<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE QUARTER ENDED: JUNE 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number: 0-28556
---------------------------
BOREALIS TECHNOLOGY CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 88-0238203
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4070 Silver Sage Drive
Carson City, NV 89701
(Address of principal executive offices)
(702) 888-3200
(Issuer's telephone number)
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 [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
equity, as of the latest practicable date:
CLASS OUTSTANDING AT
Common Stock - par value $.001 ("Common Stock") June 30, 1998: 8,587,576
Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X].
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BOREALIS TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997 3
Condensed Statements of Operations (unaudited)
three months and six months ended June 30, 1998
and 1997 4
Condensed Statements of Cash Flows (unaudited)
six months ended June 30, 1998 and 1997 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Risk Factors
9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
</TABLE>
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOREALIS TECHNOLOGY CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,643,316 $ 2,080,095
Accounts receivable -- 353,580
Certificate of deposit -- 650,000
Other current assets 718,551 290,667
------------ ------------
Total current assets 2,361,867 3,374,342
Property and equipment, net 794,425 819,417
Note receivable from an employee 333,724 156,988
Other assets 44,890 52,511
------------ ------------
Total assets $ 3,534,906 $ 4,403,258
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 392,457 $ 80,887
Accrued employee compensation 461,195 596,450
Promissory note 250,000 900,000
Other accrued liabilities 114,197 110,350
Deferred revenue 146,904 113,448
Current portion of capital lease obligations 34,609 67,336
------------ ------------
Total current liabilities 1,399,362 1,868,471
Capital lease obligations 15,998 35,597
------------ ------------
Total liabilities 1,415,360 1,904,068
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
Issued and outstanding - none
Common stock, $.001 par value:
Authorized shares - 30,000,000;
Issued and outstanding shares: 8,587,576
at June 30, 1998, and 5,245,428 at December 31, 1997 8,587 5,245
Additional paid-in capital 20,689,790 16,739,788
Note receivable from stockholder (74,999) (93,124)
Accumulated deficit (18,503,832) (14,152,719)
------------ ------------
Total stockholders' equity 2,119,546 2,499,190
------------ ------------
Total liabilities and stockholders' equity $ 3,534,906 $ 4,403,258
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
3
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BOREALIS TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 63,608 $ 185,005 $ 259,231 $ 207,354
Cost of revenues 18,633 25,248 36,870 36,268
----------- ----------- ----------- -----------
Gross profit 44,975 159,757 222,361 171,086
Operating expenses:
Sales and marketing 1,122,093 1,559,490 2,210,976 2,376,076
Research and development 880,324 558,803 1,666,473 1,176,312
General and administrative 365,021 486,566 686,990 992,969
----------- ----------- ----------- -----------
Total operating expenses 2,367,438 2,604,859 4,564,439 4,545,357
Loss from operations (2,322,463) (2,445,102) (4,342,078) (4,374,271)
Interest income (expense) (6,153) (3,491) (9,036) 14,619
----------- ----------- ----------- -----------
Net loss $(2,328,616) $(2,448,593) $(4,351,114) $(4,359,652)
=========== =========== =========== ===========
Basic and diluted net loss
per common share $ (0.36) $ (0.77) $ (0.73) $ (1.37)
=========== =========== =========== ===========
Shares used in computing basic and diluted net
loss per common share 6,451,256 3,184,781 5,988,221 3,184,644
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
4
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BOREALIS TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(4,351,114) $(4,359,652)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 202,636 169,526
Common stock issued for compensation 123,825 48,180
Recognized portion employee note receivable 106,596 --
Changes in operating assets and liabilities:
Accounts receivable 353,580 200
Other current assets (283,166) 12,507
Accounts payable 311,570 243,762
Accrued employee compensation and benefits (135,255) 79,642
Other accrued Liabilities 3,847 430,868
Deferred Revenue 33,456 (32,779)
----------- -----------
Net cash used in operating activities (3,634,025) (3,407,746)
INVESTING ACTIVITIES
Proceeds from investment 650,000 --
Purchases of property and equipment (177,644) (252,544)
Increase in employee note receivable (425,000) --
----------- -----------
Net cash used in investing activities 47,356 (252,544)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 3,847,644 --
Proceeds from exercise of common stock options -- 1,670
Payment of promissory note (650,000) --
Payments under capital lease obligations (47,754) (103,520)
----------- -----------
Net cash provided by (used in) financing activities 3,149,890 (101,850)
Net (decrease) in cash and cash equivalents (436,779) (3,762,140)
Cash and cash equivalents at beginning of period 2,080,095 3,921,506
----------- -----------
Cash and cash equivalents at end of period 1,643,316 159,366
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
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BOREALIS TECHNOLOGY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For further information, refer to the 1997
financial statements and footnotes thereto included in the Company's 10-KSB and
the Company's registration statement on form SB-2 declared effective by the
Securities and Exchange Commission on July 21, 1997.
NOTE 2 - FINANCING
In June 1998, the Company began a private placement to sell shares of
Common Stock at a per share price of $1.00. As of June 30, the Company had sold
2,693,000 shares and recorded net proceeds of $2.7 million.
