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, 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 /X/ No / /
As of May 1, 2000 there were 9,840,252 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, 2000 (unaudited)...................................3
Condensed Consolidated Statement of Operations
For the three months ended March 31, 2000 and 1999 (unaudited).....4
Condensed Consolidated Statement of Cash Flows
For the three months ended March 31, 2000 and 1999 (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.........................18
Item 6. Exhibits and Reports on Form 8-K..................................18
SIGNATURES ..................................................................19
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31,
2000
ASSETS
Current assets
<S> <C>
Cash and cash equivalents $4,097,828
Accounts receivable, net of allowance for doubtful
accounts of $109,000 1,001,253
Prepaid expenses and other current assets 165,334
----------
Total current assets 5,264,415
Property and equipment, net 843,704
Deposits and other assets 187,258
----------
Total assets $6,295,377
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 316,906
Accrued expenses 361,352
Deferred revenue 224,248
Deferred rent 28,921
Capital lease obligations due within one year 123,326
----------
Total current liabilities 1,054,753
Capital lease obligations 1,833
Deferred rent 260,934
----------
Total liabilities 1,317,520
----------
Stockholders' equity
Preferred stock, $.001 par value: 4,000,000 shares authorized;
0, 5,000 and 2,425 shares of Series A, B and C, respectively,
issued and outstanding 7
Common stock, $0.003 par value: 60,000,000 shares
authorized; 9,727,939 shares issued and outstanding 29,184
Additional paid-in capital 48,281,605
Accumulated deficit (43,332,939)
-----------
Total stockholders' equity 4,977,857
-----------
Total liabilities and stockholders' equity $ 6,295,377
-----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
Revenues
<S> <C> <C>
Software licenses $ 273,800 $ 50,000
Maintenance and services 54,591 26,189
----------- ----------
Total revenues 328,391 76,189
Cost of revenues
Software licenses 10,952 2,050
Maintenance and services 20,426 18,988
---------- -----------
Total cost of revenues 31,378 21,038
---------- -----------
Gross profit 297,013 55,151
---------- -----------
Operating expenses
Sales and marketing 1,409,759 888,684
Research and development 526,889 532,031
General and administrative 410,887 347,124
---------- -----------
Total operating expenses 2,347,535 1,767,839
---------- -----------
Loss from operations (2,050,522) (1,712,688)
Interest income 65,385 9,249
Interest expense (5,889) (14,098)
Other expense (3,866) --
---------- -----------
Net loss $(1,994,892) $(1,717,537)
---------- -----------
Basic and diluted net loss per common share $ (.24) $ (.94)
---------- -----------
Weighted average shares used in per share
computation (Note 2) 8,313,372 1,828,115
---------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
Cash flows from operating activities
<S> <C> <C>
Net loss $(1,994,892) $(1,717,537)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 111,493 109,578
Options issued for consulting services 142,735 137,330
Changes in operating assets and liabilities
Accounts receivable, net 230,295 29,487
Prepaid expenses and other current assets (17,100) (70,592)
Deposits and other assets (30,211) 5,822
Accounts payable and accrued expenses (233,641) (271,566)
Deferred rent (2,438) (3,003)
Deferred revenue 54,493 (26,189)
----------- ------------
Net cash used in operating activities (1,739,266) (1,806,670)
----------- ------------
Cash flows from investing activities
Acquisitions of property and equipment (108,897) (14,589)
----------- ------------
Net cash used in investing activities (108,897) (14,589)
----------- ------------
Cash flows from financing activities
Proceeds from exercise of common stock warrants 1,456,250 --
Proceeds from exercise of common stock options 46,919 341,250
Collection of stock subscriptions receivable, net -- 1,397,004
Repayment of loan payable to stockholders -- (300,000)
Payments of capital lease obligations (46,032) (42,143)
----------- ------------
Net cash provided by financing activities 1,457,137 1,396,111
----------- ------------
Net decrease in cash and cash equivalents (391,026) (425,148)
Cash and cash equivalents at beginning of year 4,488,854 854,018
----------- ------------
Cash and cash equivalents at end of period $ 4,097,828 $ 428,870
=========== ============
</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 period ended March 31,
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") 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 with
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 issuable upon the conversion of Convertible Preferred
Stock, as of the date of conversion, and the number of common shares issuable
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 Series A, B and
C Convertible Preferred Stock issued during 1999 and 1998 has been excluded due
to the antidilutive effect. As a result, the basic and diluted per share amounts
are identical for all periods presented.
