Our revenues and backlog have also decreased substantially. To address the going concern issue, management implemented financial and operational plans to improve operating efficiencies, reduce overhead and accelerate cash from our contracts, reduce and eliminate cash losses, and position us for future profitable operations. We have reduced our general and administrative expenses by reducing occupancy costs, streamlining our executive and administrative support team, and using attrition to reduce costs. The accompanying unaudited consolidated financial statements for PlanGraphics, Inc. and its operating subsidiary in this quarterly report reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations, financial position and cash flows. All significant inter-company balances and transactions have been eliminated in our consolidation. We believe that the disclosures are adequate to make the information presented not misleading. The results of this interim period are not necessarily indicative of the results for the full fiscal year ending September 30, 2008. These consolidated financial statements should be read in conjunction with the Company's financial statements and notes for the year ended September 30, 2007, included in the Company's Annual Report on Form 10-KSB. Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. (2) Going Concern Statement As reported in the consolidated financial statements accompanying our annual report on Form 10-KSB for the year ended September 30, 2007, the Company incurred net losses for the years ended September 30, 2007 and 2006. The Company has also suffered recurring losses, has a negative working capital position and a stockholders' deficit. As noted in the auditor's report on our September 30, 2007, financial statements, these factors raise substantial doubt about the Company's ability to continue as a going concern. For the nine months ended June 30, 2008, the Company is reporting net loss of $288,534 and cash provided by operations amounted to $159,424, representing a decrease in net income and in cash flows from the same period of the prior year. The Company has had a history of net losses over the years. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. 7 Management has taken aggressive action to reduce operating costs to the maximum extent possible and has established plans intended to increase the sales of the Company's products and services. Management intends to seek financing to provide funds needed to increase liquidity, fund growth in revenues and to implement its business plan. We intend to secure working capital through additional debt or equity financings or from the sale of certain assets. Any additional equity financing could dilute the equity interests of existing security holders. If adequate funds are not available or are not available on acceptable terms, our ability to operate our business and fund our operations could be materially and adversely affected. No assurance can be given that the Company will be able to raise any additional capital. (3) Accounts Receivable The components of contract receivable are as follows: June 30, 2008 -------- Billed $540,043 Unbilled 195,694 -------- 735,737 Less allowance for doubtful accounts 19,825 -------- Accounts receivable, net $715,912 ======== At June 30, 2008, customers exceeding 10% of billed accounts receivable were the Italian Ministry of Finance ("IMF"), 23%, New York City Department of Environmental Engineering (NYDEP), 24% and international clients in China (in the aggregate), 18%. At the same date, customers exceeding 10% of revenue for the quarter were NYDEP, 23%, San Francisco Department of Technology and Information Systems, 17%, and the IMF, 13%. At June 30, 2007, customers exceeding 10% of billed accounts receivable were NYDEP, 32%, Hunter College, 14%, and Panzhihua Municipal Planning Office (China), 13%. At the same date, customers exceeding 10% of revenue for the quarter were NYDEP, 27%, Hunter College, 14%, San Francisco Department of Technology and Information Systems, 12%. Billed receivables include $53,426 for the net amount of factored invoices due from Rockland. This amount is comprised of the amount of outstanding uncollected invoices on hand at Rockland ($314,798) less the net amount of funds employed by Rockland in servicing them ($261,372) which consists of actual cash advances, payments, and other reserves and fees related to the factoring agreement. Pursuant to the factoring agreement we have granted Rockland a lien and security interest in all of our cash, accounts, goods and intangibles. Billing terms are negotiated in a competitive environment and are typically based on reaching project milestones. When appropriate we establish a reserve ("allowance for doubtful accounts") for estimated uncollectible amounts of billed and unbilled accounts receivable. When we determine that the collection of a billed or unbilled account receivable related to an active contract is not probable, we reduce the contract value accordingly. When we determine that the collection of a billed or unbilled account receivable related to a completed contract is not probable, we record bad debt expense and increase the allowance for doubtful accounts. When we identify that the collection of a reserved account receivable will not be collected, we write off the account receivable and reduce the allowance for doubtful accounts. Deferred revenue amounted to $240,806 at June 30, 2008, and represents amounts billed in excess of amounts earned. These amounts are offset by work in progress which represents work completed but not yet invoiced but included in Accounts Receivable, typically pending completion of payment milestones. 