By WTT Contributing Columnist Gail Kailing September 10, 2002 -- Yesterday evening, ImageX ® (NASDAQ Small Cap Market: IMGX) announced that it would sell Extensis to Celartem Technology USA for $9 million or $11 million if certain revenue targets are reached. Extensis is a provider of digital media management tools for creative software professionals and has been considered a non-core holding for ImageX. The sale gives ImageX the cash it disparately needs and allows the company to concentrate on selling their Channel Marketing and Print Systems. It also provides ImageX with more resources to execute on their patent licensing strategy - which includes lawsuits when necessary. ImageX Versus iPrint ImageX announced just before the Labor Day holiday weekend that it has filed suit against iPrint Technologies (NASDAQ Small Cap Market: IPRT) for patent infringement. The patent, U.S. Patent number 6,429,947, covers technology that automates the prepress process. ImageX also filed a preliminary injunction motion requesting an expedited hearing to prohibit iPrint from continuing to use its online printing technology. These two companies have been on parallel business paths in the past. In April, we published a Special Report entitled, iPrint & ImageX - The Price of Being an Industry Pioneer. This report discussed how the two companies developed in parallel, and leapfrogged each other through a number of milestones. Among many similarities, the report noted: - iPrint was founded in 1996 and launched their online print shop in December 1996. ImageX was founded in 1995 and launched the ImageX Online Print Center in 1997. - In 1999, both filed an S-1 for a public offering. ImageX’s IPO yielded about $21 million and iPrint’s more than $48 million. (ImageX completed a secondary offering for about $101 million.) - In 2000, the companies struck a one-year strategic agreement to provide ImageX small business customers with access to iPrint’s Online Printshop for the SOHO market. - In early 2002, both iPrint and ImageX faced the threat of Nasdaq delisting. (Nasdaq Stock Market, Inc. may delist firms where the common stock fails to meet the $1.00 per share minimum bid price and the $5 million minimum market value of public float requirement for 10 consecutive trading days prior to a specified deadline determined by Nasdaq.) Shortly after this report, both companies were transferred to the Nasdaq SmallCap Market. The transfer for both companies took place on the same day - June 11, 2002. From Parallel to Confrontation In 2001, iPrint announced their intention to target large corporations with their Web-based solutions. This move positioned iPrint as a direct competitor to ImageX and their strategic partnership ended. When asked to comment on iPrint’s new direction, Rich Begert, ImageX CEO said, "They are 3 1/2 years late. We have been doing this longer, have technology better suited for large corporate customers, and patent pending systems already in place and proven." (WhatTheyThink.com news story 2/7/01) The timing of this lawsuit gives the appearance of predatory behavior by ImageX. On August 28, iPrint provided details of the proposed disposition of some assets and assignment of others to MadeToOrder.com (MTO). Under the terms of the proposed transaction, MTO would purchase certain iPrint assets and assume certain iPrint liabilities. A lawsuit at this time certainly puts ImageX in the power seat in regards to negotiations with iPrint. WhatTheyThink.com reached iPrint on August 30. A company spokeswoman said they would have no further comment at this time and referred us to their press release dated August 29: "iPrint has not yet had an opportunity to fully evaluate this new patent, but believes that ImageX's claims are without merit. iPrint intends to vigorously defend these allegations." WhatTheyThink.com asked Rich Begert, ImageX’s president and CEO to comment on the legal action. WTT: The timing of these announcements seems a bit like kicking a man while he’s down. Why did you file suit and ask for the injunction now? Rich Begert: We’ve been implementing a patent strategy that was initiated more than two years ago. Patents take time to make it through the patent office. We have more than 80 patents and patents-pending, and we felt it was important to have a critical number of patents approved to protect our processes before we moved ahead to licensing our technology. WTT: That explains why you are moving ahead on licensing ImageX technology, but why the suit against iPrint now? Rich Begert: We have been attempting to initiate discussions with iPrint because we believe they are infringing on our patents, but iPrint hadn’t responded. We felt strong enough about it to file suit and request the injunction. WTT: What is your overall intellectual property strategy? Rich Begert: Our strategy is to create visibility, to protect the value of ImageX intellectual property and to generate licensing revenue. We are following parallel paths with other companies and have opened a number of discussions. We expect some will settle and some will result in suits. --- Sale of Extensis: Overview of the Top and Bottom Line Effects for ImageX The net result of the Extensis sale for ImageX will be an estimated gain of $2.8 to 3.8 million after transaction costs and adjustments, when the sale closes this month. There will be lower revenues due to the sale of Extensis, and a lower gross profit will likely result as well. Financials taken from ImageX's second quarter report show that software sales were 28% revenue. At the same time the gross margin for the software segment reached 81% for the second quarter compared to gross margin for the printing segment of 24%. Changes of that magnitude will certainly mean that the overall gross margin of 40% will be much lower. While the sale of Extensis will generate needed cash in the short term, it will affect revenues and profits in the future. ImageX expects sales of the Channel Management System and patent licenses to offset the reduction over time.