U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1996
Gateway Data Sciences Corporation
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Arizona 86-0527788
- ------------------------------- -----------------------------
(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
3410 E. University Drive, Phoenix, AZ 85034
------------------------------------------------
(Address of principal executive offices)
(602) 968-7000
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 No XX
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity: 2,798,949 shares of common stock, $.01 par value (as of June 12, 1996)
----------
-1-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 1996
and January 31, 1996 3
Consolidated Statements of Operations for the
three months ended April 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
three months ended April 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION 11
Signatures 12
-2-
<PAGE>
PART I, ITEM 1. FINANCIAL STATEMENTS
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1996 AND JANUARY 31, 1996
<TABLE>
<CAPTION>
April 30, January 31,
1996 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,526,796 $ 93,402
Trade receivables -- less allowance of $90,100 4,066,568 2,914,154
Inventories 889,101 388,041
Prepaid expenses and other assets 898,167 928,287
------------- ------------
Total current assets 8,380,632 4,323,884
PROPERTY AND EQUIPMENT -- Net 1,417,541 1,139,770
NET INVESTMENT IN LEASE RESIDUALS 1,558,547 1,558,547
OTHER ASSETS 134,066 116,216
$ 11,490,786 $ 7,138,417
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 609,934 1,279,947
Accrued liabilities 1,799,566 2,107,207
Accrued payroll and benefits 319,598 262,719
Due to officers and employees (Note 3) 0 536,172
Accrued interest 1,445 14,664
Current portion of notes payable 142,298 136,436
Current portion of capital lease obligations 60,369 58,798
Deferred revenue 960,446 808,731
------------- ------------
Total current liabilities 3,893,656 5,204,674
DEFERRED REVENUE, recognized after one year 1,789,151 1,769,314
NOTES PAYABLE, less current portion 404,189 1,252,038
LINE OF CREDIT 28,372 311,555
CAPITAL LEASE OBLIGATIONS, less current portion 45,899 61,545
------------- ------------
Total liabilities 6,161,267 8,599,126
------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT) :
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value, 20,000,000 shares authorized,
2,793,199 shares issued and outstanding at April 30, 1996 and
1,543,199 shares issued and outstanding at January 31, 1996 27,931 15,431
Additional paid-in capital 9,109,947 2,587,848
Deferred compensation (11,700) (11,700)
Accumulated deficit (3,796,659) (4,052,289)
------------- ------------
Total shareholders' equity (deficit) 5,329,519 (1,460,710)
------------- ------------
$ 11,490,786 $ 7,138,417
============= ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1996 AND 1995
Three Months Ended
April 30,
----------------------------
(Unaudited)
1996 1995
---- ----
REVENUE
Product revenue $ 968,748 $ 6,882,478
Software license revenue 1,296,021 484,325
Professional services 530,329 227,645
------------- --------------
Total revenues 2,795,098 7,594,448
------------- --------------
OPERATING EXPENSES:
Products sold 557,482 5,356,567
Software development 754,981 681,286
Professional services 488,967 425,047
Sales and marketing 342,549 382,366
General and administrative 344,599 302,243
------------- --------------
Total expenses 2,488,578 7,147,509
------------- --------------
INCOME FROM OPERATIONS 306,519 446,939
OTHER (INCOME) EXPENSE:
Interest expense 50,984 236,622
Other, net (95) (323)
------------- --------------
Total other expense, net 50,889 236,299
------------- --------------
INCOME BEFORE INCOME TAXES 255,630 210,640
PROVISION FOR INCOME TAXES -- --
------------- --------------
NET INCOME $ 255,630 $ 210,640
------------- --------------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (Note 2) $ .12 $ .14
============= =============
COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (Note 2) 2,214,934 1,557,385
============= =============
See notes to consolidated financial statements.
