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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13587
QUERYOBJECT SYSTEMS CORPORATION
Formerly "CrossZ Software Corporation"
(Exact name of registrant as specified in its charter)
Delaware 94-3087939
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(Address of principal executive offices)
(516) 228-8500
(Registrant's telephone number, including area code)
CrossZ Software Corporation
(Former name of registrant)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of July 31, 1998 there were 5,121,422 shares of the Registrant's
common stock outstanding.
Transitional Small Business Disclosure Format. Yes / / No /X/
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<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of June 30, 1998 (unaudited)............................ 3
Condensed Consolidated Statement of Operations
For the three months and six months ended June 30, 1998
and 1997 (unaudited) ...................................... 4
Condensed Consolidated Statement of Cash Flows
For the six months ended June 30, 1998 and 1997 (unaudited). 5
Notes to the Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis or Plan of Operation... 7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................. 16
Item 4. Submission of Matters to a Vote of Security Holders........ 16
Item 5. Other Information.......................................... 17
Item 6. Exhibits and Reports on Form 8-K........................... 17
SIGNATURES........................................................... 18
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1998
ASSETS
Current assets
<S> <C>
Cash and cash equivalents.................................... $ 1,003,853
Accounts receivable, net of allowance for doubtful
accounts of $30,000...................................... 158,680
Restricted certificate of deposit............................ 598,453
Prepaid expenses and other current assets.................... 79,540
------------
Total current assets..................................... 1,840,526
Property and equipment, net........................................ 1,131,600
Deposits and other assets.......................................... 146,452
------------
Total assets............................................. $ 3,118,578
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................. $ 285,660
Accrued expenses............................................. 890,476
Deferred revenue............................................. 58,751
Loan payable to stockholders................................. 565,122
Customer advance............................................. 300,000
Capital lease obligations due within one year................ 206,652
------------
Total current liabilities................................ 2,306,661
Capital lease obligations.......................................... 260,816
Deferred rent .................................................... 269,381
------------
Total liabilities........................................ 2,836,858
------------
Stockholders' equity
Preferred stock, 2,000,000 shares authorized;
none issued and outstanding.............................. --
Common stock, $0.001 par value: 30,000,000 shares
authorized; 5,121,422 shares issued and outstanding...... 5,121
Additional paid-in capital................................... 30,471,579
Accumulated deficit.......................................... (30,194,980)
------------
Total stockholders' equity............................... 281,720
------------
Total liabilities and stockholders' equity............... $ 3,118,578
============
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
3
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues
<S> <C> <C> <C> <C>
Software licenses............................... $ 60,000 $ 398,750 $ 135,000 $ 398,750
Services and maintenance........................ 24,165 81,187 61,026 96,377
------------ ------------ ----------- ------------
Total revenues........................ 84,165 479,937 196,026 495,127
Cost of revenues
Software licenses............................... 750 5,807 1,500 5,807
Services and maintenance........................ 21,155 51,169 45,911 54,739
------------ ------------ ----------- ------------
Total cost of revenues................ 21,905 56,976 47,411 60,546
------------ ------------ ----------- ------------
Gross Profit......................................... 62,260 422,961 148,615 434,581
------------ ------------ ----------- ------------
Operating expenses
Sales and marketing............................. 1,141,228 986,988 2,468,446 2,061,319
Research and development........................ 614,839 662,315 1,181,256 1,197,731
General and administrative...................... 400,729 323,711 850,730 608,435
------------ ------------ ----------- ------------
Total operating expenses.............. 2,156,796 1,973,014 4,500,432 3,867,485
----------- ------------ ----------- ------------
Loss from operations................................. (2,094,536) (1,550,053) (4,351,817) (3,432,904)
Interest income...................................... 38,024 8,239 101,365 27,093
Interest expense..................................... (35,924) (58,101) (77,336) (101,612)
Other income (expense)............................... 25 -- (206) 542
------------ ------------ ----------- ------------
Net loss............................................ . $ (2,092,411) $ (1,599,915) $ (4,327,994) $ (3,506,881)
------------ ------------ ----------- ------------
Basic net loss per share............................. $ (.41) $ (.64) $ (.85) $ (1.41)
------------ ------------ ----------- ------------
Weighted average shares used in basic per share
computation (Note 3)............................ 5,120,519 2,498,768 5,118,580 2,494,666
=========== ============ =========== ============
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
4
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net loss ................................................ $ (4,327,994) $ (3,506,881)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization...................... 204,864 97,413
Loss on sale of computer equipment................. 206 --
Options issued for consulting services............. 76,499 104,500
Changes in operating assets and liabilities
Accounts receivable, net........................ 341,087 595,537
Prepaid expenses and other current assets....... (31,286) (90,830)
Deposits and other assets....................... 3,822 (44,525)
Accounts payable and accrued expenses........... (465,976) 476,927
Deferred rent................................... 448 6,647