8 (4) Lease Obligations We lease various equipment as well as facilities under operating leases that expire through the year 2012. (5) Stock-Based Compensation. We follow the provisions of SFAS No. 123R, Share Based Payment. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations as compensation expense (based on their fair values) over the vesting period of the awards. Option valuation models (we use the Black-Scholes model) to estimate fair value require the input of highly subjective assumptions including the expected life of the option. Because our employee stock options have characteristics significantly different from those of traded options (which we do not have), and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. We granted options to acquire 972,144 and 3,722,144 shares of common stock during the periods ended June 30, 2008 and 2007, respectively. The fair value of the options granted in the nine-month periods ended June 30, 2008 and 2007, was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the above years: 2008 2007 ------------ ------------ Dividend yield 0.00% 0.00% Expected Volatility 1.33% 1.31% Risk free interest rate 3.58% 4.39% Expected lives 5 years 5 years The weighted-average grant date fair value for stock options granted during 2008 and 2007 was approximately $0.00 and $0.00, respectively, according to our Black-Scholes computations. Additional information regarding the status of stock options outstanding at June 30, 2008 appears in the following tables; we had no warrants outstanding at that date. 9 Stock Options ----------------------------------------- Weighted Number of Average Shares Exercise Price --------------- ------------------- Outstanding at 9/30/2007 8,447,790 $ 0.021 --------------- ------------------- Granted 972,214 0.0036 Expired/Cancelled (1,509,214) 0.0400 Exercised (1,944,288) 0.0042 --------------- ------------------- Outstanding at 6/30/2008 5,966,502 $ 0.014 =============== =================== Exercisable at 9/30/2007 8,447,790 $ 0.021 --------------- ------------------- Exercisable at 6/30/2008 5,966,502 $ 0.014 --------------- ------------------- Stock Options ----------------------------------------------------- Range of Weighted-average Exercise Shares Remaining Years Prices Contractual Life ----------------------------------------------------- $0.0048-$0.015 4,694,288 3.871 $0.020-$0.040 1,272,214 0.920 -------------- 5,966,502 ============== There were options exercised to acquire 1,944,288 shares of our common stock during the period ending June 30, 2008; the total intrinsic value of options exercised to date during fiscal year 2008 is $5,444.01. Because we did not have any unvested options or warrants as of June 30, 2008, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Equity Compensation Plan. (6) Net Loss Per Common Share. Basic loss per share includes no dilution and is computed by dividing income or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, when appropriate. The total number of shares of common stock issuable upon exercise of warrants and options outstanding and exercisable at June 30, 2008 and 2007, were 5,966,502 and 8,447,790, respectively. 2008 2007 --------- --------- Options 5,966,502 8,447,790 Warrants -- -- --------- --------- Total outstanding 5,966,502 8,447,790 ========= ========= The following is a reconciliation of the number of shares used in the Basic Earnings Per Share ("EPS") and Diluted EPS computations: 10
Periods ending June 30, Nine months Three months ----------------------- ----------------------- 2008 2007 2008 2007 ---------- ---------- ---------- ---------- Basic EPS share quantity 97,308,032 97,214,418 97,495,260 97,214,418 Effect of dilutive options and warrants* -- -- -- -- ---------- ---------- ---------- ---------- Dilutted EPS share quantity 97,308,032 97,214,418 97,495,260 97,214,418 *The closing market price of PGRA on June 30, 2007 was lower than the exercise price of all outstanding options and warrants. Because of that, we assume that none of the outstanding options or warrants at that date would have been exercised and therefore none were included in the computation of diluted earnings per share for periods ended June 30, 2007. Further, for the net-loss periods we excluded any effect of outstanding options and warrants as their effect would be anti-dilutive. (7) Supplemental Cash Flow Information During the nine months ended June 30, 2008, PlanGraphics paid $94,808 of interest. Also, payments of $1,065 for taxes were made. (8) Foreign Currency Translation Assets and liabilities of the Company's foreign subsidiary are translated at the rate of exchange in effect at the end of the period. Net sales and expenses are translated at the actual rate of exchange incurred for each transaction during the period. The total of all foreign currency transactions and translation adjustments resulted in a net gain of $13,020 during the nine month period. (9) Provision for Income Taxes At the beginning of this fiscal year we had net operating loss carryforwards of $19.1 million with expirations through 2027. At June 30, 2008, the amount of the net operating loss carryforward balance is estimated at $19.4 million. Since we are unable to determine that deferred tax assets exceeding tax liabilities are more likely than not to be realized, we have recorded a valuation allowance equal