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 June 30, 1997
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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 23-2707366
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(State of other jurisdiction (IRS Employer ID No.)
of incorporation of organization)
900 West Valley Road, Suite 1000, Wayne, Pa 19087
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(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 JUNE 30, 1997
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Class A Common Stock, no par value.............. 9,391,627
Class B Common Stock, no par value.............. 100,000
1
INFONAUTICS, INC.
INDEX
PAGE NUMBER
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PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (unaudited)
and December 31, 1996....................................... 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 1997
and June 30, 1996........................................... 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1997 and June 30, 1996............ 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 7-9
PART II: OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K........................ 10
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFONAUTICS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
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Assets
Current assets:
Cash and cash equivalents........................................................ $ 7,215,911 $ 16,064,159
Short-term investments........................................................... 9,993,521 11,314,956
Receivables:
Trade, less allowance for doubtful accounts of
$117,566 and $31,590 in 1997 and 1996......................................... 793,910 373,509
Other.......................................................................... -- 62,406
Prepaid expenses and other assets................................................ 983,893 565,858
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Total current assets......................................................... 18,987,235 28,380,888
Property and equipment, net........................................................ 2,812,797 1,701,306
Prepaid and other assets........................................................... 161,761 145,265
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Total assets................................................................. $ 21,961,793 $ 30,227,459
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable................................................................. $ 1,155,858 $ 1,199,621
Accrued expenses................................................................. 900,064 543,920
Deferred revenue................................................................. 1,514,747 796,129
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Total current liabilities.................................................... 3,570,669 2,539,670
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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; 9,391,627 and 9,389,357 shares issued and outstanding
at June 30, 1997 and December 31, 1996......................................... -- --
Class B common stock, no par value; 100,000 shares authorized, issued
and outstanding; 50 votes per share............................................ -- --
Additional paid-in capital....................................................... 53,360,221 53,354,345
Deferred compensation............................................................ (312,500) (375,000)
Accumulated deficit.............................................................. (34,656,597) (25,291,556)
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Total shareholders' equity................................................... 18,391,124 27,687,789
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Total liabilities and shareholders' equity................................... $ 21,961,793 $ 30,227,459
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The accompanying notes are an integral part of these
consolidated financial statements.
3
INFONAUTICS, INC.
Consolidated Statements Of Operations
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1997 1996 1997 1996
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Revenues.................................................... $ 1,904,093 $ 429,531 $ 2,711,450 $ 619,672
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Costs and expenses:
Cost of revenues.......................................... 617,079 198,209 1,070,274 295,898
Customer support expenses................................. 146,993 67,159 258,047 136,065
Development expenses...................................... 1,473,012 1,178,723 2,850,294 2,534,108
Sales and marketing expenses.............................. 2,804,160 1,132,575 5,693,572 2,052,751
General and administrative expenses....................... 1,274,206 781,573 2,811,043 1,553,240
------------ ----------- ------------ -----------
Total costs and expenses................................ 6,315,450 3,358,239 12,683,230 6,572,062
------------ ----------- ------------ -----------
Loss from operations........................................ (4,411,357) (2,928,708) (9,971,780) (5,952,390)
Interest income (expense), net.............................. 272,415 326,608 606,739 334,970
------------ ----------- ------------ -----------
Net loss................................................ $(4,138,942) $(2,602,100) $(9,365,041) $(5,617,420)
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Net loss per common equivalent share........................ $ (.44) $ (.31) $ (1.00) $ (.78)
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Weighted average number of common and equivalent
shares outstanding........................................ 9,491,600 8,435,300 9,491,600 7,203,800
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
The accompanying notes are an integral part of these
consolidated financial statements.
4
INFONAUTICS, INC.
Consolidated Statements Of Cash Flows
(unaudited)
SIX MONTHS ENDED JUNE 30,
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1997 1996
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Cash flows from operating activities:
Net loss........................................................................... $(9,365,041) $(5,617,420)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization...................................................... 425,821 259,633
Provision for losses on accounts receivable........................................ 85,976 --
Amortization of deferred compensation.............................................. 62,500 62,500
Changes in operating assets and liabilities:
Receivables:
Trade.......................................................................... (506,377) (4,954)
Other.......................................................................... 62,406 215,484
Prepaid and other assets......................................................... (434,531) (128,940)
Accounts payable................................................................. (43,763) (132,969)
Accrued expenses................................................................. 356,145 (530,125)
Deferred revenue................................................................. 718,618 11,509
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Net cash used in operating activities........................................ (8,638,246) (5,865,282)
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Cash flows from investing activities:
Purchases of property and equipment................................................ (1,537,313) (498,683)
Purchases of short-term investments................................................ (9,118,565) --
Proceeds from maturity of short-term investments................................... 10,440,000 --
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Net cash provided by (used) in investing activities.......................... (215,878) (498,683)
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Cash flows from financing activities:
Net proceeds from issuance of common stock......................................... 5,876 42,019,913
Payments under note payable -- funding agreement................................... -- (232,437)
Repayment of loans to officer...................................................... -- (48,500)
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Net cash provided by financing activities.................................... 5,876 41,738,976
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Net increase (decrease) in cash and cash equivalents................................. (8,848,248) 35,375,011
Cash and cash equivalents, beginning of period....................................... 16,064,159 962,010
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Cash and cash equivalents, end of period............................................. $ 7,215,911 $36,337,021
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The accompanying notes are an integral part of these
consolidated financial statements.