Deferred revenue................................ 28,716 71,387
------------ -------------
Net cash used in operating activities................ (4,169,614) (2,289,825)
------------ -------------
Cash flows from investing activities
Release of restricted certificate of deposit............. 296,213 --
Loan receivable from stockholder......................... (65,000) --
Acquisitions of property and equipment................... (88,408) (215,856)
Purchase of restricted certificate of deposit............ (16,827) (18,012)
------------ -------------
Net cash provided by (used in) investing activities.. 125,978 (233,868)
------------ -------------
Cash flows from financing activities
Proceeds from issuance of common stock.................. 10,384 52,218
Proceeds from interim financing notes payable to
shareholders.............................................. -- 950,000
Repayment of loan payable to stockholders................ (326,213) (60,000)
Payments of capital lease obligations.................... (115,534) (128,394)
Repayment of loan receivable from stockholder............ 12,300 --
Proceeds from sale-leaseback transaction................. 29,202 409,429
------------ -------------
Net cash (used in) provided by financing activities..... (389,861) 1,223,253
------------ -------------
Net decrease in cash and cash equivalents...................... (4,433,497) (1,300,440)
Cash and cash equivalents at beginning of year................. 5,437,350 1,367,566
------------ -------------
Cash and cash equivalents at end of period..................... $ 1,003,853 $ 67,126
============ =============
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
5
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring adjustments,
which in the opinion of management are necessary to fairly state the Company's
financial position, results of operations and cash flows for the periods
presented. These financial statements should be read in conjunction with the
Company's audited financial statements included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1997. The condensed consolidated
results of operations for the period ended June 30, 1998 are not necessarily
indicative of the results to be expected for any subsequent quarter, for the
entire fiscal year ending December 31, 1998, or for any future period.
In May 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation changing the name of the Company to
"QueryObject Systems Corporation".
In May 1998, the Company formed QueryObject Systems Corporation Ltd., a
wholly owned subsidiary based in the United Kingdom. The condensed consolidated
financial statements include the accounts of the Company and its subsidiary. All
significant intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to the condensed financial
statements for the six months ended June 30, 1997 to conform to the 1998
presentation.
2. Initial Public Offering
On November 20, 1997, the Company's Initial Public Offering ("IPO") of
2,500,000 shares of common stock was consummated, which resulted in net proceeds
to the Company of $12,469,574 before repayment of certain bridge and interim
financings, including interest thereon, which totaled approximately $5,281,000.
As of the closing date of the IPO, all of the Company's outstanding preferred
stock was converted into an aggregate of 1,697,313 shares of Common Stock.
3. Net Loss Per Common Share
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128") beginning with the Company's fourth
quarter of 1997.
Basic net loss per common share is computed by dividing net loss for
the period by the sum of the weighted average number of shares of common stock
issued and outstanding after conversion of all outstanding preferred stock
effected contemporaneously with the IPO. All outstanding shares of Series A, B,
C and D Preferred Stock were converted as though such conversion occurred at the
beginning of the earliest period presented or the date of issuance in the case
of the Series D. Historical net loss per share has not been presented since such
amount is not deemed to be meaningful due to the significant change in the
Company's capital structure resulting from the IPO.
6
<PAGE>
Options and warrants to acquire common stock have not been included in the
computation of net loss per share because to do so would have been antidilutive
for the periods presented.
4. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Interest paid during the period................................ $ 78,752 $ 81,421
Schedule of non cash investing and financing activities:
Series D Preferred Stock, issued for dividends........... -- 506,342
</TABLE>
5. Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
6. Liquidity and Business Risks
The Company has incurred operating losses since inception, and negative
cash flows from operating activities. As of June 30, 1998, the Company had an
accumulated deficit of $30,194,980. The Company has had a limited operating
history as a software product company and has not made significant sales of its
products. Therefore, revenues are difficult to predict. As previously reported,
the Company anticipated that cash generated from operations would be
insufficient to satisfy the Company's liquidity requirements, and therefore the
Company is seeking to sell additional equity securities through a private
offering to "accredited investors." See "Management's Discussion and Analysis or
Plan of Operation Liquidity and Capital Resources". To date, the Company has no
commitments, agreements or understandings with respect to the private offering
or any other additional financing and there can be no assurance that the Company
will be able to consummate the private offering or any other transaction. Any
sale of additional equity securities will result in additional dilution to the
Company's stockholders. The independent accountants' report for the year ended
December 31, 1997 states that the Company's recurring losses from operations and
the Company's negative cash flow from operating activities raise substantial
doubt about the Company's ability to continue as a going concern.
Item 2. Management's Discussion and Analysis or Plan of Operation
The discussion in this report on Form 10-QSB contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors" in this Part I, Item 2 as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in "Risk Factors"
in Part I, Item 1 - Business, included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
7
<PAGE>
The discussion and analysis below should be read in conjunction with
the Condensed Consolidated Financial Statements of the Company and the Notes
thereto included elsewhere herein.
