SECURITIES AND EXCHANGE COMMISSION Washington, DC FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - ----- EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 -------------- 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 0-28284 INFONAUTICS, INC. (exact name of registrant as specified in its charter) Pennsylvania 23-2702366 ------------ ---------- (State of other jurisdiction (IRS Employer ID No.) of incorporation of organization) 900 West Valley Road, Suite 1000, Wayne, Pa 19087 -------------------------------------------------- (Address of principal executive offices) (610) 971-8840 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at September 30, 1996 ----- ----------------------------- Class A Common Stock, no par value 9,386,834 Class B Common Stock, no par value 100,000 1 INFONAUTICS, INC. INDEX Page Number ----------- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets (unaudited) as of September 30, 1996 and December 31, 1995 3,4 Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 30, 1996 and September 30, 1995 5 Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 1996 and September 30, 1995 6 Notes to Consolidated Financial Statements 7,8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements INFONAUTICS, INC. Consolidated Balance Sheets (unaudited) September 30, December 31, 1996 1995 ------------ ------------ Assets Current assets: Cash and cash equivalents. . . . . . . . . . $ 14,438,936 $ 962,010 Short-term investments 17,533,744 -- Receivables: Trade. . . . . . . . . . . . . . . . . . 246,540 125,345 Other. . . . . . . . . . . . . . . . . . 65,208 250,000 Prepaid expenses and other assets. . . . . . 419,066 92,210 ------------ ------------ Total current assets. . . . . . . . 32,703,494 1,429,565 Property and equipment, net. . . . . . . . . . 1,423,746 816,261 Prepaid and other assets . . . . . . . . . . . 165,116 156,635 Deferred financing costs . . . . . . . . . . . -- 130,000 ------------ ------------ Total assets. . . . . . . . . . . . . $ 34,292,356 $ 2,532,461 ------------ ------------ ------------ ------------ Liabilities and Shareholders' Equity (Deficit) Current liabilities: Note payable - funding agreement . . . . . . $ -- $ 94,245 Accounts payable . . . . . . . . . . . . . . 721,012 756,169 Due to officer . . . . . . . . . . . . . . . -- 48,500 Accrued expenses . . . . . . . . . . . . . . 505,310 1,544,172 Deferred revenue . . . . . . . . . . . . . . 673,702 500,000 ------------ ------------ Total current liabilities . . . . . . 1,900,024 2,943,086 Note payable - funding agreement . . . . . . . -- 138,192 ------------ ------------ Total liabilities . . . . . . . . . . 1,900,024 3,081,278 ------------ ------------ Commitments and contingencies Shareholders' equity (deficit): Preferred stock, no par value. . . . . . . . -- -- Class A common stock, no par value; 25,000,000 shares authorized; one vote per share; 9,386,834 and 5,935,748 shares issued and outstanding at September 30, 1996 and December 31,1995 -- -- Class B common stock, no par value; 100,000 shares authorized, issued and outstanding; 50 votes per share . . . . . . . . . . . -- -- 3 Additional paid-in capital . . . . . . . . . 53,359,836 11,313,997 Deferred compensation. . . . . . . . . . . . (406,250) -- Accumulated deficit. . . . . . . . . . . . . (20,544,316) (11,505,336) ------------ ------------ 32,409,270 (191,339) ------------ ------------ Less notes and stock subscription receivables. (16,938) (357,478) ------------ ------------ Total shareholders' equity (deficit). . . . 32,392,332 (548,817) ------------ ------------ Total liabilities and shareholders' equity. $ 34,292,356 $ 2,532,461 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of the financial statements. 4 INFONAUTICS, INC. Consolidated Statements Of Operations (unaudited) Three months ended Nine months ended September 30, 1996 September 30, 1996 ---------------------------- ---------------------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- Revenues . . . . . . . . . . . . . . . . . $ 315,011 $ 114,772 $ 934,683 $ 267,164 ------------- ------------- ------------- ------------- Costs and expenses: Cost of revenues.. . . . . . . . . . . 174,190 60,255 487,428 140,261 Customer support expenses. . . . . . . 80,373 48,570 216,438 87,128 Development expenses . . . . . . . . . 1,386,972 984,419 3,921,080 2,144,063 Sales and marketing expenses . . . . . 1,495,838 537,687 3,548,589 1,030,202 General and administrative expenses. . 1,033,924 546,504 2,569,824 1,342,096 ------------- ------------- ------------- ------------- Total costs and expenses. . . . . . 4,171,297 2,177,435 10,743,359 4,743,750 ------------- ------------- ------------- ------------- Loss from operations. . . . . . . . . . . (3,856,286) (2,062,663) (9,808,676) (4,476,586) Interest and investment income (expense), net . . . . . . . . 