NOTE 3 - BASIC AND DILUTED NET LOSS PER COMMON SHARE
Loss per share was computed by dividing the net loss by the weighted
average number of shares of common stock outstanding. Common stock equivalents
from stock options and warrants are excluded from the computation because their
effect is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which the Company adopted on December 31,
1997. As a result, the Company changed the method used to compute earnings per
share. Under the new requirements for calculating basic earnings (loss) per
share, the dilutive effect of stock options was excluded. A restatement of prior
periods was not necessary as common equivalent shares from common stock options
and warrants have been excluded from the computation of net loss per share, as
their effect is anti-dilutive.
NOTE 4 - BORROWINGS
At June 30, 1998, the Company had $250,000 outstanding pursuant to a
bank credit line subject to certain restrictive covenants. These borrowings
accrue interest at 10.25% per annum and are due and payable on July 14, 1998.
NOTE 5 - USE OF ESTIMATES
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which require the Company's
management to make estimates and assumptions that affect the amounts reported
therein. Actual results could vary from such estimates.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking
statements regarding future events and the future financial performance of
Borealis Technology Corporation (the "Company") that involve risks and
uncertainties including, but not limited to, statements related to the market
acceptance of Arsenal and the adequacy of the Company's cash reserves. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth herein under "Risk Factors" and elsewhere in this Statement.
The Company has experienced significant operating losses for each of
the fiscal years beginning with fiscal 1994 and for the six month period ended
June 30, 1998 and expects such losses to continue for the forseeable future. The
Company's sole product, Arsenal, is designed for the customer relationship
management market. To date, the Company has shipped its Arsenal product to 6
customers. The Company derives substantially all of its revenues from the sale
of Arsenal licenses and maintenance contracts for Arsenal. There can be no
assurance that Arsenal will ever achieve significant market acceptance or that
the Company will ever achieve profitability.
The Company's future operating results will depend on many factors,
including demand for Arsenal, the level of product and price competition,
potential customers' perceptions of the Company's financial position, the
ability of the Company to develop and market new products and to control costs,
the ability of the Company to expand its direct sales force and indirect
distribution channels and the ability of the Company to attract and retain key
personnel. In particular, the ability of the Company to achieve revenue growth
in the future will depend on its success in adding, assimilating and retaining a
substantial number of direct sales personnel and third party integrators in
future periods. Purchases of customer relationship management products, such as
Arsenal, are discretionary and generally involve a significant commitment of
capital. As a result, in the event of any downturn in any potential customer's
business or the economy in general, purchases of the Company's products may be
deferred or canceled, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has generally recognized and expects to recognize product
and license revenue which is not subject to significant obligations upon
execution of a licensing agreement, delivery of the software and when collection
is deemed probable. Service revenues are recognized as services are performed
while maintenance revenues are recognized ratably over the term of the support
period.
REVENUES:
Revenues have historically consisted of revenues from the licensing and
sale of products, revenues from service and maintenance agreements and revenues
from consulting and training services. Revenues decreased from $185,005 for the
three months ended June 30, 1997 to $63,608 for the comparable period ended June
30, 1998. This decrease reflects a slowdown in sales due to potential customers'
perceptions of the Company's financial position. Revenues increased from
$207,354 for the six months ended June 30, 1997 to $259,231 for the six months
ended June 30, 1998. This increase reflects the introduction of the Company's
Arsenal product in the second quarter of 1997. There can be no assurance that
the Company's revenues will increase or fail to decrease and the Company's
ability to generate revenues will be dependent upon, among other things, market
acceptance of Arsenal and the Company's ability to attract, retain and
assimilate additional sales personnel and the Company's ability to secure
additional financing.
COST OF REVENUES:
Cost of revenues represents primarily amounts incurred pursuant to
royalty obligations and maintenance agreements on certain technology and the
wages of technical services personnel. The cost of revenues decreased from
$25,248 for the three months ended June 30, 1997 to $18,633 for the comparable
period ended June 30, 1998. The cost of revenues increased slightly from $36,268
for the six months ended June 30, 1997 to $36,870 for the six months ended June
30, 1998. The Company anticipates that the absolute dollar spending for cost of
revenues will increase in the foreseeable future as the Company expands its
technical services organization to support customer needs. However, given the
limited sales of Arsenal, the Company believes that the ratio of cost of
revenues to revenues are not meaningful in the periods presented or indicative
of future ratios.
7
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OPERATING EXPENSES:
Total operating expenses are comprised of sales and marketing, research
and development, and general and administrative expenses. Sales and marketing
expenses decreased from $1,559,490 for the three months ended June 30, 1997 to
$1,122,093 for the comparable period ended June 30, 1998. Sales and marketing
expenses decreased from $2,376,076 for the six months ended June 30, 1997 to
$2,210,976 for the comparable period ended June 30, 1998. These decreases are
primarily the result of decreased spending on trade shows, print advertising and
promotional events. Research and development expenses increased from $558,803
for the three months ended June 30, 1997 to $880,324 for the comparable period
ended June 30, 1998. Research and development expenses increased from $1,176,312
for the six months ended June 30, 1997 to $1,666,473 for the comparable period
ended June 30, 1998. These increases in research and development expenses are
due to increases in staffing and expenditures related to the development of
enhancements to Arsenal. General and administrative expenses decreased from
$486,566 for the three months ended June 30, 1997 to $365,021 for the comparable
period ended June 30, 1998. General and administrative expenses decreased from
$992,969 for the six months ended June 30, 1997 to $686,990 for the comparable
period ended June 30, 1998. These decreases in general and administrative
expenses are primarily due to decreases in staffing.
