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 March 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13587
QUERYOBJECT SYSTEMS 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)
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 April 30, 1999 there were 6,492,985 shares of the Registrant's
common stock outstanding.
Transitional Small Business Disclosure Format. Yes / / No /X/
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of March 31, 1999 (unaudited)................................. 3
Condensed Consolidated Statement of Operations
For the three months ended March 31, 1999 and 1998 (unaudited)... 4
Condensed Consolidated Statement of Cash Flows
For the three months ended March 31, 1999 and 1998 (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........................19
Item 6. Exhibits and Reports on Form 8-K.................................19
SIGNATURES.................................................................20
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
1999
ASSETS
Current assets
Cash and cash equivalents ............................... $ 428,870
Accounts receivable, net of allowance for doubtful
accounts of $46,000 ............................... 247,040
Prepaid expenses and other current assets ............... 173,343
------------
TOTAL CURRENT ASSETS .............................. 849,253
Property and equipment, net .................................. 865,247
Deposits and other assets .................................... 75,209
------------
TOTAL ASSETS ................................. $ 1,789,709
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ........................................ $ 361,505
Accrued expenses ........................................ 653,704
Deferred revenue ........................................ 58,602
Deferred rent ........................................... 15,370
Capital lease obligations due within one year ........... 180,077
TOTAL CURRENT LIABILITIES ......................... 1,269,258
Capital lease obligations .................................... 125,075
Deferred rent ................................................ 251,455
------------
TOTAL LIABILITIES ................................. 1,645,788
============
Stockholders' equity
Preferred stock, $.001 par value:
2,000,000 shares authorized;
1,681,625 and 96,750 shares of
Series A and B, respectively,
issued and outstanding ............................ 1,778
Common stock, $0.001 par value:
30,000,000 shares
authorized; 6,068,485 shares
issued and outstanding ............................ 6,068
Additional paid-in capital .............................. 37,266,068
Accumulated deficit ..................................... (37,129,993)
------------
TOTAL STOCKHOLDERS' EQUITY ........................ 143,921
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $ 1,789,709
============
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
Revenues
<S> <C> <C>
Software licenses .................... $ 50,000 $ 75,000
Maintenance .......................... 26,189 36,861
----------- -----------
TOTAL REVENUES .............. 76,189 111,861
Cost of revenues
Software licenses .................... 2,050 750
Maintenance .......................... 18,988 24,756
----------- -----------
TOTAL COST OF REVENUES ...... 21,038 25,506
----------- -----------
Gross Profit .............................. 55,151 86,355
----------- -----------
Operating expenses
Sales and marketing ................. 888,684 1,327,218
Research and development ............ 532,031 566,417
General and administrative .......... 347,124 450,001
----------- -----------
TOTAL OPERATING EXPENSES.... 1,767,839 2,343,636
----------- -----------
LOSS FROM OPERATIONS ..................... (1,712,688) (2,257,281)
Interest income ........................... 9,249 63,341
Interest expense .......................... (14,098) (41,412)
Other expense............................ -- (231)
----------- -----------
NET LOSS .................................. $(1,717,537) $(2,235,583)
----------- -----------
Basic and diluted net loss per common share $ (.31) $ (.44)
----------- -----------
Weighted average shares used in per share
computation (Note 2) ................. 5,484,345 5,116,626
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
Cash flows from operating activities
<S> <C> <C>
Net loss .......................................................... $ (1,717,537) $ (2,235,583)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization....................................... 36,583 106,580
Gain on sale of computer equipment.................................. -- 231
Options issued for consulting services.............................. 137,330 --
Changes in operating assets and liabilities
Accounts receivable, net........................................ 29,487 251,594
Prepaid expenses and other current assets....................... (5,592) (32,538)
Deposits and other assets....................................... 5,822 3,906
Accounts payable and accrued expenses........................... (262,567) (215,439)
Deferred rent................................................... (3,003) 224
Deferred revenue................................................ (26,189) 43,597
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES................................. (1,805,666) (2,077,428)
------------ ------------
Cash flows from investing activities
Loan receivable from stockholder....................................... -- (65,000)
Acquisitions of property and equipment................................. (14,589) (45,964)
Purchase of restricted certificate of deposit.......................... -- (9,221)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES................................. (14,589) (120,185)
------------ ------------
Cash flows from financing activities
Proceeds from issuance of common stock................................ 341,250 9,185
Collection of stock subscriptions receivable, net...................... 1,396,000 --
Repayment of loan payable to stockholders.............................. -- (30,000)
Repayment of notes payable............................................. (300,000) --
Payments of capital lease obligations.................................. (42,143) (61,920)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,395,107 (82,735)
------------ ------------
Net decrease in cash and cash equivalents................................... (425,148) (2,280,348)
Cash and cash equivalents at beginning of year.............................. 854,018 5,437,350
------------ ------------
Cash and cash equivalents at end of period.................................. $ 428,870 $ 3,157,002
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
QUERYOBJECT SYSTEMS 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, 1998. The results of operations
for the period ended March 31, 1999 are not necessarily indicative of the
results to be expected for any subsequent quarter, or for the entire fiscal year
ending December 31, 1999, or for any future period.
2. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss for the
period by the sum of the weighted average number of shares of common stock
outstanding. Options and warrants to acquire common stock and the Series A and B
Convertible Preferred 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.
3. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
MARCH 31,
1999 1998
Interest paid during the period............... $ 24,240 $ 31,696
4. 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.
5. LIQUIDITY AND BUSINESS RISKS
The Company has incurred operating losses since inception, has
incurred negative cash flows from operating activities, has negative working
capital and had an accumulated deficit of $37,129,993 and $35,412,456 as of
March 31, 1999 and December 31, 1998, respectively. 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.
The Company anticipates that its cash and cash equivalent balances at March 31,
1999 will be insufficient to satisfy its operating cash flow requirements in the
foreseeable future. Accordingly, the Company will seek to sell additional equity
or convertible debt securities, however, there can be no assurances that the
Company will be successful in raising additional funds. See "Risk Factors
6
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That May Affect Future Results - Negative Working Capital; Need for Additional
Funding". The sale of additional equity or convertible debt securities will
result in additional dilution to the Company's stockholders.
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, 1998.
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 until 1997
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. In November 1997, the Company began implementation of full-scale
marketing activity for QUERYOBJECT SYSTEM. The Company has a limited operating
history as a software product company and has made only limited sales of its
QUERYOBJECT SYSTEM.
To date, the Company has incurred substantial losses from
operations, and at March 31, 1999, had an accumulated deficit of $37,129,993.
The Company expects to incur substantial operating expenses in the future to
support its product development efforts, establish and expand its domestic and
international sales and marketing capabilities, including recruiting additional
indirect channel partners, and support and expand its technical and management
personnel and organization.
Revenues from the sales of the Company's products are generally
recognized upon the execution of a software licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. In instances where a
significant vendor obligation exists, revenue recognition is delayed until such
obligation has been satisfied. Allowances for estimated future returns are
provided for upon shipment.
7
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's
consolidated statements of operations for the three months ended March 31, 1999
and 1998 ($ in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
REVENUES
<S> <C> <C>
Software licenses.................................. $ 50 $ 75
Maintenance........................................ 26 37
------- ----------
TOTAL REVENUES............................... 76 112
------- ----------
Cost of revenues
Software licenses.................................. 2 1
Maintenance........................................ 19 25
------- ----------
TOTAL COST OF REVENUES....................... 21 26
------- ----------
GROSS PROFIT............................................ 55 86
------- ----------
Operating expenses
Sales and marketing................................ 889 1,327
Research and development........................... 532 566
General and administrative......................... 347 450
------- ----------
TOTAL OPERATING EXPENSES..................... 1,768 2,343
------- ----------
LOSS FROM OPERATIONS.................................... (1,713) (2,257)
Interest income.................................... 9 63
Interest expense................................... (14) (42)
------- ----------
NET LOSS................................................ $(1,718) $ (2,236)
======= ==========
</TABLE>
REVENUES
The Company's license revenues have been generated from sales of
QUERYOBJECT SYSTEM. Maintenance revenues consist of ongoing support and products
updates and are recognized ratably over the term of the contract, which is
typically twelve months.
Total revenues decreased by $36,000, or 32%, from $112,000 for the
three months ended March 31, 1998 ("1998") to $76,000 for the three months ended
March 31, 1999 ("1999"). License revenues for 1999 and 1998 were the result of
one license sale in each quarter. Maintenance revenue decreased by $11,000, or
30%, from $37,000 in 1998 to $26,000 in 1999, primarily due to non-renewal of
certain maintenance agreements.
