<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: MARCH 31, 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") March 31, 1998: 5,879,148
Transitional Small Business Disclosure Format (check one): Yes __ ; No X .
<PAGE> 2
BOREALIS TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Balance Sheets
March 31, 1998 (unaudited) and December 31, 1997 3
Condensed Statements of Operations (unaudited)
three months ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows (unaudited)
three months ended March 31, 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>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOREALIS TECHNOLOGY CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,064,578 $ 2,080,095
Accounts receivable -- 353,580
Certificate of deposit -- 650,000
Other current assets 457,425 290,667
------------ ------------
Total current assets 1,522,003 3,374,342
Property and equipment, net 827,895 819,417
Long term investment -- --
Note receivable from employees 389,974 156,988
Other assets 50,686 52,511
------------ ------------
Total assets $ 2,790,558 $ 4,403,258
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 148,826 $ 80,887
Accrued employee compensation 471,765 596,450
Promissory Note 250,000 900,000
Other accrued liabilities 90,756 110,350
Deferred Revenue 95,496 113,448
Current Portion of capital lease obligations 47,725 67,336
------------ ------------
Total current liabilities 1,104,568 1,868,471
Capital lease obligations 25,052 35,597
------------ ------------
Total liabilities 1,129,620 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 - 10,000,000;
Issued and outstanding shares: 5,879,149 at
March 31, 1998 and 5,245,428 at December 31, 1997 5,879 5,245
Additional paid-in capital 17,923,399 16,739,788
Note receivable from stockholder (93,124) (93,124)
Accumulated deficit (16,175,216) (14,152,719)
------------ ------------
Total stockholders' equity 1,660,938 2,499,190
------------ ------------
Total liabilities and stockholders' equity $ 2,790,558 $ 4,403,258
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
-3-
<PAGE> 4
BOREALIS TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Total revenues $ 195,623 $ 22,349
Cost of revenues 18,237 11,020
----------- -----------
Gross profit 177,386 11,329
Operating expenses:
Sales and marketing 1,088,883 816,586
Research and development 786,149 617,509
General and administrative 321,969 506,403
----------- -----------
Total operating expenses 2,197,001 1,940,498
Loss from operations (2,019,615) (1,929,169)
Interest income (expense) (2,883) 18,110
----------- -----------
Net loss $(2,022,498) $(1,911,059)
=========== ===========
Basic and diluted net loss
per common share $ (0.37) $ (0.60)
=========== ===========
Shares used in computing basic and
diluted net loss per common share 5,520,040 3,184,506
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
-4-
<PAGE> 5
BOREALIS TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,022,498) $(1,911,059)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 97,601 80,511
Noncash charges, net 68,000 48,180
Recognized portion of employee note receivable 50,346
Changes in assets and liabilities:
Accounts receivable 353,580 2,000
Other assets (23,266) (88,002)
Accounts payable 67,939 (45,822)
Other liabilities (162,230) 73,743
----------- -----------
Net cash used in operating activities (1,570,528) (1,840,449)
INVESTING ACTIVITIES
Proceeds of investment 650,000 --
Purchases of property and equipment (106,079) (179,086)
Increase in employee note receivable (425,000) --
----------- -----------
Net cash (used in) provided by investing activities 118,921 (179,086)
FINANCING ACTIVITIES
Payments under capital lease obligations (30,156) (64,866)
Payment of promissory note (650,000) --
Proceeds from issuance of common stock, net 1,116,246 --
----------- -----------
Net cash (used in) provided by financing activities 436,090 (64,866)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,015,517) (2,084,401)
Cash and cash equivalents at beginning of period 2,080,095 3,921,506
----------- -----------
Cash and cash equivalents at end of period $ 1,064,578 $ 1,837,105
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
-5-
<PAGE> 6
BOREALIS TECHNOLOGY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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 month period ended March 31, 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 November 1997, the Company began a private placement to sell units
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. As of December 1997, the
Company had sold 183,640 units and recorded proceeds of $1.0 million, net of
related commissions and private placement expenses.
On February 20, 1998 the Company successfully completed the private
placement selling a total of 500,500 units and recording total proceeds of $2.2
million, net of commissions and private placement expenses. In conjunction with
the second closing, the units under the agreement were retroactively re-priced,
effectively increasing the number of units issued under the first closing.
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 March 31, 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.
NOTE 6 - ADOPTION OF NEW PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on
the Company's net loss or stockholders' equity.
As of January 1, 1998, the Company implemented the AICPA's Statement
of Position 97-2, Software Revenue Recognition ("SOP97-2"). Adoption of SOP97-2
had no impact on the Company's revenue recognition.
