UNITED STATES
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 June 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: 0-19813
INFONOW CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3083360
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
3131 So. Vaughn Way, Suite 134, Aurora, CO 80014
(Address of principal executive offices) (Zip Code)
(303) 368-4646
(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 preceding12 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
3,576,829 shares of common stock, $.001 par value, were outstanding
as of August 8, 1996.
INFONOW CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I.Financial Information Page No.
<S> <C>
Item 1. Financial Statements
Balance Sheets -- June 30, 1996 (Unaudited) and
December 31, 1995 1
Unaudited Statements of Operations -- For the Three
Months Ended June 30, 1996 and June 30, 1995, and
for the Six Months Ended June 30, 1996 and
June 30, 1995. 2
Unaudited Statements of Cash Flows -- For the Six
Months Ended June 30, 1996 and June 30, 1995 3
Notes to Unaudited Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II.Other Information 12
SIGNATURES 14
</TABLE>
INFONOW CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> June 30, 1996 December 31, 1995
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 182,854 $ 231,781
Accounts receivable, net 316,217 494,918
Other current assets 55,900 34,809
Total current assets 554,971 761,508
Property and Equipment, net 297,279 336,050
Goodwill, net of accumulated amortization
of $194,079 and $87,820 at June 30, 1996
and December 31, 1995, respectively. 2,993,696 3,099,955
Software development costs, net of accumulated
amortization of $ 38,889 at June 30, 1996. 382,488 -
Other assets and deferred charges 19,717 18,381
Total assets $ 4,248,15 $ 4,215,894
CURRENT LIABILITIES:
Accounts payable and accrued expenses 813,563 $435,591
Notes payable - current portion 83,011 43,202
Related party payables 150,000 -
Deferred compensation 108,612 -
Unearned revenue 42,835 123,386
Capital lease obligation - current 3,786 3,514
Total current liabilities $ 1,201,807 605,693
CAPITAL LEASE OBLIGATION 15,840 14,039
NOTES PAYABLE 149,551 172,440
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDER'S EQUITY
Preferred stock, $.001 par value, 2,000,000 shares
authorized, none issued - -
Common stock, $.001 par value; 15,000,000 shares
authorized, 3,107,275 and 3,183,567 shares issued
and outstanding at March 31, 1996 and
December 31, 1995, respectively 3,669 3,184
- -
Treasury stock
Additional paid-in capital 19,685,874 19,478,118
Accumulated deficit (16,808,590) (16,057,580)
Total stockholder's equity 2,880,953 3,423,722
Total liabilities and stockholder's
equity $ 4,248,151 $ 4,215,894
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated balance sheets
INFONOW CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION> For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
SALES $ 479,481 $ 83,879 $ 1,222,814 $ 139,127
OPERATING EXPENSES:
Cost of sales 369,186 65,210 534,670 97,218
Selling, general and
administrative 667,899 654,679 1,428,122 939,660
Research and development - 12 - 11,740
Total operating expenses 1,037,085 719,901 1,962,792 1,048,618
Net loss from operations (557,604) (636,022) (739,978) (904,491)
OTHER INCOME (EXPENSE):
Loss on disposition of assets - (72,758) - (113,422)
Interest income (expense), net (7,068) 812 (11,032) 7,815
Net loss before extraordinary
gain from debt restructuring (564,672) (707,968) (751,010)(1,030,728)
EXTRAORDINARY GAIN FROM
DEBT RESTRUCTURING - 169,683 - 169,683
NET LOSS (564,672) (538,285) (751,010) (861,045)
Net loss per common share before
extraordinary gains from debt
restructuring $(0.17) $(0.59) $(0.23) $(1.35)
Extraordinary gain from debt
restructuring - $0.14 - $0.22
Net loss per common share $(0.17) $(0.45) $(0.23) $(1.13)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,345,603 1,191,431 3,241,718 763,147
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
INFONOW CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION> For the Six Months Ended June 30,
1996 1995
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(751,010) $(861,045)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 235,813 61,160
Gain on debt restructuring (169,683)
Allowance for bad debts 43,785 -
Compensation expense related to stock options
and stock warrant issuances 327,599
Loss on asset dispositions 125,469
Changes in operating assets and liabilities:
Decrease (Increase ) in accounts receivable 134,916 101,138
Decrease in inventory - 5,969
Increase in other current assets (21,089) (34,797)
Increase (decrease) in payables and
accrued liabilities 236,582 51,782
