U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10416
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INFODATA SYSTEMS INC.
(Exact name of Small Business Issuer in its charter)
VIRGINIA 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 Monument Drive, Fairfax, Virginia 22033
(Address of principal executive office)
(703) 934-5205
(Issuer's telephone number)
--------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
As of May 11, 1998, there were 4,450,888 common shares outstanding. As of May
11, 1998, the aggregate market value (computed by reference to the average bid
and asked prices on such date) of voting common shares held by non-affiliates
was approximately $16,883,000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations 3
Three Months Ended March 31, 1998 and 1997
Condensed Consolidated Balance Sheet 4 - 5
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Cash Flows 6
Three Months Ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis 9 - 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I--FINANCIAL INFORMATION
ITEM 1
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
---------------------------
Revenues............................................. $2,910 $2,041
Cost of revenues..................................... 1,772 1,350
------- -------
Gross profit......................................... 1,138 691
------- -------
Operating expenses:
Research and development........................... 604 367
Selling, general and administrative................ 1,275 1,207
------- -------
1,879 1,574
------- -------
Operating (loss) income.............................. (741) (883)
Interest income...................................... 49 25
Interest expense..................................... (13) (2)
------- -------
Income (loss) before income taxes.................... (705) (860)
Provision for income taxes........................... -- (5)
------- -------
Net income (loss).................................... $ (705) $ (855)
======= =======
Net income available to common shareholders.......... $ (705) $ (855)
======= =======
Per share:
Net income (loss) per common and equivalent share
Basic ........................................... $(0.20) $(0.37)
======= =======
Diluted ......................................... $(0.20) $(0.37)
======= =======
Weighted average shares outstanding.................. 3,477 2,291
======= =======
The accompanying notes are an integral part of these consolidated statements.
3
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31
1998 1997
---------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 5,209 $ 284
Short term investments..................................... 4 4
Accounts receivable, net of allowance of $28 and $78....... 2,204 2,772
Other current assets....................................... 210 174
-------- --------
Total current assets..................................... 7,627 3,234
Property and equipment, at cost:
Furniture and equipment.................................... 2,848 2,817
Less accumulated depreciation and amortization............. (2,307) (2,220)
-------- --------
Net property and equipment............................... 541 597
Goodwill, net of accumulated amortization of $439 and $296... 3,228 3,371
Other assets................................................. 105 309
Software development costs, net of accumulated amortization
of $2,104 and $2,094....................................... 32 42
-------- --------
Total assets................................................. $11,533 $ 7,553
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31
1998 1997
---------------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations............... $ 24 $ 26
Current portion of note payable............................ - 880
Accounts payable .......................................... 352 1,482
Accrued expenses........................................... 865 928
Deferred revenue........................................... 1,589 1,592
Current portion of deferred rent........................... 11 19
--------- ---------
Total current liabilities................................ 2,841 4,927
Capital lease obligations.................................... - 6
Total liabilities ....................................... 2,841 4,933
--------- ---------
Shareholders' equity:
Common stock............................................... 131 82
Additional paid-in capital ................................ 19,398 12,670
Accumulated deficit ....................................... (10,837) (10,132)
--------- ---------
Total shareholders' equity .............................. 8,692 2,620
--------- ---------
Total liabilities and shareholders' equity................... $ 11,533 $ 7,553
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
5
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ (705) $ (855)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization............................ 87 79
Software amortization.................................... 10 10
Goodwill and other intangible amortization............... 143 12
Changes in operating assets and liabilities:
Accounts receivable...................................... 567 131
Other current assets..................................... (36) (68)
Other assets ............................................ 204 (3)
Accounts payable......................................... (1,130) (176)
Accrued expenses......................................... (64) 93
Deferred revenue......................................... (3) 9
Deferred rent............................................ (8) (8)
--------- ---------
Net cash used in operating activities.................. (935) (776)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net................... (31) (132)
Proceeds from maturity of short term investments........... - 314
--------- ---------
Net cash (used in) provided by investing activities...... (31) 182
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations...................... (8) (12)
Proceeds from short-term borrowings........................ 116 -
Payments of notes payable.................................. (996) -
Issuance of common stock .................................. 6,779 111
--------- ---------
Net cash provided by financing activities.............. 5,891 99
--------- ---------
Net increase (decrease) in cash and cash equivalents....... 4,925 (495)
Cash and cash equivalents at beginning of period........... 284 1,266
--------- ---------
Cash and cash equivalents at end of period................. $ 5,209 $ 771
========= =========
The accompanying notes are an integral part of these consolidated statements.
