<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
Commission File Number: 0-22325
INFORMATION ARCHITECTS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 87-0399301
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4064 Colony Road, Charlotte, NC 28211
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(Address of principal executive offices) (Zip Code)
704-365-2324
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(Registrants telephone number, including are 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 and Exchange Act of 1934
during the proceeding 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.
[X] Yes [ ] No
As of March 31, 2000, there were 29,136,827 shares of Information Architects
Corporation common stock, $0.001 par value, outstanding.
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PART I. FINANCIAL INFORMATION PAGE
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations (Unaudited) for the
Three Months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months ended March 31, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6 - 7
ITEM 2: Management's Discussion and Analysis of Financial
Condition And Results of Operations
Overview 8
Results of Operations for the Three Months Ended March 31,
2000, Compared with the Three Months ended March 31, 1999 9
Financial Condition and Liquidity 9-10
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 10
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 10
Signatures 11
Financial Data Schedule 12
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
INFORMATION ARCHITECTS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 8,879,181 $ 7,398,252
Accounts receivable, net 712,739 2,521,781
Earned and unbilled revenue 34,250 63,229
Prepaid expenses 167,631 226,607
Loan receivable, officers 137,079 14,624
Other receivables 94,783 148,010
------------ ------------
TOTAL CURRENT ASSETS 10,025,663 10,372,503
PROPERTY AND EQUIPMENT, NET 2,767,408 2,970,123
SOFTWARE COSTS, NET 1,122,560 1,169,167
TRADEMARKS, NET 79,876 82,021
DEFERRED TAX ASSET 1,800,000 1,800,000
OTHER ASSETS 263,747 317,189
------------ ------------
$ 16,059,254 $ 16,711,003
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 587,543 $ 1,961,385
Accrued payroll and commissions 143,561 39,116
Other current liabilities 460,735 927,131
Unearned revenue 159,813 71,906
Current portion of capital lease obligation 209,602 202,431
Note payable 100,000 175,000
------------ ------------
TOTAL CURRENT LIABILITIES 1,661,254 3,376,969
CONVERTIBLE DEBENTURE PAYABLE 1,939,760 1,939,760
CAPITAL LEASE OBLIGATION 100,292 151,774
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 50,000,000 shares
authorized; 29,136,827 and 27,495,515 shares issued
and outstanding respectively 29,137 27,496
Additional paid-in capital 52,820,001 48,547,900
Deficit (40,432,891) (37,276,045)
Accumulated other comprehensive loss (58,299) (56,851)
------------ ------------
12,357,948 11,242,500
------------ ------------
$ 16,059,254 $ 16,711,003
============ ============
</TABLE>
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INFORMATION ARCHITECTS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
<S> <C> <C>
REVENUE:
Product license $ 3,338 $ --
Services 516,768 --
------------ ------------
Total revenue 520,106 --
COST OF REVENUE 169,732 --
------------ ------------
GROSS PROFIT 350,374 --
OPERATING EXPENSES
Sales and marketing 915,570 --
Research and development 555,714 --
General and administrative 1,771,004 1,485,914
Depreciation and amortization 334,168 238,810
------------ ------------
3,576,456 1,724,724
------------ ------------
LOSS FROM OPERATIONS (3,226,082) (1,724,724)
OTHER INCOME (EXPENSE)
Interest income 97,559 10,228
Interest expense (66,036) (72,366)
Acquisition costs -- (165,883)
Other 37,713 --
------------ ------------
69,236 (228,022)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (3,156,846) (1,952,745)
Discontinued Operations:
Loss from operations of discontinued business -- (1,199,877)
------------ ------------
NET LOSS $ (3,156,846) $ (3,152,622)
============ ============
Basic:
Loss per share from continuing operations $ (0.11) $ (0.11)
Loss per share from discontinued operations $ -- $ (0.07)
------------ ------------
Net loss per share $ (0.11) $ (0.18)
============ ============
Diluted:
Loss per share from continuing operations $ (0.11) $ (0.11)
Loss per share from discontinued operations $ -- $ (0.07)
------------ ------------
Net loss per share $ (0.11) $ (0.18)
============ ============
Weighted average common shares outstanding:
Basic 28,316,885 17,449,668
============ ============
Diluted 28,316,885 17,449,668
============ ============
</TABLE>
