SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 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 June 30, 2000 (unaudited)...................................3
Condensed Consolidated Statements of Operations
For the three months and six months ended June 30, 2000
and 1999 (unaudited)..............................................4
Condensed Consolidated Statements of Cash Flows
For the six months ended June 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 2. Changes in Securities and Use of Proceeds........................17
Item 4. Submission of Matters to a Vote of Security Holders..............17
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
(Unaudited)
<TABLE>
<CAPTION>
June 30,
2000
ASSETS
Current assets
<S> <C>
Cash and cash equivalents $ 8,516,562
Accounts receivable, net of allowance for doubtful
accounts of $259,960 911,587
Prepaid expenses and other current assets 137,134
Total current assets 9,565,283
Property and equipment, net 927,602
Deposits and other assets 215,444
Total assets $ 10,708,329
------------
LIABILITIES AND STOCKHOLDERS" EQUITY
Current liabilities
Accounts payable $ 182,695
Accrued expenses 465,732
Deferred revenue 150,929
Deferred rent 32,310
Capital lease obligations 7,528
Total current liabilities 839,194
Deferred rent 254,928
Total liabilities 1,094,122
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, $0.003 par value: 60,000,000 shares
authorized; 9,840,252 shares issued and outstanding 29,521
Additional paid-in capital 48,454,534
Accumulated deficit (45,404,841)
Total stockholders' equity 3,079,214
Total liabilities and stockholders' equity $ 10,708,329
------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Revenues
<S> <C> <C> <C> <C>
Software licenses .......................... $ 582,850 $ 503,200 $ 856,650 $ 553,200
Maintenance and services ................... 110,720 26,905 165,311 53,094
----------- ----------- ----------- -----------
Total revenues ......... 693,570 530,105 1,021,961 606,294
Cost of revenues
Software licenses .......................... 23,820 20,128 34,772 22,178
Maintenance and services ................... 19,358 18,870 39,784 37,858
----------- ----------- ----------- -----------
Total cost of revenues . 43,178 38,998 74,556 60,036
----------- ----------- ----------- -----------
Gross profit ......................................... 650,392 491,107 947,405 546,258
----------- ----------- ----------- -----------
Operating expenses
Sales and marketing ........................ 1,615,798 961,289 3,025,557 1,849,974
Research and development ................... 695,495 707,596 1,222,384 1,239,627
General and administrative ................. 526,098 345,392 936,985 692,516
----------- ----------- ----------- -----------
Total operating expenses 2,837,391 2,014,277 5,184,926 3,782,117
----------- ----------- ----------- -----------
Loss from operations ................................. (2,186,999) (1,523,170) (4,237,521) (3,235,859)
Interest income ...................................... 119,105 2,063 184,490 11,312
Interest expense ..................................... (4,208) (12,923) (10,097) (27,022)
Other income (expense) ............................... 200 (1,288) (3,666) (1,288)
----------- ----------- ----------- -----------
Net loss ............................................. $(2,071,902) $(1,535,318) $(4,066,794) (3,252,857)
----------- ----------- ----------- -----------
Basic and diluted net loss per common share .......... $ (.21) $ (.71) $ (.45) $ (1.63)
----------- ----------- ----------- -----------
Weighted average shares used in per share
computation (Note 2) ....................... 9,811,407 2,155,793 9,062,390 1,992,860
----------- ----------- ----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
Cash flows from operating activities
<S> <C> <C>
Net loss $ (4,066,794) $ (3,252,857)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization................ 223,894 219,849
Loss on disposal of equipment................ 9,033 1,288
Options issued for consulting services....... 289,625 257,652
Changes in operating assets and liabilities
Accounts receivable, net.................. 319,961 (548,844)
Prepaid expenses and other current assets. 11,100 (215,973)
Deposits and other assets................. (58,397) 12,415
Accounts payable and accrued expenses..... (263,470) 437,144
Deferred rent............................. (5,055) (8,127)
Deferred revenue.......................... (18,826) 59,269
------------ -----------
Net cash used in operating activities............ (3,558,929) (3,038,184)
------------ -----------
Cash flows from investing activities
Acquisitions of property and equipment............... (314,228) (78,564)
Repayment of stockholder note receivable............. -- 65,000
------------ -----------
Net cash used in investing activities............ (314,228) (13,564)
------------ -----------
Cash flows from financing activities
Proceeds from exercise of common stock warrants...... 1,456,250 635,256
Proceeds from exercise of common stock options....... 73,285 --
Proceeds from issuance of preferred stock, net....... -- 834,517
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 loan payable to stockholders........... -- 400,000
Payments of capital lease obligations................ (163,663) (85,544)
------------ -----------
Net cash provided by financing activities........ 7,900,865 2,481,233
------------ -----------
Net increase (decrease) in cash and cash equivalents...... 4,027,708 (570,515)
Cash and cash equivalents at beginning of year............ 4,488,854 854,018
Cash and cash equivalents at end of period................ $ 8,516,562 $ 283,503
------------ -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 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") 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 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 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 has an accumulated deficit of
$45,404,841 and $41,338,047 as of June 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. The Company anticipates that its cash and
cash equivalent balance at June 30, 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 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, $.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 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 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.