6
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1998, are not necessarily indicative of the results for the
year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1997.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1) REVENUE RECOGNITION - The Company recognizes revenue from software
licenses upon delivery of the software product to the customer or upon
customer acceptance, if a trial period exists. Revenues from post
contract support, including revenue bundled with the initial license
fee, are recognized ratably over the period that customer support
services are provided. Software service revenue is recognized as
performed if there is no contract in place.
Revenues from consulting and professional services contracts are
recognized on the percentage-of-completion method for fixed price
contracts and on the basis of hours incurred at contract rates for time
and materials contracts. Revenues from cost reimbursement contracts are
recognized as costs are incurred. Any amounts paid by customers prior to
the actual performance of services are recorded as deferred revenue
until earned, at which time they are recognized in accordance with the
type of contract.
The American Institute of Certified Public Accountants has issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", that
supersedes SOP 91-1. SOP 97-2 provides additional guidance with respect
to multiple elements, returns, exchanges, and platform transfer rights;
resellers; services; funded software-development arrangements; and
contract accounting. SOP 97-2 was implemented during the Company's
quarter ended March 31, 1998, however, it did not have a significant
impact on the Company's financial statements.
2) USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
7
3) EARNINGS PER SHARE - The Company implemented Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," as of
December 31, 1997. SFAS No. 128 replaces the presentation of primary and
fully diluted earnings per share with basic and diluted earnings per
share. The 1997 earnings per share amount has been restated in
accordance with SFAS No. 128. Earnings per share have been computed
using the weighted average number of common shares outstanding.
4) NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 130 requires that an enterprise report
items of other comprehensive income separately from retained earnings
and additional paid-in-capital in the equity section of a statement of
financial position. The Company was required to adopt SFAS No. 130 in
the first quarter of 1998, however, the Company did not have other
comprehensive income for the period ended March 31, 1998. The Company
does not expect SFAS No. 130 to have a significant impact on its
financial statements. SFAS No. 131 requires the Company to report
financial and descriptive information about its reportable operating
segments. The Company will adopt SFAS No. 131 in its year-end reporting
as of December 31, 1998. The Company is currently evaluating the impact
of SFAS No. 131 on its financial statements.
NOTE C - LINE OF CREDIT
The Company maintains a line of credit with Merrill Lynch Business Financial
Services, Inc. for up to $1,000,000 based upon eligible receivables at a per
annum rate equal to the sum of 2.9% plus the 30 day commercial paper rate.
Currently, this per annum rate approximates prime. The facility expires in
July 1998, and management expects that the line will be renewed at that time.
The Company did not have any borrowings under the line of credit as of March
31, 1998.
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $13,000 and $2,000 for the periods ended
March 31, 1998 and March 31, 1997, respectively. No cash was paid for income
tax in either period.
NOTE E - RISKS AND UNCERTAINTIES
Within the past year, the Company has introduced the Virtual File Cabinet(TM)
(VFC(R)), a family of new proprietary software products. The Company has
incurred significant costs related to these products and will continue to
incur these costs in the future. Revenue for VFC products commenced during
July 1997. Although management believes revenues should increase materially
over time, there can be no assurance as to the amount of VFC revenues in the
future. Therefore, the Company has also developed a plan to implement certain
cost control measures during 1998. Also, the Company's operations are subject
to certain other risks and uncertainties, including the uncertainty of future
operating results, fluctuations in quarterly results, a change in the mix of
products, a decline in INQUIRE/Text sales and the reliance on VFC, lengthy
sales and implementation cycles, rapid technological changes and product
obsolescence, competition, risks associated with sales channels, and
dependence on government contracts and security clearances.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY OVERVIEW
The Company provides electronic document management software and systems to
corporate and government workgroups, departments and enterprises. Prior to
1994, the strength of the Company was in the sales, support, and maintenance
of INQUIRE(R)/Text, one of the most respected full-text retrieval products
used for storing, indexing, retrieving and managing large collections of
documents on IBM and IBM-compatible mainframes. In 1994, the Company began to
broaden its focus to provide a wider range of document and information
management solutions deliverable through client/server, internet and intranet
technology, in addition to INQUIRE/Text-based solutions. As part of this
effort, the Company acquired Merex, Inc., a systems integrator and software
company in 1995 and AMBIA(R) Corporation (AMBIA), a software products company
in 1997. In addition, the Company made, and continues to make, a significant
investment in new software products. As a result, the Company believes it is
well-positioned to address the requirements of the electronic document market.