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INFORMATION ARCHITECTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(3,156,846) $(3,152,622)
Adjustments to reconcile net loss to net
cash used in operating activities:
Allowance for doubtful accounts (75,000) --
Depreciation and amortization 334,168 597,024
Decrease (increase) in assets:
Accounts receivable 1,884,042 1,537,270
Earned and unbilled revenue 28,979 (2,077,287)
Prepaid expenses and other current assets 58,976 102,506
(Decrease) increase in liabilities:
Accounts payable (1,373,842) (255,454)
Accrued payroll and commissions 104,445 637,770
Other current liabilities (433,379) 1,242,268
Unearned revenue 13,907 336,445
----------- -----------
Total adjustments 542,296 2,120,542
----------- -----------
Net cash used in operating activities (2,614,550) (1,032,080)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (41,718) (735,754)
Additions of computer software -- (143,894)
Decrease (increase) in other assets 53,442 (62,759)
Decrease (increase) in other receivables 53,227 (248,788)
----------- -----------
Net cash provided by (used in) investing activities 64,951 (1,191,195)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock 4,272,294 153,494
Advances to officers (122,455) --
Loans from stockholders -- 70,946
Repayment of stockholders' loans -- (1,299,900)
Proceeds from loans -- 3,000,000
Repayment of loans (75,000) --
Repayment of capital lease obligations (44,311) (11,802)
----------- -----------
Net cash provided by financing activities 4,030,528 1,912,738
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,480,929 (310,537)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 7,398,252 2,962,570
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 8,879,181 $ 2,652,033
=========== ===========
SUPPLEMENTAL DISCLOSURES
INTEREST PAID $ 19,361 $ 76,822
=========== ===========
UNREALIZED CURRENCY (LOSSES) GAINS $ (1,448) $ 54,391
=========== ===========
</TABLE>
During the first quarter of 2000, we acquired software valued at $74,000 as
partial consideration for an outstanding accounts receivable balance.
During the first quarter of 1999, we acquired computer software for $750,000 of
our common stock.
During the first quarter of 1999, a former officer paid an amount owed to us
with 66,667 share of common stock (valued at $400,000) and real estate, held for
sale (valued at $400,000).
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INFORMATION ARCHITECTS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1 The interim unaudited financial statements as of March 31, 2000 and 1999
and for the three month periods then ended, reflect all adjustments that,
in the opinion of management, are necessary for a fair statement of the
results for the interim periods presented. All adjustments were of a
normal recurring nature. Certain items in the 1999 financial statements
have been reclassified to conform to the 2000 classification.
2 No tax benefit was recorded for the three-month periods ended March 31,
2000 and 1999, due to uncertainty of realization.
3 We have adopted Financial Accounting Standards Board ("FASB") Statement
No. 128, "Earnings per Share". Basic earnings per common share is computed
by dividing the net earnings (loss) by the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share gives effect to stock options and warrants which are considered to
be dilutive common stock equivalents. Treasury shares have been excluded
from the weighted average number of shares.
4 We have adopted Financial Accounting Standards Board ("FASB") Statement
No. 130, "Reporting Comprehensive Income". This statement requires
reporting of change in owners' equity that does not result directly from
transactions with owners. An analysis of these changes follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
3/31/00 3/31/99
------- -------
<S> <C> <C>
Net Loss $(3,156,846) $(3,152,622)
Foreign Currency Translation Adjustments - Net (1,448) 54,391
-------------------------------
Total $(3,158,294) $(3,098,231)
===============================
</TABLE>
5 In the fourth quarter of 1999 we decided to discontinue our software
reengineering services, specializing in the correction of existing
mainframe computer software systems to manage the Year 2000 and
thereafter. The manner of disposal was discontinuing the operation and
taking write-offs for all unamortized intangible assets. Included in the
loss on disposal is an estimate of $150,000 to cover expenses that may by
incurred during the phase out period. At March 31, 2000, assets and
liabilities attributable to the Y2K segment included accounts receivable
($349,000) accounts payable ($464,000) and accrued expenses ($225,000).