-4-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 255,630 $ 210,640
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................... 117,624 68,559
Effect of changes in assets and liabilities:
Trade receivables........................................................... (1,152,414) (1,652,512)
Inventories................................................................. (501,060) 1,835,857
Prepaid expenses and other assets........................................... 12,269 (470,378)
Accounts payable............................................................ (670,013) 278,869
Accrued liabilities......................................................... (307,641) (757,946)
Accrued payroll and benefits................................................ 56,879 171,102
Accrued interest............................................................ (13,219) 31,805
Deferred revenue............................................................ 171,552 (246,414)
------------- -------------
Net cash used in operating activities............................ (2,030,393) (530,418)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................................. (395,395) (25,375)
Net investment in lease residuals............................................... -- 112,500
------------- -------------
Net cash (used in) provided by investing activities............. (395,395) 87,125
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering....................................... 6,534,599 --
Principal payments on notes payable............................................. (841,987) (23,772)
Principal payments on capital lease obligations................................. (14,075) (116,686)
Net payments on line of credit.................................................. (283,183) --
Net proceeds from borrowings from (payments to) officers and employees.......... (536,172) 275,192
------------- -------------
Net cash provided by financing activities........................ 4,859,182 134,734
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................... 2,433,394 (308,559)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................................... 93,402 311,916
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................... $ 2,526,796 $ 3,357
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 64,429 $ 236,622
============= =============
Cash paid during the period for income taxes.................................... $ 39,500 $ --
============= =============
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
1. INTERIM FINANCIAL REPORTING
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows for the periods presented have been made. The results of operations
for the three-month period ended April 30, 1996 are not necessarily indicative
of the operating results that may be expected for the entire year ending January
31, 1997. These financial statements should be read in conjunction with the
Company's Form 10-KSB for the fiscal year ended January 31, 1996.
2. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed using the
weighted average number of common and common equivalent shares outstanding
during each period. Common stock equivalents consist of stock options and
warrants.
3. TRANSACTIONS WITH RELATED PARTIES
During the three months ended April 30, 1996, the Company used a
portion of the proceeds of its initial public offering (Note 4) to retire
$536,172 of accrued liabilities due to certain officers and employees and
$660,000 of bridge notes payable due to certain of the Company's officers,
members of the Board of Directors, and an affiliated party.
4. INITIAL PUBLIC OFFERING
In March 1996 the Company completed an initial public offering of its
common stock. The Company sold 1,250,000 shares of its common stock at $6.75 per
share, resulting in net proceeds to the Company of approximately $6.5 million.
The Company used the proceeds to pay down its line of credit and retire the
bridge notes payable (Note 3). The Company also intends to use a portion of the
net proceeds to develop new software applications and enhancements to existing
applications, to modify its software products to operate on open architecture
platforms, to expand marketing and sales operations, to make additional capital
investments, and for working capital purposes.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operations
The Company designs, develops, markets and implements software products
and provides related customer support services and hardware for point-of-sale,
retail merchandising, and warehouse automation systems. The Company also
provides professional services, including installation, training, maintenance,
customization, and modifications in conjunction with sales of its software
products. The Company markets its products and services entirely through an
internal sales force.
Founded in 1985, the Company historically derived its revenue primarily
from sales of hardware and software products developed by third parties,
primarily International Business Machines Corp. ("IBM"). The Company's
dependence on the resale of third parties' products adversely affected the
Company's competitive position, gross profit margins, and operating results. As
a result, in 1991 the Company changed its business strategy to emphasize the
development and sale of its own software products. The Company intends to use a
substantial portion of the proceeds from its initial public offering completed
in March 1996 to significantly accelerate the transition of its business focus
during the next 12 months. As a result, the Company anticipates that revenue
from third-party hardware and software products will continue to decrease from
historical levels and that revenue from software licenses and professional
services will increase in dollar amounts as well as a percentage of total
revenue during the next several years. The Company believes that, although the
change in product mix will initially result in lower total revenue, it will also
result in a more favorable gross profit margin for the Company, reduced
borrowing requirements, and a higher net margin as sales of software become a
higher percentage of total revenue. This change is evident in the results of
operations for the three months ended April 30, 1996.
Product revenue includes hardware, third-party software, and
third-party maintenance sold to the Company's customers. Software license
revenue includes revenue from the licensing of the Company's proprietary
software offerings as well as revenue from the customization and modification of
the Company's software for its customers. Professional services revenue includes
services to install the Company's software products and third-party hardware and
software products, and services to train customers in the use of the Company's
software products and third-party hardware and software products.
Cost of products sold includes costs of those products (software and
hardware) not manufactured by the Company and maintenance resold by the Company.