In 1997, the Company's revenue derived from consulting, client/server
software, and internet and intranet technologies increased by $1,242,000 or
18% from $6,778,000 in 1996 to $8,020,000 in 1997. In the three months ended
March 31, 1998, revenue from these sources increased $1,094,000 or 85%
compared to the first three months of 1997. As a percentage of total revenue,
these sources have increased from 46% in 1994, to 71% of the Company's revenue
in 1996 to 75% in 1997 and to 82% during the first quarter of 1998.
In January 1997, the Company introduced the Virtual File Cabinet(TM) (VFC),
and began to market VFC in the second quarter of 1997. The Company anticipates
that VFC will constitute an increasing percentage of the Company's revenue for
the foreseeable future. In December 1997, the Company entered into an
agreement with Adobe Systems Incorporated to cross license and co-market
certain technologies (the "Cross-License Agreement"). Based on the most recent
extensions, the Company expects to receive more than $900,000 in consulting
fees pursuant to an agreement ("Consulting Agreement") entered into in
connection with the Cross-License Agreement for modifications to certain of
its technologies so that it can be incorporated into future Adobe products.
This represents a $200,000 increase over the original Agreement. Through the
first quarter of 1998, the Company recognized approximately $705,000 in
revenue under this Agreement, of which $355,000 was recognized during the
first quarter of 1998. The Company recognizes revenue from its services in
both 1997 and 1998 on a percentage of completion basis. The Consulting
Agreement may be terminated by Adobe upon 30 days' written notice and payment
of 10% of the next unpaid installment of the consulting fee. Upon acceptance
of the modifications by Adobe, the Company will earn a license fee of
$1,000,000. Although the Company has received approximately 50% of the license
fee under the Cross-License Agreement, any license fees received by the
Company are subject to refund if the Company fails to deliver an acceptable
final product to Adobe. The Company has not and will not recognize any revenue
9
with respect to these license fees until the product has been accepted and the
fees are no longer refundable, which is expected to occur in the second half
of 1998. As a result of the Agreement, certain Adobe products will display a
"VFC Button" that will provide a direct link to VFC or to VFC marketing
information if the user does not have VFC. Adobe will receive royalties based
on any sales of VFC arising out of this marketing arrangement, and will also
receive commissions for any VFC sales that it makes directly.
The Company has targeted the marketing of VFC to leading companies in specific
industry niches in order to gain faster recognition. These industries include
finance, high technology and the government. The company has sold VFC to
various organizations in these areas including State Street Bank, PNC, AT&T,
and the Department of Energy. The Company expects that these customers will
help it in the future both as references and through further sales within the
customers' organizations. The sales cycle for initial sales of VFC has ranged
from three to nine months. The Company believes that the sales cycle for
repeat sales to customers may be shorter. VFC has been licensed at an
introductory price of $4,995 per server. Effective April 1, 1998, the Company
increased the price of VFC to $9,995 per server. The Company also provides
support packages and extension products at an additional price. The Company
offers annual maintenance for VFC at a cost of 20% of the purchase price
recognized over the course of the maintenance period. For the quarter ended
March 31, 1998, maintenance revenues for VFC were immaterial.
On July 22, 1997, the Company acquired all of the common stock of AMBIA in
exchange for 400,000 shares of the Company's Common Stock with a fair value of
$7.75 per share, which was the trading price of the Company's Common Stock on
such date. As a result of the acquisition, outstanding options to purchase
390,000 shares of AMBIA common stock were converted into options to acquire
approximately 35,000 shares of the Company's Common Stock at an exercise price
of $1.69 per share. The fair value of the options is recorded as part of the
acquisition cost. The total acquisition cost was approximately $3,461,000,
including the direct costs of the acquisition. Approximately $3,292,000 was
allocated to goodwill, $25,000 was allocated to acquired tangible assets and
$144,000 was allocated to acquired intangible assets, which did not include
AMBIA's work force. The Company did not allocate any amount to AMBIA's work
force because of the Company's belief that businesses located in Silicon
Valley, such as AMBIA, experience high personnel turnover. The acquired
intangible assets and goodwill are being amortized over two years and seven
years, respectively. The acquisition was treated as a purchase. AMBIA is now a
wholly-owned subsidiary of the Company.
