<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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 0-25075
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ARTIFICIAL LIFE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3253298
- ------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
FOUR COPLEY PLACE, SUITE 102
BOSTON, MASSACHUSETTS 02116
- ------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 266-5542
- --------------------------------------------------------------------------------
(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 practical date:
Common Stock, $0.01 par value per share - 9,310,574 shares as of April 30, 1999
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,687,829 $ 10,196,915
Accounts receivable, trade -- 438,723
Due from officer/stockholder 122,728 161,889
Notes and accounts receivable affiliate 40,000 41,000
Prepaid expenses and other current assets 99,958 296,635
------------ ------------
Total current assets 11,950,515 11,135,162
------------ ------------
Property and equipment:
Furniture and fixtures 145,281 145,281
Computer equipment 545,680 903,784
Leasehold improvements 45,544 51,125
Office equipment 57,620 50,952
------------ ------------
794,125 1,151,142
Less accumulated depreciation and amortization 160,274 210,520
------------ ------------
633,851 940,622
------------ ------------
Other assets:
Capitalized software development costs 215,169 524,887
Deposits and other assets 85,185 92,689
------------ ------------
300,354 617,576
------------ ------------
$ 12,884,720 $ 12,693,360
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 444,367 $ 455,672
Due to officer/stockholder -- 18,908
Accrued expenses 171,267 287,260
------------ ------------
Total current liabilities 615,634 761,840
------------ ------------
Note payable - officer/stockholder 500,000 500,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.01 par value; 30,000,000 shares
authorized, 9,270,574 and 9,310,574 shares issued
and outstanding in 1998 and 1999, respectively 92,706 93,106
Additional paid-in capital 13,929,618 14,231,818
Notes receivable from stockholders (79,423) (20,891)
Accumulated deficit (2,147,266) (2,854,575)
Accumulated other comprehensive loss (26,549) (17,938)
------------ ------------
Total stockholders' equity 11,769,086 11,431,520
------------ ------------
$ 12,884,720 $ 12,693,360
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Revenues:
Software license agreements $ 116,667 $ --
Application services 216,351 438,723
Software products -- 700
----------- -----------
333,018 439,423
----------- -----------
Operating expenses:
Selling, general and administrative 326,268 778,182
Engineering 138,754 243,979
Research and development 44,873 154,851
Depreciation and amortization 29,572 36,154
----------- -----------
Total operating expenses 539,467 1,213,166
----------- -----------
Loss from operations (206,449) (773,743)
Other income (expenses):
Foreign exchange loss -- (29,124)
Interest income -- 116,943
Interest expense (5,538) (21,385)
----------- -----------
Loss before provision
for income taxes (211,987) (707,309)
Provision for income taxes -- --
----------- -----------
Net loss $ (211,987) $ (707,309)
=========== ===========
Basic and diluted net loss per share $ (0.03) $ (0.08)
Weighted average shares outstanding
used in per share calculation 6,967,213 9,302,574
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 4
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Comprehensive Preferred Stock Common Stock Additional
Income ----------------------- ------------------------- Paid-in Notes
(Loss) Shares Amount Shares Amount Capital Receivable
------------- --------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 -- $ -- 6,967,213 $ 69,672 $ 426,567 $ --
Net loss $ 211,987) -- -- -- -- -- --
============ ----- ------------ ------------ ------------ ------------ --------
Balance at March 31, 1998 -- $ -- 6,967,213 $ 69,672 $ 426,567 $ --
===== ============ ============ ============ ============ ========
Balance at December 31, 1998 -- $ -- 9,270,574 $ 92,706 $ 13,929,618 $(79,423)
Issuance of common stock -- -- 40,000 400 302,200 --
Repayment of notes receivable
from stockholders -- -- -- -- -- 58,532
Comprehensive income:
Net loss $ (707,309) -- -- -- -- -- --
Foreign currency translation
adjustment 8,611 -- -- -- -- -- --
------------
Total comprehensive loss $ (698,698)
============ ----- ------------ ------------ ------------ ------------ --------
Balance at March 31, 1999 -- $ -- 9,310,574 $ 93,106 $ 14,231,818 $(20,891)
