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 September 30, 2000
/ / 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)
One Expressway Plaza - Suite 208
Roslyn Heights, New York 11577
(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 / / No / /
As of October 31, 2000 there were 9,850,654 shares of the
Registrant's common stock outstanding.
Transitional Small Business Disclosure Format. Yes / / No / /
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of September 30, 2000 (unaudited)..............................3
Condensed Consolidated Statements of Operations
For the three months and nine months ended September
30, 2000 and 1999 (unaudited).....................................4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2000 and 1999 (unaudited).5
Notes to the Condensed Consolidated Financial Statements..........6
Item 2. Management's Discussion and Analysis or Plan of Operation.........8
PART II. OTHER INFORMATION
Item 5. Other Information................................................18
Item 6. Exhibits and Reports on Form 8-K.................................18
SIGNATURES .................................................................19
2
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Part I.
FINANCIAL INFORMATION
Item 1. Financial Statements
QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30,
2000
ASSETS
<S> <C>
Current assets
Cash and cash equivalents ....................................... $ 5,744,804
Accounts receivable, net of allowance for doubtful
accounts of $54,587 .......................................... 750,782
Prepaid expenses and other current assets ....................... 340,042
-----------
Total current assets ......................................... 6,835,628
Property and equipment, net ......................................... 1,231,917
Deposits and other assets ........................................... 204,614
-----------
Total assets ................................................. $ 8,272,159
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................ $ 267,930
Accrued expenses ................................................ 431,363
Deferred revenue ................................................ 148,167
Deferred rent ................................................... 35,898
Capital lease obligations ....................................... 25,157
-----------
Total current liabilities .................................... 908,515
Deferred rent ....................................................... 259,751
-----------
Total liabilities ............................................ 1,168,266
-----------
Minority interest (Note 5) .......................................... 6,534,993
-----------
Stockholders' equity
Preferred stock, $.001 par value: 4,000,000 shares authorized;
none issued and outstanding ................................. --
Common stock, $.003 par value: 60,000,000 shares
authorized; 9,850,654 shares issued and outstanding ......... 29,552
Additional paid-in capital ...................................... 48,630,759
Accumulated deficit ............................................. (48,091,411)
-----------
Total stockholders' equity .................................. 568,900
-----------
Total liabilities and stockholders' equity .................. $ 8,272,159
-----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Revenues
<S> <C> <C> <C> <C>
Software licenses ..................... $ 222,000 $ 525,200 $ 1,078,650 $ 1,078,400
Maintenance and services .............. 154,711 29,365 320,022 82,459
----------- ------------- ----------- -----------
Total revenues ............... 376,711 554,565 1,398,672 1,160,859
Cost of revenues
Software licenses ..................... 8,880 20,004 43,652 42,182
Maintenance and services .............. 70,556 18,949 110,340 56,807
----------- ----------- ----------- -----------
Total cost of revenues ....... 79,436 38,953 153,992 98,989
----------- ----------- ----------- -----------
Gross profit .............................. 297,275 515,612 1,244,680 1,061,870
----------- ----------- ----------- -------------
Operating expenses
Sales and marketing ................... 2,020,391 877,889 5,045,948 2,727,863
Research and development .............. 693,640 507,827 1,916,024 1,747,454
General and administrative ............ 380,465 326,368 1,317,450 1,018,884
----------- ----------- ----------- -----------
Total operating expenses ..... 3,094,496 1,712,084 8,279,422 5,494,201
----------- ----------- ----------- -----------
Loss from operations ...................... (2,797,221) (1,196,472) (7,034,742) (4,432,331)
Interest income ........................... 110,658 14,165 295,148 25,477
Interest expense .......................... (1,293) (7,896) (11,390) (34,918)
Other income (expense) .................... 1,286 -- (2,380) (1,288)
----------- ----------- ----------- ------------
Net loss .................................. $(2,686,570) $(1,190,203) $(6,753,364) (4,443,060)
----------- ----------- ----------- ------------
Basic and diluted net loss per common share $ (.27) $ (.51) $ (.72) $ (2.11)
----------- ----------- ----------- ------------
Weighted average shares used in per share .