Overview
The Company commenced operations in February 1989, and to date
substantially all of its revenues have been derived from providing contract
services to customers using its proprietary business intelligence technology. In
the third quarter of 1996, the Company shifted its focus to commercializing its
proprietary business intelligence technology and most of its activities since
then have been devoted to research and development, recruiting personnel,
raising capital, and developing a sales and marketing strategy and
infrastructure. Accordingly, the Company has a limited operating history as a
software product company and has made only limited sales of its QueryObject
System. The Company's future financial performance will depend upon the
successful customer acceptance of QueryObject System.
To date, the Company has incurred substantial losses from operations,
and at June 30, 1998 had an accumulated deficit of $30,194,980. The Company's
operations and activities have been primarily funded through sales of equity and
debt securities, including the closing of the IPO on November 25, 1997. The
Company expects to incur substantial operating expenses in the future to support
its product development efforts, establish and expand its domestic and
international sales and marketing capabilities, including recruiting additional
indirect channel partners, and support and expand its technical and management
personnel and organization.
In November 1997, the Company began implementation of full-scale marketing
activity for QueryObject System. QueryObject System previously required
additional consulting services to implement and was promoted selectively through
the direct sales channel, at several industry trade shows, and to potential
business partners. The current release of QueryObject System has reduced
consulting requirements and is capable of running on additional UNIX operating
systems and the Windows NT operating system. The Company intends to increase
promotional activity, including increased trade show and partnering activity and
public relations. The Company markets and sells QueryObject System through its
direct sales force as well as through indirect channel partners such as Original
Equipment Manufacturers ("OEMs") and Value Added Resellers ("VARs"). The Company
anticipates that sales through indirect channel partners will be harder to
forecast and will most likely have lower gross margins. There can be no
assurance that the Company will be successful in developing additional products,
in marketing and selling its products, or that such products will achieve broad
market acceptance. The Company's inability to develop its products or to
establish and expand its relationships with indirect channel partners would have
a material adverse effect on the Company's business, financial condition and
results of operations.
Revenues from the sales of the Company's products are generally
recognized upon the execution of a software licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. In instances where a
significant vendor obligation exists, revenue recognition is delayed until such
obligation has been satisfied. Allowances for estimated future returns are
provided for upon shipment. It is anticipated that in the near term, the
Company's revenues from sales of products will be difficult to predict due to
the discretionary nature of business data delivery
8
<PAGE>
software purchases and the variable length of the sales cycle with respect to
new product introductions. Further, although the Company's product line will
include products with sales prices from $7,500 to over $250,000, the
preponderance of its revenues is expected to be derived from products with sales
prices from $60,000 to $160,000. As a result, the timing of the receipt and
shipment of a single order can have a significant impact on the Company's
revenues, results of operations and cash flows for a particular period.
Results of Operations
The following table sets forth certain items in the Company's condensed
consolidated statement of operations for the three and six month periods ended
June 30, 1998 and 1997 ($ in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues
Software licenses...................................... $ 60 $ 399 $ 135 $ 399
Services and maintenance............................... 24 81 61 96
---------- -------- --------- ----------
Total revenues...................................... 84 480 196 495
---------- -------- --------- ----------
Cost of revenues
Software licenses...................................... 1 6 1 6
Services and maintenance............................... 21 51 46 54
---------- -------- --------- ----------
Total cost of revenues.............................. 22 57 47 60
---------- -------- --------- ----------
Gross profit................................................. 62 423 149 435
---------- -------- --------- ----------
Operating expenses
Sales and marketing.................................... 1,141 987 2,469 2,061
Research and development............................... 615 662 1,181 1,198
General and administrative............................. 401 324 851 609
---------- -------- --------- ----------
Total operating expenses............................ 2,127 1,973 4,501 (3,868)
---------- -------- --------- ----------
Loss from operations......................................... (2,095) (1,550) (4,352) (3,433)
Interest income............................................ 38 8 101 27
Interest expense........................................... (35) (58) (77) (102)
Other income............................................... -- -- -- 1
---------- -------- --------- ----------
Net loss..................................................... $ (2,092) $ (1,600) $ (4,328) $ (3,507)
========== ======== ========= ==========
</TABLE>
Revenues
The Company's license revenues have been generated from sales of
QueryObject System. Service revenues have been generated from fees paid by
customers on a project or contract basis for data analysis by the Company using
its proprietary software, and are recognized over the term of the respective
agreements. Maintenance revenues consist of ongoing support and product updates
and are recognized ratably over the term of the contract, which is typically
twelve months.