COST OF REVENUES
Cost of software license revenues consists primarily of royalties,
product packaging, documentation and production costs. Cost of software license
revenues increased as a percentage of software license revenues from 1.0% in
1998 to 4.1% in 1999, primarily due to
8
<PAGE>
royalties due to a third party for 1999 shipments. Cost of maintenance revenues
consist primarily of customer support costs. Cost of maintenance revenues
increased as a percentage of maintenance revenues from 67% in 1998 to 72% in
1999, primarily due to the lower revenue 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, consulting expense, advertising related costs,
collateral material and trade shows. Sales and marketing expenses decreased by
$438,000, or 33%, from $1,327,000 in 1998 to $889,000 in 1999, primarily due to
reduced sales, personnel related costs, marketing expenses and recruiting fees.
The Company believes that its sales and marketing expenses will increase in
absolute dollars as the Company increases promotion and other marketing
expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and other personnel related expenses, recruiting costs
associated with the hiring of software engineers and quality assurance
personnel, consultant costs and depreciation of development equipment. Research
and development expenses decreased by $34,000, or 6%, from $566,000 in 1998 to
$532,000 in 1999, primarily due to a decrease in consultant costs and personnel
related expense. 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 decreased by $103,000, or 23%, from $450,000 in 1998 to
$347,000 in 1999, primarily due to a decrease in personnel related costs. The
Company believes that its general and administrative expenses will increase in
absolute dollars as it incurs additional costs including investor relations
programs.
INTEREST INCOME AND INTEREST EXPENSE
Interest income represents income earned on the Company's cash and
cash equivalents. Interest income decreased by $54,000, or 86%, from $63,000 in
1998 to $9,000 in 1999, primarily due to a lower level of cash and cash
equivalents on deposit during 1999.
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 $28,000, or 67%, from
$42,000 in 1998 to $14,000 in 1999. This decrease was primarily due to the
repayment of the outstanding balance of the Loan Agreement in October 1998.
9
<PAGE>
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 1998 and 1997 and consequently paid no
federal or state income taxes. At December 31, 1998, the Company had net
operating losses and research and experimental tax credit carryforwards of
$29,660,000 and $207,000, respectively, available to offset future federal
taxable income and tax. These net operating loss carryforwards expire at various
dates through 2018. 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 its initial public
offering ("IPO") whereby it sold 2,500,000 shares of Common Stock 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 then outstanding 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 September 30, 1998 (approximately 10 months after the IPO), the
Company had negative working capital of $1,744,000. The variance between the
Company's expectations at the time of the IPO and the Company's analysis of its
cash position was primarily due to lower than expected sales of the Company's
products. The Board of Directors of the Company considered various means of
procuring additional financing and determined that a private offering of the
Company's securities would be in the best interests of the Company.
As a result, in October and November 1998, the Company had the
initial closing of two private placements -- the Series A Private Placement and
the Series B Private Placement. The Series A Private Placement consisted of
1,750,000 Units (the "Series A Units") with a gross sales price of $3,500,000.
The Series B Private Placement consisted of 10 Units (the "Series B Units") with
a gross sales price of $1,000,000. Each Series A Unit consisted of one share of
Series A Convertible Preferred Stock ("Series A Preferred Stock") and a warrant
to purchase 2.5 shares of Common Stock at a per share exercise price equal to
$.50. Each Series B Unit consisted of 10,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred Stock") and warrants to purchase an
aggregate of 125,000 shares of Common Stock at a per share exercise price equal
to $.50. The Series A Units were sold at a purchase price of $2.00 per Unit and
each share of Series A Preferred Stock share is convertible into four shares of
Common Stock. The Series B Units were sold at a purchase price of $100,000 per
Unit and each share of Series B Preferred
11
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Stock is convertible into twenty shares of Common Stock. The effective purchase
price, on a Common Stock equivalent basis was $.50 per common share, which
represented a discount from the fair market value of the Company's Common Stock
on the various dates of issuance. The Company consummated the final closing on
each of the Series A Private Placement and the Series B Private Placement in
February 1999 and received an aggregate of (1) $3,181,000 from the Series A
Private Placement (after deduction of commissions and expenses payable to the
placement agent) and (ii) $814,000 from the Series B Private Placement (after
deduction of commissions and expenses payable to the placement agent). The
Company has also received $534,050 from the exercise of warrants granted in the
Series A Private Placement and Series B Private Placement, of which $341,250 was
received in the three months ended March 31, 1999.