On February 20, 1998, the Company completed a secondary public offering of its
common stock. The gross proceeds of the offering were $8,000,000, which
consisted of 1,600,000 shares priced at $5.00 per share. After the expenses of
the offering including the underwriters' fees, legal fees, accounting fees,
blue sky fees, registration costs, printing and engraving costs, and other
miscellaneous fees, the resultant net proceeds were approximately $6,600,000.
On April 2, 1998, the underwriters informed the Company of their intent to
exercise an over-allotment option they had been granted to the extent of
50,000 shares. That transaction closed on April 7, 1998 and the Company
received an additional $250,000 in gross proceeds. After expenses, the
additional net proceeds were estimated to be $220,000. Thus, the total net
proceeds of the offering were approximately $6,820,000.
At March 31, 1998, the Company had a net operating loss ("NOL") aggregating
approximately $9,152,000 available to affect future taxable income. Under
10
Section 382 of the Internal Revenue Code of 1986, as amended ("Code"),
utilization of prior NOLs is limited after an ownership change, as defined in
Section 382, to an amount equal to the value of the loss corporation's
outstanding stock immediately before the date of the ownership change
multiplied by the federal long-term tax-exempt rate in effect during the month
that the ownership change occurred. As a result of the AMBIA acquisition, the
Company is subject to limitations on the use of its NOL as provided under
Section 382. Accordingly, there can be no assurance the Company will be able
to utilize a significant amount of NOLs.
Any amounts paid by customers prior to the actual performance of services are
recorded as deferred revenue until earned, at which time they are recognized
in accordance with the type of contract. The margins realized on transactions
involving deferred revenue depend on the type of service rendered by the
Company. In general, most deferred revenue is generated by software
maintenance contracts or software licenses that traditionally have high
margins. Most of the Company's maintenance revenue pertains to INQUIRE/Text.
The Company's costs under maintenance contracts associated with this product
are generally low and consequently, the gross margin is typically high. The
balance of deferred revenue generally relates to consulting services, which
carry lower margins than maintenance contracts.
The components of the Company's cost of revenue depend on the product or
service. For consulting, the most significant item is the direct labor cost of
the consultants. Other components include any subcontractor costs, any
non-labor direct costs such as travel and any associated indirect costs (e.g.,
office rent, administration, etc.) allocated to the consulting engagement.
Indirect costs are allocated based on head count and square footage of office
space. For third-party product sales, the cost of revenue includes the cost
incurred by the Company to acquire the product, shipping and delivery charges,
associated taxes, any customization work done by the Company, and any special
packaging costs incurred prior to shipment. The cost of maintenance revenue
includes the customer service and software engineering personnel supporting
the product and an allocation of associated indirect costs based on head count
and square footage of office space. For products that have been developed
internally, the Company includes shipping, delivery, packaging, production,
the direct labor of personnel involved in delivering and installing the
product and any associated expenses involved with the installation.
Future operating results will depend upon many factors, including the demand
for the Company's products, the effectiveness of the Company's efforts to
integrate various products it has developed or acquired and to achieve the
desired levels of sales from such product integration, the level of product
and price competition, the length of the company's sales cycle, seasonality of
individual customer buying patterns, the size and timing of individual
transactions, the delay or deferral of customer purchases and implementations,
the budget cycles of the Company's customers, the timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of sales by products, services and distribution channels, acquisitions by
competitors, the ability of the Company to develop and market new products and
control costs, and general domestic economic and political conditions.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to the Three Months Ended March 31,
1997
11
REVENUES
Total revenue increased by $869,000, or 43%, from $2,041,000 for the three
months ended March 31, 1997 to $2,910,000 for the three months ended March 31,
1998. The Company derived revenues from consulting services, sales from the
Company's VFC family of software products, sales of INQUIRE/Text-related
products and maintenance related thereto, and sales of third party products.