9
<PAGE>
Total revenues decreased by $396,000, or 83%, from $480,000 in the
second quarter of 1997 to $84,000 in the second quarter of 1998. For the first
six months, total revenues decreased by $299,000, or 60%, from $495,000 in 1997
to $196,000 in 1998. These decreases were primarily due to a decrease in license
revenues in the 1998 periods as compared to 1997. The Company recorded license
revenue from the sale of one license in each of the two quarters in 1998,
whereas the Company recorded license revenue from the sale of one license in the
second quarter of 1997. However, the license sold in the second quarter of 1997
was a multi-platform sale pursuant to a master reseller agreement, and therefore
was priced at a higher rate than single platform sales. Service and maintenance
revenue decreased by $57,000, or 70%, from $81,000 in the second quarter of 1997
to $24,000 in the second quarter of 1998. For the first six months, service and
maintenance revenue decreased by $35,000, or 36%, from $96,000 in 1997 to
$61,000 in 1998. These decreases were primarily due to the curtailment of
service-based engagements.
Cost of Revenues
Cost of software license revenues consists primarily of product
packaging, documentation and production costs. Cost of software license revenues
as a percentage of software license revenues was 1.3% and 1.1%, respectively,
for the three month and six month periods ended June 30, 1998, which resulted
from the sale of one license in each quarter of 1998. Cost of software license
revenues as a percentage of software license revenues was 1.5% for both the
three month and six month periods ended June 30, 1997, which resulted from the
sale of one license in the second quarter of 1997.
Cost of services and maintenance revenues consist primarily of customer
support costs and direct costs associated with providing services. Cost of
services and maintenance revenues as a percentage of services and maintenance
revenues were 87.5% and 75.2%, respectively, for the three month and six month
periods ended June 30, 1998. Cost of services and maintenance revenues as a
percentage of services and maintenance revenues were 63.0% and 56.8%,
respectively, for the three month and six month periods ended June 30, 1997. The
higher percentages during the 1998 periods were primarily due to higher
personnel costs necessary to service an expanded customer base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, including sales commissions and incentives, of all personnel
involved in the sales and marketing process, as well as related recruiting
costs, public relations, advertising related costs, collateral material and
trade shows. Sales and marketing expenses increased by $154,000, or 16%, from
$987,000 in the second quarter of 1997 to $1,141,000 in the second quarter of
1998. For the first six months, sales and marketing expenses increased by
$407,000, or 20%, from $2,061,000 in 1997 to $2,468,000 in 1998. These increases
were primarily due to increased personnel costs, and increased costs associated
with public relations, collateral material and trade shows. These increases were
offset, in part, by reduced recruiting costs in the 1998 periods. The Company
believes that its sales and marketing expenses will increase in absolute dollars
as the Company continues to increase promotion and other marketing expenses.
10
<PAGE>
Research and Development. Research and development expenses consist
primarily of salaries and other personnel related expenses, recruiting costs
associated with the hiring of additional software engineers and quality
assurance personnel, consultant costs and depreciation of development equipment.
Research and development expenses decreased by $47,000, or 7%, from $662,000 in
the second quarter of 1997 to $615,000 in the second quarter of 1998. For the
first six months, research and development expenses decreased by $17,000, or 1%,
from $1,198,000 in 1997 to $1,181,000 in 1998. These decreases were primarily
due to lower consulting costs and lower recruiting costs as compared to 1997.
The Company believes that a significant level of investment for product research
and development is required to remain competitive and, accordingly, the Company
anticipates that it will continue to devote substantial resources to product
research and development and that these costs will increase in absolute dollars.
To date, all research and development costs have been expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, MIS, human resources and general
management, as well as insurance and professional expenses. General and
administrative expenses increased by $77,000, or 24%, from $324,000 in the
second quarter of 1997 to $401,000 in the second quarter of 1998. For the first
six months, general and administrative expenses increased by $243,000, or 40%,
from $608,000 in 1997 to $851,000 in 1998. These increases were primarily due to
higher consulting fees, increased professional expenses associated with being a
public company and increased personnel related costs and benefits. The Company
believes that its general and administrative expenses will increase in absolute
dollars as it incurs additional costs related to being a public company,
including investor relations programs.
Interest Income and Interest Expense
Interest income represents income earned on the Company's cash and cash
equivalents. Interest income increased by $30,000, or 375%, from $8,000 in the
second quarter of 1997 to $38,000 in the second quarter of 1998. For the first
six months, interest income increased by $74,000, or 274%, from $27,000 in 1997
to $101,000 in 1998. These increases were primarily due to a higher level of
cash and cash equivalents on deposit during 1998.
Interest expense generally represents charges relating to the H.C.C.
Financial Services Loan Agreement (the "Loan Agreement") and interest expense on
capital equipment leases. Interest expense decreased by $22,000, or 38%, from
$58,000 in the second quarter of 1997 to $36,000 in the second quarter of 1998.