computation (Note 2) .................. 9,844,960 2,336,130 9,325,154 2,108,541
----------- ----------- ----------- ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
Cash flows from operating activities
<S> <C> <C>
Net loss ........................................................ $(6,753,364) $(4,443,060)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization .............................. 341,367 319,808
Loss on disposition of equipment ........................... 9,033 1,288
Options issued for consulting services ......... 436,551 380,565
Changes in assets and liabilities
Accounts receivable, net ................ 480,765 (615,905)
Prepaid expenses and other current assets (191,808) (232,221)
Deposits and other assets ............... (47,567) (23,457)
Accounts payable and accrued expenses ... (212,607) (148,731)
Deferred rent ........................... 3,358 (15,371)
Deferred revenue ........................ (21,588) 56,215
---------- ---------
Net cash used in operating activities ... (5,955,860) (4,720,869)
---------- ---------
Cash flows from investing activities
Acquisitions of property and equipment .................... (736,017) (184,158)
Repayment of stockholder note receivable .................. -- 65,000
---------- ---------
Net cash used in investing activities ... (736,017) (119,158)
---------- ---------
Cash flows from financing activities
Proceeds from exercise of common stock warrants .......... 1,456,250 719,331
Proceeds from exercise of common stock options ............ 102,618 --
Proceeds from issuance of preferred stock, net ............ -- 4,089,791
Proceeds from issuance of IQO preferred stock, net ........ 6,534,993 --
Collection of stock subscriptions receivable, net ......... -- 1,397,004
Repayment of loans payable to stockholders ................ -- (700,000)
Proceeds from loans payable to stockholders ............... -- 400,000
Payments of capital lease obligations ..................... (146,034) (130,247)
---------- ---------
Net cash provided by financing activities 7,947,827 5,775,879
---------- ---------
Net increase in cash and cash equivalents ............................ 1,255,950 935,852
Cash and cash equivalents at beginning of year ....................... 4,488,854 854,018
---------- ---------
Cash and cash equivalents at end of period ........................... $ 5,744,804 $ 1,789,870
---------- ---------
</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, 1999, and have been prepared on
the basis that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The results of operations for the periods ended September
30, 2000 are not necessarily indicative of the results to be expected for any
subsequent quarter, or for the entire fiscal year ending December 31, 2000, or
for any future period.
The condensed consolidated financial statements include the accounts
of QueryObject Systems Corporation and its subsidiaries, internetQueryObject
Corporation ("IQO"), QueryObjectexchange Corporation and QueryObject Systems
Corporation, Ltd. All significant intercompany transactions have been eliminated
in consolidation.
On January 27, 2000, the Company's stockholders approved a
one-for-three reverse stock split of all common stock outstanding. The
one-for-three reverse stock split also affects options and warrants outstanding
as well as the conversion ratio of Convertible Preferred Stock into common
stock. All share and per share amounts affecting net loss per share, weighted
average number of common and common equivalent shares outstanding, common stock
and all other stock transactions presented in these financial statements have
been restated to reflect the one-for-three reverse stock split.
Certain prior period amounts have been reclassified to conform to
their 2000 presentation.
2. BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss by the
sum of the weighted average number of shares of common stock outstanding. The
weighted average number of shares of common stock outstanding includes the
number of common shares issued upon the conversion of Convertible Preferred
Stock, as of the date of conversion, and the number of common shares issued upon
the exercise of options and warrants, as of the date of exercise.
Diluted earnings per share is based on the potential dilution that
would occur on exercise or conversion of securities into common stock.
Outstanding options and warrants to purchase shares of common stock that could
potentially dilute basic earnings per share in the future were not included in
the computation of diluted net loss per share because to do so would have had an
antidilutive effect for the periods presented. In addition, the Convertible
Preferred Stock issued during 1999 and 1998 has been excluded prior to its
conversion to common shares, due to the
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antidilutive effect. As a result, the basic and diluted per share amounts are
identical for all periods presented.
3. 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.