===== ============ ============ ============ ============ ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Earnings Comprehensive Stockholders'
(Deficit) Loss Equity
-------------- -------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 43,940 $ -- $ 540,179
Net loss (211,987) -- (211,987)
------------ ------------ ------------
Balance at March 31, 1998 $ (168,047) $ -- $ 328,192
============ ============ ============
Balance at December 31, 1998 $ (2,147,266) $ (26,549) $ 11,769,086
Issuance of common stock -- -- 302,600
Repayment of notes receivable
from stockholders -- -- 58,532
Comprehensive income:
Net loss (707,309) -- (707,309)
Foreign currency
translation adjustment -- 8,611 8,611
Total comprehensive
loss
------------ ------------ ------------
Balance at March 31, 1999 $ (2,854,575) $ (17,938) $11,431,520
============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1999
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (211,987) $ (707,309)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 29,572 36,154
Decrease in due from affiliate 230,000 --
(Increase) decrease in deposits and other assets 19,762 (8,744)
(Increase) decrease in accounts receivable, trade 132,763 (438,723)
(Increase) decrease in prepaid expenses and other current assets 51,453 (193,476)
Increase in accounts payable and accrued expenses 58,779 122,365
Decrease in deferred revenue (116,667) --
Increase in due to/from officer/stockholders (122,271) (20,913)
------------ ------------
Net cash provided (used) by operating activities 71,404 (1,210,646)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (2,298) (353,762)
Expenditures for capitalized software development costs -- (296,262)
Increase in notes and accounts receivable affiliate -- (1,000)
------------ ------------
Net cash used by investing activities (2,298) (651,024)
------------ ------------
Cash flows from financing activities:
Proceeds from notes receivable from stockholders -- 58,532
Proceeds from issuance of common stock -- 302,600
------------ ------------
Net cash provided by financing activities -- 361,132
------------ ------------
Effect of exchange rate changes on cash -- 9,624
------------ ------------
Net increase (decrease) in cash and cash equivalents 69,106 (1,490,914)
Cash and cash equivalents at beginning of period 22,382 11,687,829
------------ ------------
Cash and cash equivalents at end of period $ 91,488 $ 10,196,915
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 5,538 $ 21,385
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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ARTIFICIAL LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and
include the accounts of Artificial Life, Inc. and its wholly-owned
subsidiary, Artificial Life Europe AG. Significant intercompany balances
and transactions have been eliminated in consolidation. Accordingly, they
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statement presentation.
The results of operations for the periods reported are not necessarily
indicative of those that may be expected for a full year. In the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair statement of operating results
for the interim periods presented have been made.
The financial information included in this report has been prepared in
conformity with the accounting policies, reflected in the financial
statements included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
2. NET LOSS PER SHARE
Basic net loss per share is calculated based on the weighted average number
of common shares outstanding for the three month periods ended March 31,
1998 and 1999. Basic and diluted net loss per share are the same as the
effect of inclusion of all common stock equivalents would be anti-dilutive.
3. COMMON STOCK
In January 1999, the Company issued 40,000 shares of common stock at $8.50
per share in connection with the underwriter's exercise of its
over-allotment option. Net proceeds to the Company amounted to $302,600.
5
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ARTIFICIAL LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- CONCLUDED -
4. EUROPEAN SUBSIDIARY
In March 1999, the Company formed a wholly-owned subsidiary in Frankfurt,
Germany. The subsidiary was formed to serve European markets and combine
the Company's European sales and marketing initiatives. The subsidiary will
commence operations in June 1999 and will concentrate on the development of
Internet applications for banks and financial service organizations.