For the first six months, interest expense decreased by $25,000, or 24%, from
$102,000 in 1997 to $77,000 in 1998. These decreases were primarily due to
reduced outstanding borrowings under the Loan Agreement.
Provision for Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company incurred net operating losses in 1997 and 1996 and consequently paid no
federal or state income taxes. At December 31, 1997, the Company had net
operating losses and research and experimental tax credit carryforwards of
$22,000,000 and $144,000, respectively, available to offset future federal
taxable income and tax. These net operating loss carryforwards expire at various
dates through 2012.
11
<PAGE>
Although the determination of whether an ownership change has occurred is
subject to factual and legal uncertainties, the Company believes that an
ownership change occurred upon the completion of previous financings and such
"ownership change" will materially limit the Company's ability to utilize its
NOL carryforward. Moreover, while such loss carryforwards are available to
offset future taxable income of the Company, the Company does not expect to
generate sufficient taxable income so as to utilize all or a substantial portion
of such loss carryforwards prior to their expiration.
Liquidity and Capital Resources
On November 25, 1997, the Company consummated the IPO. The Company sold
2,500,000 shares of Common Stock in the IPO and received approximately
$12,470,000 of cash, net of underwriting discounts, commissions and other
offering costs. The Company immediately repaid $5,100,000 plus accrued interest
due on Bridge and Interim Financings payable. Upon completion of the IPO, all
outstanding shares of preferred stock (a total of approximately 1,697,000
shares) were converted into shares of Common Stock.
The IPO prospectus indicated that the Company believed that
the proceeds of the IPO together with then existing resources and cash
anticipated to be generated from operations, would be sufficient to satisfy the
Company's cash requirements for at least 14 months after the completion of the
IPO. However, as of June 30, 1998, the Company had negative working capital of
$466,000. The variance between the Company's expectations at the time of the IPO
and the Company's current analysis of its cash position is primarily due to
lower than expected sales of the Company's products. The Board of Directors of
the Company has considered various means of procuring additional financing and
has determined that a private offering of the Company's securities would be in
the best interests of the Company. Accordingly, the Company is undertaking a
private offering which currently contemplates the issuance of a minimum of
2,000,000 shares of Common Stock and a maximum of 4,000,000 shares of Common
Stock and which may also include the grant of Common Stock Purchase Warrants to
the purchasers in the private offering. The Company anticipates that the
offering price will be at a discount to the closing sale price of the Company's
Common Stock on the day immediately preceding the initial closing of the private
placement. On August 13, 1998, the closing sale price of the Common Stock of
the Company on the Nasdaq SmallCap Market was $2 3/4 per share. The net
proceeds of the private offering will be used for sales and marketing, research
and development, and general working capital purposes in the proportions of 50%,
30% and 20%, respectively. To date, the Company has no commitments, agreements
or understandings with respect to such private offering or any other additional
financing and there can be no assurance as to the terms of such private offering
or that the Company will be able to consummate such private offering or any
other financing transaction. If the Company is unable to effect the private
offering, or obtain other short-term financing, the Company will lack the cash
necessary to continue operating. The sale of additional equity securities will
result in additional dilution to the Company's stockholders.
Under Rule 4310(c)(25)(H)(i) of the Nasdaq Stock Market ("Rule
4310(c)(25)(H)(i)"), the Company is required to obtain stockholder approval in
connection with any transaction, other than a public offering, that involves the
issuance by the Company of Common Stock (or securities convertible into or
exercisable for Common Stock) that equals 20% or more of the Common Stock of the
Company outstanding before the issuance of such securities, at a price below
market value. On August 12, 1998, in order to effect compliance with Rule
4310(c)(25)(H)(i) and enable the Company to consummate a private offering, the
Company's stockholders approved a proposal that authorizes the Board of
12
<PAGE>
Directors of the Company to determine (i) the number of shares of Common Stock
that will be issued in a private offering (which may or may not exceed 20% or
more of the Common Stock outstanding); (ii) the purchase price of such shares of
Common Stock and (iii) whether Warrants will be issued in the private offering
and, if so, the terms and conditions of the Warrants.
Prior to the IPO, the Company funded its operations primarily through
sales of preferred equity securities, with net proceeds therefrom of
approximately $14,000,000 and, to a lesser extent, through interim financings
and a bridge financing, through capital and operating equipment leases, the
issuance of notes payable and the Loan Agreement. As of June 30, 1998, the
Company had $1,004,000 in cash and cash equivalents. Net cash used in operating
activities was $4,170,000 and $2,290,000 for the six months ended in 1998 and
1997, respectively. For 1998, net cash used in operating activities was
primarily attributable to a net loss of $4,328,000, less depreciation and
amortization of $205,000. For 1997, net cash used in operating activities was
primarily attributable to a net loss of $3,507,000 less depreciation and
amortization of $97,000 and an increase in accounts payable and accrued expenses
and a decrease in accounts receivable totaling $1,072,000. Net cash provided by
financing activities of $1,223,000 in 1997 resulted primarily from an Interim
Financing Note payable to a stockholder and the proceeds of sale-leaseback
transactions. In addition to the IPO, since January 1, 1997, the Company's
principal sources of capital have been through several bridge financings whereby
the Company received approximately $6,100,000 in proceeds. The Company repaid
promissory notes issued in connection with such bridge financings either out of
proceeds from the IPO or out of proceeds from a bridge financing consummated in
July 1997.