4. LIQUIDITY AND BUSINESS RISKS
The Company has incurred operating losses since inception, has
incurred negative cash flows from operating activities and has an accumulated
deficit of $48,091,411 and $41,338,047 as of September 30, 2000 and December 31,
1999, 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. It is anticipated that the cash
and cash equivalent balance of IQO at September 30, 2000 will be sufficient to
satisfy its cash flow requirements for more than 12 months. QueryObject Systems
Corporation anticipates that its cash and cash equivalent balance at September
30, 2000 will be insufficient to satisfy its cash flow requirements beyond
December 2000. The Company is seeking to sell additional equity or convertible
debt securities, however, there can be no assurance that the Company would be
successful in raising additional funds. The sale of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders.
5. IQO PREFERRED STOCK
In April 2000, IQO sold 70 Units, at a purchase price per Unit of
$100,000 (the "Units"), each Unit consisted of 125,000 shares of Series A
Preferred Stock and a Common Stock Purchase Warrant to purchase 125,000 shares
of IQO's Common Stock (the "IQO Private Placement"). IQO received net proceeds
of $6,534,993. Each share of Series A Preferred Stock is convertible, at the
option of the holder, into one share of IQO Common Stock (8,750,000 shares in
total). The Series A Preferred Stock ranks senior to all other classes of IQO
capital stock and has a liquidation preference equal to its purchase price of
$.80 per share. The Series A Preferred Stock is not entitled to receive
dividends unless dividends are declared on a junior security with the approval
of the Series A holders. The Common Stock Purchase Warrants are exercisable
until April 17, 2001 at an exercise price of $1.00 per share.
IQO granted the placement agent in the IQO Private Placement an
option to purchase 492,500 shares of its Common Stock and paid commissions and a
non-accountable expense allowance of $394,000. The securities offered and sold
in the IQO Private Placement were not registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States by the
holders thereof absent registration or an applicable exemption from registration
requirements.
7
<PAGE>
As of September 30, 2000, the Company owns all the outstanding IQO
Common Stock. Assuming the conversion of all of the Series A Preferred Stock
into IQO Common Stock, the Company would own 53.3% of the outstanding IQO Common
Stock. The Company has reported the proceeds from the IQO Private Placement,
less professional expenses and fees associated with the offering, as Minority
Interest in the accompanying Condensed Consolidated Balance Sheet.
6. RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In June 2000, the SEC issued SAB No. 101B to defer the effective
date of implementation of SAB No. 101 until the fourth quarter of fiscal 2000.
The Company is in the process of evaluating the impact of SAB 101.
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, 1999.
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, but has a limited
operating history as a software product company and has made only limited sales
of its QueryObject System.
During April 2000, the Company began staffing and incurred initial
marketing and product-related expenses and general and administrative expenses
with respect to IQO. As of October 31, 2000, IQO has 18 full time equivalent
employees. Total expenses for the three and nine month periods ended September
30, 2000 were $955,422 and $2,023,793, respectively. IQO will resell the
Company's database, data streaming and data distribution technology to Internet
based businesses. IQO is developing applications that capture, store, manage,
distribute and analyze data for CRM (Customer Relationship Management).
To date, the Company has incurred substantial losses from
operations, and at September 30, 2000, had an accumulated deficit of
$48,091,411. The Company expects to incur substantial
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operating expenses in the future to support its product development efforts
(including those of IQO), establish and expand its domestic and international
sales and marketing capabilities, including recruiting additional indirect
channel partners, and support and expand its technical and management personnel
and organization.
