10-Q 1 a10-q.txt 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 1O-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 1, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number : 0-26226 MICROFIELD GRAPHICS, INC. (Exact name of small business issuer as specified in its charter) OREGON 93-0935149 (State or other jurisdiction (I. R. S. Employer of incorporation or organization) Identification No.) 16112 SW 72ND AVENUE PORTLAND, OREGON 97224 (Address of principal executive offices and zip code) (503) 620-4000 (Issuer's telephone number including area code) Check whether the issuer (1) filed all reports required to be filed by Section 3 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] The number of shares outstanding of the Registrant's Common Stock as of July 1, 2000 was 4,572,793 shares. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] MICROFIELD GRAPHICS, INC. FORM 10-QSB INDEX
PART I FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheet - July 1, 2000 and January 1, 2000 3 Consolidated Statement of Operations - Three and 4 Six Months Ended July 1, 2000 and July 3, 1999 Consolidated Statement of Cash Flows - Six Months Ended July 1, 2000 and July 3, 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II OTHER INFORMATION Item 1 Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11
2 MICROFIELD GRAPHICS, INC. CONSOLIDATED BALANCE SHEET
July 1, January 1, 2000 2000 ------------------- -------------------- (unaudited) Current assets: Cash $ 221,388 $ 113,041 Accounts receivable, net of allowances of $11,748 and $27,153 276,390 265,524 Inventories (Note 2) 461,515 496,696 Prepaid expenses and other 84,334 120,969 ------------------- -------------------- Total current assets 1,043,627 996,230 Property and equipment, net (Note 3) 189,822 244,714 Other assets 35,182 76,915 ------------------- -------------------- $ 1,268,631 $ 1,317,859 =================== ==================== Current liabilities: Accounts payable 475,021 338,325 Current portion of debt $ 285,667 $ 360,473 Accrued payroll and payroll taxes 94,227 133,650 Unearned income 41,469 77,687 Accrued liabilities 71,247 82,048 ------------------- -------------------- Total current liabilities 967,631 992,183 Long-term debt, net of discount 42,582 - Other long-term liabilities - 52,455 ------------------- -------------------- Total liabilities 1,010,213 1,044,638 Shareholders' equity: Common stock, no par value, 25,000,000 shares authorized, 4,572,793 and 4,132,185 shares issued and outstanding 15,750,281 15,273,912 Accumulated deficit (15,491,863) (15,000,691) ------------------- -------------------- Total shareholders' equity 258,418 273,221 ------------------- -------------------- $ 1,268,631 $ 1,317,859 =================== ====================
The accompanying notes are an integral part of these consolidated financial statements. 3 MICROFIELD GRAPHICS, INC. CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Six months ended July 1, July 3, July 1, July 3, 2000 1999 2000 1999 ---------------- --------------- ------------------ --------------- (unaudited) (unaudited) (unaudited) (unaudited) Sales $ 681,306 807,433 1,523,462 1,860,748 Cost of goods sold 478,735 501,433 992,205 1,172,724 ---------------- --------------- -------------- --------------- Gross profit 202,571 306,000 531,257 688,024 Operating expenses Research and development 79,455 281,049 133,999 525,659 Marketing and sales 199,734 578,298 411,431 1,059,717 General and administrative 255,193 241,371 456,385 489,000 241,371 241,371 ---------------- --------------- -------------- --------------- 534,382 1,100,718 1,001,815 2,074,376 ---------------- --------------- -------------- --------------- Loss from operations (331,811) (794,718) (470,558) (1,386,352) Other income (expense) Interest income (expense), net (48,530) (12,040) (63,953) (27,284) Other income, net 44,304 (49,742) 43,339 (49,518) ---------------- --------------- -------------- --------------- Loss before provision for (336,037) (856,500) (491,172) (1,463,154) Income taxes Provision for income taxes -- -- -- -- ---------------- --------------- -------------- --------------- Net loss $ (336,037) (856,500) (491,172) (1,463,154) ================ =============== ============== =============== Net loss per share Basic $ (.08) (.22) (.12) (.37) ================ =============== ============== =============== Diluted $ (.08) (.22) (.12) (.37) ================ =============== ============== =============== Shares used in per share calculations Basic 4,160,025 3,926,753 4,146,105 3,926,753 ================ =============== ============== =============== Diluted 4,160,025 3,926,753 4,146,105 3,926,753 ================ =============== ============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 4 MICROFIELD GRAPHICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six months ended ------------------------------------------------------ July 1, July 3, 2000 1999 ------------------------- -------------------- Cash