Based on the Company's research and development process, costs incurred
between the establishment of technical feasibility and general release have not
been material and therefore have not been capitalized in accordance with
Statement of Financial Accounting Standards No. 86. All research and development
costs are expensed as incurred.
NET LOSS:
As a result of the factors discussed above, the net loss decreased from
$2,448,593 for the three months ended June 30, 1997 to $2,328,616 for the three
months ended June 30, 1998 and decreased from $4,359,652 for the six months
ended June 30, 1997 to $4,351,114 for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In May 1998, the Company began a private placement (the "Private
Placement") to sell shares of Common Stock at a per share price of $1.00 per
share. As of June 30, 1998, the Company had sold 2,693,000 units and recorded
net proceeds of $2.7 million. In February, the Company completed a private
placement of securities comprised of two shares of Common Stock and one warrant
exercisable for one share of Common Stock at a per share price of $5.00. The
Company issued approximately 1.0 million shares of Common Stock and warrants to
purchase approximately 500,000 shares of Common Stock.
The Company's cash and short-term investments totaled $1,643,316 at
June 30, 1998, representing 46% of total assets. The Company used $3.6 million
of cash to fund operations for the six months ended June 30, 1998. Net cash used
in operating activities was primarily for the development, sales and marketing
costs associated with Arsenal. The Company's principal investing activities
consisted of advances to an employee and expenditures for computers and computer
related equipment. At June 30, 1998, the Company had $250,000 outstanding
pursuant to a bank credit line subject to certain restrictive covenants. The
Company is currently in discussions to extend the note. However, there can be
no assurance any extension will be approved.
The Company's existing capital resources and cash generated from
operations, if any, are sufficient to meet the Company's cash requirements only
for the next month at its anticipated level of operations. The Company is
currently seeking additional funding. However, there can be no assurance that
any additional financing will be available on acceptable terms, or at all, as
required by the Company. Moreover, if additional financing is not available, the
Company will be required to reduce or suspend its operations, seek an
acquisition partner or sell securities on terms that may be highly dilutive or
otherwise disadvantageous to investors.
For the quarter ended March 31, 1998, the Company was not able to
maintain the standards for continued quotation on the Nasdaq SmallCap Market. As
a result Nasdaq required the Company to submit a plan that indicated how the
Company would get back into compliance with the listing standards. The Company
was granted a temporary exception from the NASDAQ Marketplace net tangible
assets/market capitalization/net income requirements subject to the Company
meeting certain conditions which will expire on September 15, 1998. Absent the
Company's ability to obtain additional financing or to generate sufficient
revenue by that time, the Company will be removed from the Nasdaq SmallCap
Market. Trading, if any, in the Common Stock would therefore be conducted in the
over-the-counter market on an electronic bulletin board established for
securities that do no meet the Nasdaq SmallCap Market Listing requirements, or
in what are commonly referred to as the "pink sheets." As a result, an investor
would find it more difficult to dispose of, or to obtain accurate quotations as
to the price of the Company's Common Stock. Nasdaq has recently promulgated new
rules which make listing of companies on the Nasdaq SmallCap Market more
difficult to maintain and has significantly increased its enforcement efforts
with regard to the standards for such listing. In addition, if the Company's
Common Stock were removed from the Nasdaq SmallCap Market, the Common Stock
would be subject to so-called "penny stock" rules that impose additional sales
practice and market making requirements on broker-dealers who sell and/or make a
market in such securities. Consequently, removal from the Nasdaq SmallCap
Market, if it were to occur, could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Common Stock and the ability
of purchasers of the Company's Common Stock to sell their securities in the
secondary market. In addition if the market price of the Company's Common Stock
is less then $5.00 per share, the Company may become subject to certain penny
stock rules even if still quoted on the Nasdaq SmallCap Market. While such penny
stock rules should not affect the quotation of the Company's Common Stock on the
Nasdaq
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SmallCap Market, such rules may further limit the market liquidity of the Common
Stock and the ability of purchasers to sell such Common Stock in the secondary
market.
RISK FACTORS
Going Concern Assumption; Future Capital Needs Uncertain; No Assurance of Future
Financing
The Company's independent auditors' report on the Company's financial
statements at December 31, 1997 and for the years ended December 31, 1996 and
1997 contains an explanatory paragraph indicating that the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. In addition, the Company had an accumulated deficit of
$18,503,832 at June 30, 1998. The Company currently requires and in the future
may require substantial additional funds and there can be no assurance that any
independent auditor's report on the Company's future financial statements will
not include a similar explanatory paragraph if the Company is unable to raise
sufficient funds or generate sufficient cash from operations to cover the cost
of its operations. The existence of the explanatory paragraph may materially
adversely affect the Company's relationship with prospective customers, third
party integrators and suppliers, and therefore could have a material adverse
effect on the Company's business financial condition and results of operations.