Revenues from the sales of the Company's products are generally
recognized upon the execution of a software licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. In instances where a
significant vendor obligation exists, revenue recognition is deferred until such
obligation has been satisfied.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's
consolidated statements of operations for the three and nine month periods ended
September 30, 2000 and 1999 ($ in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Revenues
<S> <C> <C> <C> <C>
Software licenses .............. $ 222 $ 525 $ 1,079 $ 1,078
Maintenance and services ....... 155 30 320 83
------- ------- ------- -------
Total revenues ......... 377 555 1,399 1,161
------- ------- ------- -------
Cost of revenues
Software licenses .............. 9 20 44 42
Maintenance and services ....... 71 19 110 57
------- ------- ------- -------
Total cost of revenues . 80 39 154 99
------- ------- ------- -------
Gross profit .............................. 297 516 1,245 1,062
------- ------- ------- -------
Operating expenses
Sales and marketing ............ 2,020 878 5,046 2,728
Research and development ....... 694 508 1,916 1,747
General and administrative ..... 380 326 1,318 1,019
------- ------- ------- -------
Total operating expenses 3,094 1,712 8,280 5,494
------- ------- ------- -------
Loss from operations ...................... (2,797) (1,196) (7,035) (4,432)
Interest income ......................... 110 14 295 25
Interest expense ........................ (1) (8) (11) (35)
Other income (expense) .................. 1 -- (2) (1)
------- ------- ------- -------
Net loss .................................. $(2,687) $(1,190) $(6,753) $(4,443)
------- ------- ------- -------
</TABLE>
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REVENUES
The Company's license revenues have been generated from sales of
QueryObject System. Maintenance revenues consist of ongoing support and product
updates that are recognized ratably over the term of the contract, typically 12
months. Service revenues consist primarily of paid proof-of-concepts performed
for customers on a project or contract basis and are recognized over the term of
the respective agreements.
Total revenues decreased by $178,000, or 32%, from $555,000 in the
third quarter of 1999 to $377,000 in the third quarter of 2000. For the first
nine months, total revenues increased $238,000, or 20% from $1,161,000 in 1999
to $1,399,000 in 2000. The increase for the first nine months was primarily due
to service revenue of IQO and the decrease for the third quarter was due to
decreased license revenue, partially offset by IQO service revenue. The Company
recorded license revenue from the sale of two licenses in the third quarter of
2000 compared to the sale of five licenses in the third quarter of 1999. The
Company recorded license revenue from the sale of 13 licenses for the first nine
months of 2000 compared to the sale of 11 licenses for the first nine months of
1999. The decrease in license revenues for the third quarter compared to 1999
was primarily due to a lack of sales in Europe. Revenues from European sales
decreased by 98% during the third quarter, which was partially offset by a 149%
increase in North America revenues. For the first nine months, revenues in
Europe decreased by 66%, which was more than fully offset by a 176% increase in
North America revenues. Maintenance and service revenue increased by $125,000,
or 417%, from $30,000 in the third quarter of 1999 to $155,000 in the third
quarter of 2000. For the first nine months, maintenance and service revenue
increased by $237,000, or 286% from $83,000 in 1999 to $320,000 in 2000. These
increases were primarily the result of IQO service revenue. Maintenance and
service revenues are expected to increase as the Company sells additional
licenses and as IQO introduces its product offering.
COST OF REVENUES
Cost of software license revenues consists primarily of royalty
payments to third parties, product packaging, documentation and production
costs. Cost of software license revenues as a percentage of software license
revenues was 4% for all periods presented.
Costs of maintenance and services revenues consist primarily of
customer support costs and direct costs associated with providing
proof-of-concept services. Cost of maintenance and services revenues as a
percentage of maintenance and services revenues were 46% and 34%, respectively,
for the three and nine-month periods ended September 30, 2000. Cost of
maintenance and services revenues as a percentage of maintenance and services
revenues were 63% and 69%, respectively, for the three and nine-month periods
ended September 30, 1999. These decreases in the 2000 periods were primarily due
to increased service revenues of IQO for which the related direct costs were
lower as a percentage of service revenues than maintenance revenues. In
addition, higher maintenance revenues for the 2000 periods did not require
additional personnel costs related to customer support.
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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 $1,142,000, or 130%, from
$878,000 in the third quarter of 1999 to $2,020,000 in the third quarter of
2000. For the first nine months, sales and marketing expenses increased
$2,318,000, or 85%, from $2,728,000 in 1999 to $5,046,000 in 2000. These
increases in the 2000 periods were primarily due to personnel related costs and
marketing and sales costs of IQO ($712,000 and $1,445,000 for the three and nine
month periods ended in 2000, respectively) and a general increase in marketing
expenses of the Company. The Company believes its sales and marketing expenses
will increase in absolute dollars as the Company continues to increase 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 additional software engineers and quality
assurance personnel, consultant costs and depreciation of development equipment.