-6-
<PAGE> 7
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 three month period ended
March 31, 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. Services 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 revenue from the licensing
and sale of products, revenue from service and maintenance agreements and
revenue from consulting and training services. Revenues increased from $22,349
for the three months ended March 31, 1997 to $195,623 for the comparable period
ended March 31, 1998. This increase is the result of the sale of the Company's
customer relationship management product, Arsenal. There can be no assurance
that the Company's revenues will continue to increase or fail to decrease, and
any further increases in the Company's 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.
COST OF REVENUES:
Cost of revenues represents primarily amounts incurred pursuant to
royalty obligations and maintenance agreements on certain technology and wages
of technical services personnel. The cost of revenues increased slightly from
$11,020 to $18,237 between the three months ended March 31, 1997 and 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, since the Company only recently
introduced 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-
<PAGE> 8
OPERATING EXPENSES:
Total operating expenses are comprised of sales and marketing,
research and development, and general and administrative expenses. Sales and
marketing expenses increased from $816,586 to $1,088,883 between the three
months ended March 31, 1997 and 1998. This increase is primarily the result of
increased staffing. Research and development expenses increased from $617,509 to
$786,149 between the three months ended March 31, 1997 and 1998. This increase
in research and development expenses is due to an increase in staffing and
expenditures related to the development of enhancements to Arsenal. General and
administrative expenses decreased from $506,403 to $321,969 between the three
months ended March 31, 1997 and 1998. This decrease in general and
administrative expenses is primarily due to a decrease in staffing between the
first quarters of 1997 and 1998. The Company anticipates that total operating
expenses will continue to increase for the foreseeable future as the Company:
(i) expands its sales and marketing function in order to facilitate the market
acceptance and sale of Arsenal and (ii) adds additional software engineers to
fund the development of enhancements to Arsenal and develop new products.
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 for the
three months ended March 31, 1998 increased to $2,022,498, from a loss of
$1,911,059 for the three month period ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
On February 20, 1998, the Company successfully completed a private
placement (the "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.
Additional financing activities included the payment of a $650,000
promissory note with the proceeds from a certificate of deposit.
The Company's cash and short-term investments totaled $1,064,578 at
March 31, 1998, representing 38% of total assets. The Company used $1.6 million
of cash to fund operations for the first quarter of 1998. As of March 14, 1998,
the Company's cash and short-term investments totaled approximately $50,000. On
May 15, 1998, the Company received a $180,000 loan from an officer of the
Company. The loan is secured by the assets of the Company, bears interest at 8%
per annum and is convertible into the Company's equity securities if the Company
is successful in raising additional capital. 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 expenditures for computers and computer related equipment.
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 few weeks 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.
As of March 31, 1998 the Company was out of compliance with the
standards for listing on the Nasdaq SmallCap Market. On April 20, 1998, the
Company received a letter from the Nasdaq Stock Market indicating that the
Company no longer met the requirements for continued listing on the Nasdaq
SmallCap Market. As a result the Company's shares of Common Stock will be
subject to removal from the Nasdaq SmallCap Market if the Company is not able to
obtain additional financing or generate sufficient revenue in the next several
weeks to satisfy the listing requirements. 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
-8-
<PAGE> 9
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.
RISK FACTORS
Going Concern Assumption; Future Capital Needs Uncertain; No Assurance of Future
Financing
The company's independent auditor's 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
$16,175,216 at March 31, 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 few weeks 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 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. 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
As of March 31, 1998 the Company was out of compliance with the
standards for listing on the Nasdaq SmallCap Market. On April 20, 1998, the
Company received a letter from the Nasdaq Stock Market indicating that the
Company no longer met the requirements for continued listing on the Nasdaq
SmallCap Market. As a result, the Company's shares of Common Stock will be
subject to removal from the Nasdaq SmallCap Market if the Company is not able to
obtain additional financing or generate sufficient revenue in the next several
weeks to satisfy the listing requirements. 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
-9-
<PAGE> 10
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.
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.
-10-
<PAGE> 11
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 three months ending March
31, 1998 and expects to incur significant operating losses for the foreseeable
future. The Company's sole product, Arsenal, is designed for the customer
relationship management market. As a result, the Company will derive
substantially all of its revenues from the sales of 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 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
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.
-11-
<PAGE> 12
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 resource 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 sales automation
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
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
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
Registration 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: May 15, 1998
-14-
<PAGE> 15
INDEX TO 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
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
Registration Statement on Form 10-KSB filed March 31, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,064,578
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,622,003
<PP&E> 1,443,654
<DEPRECIATION> 615,759
<TOTAL-ASSETS> 2,790,558
<CURRENT-LIABILITIES> 1,104,568
<BONDS> 0
0
0
<COMMON> 5,879
<OTHER-SE> 1,655,059
<TOTAL-LIABILITY-AND-EQUITY> 2,790,558
<SALES> 150,000
<TOTAL-REVENUES> 195,623
<CGS> 0
<TOTAL-COSTS> 18,237
<OTHER-EXPENSES> 786,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,097
<INCOME-PRETAX> (2,022,498)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,022,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,022,498)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