In connection with the Series A and Series B Private Placements, the
placement agent was granted an option to purchase additional Series A and Series
B Units equal to 10% of the Series A and Series B Units sold and received a
commission and non-accountable expense allowance equal to 5.6% and 9.3%
respectively, of the gross proceeds received by the Company.
As of March 31, 1999, the Company had $429,000 in cash and cash
equivalents and a working capital deficit of $420,000. Net cash used in
operating activities was $1,806,000 and $2,077,000 in 1999 and 1998,
respectively. For 1999, net cash used in operating activities was primarily
attributable to a net loss of $1,718,000, less depreciation, amortization and
consulting expenses of $174,000 and a decrease in accounts payable and accrued
expenses of $263,000. For 1998, net cash used in operating activities was
primarily attributable to a net loss of $2,236,000, less depreciation and
amortization of $107,000. Net cash provided by financing activities was
$1,395,000 in 1999, primarily as a result of the collection of stock
subscription receivables and the exercise of common stock purchase warrants.
The Company does not currently have a line of credit with a
commercial bank. As of December 31, 1998, the Company's principal commitments
consisted of obligations under operating and capital leases and employment
agreements. At that date, the Company had approximately $347,000 in
outstanding borrowings under capital leases which are payable through 2001.
Pursuant to employment agreements with executive officers of the Company, the
Company is obligated to pay $262,000 and $0 in salaries for the years ended
December 31, 1999 and 2000, respectively.
As of March 31, 1999, the Company had a deficit in working capital
of $420,000. During 1999, the Company received $1,396,000 in working capital
from the proceeds of the 1998 Private Placement and $534,050 from the exercise
of warrants granted in the 1998 Private Placement, of which $192,800 was
received subsequent to March 31, 1999. The Company has incurred operating losses
since inception, has incurred negative cash flows from operating activities and
had an accumulated deficit of $37,129,993 as of March 31, 1999. 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.
The Company anticipates that its current cash and cash equivalent position will
be insufficient to satisfy its liquidity requirements, and as a result, the
Company is seeking to sell additional equity securities. See "Risk Factors That
May Affect Future Results - Negative Working Capital; Need for Additional
Funding". The sale of additional equity securities will result in additional
dilution to the Company's stockholders.
11
<PAGE>
YEAR 2000 COMPLIANCE
We have commenced an assessment of the readiness of our internal
business information systems for handling the Year 2000 and the Year 2000
compliance of our products. We believe that we will need to modify or replace
portions of our internal business information systems to ensure Year 2000
compliance and we expect that we will successfully address Year 2000 issues
relating to our internal business information systems by the end of fiscal 1999.
We believe that our current products are Year 2000 compliant.
However, it is possible that current or future customers will assert claims
against us with respect to Year 2000 issues and, in the event such claims are
asserted and adjudicated in favor of these customers, our liability could be
material. We are taking steps to identify affected customers and assist them in
assessing risks that may be associated with our products. We may incur
increasing costs regarding customer service related to these actions over the
next few years. As our customer service programs are currently ongoing, we are
unsure of the scope of any resulting Year 2000 issues and potential liability
resulting from such issues. We do not know the potential impact on our business,
operating results and financial condition with respect to these matters.
We have had discussions with our significant vendors, service
providers and large customers to evaluate Year 2000 issues, if any, relating to
the interaction of their systems with our internal systems. We have not yet
received written compliance information from these third parties and we cannot
currently determine when we will receive all of this information. Thus, despite
the initiation of these discussions, we lack the information necessary to
estimate the potential impact of Year 2000 compliance issues relating to these
third parties and their interaction with us and are unsure of when we will
receive such information.
While we have not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues, there can be no
assurance that our Year 2000 compliance costs will continue at this level. Most
of our expenses have related to the opportunity cost of time spent by our
employees evaluating our internal business information systems, our products and
the interaction of our internal business information systems with the internal
systems of third parties. Although we are unaware of any material operational
issues or costs associated with preparing our internal business information
systems and products for the Year 2000, we are unsure that we will avoid serious
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in our technology. Such unanticipated negative consequences
and/or material costs, if incurred, could have a material adverse effect on our
business, operating results or financial condition.
Because we are unaware of any material Year 2000 compliance issues,
we lack a Year 2000-specific contingency plan. If Year 2000 compliance issues
are discovered, we will evaluate the need for one or more contingency plans
relating to such issues. If we are unable to develop and implement appropriate
contingency plans, as needed, in a timely manner, we may experience delays in,
or increased costs associated with, implementation of changes to address any
such issues, which could have a material adverse effect on our business,
operating results or financial condition.