Research and development expenses increased $186,000, or 37%, from $508,000 in
the third quarter of 1999 to $694,000 in the third quarter of 2000. For the
first nine months, research and development expenses increased $169,000, or 10%,
from $1,747,000 in 1999 to $1,916,000 in 2000. These increases in the 2000
periods were primarily due to increased personnel related costs of IQO. The
Company believes a significant level of investment for product research and
development is required to remain competitive and, accordingly, the Company
anticipates it will continue to devote substantial resources to product research
and development (including those of IQO) 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 and accounting, human resources
and general management, as well as insurance and professional expenses. General
and administrative expenses increased $54,000, or 17%, from $326,000 in the
third quarter of 1999 to $380,000 in the third quarter of 2000. For the first
nine months, general and administrative expenses increased $299,000, or 29%,
from $1,019,000 in 1999 to $1,318,000 in 2000. These increases in the 2000
periods were primarily due to higher legal and professional expenses, costs
relating to IQO and higher bad debt expense, offset in part by a reduction in
personnel related costs. The Company believes its general and administrative
expenses (including those of IQO) will increase in absolute dollars.
INTEREST INCOME AND INTEREST EXPENSE
Interest income represents income earned on the Company's cash and
cash equivalents. Interest income increased $96,000 from $14,000 in the third
quarter of 1999 to $110,000 in the third quarter of 2000. For the first nine
months, interest income increased $270,000 from $25,000 in 1999 to $295,000 in
2000. These increases in the 2000 periods were primarily due to a higher level
of cash and cash equivalents on deposit during 2000 as a result of the closing
of the IQO Private Placement in April 2000.
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Interest expense generally represents interest on capital equipment
leases. Interest expense decreased $7,000 from $8,000 in the third quarter of
1999 to $1,000 in the third quarter of 2000. For the first nine months, interest
expense decreased $24,000 from $35,000 in 1999 to $11,000 in 2000. These
decreases in the 2000 periods were primarily due to a lower outstanding balance
on capital lease obligations.
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 1999 and 1998 and consequently paid no
federal or state income taxes. At December 31, 1999, the Company had net
operating losses and research and experimental tax credit carryforwards of
$37,705,000 and $259,000, respectively, available to offset future federal
taxable income and tax. These net operating loss carryforwards expire at various
dates through 2019. 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
Since January 1, 1999, the Company has consummated several
financings to fund operations as follows:
(a) In April 2000, IQO received $6,534,993 in net proceeds from a
private placement of Series A Preferred Stock and Common Stock Purchase
Warrants. See Note 5 of Notes to Condensed Consolidated Financial Statements.
(b) Between June and August 1999, the Company received net
proceeds of $4,089,791 from a private placement of securities that have been
converted or exercised into an aggregate of 3,239,169 shares of Common Stock.
(c) Between October 1998 and February 1999, the Company received
net proceeds of $3,995,000 (of which $1,397,004 was received after January 1,
1999) from two private placements of securities that have been converted or
exercised into an aggregate of 4,834,103 shares of Common Stock.
During the year ended December 31, 1999, the exercise of Warrants
granted in the private placements noted in (b) and (c) above resulted in
proceeds to the Company of $5,213,908. In January 2000, the exercise of the
remaining outstanding Warrants from such private placements resulted in proceeds
to the Company of $1,456,250.
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As of September 30, 2000, the Company had $5,744,804 in cash and
cash equivalents and working capital of $5,927,113. The Company has incurred
operating losses since inception, has incurred negative cash flows from
operating activities and had an accumulated deficit as of September 30, 2000 and
December 31, 1999 of $48,091,411 and $41,338,047, respectively.