The results of operations of our software reengineering services for the
periods ended March 31, 2000 and 1999 have been shown as discontinued
operations.
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INFORMATION ARCHITECTS CORPORATION
DISCONTINUED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
<S> <C> <C>
Revenues $ -- $ 5,709,715
---------- ------------
Expenses:
Payroll and related costs -- 5,602,455
Rent and occupancy -- 154,472
Advertising and promotion -- 143,716
Depreciation and amortization -- 358,214
Other operating expenses -- 622,682
---------- ------------
-- 6,881,539
---------- ------------
Loss from operations -- (1,171,824)
Other Income (Expenses)
Interest Expense -- (18,092)
Interest Income -- 9,441
Other -- (19,402)
---------- ------------
-- (28,053)
---------- ------------
Net Loss $ -- $ (1,199,877)
========== ============
Net Loss per common share
Basic $ -- $ (0.07)
========== ============
Diluted $ -- $ (0.07)
========== ============
Weighted average common shares outstanding
Basic 28,316,885 17,449,668
========== ============
Diluted 28,316,885 17,449,668
========== ============
</TABLE>
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The statements made in this Form 10-Q that are not historical facts
contain "forward-looking information" within the meaning of the Private
Securities Litigation Reform Act of 1995, and Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended,
which can be identified by the use of forward-looking terminology such as "may",
"will", anticipates", "expects", "projects", "estimates", "believes", "seeks",
"could", "should", or "continue", the negative thereof, other variations or
comparable terminology. Important factors, including certain risks and
uncertainties with respect to such forward-looking statements that could cause
actual results to differ materially from those reflected in such forward looking
statements include, but are not limited to our ability to manage growth and
acquisitions of technology or people, diversification of our business, the
effect of economic and business conditions, including risks inherent in
international operations, the ability to attract and retain technical personnel
and other risks detailed from time to time in our SEC reports. We assume no
obligation to update the information in this Form 10-Q.
OVERVIEW
Our patented Metaphoria(R) framework provides infrastructure for
conveying both content and functionality by way of the Internet. We provide
dynamic content aggregation and syndication allowing bi-directional transactions
without requiring proprietary static repositories. We believe our Internet-based
solutions provide a bridge to protect business' existing investment in legacy
and PC-based information and still capitalize on the Internet revolution. Our
software architecture is designed to provide customers with a low maintenance
framework for the Internet. These Internet-based solutions should enable our
customers in making timely decisions, transacting business, disseminating
information and collaborating among co-workers, customers, suppliers and
partners by transforming electronic information, regardless of platform or
application, into real-time transactions.
The Metaphoria Framework is a patented, JAVA-based and open Internet
technology that seeks to address the market need for the convergence of multiple
data management strategies, including content management, knowledge management,
document management and data warehousing. Without moving the original data,
Metaphoria provides personalized access to the information that is independent
from the software application. The "digital content" from multiple sources may
be delivered in a real-time Internet browser presentation, providing interaction
and update capability, as well.
Our Internet business model revenue is derived from software product
license fees, annual maintenance fees, and professional and training services
fees. Our revenue recognition policy for the software product is in accordance
with the AICPA's Statement of Position (SOP) 97-2, which generally states that
revenue related to components of software sales and implementations should be
attributed to each component based on the fair values of each component. Revenue
for software licenses is generally recognized upon customer's receipt of the
software with no significant obligations related to the installation of the
software. Maintenance fees are recognized ratably over the contract period.
Professional and training services are recognized as the services are performed.