Flows From Operating Activities: Net loss $ (491,172) $ (1,463,154) Adjustments to reconcile net loss to net cash Used in operating activities: Depreciation and amortization 68,570 99,845 Noncash portion of employee option exercise --- -- recorded as compensation expense 105,951 -- Changes in assets and liabilities: Accounts receivable (10,866) 300,188 Inventories 35,181 235,798 Prepaid expenses and other 36,635 57,547 Accounts payable 136,696 (178,082) Accrued payroll and payroll taxes (39,423) (192,572) Unearned income (36,218) 25,046 Accrued liabilities (10,801) (6,316) --------------------- -------------------- Net cash used in operating activities (205,447) (1,121,700) Cash flows from investing activities: Acquisition of property and equipment (3,905) (30,326) Other long-term assets 31,960 -- --------------------- -------------------- Net cash provided by investing activities 28,055 (30,326) Cash flows from financing activities: Payments on equipment line of credit (52,455) (41,667) Proceeds from (payments on) operating line of credit (74,805) (131,000) Proceeds from (payments on) Long Term Note 400,000 Proceeds from exercise of common stock options and warrants 13,000 1,210 Proceeds from issuance of common stock -- 988,754 --------------------- -------------------- Net cash provided by financing activities 285,739 817,297 Net increase (decrease) in cash and cash equivalents 108,347 (334,729) Cash and cash equivalents, beginning of period 113,041 739,628 --------------------- -------------------- Cash and cash equivalents, end of period $ 221,388 $ 404,899 ===================== ==================== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 48,530 $ 17,555 ===================== ==================== Income taxes $ -- $ -- ===================== ==================== Issuance of Common Stock Warrants Recorded as debt discount $ 357,418 $ -- ===================== ====================
The accompanying notes are an integral part of these consolidated financial statements. 5 MICROFIELD GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Microfield Graphics, Inc. (the "Company") for the quarters and six months ended July 1, 2000 and July 3, 1999 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. The financial information as of January 1, 2000 is derived from the Company's Annual Report on Form 10-KSB. The accompanying consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles and should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended January 1, 2000. In the opinion of Company management, the unaudited consolidated financial statements for the interim periods presented include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. Operating results for the quarter ended July 1, 2000 are not necessarily indicative of the results that may be expected for the full year or any portion thereof. The Company's fiscal year is the 52- or 53-week period ending on the Saturday closest to the last day of December. The Company's current fiscal year is the 52-week period ending December 30, 2000. The Company's last fiscal year was the 52-week period ended January 1, 2000. The Company's second fiscal quarters in fiscal 2000 and 1999 were the 13-week periods ended July 1, 2000 and July 3, 1999, respectively. 2. INVENTORIES Inventories are stated at the lower of standard cost (which approximates the first-in, first-out method), or market value. Inventory costs include raw materials, direct labor and allocated overhead and consist of the following:
July 1, January 1, 2000 2000 -------------------- ---------------------- Raw materials $365,817 $368,498 Finished goods 95,698 128,198 -------------------- ---------------------- $461,515 $496,696 ==================== ======================
3. PROPERTY AND EQUIPMENT
July 1, January 1, 2000 2000 -------------------- ---------------------- Machinery and equipment $1,200,490 $1,196,585 Less accumulated depreciation and amortization 1,010,668 951,871 -------------------- ---------------------- $189,822 $244,714 ==================== ======================
4. SUBORDINATED NOTE AGREEMENT 6 On June 30, 2000, the Company issued a Subordinated Promissory Note to a financing company. The promissory note plus unpaid interest (payable at an initial rate of 10 percent per annum) is due as follows: (a) interest in arrears on the last day of each quarter beginning September 30, 2000, and (b) the outstanding principal balance and all accrued and unpaid interest on the earlier of (i) June 30, 2005 or (ii) demand by holder made at any time after June 30, 2003. In connection with this Subordinated Promissory Note, the Company issued two stock warrants each to purchase individually 1,033,000 common shares at a price of $0.50 per share or $0.38722 per share, respectively. The aggregate estimated fair value of the warrants of $357,418 has been recorded as a debt discount and is being amortized using the effective interest method over the three-year term of the related debt. Amortization of the debt discount is included in interest expense. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Microfield Graphics, Inc. (the "Company") develops, manufactures and markets computer conferencing and telecommunications products to facilitate group communications. The principal purpose of these products is to make meetings more productive and cost effective by capturing ideas from all meeting members (whether they are located locally or linked remotely through a computer and an audio hookup) and making the information available to all of the linked systems, where everyone involved can see and interact with the information produced and presented. The Company's product lines incorporate a series of digital whiteboards, interactive rear projection systems, and interactive plasma display systems under the brand name SoftBoard, along with a variety of application software packages, supplies and accessories. Information written or drawn on the SoftBoard surface is recorded and displayed on a personal computer simultaneously and in color using the Company's proprietary technology. The information is recorded in a computer file that can be replayed, printed, faxed, e-mailed or saved for future applications. Optional proprietary software allows the information to be communicated in real time to remote computers over standard telephone lines, networks and the Internet. During 1999, the Company experienced significantly reduced sales and negative cash flows from operations. The reduction was due primarily to the loss of sales from Minnesota Mining and Manufacturing Company, a major OEM customer. At the end of the second quarter of 1999, the Company concluded that it might not have sufficient funds to operate for at least twelve months. Management based such conclusions on the reduction in sales and resulting losses that occurred during the first six months of 1999, coupled with diminishing cash resources (cash and cash equivalents, and cash available under its operating line of credit). In response, management restructured its operations through a combination of staff reductions, workweek reductions, temporary executive salary reductions and reductions in general expense spending levels. However, there can be no assurance that the Company will achieve profitability on a continuing basis. The Company was incorporated in Oregon in 1986. The Company's executive offices are located at 16112 SW 72nd Avenue, Portland, OR 97224. 7 RESULTS OF OPERATIONS The following table sets forth, as a percentage of sales, certain consolidated statement of operations data relating to the SoftBoard Business for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------------- -------------------------------- JULY 1 JULY 3 JULY 1 JULY 3 2000 1999 2000 1999 --------------- -------------- ------------ -------------- Sales 100 % 100 % 100 % 100 % Cost of goods sold 70 62 65 63 --------------- -------------- ------------ ---------- Gross profit 30 38 35 37 Research and development (12) (35) (9) expenses (28) Marketing and sales expenses (29) (72) (27) (57) General and administrative (37) (30) (30) expenses (26) --------------- -------------- ------------ ---------- Loss from operations (49) (98) (31) (75) Other income (expense) (1) (8) (1) (4) --------------- -------------- ------------ ---------- Loss before provision for (49) (106) (32) income taxes (79) Provision for income taxes -- -- -- -- --------------- -------------- ------------ ---------- Net loss (49) % (106) % (32) % (79) % =============== ============== ============ ==========
QUARTER ENDED JULY 1, 2000 COMPARED WITH QUARTER ENDED JULY 3, 1999 SALES. Sales decreased $126,000 (16%) to $681,000 in the second quarter of 2000 from $807,000 in the second quarter of 1999. The decrease for the quarter was consistent with the Company's planned reduction in expenses for advertising and sales promotion. GROSS PROFIT. Cost of goods sold includes the cost of raw materials needed to assemble the products, assembly and preparation by vendors and direct and indirect costs associated with the procurement, testing, scheduling and quality assurance functions performed by the Company. The Company's gross margin decreased to 30% in the second quarter of 2000 from 38% in the second quarter of 1999. The decrease in gross margin during the second quarter of 2000 was due primarily to lower overall sales and a one time non-recurring compensation charge, offset by lower manufacturing overhead expense. RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are expensed as incurred. These expenses decreased $202,000 (72%) to $79,000 in the second quarter of 2000 from $281,000 in the second quarter of 1999. The reduction is due primarily to restructuring efforts implemented in the second quarter of 1999 that included significant reductions in development programs. MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased $379,000 (66%) to $200,000 in the second quarter of 2000 from $578,000 in the second quarter of 1999. The decrease between quarters was due primarily to lower costs associated with the current advertising program and decreased participation in trade shows during the quarter. 