Revenues from consulting services and third party products increased by
$834,000, or 65%, from $1,281,000 for the three months ended March 31, 1997 to
$2,115,000 for the three months ended March 31, 1998. This was due to an
increase in the size and number of consulting engagements. The VFC family of
products which includes the Company's VFC and AMBIA software products were
introduced during 1997 and produced $266,000 in revenue during the first
quarter of 1998. The first sale of these products was recorded in the third
quarter of 1997. Revenue generated primarily from INQUIRE/Text-related
products and maintenance decreased by $231,000, or 30%, from $760,000 for the
three months ended March 31, 1997 to $529,000 for the three months ended March
31, 1998. Of this decrease, recurring INQUIRE/Text maintenance revenue
declined 15% compared to the same quarter last year. The Company expects that
INQUIRE/Text-related revenues will continue to decline over time as customers
move applications off mainframes.
GROSS PROFIT
Gross profit increased by $447,000 or 65%, from $691,000 for the three months
ended March 31, 1997 to $1,138,000 for the three months ended March 31, 1998.
The increase in gross profit was due primarily to increased revenue and
increased margins in consulting. In addition, the VFC family of products
helped the Company's gross profit, but this was generally offset by the
decline in INQUIRE/Text-related revenues.
Gross margin as a percent of revenues increased by 5% from 34% for the three
months ended March 31, 1997 to 39% for the three months ended December 31,
1998. The increase was due to increased margins in the consulting business.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $237,000, or 65%, from $367,000
for the three months ended March 31, 1997 to $604,000 for the three months
ended March 31, 1998. The principal cause of the increase was the continued
development of the VFC family of products. During 1997, research and
development increased significantly during the last two quarters of the year
(the quarters ended September 30, 1997 and December 31, 1997). Management
expects that quarterly research and development expenses during 1998 will be
consistent with the level of research and development expenditures during
these quarters.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $68,000, or 6%, from
$1,207,000 for the three months ended March 31, 1997 to $1,275,000 for the
three months ended March 31, 1998. The increase was due primarily to increases
in marketing expenditures related to the sale of the VFC family of products.
In addition, the Company's amortization of goodwill associated with the
acquisition of AMBIA Corporation increased expenses by $141,000 compared to
the first quarter of 1997. Management expects that selling and marketing
expenses will continue to increase at a moderate rate for the duration of 1998
as the Company expands its sales of the developing VFC family of products.
12
Management expects general and administrative expenses to remain stable
throughout 1998.
INTEREST INCOME AND EXPENSE
Net interest income increased $ 13,000, or 57%, from $23,000 for the three
months ended March 31, 1997 to $36,000 for the three months ended March 31,
1998. The increase was due to higher balances of cash, cash equivalents, and
short-term investments during the three months ended March 31, 1998. These
balances increased significantly during the first quarter of 1998 as a result
of the Company's secondary financing. The Company invested only in short-term,
highly liquid money market instruments.
NET LOSS
Net loss decreased $150,000, from $855,000 for the three months ended March
31, 1997 to a net loss of $705,000 for the three months ended March 31, 1998.
The decrease was due to the factors discussed above. There was no preferred
stock outstanding in either 1997 or 1998. As of March 31, 1997, net loss
amounted to $855,000 or $0.37 per share on both a basic and diluted basis. For
the three months ended March 31, 1998, the net loss was $705,000, or $0.20 per
share on both a basic and diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash, cash equivalents and short-term
investments of $5,213,000 and a working capital surplus of $4,786,000. The
Company had no borrowings as of March 31, 1998. The Company maintains a line
of credit with Merrill Lynch Business Financial Services, Inc. for up to
$1,000,000 based upon eligible receivables. Interest on this debt is
calculated at a per annum rate equal to the sum of 2.9% plus the 30-day
commercial paper rate. Currently, this per annum rate approximates prime. The
facility expires in July 1998, and the Company expects to renew it at that
time. The line of credit is contingent upon the Company continuing to meet
certain general funding requirements, including the absence of any material
adverse change in the Company's business or financial condition, the continued
accuracy of the Company's representations and warranties and the provision of
annual and quarterly financial information. The Company is currently in
compliance with these funding requirements. During the first quarter of 1998,
the Company paid off the line of credit in full.