We have been pleased with the response for our Metaphoria suite of
products. However, the launching of our Internet offering is still in its early
stages. We anticipate continuing favorable responses, but our potential must be
evaluated from the perspective of a start-up Internet opportunity in its early
stages of development. Some of these risks include, but are not limited to, the
impact of start-up and acquisition costs, the volatility of the emerging
Internet marketplace, the ability to gain an edge on our competition, proper
visibility and government regulation in the Internet sector. Other risks that we
face include, but are not limited to, the ability to effectively penetrate the
e-commerce marketplace, hire and retain quality personnel, successfully
implement our marketing strategies, and develop ongoing technologies ahead of
our competitors. There are no assurances that we will succeed in addressing any
or all of these risks.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE
MONTHS ENDED MARCH 31, 1999
In 1999, we discontinued our previous Y2K business, as discussed in our
1999 annual report on Form 10-K, and began our current Internet aggregation and
syndication business. Because of this, there was no Y2K business in the first
quarter of 2000 and no Internet business in the first quarter of 1999. The only
expenses shown for the first quarter 1999 are the overhead expenses necessary to
maintain a corporate structure. Therefore, it is not a direct comparison between
2000 and 1999 income statements.
Revenue for the three months ended March 31, 2000 is 100% from our new
Internet product and service offerings. There were no equivalent sales of our
Internet offering for the three months ended March 31, 1999.
Total operating expenses for the three months ended March 31, 2000 were
$1,852,000 more than the same period for 1999. This increase is primarily the
result of sales and marketing expenses of $916,000 and research and development
expenses of $556,000 incurred in the first quarter 2000 versus zero spending for
Internet sales and marketing and research and development in the first quarter
of 1999. Depreciation and amortization for our office furniture, equipment and
Metaphoria software contributed another $95,000 to the variance.
Interest income for the three months ended March 31, 2000 was $87,000
more than the same three month period for 1999 due to the increased cash
balances during the first quarter 2000. Acquisition costs decreased $166,000 for
the three months ended March 31, 2000 compared to the same period for 1999. No
acquisition expense was incurred during the first quarter 2000.
There was no loss from discontinued operations for the three months
ended March 31, 2000 as compared to a loss of $1,200,000 from discontinued
operations for the three months ended March 31, 1999.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2000, we had working capital of $8,364,000 as compared to
working capital of $6,483,000 at March 31, 1999, an increase of $1,881,000 or
29%. We had cash and cash equivalents of $8,879,000 at March 31, 2000 compared
to cash and cash equivalents of $2,652,000 at March 31, 1999, an increase of
$6,227,000 or 235%. As a result of the expenses associated with our new Internet
offering, we are, and expect to continue, operating at a loss for at least the
second and third quarters of 2000.
The sources of cash for the first quarter 2000 were primarily from
collecting receivables, operating sales and the exercise of outstanding stock
options and warrants. In order to continue to grow and compete in the rapidly
developing Internet marketplace, we expect significant increase in our operating
expenses, especially in our sales and marketing expenses, as well as our
research and development expenses. We are planning to obtain additional
financing prior to the end of the third quarter 2000 to fund our growth in
operations and an increased marketing campaign as outlined above. Although we
rescinded our S-3 registration for financing due to the market conditions on
April 19, 2000, we are currently in discussions with various investment bankers.
We believe that the combination of present cash balances, future operating cash
flows and cash provided by the exercise of options and warrants as well as the
additional financing to be obtained will be adequate to fund our growth and
provide adequate liquidity for the near-term foreseeable future. However, there
is no assurance that we will be able to raise additional financing on acceptable
terms or at all.