Increase (decrease) in payables to officers,
directors and related parties - 114
Increase in unearned revenue (80,551) 55,250
Net cash flows used in operating activities (201,554) (337,044)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment (51,895) (8,825)
Proceeds of net assets of Cimarron - (160,000)
Decrease (increase) in other assets (422,712) -
Proceeds from sale of equipment - 12,047
Net cash flow used in investing activities (474,607) (156,778)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock - 1,250,956
Proceeds from the exercise of options
and warrants 208,241 -
Payment of capital lease obligation (1,710) (1,721)
Proceeds from notes payable 553,664 292,512
Payment of notes payable (132,961) (210,247)
Net cash flows from financing activities 627,234 1,331,500
Net increase (decrease) in cash and
cash equivalents (48,927) 837,678
CASH AND CASH EQUIVALENTS, beginning of period 231,781 17,976
CASH AND CASH EQUIVALENTS, end of period $ 182,854 $ 855,654
Supplemental Information:
Cash paid during period for interest $ 14,200 $ 29,230
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
INFONOW CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The financial
statements as of December 31, 1995 have been derived from audited
financial statements, the report on which included an explanatory
paragraph describing uncertainties concerning the Company's ability to
continue as a going concern. The financial statements should be read in
conjunction with the financial statements and notes thereto contained
in the Company's Form 10-K for the fiscal year ended December 31, 1995.
The results of operations for the three months and six months ended
June 30, 1996 are not necessarily indicative of the results that will
be achieved for the entire fiscal year ending December 31, 1996.
Note 2 - SUPPLEMENTAL CASH FLOW DISCLOSURES
During the six months ended June 30, 1996, the Company completed a
noncash transaction with Environmental Research Institute, Inc. ("ESRI"),
in which the company received computer equipment and software licenses
from ESRI in exchange for an obligation of $350,000 to be paid to ESRI
which has been recorded as an accrued expense.
During the six months ended June 30, 1995, the Company had the following
noncash transactions: the Company purchased Cimarron International, Inc.
("Cimarron") with a combination of cash, notes and common stock, the
Company renegotiated certain accounts and notes payable, the Company
agreed to issue common stock, warrants, and certain other consideration
to certain related party debtholders and preferred shareholders, and
the Company converted a convertible note payable to common stock.
Note 3 - RELATED PARTY TRANSACTIONS
On March 29, 1996, the company executed a promissory note to the Chief
Financial Officer of the Company in the amount of $100,000 secured by
all the receivables of the Company. The note is due in March 1997
bearing interest at prime plus 2.75%. The note can be converted into
common stock of the Company at $3.00 per share at the option of the
note holder at any time prior to maturity.
In a separate transaction, a Vice-President of the Company has advanced
$50,000 to the Company as a short term non-interest bearing loan.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company was originally formed to engage in the development and
marketing of an electronic distribution system using CD-ROM technology
for software programs and other products. During 1995, the Company
ceased all activities in this business and shifted its strategy towards
providing Internet-based turn-key applications and services to large
business and governmental organizations. As part of this strategy change,
the Company acquired Cimarron International, Inc., a multimedia
production company and Navigist, Inc., a network engineering consulting
company in May and August of 1995, respectively. In addition to these
acquisitions, the Company formed a third business unit, Internet Products,
which is pursuing opportunities on the Internet utilizing the skills of
both Cimarron and Navigist, as well as its own personnel.
As the result of declining sales and negative cash flows from it's
Navigist operations during the six months ended June 30, 1996, the
Company ceased Navigist's network and communications consulting
operations located in Denver, CO during the second quarter. The applications
development group that was previously part of the Denver Navigist
operations was consolidated into the Internet Products Group. Navigist's
San Jose operations have remained unchanged, and the Company believes
that those ongoing operations are self sustaining on a cash flow basis.