In the absence of receiving additional funding, the Company
anticipates that its existing capital resources and cash generated from
operations, if any, will be sufficient to meet the Company's cash requirements
for the next month at its anticipated level of operations. There can be no
assurance that any additional financing will be available on acceptable terms,
or at all, as required by the Company. Moreover, if additional financing is not
available, the Company will be required to reduce or suspend its operations,
seek an acquisition partner or sell securities on terms that may be highly
dilutive or otherwise disadvantageous to investors. The Company has experienced
in the past, and may continue to experience, operational difficulties and delays
in its product development due to working capital constraints. Any such
difficulties or delays could have a material adverse effect on the Company's
business, financial condition and results of operations.
Complete Dependence on Recent Product Introduction
The Company derives substantially all of its revenues from the sale of
licenses and maintenance contracts for Arsenal. Consequently, the Company is
entirely dependent on the market acceptance of Arsenal. Unless and until Arsenal
receives market acceptance, the Company will have no material source of revenue.
There can be no assurance that Arsenal will achieve market acceptance. The
Company's ability to effectuate market acceptance and sales of Arsenal will be
substantially dependent on the hiring and training of additional personnel, and
there can be no assurance that the Company will be able to successfully hire and
train such personnel. Although the Company has begun to hire additional
personnel, market acceptance of Arsenal will require the Company to successfully
hire and retain sales personnel in a timely manner, of which there can be no
assurance. Any such failure will have a material adverse effect on the Company's
business, financial condition and results of operations. Failure of Arsenal to
achieve significant market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Liquidity of Trading Market; Penny Stock
For the quarter ended March 31, 1998, the Company was not able
to maintain the standards for continued quotation on the Nasdaq SmallCap Market.
As a result Nasdaq required the Company to submit a plan that indicated how the
Company would get back into compliance with the listing standards. The Company
was granted a temporary exception from the NASDAQ Marketplace net tangible
assets/market capitalization/net income requirements subject to the Company
meeting certain conditions which will expire on September 15, 1998. Absent the
Company's ability to obtain additional financing or to generate sufficient
revenue by that time, the Company will be removed from the Nasdaq SmallCap
Market. Trading, if any, in the Common Stock would therefore be conducted in the
over-the-counter market on an electronic bulletin board established for
securities that do no meet the Nasdaq SmallCap Market Listing requirements, or
in what are commonly referred to as the "pink sheets." As a result, an investor
would find it more difficult to dispose of, or to obtain accurate quotations as
to the price of the Company's Common Stock. Nasdaq has recently promulgated new
rules which make listing of companies on the Nasdaq SmallCap Market more
difficult to maintain and has significantly increased its enforcement efforts
with regard to the standards for such listing. In addition, if the Company's
Common Stock were removed from the Nasdaq SmallCap Market, the Common Stock
would be subject to so-called "penny stock" rules that impose additional sales
practice and market making requirements on broker-dealers who sell and/or make a
market in such securities. Consequently, removal from the Nasdaq SmallCap
Market, if it were to occur, could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Common Stock and the ability
of purchasers of the Company's Common Stock to sell their securities in the
secondary market. In addition if the market price of the Company's Common Stock
is less then $5.00 per share, the Company may become subject to certain penny
stock rules even if still quoted on the Nasdaq SmallCap Market. While such penny
stock rules should not affect the quotation of the Company's Common Stock on the
Nasdaq SmallCap Market, such rules may further limit the market liquidity of the
Common Stock and the ability of purchasers to sell such Common Stock in the
secondary market.
9
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Recent Hires of Key Executives; Need to Fill Key Executive Position; Dependence
on Limited Number of Key Personnel
The Company's Chairman of the Board recently assumed the position as
Chief Executive Officer following the resignation of its President and Chief
Executive Officer. The Company's future success substantially depends on the
efforts of certain of its officers and key technical and other employees, many
of whom have only recently joined the Company. In particular, the Company's
Senior Vice President of World Wide Sales and Services and its Vice President of
Business Development recently joined the Company in November 1997 and the
Company's Vice President of Engineering recently joined the Company in February
1998. Additionally, the Company is currently seeking to hire a Vice President of
Marketing. The Company's future success will require it to recruit additional
key personnel, including additional sales and marketing personnel. The Company
has not entered into employment agreements nor does it have key man life
insurance. The Company believes that its future success depends on its ability
to attract, retain and motivate highly skilled employees, who are in great
demand. There can be no assurance that the Company will be successful in doing
so.