The Company does not currently have a line of credit with a commercial
bank. Under the Loan Agreement, the Company has outstanding borrowings in the
aggregate principal amount of approximately $565,000, such indebtedness secured
by a security interest in and lien on all of the Company's assets. An Addendum
to the Loan Agreement provides that H.C.C., the lender thereunder, will not
demand payment under the Loan Agreement (and requires the Company to maintain a
restricted Certificate of Deposit which was in the amount of $598,000 as of June
30, 1998), until the earlier of March 31, 1998, a material breach by the Company
under the Addendum or an event of default under the Loan Agreement. In April
1998, the Company began repaying the indebtedness under the Loan Agreement,
utilizing the funds on deposit in the restricted Certificate of Deposit. The
indebtedness is being repaid at the rate of 10% of the outstanding month end
balance each month, for twelve consecutive months, to be followed by a payment
in full of the remaining outstanding balance.
As of June 30, 1998, the Company's principal commitments consisted of
obligations under operating and capital leases (payable through 2001) and
employment agreements. Pursuant to employment agreements with executive officers
of the Company, the Company is obligated to pay $936,000 and $460,000 in
salaries for the years ended December 31, 1998 and 1999, respectively.
Year 2000 Compliance
The Company has assessed and continues to assess the impact of the Year
2000 issue on its operations, including the development of cost estimates for,
and the extent of programming changes required to address, this issue. Although
final cost estimates have yet to be determined, the Company expects that these
Year 2000 costs will not be material to the Company's expenses during 1998 and
1999. The Company does not currently have any information concerning the Year
2000 compliance status of its suppliers and customers. In the event that any of
the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected.
13
<PAGE>
Risk Factors That May Affect Future Results
The Company's business involves a number of risks, some of which are
beyond the Company's control. The following discussion highlights some of these
risks and should be read in conjunction with "Risk Factors" in Part I, Item 1 -
Business, included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.
Negative Working Capital; Need For Additional Funding. At June 30,
1998, the Company had negative working capital of $466,135. The Company has had
a limited operating history as a software product company and has not made
significant sales of its products. Therefore, revenues are difficult to predict.
As previously reported, the Company anticipated that cash generated from
operations would be insufficient to satisfy the Company's liquidity
requirements, and as a result, the Company is seeking to sell additional equity
securities. See "Management's Discussion and Analysis or Plan of Operation -
Liquidity and Capital Resources." If the Company is unable to close the private
offering, or obtain other short-term financing, the Company will lack the cash
necessary to continue operating. To date, the Company has no commitments,
agreements or understandings with respect to such additional financing and there
can be no assurance that the Company will be able to consummate any such
transaction. The sale of additional equity securities will result in additional
dilution to the Company's stockholders.
Accumulated Deficit; Historical and Projected Future Operating Losses;
Going Concern Qualification in the Independent Accountants' Report. At June 30,
1998, the Company had an accumulated deficit of $30,194,980. For the fiscal
years ended December 31, 1997 and 1996, and for the six months ended June 30,
1998, the Company incurred net losses of $10,563,484, $4,917,935 and $4,327,994,
respectively. In addition, the Company has incurred a net loss in each year
during which it has operated, and its operations to date have been financed in
significant part through sales of both equity and debt securities. The Company's
expense levels are high and revenues are difficult to predict. As a result, the
Company expects to continue to incur net losses for the foreseeable future.
There can be no assurance that significant revenues or profitability will ever
be achieved or, if they are achieved, that they can be sustained or increased on
a quarterly or annual basis in the future. Future operating results will depend
on many factors, including the demand for the Company's products, the level of
product and price competition, the Company's success in expanding its direct
sales force and indirect distribution channels, the ability of the Company to
develop and market products and to control costs, the percentage of the
Company's revenues derived from indirect channel partners and general economic
conditions. The independent accountants' report for the year ended December 31,
1997 states that the Company's recurring losses from operations and the
Company's negative cash flow from operating activities raise substantial doubt
about the Company's ability to continue as a going concern.
Lack of Substantial Revenue; Limited Operating History. The Company has
had a limited operating history as a software product company and has not made
significant sales of its products. Total revenues for the year ended December
31, 1997 and for the six months ended June 30, 1998 were $1,012,159 and
$196,026, respectively. Total revenues for the periods noted above included four
sales and two sales, respectively, of QueryObject System. Prior to 1997, the
Company's revenues were derived primarily from contract services provided to
customers using the Company's proprietary data analysis technology. The Company
has discontinued this business.