12
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY OPERATES IN A RAPIDLY CHANGING ENVIRONMENT THAT INVOLVES
A NUMBER OF RISKS, SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL. THE FOLLOWING
DISCUSSION HIGHLIGHTS THE MOST MATERIAL OF THE RISKS.
NEGATIVE WORKING CAPITAL; NEED FOR ADDITIONAL FUNDING: At March 31,
1999, we had negative working capital of $420,005. We have had a limited
operating history as a software product company, have not made significant sales
of our products and our revenues are difficult to predict.
We sold securities in private placements in October and November
1998 so that we could continue operations. In the private placements, we
received conditional commitments to purchase $4,500,000 of units consisting of
convertible preferred stock and warrants to purchase common stock, of which
payment for all of the units had been made as of February 1999. We received net
proceeds of approximately $3,995,000 from such private placements (of which
$1,396,000 was received subsequent to December 31, 1998). During 1999, we also
received proceeds of $521,750 from the exercise of warrants granted in such
private placements. However, given our continued operating losses, we will need
additional financing to continue operations. Our current projections indicate
that our current cash and cash equivalent position will be insufficient to
satisfy our liquidity requirements. Except as provided in the next paragraph, we
have no commitments, agreements or understandings regarding additional
financings and we may be unable to obtain additional financing.
We are in discussions with a placement agent relating to a proposed
private placement (the "Series C Private Placement") of a minimum of 10 and a
maximum of 30 units (the "Units") at a purchase price of $100,000 per unit. Each
Unit would consist of 100 shares of newly-created Series C Convertible Preferred
Stock, $.001 par value (the "Series C Preferred Stock"), and a Common Stock
Purchase Warrant (the "Warrant") to purchase 100,000 shares of Common Stock. If
all 30 Units were to be sold, we could in our discretion determine to sell up to
an additional 15 Units on the same terms and conditions as those prepared to be
offered. It is currently anticipated that each share of Series C Preferred Stock
would be convertible into such number of shares of Common Stock as is equal to
the quotient obtained by dividing $1,000 by the fair market value of the Common
Stock, i.e., the average closing price of the Common Stock in the principal
securities market in which it is then traded for the five trading days
immediately preceding the date of the initial closing of the offer. Assuming a
fair market value of $.75 per share, a share of Series C Preferred Stock would
initially be convertible into 1,333 shares of Common Stock. The Warrants would
have a term of 2 1/2 years and would be exercisable at a per share price equal
to the fair market value of the Common Stock. We are unable to predict whether
the Series C Private Placement will be consummated and based on discussion with
the placement agent and market conditions, the terms of the Series C Private
Placement may change.
ACCUMULATED DEFICIT; HISTORICAL AND PROJECTED FUTURE OPERATING
LOSSES; GOING CONCERN QUALIFICATION IN INDEPENDENT ACCOUNTANTS' REPORT: At March
31, 1999, our accumulated deficit was $37,129,993. For the three months ended
March 31, 1999 and the fiscal years ended December 31, 1998, and 1997, we
incurred net losses of $1,717,537, $7,294,032 and $10,563,484, respectively. We
have incurred a net loss in each year of our existence, and have financed our
operations primarily through sales of equity and debt securities. Our expense
levels
13
<PAGE>
are high and our revenues are difficult to predict. The independent accountants'
report on our financial statements for the year ended December 31, 1998 states
that our recurring losses from operations, our deficiencies in working capital
and stockholders' equity, and negative cash flow from operating activities raise
substantial doubt about our ability to continue as a going concern.
We expect to incur net losses for the foreseeable future. We may
never achieve or sustain significant revenues or profitability on a quarterly or
annual basis in the future. Our future operating results will depend on many
factors, including:
o product demand
o product and price competition in our industry
o our success in expanding our direct sales force and establishing
indirect channel partners
o our ability to develop and market products and control costs
o the percentage of our revenues that is derived from indirect
channel partners
LIMITED OPERATING HISTORY; LACK OF SUBSTANTIAL REVENUE: We have a
limited operating history as a software product company and have made only
limited sales of our products. Our total revenues for the year ended December
31, 1998 and for the three months ended March 31, 1999 were $928,505 and
$76,189, respectively. Prior to 1997, our revenues were derived primarily from
contract data analysis services, which we no longer provide.