Dependence on Third Party Integrators
Software products that address the customer relationship management
needs of medium- to large-size businesses are typically highly complex and
require significant customization that often results in an extensive
implementation process. The Company's strategy for implementing Arsenal is
dependent on the utilization of third-party integrators to install, customize
and service it. Consequently, third-party integrators are required to undergo a
substantial amount of training to be able to apply the Company's products to the
varied needs of the Company's current and prospective customers. There can be no
assurance that the Company will be able to attract and retain personnel
necessary to train such integrators. In addition, there can be no assurance that
the Company's training will be sufficient or that such integrators will be able
to provide the level or quality of service required to meet the needs of the
Company's current and prospective customers. The Company will likely be
dependent on third-party integrators to complete certain post-delivery
obligations prior to the Company's recognition of revenue. Any failure of such
integrators to complete such obligations could prevent the Company from
recognizing revenue and the failure to so recognize revenue could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the Company is unable to maintain effective, long-term
relationships with these integrators, or if such integrators fail to meet the
needs of the Company's current and prospective customers in a timely fashion, or
at all, such failure would result in a loss of, or delay in, market acceptance
of sales and could result in increased product support costs and an injury to
the Company's reputation, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has not and does not plan to enter into or maintain
exclusive relationships with third-party integrators and, consequently, such
integrators may have existing relationships with, or may undertake new
relationships with, the Company's direct competitors. There can be no assurance
that such integrators will promote Arsenal effectively, or at all. The failure
of the Company to provide sufficient incentive for such integrators may
materially and adversely affect the Company's sales of Arsenal which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Recent Losses; Quarterly Fluctuations in Performance
The Company has experienced significant operating losses in each of
fiscal years beginning with fiscal 1994 and for the six months ending June 30,
1998 and expects to incur significant operating losses for the foreseeable
future. The Company commenced sales of Arsenal, currently the Company's only
product, in April 1997. As a result, the Company derives substantially all of
its revenues from the sales of licenses and maintenance contracts for Arsenal.
Consequently, the Company is entirely dependent on the market acceptance of
Arsenal. Unless and until Arsenal receives market acceptance, the Company will
have no material source of revenue. There can be no assurance that Arsenal will
achieve market acceptance, moreover, there can be no assurance that the Company
will ever achieve profitability.
The Company's operating and other expenses are relatively fixed in the
short term. As a result, variation in the timing of revenues will cause
significant variations in quarterly operating results. Notwithstanding the
difficulty in forecasting future sales, the Company generally must undertake its
development, sales and marketing activities and other commitments months in
advance. Accordingly, any shortfall in revenues in a given quarter may
materially adversely affect the Company's business, financial condition and
results of operations due to the inability to adjust expenses during the quarter
to match the level of revenues for the quarter. Once commitments for such
expenditures are undertaken, the Company may be unable to reduce them quickly if
revenue is less than expected. In addition, the Company's sales expectations are
based entirely on its internal estimates of future demand. Due to these and
other factors, the Company believes that quarter-to-quarter comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance.
Operating results may fluctuate as a result of many factors, including
volume and timing of orders received, the extent to which the Company is
required to establish and support a third-party integrator channel or hire
additional sales personnel to supplement such channel, announcements by the
Company and its competitors, the timing of commercial introduction of
10
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enhancements to Arsenal, if any, or competitive products, the impact of price
competition on the Company's average selling prices, and the level of research
and development required to complete any future product enhancements. Almost all
of these factors are beyond the Company's control. In addition, due to the short
product life cycles that characterize the customer resource management software
market, the Company's failure to introduce any Arsenal enhancements in a timely
manner could have a material adverse effect on the Company's business, financial
condition and results of operations.
Rapid Technological Change; Risk of Product Delays or Defects
The customer relationship management software market is characterized
by ongoing technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends in large part upon its
ability to obtain market acceptance of Arsenal, develop enhancements to Arsenal
to address the changing requirements of its customers, educate third-party
integrators regarding Arsenal and anticipate or respond to technological
advances, competitive products and emerging industry standards in a timely,
cost-effective manner. There can be no assurance that the Company will be
successful in marketing and supporting Arsenal or enhancements to Arsenal, if
any, or will not experience difficulties that could delay or prevent the
successful marketing and support of these products, or that Arsenal and any such
product enhancements will adequately meet the requirements of the marketplace
and achieve any significant degree of commercial acceptance. The Company has in
the past experienced delays in product development, including significant delays
in the development of Arsenal. Delays in enhancements to Arsenal, if any, may
result in customer dissatisfaction and delay or loss of product and maintenance
revenues. In addition, there can be no assurance that Arsenal or other future
products will meet the requirements of the marketplace or will conform to
industry standards and requirements. Any delays in the development or
introduction of enhancements to Arsenal or failure to respond to market
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
Software products such as Arsenal often contain errors or "bugs" that
can adversely affect the performance of the product or damage a user's data.