These actions were taken to better focus the application development
group on Internet Products projects and reduce recent operating and
cash losses due to poor sales in the network communications engineering
business in Denver.
In July 1996, the Company deployed its first Internet offering, called
FindNowSM a locator and mapping service. FindNowSM was integrated into
the VISA International web site (http://www.visa.com) in July 1996, and
is the first customer for this service. In August of 1996, the Company
implemented the FindNowSM system for Compaq Computers
(http://www.compaq.com). The Company is in discussions with other customers
at the current time and expects sales of this service to increase in the third
and fourth quarters of this fiscal year.
Results of Operations
As discussed in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1995, the Company's business changed
substantially in 1995. The results of operations for the quarter ended
June 30, 1995 include the results of the operations for Cimarron
from May 23, 1995, which was the date the Company acquired Cimarron.
The results of Navigist for the six months ended June 30, 1995 were not
included as the Company did not acquire Navigist until August 1995. For
the six months ended June 30, 1995, $76,041 of the Company's revenues
related to the sales of software distributed via CD-ROM. The results for
the three and six months ended June 30, 1996 reflect the acquisitions of
Cimarron and Navigist, the formation of the Company's Internet Products
Group, and include no revenues or expenses from the Company's previous
CD-ROM software distribution business as all operations in this business
were discontinued in the third quarter of 1995.
Three and Six Months Ended June 30, 1996 Compared to the Three and Six
Months Ended June 30, 1995
Total sales for the three months and six months ended June 30, 1996
increased by 471% and 779%, respectively compared to the same periods in
the prior year. These increases are the result of the acquisition of the
operations of Cimarron and Navigist and revenues generated from the
Internet Products Group, which comprised 47%, 38% and 15%, respectively
of the Company's revenues for the six months ended June 30, 1996. These
increases were offset by a decrease of $76,041 in revenues from the
Company's previous business of selling software distributed via CD-ROM.
The Company ceased all activity in this business during the quarter
ending September 30, 1995. Sales for the three months ended June 30, 1996
declined 35%, or approximately $263,800 compared to sales in the first
quarter ended March 31, 1996. This decline was due primarily to the
decline in the sales of the Denver Navigist operations.
The net loss of the Company increased by approximately 5% for the three
months ended June 30, 1996, and decreased by 13% for the six months ended
June 30, 1996, respectively, compared to the same periods in the prior
year the results for the three and six month periods ended June 30, 1995
included $ 96,925 and $ 56,261, respectively, of net non-operating income
related to the loss on and sale of assets and extraordinary gain from debt
restructuring. Without these non-operating items, the net operating loss
of the Company would have decreased by 11% and 18% for the three months
and six months ended June 30, 1996, respectively. Although the net losses
were lower when compared to prior year periods, the net loss in the quarter
ended June 30, 1996, increased significantly (203%) compared to the
previous quarter ended March 31, 1996. The increase in loss in the current
quarter was due primarily to the losses incurred in the Denver Navigist
operations in the second quarter which accounted for approximately 68% of
the total net loss for the quarter ended June 30, 1996. These losses were
caused primarily from the decline of sales as compared to the first quarter
sales of Navigist. As a result of these declining sales, the Company closed
the Denver Navigist operations and the operating expenses related to that
unit were eliminated. The Company believes that the reassignment of the
applications development group, closure of the Denver Navigist office and
elimination of the related expenses may result in lower operating losses
in future quarters and will allow the Company to better focus its effort
on the further development of its FindNowSM system and other Internet
products.