DEPENDENCE UPON QUERYOJECT SYSTEM; UNCERTAIN MARKET ACCEPTANCE OF
QUERYOBJECT SYSTEM: Substantially all of our revenues for the foreseeable future
are expected to be derived from sales of QUERYOBJECT SYSTEM. Between January 1,
1995 and March 31, 1999, we had software product revenue from only 16
QUERYOBJECT SYSTEM installations, including those sold pursuant to reseller
agreements for the resellers' own use. We only recently commenced an integrated
marketing effort for our products. Our future financial performance will depend
upon the successful introduction and customeracceptance of QUERYOBJECT SYSTEM
and the development of new and enhanced versions of the product. If we fail to
achieve broad market acceptance of QUERYOBJECT SYSTEM, it would have a material
adverse effect on our business, operating results and financial condition.
NASDAQ DELISTING; POTENTIALLY LIMITED TRADING MARKET: Effective with
the close of business on May 6, 1999, our Common Stock was delisted from the
Nasdaq SmallCap Market ("Nasdaq") because of our inability to comply with
certain maintenance standards required for continued listing on Nasdaq,
including the net tangible asset requirement. We fell out of compliance
primarily as a result of continued losses during 1998.
Now that the Common Stock has been delisted from Nasdaq, trading in
the Common Stock is conducted on the OTC Bulletin Board and may continue to be
conducted on the Boston Stock Exchange. The Boston Stock Exchange has notified
us that we may not meet such exchange's continuing listing requirements with
regard to net tangible assets and that it will delist the Common Stock if we
have less than $500,000 in net tangible assets. We will be unable
14
<PAGE>
to maintain at least $500,000 in net tangible assets without additional
financing. The Boston Stock Exchange has advised us that the Common Stock can
temporarily continue to be traded on the Boston Stock Exchange at least until
May 28, 1999. At such time, we must advise the Boston Stock Exchange whether the
offering of Series C Preferred Stock has closed and how much proceeds we will
receive from such offering. Based on such information and our financial
condition at such time, the Boston Stock Exchange may determine to delist the
Common Stock even if we receive proceeds from the offering of Series C Preferred
Stock.
If the Common Stock is delisted from the Boston Stock Exchange, the
Common Stock could be considered a penny stock. SEC regulations generally define
a penny stock to be an equity security that is not listed on Nasdaq or a
national securities exchange and that has a market price of less than $5.00 per
share, subject to certain exceptions. The regulations of the SEC would require
broker-dealers to deliver to a purchaser of Common Stock a disclosure schedule
explaining the penny stock market and the risks associated with it. Various
sales practice requirements are also imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, broker-dealers 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 our Common Stock is traded only on the OTC Bulletin Board and
becomes subject to the regulations applicable to penny stocks, investors may
find it more difficult to obtain timely and accurate quotes and execute trades
in the Common Stock.
USE OF INDIRECT CHANNEL PARTNERS TO INCREASE SALES: As part of our
sales and marketing efforts, we are seeking to develop strategic relationships
with indirect channel partners, such as original equipment manufacturers and
value-added resellers, to increase the number of our customers. We currently are
investing, and intend to continue to invest, significant resources to develop
indirect channel partners. Our results of operations will be adversely affected
if we are unable to attract indirect channel partners to market our products
effectively and provide timely and cost effective customer support and service.
If we successfully sell products through these sales channels, the lower unit
prices we expect to receive for such sales will result in our gross margins
being lower than if we had sold those products through our direct sales force.
DEPENDENCE ON SIGNIFICANT CUSTOMERS: For the three months ended
March 31, 1999, one customer accounted for 66%, and for the fiscal year ended
December 31, 1998, four customers accounted for 80%, of our total revenues. We
are unsure if we will realize significant future revenues from any of these
customers. We also expect that for the foreseeable future a relatively small
number of customers and value added resellers will account for a significant
percentage of our revenues. The loss of any such customer would have a material
adverse effect on our operating results and financial condition.
DEPENDENCE UPON KEY PERSONNEL; NEED TO INCREASE SALES, MARKETING,
DEVELOPMENT AND TECHNICAL PERSONNEL: Our future performance depends in
significant part upon the continued service of key technical, sales and senior
management personnel. The loss of the services of one or more of our key
employees, in particular, Robert Thompson, our President and Chief Executive
Officer, or Daniel M. Pess, our Chief Operating and Financial Officer, could
have a material adverse effect on our business, operating results and financial
condition. We have an employment agreement with Mr. Thompson that expires in
October 1999, and an employment
15
<PAGE>
agreement with Mr. Pess that expires in May 1999. We are unsure if we will be
able to agree with either of Messrs. Thompson or Pess on the terms of extensions
to their employment agreements prior to the expiration of these agreements.