6
<PAGE>
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 had an accumulated deficit of
$43,332,939 and $41,338,047 as of March 31, 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. The Company anticipates that its cash and
cash equivalent balance at March 31, 2000 may be insufficient to satisfy its
cash flow requirements for more than 12 months. In this event, the Company may
seek to sell additional equity or convertible debt securities, however, there
can be no assurances 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. Subsequent Event
In April 2000, IQO sold 70 Units (the "Units") of Series A Preferred
Stock totaling gross proceeds of $7,000,000 in a private placement (the "IQO
Private Placement"). The purchase price per Unit was $100,000. Each Unit
consists of 125,000 shares of newly-created Series A Preferred Stock and a
Common Stock Purchase Warrant exercisable until April 17, 2001 to purchase
125,000 shares of IQO's Common Stock at an exercise price of $1.00 per share.
IQO received net proceeds of $6,572,935 and issued 8,750,000 shares of Series A
Preferred Stock. Each share of Series A Preferred Stock is convertible into one
share of IQO Common Stock.
IQO granted the placement agent in the IQO Private Placement an option
to purchase an aggregate of 492,500 shares of its Common Stock and paid
commissions and non-accountable expense allowances equal to $394,000. The
securities offered and sold in the 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>
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, 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.
During the three months ended March 31, 2000, the Company began
staffing and incurred initial marketing expenses with respect to its subsidiary,
IQO. IQO will resell the Company's database, data streaming and data
distribution technology to Internet based businesses.
To date, the Company has incurred substantial losses from operations,
and at March 31, 2000, had an accumulated deficit of $43,332,939. The Company
expects to incur substantial operating expenses in the future to support its
product development efforts (including those of IQO), establish and expand its
domestic and international sales and marketing capabilities, including
recruiting additional indirect channel partners, and support and expand its
technical and management personnel and organization.
Revenues from the sales of the Company's products are generally
recognized upon the execution of a software licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. In instances where a
significant vendor obligation exists, revenue recognition is deferred until such
obligation has been satisfied. Allowances for estimated future returns are
provided for upon shipment.
8
<PAGE>
Results of Operations
The following table sets forth certain items in the Company's condensed
consolidated statements of operations for the three months ended March 31, 2000
and 1999 ($ in thousands):
Three Months Ended
March 31,
2000 1999
-------- ---------
Revenues
Software licenses $ 274 $ 50
Maintenance and services 54 26
------- -------
Total revenues 328 76
------- -------
Cost of revenues
Software licenses 11 2
Maintenance and services 20 19
------- -------
Total cost of revenues 31 21
------- -------
Gross profit 297 55
------- -------
Operating expenses
Sales and marketing 1,410 889
Research and development 527 532
General and administrative 411 347
------- -------
Total operating expenses 2,348 1,768
------- -------
Loss from operations (2,051) (1,713)
Interest income 65 9
Interest expense (6) (14)
Other expense (3) --
------- -------
Net loss $(1,995) $(1,718)
------- -------
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, which is
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 increased by $252,000, or 332%, from $76,000 for the
three months ended March 31, 1999 ("1999") to $328,000 for the three months
ended March 31, 2000 ("2000"). License revenues increased by $224,000, or 448%,
from $50,000 in 1999 to $274,000 in 2000. During 2000, license revenues were
derived from the sale of three licenses, while during 1999 license revenues were
derived from the sale of one license. Maintenance and service revenue increased
by $28,000, or 108% from $26,000 in 1999 to $54,000 in 2000. Maintenance and
service revenues are expected to increase as the Company sells additional
licenses.