Net cash used in operating activities for the three months ended March 31,
1998 of $935,000 was due to the Company's net loss for the period of $705,000,
a decrease in prepaid assets of $36,000, a decrease in accrued expenses of
$63,000, and a decrease in accounts payable of $1,130,000, partially offset by
an decrease in accounts receivable of $568,000, depreciation and amortization
expense of $230,000, and an increase in other assets of $204,000.
Net cash used in investing activities of $31,000 for the three months ended
March 31, 1998 was due to purchases of property and equipment.
Net cash provided by financing activities of $5,891,000 was due to the
proceeds received from the secondary financing of $6,779,000 and proceeds from
short-term borrowing of $116,000, offset by $996,000 used to pay off the
Company's line of credit in full.
13
Net cash flow from operating activities for the three months ended March 31,
1998 were not sufficient to fund the operations of the business. However,
based upon the Company's expectations of growth in future revenues from both
its consulting business and its VFC family of products, and based on the
successful financing completed on February 20, 1998, management believes that
available and projected resources will be sufficient to meet its working
capital requirements through December 31, 1998 and beyond.
Effective February 17, 1998 and completed February 20, 1998, the Company sold
1,600,000 shares of common stock in an underwritten public offering for a
price of $5.00 per share, or a total of $8.0 million. The Company plans to use
approximately $5.6 million of the net proceeds from the offering to expand the
Company's sales and marketing activities, for research and development, and
for working capital and general corporate purposes. Approximately $1.0 million
of the proceeds were used to pay off institutional debt.
Since December 31, 1997, the Company has continued to incur losses and
management's projections indicate that the Company will continue to generate
operating losses and negative cash flow through the third quarter of 1998. The
Company expects to operate on a positive cash flow basis beginning in the
fourth quarter of 1998, as a result of increased sales of the VFC family of
products and improved consulting margins. The Company estimates that the VFC
family will account for approximately 25% to 30% of the Company's revenues in
1998. However, there can be no assurance that this will be the case. The
Company expects that, on a per product basis, the gross margin on VFC related
sales will range from 60% to 75%, although there can be no assurance that this
will be the case. The first sale of VFC was not recorded until the third
quarter of 1997. The Company believes VFC sales will increase, at a minimum,
through the end of the year 2000. There can be no assurance, however that VFC
sales will increase, or if they increase, that they will continue to do so
through the year 2000 or that revenues from such sales will grow. The
Company's actual cash requirements may vary materially from those now planned
and will depend upon numerous factors, including the general market acceptance
of the Company's new and existing products and services, the growth of the
Company's distribution channels, the technological advances and activities of
competitors, and other factors. If the Company is not successful in developing
and marketing VFC, the Company's cash flow will be materially and adversely
affected, and the Company may need to implement certain cost control measures
or obtain additional financing. There can be no assurance such financing will
be available on reasonable terms or at all. If such financing is not available
the Company will be materially and adversely affected. Even if such financing
is available, it may involve significant dilution to the then holders of
Common Stock.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-QSB RELATING TO PRODUCT
DEVELOPMENT, REVENUE AND THE ADEQUACY OF WORKING CAPITAL ARE BASED ON CURRENT
EXPECTATIONS THAT INVOLVE UNCERTAINTIES AND RISKS ASSOCIATED WITH NEW PRODUCTS
INCLUDING, BUT NOT LIMITED TO, MARKET CONDITIONS, SUCCESSFUL PRODUCT
DEVELOPMENT AND ACCEPTANCE, THE INTRODUCTION OF COMPETITIVE PRODUCTS, ECONOMIC
CONDITIONS, AND THE TIMING OF ORDERS FOR PRODUCTS. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM CURRENT EXPECTATIONS. READERS ARE CAUTIONED
NOT TO PUT UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS
ANY INTENT OR OBLIGATION TO UPDATE PUBLICLY THESE FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Document
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27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. The Company filed a Form 8-K on February 20, 1998
at the direction of the Nasdaq Stock Market's Listing Qualifications Panel to
demonstrate compliance with the minimum capital and surplus requirement and to
request continued listing on the Nasdaq stock market. The Company believes it
is in full compliance with the new standards for continued listing on Nasdaq.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INFODATA SYSTEMS INC.
BY: /s/JAMES A. UNGERLEIDER
------------------------
James A. Ungerleider
President and CEO
Date: May 14, 1998
BY: /s/CHRISTOPHER P. DETTMAR
--------------------------
Christopher P. Dettmar
Chief Financial Officer
15