Our future success also depends on our continuing ability to
attract, train and retain highly qualified technical, sales, marketing,
development and managerial personnel. Competition for such personnel is intense,
and we may be unable to retain key technical, sales, development and managerial
employees or attract, assimilate or retain other highly qualified technical,
sales, development and managerial personnel in the future. If we are unable to
hire such personnel on a timely basis, our business, operating results and
financial condition could be materially adversely affected.
LACK OF PROPRIETARY TECHNOLOGY PROTECTION; RISKS OF INFRINGEMENT: We
rely primarily on a combination of trade secrets, confidentiality agreements and
contractual provisions to protect our proprietary technology. We license rather
than sell our software and require licensees to enter into license agreements
that impose certain restrictions on their ability to utilize the software. In
addition, we seek to avoid disclosure of our trade secrets, including but not
limited to requiring those persons with access to our proprietary information to
execute confidentiality agreements and restricting access to our source code.
These steps afford only limited protection. We have no patents or patent
applications pending. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. Policing unauthorized use of our
products may be difficult and costly, and software piracy may become a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. We are unable to predict whether our means of protecting our
proprietary rights will be adequate or whether competitors will independently
develop the same technology.
From time to time, third parties may assert patent, copyright and
other intellectual property claims against us. If we are unable to license
protected technology that may be used in our products, we could be prohibited
from manufacturing and marketing such products. We also could incur substantial
costs to redesign our products, to defend any legal action taken against us or
to pay damages to any infringed party. Litigation, which could result in
substantial cost to and diversion of our resources, may be necessary to enforce
our other intellectual property rights or to defend ourselves against claimed
infringement of the rights of others.
INTERNATIONAL OPERATIONS: Our international sales for the three
months ended March 31, 1999 and for the fiscal year ended in 1998, were
approximately 66% and 17% of our total revenue, respectively. We intend to
expand our international operations and to enter additional international
markets, which will require significant management attention and financial
resources and could adversely affect our business, operating results or
financial condition. To expand international sales successfully, we must
establish additional foreign operations, hire additional personnel and recruit
additional international resellers and distributors. If we are unable to do so
in a timely manner, our growth, if any, in international sales will be limited,
and our business, operating results and financial condition could be materially
adversely affected. We anticipate that our international sales, if any, will be
denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and,
therefore, potentially less competitive in those markets. Additional risks
inherent in our future international business activities generally include:
16
<PAGE>
o unexpected changes in regulatory requirements
o tariffs and other trade barriers
o costs of localizing products for foreign countries
o longer accounts receivable payment cycles
POSSIBLE VOLATILITY OF SECURITIES PRICES: The market price of our
common stock has in the past been, and may in the future continue to be,
volatile. For instance, between January 1, 1998 and May 10, 1999, the closing
price of our common stock has ranged between $.47 and $5.50. The volatility of
the market price of our common stock may further increase now that our common
stock has been delisted from Nasdaq. A variety of events may cause the market
price of our common stock to fluctuate significantly, including:
o quarter to quarter variations in operating results
o adverse news announcements
o the introduction of new products
o market conditions in the industry
In addition, the stock market in recent years has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many companies that service the software
industry and that often have been unrelated to the operating performance of such
companies. These market fluctuations may adversely affect the price of our
common stock.
ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS: Our Board of
Directors has the authority, without further action by the stockholders, to
issue 41,025 shares of preferred stock on such terms and with such rights,
preferences and designations, including, without limitation restricting
dividends on our common stock, dilution of the voting power of our common stock
and impairing the liquidation rights of the holders of our common stock, as the
Board may determine without any vote of the stockholders. Issuance of such
preferred stock, depending upon the rights, preferences and designations thereof
may have the effect of delaying, deterring or preventing a change in our
control. In addition, certain "anti-takeover" provisions of the Delaware General
Corporation Law, among other things, may restrict the ability of our
stockholders to authorize a merger, business combination or change of control.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS: Certain
forward-looking statements, including statements regarding our expected
financial position, business and financing plans are contained in this
prospectus or are incorporated in documents annexed as exhibits to this
prospectus. These forward-looking statements reflect our views with respect to
future events and financial performance. The words, "believe," "expect," "plans"
and "anticipate" and similar expressions identify forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such
17
<PAGE>
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
prospectus. All subsequent written and oral forward-looking statements
attributable to us are expressly qualified in their entirety by the cautionary
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. We undertake no
obligations to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As described under "Management's Discussion and Analysis or Plan of
Operation - Liquidity and Capital Resources," the Company has closed on the
Series A Private Placement and the Series B Private Placement. The sale of the
securities in the Series A Private Placement and the Series B Private Placement
was made pursuant to the exemption contained in Section 4(2) of the Securities
Act of 1933, as amended. Southeast Research Partners, Inc. acted as the
placement agent of the Series A Private Placement and the Series B Private
Placement. For more information relating to the Series A Private Placement and
the Series B Private Placement (including the conversion or exercise terms of
the securities issued in the Private Placements), please see "Management"s
Discussion and Analysis of Plan of Operation - Liquidity and Capital Resources."
During the three months ended March 31, 1999, the Company issued an
aggregate of 263,000 shares of Common Stock pursuant to the conversion of Series
A Preferred Stock and Series B Preferred Stock. The Company also issued an
aggregate of 672,500 shares of Common Stock pursuant to the exercise of Warrants
granted in the Series A Private Placement and the Series B Private Placement.
The Warrants had an exercise price of $.50 per share of Common Stock. The
issuance of the shares of Common Stock upon the conversion of the Series A
Preferred Stock and the Series B Preferred Stock and the exercise of the
Warrants was made pursuant to the exemption contained in Section 4(2) of the
Securities Act of 1933, as amended.
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 March
31, 1999.
19
<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: May 13, 1999 QUERYOBJECT SYSTEMS CORPORATION
By: /s/ Daniel M. Pess
-----------------------------------------------------
Executive Vice President, Chief Operating Officer and
Chief Financial Officer Principal Financial Officer
and Principal Accounting Officer)
20
QUERYOBJECT SYSTEMS CORPORATION EXHIBIT 11.1
Computation of Net Loss Per Share
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock 5,122,985 01/01/99 03/31/99 90 5,122,985
Conversion of preferred stock into common 40,000 02/17/99 03/31/99 43 19,111
Warrant exercise 480,000 02/24/99 03/31/99 36 192,000
Conversion of preferred sotck into common 198,000 02/25/99 03/31/99 35 77,000
Warrant exercise 15,000 02/25/99 03/31/99 35 5,833
" 67,500 02/26/99 03/31/99 34 25,500
" 22,500 03/01/99 03/31/99 31 7,750
" 10,000 03/02/99 03/31/99 30 3,333
Conversion of preferred stock into common 25,000 03/03/99 03/31/99 29 8,056
Warrant exercise 25,000 03/05/99 03/31/99 27 7,500
" 31,250 03/08/99 03/31/99 24 8,333
" 31,250 03/12/99 03/31/99 20 6,944
--------- -----------
At March 31, 1999 6,068,485 5,484,345
--------- -----------
Net loss $(1,717,537)
===========
Net Loss per common share $ (0.31)
===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock 5,110,605 01/01/98 03/31/98 90 5,110,605
Option exercise 1,875 01/15/98 03/31/98 76 1,583
" 2,118 01/16/98 03/31/98 75 1,765
" 4,584 02/12/98 03/31/98 47 2,394
" 625 02/28/98 03/31/98 32 222
" 365 03/01/98 03/31/98 14 57
--------- -----------
At March 31, 1998 5,120,172 5,116,626
--------- -----------
Net Loss $(2,235,583)
===========
Net Loss per common share $ (0.44)
===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 428,870
<SECURITIES> 0
<RECEIVABLES> 292,940
<ALLOWANCES> 45,900
<INVENTORY> 0
<CURRENT-ASSETS> 849,253
<PP&E> 2,109,111
<DEPRECIATION> 1,243,864
<TOTAL-ASSETS> 1,789,709
<CURRENT-LIABILITIES> 1,269,258
<BONDS> 0
0
1,778
<COMMON> 6,068
<OTHER-SE> 136,075
<TOTAL-LIABILITY-AND-EQUITY> 1,789,709
<SALES> 76,189
<TOTAL-REVENUES> 76,189
<CGS> 21,038
<TOTAL-COSTS> 1,788,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,098
<INCOME-PRETAX> (1,717,537)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,717,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,717,537)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