5. SUBSEQUENT EVENTS
In April 1999, the Company entered into a joint venture with two
international retailers in the field of e-commerce. The main focus of this
joint venture is to sell consumer goods over the Internet using deep
discounts and high volume, both in terms of transactions and web visits. As
part of the transaction, the Company will license its SmartBot technology
to the joint venture. In addition, the Company will provide products and
software development and consulting services to the joint venture and
receive payments therefor. The partners in the joint venture will be
responsible for using their purchasing relationships to obtain certain
consumer products which will be sold on the joint venture's e-commerce
Website. The Company has allocated up to $2,150,000 of the proceeds from
its IPO to purchase its 50% interest in this joint venture and to meet its
obligations to contribute additional capital to the joint venture. Under
the terms of the joint venture agreement, the Company may market any
e-commerce applications it develops to other e-commerce companies.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
The words "believe", "expect", "anticipate" and similar expressions identify
forward-looking statements. Such statements are based on management's current
assumptions and expectations and are subject to a number of factors and
uncertainties which could cause actual results or business conditions to differ
materially from those anticipated in the forward-looking statements. There can
be no assurance that actual results will not differ materially from those
described in such statements because of various factors, including, but not
limited to: the recent change in the Company's strategy; limited revenues
generated by the Company; the Company's dependence on the growth in demand for
agent-based software products, such as the Company's suite of SmartBot products;
competition with more established software companies; market acceptance of the
Company's software robot products; the Company's ability to minimize design
defects, software errors, misuse of the Company's products, incorrect data from
external sources and other potential problems which may be out of the Company's
control; the Company's ability to remain competitive by enhancing existing
products, developing new products and technologies that address the increasingly
sophisticated and varied needs of its customers and by responding to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis; the ability of the Company to retain its key
employees; the Company's dependence of third party contractors to complete
portions of its development work; certain risks associated with sales in foreign
markets, including political and economic instability, restrictive trade
policies of foreign governments, local economic conditions in foreign markets,
potentially adverse tax consequences and the burdens on customers of complying
with a variety of applicable laws; the Company's dependence on continued growth
of the Internet and online commerce; the Company's ability to protect its
intellectual property and other proprietary rights; the Company's ability to
raise additional financing, as necessary; the Company's ability to establish and
maintain brand identity; the management of the Company's foreign operations; the
success by the Company in identifying and licensing third party voice
recognition software which will be compatible with its products; the impact of
government regulations; the failure by the Company, its clients or suppliers to
be year 2000 compliant; and, general economic conditions.
OVERVIEW
The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec GmbH, a German
multimedia and Internet solutions company owned by Eberhard Schoneburg,
Artificial Life's President, Chief Executive Officer and Chairman, and two
corporate investors: a major German retailer and an industrial conglomerate. In
July 1997, Mr. Schoneburg sold all of his shares of Neurotec GmbH to the two
remaining stockholders and contemporaneously purchased 100% of the shares of
Neurotec International Corp. (the "Management Buyout"). In August 1997, the
Company changed its name to Artificial Life, Inc.
As a result of a change in control of the Company in connection with the
Management Buyout, the Company has presented its assets and liabilities
subsequent to July 3, 1997 to reflect the purchase price paid for the stock of
the Company. This treatment is consistent with "push down" accounting as
promulgated by the Securities and Exchange Commission ("SEC"). In Management's
opinion, the purchase price of the Company's stock in the Management Buyout
reflected the fair value of the Company at such time.
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<PAGE> 9
The difference between the Company's net book value at July 4, 1997 and the fair
value has been recorded as a reduction of the Company's net deferred tax asset
and long-term assets, resulting in a new depreciation basis for financial
statement purposes for such assets. As of July 4, 1997, the stockholder's equity
section reflects cumulative earnings prior to the Management Buyout as paid-in
capital. As a result, retained earnings at March 31, 1999 reflects the results
of operations of the Company only from the date of the Management Buyout.
Following the Management Buyout, the Company's management made the strategic
decision to shift the Company's primary business focus from providing software
consulting services to the development, marketing and support of its ALife suite
of SmartBot software products. Management's decision to shift the primary
business focus of the Company has had and will likely continue to have an
adverse effect on the Company's results of operations in the near term. The
Company expects that an increasing percentage of its future revenues will be
derived from sales and services associated with its SmartBot software products
and that revenues from its consulting business, as a percentage of gross
revenues, will significantly decrease over time. To date, the Company's major
source of revenue has been derived from its software consulting services, and it
has generated minimal revenue from the sale of its SmartBot software products.
The Company is currently expanding its research and development, production and
marketing capabilities associated with the anticipated sale of its SmartBot
products, and as a result, operating expenses are expected to increase
significantly going forward. The Company expects to continue to incur increasing
losses and generate negative cash flow from operations until at least the year
2000. To the extent that the Company's product development, marketing and sales
efforts do not result in commercially successful products that generate
significant net revenues, the Company will be materially adversely affected.
