Join Date: Jun 2006
Posts: 14
| 23-Apr-2008
Quarterly Report
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 first quarter of fiscal year 2008.
o We have a working capital deficit at December 31, 2007, of $3,072,895, 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 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 has been extended through June 30, 2008, and the required monthly volume reduced to $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 as well as delayed payments to subcontractors and suppliers. 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.
o 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 are experiencing a reduced number of opportunities and significantly higher sensitivity to pricing in the 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;
o Changing our revenue mix to increase the amount of higher margin software sales;
o Successfully meeting the challenges of an increasingly contracting economic environment;
o Increasing lagging revenue through expanded lead generation and sales into a more diverse range of clientele; and
o Maintaining and increasing net income.
Financial Condition
The following discussion of liquidity and capital resources addresses our requirements and sources as of December 31, 2007 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 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 December 31, 2007 we had a net working capital deficit of ($3,072,895) versus a net working capital deficit of ($3,080,660) at September 30, 2007.
In the three months ended December 31, 2007, operations used net cash of $16,158, as compared to $33,976 provided by operations during the period ended December 31, 2006. This $50,134 change was primarily a result of the increase in our accounts receivable balance.
Our accounts receivable at December 31, 2007, have increased by $157,733 since September 30, 2007, as we earned revenue that had not yet been paid for by customers. Notes payable with current maturities decreased by $20,664 from September 30, 2007 as a result of the payment of certain notes while accounts payable grew slightly by $27,702 during the same period.
In the period ended December 31, 2007, investing activities did not use cash while it used $19,402 during the period ended December 31, 2006. The primary reason for the change was purchases of equipment and cost of software in the prior year period.
Financing activities in the period ended December 31, 2007, used $55,205 as compared to net cash used of $10,000 in financing activities in the period ended December 31, 2006. The change was a result of the paying down of certain interest bearing notes.
Accounts receivable balances at December 31, 2007 and 2006, 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 most recently extended to June 30, 2008, and the required volume of financed receivables is a three month average of $250,000 per month.
Operations Outlook
While our factoring arrangement is improved (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 contracting US economy through the end of calendar year 2008.
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 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 $600,000 per annum.
As of February 28, 2008, we had work backlog and assignments of approximately $3.98 million, a decrease from the $5.5 million reported for December 31, 2006. All of the backlog at December 31, 2006, was funded while $3.1 million of our current backlog is funded. 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 December 31, 2006 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 as a result of cash flow issues. Management has also taken the course of reducing its efforts in pursuit of additional projects in China as a prime contractor as a result 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. Delays in the completion of several competitive awards also impeded the receipt of new contracts to replace backlog converted to revenue.
We report backlog based on executed contracts. 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.
We have 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. 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.
In addition, we plan to grow internally through strategic alliances that enhance shareholder value and joint marketing initiatives that allow us to increase business with our limited resources while continuing to examine a diverse range of options to enhance shareholder value, including the sale of operating assets, the licensing of intellectual property and merger and acquisition opportunities.
Results of Operations
Result of Operations for the three months Ended December 31, 2007
Revenues
Our revenues decreased $392,409 or 28% from $1,426,039 for the quarter ended December 31, 2006 to $1,033,630 for the quarter ended December 31, 2007. This decrease was caused primarily by a lower number of active revenue generating projects in our system.
Costs and Expenses
Total costs and expenses for the quarter ended December 31, 2007 amounted to $1,020,685, a $291,261 decrease from the $1,311,946 for the quarter ended December 31, 2006. This 22% decrease is primarily due to more efficient utilization of resources and actions taken to reduce management costs associated with revenue generation.
Direct contract costs decreased by $228,334, or 30%; the decrease was primarily related to a 40% decrease in subcontractor costs of $184,998 and a decrease of $46,531 in direct salaries or 16%. However, the overall 30% decrease in direct contract costs was proportionately lower than the 22% decrease in revenues.
Salaries and benefits decreased somewhat by approximately $41,024, or 12% as a result of attrition. General and administrative expenses decreased $11,290, or 8%, primarily as a result of decreases in legal expenses and bank fees; marketing expenses decreased further by $4,287, or 63%, as a result of limited budgets and a higher reliance on third party partners; and, finally, other operating costs decreased 6,326, or 10%, primarily as a result of decreased depreciation and amortization expenses.
Net Income
On a consolidated basis, we reported operating income of $12,945 for the quarter ended December 31, 2007, as compared to operating income of $114,093 in the prior year. This change is primarily attributable to decreased revenues during the current quarter.
Interest expense amounted to $43,671 in the current quarter compared with $53,276 during the same period of the prior year; the decrease occurred because of reduced factoring of accounts receivable. Other income increased from the prior year total by $2,098 due to increases in royalties earned.
On a consolidated basis, we are reporting a net loss of $686 for the quarter ended December 31, 2007, as compared to net income of $88,757 for the prior year period. The items noted above account for the change to net loss.
Income Taxes and Deferred Tax Valuation Allowance -- FY 2008
We reported net income for the three months ended December 31, 2007. Coupled with losses in prior years, we have generated a sizeable federal tax net operating loss, or NOL, carryforward which totals approximately $19.1 million as of December 31, 2007, comparable 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 three months ended December 31, 2007.
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. |