434,726 2,635 769,696 (4,920) ------------- ------------- ------------- ------------- Net loss. . . . . . . . . . . . . $(3,421,560) $(2,060,028) $(9,038,980) $(4,481,506) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Net loss per common equivalent share . . . $ (0.36) $ (0.34) $ (1.05) $ (0.74) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common and equivalent shares outstanding . . .. . . 9,486,834 6,062,289 8,638,402 6,062,289 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- The accompanying notes are an integral part of the financial statements. 5 INFONAUTICS, INC. Consolidated Statements Of Cash Flows (unaudited) Nine months ended September 30, -------------------------------- 1996 1995 ------------- ------------- Cash flows from operating activities: Net Loss . . . . . . . . . . . . . . . . . . . . . $ (9,038,980) $ (4,481,506) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization. . . . . . . . . 375,732 189,036 Amortization of deferred compensation. . . . . 93,750 -- Common stock issued for services -- 99,098 Changes in operating assets & liabilities: Receivables: Trade . . . . . . . . . . . . . . . . . . (121,195) (77,443) Other . . . . . . . . . . . . . . . . . . 184,792 (58,130) Prepaid expenses and other assets . . . . . (326,856) (134,210) Prepaid and other assets . . . . . . . . . (8,481) (46,040) Accounts payable. . . . . . . . . . . . . . (35,157) 13,960 Accrued expenses. . . . . . . . . . . . . . (1,038,862) 368,113 Deferred revenue. . . . . . . . . . . . . . 173,702 (14,000) ------------- ------------- Net cash used in operating activities . (9,741,555) (4,141,122) ------------- ------------- Cash flows from investing activities: Purchases of property and equipment. . . . . . . . (983,217) (478,091) Purhase of investments, net . . . . . . . . . . . (17,533,744) -- ------------- ------------- Net cash used in investing activities . (18,516,961) (478,091) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock, net. . . . 42,016,379 6,453,838 Payments under note payable - funding agreement. . (232,437) (4,572) Proceeds from long-term borrowings and note payable. . . . . . . . . . . . . . . . . . . . . - 31,000 Repayment of loans to officer. . . . . . . . . . . (48,500) (36,375) ------------- ------------- Net cash provided by financing activities . . . . . . . . . . . . . 41,735,442 6,443,891 ------------- ------------- Net increase in cash and cash equivalents . . . . . . . . . . 13,476,926 1,824,678 Cash and cash equivalents, beginning of period . . . 962,010 718,364 ------------- ------------- Cash and cash equivalents, end of period . . . . . . $ 14,438,936 $ 2,543,042 ------------- ------------- ------------- ------------- Supplemental disclosure of cash flow information and noncash investing and financing activities: Cash paid for interest expense . . . . . . . . 58,916 6,654 Noncash items: Issuance of stock for note and subscription receivable . . . . . . . . . -- 54,000 The accompanying notes are an integral part of the financial statements. 6 INFONAUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited financial statements of Infonautics, Inc. (the "Company") presented herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that the disclosures in this Report are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements for the year ended December 31, 1995 and the notes thereto included in the Company's Registration Statement on Form S-1 (No. 333-2428). The financial information in this report reflects, in the opinion of management, all adjustments of a normal recurring nature necessary to present fairly the results for the interim period. Quarterly operating results may not be indicative of results which would be expected for the full year. 2. Private Placement and Initial Public Offering On February 26, 1996, the Company completed a private placement in which it issued 1,201,086 shares of Class C Common Stock with proceeds to the Company of approximately $12.9 million, which is net of approximately $0.8 million of offering expenses. In May 1996, the Company completed an initial public offering of 2,250,000 shares of its Class A Common Stock at $14.00 per share. The proceeds to the Company, net of underwriting discounts, commissions and offering expenses were approximately $28.7 million. Concurrent with the closing of the initial public offering, all outstanding shares of Class C Common Stock were converted into an equal number shares of Class A Common Stock. 2. Cash and Cash equivalents Cash equivalents are carried at cost, and consist primarily of highly liquid money market instruments which approximate fair value. 3. Investments The Company invests certain of its excess cash in debt instruments of the U.S. Government, its agencies, and of high quality corporate issuers. All highly liquid instruments with an original maturity of three months or less are considered cash equivalents; those with original maturities greater than three months are considered short-term investments. The Company has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115) and, accordingly, has classified all investments as available-for-sale. At September 30, 1996, all investments were short-term and consisted primarily of corporate debt securities and debt instruments of the U.S. Government and U.S. Government agencies. At December 31, 1995, the Company did not hold any short-term or long-term investments. Unrealized holding gains at September 30, 1996 were not significant. 