The decline in sales experienced in the quarter ended June 30, 1996,
contributed to a decline in gross margins from 75% in the first quarter
to 23% in the second quarter of 1996. However, gross margins improved
over comparable periods in the prior year improving 2% and 39% for the
three and six month periods ended June 30, 1996, compared to the reported
results of the prior year. If the effect of the sales decrease and related
costs in the Navigist operations are eliminated, the gross margins of the
business have significantly improved over the prior year primarily due to
the replacement of revenues generated from the sales of software
distributed on CD-ROM with the sales of multimedia and slide presentations
and network engineering services. Profit margins in the Company's prior
business was dependent upon completing a relatively large number of small
transactions in order to generate sufficient revenues to offset operating
costs. The Company's current business involves providing Internet and
intranet applications development and services, multimedia and slide
presentations, and network engineering consulting on a project basis. These
projects are sold on a fixed fee or time and expense basis and are priced
to generate sufficient gross margins on a stand alone basis, and are
therefore less dependent on sales volume to generate gross margin
percentages. The Company anticipates that future revenues from its
Internet Products Group may contain continuing service fees, either on a
fixed monthly, or transaction basis which may cause variances the overall
gross margin levels depending on the structure of the arrangements
ultimately consummated with customers.
Selling, general and administrative expenses of the Company increased 2%
and 51% for the three and six months ending June 30, 1996, respectively.
Selling, general and administrative expenses have declined 12% in the
quarter ended June 30, 1996, compared to the quarter ended March 31, 1996.
The increases compared to the prior year relate to the added costs of
operations from the acquisitions of Navigist and Cimarron and the
formation of the Internet Products Group, resulting in selling general
and administrative expenses declining as a percent of sales from 675%
in the six month period ended June 30, 1995, to 116% for the six month
period ending June 30, 1996 and has declined from 787% in the three month
period ending June 30, 1995, to 139% for the three month period ending
June 30, 1996. The decline of selling, general and administrative
expenses in the second quarter of 1996 compared to the first quarter of
1996 is the result of the effect of further management cost reductions
in several areas and elimination of the operating expenses for Navigist
during a part of the second quarter of 1996.
Liquidity and Capital Resources; Need for Additional Financing
The Company had cash and equivalents of $182,854 at June 30, 1996,
compared to $205,024 at the end of the first quarter of 1996 and $231,781
as of December 31, 1995. Although the Company has made progress in
commercializing its FindNowSM Service with the implementation of two
clients as of the date of this report, the Company has sustained continued
operating losses and expects an operating losses for third quarter.
However, the Company believes that it will be able to reduce the losses in
the third quarter based on the elimination of losses from its Navigist
Denver operation, as a result of it's closure, and additional sales of
its FindNowSM service, as the Company increases sales and marketing
efforts for FindNowSM. The Company used cash of $114,170 and $201,554
in its operations during the quarters ended March 31, 1996 and
June 30, 1996 respectively.
The Company has a working capital deficit of $646,836 as of June 30, 1996
compared to a working capital surplus of $155,815 at the beginning of the
fiscal year. This change in working capital relates to short term
financing from two officers of the Company. The two loans, totaling
$150,000, are intended to provide "bridge" capital until the Company is
able to complete a private placement. In addition, the Company also
recorded a short term obligation of $350,000 related to computer hardware
and software licenses obtained from ESRI in connection with the
development of the Company's FindNowSM system. Cash payments of $100,000
have been made towards this obligation during the six months ended
June 30, 1996. These transactions increased current liabilities by
$500,000 during the six months ending June 30, 1996. During the same
period, while current assets were reduced by approximately $207,000
primarily due to the reduction in receivables related to the closure of
the Navigist Denver operations, and collection of receivables in
the normal course of the Company's operations.
During the quarter ended June 30, 1996, the Company received
approximately $208,000 in proceeds from the exercise of warrants to
purchase common stock of the Company. The Company believes that it will
require additional cash to fund operations for the remainder of 1996
in order to continue operations as currently planned. The Company is
planning a private placement of its common stock which is intended to
raise gross proceeds of approximately $1.0 million to $1.5 million. The
proceeds will be used to continue development of the FindNowSM system,
increase sales and customer support resources in the Internet Products
Group and provide for general corporate working capital. The Company
believes the proceeds of the offering, if the planned amount is raised,
would be sufficient to meet its capital needs for the next 12 months.