9
<PAGE>
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 4.1% in 1999 and 4.0% in 2000. Cost of maintenance and services
revenues consist primarily of customer support costs and direct costs associated
with proof-of-concept services. Cost of maintenance and services revenues
decreased as a percentage of maintenance and services revenues from 72% in 1999
to 37% in 2000, primarily due to higher revenues that did not require
significant additional personnel costs related to customer support.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, including sales commissions and incentives, of all personnel
involved in the sales and marketing process, as well as related recruiting
costs, public relations, advertising related costs, collateral material and
trade shows. Sales and marketing expenses increased by $521,000, or 59%, from
$889,000 in 1999 to $1,410,000 in 2000, primarily due to personnel related costs
and marketing costs of IQO and a general increase in marketing expenses of the
Company. The Company believes that its sales and marketing expenses will
increase in absolute dollars as the Company continues to increase promotion and
other marketing expenses.
Research and Development. Research and development expenses consist
primarily of salaries and other personnel related expenses, recruiting costs
associated with the hiring of additional software engineers and quality
assurance personnel, consultant costs and depreciation of development equipment.
Research and development expenses decreased by $5,000, or 1%, from $532,000 in
1999 to $527,000 in 2000, primarily due to a decrease in personnel related
costs, offset in part by higher depreciation 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 (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, MIS, human resources and general
management, as well as insurance and professional expenses. General and
administrative expenses increased by $64,000, or 18%, from $347,000 in 1999 to
$411,000 in 2000, primarily due to higher legal and professional expenses, that
was offset in part by a reduction in personnel related costs. The Company
believes that its general and administrative expenses 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 by $56,000, or 622%, from $9,000 in 1999
to $65,000 in 2000, primarily due to a higher level of cash and cash equivalents
on deposit during 2000.
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Interest expense generally represents interest on capital equipment
leases. Interest expense decreased by $8,000, or 57%, from $14,000 in 1999 to
$6,000 in 2000. This decrease was 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, 1998, the Company has consummated several financings
to fund operations as follows:
(a) During June, July and August 1999, the Company sold 45 Units (the
"Units") totaling gross proceeds of $4,500,000 in a private placement (the
"Series C Private Placement"). Each Unit consisted of 100 shares of Series C
Convertible Preferred Stock ("Series C Preferred Stock") and a Common Stock
Purchase Warrant (the "Series C Warrants") exercisable until December 28, 2001
to purchase 33,333 shares of Common Stock at an exercise price of $2.5875 per
share. As described below, all Series C Warrants have been exercised. The
Company received proceeds of $4,089,791, after deduction of commissions and
expenses payable to the placement agent. As of March 31, 2000, there were 2,425
shares of Series C Preferred Stock issued and outstanding, all of which
converted to Common Stock during April 2000.
The Company granted the placement agent and the selected dealer in the
Series C Private Placement options to purchase an aggregate of 146,667 shares of
Common Stock.
(b) During May and June 1999, the Company borrowed $400,000 from
stockholders of the Company and issued promissory notes (the "1999 Notes
Payable"). The 1999 Notes Payable bore interest at 12% per annum and upon the
initial closing of the Series C Private Placement on June 28, 1999, the 1999
Notes Payable were repaid.
(c) 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
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Preferred Stock ("Series A Preferred Stock") convertible into 1.333 shares of
Common Stock and a warrant to purchase .83 of a share of Common Stock at a per
share exercise price of $1.50. Each Series B Unit consisted of 10,000 shares of
Series B Convertible Preferred Stock ("Series B Preferred Stock") convertible
into 6.666 shares of Common Stock and warrants to purchase 41,666 shares of
Common Stock at a per share exercise price of $1.50. As described below, all
Series A and Series B Warrants have been exercised. 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 $3,995,000 from such
private placements (after deduction of commissions and expenses payable to the
placement agent). As of March 31, 2000, there were no shares of Series A
Preferred Stock issued and outstanding and there were 5,000 shares of Series B
Preferred Stock issued and outstanding, all of which converted to Common Stock
during April 2000.