There can be no assurance that, despite testing by the Company and by potential
customers, errors will not be found in Arsenal, resulting in a loss, of, or
delay in, market acceptance and sales, diversion of development resources,
injury to the Company's reputation, or increased service and warranty costs, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition
The customer relationship management software market is highly
competitive, highly fragmented and characterized by rapid technological change,
frequent new product introductions, short product life cycles and evolving
industry standards, and is expected, in the future, to be characterized by
significant price erosion over the life of a product. Within specific ranges of
functionality, the Company experiences competition from many sources, including:
(i) companies that directly address the sales automation market, such as Aurum
Software, Inc., Siebel Systems, Inc., Saratoga Systems, Inc., Saleskit Software
and Brock Control Systems, Inc.; (ii) third-party integrators, such as Andersen
Consulting, LLP and KPMG Peat Marwick LLP, that design, develop and implement
custom solutions; (iii) the internal information technology departments of
organizations that develop proprietary applications; and (iv) companies such as
Symantec Corporation, Goldmine Software Corporation, and Modatech Systems
Corporation, suppliers of Personal Information Managers ("PMS") off-the-shelf
software specific to personal computers designed to aid in such activities as
time management, contact management and calendaring. In addition, the Company
may experience competition from additional companies, to the extent such
companies enter the customer relationship management market, such as "groupware"
vendors, "help-desk" vendors, Local Area Network ("LAN") based application
development tools vendors, remote LAN-access communication vendors and
communications and systems management software vendors. Among the Company's
potential competitors are also a number of large hardware and software companies
that may develop or acquire products that compete in the customer relationship
management software market.
Current and potential competitors have established and may establish
cooperative relationships with third parties to increase the ability of their
products to address the needs of the Company's current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing, name recognition and other resources than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
can the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures will not materially adversely affect the Company's business, financial
condition and results of operations.
Risks Associated with Managing Growth
11
<PAGE> 12
The Company's anticipated level of growth, should it occur, will
challenge the Company's management and its sales and marketing, customer
support, research and development, finance and general and administrative
operations. The Company's future performance will depend in part on its ability
to manage any such growth, should it occur, and to adapt its operational and
financial control systems, if necessary, to respond to changes resulting from
any such growth. The failure of the Company's management to respond to and
manage growth effectively will have a material adverse effect on the Company's
business, financial condition and results of operations.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1(1) Agreement and Plan of Merger between Borealis
Corporation, a Nevada corporation, and Borealis
Technology Corporation, a Delaware corporation,
dated June 7, 1996.
3.1(1) Registrant's Certificate of Incorporation, as
currently in effect.
3.2(1) Registrant's Bylaws, as currently in effect.
4.1(1) Specimen Certificate of Registrant's Common Stock
4.2(1) Form of WSGR Warrant
4.3(1) Form of Warrant issued to H.J. Meyers & Co., Inc.
in connection with the Registrant's initial public
offering
4.4(1) Registrant's Contingent Rights Plan
4.5(2) Form of Warrant issued to H.J. Merers & Co., Inc.
in connection with the Registrant's July 1997
public offering
10.1(1) Real Property Lease between Registrant and Incline
Investors Group, dated June 15, 1995.
10.2(1) Real Property Sublease between Registrant and U.S.
Bank of Nevada, dated November 7, 1995.
10.3(1) 1994 Stock Plan.
10.4(1) 1996 Stock Plan.
10.5(1) 1996 Director Option Plan.
10.6(1) Form of Indemnification Agreement.
10.7(1) Asset License and Purchase Agreement between the
Registrant and Sales Technologies, Inc., dated
April 15, 1994.
10.8(1) Lease between the Registrant and DBB Holdings,
Inc., dated June 11, 1996.
10.9(3) Promissory Note between the Registrant and US Bank
dated July 11, 1996.
10.10(4) 1997 Employee Stock Purchase Plan
10.11(1) Form of Warrant for 2000 shares granted to Peter
Pitsker on June 11, 1996
10.12(1) Form of Warrant for 7,000 shares granted to Jerry
Brooks on June 11, 1996
10.13(2) Solution Provider Agreement between the Registrant
and American Technology Corporation, dated October
4, 1996
10.14(2) Promissory Note issued to Oxbow LLC
10.15(2) Warrant issued to Oxbow LLC
10.16(2) Rights Agreement between the Registrant and Oxbow
LLC
10.17(5) Form of Unit Purchase Agreement for 1997/98
private placement
10.18(5) Form of Warrant for 1997-98 private placement
10.19 Form of Purchase Agreement for 1998 private
placement.
27.1 Financial Data Schedule
</TABLE>
------------------------
(1) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form SB-2
which became effective on June 20, 1996.
(2) Incorporated by reference to exhibits with
Registrant's Registration Statement on Form SB-2
which became effective on July 21, 1997.
(3) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form 10-QSB
filed August 13, 1996
(4) Incorporated by reference to annex filed with
Registrant's Definitive Proxy Statement on Schedule
14A filed April 11, 1997.
(5) Incorporated by reference to exhibits filed with
Registrant's Statement on Form 10-KSB filed March 31,
1998.
(b) Reports on Form 8-K.
None.
13
<PAGE> 14
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BOREALIS TECHNOLOGY CORPORATION
Registrant
BY: /s/ Elizabeth J. Gaspar
-------------------------------------
Elizabeth J. Gaspar
Executive Vice President
Chief Financial Officer
Date: August 13, 1998
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1(1) Agreement and Plan of Merger between Borealis
Corporation, a Nevada corporation, and Borealis
Technology Corporation, a Delaware corporation,
dated June 7, 1996.
3.1(1) Registrant's Certificate of Incorporation, as
currently in effect.
3.2(1) Registrant's Bylaws, as currently in effect.