7 4. Shareholders' Equity In February 1996, the Board of Directors of the Company authorized the following, which were subsequently approved by the shareholders in April 1996: (i) an amendment to the Company's Articles of Incorporation, changing the name of the Company from Infonautics Corporation to Infonautics, Inc.; (ii) an increase in the number of authorized shares of Class A Common Stock to 25,000,000; (iii) a 2-for-1 stock split in the form of a stock dividend; (iv) a 500,000 increase in the number of shares of Class A Common Stock that may be issued under the 1994 Omnibus Stock option plan and (v) the adoption of the 1996 Equity Compensation plan, which provides for the issuance of a maximum of 500,000 shares of Class A Common Stock pursuant to grants of stock options, stock appreciation rights, restricted stock or performance units. 5. Net Loss Per Common Equivalent Net loss per common equivalent share is computed based upon the weighted average number of common shares outstanding during the periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin Topic 4-D, all common shares and common equivalent shares issued by the Company during the twelve-month period prior to the Company's initial public offering have been included in the calculation as if they were outstanding, using the treasury stock method, for all periods presented, at the initial public offering price of $14.00 per share. Outstanding common stock equivalents have not been included in computation of common equivalent shares for the period subsequent to the IPO. 6. Revenue Recognition Through December 31, 1995, all the Company's revenues were derived from licensing its service to Prodigy. Revenues are recorded at the amount received from Prodigy, net of Prodigy's fees. Revenues through September 30, 1996 include Prodigy related subscriptions, subscription revenue from the sale of the Company's services over the Internet and revenue from the licensing of the Company's core technology, the Electronic Printing Press. Revenues from subscriptions are recognized in the month the subscription service is provided for subscriptions to the consumer market. In the three months ended September 30, 1996, revenue from the sale of the Company's service over the Internet included sales to the institutional market, which include schools and libraries. These agreements have up to twelve month terms. Deferred revenue from these subscription agreements are recorded and recognized over the term of the contract, beginning with the month the service is commenced. Costs incurred with the procurement of the subscriptions and the delivery of the service are expensed as incurred. License fees are recognized when delivery and services related to the license agreement are complete. Payments received in advance of providing services or for a long-term license are deferred until the period such services are provided. 7. Commitments The Company leases its facilities and certain other equipment under operating agreements expiring through 2000. Future noncancelable minimum payments as of September 30, 1996 under these leases, for each fiscal year ended December 31 are as follows: 1997 $ 755,000 1998 667,000 1999 385,000 2000 183,000 ---------- $1,990,000 ---------- ---------- 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Report contains, in addition to historical information, forward looking statements by the Company with regard to its expectations as to financial results and other aspects of its business that involve risks and uncertainties and may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding the Company's accrued and mandatory contributions to the royalty pool for content providers, changes in the number of publications available on the services, anticipated increases in data preparation costs, growth and expansion plans and the sufficiency of the Company's liquidity and capital. Such statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Factors that may cause such a difference include, but are not limited to, those described under "Risk Factors" in the Company's Prospectus dated April 29, 1996, issued in connection with the Company's Registration Statement on Form S-1 (333-2428). Financial information discussed in this report is rounded to the nearest thosuand. Results of Operations Revenues Revenues were $315,000 for the three months ended September 30, 1996 compared to $115,000 for the three months ended September 30, 1995. For the nine month period ended September 30, 1996, revenues were $935,000, compared to $267,000 for the same period