5
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,
1996 and the notes thereto included in the Company's 1996 Annual Report on
Form 10-K.
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. NET LOSS PER COMMON EQUIVALENT
Net loss per common equivalent share is computed using the weighted average
number of Class A and Class B Common Shares outstanding during the periods
presented. For the three and six months ended June 30, 1996, net loss per common
equivalent share is computed pursuant to Securities and Exchange Commission
Staff Accounting Bulletin Topic 4-D, whereby 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 at the initial public
offering price of $14.00 per share. Outstanding common stock equivalents have
not been included in the computation of common equivalent shares for the period
subsequent to the IPO, in accordance with Accounting Principles Board No. 15,
"Earnings Per Share". As a result, outstanding common stock equivalents have not
been included in computation of common equivalent shares for the three and six
months ended June 30, 1997, as the effect would be anti-dilutive.
3. IMPACT OF ACCOUNTING STANDARDS ISSUED IN 1996:
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997, earlier application is not permitted.
This Statement requires restatement for all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS No. 128
will have on its financial statements.
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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 seasonality, subscriber cancellations,
increasing costs, growth and expansion plans, sales and marketing plans,
operating results, 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 1996 Annual
Report on Form 10-K. Financial information discussed in this report is
rounded to the nearest thousand. The following discussion should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUES. Total revenues were $1,904,000 for the three months ended
June 30, 1997 compared to $430,000 for the three months ended June 30, 1996.
Total revenues were $2,711,000 for the six months ended June 30, 1997
compared to $620,000 for the six months ended June 30, 1996.
Consumer revenue for the three months ended June 30, 1997 more than tripled
to $846,000, from $234,000 for the three months ended June 30,1996. Consumer
revenues were $1,334,000 for the six months ended June 30, 1997 compared to
$424,000 for the six months ended June 30, 1996.
The increase in consumer revenue was due to increased subscription revenues
from 1)the retention of existing subscribers and 2) the addition of new Electric
Library customers. Electric Library which was launched late in the first quarter
1996, had 31,300 subscribers at June 30, 1997, as compared to just 3,700 at June
30, 1996. Homework Helper, available only through Prodigy's Classic service, had
4,200 monthly subscribers at June 30, 1997, compared to 8,300 at June 30, 1996.
The Company expects to continue to see a decline in revenue from Homework Helper
subscriptions.
Institutional subscription revenue was $336,000 for the three months ended
June 30,1997 compared to $21,000 for the three months ended June 30, 1996.
Institutional subscription revenue was $501,000 for the six months ended June
30, 1997 compared to $21,000 for the six months ended June 30, 1996.
Institutional subscription revenue in the second quarter increased due to an
increase in the number of contracts with schools and institutions.
New Media Services revenue was $222,000 for the three months ended June 30,
1997 compared to $175,000 for the three months ended June 30, 1996. New Media
Services revenue was $376,000 for the six months ended June 30, 1997 compared to
$175,000 for the six months ended June 30, 1996. New Media Services revenue in
the second quarter of 1997 was generated primarily from hosting services and
integration services, while in the second quarter of 1996, New Media Services
revenue was derived from an agreement to license the Company's core technology.
An amount of $500,000 was included in second quarter 1997 revenues. This
amount was received in 1995 as consideration for limited exclusivity contained
in a marketing agreement. During the second quarter, the period of exclusivity
ended and the Company had no further obligation. Prior to the recognition as
revenue this quarter, the amount was recorded as deferred revenue.
7
Management anticipates that growth rates in the third quarter are likely
to reflect a seasonal element, given that little school related research work
is done in July and August. As a result, the Company's third quarter results
will be affected by reduced levels of traffic on the Company's Internet sites
and by customary subscriber cancellations.
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 $617,000 for the three months ended June 30, 1997, or 44% of
total revenues, excluding the $500,000 of revenue described above. Cost of
revenues for the three months ended June 30, 1996 were $198,000, or 46% of
total revenues. Cost of revenues of $1,070,000 and $296,000, for the six
months ended June 30, 1997 and 1996, respectively, were as a percentage of
revenues, 48% (excluding the $500,000 revenue described above) and 48%,
respectively. Cost of revenues, as a percentage of total revenues, varies
from period to period as the mix of revenues differs. Additionally, certain
direct costs, such as communication costs, do not increase at the same rate
as revenues.