14
<PAGE>
Dependence Upon New Products; Uncertain Market Acceptance.
Substantially all of the Company's revenues for the foreseeable future are
expected to be derived from sales of QueryObject System. Between January 1, 1995
and June 30, 1998, the Company realized software product revenue from only nine
QueryObject System installations, one of which (sold in 1995) was a
pre-production beta version. Further, the Company has recently commenced an
integrated marketing effort for its products. The Company's future financial
performance will depend upon the successful introduction and customer acceptance
of QueryObject System and the development of new and enhanced versions of the
product. The failure to achieve broad market acceptance of QueryObject System
will have a material adverse effect on the business, operating results and
financial condition of the Company.
Potentially Limited Trading Market; Possible Volatility of Stock Price.
The Common Stock is listed on the Nasdaq SmallCap Market ("Nasdaq"). Under
recently implemented Nasdaq rules, in order for the Company to remain eligible
for listing on Nasdaq, (i) the Company's Common Stock must have a minimum bid
price of $1.00, (ii) the Company must have minimum tangible net assets of
$2,000,000 or a market capitalization of $35,000,000 or net income of $500,000
in two of the three prior years, (iii) the Company must have a public float of
at least 500,000 shares with a market value of at least $1,000,000 and the
Common Stock must have at least two market makers and be held of record by at
least 300 stockholders. As of June 30, 1998, the Company had $281,720 in net
tangible assets. The Company believes that without additional financing (of
which there can be no assurance), the Company will continue to have less than
$2,000,000 in net tangible assets. The failure to meet the maintenance criteria
in the future may result in the Common Stock no longer being eligible for
quotation on Nasdaq and trading, if any, of the Common Stock would thereafter be
conducted on the OTC Bulletin Board. As a result of such ineligibility for
quotations, it may be more difficult for investors to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock.
The regulations of the Securities and Exchange Commission
("Commission") promulgated under the Securities Exchange Act of 1934, as
amended, require additional disclosure relating to the market for penny stocks.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. A disclosure schedule explaining the penny stock market and the
risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks, the market liquidity for the Company's
securities could be severely affected. In such an event, the regulations on
penny stocks could limit the ability of broker-dealers to sell the Company's
securities and thus the ability of purchasers of the Company's securities to
sell their securities in the secondary market. In the absence of an active
trading market, holders of the Common Stock may experience substantial
difficulty in selling their securities.
The trading price of the Company's Common Stock is expected to be
subject to significant fluctuations in response to variations in quarterly
operating results, changes in analysts' earnings estimates, general conditions
in the computer software industry and other factors. In addition, the
15
<PAGE>
stock market is subject to price and volume fluctuations that affect the market
prices for companies and that are often unrelated to operating performance.
Dependence on Significant Customers. For the fiscal year ended December
31, 1997 and for the six months ended June 30, 1998, one customer in each period
accounted for 65% and 71%, respectively, of the Company's total revenues. The
Company does not know at this time if significant future revenues from these
customers will occur.
Potential Fluctuations in Periodic Results. The Company's revenues may
be subject to significant variation from period to period due to the
discretionary nature of business intelligence data delivery software purchases
and will be difficult to predict. Further, although the Company's product line
will include products with sales prices from $7,500 to over $250,000, the
majority of its revenues is expected to be derived from products with sales
prices from $60,000 to $160,000. As a result, the timing of the receipt and
shipment of a single order can have a significant impact on the Company's
revenues and results of operations for a particular period. It is also expected
that for the foreseeable future a relatively small number of customers and VARs
will account for a significant percentage of the Company's revenues. The Company
anticipates that product revenues in any quarter will be substantially dependent
on orders booked and shipped in that quarter, and revenues for any future
quarter will not be predictable with any significant degree of certainty.
Product revenues are also difficult to forecast because the market for business
intelligence software products is rapidly evolving, and the Company's sales
cycle may vary substantially with each customer. As the Company matures in its
product releases, it is anticipated that the Company will operate with limited
order backlog because its software products will typically be shipped shortly
after orders are received.
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On November 19, 1997 the Commission declared effective the Company's
Registration Statement on Form SB-2 (File No. 333-34667) relating to the initial
public offering ("IPO") of 2,500,000 shares of common stock, $.001 par value
(the "Common Stock") of the Company at a price per share of $6.00. Subsequent to
the information provided in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997, the Company has used proceeds of the IPO as
follows; $2,138,000 has been used to fund the Company's integrated full scale
sales and marketing activities and to expand its sales and marketing activities
both domestically and internationally, $1,108,000 has been used for research and
development including enhancements to existing features and development of new
functions for QueryObject System and $1,040,000 of the proceeds of the IPO have
been used for working capital and general corporate purposes. The remaining
amount of the proceeds from the IPO, $1,004,000, have been invested temporarily
in investment grade, short-term, interest bearing instruments.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of the Company on May 27, 1998,
the stockholders (i) elected five members of the Board of Directors to serve
until the next annual meeting, (ii) amended the Company's
16
<PAGE>
Certificate of Incorporation to change the Company's name to "QueryObject
Systems Corporation", and (iii) ratified the appointment of Price Waterhouse LLP
as the Company's independent public accounts for year ending December 31, 1998.