The Company is currently in discussions with a number of potential clients
for its FindNowSM service. As of August 13, 1996, two customers had
contracted with the Company to utilize the FindNowSM service. The Company
believes that it has a viable market for its FindNowSM service based on
contact and inquiries from prospective customers received since the
deployment of FindNowSM. However, there can be no assurance that the
Company will be able to generate sufficient cash flow from anticipated
sales of FindNowSM service to cover operating costs of the Internet
Products group or related corporate administrative costs.
In addition to its planned private placement, the Company has also taken
steps to minimize its operating cash needs including reductions in
operating expenses. In addition, voluntary salary deferrals for certain of
its officers which amounted to $108,612 at the end of the six months ended
June 30, 1996 have been put in place. Without additional financing, sales
of FindNowSM service or additional changes in the Company's operations,
the Company believes that it has sufficient working capital to continue
operations through the end of the third quarter of 1996. In the event
that the Company can not obtain additional funding, the Company believes
that it can make additional changes in its operations to further reduce
the Company's cash requirements. However, the Company believes that these
changes would significantly reduce its chances of successfully
marketing its FindNowSM service and that there can be assurance that the
Company could continue as a going concern even with additional cost
reduction measures. Accordingly, there is an explanatory paragraph in the
auditors report describing uncertainties concerning the Company's ability
to continue as a going concern included in the Company's audited financial
statements dated December 31, 1995.
Forward Looking Statements and Related Business Risks and Assumptions
The Company's actual results may vary materially from the forward looking
statements made above. The Company intends that such statements be
subject to the safe harbor provision of the Securities Act. The Company's
forward-looking statements include the plans and objectives of management
for future operations and relate to: (i) the ability of the Company to
generate future sales of the Company's FindNowSM service, (ii) market
acceptance of the FindNowSM service, (iii) success of the Company in
forecasting and meeting the demand of the customers of the FindNowSM
service, including maintaining technical performance of the system as new
FindNowSM customers are added, (iv) ability to obtain financing to
purchase equipment needed to provide service to additional FindNowSM
customers, (v) ability to maintain pricing and thereby maintain adequate
profit margins on its products and services (vi) ability to retain
qualified technical personnel (vii) ability of the company to maintain
current pricing and sales volume in its operations of Cimarron and
Navigist (viii) ability to control development costs of FindNowSM service
within current budgeted levels, (ix) and the ability of the Company to
raise additional capital.
The foregoing assumptions are based on judgments with respect to, among
other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond the Company's ability
to control. There are also other risks which could cause the Company's
revenues or costs to vary markedly from the forward-looking statements
made above, such as the risk that the market demand for the FindNowSM may
not develop as expected or if it does develop, that the Company will be
able to generate sufficient sales to fund its operations. Accordingly,
although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could
prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized and
any statements should not be regarded as a representation by the Company
or any other person that the Company's objectives or plans will be
achieved.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a.Reports on Form 8-K
None
b.Exhibits - Included as exhibits are the items listed on the Exhibit
Index. The Registrant will furnish a copy of any of the exhibits listed
below upon payment of $5.00 per exhibit to cover the costs to the
Registrant of furnishing such exhibit.
[C]Exhibit
Number [C]Exhibit
27.1* Financial Data Schedule
3.1 Certificate of Incorporation of Infonow
Corporation. (Incorporated by Reference to Exhibit
3.1 of Registration No. 33-43035 on Form S-1).
3.3 By-Laws of InfoNow Corporation (Incorporated by
Reference to Exhibit 3.3 of Registration No. 33-
43035 on Form S-1).
4.1 Form of Common Stock Certificate for the
Registrant's common stock, $0.01 par value per
share (Incorporated by Reference to Exhibit 4.1 of
Registration No. 33-43035 on Form S-1).
*Filed herewith
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.
Dated: August 16,1996
INFONOW CORPORATION
(Registrant)
/s/ Michael W. Johnson
Michael W . Johnson
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Kevin D. Andrew
Kevin D. Andrew
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