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 $147,000 for the three months ended June 30, 1997 compared
to $67,000 for the three months ended June 30, 1996. Customer support expenses
were $258,000 for the six months ended June 30, 1997 compared to $136,000 for
the six months ended June 30, 1996. The increase in 1997 resulted primarily from
higher staffing levels and the continuing need for the Company to provide
additional support to its growing customer base. The Company anticipates
continuing to make increasing customer support expenditures as the Company
provides service to an increased number of subscribers.
DEVELOPMENT. Development expenses consist primarily of costs associated with
the design, programming, testing, documentation and support of the Company's
new and existing software, services and databases. Development expenses were
$1,473,000 for three months ended June 30, 1997 compared to $1,179,000 for
the three months ended June 30, 1996. Development expenses were $2,850,000
for the six months ended June 30, 1997 compared to $2,534,000 for the six
months ended June 30, 1996. The Company anticipates continuing to make
significant development expenditures as it develops new and enhanced services.
SALES AND MARKETING. Sales and marketing expenses consist primarily of costs
related to compensation, attendance at conferences and trade shows,
advertising, promotion and other marketing programs. Sales and marketing
costs were $2,804,000 for the three months ended June 30, 1997 compared to
$1,133,000 for the three months ended June 30, 1996. Sales and marketing
costs were $5,694,000 for the six months ended June 30, 1997 compared to
$2,053,000 for the six months ended June 30, 1996. This increase was a result
of the continued efforts to increase sales and expand distribution channels
including increases in the number of sales and marketing personnel and
expansion of promotional marketing programs, including online advertising and
attendance at school and library trade shows.
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 $1,274,000 for
the three months ended June 30, 1997 compared to $782,000 for the three
months ended June 30, 1996. General and administrative expenses were
$2,811,000 for the six months ended June 30, 1997 compared to $1,533,000 for
the six months ended June 30, 1996. The increases in general and
administrative expenses were due to the expansion of internal staffing and
increases in professional service fees to support the Company's expanded
operations.
Interest Income, net. Interest income, net, decreased to $272,000 in the
three month period ended June 30, 1997, from $327,000 for the comparable
period in 1996 due to less interest earned on lower cash, cash equivalents,
and short-term investment balances.
8
INCOME TAXES. The Company has not recorded an income tax benefit because it
has incurred net operating losses since inception.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents, and short-term investments of
approximately $17.2 million at June 30, 1997, as compared to $27.4 million at
December 31, 1996, a decrease of $10.2 million. Net cash used in operations was
$8.6 million for the six months ended June 30, 1997 compared with $5.9 million
for the comparable period in 1996, due primarily to a greater net loss in the
six month period ended June 30, 1997.
Net cash used in investing activities for the six months ended June 30, 1997
was $216,000, $1,537,000 used for capital expenditures and $1,321,000, net,
provided by investment purchases and proceeds. Net cash used in investing
activities for the six months ended June 30, 1996 was $499,000 for capital
expenditures.
Net cash provided by financing activities for the six months ended June 30,
1997 was $6,000 as a result of stock option exercises, compared to the $42
million proceeds raised in the public offering and private placement in the
comparable period in 1996.
The Company acquired $1.5 million of fixed assets during the six months
ended June 30, 1997, the most significant purchases being computer equipment to
expand the capacity of the system which was necessitated by the increase in
subscribers from consumer and institutional contracts. As of June 30, 1997 the
Company did not have any material commitments for capital expenditures for the
balance of 1997. The Company does, however, expect to purchase approximately
$500,000 of office furniture, leasehold improvements and computer equipment
through the end of 1997.
As of June 30, 1997, the Company's principal source of liquidity was
approximately $17.2 million in cash, cash equivalents and short-term
investments. The Company believes that these funds, together with other inflows
of cash, will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, any
projections of future cash needs and cash flows is subject to substantial
uncertainty. If the cash and cash equivalents balance and cash generated by
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may be required to sell additional debt or equity securities. The sale
of additional equity or debt securities, if available, could result in dilution
to the Company's stockholders.
9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Agreement of Lease dated June 14, 1994, as amended April 14,
1997 between Infonautics, Inc. and West Valley Business Trust.
Exhibit 11.1 Computation of net income (loss) per common share for the three
and six months ended June 30, 1997 and 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended
June 30, 1997.
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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: August 7, 1997 /S/ MARVIN I. WEINBERGER
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MARVIN I. WEINBERGER
Chief Executive Officer
Date: August 7, 1997 /S/ RONALD A. BERG
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RONALD A. BERG
Vice President-Finance and
Administration, Chief Financial Officer
(Principal Financial
and Accounting Officer)
11