The Company does not capitalize any software development costs associated with
the development of its proprietary software products and has expensed all
payroll and related costs for software development as incurred. Sales and
marketing expenses consist primarily of salaries, commissions and related
benefits, and general and administrative costs associated with or allocated to
the Company's sales and marketing personnel. General and administrative expenses
include the cost of finance and accounting, human resources, corporate
information systems and other administrative functions of the Company.
Results of Operations of the Company for the Three Months ended April 30, 1996
Revenue. Total revenue decreased by 63% from approximately $7.6 million
in the three months ended April 30, 1995 to approximately $2.8 million in the
three months ended April 30, 1996. Product revenue decreased by 86% from
approximately $6.9 million to approximately $969,000
-7-
<PAGE>
during the same periods. As a percentage of total revenue, product revenue
decreased from 91% during the three months ended April 30, 1995 to 34% during
the three months ended April 30, 1996. Software license revenue increased by
168% from approximately $484,000 in the three months ended April 30, 1995 to
approximately $1.3 million in the three months ended April 30, 1996. As a
percentage of total revenue, software license revenue increased from 6% to 46%
during the same period. Professional services revenue increased 133% from
approximately $228,000 to approximately $530,000 during the three month periods
ending April 30, 1995 and 1996, respectively. As a percentage of total revenue,
professional services revenue increased from 3% of total revenue to 19% of total
revenue during the three months ended April 30, 1995 and 1996, respectively.
The overall decrease in total revenue is attributed to significantly
lower product revenue. The decrease in product revenue is attributed to reduced
sales of third-party hardware products, principally those manufactured by IBM,
including the IBM AS/400. IBM has delayed shipment on its new AS/400 line of
RISC (Reduced Instruction Set Computing) processors, thus delaying sales to many
of the Company's customers. The increase in software license and professional
services revenue resulted from the Company's continued focus on sales of its
proprietary software products, as well as continuing to provide professional
services to implement its software products.
Cost of Products Sold. Cost of products sold decreased 90% from
approximately $5.4 million during the three months ended April 30, 1995 to
approximately $557,000 during the three months ended April 30, 1996. This
decrease is attributed to the corresponding decrease in sales of third-party
hardware products during the same period. As a percentage of product revenue,
gross margins on product revenue were approximately 40% and 24% during the three
months ended April 30, 1996 and 1995, respectively. The increase in total gross
margin is attributed to an overall significantly lower volume of sales of IBM
AS/400s and to the higher margins associated with the retail industry-related
products, which the Company resells at higher gross margin levels than IBM
AS/400s.
Software Development Expense. Software development expense increased
from approximately $681,000 to approximately $755,000 during the three months
ended April 30, 1995 and 1996, respectively. The 11% increase is attributed to
increased research and development effort associated with the development of the
Company's proprietary software products. As a percentage of total revenue,
software development costs increased from 9% in the three months ended April 30,
1995 to 27% in the three months ended April 30, 1996. This increase is
attributed to the overall decrease in total revenue.
Professional Services Expense. Professional services expense increased
by 15% from approximately $425,000 to approximately $489,000 during the three
months ended April 30, 1995 and 1996, respectively. Additional personnel
contributed to this increase. As a percentage of professional services revenue,
professional services expense decreased from 187% in the three months ended
April 30, 1995 to 92% in the three months ended April 30, 1996. This decrease is
attributed to increased utilization of professional services personnel.
Sales and Marketing Expense. Sales and marketing expenses decreased 10%
from approximately $382,000 to approximately $343,000 in the three months ended
April 30, 1995 and 1996, respectively. The decrease can be attributed to lower
commission expenses paid as a result of changes in sales compensation plans for
fiscal 1997.
General and Administrative Expense. General and administrative expenses
increased from approximately $302,000 in the three months ended April 30, 1995
to approximately $345,000 in the three months ended April 30, 1996. This 14%
increase is attributed to additional personnel and associated costs.
-8-
<PAGE>
Other Income (Expense). Interest expense was approximately $51,000
during the three months ended April 30, 1996, as compared with approximately
$237,000 during the three months ended April 30, 1995. In September 1995, the
Company converted approximately $1.2 million of debt into shares of common
stock. Interest expense related to this debt, together with interest expense due
to vendor late payments that were incurred during the three months ended April
30, 1995, were not incurred during the three month period ended April 30, 1996.