a year earlier. During the nine months ended September 30, 1996, revenue was recognized from the Homework Helper service on Prodigy, the Electric Library service available on the Internet and, for the first time, from the licensing of the Company's core technology underlying Homework Helper and Electric Library, which is known as the Electronic Printing Press. All 1995 revenue is attributable to subscription and hourly usage fees of the Homework Helper service on Prodigy, which was introduced by the Company during the first quarter of 1995. Revenues in the third quarter were $315,000 compared to $430,000 in the second quarter 1996. Revenues in the third quarter were primarily from sales in the consumer market (month to month Electric Library and Homework Helper subscriptions) and the institutional market(long-term Electric Library subscriptions). During the third quarter of 1996, Electric Library revenue increased as the subscriber base grew from 3800, at June 30, 1996, to approximately 5,900 at September 30, 1996, with over half the increase occurring in the month of September, the beginning of the school year. Homework Helper monthly subscribers decreased from approximately 8,300 at June 30, 1996, to 6,900 at September 30, 1996. Additionally, the Company recognized institutional market revenues from subscriptions with terms up to twelve months. Revenue from the long-term subscriptions is deferred and recognized ratably over the term of the agreement, commencing with the month the service begins. Deferred revenue increased during the three months ended September 30, 1996 from approximately $500,000 to $674,000 as a result of institutional market subscriptions described above. Costs and Expenses Cost of Revenues. Cost of revenues consists primarily of royalties and license fees paid to providers of content, hardware and software, as well as communication costs associated with the delivery of the online services. Cost of revenues were $174,000 (or 55% of revenues) for the three months ended September 30, 1996, as compared to $60,000 (or 53% of revenues) for the same period in 1995. Cost of revenues for the nine months ended September 30, 1996 and 1995 were $487,000 (52% of revenues) and $140,000 (52% of revenues), respectively. Cost of revenues in the second quarter, 1996 was 46% of revenues compared to the third quarter cost of revenues which was 55% of revenues. The increase in cost of revenues in the third quarter is primarily due to second quarter 1996 revenues from licensing the Electronic Printing Press which has a greater gross margin than the Company's subscription services. In addition, in order to attract new content providers and retain existing ones, the Company began offering content providers the option to participate in a minimum royalty pool, payable at the end of the contract period, June 1997. As a result, the Company accrued $25,000 for the three months ended September 30, 1996 to supplement the royalty pool for those providers participating in the minimum pool. Beginning in 1997, and to a lesser extent during the fourth quarter of 1996, the Company expects to reduce its reliance on content aggregators and, instead, attempt to contract directly with the publishers represented by such aggregators. It is expected that this will result in changes in the number of publications available on the services. In addition, the combination of contracting directly with publishers, and the Company's overall effort to increase the content available under its Electric Library and Homework Helper services will result in an increase in data preparation costs, which to date have not been material. However, although there can be no assurance, the Company believes that any changes in the number of publications on the services or the increase in data preparation costs will not have a material adverse effect on the Company. 9 Customer Support. Customer support expenses consist primarily of costs associated with the staffing of professionals responsible for assisting users with technical and product issues and monitoring customer feedback. Customer support expenses were $80,000 for the three months ended September 30, 1996 compared to $49,000 for the same period in 1995. For the nine months ended September 30, 1996 and 1995, customer support expenses were $216,000 and $87,000, respectively. The increase corresponds with the increase in revenues as the Company increased staff to support both the Homework Helper and Electric Library internet consumer and institutional market services. Development. Development expenses consist primarily of costs associated with the design, programming, testing, documentation and support of the Company's new and existing software and services. Development expenses were $1,387,000 for the three months ended September 30, 1996, as compared to $984,000 for the same period in 1995. For the nine months ended September 30, 1996 and 1995, development expenses were $3,921,000 and $2,144,000, respectively. Development expenses for the three and nine months ended September 30, 1996 were greater than the comparable periods last year due to the growth of the development staff in order to support increased development activities, and continued enhancements and improvements to the Company's service. Development expense in the third quarter of 1996 was $200,000 greater than the previous quarter, attributable to a full quarter of payroll costs for staff added in the second quarter. Sales and Marketing. Sales and marketing costs consist primarily of costs related to compensation, attendance at conferences and trade shows, advertising, promotion and other marketing programs. Sales and marketing expenses were $1,496,000 for the three months ended September 30, 1996, as compared to $538,000 for the same period in 1995. Sales and marketing expenses were $3,549,000 for the nine months ended September 30, 1996, as compared to $1,030,000 for the same period in 1995. The increase was a result of the continued efforts to increase sales and expand distribution channels. Promotional marketing programs increased, mainly to support the introduction of Electric Library, and the number of sales and marketing personnel grew. The Company anticipates further increasing the size of its sales and marketing staff and expects to incur significant increased expenditures for promotional and advertising activities. General and Administrative. General and administrative expenses consist primarily of expenses for administration, office operations, finance and general management activities, including legal, accounting and other professional fees. General and administrative expenses were $1,034,000 for the three months ended September 30, 1996, as compared to $547,000 for the same period in 1995, or an 89% increase. For the nine months ended September 30, 1996 and 1995, general and administrative expenses were $2,570,000 and $1,342,000, respectively. The increases in general and administrative expense were due to the expansion of internal staffing, increased costs relating to the licensing of additional content and the maintenance of existing content, and increases in professional service fees to support the Company's expanded operations. 10 Interest and Investment Income (Expense), net. Interest and investment income (expense), net consists of interest earned on cash, cash equivalents and investments, offset by interest expense on equipment financing, debt and a loan from an officer. Interest income (expense), net increased to $435,000 from less than $3,000 for the three months ended September 30, 1996 compared to the same period in 1995. Significant increases in interest income resulted from earnings on the proceeds of the private placement (first quarter 1996) and initial public offering funds (second quarter 1996). In addition, during the first quarter of 1996, the Company paid off its loan from an officer and debt. Liquidity and Capital Resources The Company's cash, cash equivalents and short-term investment balance was $31,973,000 at September 30, 1996, as compared to $962,000 at December 31, 1995. Net cash used in operations was $9,742,000 for the nine months ended September 30, 1996, as compared to $4,141,000 used for operations for the same period in 1995. The increase in net cash used in operations was primarily attributable to the increased net loss. Net cash used in investing activities was $18,517,000 for the nine months ended September 30, 1996, as compared to $478,000 for the same period in 1995. Investing activities consisted primarily of purchases of investments and, additionally, purchases of property and equipment. Net cash provided by financing activities was $41,735,000 for the nine months ended September 30, 1996, as compared to $6,444,000 for the same period in 1995. This increase resulted from the sale of Class C Common Stock in a private placement which generated proceeds of $12.9 million, net of offering expenses, and the completion of an initial public offering in May 1996 with proceeds totaling $28.7 million. The Company believes that cash-flow from operations together with existing cash balances and proceeds from the initial public offering will be sufficient to meet its working capital requirements for at least the next twelve months. 11 PART II. OTHER INFORMATION Item 6. Exhibits & Reports on Form 8-K (a) Exhibits: 11.1 Computation of net income (loss) per common share for the three months ended September 30, 1996 and 1995. (b) Reports on Form 8-K: None. 12 SIGNATURES Pursuant to the requirements 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. INFONAUTICS, INC. Date: November 13, 1996 /s/ Marvin I. Weinberger ---------------------------- Marvin I. Weinberger Chief Executive Officer Date: November 13, 1996 /s/ Ronald A. Berg ---------------------------- Ronald A. Berg Vice President-Finance and Administration, Chief Financial Officer (Principal Financial and Accounting Officer) 13