We are currently finalizing the removal of the debt from the July 1999
financing from our balance sheet and do not anticipate any cash impact from this
transaction. On July 30, 1999, we issued $5 million in original principal amount
of its 6% convertible debentures (the "Convertible Debentures") to King LLC
("King"). In order to satisfy the NASDAQ Stock Market Rule requiring stockholder
approval for the issuance of the Convertible Debentures at the time the
Convertible Debentures were issued, the terms of the Convertible Debentures
placed a cap on the number of shares that can be issued upon conversion, such
that the holders of the Convertible Debentures cannot, without prior stockholder
approval, convert the security into more than 19.999% of our Common
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<PAGE> 10
Stock outstanding as of July 30, 1999. As of December 1, 1999, we had issued
19.999% of our Common Stock outstanding as of July 30, 1999, or 3,878,567 shares
to King upon conversion of the Convertible Debentures. In order to issue
additional shares to King to retire the outstanding principal and interest of
the Convertible Debentures, we are asking our shareholders to approve the
issuance of additional shares of our common stock to King. Pursuant to a letter
agreement, we and King have agreed that, upon our receiving approval from our
stockholders to issue additional shares of Common Stock to King, we shall issue
1,000,000 shares of our Common Stock in full satisfaction of all outstanding
principal and interest due to King from us under the Convertible Debenture and
that, upon issuing such shares, the Convertible Debenture shall automatically
terminate. We are also subject to a Registration Rights Agreement, which will
require us to file a registration statement covering such 1,000,000 shares and
to seek effectiveness of the registration statement if the matter is approved by
stockholders.
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to a November 8, 1999 agreement between us and Ron Bloom,
under which Mr. Bloom provided consulting services to us, we issued warrants for
300,000 shares of common stock vesting 150,000 at that time and 150,000 on June
1, 2000, subject to our thirty day right to terminate the second 150,000
warrants. The warrants were issued under the exemption set forth in Section 4(2)
of the Securities Act of 1933. On March 31, 2000, we exercised our right to
terminate the second tranche of 150,000 warrants having an expiration date of
November 8, 2004 and an exercise price of $4.00 per share.
Pursuant to a November 18, 1999 agreement between Stonegate Securities,
Inc. ("Stonegate") and us, Stonegate acted as our placement agent for a private
offering and received compensation in the form of commissions of $820,233.00,
and we issued to them 448,111 warrants to purchase shares of our common stock at
a price of $1.83 per share ("Placement Warrants"). The warrants were issued
under the exemption set forth in Rule 506 of Regulation D of the Securities Act
of 1933. On December 16, 1999 Stonegate assigned the Placement Warrants as
follows: Scott Griffith 190,447 Placement Warrants, Jesse Shelmire 190,447
Placement Warrants and LBL Investments 67,217 Placement Warrants. On March 15,
2000 Jesse Shelmire exercised 40,447 Placement Warrants.
Pursuant to a November 8, 1999 agreement between us and Erinch Ozada,
under which Mr. Ozada provides consulting services to us, we issued warrants for
500,000 shares of common stock which are now vested. The warrants have an
expiration date of November 8, 2004 and an exercise price of $2.00 per share.
The warrants were issued under the exemption set forth in Section 4(2) of the
Securities Act of 1933. Mr. Ozada has piggyback registration rights for the
underlying common stock. On March 27, 2000, Mr. Ozada exercised the remaining
250,000 warrants.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No.
27. Financial Data Schedule
Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on our behalf by
the undersigned thereunto duly authorized.
INFORMATION ARCHITECTS CORPORATION
- ----------------------------------
(Registrant)
Date: May 1, 2000 /s/Robert F. Gruder
----------- Robert F. Gruder,
Chief Executive Officer
Date: May 1, 2000 /s/J. Wayne Thomas
----------- J. Wayne Thomas,
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 2000 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN OUR FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,879
<SECURITIES> 0
<RECEIVABLES> 738
<ALLOWANCES> 25
<INVENTORY> 0
<CURRENT-ASSETS> 10,026
<PP&E> 4,749
<DEPRECIATION> 1,982
<TOTAL-ASSETS> 16,059
<CURRENT-LIABILITIES> 1,661
<BONDS> 2,040
0
0
<COMMON> 29
<OTHER-SE> 12,329
<TOTAL-LIABILITY-AND-EQUITY> 16,059
<SALES> 520
<TOTAL-REVENUES> 520
<CGS> 170
<TOTAL-COSTS> 504
<OTHER-EXPENSES> 556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> (3,157)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,157)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,157)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