to the net deferred tax assets at September 30, 2007 and at June 30, 2008. As a result, no provision or benefit for income tax has been recorded for the nine months ended June 30, 2008. (10) Recently Issued Accounting Pronouncements FSP 142-3. In April 2008, the Financial Accounting Standards Board ("ASB") issued Financial Statement of Position ("FSP") 142-3, "Determination of the Useful Life of Intangible Assets", (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets". FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of FSP 142-3 on its consolidated financial position and results of operations. SFAS 162. In May 2008, the FASB issued Statement of Financial Accounting Standard ("FAS") No. 162, "The Hierarchy of Generally Accepted Accounting Principles ("GAAP")." SFAS No. 162 identifies the sources of accounting principles (see below) and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company's consolidated financial position and results of operations. 11
The sources of accounting principles that are generally accepted are categorized in descending order as follows: a) FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB. b) FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position. c) AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts (EITF D-Topics). d) Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry. SFAS 163. In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60." Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. Management has concluded that, because the Company is not involved in the insurancy industry, the adoption of FASB 163 is not expected to have a material impact on the Company's consolidated financial position and results of operations. FSP 14-1. In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." APB 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer's nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. APB 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting APB 14-1 on its consolidated financial statements. (11) Segment Information The Company follows the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the reporting of information about operating segments in annual and interim financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. In the opinion of management, the Company operates in one business segment, business information services, and all revenue from its services and license fees and royalties are earned in this segment. Management of the Company makes decisions about allocating resources based on this one operating segment. The Company has three geographic regions for its operations, the United States, Europe and Asia. Revenues are attributed to geographic areas based on the location of the customer. The following table depicts the geographic information expected by FAS 131: 12 Geographic information for the nine month period ended June 30, 2008 Long-lived Accounts ---- Assets Receivable Revenues (Net) (Net) ---------- ---------- ---------- 2008 United States and Canada $2,155,006 $ 225,663 $ 481,372 Europe 569,170 3,677 234,540 Asia 218,316 -- -- ---------- ---------- ---------- Total $2,942,492 $ 229,340 $ 715,912 2007 ---- United States and Canada $2,629,623 $ 345,358 $1,173,911 Europe 480,210 5,100 -- Asia 229,902 -- -- ---------- ---------- ---------- Total $3,339,735 $ 350,458 $1,173,911 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary of PlanGraphics, Inc. PlanGraphics is a full life-cycle systems integration and implementation firm, providing a broad range of services in the design and implementation of information technology related to spatial information management in the public and commercial sectors. During FY 2007 approximately 67% of our sales were to customers in federal, state and local governments, and utilities; 22% to international customers and the remaining 11% to commercial enterprises. Our customers are located in the United States and foreign markets requiring locational or "spatial" information. The mix of customers remained comparable through the third quarter of fiscal year 2008. o We have a working capital deficit at June 30, 2008, of $3,305,691, and have had recurring net losses in all prior fiscal years back to 1998. The viability of PlanGraphics is dependent upon our ability to achieve, then maintain and increase profitability in future operations. o Management's foremost challenges are coping with limited cash flows and building a profitable business at a time when federal, state and local governments are experiencing constrained revenues and budget deficits and the commercial sector is, in part, negatively affected by a contracting economy. o The Company depends on internal cash flow to support operations. Internal cash flow is affected significantly by customer contract terms, delays in foreign currency transfers and our progress achieved on projects. o Management continues to carefully manage payments and from time to time has borrowed funds from officers to meet temporary working capital shortages. o Our Master Factoring Agreement with Rockland continues through December 31, 2008; it requires us to submit invoices amounting to an average of $250,000 per month. o We have reduced our general and administrative expenses by reducing occupancy costs, constraining overhead and administrative costs and streamlining our management and production teams. o As a result of our very constrained cash flows, we sometimes delay payments to subcontractors and suppliers. From time to time, we have delayed management and employee payrolls. We have also experienced the departure of certain technical employees, reduced availability of subcontractors and legal costs related to negotiating work-out agreements and settlements with creditors. 