8 GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $14,000 (6%) to $255,000 in the second quarter of 2000 from $241,000 in the second quarter of 1999. The increase in administrative expenses during the second quarter of 2000 was due primarily to legal expenses incurred in connection with the class action lawsuit filed against the Company and its chief executive officer in February 2000 and costs associated with a one time non-recurring settlement of certain outstanding stock options, offset by lower costs resulting from the restructuring implemented in the second quarter of 1999. OTHER INCOME (EXPENSE). Other income (expense) includes interest income, interest expense, and miscellaneous income. Other expense decreased $58,000 (94%) to ($4,000) in the second quarter of 2000 from ($62,000) the second quarter of 1999. INCOME TAXES. The Company recorded losses from operations in the second quarters of 2000 and 1999. Accordingly, no provision for income taxes was provided for in either of these periods. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations and capital expenditures through public and private sales of equity securities, cash from operations, and borrowings under bank lines of credit. At July 1, 2000 the Company had working capital of approximately $76,000 and its principal source of liquidity consisted of $221,388 in cash and cash equivalents. Accounts receivable increased $11,000 to $276,000 at July 1, 2000 from $265,000 at January 1, 2000. This was primarily due to improved account collection policies implemented as part of the restructuring and cost reduction plan. Inventories decreased $35,000 to $462,000 at July 1, 2000 from $497,000 at January 1, 2000. This decrease was due primarily to the lowering of inventory levels implemented as part of the restructuring and cost reduction plan. Accounts payable increased $137,000 to $475,000 at July 1, 2000 compared to $338,000 at January 1, 2000 as a result of the implementation of more favorable payment terms with the Company's vendors. The Company has a line of credit with its bank using its accounts receivable and certain of its inventory as collateral. The Loan Agreement for the line of credit expired on September 8, 1999, at which time $524,000 was outstanding under the line of credit. The Company and the bank continued to operate under the terms of the Loan Agreement until new terms were formalized on October 25, 1999. At September 8, 1999 and at October 2, 1999, the Company was not in compliance with the minimum tangible net worth financial covenant of its Loan Agreement with the bank. On October 15, 1999, the bank delivered a notice of default and the Company subsequently entered into a Forbearance Agreement which provided for a reduction in the line of credit to $650,000, the elimination of inventory from the collateral base over a 14 month period, an interest rate increase, and certain financial covenants with which the Company was required to comply. The Forbearance Agreement period ended April 30, 2000. On April 27, 2000 the Company entered into an Accounts Receivable Purchase Agreement with the bank, which provides for financing in an amount equal to 80% of accounts receivable up to a maximum of $750,000, interest of 3% per month on the outstanding loan balance, repayment of the inventory portion of the collateral base (the "Placeholder Note"), and certain financial covenants with which the Company is required to comply. The balance of the Placeholder Note at July 1, 2000 was $109,884. The Accounts Receivable Purchase Agreement extends through December 31, 2000. 9 On June 30, 2000 the Company issued a Subordinated Promissory Note to JMW Capital Partners, Inc. ("JMW") pursuant to which the Company borrowed $400,000 from JMW. The promissory note plus unpaid interest (payable at an initial rate of 10 percent per annum) is due as follows: (a) interest in arrears on the last day of each quarter beginning September 30, 2000, and (b) the outstanding principal balance and all accrued and unpaid interest on the earlier of (i) June 30, 2005 or (ii) demand by holder made at any time after June 30, 2003. In connection with this Subordinated Promissory Note, the Company issued to JMW two stock warrants each to purchase 1,033,000 shares of the Company's common stock at a price of $0.50 per share and $0.38722 per share, respectively. The warrants, which are exercisable until June 30, 2005, have an aggregate estimated fair value of $357,418 which has been recorded as a debt discount and is being amortized using the effective interest method over the five year term of the related debt. Amortization of the debt discount is included in interest expense. The Company agreed to a number of financial and