4.1(1) Specimen Certificate of Registrant's Common Stock
4.2(1) Form of WSGR Warrant
4.3(1) Form of Warrant issued to H.J. Meyers & Co., Inc.
in connection with the Registrant's initial public
offering
4.4(1) Registrant's Contingent Rights Plan
4.5(2) Form of Warrant issued to H.J. Merers & Co., Inc.
in connection with the Registrant's July 1997
public offering
10.1(1) Real Property Lease between Registrant and Incline
Investors Group, dated June 15, 1995.
10.2(1) Real Property Sublease between Registrant and U.S.
Bank of Nevada, dated November 7, 1995.
10.3(1) 1994 Stock Plan.
10.4(1) 1996 Stock Plan.
10.5(1) 1996 Director Option Plan.
10.6(1) Form of Indemnification Agreement.
10.7(1) Asset License and Purchase Agreement between the
Registrant and Sales Technologies, Inc., dated
April 15, 1994.
10.8(1) Lease between the Registrant and DBB Holdings,
Inc., dated June 11, 1996.
10.9(3) Promissory Note between the Registrant and US Bank
dated July 11, 1996.
10.10(4) 1997 Employee Stock Purchase Plan
10.11(1) Form of Warrant for 2000 shares granted to Peter
Pitsker on June 11, 1996
10.12(1) Form of Warrant for 7,000 shares granted to Jerry
Brooks on June 11, 1996
10.13(2) Solution Provider Agreement between the Registrant
and American Technology Corporation, dated October
4, 1996
10.14(2) Promissory Note issued to Oxbow LLC
10.15(2) Warrant issued to Oxbow LLC
10.16(2) Rights Agreement between the Registrant and Oxbow
LLC
10.17(5) Form of Unit Purchase Agreement for 1997/98
private placement
10.18(5) Form of Warrant for 1997-98 private placement
10.19 Form of Purchase Agreement for 1998 private
placement.
27.1 Financial Data Schedule
</TABLE>
------------------------
(1) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form SB-2
which became effective on June 20, 1996.
(2) Incorporated by reference to exhibits with
Registrant's Registration Statement on Form SB-2
which became effective on July 21, 1997.
(3) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form 10-QSB
filed August 13, 1996
(4) Incorporated by reference to annex filed with
Registrant's Definitive Proxy Statement on Schedule
14A filed April 11, 1997.
(5) Incorporated by reference to exhibits filed with
Registrant's Statement on Form 10-KSB filed March 31,
1998.
(b) Reports on Form 8-K.
None.
<PAGE> 1
Exhibit 10.19
TERMS OF THE OFFERING
The shares of Common Stock ("Shares"), par value $0.001, are being
offered without registration under the Securities Act of 1933, as amended (the
"Securities Act"), and the securities laws of certain states, in reliance on the
private offering exemption contained in Section 4(2) of the Securities Act and
on Regulation D of the Securities and Exchange Commission (the "SEC") thereunder
("Regulation D") and in reliance on similar exemptions under certain applicable
state laws.
THE INVESTMENT CONTEMPLATED HAS A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS MUST CONDUCT THEIR OWN EXTENSIVE DUE DILIGENCE TO DETERMINE THE
SUITABILITY OF AN INVESTMENT IN THE COMPANY FOR THEIR OWN PORTFOLIO.
THE OFFERING
PRICE PER SHARE
The price per Share (the "Per Share Price") will be $1.00 per share.
QUALIFICATION OF INVESTORS--ACCREDITED INVESTORS
Shares are suitable only for long-term investment by persons who have
sufficient financial means to bear the risk of total loss of their investment in
the Company and who have no need for liquidity in their investment.
Sales will be made only to individuals who at the time of sale are, or
whom the Company reasonably believes are, "Accredited Investors" within the
meaning of Regulation D promulgated by the SEC and similar provisions under
applicable state laws. Each Investor will be required to complete an Investor
Suitability Questionnaire and an agreement, which contains specific
representations regarding the Investor's status as an "Accredited Investor."
The suitability standards referred to above represent minimum
suitability requirements for prospective investors and the satisfaction of such
standards by a prospective investor does not necessarily mean that the Shares
are a suitable investment for such prospective investor. The Company may make or
cause to be made such further inquiry and obtain such additional information as
it deems appropriate with regard to the suitability of prospective investors.
The Company reserves the right to modify, increase or decrease the suitability
standards and minimum investment with respect to certain investors in order to
comply with any applicable state or local laws, rules, regulations or otherwise.
THE SUITABILITY STANDARDS DISCUSSED ABOVE REPRESENT MINIMUM SUITABILITY
STANDARDS FOR PROSPECTIVE INVESTORS. EACH PROSPECTIVE INVESTOR SHOULD DETERMINE
WHETHER THIS INVESTMENT IS APPROPRIATE FOR SUCH INVESTOR.
The Company reserves the right to screen prospective investors and has
the right, in its sole discretion, to reject any prospective investor for any
reason.
THE COMPANY WILL NOT OFFER OR SELL SHARES TO ANY PROSPECTIVE INVESTOR
WHO HAS NOT FILLED OUT, AS THOROUGHLY AS POSSIBLE, AN INVESTOR SUITABILITY
QUESTIONNAIRE.