There can be no assurance that the Company will ever generate sufficient
revenues from the sale of the Company's products or associated services to
achieve or maintain profitability.
In addition, as a result of the Company's recent transition in its primary
business focus from software consulting to product development, marketing and
support, the Company's research and development expenditures increased to
$446,317 for the year ended December 31, 1998 from zero in 1997 and $154,851 for
the quarter ended March 31, 1999 compared to $44,873 for the quarter ended March
31, 1998. This increase is due to the fact that, prior to 1998, all research and
development expenditures were related to consulting services for which the
Company was reimbursed by its customers and thus, such expenditures are included
in engineering expenses in the Company's financial statements through December
31, 1997. Conversely, during 1998, due to the Company's shift in business focus,
the Company had most of its employees engaged in the research and development of
its SmartBot products.
Because the Company has shifted its primary business focus from software
consulting to product development, marketing and support, results of operations
to date are not reflective of the Company's business prospects going forward.
Moreover, the Company expects to experience significant fluctuations in its
future operating results due to a variety of factors. Factors that may affect
the Company's operating results include the success of product development, the
amount of software consulting undertaken in the future, market acceptance of the
Company's products, frequency and timeliness of new product releases, success of
strategic alliances, the mix of product and service sales, the Company's
response to competitive pressure and its ability to attract and retain qualified
personnel. Gross profit margins will vary from product to product and between
products and services and although the Company may have some ability to affect
its products and services mix, the Company's sales mix may vary from period to
period and its gross margins will fluctuate accordingly.
8
<PAGE> 10
RESULTS OF OPERATIONS
The Company's principal source of revenue from inception through May 1998 was
from the provision of software consulting services. From inception through July
3, 1997, the preponderance of those revenues were generated by subcontracts
issued from Artificial Life's former parent company and affiliates thereof, all
of which revenues ceased shortly after the Management Buyout. Of the non-related
party revenues, most were derived from the Company's long-term consulting
contract with its major domestic client. This consulting contract started in
late 1996 and concluded in May 1998.
During the fourth quarter of 1997, the Company began evaluating the addition of
software product development to its core business of providing software
consulting services. The Company commenced software development plans while it
continued to provide software consulting services under its existing contracts
and to seek new consulting contracts. In the first quarter of 1998, the Company
began software development activities while continuing to service its one
existing consulting contract. During this time the Company limited its efforts
in seeking new consulting contracts as it began to shift its primary business
focus to software development. During the second quarter of 1998, when the
Company's major domestic consulting contract ended, the Company focused a
substantial portion of its available resources on product development.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES: Revenues for the quarter ended March 31, 1999 were $439,423 as
compared to $333,018 for the quarter ended March 31, 1998. The increase of
$106,405 or 31.95% is primarily attributable to the Company's entering into a
consulting agreement with a European Trust which generated revenue of $438,723.
Revenue in the first quarter of 1998 was from application services and software
license agreements.
ENGINEERING EXPENSES: Engineering expenses generally consist of salary and
payroll tax expenses, training, consulting, subcontracting and other expenses
incurred to develop and fulfill the engineering requirements of the products and
services from which the Company derives its revenues. Engineering expenses for
the quarter ended March 31, 1999 were $243,979 as compared to $138,754 for the
quarter ended March 31, 1998. The increase of $105,225 or 75.84% is directly
attributable to costs incurred in connection with the European Trust consulting
agreement entered into in 1999.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses consist of
expenses similar in nature to engineering expenses except that such expenses
typically relate to new products and activities that will generate revenue at
some future date. Research and development expenses for the quarter ended March
31, 1999 were $154,851 as compared to $44,873 for the quarter ended March 31,
1998. The increase of $109,978 or 245.09% is directly attributable to the
Company's increased product development activities. Significant increases
include payroll costs of approximately $70,000 and professional affiliation
costs of approximately $31,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling expenses consist of salary
and payroll tax expenses of marketing personnel and costs relating to marketing
materials, promotional videos, advertising and public relations activities.