The vote for nominated directors was as follows:
Nominee For Withhold
Alan W. Kaufman 3,538,295 1,300
Andre Szykier 3,538,295 1,300
Rino Bergonzi 3,538,295 1,300
Irwin Jacobs 3,538,295 1,300
Amy Newmark 3,538,295 1,300
The vote for amending the Certificate of Incorporation was as follows:
For Against Abstain
3,534,795 3,300 1,500
The vote for Ratifying the Appointment of Price Waterhouse LLP was as
follows:
For Against Abstain
3,538,595 1,000 --
Item 5. Other Information
Pursuant to recent amendments to the proxy rules under the Securities
Exchange Act of 1934, as amended, the Company's stockholders are notified that
the deadline for providing the Company timely notice of any stockholder proposal
to be submitted outside of the Rule 14a-8 process for consideration at the
Company's 1999 Annual Meeting of Stockholders (the "Annual Meeting") will be
March 12, 1999. As to all such matters which the Company does not have notice on
or prior to March 12, 1999, discretionary authorization shall be granted to the
designated persons in the Company's proxy statement for the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Statement of Computation of Net Income Per Share (Exhibit 11.1)
Financial Data Schedule (Exhibit 27.1)
(b) Reports of Form 8-K
No Reports on Form 8-K were filed during the quarter ended June
30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 13, 1998 QUERYOBJECT SYSTEMS CORPORATION
By: /s/ Daniel M. Pess
--------------------------------------
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
18
QueryObject Systems Corporation EXHIBIT 11.1
Computation of Net Loss Per Common Share
<TABLE>
<CAPTION>
Three Months ended June 30, 1997 Six months ended June 30, 1997
------------------------------------ ---------------------------------------
Number of Weighted Number of Weighted
Common Days Average Common Days Average
Shares Outstanding Shares Shares Outstanding Shares
-------- ------------ ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Common stock outstanding at January 1, 1997 2,453,710 90 2,453,710 2,453,710 180 2,453,710
Accretion of series D dividends 59,153 90 29,577 59,153 90 29,577
Exercise of common stock options 1,250 90 1,250 1,250 157 1,084
Exercise of common stock options 8,320 90 8,320 8,320 147 6,757
Exercise of common stock options 2,778 90 2,778 2,778 129 1,980
Exercise of common stock options 6,267 45 3,134 6,267 45 1,558
Weighted average shares used in per share 2,498,769 2,494,666
========= =========
computation
Net loss for the period (1,599,915) (3,506,881)
Net less per common share $ (0.64) $ (1.41)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months ended June 30, 1998 Six months ended June 30, 1998
------------------------------------ ---------------------------------------
Number of Weighted Number of Weighted
Common Days Average Common Days Average
Shares Outstanding Shares Shares Outstanding Shares
-------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Common stock outstanding at January 1, 1998 5,110,605 90 5,110,605 5,110,605 180 5,110,605
Accretion of series D dividends 1,875 90 1,875 1,875 167 1,730
Exercise of common stock options 2,118 90 2,118 2,118 166 1,942
Exercise of common stock options 4,584 90 4,584 4,584 138 3,495
Exercise of common stock options 625 90 625 625 123 425
Exercise of common stock options 365 90 365 365 104 210
Exercise of common stock options 1,250 25 347 1,250 25 173
Weighted average shares used in per share 5,120,519 5,118,580
computation ========= =========
Net loss for the period (2,092,411) (4,327,994)
Net less per common share $ (0.41) $ (0.85)
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,003,853
<SECURITIES> 0
<RECEIVABLES> 188,680
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,840,526
<PP&E> 2,050,146
<DEPRECIATION> 918,546
<TOTAL-ASSETS> 3,118,578
<CURRENT-LIABILITIES> 2,306,661
<BONDS> 0
0
0
<COMMON> 5,121
<OTHER-SE> 276,599
<TOTAL-LIABILITY-AND-EQUITY> 3,118,578
<SALES> 196,026
<TOTAL-REVENUES> 196,026
<CGS> 47,411
<TOTAL-COSTS> 4,547,843
<OTHER-EXPENSES> 206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,336
<INCOME-PRETAX> (4,327,994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,327,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,327,994)
<EPS-PRIMARY> (.85)
<EPS-DILUTED> (.85)
</TABLE>