As of June 30, 2000, the Company owns all the outstanding common stock
of IQO. 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.
7
<PAGE>
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 the six months ended June 30, 2000, the Company began staffing
and incurred initial marketing and product related expenses and general and
administrative 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 June 30, 2000, had an accumulated deficit of $45,404,841. The Company
expects to incur substantial operating expenses in the future to support its
product development efforts (including those of IQO), establish and expand its
domestic and international sales and marketing capabilities, including
recruiting additional indirect channel partners, and support and expand its
technical and management personnel and organization.
Revenues from the sales of the Company's products are generally
recognized upon the execution of a software licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. In instances where a
significant vendor obligation exists, revenue recognition is deferred until such
obligation has been satisfied.
8
<PAGE>
Results of Operations
The following table sets forth certain items in the Company's condensed
consolidated statements of operations for the three and six month periods ended
June 30, 2000 and 1999 ($ in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Revenues
<S> <C> <C> <C> <C>
Software licenses.................................... $ 583 $ 503 $ 857 $ 553
Maintenance and services............................. 111 27 165 53
---------- -------- -------- ----------
Total revenues.................................... 694 530 1,022 606
---------- -------- -------- ----------
Cost of revenues
Software licenses.................................... 24 20 35 22
Maintenance and services............................. 20 19 40 38
---------- -------- -------- ----------
Total cost of revenues............................ 44 39 75 60
---------- -------- -------- ----------
Gross profit................................................. 650 491 947 546
---------- -------- -------- ----------
Operating expenses
Sales and marketing.................................. 1,616 961 3,026 1,850
Research and development............................. 695 708 1,222 1,240
General and administrative........................... 526 345 937 692
---------- -------- -------- ----------
Total operating expenses.......................... 2,837 2,014 5,185 3,782
---------- -------- -------- ----------
Loss from operations......................................... (2,187) (1,523) (4,238) (3,236)
Interest income............................................ 119 2 184 11
Interest expense........................................... (4) (13) (10) (27)
Other expense.............................................. -- (1) (3) (1)
---------- -------- -------- ----------
Net loss..................................................... $ (2,072) $ (1,535) $ (4,067) $ (3,253)
========== ======== ======== ==========
</TABLE>
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 $164,000, or 31%, from $530,000 in the
second quarter of 1999 to $694,000 in the second quarter of 2000. For the first
six months, total revenues increased by $416,000, or 69% from $606,000 in 1999
to $1,022,000 in 2000. The increase for the first six months was primarily due
to an increase in license revenues as compared to 1999 and the increase for the
second quarter was due to increased license revenue and increased service
revenue. The Company recorded license revenue from the sale of eight (8)
licenses in the second
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<PAGE>
quarter of 2000 as compared to the sale of five (5) licenses in the second
quarter of 1999. The Company recorded license revenue from the sale of 11
licenses for the first six months of 2000 as compared to the sale of 5 licenses
for the first six months of 1999. Maintenance and service revenue increased by
$83,000, or 307%, from $27,000 in the second quarter of 1999 to $110,000 in the
second quarter of 2000. This increase was primarily the result of an increase in
proof-of-concept services. For the first six months, maintenance and service
revenue increased by $112,000, or 211% from $53,000 in 1999 to $165,000 in 2000.