PLAN OF DISTRIBUTION
The Shares are being offered for sale by the Company. The Company is
required to pay the costs of qualifying the Shares, and the securities
underlying the Shares, under federal and state securities laws, together with
legal and accounting fees, printing and other costs in connection with this
Offering.
T-1
<PAGE> 2
The Company may complete multiple sales of Shares, (the closing of
which are referred to herein as "Subsequent Closings" with each of the first
closing of a sale of Shares and the Subsequent Closings referred to herein as a
"Closing"). The capital contributed from investors at all Closings will not
exceed $5,000,000. Cash from all subscriptions received and accepted by the
Company, up to the Maximum Offering amount, will be immediately available to the
Company.
REGISTRATION OBLIGATION
The Company will, not later than 90 days following the last Closing,
use its commercially reasonable efforts to effect a registration on Form S-3 for
the resale of shares of Common Stock offered hereby. The Company will bear all
expenses of registration (exclusive of underwriting discounts and commissions or
other selling expenses and fees of counsel of a selling shareholder). The
Company will be obligated to use its commercially reasonable efforts to keep
such registration effective for two years following the First Closing. In the
event that any holder of Common Stock sold in the Offering wishes to sell such
Common Stock pursuant to such registration, such holder will be required to give
the Company three (3) business days' notice of its intent to sell in reliance on
such registration, and such notice shall be deemed to constitute a
representation that any written information previously supplied by such holder
is accurate as of the date of such notice. Within three (3) business days
following such notice, the Company may require that such holder delay such sale
for a period not to exceed 60 days if the Company certifies in writing that such
delay is necessary because a sale pursuant to the registration statement in its
then-current form would not be in the best interests of the Company and its
stockholders due to disclosure obligations of the Company; provided, however,
that the Company will not be entitled to invoke its right to delay a sale more
than three times in any calendar year.
SUMMARY OF SUBSCRIPTION PROCEDURE
Included with this Terms of the Offering is an Investor Suitability
Questionnaire. Each prospective investor should promptly complete, execute and
fax this Questionnaire to the Company at (702) 888-3219, attn: Elizabeth Gasper,
CFO of Borealis, 4070 Silver Sage Drive, Carson City, Nevada 89701. To subscribe
for Shares, Accredited Investors should send an executed copy of this Terms of
the Offering to the Company via fax at (702) 888-3219, or mail, 4070 Silver Sage
Drive, Carson City, Nevada 89701 attn: Elizabeth Gasper, CFO of Borealis, and a
cash payment in the form of a check, bank draft or money order payable to
"Borealis Technology Corporation" in the amount of the subscription or funds
wired per the following instructions:
<TABLE>
<S> <C>
To the account of: Borealis Technology Corp.
Account Number: 8290104127
ABA Number: 121201694
Bank: U.S. Bank - Incline Village
Address: Incline Village, NV 89450
Phone: (702) 831-4780
</TABLE>
All subscription documents should be returned whether executed or
unexecuted to Borealis Technology Corporation, 4070 Silver Sage Drive, Carson
City, Nevada 89701, Attn: Elizabeth Gasper.
SUBSCRIPTION DOCUMENTS SUBMITTED TO THE COMPANY MERELY CONSTITUTE AN
OFFER TO INVEST IN THE OFFERING WHICH OFFER MAY BE ACCEPTED OR REJECTED BY THE
COMPANY IN ITS SOLE DISCRETION.
T-2
<PAGE> 3
DESCRIPTION OF THE SHARES
The Shares being offered by the Company consist of Common Stock, $.001
par value.
COMMON STOCK
As of May 22, 1998, there were approximately 5,879,148 shares of Common
Stock outstanding. The holders of Common Stock are entitled to one vote per
share on all matters to be voted on by stockholders. Subject to preferences that
may be applicable to any outstanding Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. The Company has never declared or paid any
cash dividends on its Common Stock. The Company currently intends to retain
future earnings, if any, to fund the development of its business and therefore
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. Pursuant to a bank term loan, the Company is restricted from
paying cash dividends without the prior approval of the lender.
In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or other
subscription rights and there are no conversion rights or redemption or sinking
fund provisions with respect to such shares. All of the outstanding shares of
Common Stock are fully paid and nonassessable.
Borealis Technology Corp. Investor Name:__________________________
____________________ Signature:___________________________
Elizabeth J. Gasper
CFO
T-3
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,643,316
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,361,867
<PP&E> 1,515,219
<DEPRECIATION> 720,794
<TOTAL-ASSETS> 3,534,906
<CURRENT-LIABILITIES> 1,399,362
<BONDS> 0
0
0
<COMMON> 8,588
<OTHER-SE> 2,110,958
<TOTAL-LIABILITY-AND-EQUITY> 3,534,906
<SALES> 150,000
<TOTAL-REVENUES> 259,232
<CGS> 0
<TOTAL-COSTS> 36,871
<OTHER-EXPENSES> 1,666,473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,171
<INCOME-PRETAX> (4,351,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,351,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,351,114)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