13 About our business: Our consulting and systems integration and implementation capabilities include business and web-enabled solutions exploiting the advanced technologies of spatial information management systems (also known as geographic information systems), data warehousing, electronic document management systems and internal and external networks. o Our contracts are often awarded as long as two to three years after we initially contact a customer. In many instances we first provide consulting services to determine an appropriate solution to a need and then we subsequently receive a larger contract. o Our consulting and implementation practice operates nationally and abroad. We are also pursuing opportunities related to executive dashboards, emergency preparedness and public safety throughout the U.S. o Our primary customer base has traditionally included state and local governments and public utilities. Recently we have begun to experience a somewhat reduced number of opportunities and increased sensitivity to pricing in available competitive procurements that have been available. Federal agencies where PlanGraphics has expertise are also exhibiting a more cautious approach and pace to contracting. o We believe the critical factors for the future success of PlanGraphics are: o Maintaining and increasing positive cash flows from operations by controlling costs; o Securing financing arrangements to fund operations and expansion while reducing the cost of financing; o Changing our revenue mix to increase the amount of higher margin software sales; o Successfully meeting the challenges of a difficult contracting economic environment through diversification; o Increasing lagging sales and revenue through expanded lead generation and sales into a more diverse range of clientele; and o Achieving consistent net income. Financial Condition The following discussion of liquidity and capital resources addresses our requirements and sources as of June 30, 2008 and should be read in conjunction with the accompanying unaudited consolidated interim financial statements and the notes to those statements appearing elsewhere in this report and our audited consolidated financial statements and the notes thereto for the year ended September 30, 2007, appearing in our FY 2007 Form 10-KSB. Readers should take into account the auditor's going concern statement as well as the liquidity caution appearing in Note B of the September 30, 2007 financial statements. The Company presently continues to encounter liquidity issues and is carefully controlling costs and expenses while managing its resources to deal with very limited cash availability. As a result, from time to time we have experienced delays in making payments of management payrolls and amounts owed to subcontractors. Cash Flow The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During fiscal years 1998 through 2007, we experienced significant losses with corresponding reductions in 14 working capital and net worth, excluding the impact of certain one time gains. Our revenues and backlog have also decreased substantially during the past two years. If we are unable to maintain and increase cash flow necessary to meet our operating and capital requirements, we will be forced to restrict operating expenditures to match available resources or seek additional financing, which may be available only at unfavorable interest rates or not available at all. These factors, among others, raise substantial doubt about our ability to continue as a going concern. We continue to experience significant liquidity issues that cause us to finance the resources needed with funds from operations and accretion of amounts owed to creditors. As a result, from time to time we have delayed payment of subcontractor invoices. As of June 30, 2008 we had a net working capital deficit of ($3,305,691) versus a net working capital deficit of ($3,080,660) at September 30, 2007. In the nine months ended June 30, 2008, operations provided net cash of $159,424, as compared to $209,347 provided by operations during the period ended June 30, 2007. This $49,923 change was primarily a result of the decrease in our accrued payrolls and accrued expenses that used cash and partially offset by a decrease in accounts receivable which provided cash. Our accounts receivable at June 30, 2008, have decreased by $359,032 since September 30, 2007, as we collected payments on billed invoices from customers. Notes payable with current maturities decreased by $140,136 from September 30, 2007 as a result of the payment of certain notes while accounts payable grew by $162,964 during the same period due to cash unavailability resulting in further accretion of amounts owed to vendors. In the period ended June 30, 2008, investing activities used cash of $62,308 while it used $81,258 during the period ended June 30, 2007. The primary reason for the change was decreased purchases of equipment and software for future use in the current period. Financing activities in the period ended June 30, 2008, used $174,678 as compared to net cash used of $69,734 in financing activities in the period ended June 30, 2007. The change was a result of the paying down of certain interest bearing notes. Accounts receivable balances at June 30, 2008 and 2007, include both billed receivables and