Net Income. Net income increased 21% from approximately $211,000, or
$.14 per share, in the three months ended April 30, 1995 to approximately
$256,000, or $.12 per share, in the three months ended April 30, 1996. The
Company attributes this increase to the 78% decrease in interest expense during
the comparable periods. The decrease in net income per share is primarily a
result of the additional shares issued in conjunction with the Company's initial
public offering in March 1996.
Liquidity and Capital Resources
The Company's working capital position increased from a deficit of
approximately ($880,000) at January 31, 1996 to approximately $4.5 million at
April 30, 1996. In March 1996, the Company completed an initial public offering
of 1,250,000 shares of common stock and raised net proceeds of approximately
$6.5 million. The Company used a portion of the proceeds from this offering to
retire $810,000 of bridge notes and related interest, to purchase approximately
$396,000 of capital equipment, and to retire approximately $536,000 of debt to
officers and employees.
The Company's operations used net cash of approximately $2.0 million
for operations during the three months ended April 30, 1996, primarily as a
result of the increase in accounts receivable, the reduction in accounts payable
and other accrued liabilities, and the investment in inventories related to
large retail point-of-sale transactions.
Capital expenditures for the three-month period ended April 30, 1996
totaled approximately $396,000, of which approximately $251,000 was for the
purchase of computer hardware and software needed for the continued efficient
development of proprietary software products. The balance of $145,000 was used
for the expansion of physical office space and related purchases of furniture
and fixtures.
Financing activities provided net cash of approximately $4.9 million in
the three months ended April 30, 1996. The Company completed its initial public
offering in March 1996, which generated net proceeds to the Company of
approximately $6.5 million. Retirement of approximately $810,000 in bridge notes
payable, payments to officers and employees of approximately $536,000, and
payments on the Company's line of credit in the amount of $283,000 partially
offset the proceeds from the initial public offering.
The Company currently has an agreement with Concord Growth Corporation
("Concord") providing for a line of credit that expires August 22, 1996, in the
amount that is the lower of $2.0 million or 75% of eligible accounts receivable.
The line of credit bears interest at the prime rate of interest quoted in the
Wall Street Journal on the first day of each month plus 8% and requires a
monthly minimum payment of $5,000. The Company anticipates that it will replace
or re-negotiate its existing line of credit during the second quarter of fiscal
1997 in order to obtain a more favorable borrowing facility.
The Company believes that existing cash balances, cash generated from
operations, and available borrowings will be sufficient to meet the Company's
liquidity needs for the next 12 months at its current level of operations.
However, the Company may be required to obtain additional
-9-
<PAGE>
capital to fund its planned growth in the future, particularly to provide funds
required to finance the Company's planned software development programs and
increased sales and marketing efforts. Potential sources of such capital may
include the proceeds from the exercise of outstanding options and warrants, bank
financing, strategic alliances, and additional offerings of the Company's equity
or debt securities. There can be no assurance that such capital will be
available on acceptable terms from these or other potential sources, and the
lack of such capital could have a material adverse effect on the Company's
operations.
-10-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Securities
Not Applicable
Item 4. Submissions of Matter to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
-11-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature:
- ----------
GATEWAY DATA SCIENCES CORPORATION
/s/ Michael M. Gordon Chairman of the Board, June 13, 1996
- ---------------------------------- President, and Chief
Executive Officer
(Principal Executive
Officer)
/s/ Vickie B. Jarvis Vice President, Finance and June 13, 1996
- ---------------------------------- Chief Financial Officer
(Principal Financial and
Accounting Officer)
-12-
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,527
<SECURITIES> 0
<RECEIVABLES> 4,067
<ALLOWANCES> 90
<INVENTORY> 889
<CURRENT-ASSETS> 8,381
<PP&E> 2,527
<DEPRECIATION> 1,110
<TOTAL-ASSETS> 11,491
<CURRENT-LIABILITIES> 3,894
<BONDS> 0
0
0
<COMMON> 28
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,491
<SALES> 2,795
<TOTAL-REVENUES> 2,795
<CGS> 557
<TOTAL-COSTS> 2,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> 256
<INCOME-TAX> 0
<INCOME-CONTINUING> 256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