other covenants in connection with the financing, including that the Company will default under the note if at any time designees of JMW constitute less than forty percent of the Company's Board of Directors. In accordance with this agreement, Robert Jesenik and Dennis Wade, principals of JMW, were appointed to the Company's Board of Directors. The Company believes its resources are sufficient to fund its operations until December 31, 2000 if the Accounts Receivable Purchase Agreement is not terminated prior to that time. In the event that the Accounts Receivable Purchase Agreement is terminated prior to that time, and the Company is unable to obtain substitute financing at acceptable terms, the Company's business and financial condition will be materially and adversely affected. The Company has no commitments for capital expenditures in material amounts. NEW ACCOUNTING PRONOUNCEMENT On April 3, 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of Accounting Principles Board Opinion No. 25" (FIN 44). FIN 44 clarifies the application of Opinion No. 25 for certain issues including the accounting consequence of various modifications to the terms of a previously fixed stock option or award. In December 1999, the Company decreased the exercise price of all outstanding incentive stock options to $0.22 per share (the "repriced options"). In accordance with FIN 44, effective July 1, 2000, any of these options which are not exercised or canceled, would be accounted for pursuant to a variable stock option plan. Accordingly, compensation expense would be recorded to the extent that the quoted market price of the Company's common stock exceeded the revised exercise price of the repriced options. Effective June 30, 2000, the Company settled all outstanding repriced options by issuing one share of the Company's common stock for each repriced option; 405,608 of the repriced options were outstanding immediately preceding the settlement. As a result, the Company recorded a one-time compensation charge of $105,951, which is equal to the aggregate fair value of the common shares issued as settlement for the repriced options. The one-time compensation charge was recorded as expense in each department (manufacturing, sales, administration) where the participating employees were assigned. 10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During February 2000, the Company was named in a class action lawsuit, ADAIR V. MICROFIELD GRAPHICS, INC. ET ANO., 00 Civ. 0629 (MBM), United States District Court Southern District of New York. The complaint alleges that the Company and its Chief Executive Officer issued a series of false and misleading statements concerning, among other things, the Company's purchase agreement with 3M. The complaint alleges that, as a result of these allegedly material misstatements and omissions, the Company's stock price was artificially inflated during the period from July 23, 1998 through April 2, 1999 and requests that damages be determined at trial. The Company denies the allegations and intends to vigorously defend itself. However, the ultimate outcome of the litigation is presently undeterminable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On June 30, 2000 the Company issued to JMW two common stock purchase warrants as consideration for the financing the Company received from JMW. Each warrant is exercisable for 1,033,000 shares of the Company's common stock at any time until June 30, 2005. The exercise prices of the warrants are $0.50 per share and $0.38722 per share, respectively. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Act"), because JMW is an accredited investor, as that term is defined in Rule 501 of the Act, and the transaction fell within the parameters of Rule 506 of the Act. ITEM 5. OTHER INFORMATION In connection with the June 30, 2000 financing with JMW, William Cargile resigned from the Company's Board of Directors and Robert Jesenik and Dennis Wade, principals of JMW, were appointed to the Company's Board of Directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits filed as part of this report is listed below:
EXHIBIT NO. ----------- 10.14 Form of $400,000 Subordinated Promissory Note issued to JMW Capital Partners, Inc., dated June 30, 2000. 10.15 Form of Stock Purchase Warrants to Purchase Shares of Common Stock of Microfield Graphics, Inc. issued to JMW Capital Partners, Inc., dated June 30, 2000. 10.16 Form of Registration Rights Agreement between the Company and JMW Capital Partners, Inc., dated June 30, 2000. 10.17 Form of Note and Warrant Purchase Agreement between the Company and JMW Capital Partners, Inc. dated June 30, 2000. 27 Financial data schedule
(b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended July 1, 2000. 11 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 15, 2000 MICROFIELD GRAPHICS, INC. By: /s/ JOHN B. CONROY -------------- John B. Conroy Chief Executive Officer (Principal Executive and Financial Officer) 12