work-in-process. The payment terms on accounts receivable are generally net 30 days and collections generally average 45 to 90 days after invoicing. Although we experienced some delayed collections, the typical collection period is consistent with industry experience with clients in the public sector. While this sometimes results in increased aging of the billed accounts receivable balance, our history reflects consistent collectibility of the receivable balances. Work-in-process represents work that has been performed but has not yet been billed. This work will be billed in accordance with milestones and other contractual provisions. The amount of unbilled revenues will vary in any given period based upon contract activity. Other delays in payment are associated with a number of factors, reflecting the financial vagaries of public sector organizations, routine administrative procedures and the normal processing delays often experienced in summer and holiday periods. Management believes that we will receive payment from all remaining sources but with some delays in timeliness. The elevated levels of aged accounts receivable we experience periodically, coupled with the need to finance projects with cash from operations, places cash flow constraints on the Company requiring it to very closely manage its expenses and payables. From time to time we have also borrowed funds from officers and employees to meet working capital needs. Capital Resources Our Master Factoring Agreement ("Amendment") with Rockland Credit Finance, LLC ("Rockland") was recently extended through December 31, 2008; it requires us to sell them an average of $250,000 of invoices per month. Operations Outlook While we have a workable factoring arrangement (see above) and we have previously raised funds from the sale of redeemable preferred stock, we expect that our operations will continue to be impacted by liquidity issues and the apparently contracting US economy through the end of calendar year 2008. 15 We continue to believe that information technology, which includes e-solutions, spatial data management and geographic information systems or "GIS," is a global market that is rapidly evolving and becoming the basis for a myriad of new applications and services to solve customer problems and create additional markets. Subsequent to the economic stress of previous years on our primary customer base, the public sector, we see continuing and increased expenditures over the longer term in the service areas where we are most significantly involved. In addition, our decision to acquire certain proprietary and licensable technologies for use as middleware to spatial and non spatial databases provides both a solution vehicle for an expanded customer base, inclusive of federal and commercial sectors, and a recurring revenue stream. These solutions include emergency response, non-emergency client/constituent management systems and asset management including utility infrastructure and real property. We believe our decisions were well timed and we further believe that market will produce material additional work flow for the company. We believe our purchase of the XMARC intellectual property and spatial integration software components provides us with increased access with additional solution architectures to federal, state and local government clients in addition to commercial enterprises. We have continued to build revenue from maintenance of existing XMARC systems already in the field resulting from additional licensing of Xmarc and STEPs, a derivative product. Recurring revenue from Xmarc based products now exceeds $675,000 per annum. As of July 31, 2008, we had work backlog and assignments of approximately $3.54 million, a slight decrease from the $3.7 million reported as of July 31, 2007. At July 31, 2008, approximately $1.35 million of the backlog and assignments was funded and $2.1 million was unfunded compared to July 31, 2007, when all backlog was funded. The increase in unfunded projects reflects a timing issue as clients are about to enter into a new fiscal year with budgetary constraints and an increased effort by the Company to define extensions of current scopes of work and budgets in advance of contract expiration. We report backlog based on signed contracts and work assignments from our customers. Assignments include contract awards where documentation is pending or task orders based on existing indefinite quantity contract vehicles. A typical contract, standard for the industry, includes terms that permit termination for convenience by either party with 30 days prior notice. Xmarc and derivative product licensing sales do not enter our backlog data, although maintenance and value added reseller fees are included. The decrease in backlog and assignments from February 28, 2008, of $3.98 million and from July 31, 2007, was caused by the natural drawdown of multi-year contracts, the transfer of a China based project with associated backlog to a business partner; the completion of certain China based projects without replacement assignments, and, generally, a reduced number of competitive opportunities, in part as a result of a contracting economy and in part as a consequence of our need to constrain marketing budgets because of cash flow issues. Management has suspended its efforts to pursue additional projects in China as a prime contractor because of increased national (i.e. Chinese) and international competition and the bundling by the World Bank of multiple projects and multiple