Maintenance and service revenues are expected to increase as the Company sells
additional licenses.
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% for both the second quarter of 2000 and for the first six
months of 2000 as compared to 4.0% for both the second quarter of 1999 and for
the first six months of 1999. These increases resulted primarily from increased
production costs for the licenses sold.
Costs 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 as a percentage of
maintenance revenues were 18% and 24%, respectively, for the three and six-month
periods ended June 30, 2000. Cost of maintenance revenues as a percentage of
maintenance revenues were 70% and 72%, respectively, for the three and six-month
periods ended June 30, 1999. These decreases in the 2000 periods were 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 $655,000, or 68%, from
$961,000 in the second quarter of 1999 to $1,618,000 in the second quarter of
2000. For the first six months, sales and marketing expenses increased by
$1,176,000, or 64%, from $1,850,000 in 1999 to $3,026,000 in 2000. These
increases in the 2000 periods were primarily due to personnel related costs and
marketing and sales costs of IQO ($374,000 and $733,000 for the three and six
month periods ended in 2000, respectively) 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 $13,000, or 2%, from $708,000 in
the second quarter of 1999 to $695,000 in the second quarter of 2000. For the
first six months, research and development expenses decreased by $18,000, or 1%,
from $1,240,000 in 1999 to $1,222,000 in 2000. These decreases in the 2000
periods were primarily
10
<PAGE>
due to a decrease in personnel related costs, offset in part by higher
depreciation and other equipment costs. 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 and accounting, human resources and
general management, as well as insurance and professional expenses. General and
administrative expenses increased by $181,000, or 52%, from $345,000 in the
second quarter of 1999 to $526,000 in the second quarter of 2000. For the first
six months, general and administrative expenses increased by $245,000, or 35%,
from $692,000 in 1999 to $937,000 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, 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 $117,000 from $2,000 in the second
quarter of 1999 to $119,000 in the second quarter of 2000. For the first six
months, interest income increased by $173,000 from $11,000 in 1999 to $184,000
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.
Interest expense generally represents interest on capital equipment
leases. Interest expense decreased by $9,000, or 69%, from $13,000 in the second
quarter of 1999 to $4,000 in the second quarter of 2000. For the first six
months, interest expense decreased by $17,000, or 63%, from $27,000 in 1999 to
$10,000 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.
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<PAGE>
Liquidity and Capital Resources
Since January 1, 1998, the Company has consummated several financings
to fund operations as follows:
(a) In April 2000, IQO sold 70 Units consisting of Series A
Preferred Stock and Common Stock Purchase Warrants and received net proceeds of
$6,534,993 in a private placement. See Note 5 of Notes to Condensed Consolidated
Financial Statements included herein for further discussion.
(b) During June, July 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.
The Company granted the placement agent and the selected dealer in this
private placement options to purchase an aggregate of 146,667 shares of Common
Stock.
(c) Between October 1998 and February 1999, the Company received
net proceeds of $3,995,000 from two private placements of securities that have
been subsequently converted or exercised into an aggregate of 4,834,103 shares
of Common Stock.
In connection with these private placements, the placement agent was
granted an option to purchase additional securities equal to 10% of the
securities sold.
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.
As of June 30, 2000, the Company had $8,516,562 in cash and cash
equivalents and working capital of $8,726,089. The Company has incurred
operating losses since inception, has incurred negative cash flows from
operating activities and had an accumulated deficit as of June 30, 2000 and
December 31, 1999 of $45,404,841 and $41,338,047, respectively.
Net cash used in operating activities was $3,559,000 and $3,038,000 for
the six-month period ended in 2000 and 1999, respectively. For 2000, net cash
used in operating activities was primarily attributable to a net loss of
$4,067,000 and a decrease in accounts payable and accrued expenses of $263,000,
less depreciation, amortization and consulting option expenses of $514,000. For
1999, net cash used in operating activities was primarily attributable to a net
loss of $3,253,000 less depreciation, amortization and consulting option
expenses of $478,000. Net cash provided by financing activities was $7,901,000
and $2,481,000 for the six-month period 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. 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.