Net cash used in operating activities was $5,956,000 and $4,721,000
for the nine-month periods ended in 2000 and 1999, respectively. For the nine
months ended September 30, 2000, net cash used in operating activities was
primarily attributable to a net loss of $6,753,000, less depreciation,
amortization and consulting option expenses of $778,000. For 1999, net cash used
in operating activities was primarily attributable to a net loss of $4,443,000
and an increase in accounts receivable of $616,000, less depreciation,
amortization and consulting option expense of $700,000. Net cash provided by
financing activities was $7,948,000 and $5,776,000 for the nine-month periods
ended in 2000 and 1999, respectively, primarily as a result of proceeds from the
IQO Private Placement and from the exercise of Warrants during 2000 and the
collection of stock subscription receivables, exercise of Warrants and the sale
of convertible securities during 1999. It is anticipated that the cash and cash
equivalent balance of IQO at September 30, 2000 will be sufficient to satisfy
its cash flow requirements for at least the next 12 months. QueryObject Systems
Corporation anticipates that its cash and cash equivalent balance at September
30, 2000 will be insufficient to satisfy its cash flow requirements beyond
December 2000. The Company is seeking to sell additional equity or convertible
debt securities, however, there can be no assurance that the Company would be
successful in raising additional funds. The sale of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders.
The Company does not currently have a line of credit with a
commercial bank. As of September 30, 2000, the Company's principal commitments
consisted of obligations under operating and capital leases and employment
agreements. At September 30, 2000, the Company had approximately $25,000 in
outstanding borrowings under capital leases, which are payable through 2001.
Pursuant to employment agreements with executive officers of the Company, as of
September 30, 2000, the Company's remaining obligation is to pay $107,500 and
$430,000 in salaries for the years ended December 31, 2000 and 2001,
respectively. Subsequent to September 30, 2000, the Company entered into an
employment agreement with a new President which will require it to pay $200,000
in salary for a one year period.
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.
WE NEED FURTHER FINANCING TO CONTINUE OUR OPERATIONS.
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. Our total revenues for the nine months ended September 30,
2000 and for the year ended December 31, 1999 were $1,398,672 and $1,774,109,
respectively. Given our continued operating losses, our cash and
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cash equivalent balance will be insufficient to satisfy our cash flow
requirements beyond December 2000 and we will need additional financing to
continue operations. We are seeking to sell additional equity or convertible
debt securities, however, we are unable to predict whether we will be successful
in raising additional funds. We have no commitments, agreements or
understandings regarding additional financings and we may be unable to obtain
additional financing on satisfactory terms or at all.
WE HAVE HAD A HISTORY OF OPERATING LOSSES AND PROJECT FUTURE LOSSES; THEREFORE
WE HAVE DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
At September 30, 2000, our accumulated deficit was $48,091,411. For
the nine months ended September 30, 2000 and for the fiscal years ended December
31, 1999 and 1998, we incurred net losses of $6,753,364, $5,925,591 and
$7,294,032, 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 are high and our revenues are difficult
to predict. The independent accountants' report on our financial statements for
the year ended December 31, 1999 states that our recurring losses from
operations and negative cash flow from operating activities raise 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
OUR REVENUES DEPEND ON SALES OF QUERYOBJECT SYSTEM AND THE SUCCESSFUL
DEVELOPMENT OF THE IQO SERVICE OFFERING. WE ARE UNCERTAIN WHETHER THERE WILL BE
BROAD MARKET ACCEPTANCE OF THESE PRODUCTS.
Substantially all of our revenues for the foreseeable future are
expected to be derived from sales of QueryObject System and from IQO services.
Through September 30, 2000, we had software product revenue from only 45
QueryObject System installations, including those sold pursuant to reseller
agreements for the resellers' own use. Our 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. If we
fail to achieve broad market acceptance of QueryObject System or fail to
successfully develop the IQO service offering and achieve broad market
acceptance, it would have a material adverse effect on our business, operating
results and financial condition.
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WE ARE SEEKING TO DEVELOP ADDITIONAL STRATEGIC RELATIONSHIPS WITH INDIRECT
CHANNEL PARTNERS TO INCREASE SALES, BUT WE MAY BE UNABLE TO ATTRACT EFFECTIVE
PARTNERS AND WE WILL HAVE LOWER GROSS MARGINS FOR SALES THROUGH INDIRECT CHANNEL
PARTNERS.