jurisdictions into single contracts. Recently we increased our focus on providing spatially enabled datamarts and decision dashboards. We have also made progress in positioning ourselves as a provider of Internet-accessible data repositories and warehouses that leverage spatial data through portals and executive dashboards. Several of our current assignments and a material portion of our contract backlog and assignments are associated with these initiatives. A recent example is the San Francisco Department of Telecommunications and Information Systems that awarded us a project during fiscal year 2006 to build out the "hub" of an inter-agency repository for the City and County's Criminal Justice System; they subsequently extended that assignment on two occasions and have initiated the processing of an additional extension for FY 2009. Recently we also successfully undertook the modernization of a military health systems forecasting toolset and database for Altarum Institute and we are now pursuing additional assignments through this third party that is dependent on federal fiscal year 2009 funding. In addition, we plan to grow through selected strategic alliances that we believe will enhance shareholder value and joint marketing initiatives that allow us to increase business with our limited resources while continuing to examine a range of options to enhance shareholder value, including diversification, the sale of operating assets, the licensing of intellectual property and merger and acquisition opportunities. 16 Results of Operations Result of Operations for the three months Ended June 30, 2008 Revenues Our revenues decreased $171,509 or 16% to $872,437 for the quarter ended June 30, 2008 from $1,043,946 for the quarter ended June 30, 2007. This decrease was caused by reduced activities on open contracts and by a lower number of active contracts in the 2008 period. Costs and Expenses Total costs and expenses for the quarter ended June 30, 2008 amounted to $953,755, a small increase of $3,780 from $949,975 for the quarter ended June 30, 2007. This 2% increase contrasts with the 16% decrease in revenue noted above. Direct contract costs decreased by $41,248, or 8%; the decrease was primarily in response to decreased activity; however, the overall percent decrease in direct contract costs was less than the 16% decrease in revenues. Salaries and benefits decreased by approximately $24,395, or 9% because of decreased salaries due to attrition. General and administrative expenses were $65,561, or 85% higher than in the prior year; this was primarily because of the prior year contained a reversal of an accrual for litigation settlement expense that did not recur in the current year making the prior year artificially low; marketing expenses increased by $2,417, or 48%, as we pursued new opportunities; and other operating costs experienced a slight increase of $1,445 because of increased depreciation and amortization. Net loss On a consolidated basis, our operating loss for the quarter ended June 30, 2008 was $81,318, a change of $175,289 from the prior year operating income of $93,971. This change is attributable to the 16% decrease in revenue coupled with the absence of comparable decreases in total cost and expenses during the current quarter. Interest expense amounted to $18,561 in the current quarter and compares with $45,194 during the same period of the prior year; the 59% decrease occurred because of decreased amounts of interest related to notes payable. Other income decreased from the prior year total by $3,442 primarily as a result of decreased royalty income. On a consolidated basis, we incurred a net loss of $79,894 for the quarter ended June 30, 2008 as compared to the net income of $72,204 for the prior year period. The impacts noted above account for the change to a net loss. Result of operations for the nine months ended June 30, 2008 Revenues Our revenues decreased $397,243 or 12% from $3,339,735 for the nine month period ended June 30, 2007 to $2,942,492 for the period ended June 30, 2008. This decrease was caused primarily by decrease in revenues from professional services and subcontractor work which was partially offset by increased Xmarc revenues. Costs and Expenses Total costs and expenses for the period ended June 30, 2008 amounted to $3,183,809, a decrease of $52,847, or 2%, compared to $3,236,656 for the period ended June 30, 2007. While costs and expenses decreased by 2%, revenues decreased by approximately 12% during the period. The decrease in costs and expenses is related to the items noted in the following paragraph. Direct contract costs decreased $65,286, or 4%, which was less than the 12% decrease in revenue. Salaries and benefits decreased by approximately $131,078, or 14%, primarily due to lower compensation costs compared to the prior year 17 resulting from attrition of staff. General and administrative expenses increased by $56,101, or 15%, primarily related to reversal of an accrual for settlement expenses in the prior year which did not recur in the current year; marketing expense decreased further by $5,290, or 28%, as a result of prioritization of cash expenditures and increased reliance on business partners for business development, other operating expenses increased by approximately $92,706, or 124%, due primarily to the reversal in the prior year of an accrual for uncollectible receivables which did not recur in the current year. Net Income/Loss On a consolidated basis, we had an operating loss for the nine month period