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.
(d) In September and October 1998, the Company borrowed $490,000 from
stockholders of the Company and issued unsecured promissory notes (the "1998
Notes"). During 1998, $20,000 of 1998 Notes was converted into Series A Units
and $170,000 of 1998 Notes was repaid. The balance of $300,000 outstanding at
December 31, 1998 was repaid in full in January 1999.
During the year ended December 31, 1999, the exercise of Series A, B
and C Warrants resulted in the issuance of 2,767,573 shares of Common Stock with
proceeds to the Company of $5,213,908. In January 2000, the exercise of the
remaining Series A, B and C Warrants resulted in the issuance of 591,697 shares
of Common Stock with proceeds to the Company of $1,456,250.
For the three months ended March 31, 2000 and the year ended December
31, 1999, the holders of Series A, B and C Preferred Stock converted preferred
stock into 4,135,941 and 475,061 shares of Common Stock, respectively. All
remaining preferred stock outstanding as of March 31, 2000 converted into Common
Stock in April 2000.
As of March 31, 2000, the Company had $4,097,828 in cash and cash
equivalents and working capital of $4,209,662. Subsequent to March 31, 2000, IQO
consummated the Private Placement (see Note 5 of Notes to the Condensed
Consolidated Financial Statements included elsewhere herein). The Company has
incurred operating losses since inception, has incurred negative cash flows from
operating activities and had an accumulated deficit as of March 31, 2000 and
December 31, 1999 of $43,332,939 and $41,338,047, respectively.
Net cash used in operating activities was $1,739,000 and $1,807,000 in
2000 and 1999, respectively. For 2000, net cash used in operating activities was
primarily attributable to a net loss of $1,995,000 and a decrease in accounts
payable and accrued expenses of $234,000, less depreciation, amortization and
consulting option expenses of $254,000. For 1999, net cash used in operating
activities was primarily attributable to a net loss of $1,718,000 and a decrease
in accounts payable and accrued expenses of $272,000, less depreciation,
amortization and consulting option expenses of $247,000. Net cash provided by
financing activities was $1,457,000 and $1,396,000 in 2000 and 1999,
respectively, primarily as a result of proceeds from
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<PAGE>
the exercise of common stock purchase warrants during 2000 and the collection of
stock subscription receivables during 1999. The Company believes that its cash
and cash equivalent balance may be insufficient to satisfy its cash flow
requirements for more than 12 months since the Company is unable to predict if
it will have sufficient revenues to enable it to continue operations without
additional financing.
The Company does not currently have a line of credit with a commercial
bank. As of December 31, 1999, the Company's principal commitments consisted of
obligations under operating and capital leases and employment agreements. At
that date, the Company had approximately $171,000 in outstanding borrowings
under capital leases, which are payable through 2001. Pursuant to employment
agreements with executive officers of the Company, as of March 31, 2000, the
Company's remaining obligation is to pay $323,000 and $430,000 in salaries for
the years ended December 31, 2000 and 2001, respectively.
Year 2000 Compliance
We have not suffered any significant Year 2000 problems with our
internal systems or with our third-party vendors and licensors of material
software and services. We completed our assessment and system tests of all
current versions of hardware and software products and technology information
systems that we use and believe that they are Year 2000 compliant. However, we
continue to monitor our Year 2000 implications. We have not incurred any
material costs in identifying or evaluating Year 2000 compliance issues.
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 May 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 three months ended March 31, 2000 and for
the year ended December 31, 1999 were $328,391 and $1,774,109, respectively.