As part of our sales and marketing efforts, we are seeking to
develop additional 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.
WE ARE DEPENDENT ON A FEW SIGNIFICANT CUSTOMERS AND THE LOSS OF A SINGLE
CUSTOMER COULD ADVERSELY EFFECT OUR BUSINESS.
For the nine months ended September 30, 2000 and the fiscal year
ended December 31, 1999, four customers accounted for 60% and 72% of our total
revenues, respectively. We are unsure if we will realize significant future
revenues from any of these customers. We also expect 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.
WE ARE DEPENDENT ON A FEW KEY PERSONNEL AND WE NEED TO ATTRACT AND RETAIN HIGHLY
QUALIFIED TECHNICAL, SALES, MARKETING, DEVELOPMENT AND MANAGEMENT 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 Chief Executive Officer, Joseph M. Valley, Jr., our new President
and Chief Operating Officer and Daniel M. Pess, our Chief Financial Officer,
could have a material adverse effect on our business, operating results and
financial condition. We have employment agreements with Mr. Thompson and Mr.
Pess that expire in December 2001 and an employment agreement with Mr. Valley
that expires November 2001.
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.
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WE LACK PROPRIETARY TECHNOLOGY PROTECTION OF OUR PRODUCTS AND MAY RISK
INFRINGEMENT UPON TECHNOLOGY DEVELOPED BY OTHERS.
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. While we
have applied for a patent for our Internet streaming technology, we are unable
to predict whether we will receive such patent and we have no other 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 the laws of the United
States. We are unable to predict whether we have adequately protected our
proprietary rights or if 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 us against claimed
infringement of the rights of others.
WE INTEND TO EXPAND OUR INTERNATIONAL SALES, BUT THERE ARE SUBSTANTIAL RISKS
INVOLVED, INCLUDING EFFECTIVELY ESTABLISHING ADDITIONAL FOREIGN OPERATIONS AND
FOREIGN REGULATORY CONCERNS.
Our international sales for the nine months ended September 30, 2000
and for fiscal year ended December 31, 1999, were approximately 21% and 49% of
our total revenue, respectively. We may expand our international operations and
enter additional international markets, which would require significant
management attention and financial resources and could adversely affect our
business, operating results or financial condition. To expand international
sales successfully, we may 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 may be limited, and our business, operating results and
financial condition could be adversely affected. Our revenues for the three
months ended September 30, 2000 declined 32% from the three months ended
September 30, 1999 primarily due to a decrease in international sales. We
anticipate that expanded 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:
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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
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE.
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, 1999
and September 30, 2000, the closing price of our common stock has ranged between
$1.41 and $10.94. 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.
WE HAVE A SIGNIFICANT AMOUNT OF AUTHORIZED BUT UNISSUED PREFERRED STOCK, WHICH
MAY AFFECT THE LIKELIHOOD OF A CHANGE OF CONTROL IN OUR COMPANY.
As of October 31, 2000, our Board of Directors has the authority,
without further action by the stockholders, to issue 4,000,000 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 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.
WE CAN GIVE NO ASSURANCES THAT OUR FORWARD LOOKING STATEMENTS WILL BE CORRECT.
Certain forward-looking statements, including statements regarding
our expected financial position, business and financing plans are contained in
this document or are incorporated in documents annexed as exhibits to this
document. 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
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statements are reasonable, we can give no assurance that such 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. We caution
readers 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.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 14, 2000, the Company's common stock commenced trading
on the American Stock Exchange.
On October 23, 2000, Joseph M. Valley, Jr. became the President and
Chief Operating Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Statement of Computation of Net Loss Per Share (Exhibit 11.1)
Financial Data Schedule (Exhibit 27)
Employment Agreement, effective October 23, 2000, by and
between Joseph M. Valley, Jr. and QueryObject Systems
Corporation (Exhibit 99.1)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 2000.
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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: November 13, 2000 QUERYOBJECT SYSTEMS CORPORATION
By: /s/ Daniel M. Pess
-------------------------------------------
Executive Vice President, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
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