General and administrative expenses consist of salary and payroll tax expenses
of administrative personnel, rent, legal and accounting fees and costs
associated with employee benefits, supplies, communications and travel. Selling,
general and administrative expenses for the quarter ended March 31, 1999 were
$778,182 as compared to $326,268 for the quarter ended March 31, 1998. The
increase of $451,914 or 138.51% is directly attributable to the establishment of
our international sales and development infrastructure. Significant increases
include payroll costs of approximately $166,000 (195.3%), professional fees of
$154,000 (394.9%), marketing and promotion of $36,000 (257.1%) and travel and
entertainment of $24,000 (51.1%).
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NET LOSS: Net loss for the quarter ended March 31, 1999 was $707,309 as compared
to a net loss of $211,987 for the quarter ended March 31, 1998. This increase of
$495,322 or 233.66% was directly related to the Company's international
expansion.
LIQUIDITY AND CAPITAL RESOURCES
From inception through July 3, 1997, the Company funded its operations primarily
through initial equity investments in 1994 and 1995 totaling $500,000 and net
income from operations. Subsequent to July 3, 1997, the Company incurred
operating losses in connection with its transition from software consulting to
product development, marketing and sales. These losses are expected to increase
and have been funded to date by a long-term stockholder loan of $500,000, a
private placement of Common Stock of $181,367, the net proceeds of which the
Company received in June 1998 and a private placement of 824,000 shares of
Common Stock which raised $3,946,481 in net proceeds. In December 1998, the
Company received $9,302,773 net proceeds from its Initial Public Offering (IPO)
in which 1,400,000 shares of common stock were sold. Lastly, the Company
realized net proceeds of $302,600 in January 1999 in connection with the
broker's exercise of the over-allotment option relating to the IPO (in which
40,000 additional shares of common stock were sold). The Company's requirements
for additional capital will depend on many factors, including but not limited to
the progress and costs associated with its research and development activities,
production costs and sales, marketing and promotional programs, establishment of
foreign operations and the levels of revenues achieved through the sale of its
SmartBot suite of products. The Company has currently placed excess funds in
interest bearing vehicles such as money market accounts and savings accounts.
Effective October 10, 1995, the Company entered into a consortium agreement (the
"MIT Agreement") with the Massachusetts Institute of Technology ("MIT"). Under
the MIT Agreement, MIT will conduct research projects for the "Things That Think
Consortium." The term of the agreement is for five years through October 9, 2000
but provides for early termination, with one year written notice, as well as
renewal options. The Company is obligated to pay an annual membership fee of
$125,000 under the MIT Agreement.
The Company leases office and other space and various office equipment under
various noncancelable leases. Minimum annual lease payments, exclusive of
additional operating costs, for the years ended December 31, 1999, 2000 and 2001
are $251,640, $251,267 and $43,811, respectively. In addition, new lease
agreements are anticipated to be signed during the second quarter of 1999 for
space requirements for the German, Swiss and New York offices.
The Company has employment agreements with certain corporate officers. The
agreements are generally one to three years in length and provide for minimum
base salaries. These agreements include severance payments under certain
conditions of approximately 50% to 300% of each officer's annual compensation.
In addition the President, Chief Executive Officer and Chairman of the Company
is entitled to receive an annual incentive bonus of 3% of the Company's profits
from operations.
The Company has entered into a joint venture with two international retailers in
the field of e-commerce. The main focus of this joint venture is to sell
consumer goods over the Internet using deep discounts and high volume, both in
terms of transactions and web visits. As part of the transaction, the Company
will license its SmartBot technology to the joint venture. In addition, the
Company will provide products and software development and consulting services
to the joint venture and receive payments therefor. The partners in the joint
venture will be responsible for using their purchasing relationships to obtain
certain consumer products which will be sold on the joint venture's e-commerce
Website. The Company has
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<PAGE> 12
allocated up to $2,150,000 of the proceeds from its IPO to purchase its 50%
interest in this joint venture and to meet its obligations to contribute
additional capital to the joint venture.
In addition, the Company has entered into a contract for the first phase of a
development and consulting project with a Europe-based global trust. The project
goal is to define and design the trust's future Internet-based financial
services and to use these services to broaden the trust's market potential. A
successful completion of this first phase could lead to a larger scale
implementation of this development project. As part of the transaction, the
Company would provide products and software consulting services to the trust and
receive payments therefor.