Given our continued operating losses, we may need additional financing to
continue operations. We anticipate that our cash and cash equivalent balance may
be insufficient to satisfy our cash flow requirements for more than 12 months,
since we are unable to predict if we will have sufficient revenues to enable us
to continue our operations without additional financing. 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 March 31, 2000, our accumulated deficit was $43,332,939. For the
three months ended March 31, 2000 and for the fiscal years ended December 31,
1999 and 1998, we incurred net losses of $1,994,892, $5,925,591 and $7,294,032,
respectively. We have incurred a net loss
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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 We Are Uncertain Whether
There Will be Broad Market Acceptance of this Product.
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, 2000, we had software product revenue from only 35 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, it would have a material adverse
effect on our business, operating results and financial condition.
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.
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<PAGE>
We Are Dependent on a Few Significant Customers and the Loss of a Single
Customer Could Adversely Effect Our Business.
For the three months ended March 31, 2000, two customers accounted for
75%, and for the fiscal year ended December 31, 1999, four customers accounted
for 72%, 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.
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 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 employment
agreements with Mr. Thompson and Mr. Pess that expire in December 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.
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 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.
15
<PAGE>
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 three months ended March 31, 2000 and
for the fiscal year ended December 31, 1999, were approximately 13% and 49% 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 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:
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
May 5, 2000, the closing price of our common stock has ranged between $1.41 and
$10.94. The volatility of the market price of our common stock may further
increase now that our common stock has been delisted from the Nasdaq SmallCap
Market. 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
16
<PAGE>
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 April 28, 2000, our Board of Directors has the authority, without
further action by the stockholders, to issue 3,701,700 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
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 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.
17
<PAGE>
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the three months ended March 31, 2000, the Company issued an
aggregate of 4,135,941 shares of Common Stock pursuant to the conversion of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock.
The Company also issued an aggregate of 68,750 shares of Common stock pursuant
to the exercise of warrants granted in the Series A Private Placement, and the
Series B Private Placement. Such warrants had an exercise price of $1.50 per
share of Common Stock. The Company also issued 522,947 shares of Common Stock
pursuant to the exercise of warrants granted in the Series C Private Placement.
Such warrants had an exercise price of $2.5875 per share of Common Stock. The
issuance of the shares of Common Stock upon the conversion of the Series A,
Series B and Series C 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. No underwriter was involved in any of the foregoing
conversions of Preferred Stock or exercises of warrants.
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 27.1)
(b) Reports of Form 8-K
No Reports on Form 8-K were filed during the quarter ended March
31, 2000.
18
<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 12, 2000 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)
19
QUERYOBJECT SYSTEMS CORPORATION EXHIBIT 11.1
Computation of Net Loss Per Share
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
----------- --------------
<S> <C> <C>
Common shares outstanding at beginning of year 4,983,663 1,707,662
Conversions of preferred stock into common shares 2,766,756 34,722
Warrants exercised into common shares 552,246 85,731
Stock options exercised into common shares 10,707 --
----------- ------------
Weighted average common shares outstanding 8,313,372 1,828,115
=========== ============
Net loss $(1,994,892) $(1,717,537)
=========== ============
Basic and diluted net loss per common share $ (0.24) $ (0.94)
=========== ============
</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, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,097,828
<SECURITIES> 0
<RECEIVABLES> 1,110,253
<ALLOWANCES> 109,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,264,415
<PP&E> 2,525,997
<DEPRECIATION> 1,682,293
<TOTAL-ASSETS> 6,295,377
<CURRENT-LIABILITIES> 1,058,673
<BONDS> 0
0
7
<COMMON> 29,184
<OTHER-SE> 4,948,666
<TOTAL-LIABILITY-AND-EQUITY> 6,295,377
<SALES> 328,391
<TOTAL-REVENUES> 328,391
<CGS> 31,378
<TOTAL-COSTS> 2,378,913
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,889
<INCOME-PRETAX> (1,994,892)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,994,892)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,994,892)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