12
<PAGE>
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 June 30, 2000, the
Company"s remaining obligation is to pay $215,000 and $430,000 in salaries for
the years ended December 31, 2000 and 2001, respectively.
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 six months ended June 30, 2000 and for
the year ended December 31, 1999 were $1,021,961 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 June 30, 2000, our accumulated deficit was $45,404,841. For the six
months ended June 30, 2000 and for the fiscal years ended December 31, 1999 and
1998, we incurred net losses of $4,066,794, $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
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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. Through June 30, 2000,
we had software product revenue from only 43 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.
We Are Dependent on a Few Significant Customers and the Loss of a Single
Customer Could Adversely Effect Our Business.
For the six months ended June 30, 2000, four 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
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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.
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 six months ended June 30, 2000 and for
the fiscal year ended December 31, 1999, were approximately 27% 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. 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,
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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
August 4, 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 August 5, 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
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 2. Changes in Securities and Use of Proceeds
As described in Note 5 of the Notes to Condensed Consolidated Financial
Statements included elsewhere herein, IQO has closed on the IQO Private
Placement. The sale of the securities in the IQO Private Placement was made in
reliance on the exemption contained in Section 4(2) of the Securities Act of
1933, as amended. EarlyBird Capital Inc. acted as the placement agent of the
Series A Private Placement. For more information relating to IQO Private
Placement (including the conversion or exercise terms of the securities issued
in the Private Placement), see Note 5 of the Notes to Condensed Consolidated
Financial Statements.
During the three months ended June 30, 2000, the Company issued an
aggregate of 102,967 shares of Common Stock upon conversion of Series B
Preferred Stock and Series C Preferred Stock. The issuance of the shares of
Common Stock upon the conversion of the Series B and Series C Preferred Stock
was made in reliance on 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.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of the Company on May 31, 2000,
the stockholders (i) elected seven members of the Board of Directors to serve
until the next annual meeting, (ii) approved the adoption of the 2000 Stock
Option Plan, and (iii) ratified the appointment of PricewaterhouseCoopers LLP as
the Company"s independent public accounts for year ending December 31, 2000.
(i) The vote to elected seven members of the Board of Directors to
serve until the next annual meeting was as follows:
Nominee For Withheld
------- --- --------
Robert A. Thompson 6,015,897 18,194
Daniel M. Pess 6,015,897 18,194
Rino Bergonzi 6,015,897 18,194
Alan W. Kaufman 6,015,897 27,518
Amy L. Newmark 6,015,897 18,194
Gianluigi Riccio 6,006,573 18,194
Andre Szykier 6,015,897 18,194
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(ii) The vote for the adoption of the 2000 stock option plan was as
follows:
Abstain and
For Against Broker Non-Votes
--- ------- ----------------
3,342,604 101,333 11,202
(iii) The vote for ratifying the appointment of PricewaterhouseCoopers
LLP was as follows:
Abstain and
For Against Broker Non-Votes
--- ------- ----------------
10,978,122 7,050 1,500
Item 5. Other Information
Pursuant to recent amendments to the proxy rules under the Securities
Exchange Act of 1934, as amended, the Company"s stockholders are notified that
the deadline for providing the Company timely notice of any stockholder proposal
to be submitted outside of the Rule 14a-8 process for consideration at the
Company"s 2001 Annual Meeting of Stockholders (the "Annual Meeting") will be
March 19, 2001. As to all such matters which the Company does not have notice on
or prior to March 19, 2001, discretionary authorization shall be granted to the
designated persons in the Company"s proxy statement for the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Statement of Computation of Net Loss Per Share (Exhibit 11.1)
Financial Data Schedule (Exhibit 27.1)
(b) Reports on Form 8-K
A Report on Form 8-K was filed on April 20, 2000 under Item 5 " Other
Events.
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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: August 11, 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)
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