The Company believes that the net proceeds of the IPO, together with its current
cash and cash equivalents, and other cash generated from operations will enable
the Company to maintain its current and planned operations through July 2000,
although there can be no assurance that the Company will not have additional
capital needs prior to such time. If cash generated from operations is
insufficient to satisfy the Company's liquidity requirements after that time,
the Company may seek to sell additional equity or debt securities or obtain a
credit facility. The sale of additional equity or convertible debt securities
could result in additional dilution to the Company's stockholders. There can be
no assurance that financing will be available in amounts or on terms acceptable
to the Company, if at all.
The Company has incurred a loss for income tax purposes for fiscal 1998 and the
first quarter 1999. This loss will be available to carry forward and reduce
income taxes, if any, in future periods.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs using a two-digit format,
as opposed to four digits, to indicate the year. Any of the Company's computer
programs or other information systems that have time-sensitive software or
embedded microcontrollers may recognize a date using "00" as the year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations.
The Company is in the process of a detailed review of its information and
non-information technology systems as they pertain to both internal operations
and product development. This review, the costs of which are not deemed
material, includes its existing and planned computer software and hardware. The
Company believes that these systems are Year 2000 compliant and has made an
initial determination that the costs and/or consequences associated with the
Year 2000 issue are not expected to have a material adverse effect on its
business operations or future financial condition. At this time, however, the
Company is developing a specific plan for assessing third party vendor systems,
assessing the readiness of significant suppliers and customers, and taking
remedial action, if necessary. The Company does not know the amount or material
nature of expenditures that it may incur in connection with this assessment, but
continues to believe that the costs associated with the Year 2000 compliance
will not have a material impact on the Company's future operating results. The
Company expects its detailed review and compliance program to be completed by
May 31, 1999. The Company, however, will continue to monitor the Year 2000
readiness of these systems and will take additional review or remedial action if
it deems it necessary to do so. During the remainder of 1999, but not later than
September 30, 1999, the Company will evaluate its need to complete a final
review, which may include soliciting and obtaining certification of Year 2000
compliance from certain third party software vendors and determining the
readiness of its significant suppliers and customers. Nevertheless, the Company
does not currently expect to experience Year 2000 problems as its computer
hardware is generally no more than two years old and it has the latest version
of computer software programs.
11
<PAGE> 13
In addition, the Company's products are designed to operate with third party
software and data. The operation of the Company's existing and proposed products
will be adversely affected if such third party software and data are not Year
2000 compliant or if such third parties have not used compatible technology in
achieving compliance. The Company at this time is determining specific plans for
certifying the Year 2000 readiness of third party software and data as they
relate to and interact with the Company's software products and consulting
activities.
To the extent that the Company's assessment is completed without identifying any
non-compliant systems operated by the Company or by third parties, the Year 2000
issue could have a material effect on the operations of the Company. The Company
could experience delays in the development of its products. Once its products
are developed and offered for commercial sale, the Company could experience
delays in delivering such products or could deliver products that do not operate
correctly, which could cause the Company to lose business and even customers and
could subject the Company to claims for damages. Problems with the Year 2000
issue could also result in delays in the Company invoicing its customers or in
the Company receiving payments from them. The severity of these possible
problems would depend on the nature of the problem and how quickly it could be
corrected or an alternative implemented, which is unknown at this time.
After completing its assessment in the second quarter of 1999, the Company plans
to develop appropriate contingency plans to address situations in which various
systems of the Company, or of third-parties with which the Company does
business, are not Year 2000 compliant. Some risks of the Year 2000 issue,
however, are beyond the control of the Company and its suppliers and customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There has been no material change in market risk since December 31, 1998.
12
<PAGE> 14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the three
months ended March 31, 1999.
13
<PAGE> 15
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 thereto duly authorized.
ARTIFICIAL LIFE, INC.
--------------------------------
(registrant)
By: /s/ Eberhard Schoneburg
-----------------------------
Eberhard Schoneburg
Chairman, President &
Chief Executive Officer
(Principal Executive Officer)
Dated: May 14, 1999
14
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