ended June 30, 2008 of $241,317, resulting in a change of $344,396 from the prior year operating income. This change is attributable to decreased revenues during the current period coupled with the very small 2% decrease in total costs and expenses that did not compare with the 12% decrease in revenues. Interest expense amounted to $110,582 in the current nine month period and compares favorably with $138,952 during the same period of the prior year; this 20% decrease is primarily attributable to decreased interest on notes payable. Other income increased from the prior year total by $1,291 primarily as a result of foreign currency gains in the current period. On a consolidated basis, we incurred a net loss of $288,534 for the nine months ended June 30, 2008, as compared to net income of $26,201 for the prior year period. The decrease in revenues that were not offset by sufficient decrease in costs and expenses as noted above account for the increased net loss. Income Taxes and Deferred Tax Valuation Allowance -- FY 2008 We reported net loss of $288,534 for the nine months ended June 30, 2008. Coupled with losses in prior years, we have generated a sizeable federal tax net operating loss, or NOL, carryforward which totals approximately $19.4 million as of June 30, 2008, compared to $19.1 million at September 30, 2007. We have established a 100% valuation allowance on the net deferred tax asset arising from the loss carryforwards in excess of the deferred tax liability. The valuation allowance has been recorded as our management has not been able to determine that it is more likely than not that the deferred tax assets will be realized. As a result, no provision or benefit for federal income taxes has been recorded for the period ended June 30, 2008. Critical Accounting Policies and Estimates We do not have any updates to the Critical Accounting Policies disclosed in Item 6, Part Two of our Annual Report on Form 10-KSB for September 30, 2007 and filed with the SEC. Subsequent Event The Company recently entered into a Transfer Agent Agreement with Island Capital Management, LLC dba Island Stock Transfer ("Island") for stock registrar and transfer agent services whereby Island supplants Computershare. The exact date of change is being determined. ITEM 3. CONTROLS AND PROCEDURES Inherent limitations of Control Systems We maintain appropriate internal controls and disclosure controls, and related procedures, that are designed to ensure that financial and other information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported promptly and properly to meet the current requirements. Such controls and procedures, no matter how well designed and operated, may have inherent limitations in a cost-effective control system, and therefore misstatements due to error or fraud may occur and not be detected. See the expanded discussion in Item 14 of Part Two in our Form 10-KSB for September 30, 2007. 18 Evaluation of Disclosure Controls and Procedures Based on their most recent evaluation, which was completed as of the end of the period covered by this report, and subject to the limitations above, both the company's Chief Executive Officer and Senior Financial Officer believe that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective in timely alerting management to material information required to be included in this Form 10-QSB and other Exchange Act filings for timely disclosure. Changes in Internal Controls Based upon their most recent evaluation which was completed as of the end of the period covered by this report, and subject to the limitations above, both our Chief Executive Officer and Senior Financial Officer concluded that there were no significant changes in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have begun the extensive process of documenting and evaluating our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 includes a requirement for an annual management report of the effectiveness of our internal controls over financial reporting and that our independent registered public accounting firm will be required to attest to the accuracy of management's evaluation report. The requirement is effective with our fiscal year ending September 30, 2010. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. N/A ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. On June 17, 2008, our Chief Executive Officer exercised stock options to acquire 1,944,288 shares of our common stock (NPV) in the amount of $8,166.01. As a result of the exercise, current liabilities were reduced in a like amount. We relied upon Section 4(2) of the Securities Act of 1933 for the issue of shares with restrictive legend. ITEM 6. EXHIBITS. (a) Exhibits: Exhibit 31.1, Section 302 Certification for the principal executive officer, dated August 11, 2008, and filed on page 21 of this report. Exhibit 31.2, Section 302 Certification for the principal financial officer, dated August 11, 2008, and filed on page 222 of this report. Exhibit 32.1, Sarbanes-Oxley Section 906 Certification for Chief Executive Officer, dated August 11, 2008, and filed on page 23 of this report. Exhibit 32.2, Sarbanes-Oxley Section 906 Certification for principal financial officer, dated August 11, 2008, and filed on page 24, of this report. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLANGRAPHICS, INC. Dated: August 11, 2008 /S/ Fred Beisser -------------------------------- Frederick G. Beisser Senior Vice President-Finance, Secretary & Treasurer (Principal financial and accounting officer) 20