QUERYOBJECT SYSTEMS CORP (FFGI) - Description of business
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Company Overview QueryObject Systems Corporation (the "Company") develops and markets proprietary business intelligence software solutions that enable business managers to leverage existing corporate data in making strategic decisions. The Company has realized limited sales of its products. Through the evolution of technology, businesses operating in transaction intensive industries, such as telecommunications, healthcare, insurance, financial services and retail, have dramatically increased their ability to gather and store large amounts of information generated from various sources. Contained within the accumulated data is information that, if extracted effectively and efficiently, can be used to enhance strategic corporate planning. While companies have invested heavily in capturing data, they have only begun to focus significant resources on the management and analysis of such data; consequently, the data gathering and analysis industry is experiencing significant growth. The Company developed its software products in response to the growing recognition of the strategic value of analyzing these increasing volumes of data. The Company believes its QueryObject System is a highly scalable and efficient solution for providing business intelligence applications and users with all the relevant information from corporate data. QueryObject System is designed as a powerful OLAP (On-Line Analytical Processing) data mart solution that transforms mainframe size databases into highly compact and portable mathematical representations that fit onto standard PC laptops. In March 1999, the Company formed internetQueryObject Corporation ("IQO"), which sells application services. IQO has developed the CustomerView application, a turnkey analytical application for the retail industry. To date, IQO has realized limited sales of its application services. The Company was incorporated in Delaware in 1997 and is the successor by merger to CrossZ International, Inc., a California corporation, incorporated in 1989. In May 1998, the name of the Company was changed from CrossZ Software Corporation to QueryObject Systems Corporation to reflect the change in the Company's focus to the sale and support of its proprietary products thereby enabling customers to do their own analysis. Unless otherwise indicated, references to the Company also include its predecessor and its subsidiaries, IQO, QueryObject Systems Corporation, Ltd. and QueryObjectexchange Corporation.Industry Background Data marts are component technologies in the "Business Intelligence" or more broadly, the "Data Warehousing" market. Current Analysis, a leading technology research company, estimates that the size of this market will increase to over $10 billion by the end of 2001, with near and long term annual compound growth of approximately 30%. The stimulus for this growth is the exceptional returns on capital experienced by companies that have invested in data warehousing and related technologies. In a 1999 study of 62 companies that invested an average of $2.2 million each in data warehousing, International Data Corp., a leading technology consulting company, found that the average return on investment after three years was 401%. There are generally three components to an enterprise-wide business intelligence system: - Data warehouse: a central repository for selected historical data derived from various databases that are stored in a summarized and standardized format and made available to users on a read-only basis. Data warehouses -3-provide users with better access to critical data in the organization's relational database management systems ("RDBMS"), but users are not generally familiar enough with database syntax to extract data from data warehouses without assistance from information technology ("IT") personnel. - Data mart: subject-specific subsets of the data warehouse. An advanced form of data mart contains pre-calculated answers stored in a multidimensional data mart known as a data cube. - Data analysis: accessing information and discovering and extracting hidden patterns or trends from databases and data marts. Despite the size of this market, and the strategic value of the "business intelligence" available from corporate data, businesses developed their information systems solely to support transactional data processing, collecting and storing the data necessary to facilitate such processing. Therefore, data storage methods designed in contemplation of narrow transactional goals are being burdened with additional tasks associated with strategic analysis. Such systems do not fully address the need to transform data into useful information. In the business intelligence area, RDBMS are most frequently used as data repositories, both for historical data as a "data warehouse" and for analytical data as a "datamart." RDBMS are tuned to optimize support of high volume on-line transaction processing ("OLTP") applications such as data entry and do not support the extraction and analysis of that data.Limitations of Traditional On-Line Analytical Processing Products Although a data warehouse is useful, because it contains all of the data that can be analyzed, its immense size makes business intelligence analysis inefficient and unwieldy. Within any data warehouse there will be data unrelated to the goal of the analysis that must be disregarded in any specific or particular analyses. For example, if a company is trying to determine the most relevant factors in retaining its customers for repeat purchases, certain elements of each customer's data profile will have a relatively high correlative value, such as income, gender or occupation, while other elements will have a relatively low correlative value, such as first name or social security number. A data warehouse contains all the data elements, however, it does not contain the additional information necessary to identify those data elements relevant to a business goal. The response to the inefficiencies of the data warehouse has been the development of the data mart. However, much of the traditional data mart technology is still based on the relational model employed in the data warehouse and often does not present that data in a fully transformed form most suitable for analytical as opposed to storage purposes. The Company believes enterprises are searching for ways to transcend these limitations, to develop data marts that more efficiently support business intelligence analytical techniques, in less time, with a more precise correlation between data mart content and the user's business objectives. At the same time, such product must perform within existing hardware and systems architectures and minimize impact on critical IT resources. The Company believes that its QueryObject System provides an enterprise-wide solution to the problems of first generation data mart technology limitations.QueryObject System(R) QueryObject System employs advanced mathematics to create compact, portable and accurate representations of data sets, called QueryObjects, from the data warehouse. In real-world applications, a QueryObject System-based data mart can contain tens, even hundreds of times more data than competitive datamart products. QueryObject System operates on UNIX, Linux and Windows NT servers and can deliver data over client-server networks or the Internet. -4- The Company believes that QueryObject System offers the following advantages over conventional data marts: o Plug and Play with Raw Data: QueryObject System allows the user to extract virtually unlimited amounts of raw data directly from an existing data warehouse or for production database, without the need to aggregate and then summarize the data. o Fresher Data: Performing a full scan on a data warehouse to create a data mart is time intensive, consumes CPU resources, and renders the warehouse virtually inaccessible to users for other purposes. In fact, most businesses find it difficult to perform more than one full scan on their data warehouse in a day and often require a week or more to create a data mart. QueryObject System was designed specifically for high speed data mart creation without the management overhead and negative performance implications associated with data warehouses and other conventional data repositories, allowing users to create dozens of data marts in a single day. Moreover, because QueryObject System technology can reside on UNIX, Linux or Windows NT servers, the user can create the data mart on the system that makes the most sense for the business and insulate mission critical applications and databases from the performance degradation normally associated with full database scans. o Lower Cost: As a result of the ability to load raw data directly into QueryObject System, users can reduce or eliminate time-consuming work such as extracting, cleaning, normalizing, formatting and summarizing data before loading it into a data warehouse. In addition, large amounts of operational data can be preserved for future analysis at far lower cost than a data warehouse. o Greater Scalability and Speed: The Company believes QueryObject based data marts contain more data in less storage space than existing data marts such as Hyperion Essbase. A single QueryObject can contain the representation of hundreds of millions of records, tens of thousands of values in each field or column and billions of potential query answers. The use of proprietary algorithmic equations allows QueryObject-based data marts to store more data in a fraction of the storage space needed by conventional data marts. Even with data marts that measure in the hundreds of millions of records, the retrieval can often be executed in seconds or less. o Greater Multi-User Support: QueryObjects can support unlimited numbers of concurrent users since all possible answers to all possible queries are contained within the data mart, and impose virtually no degradation on processing, in contrast to conventional data marts that consume large amounts of processing power in computing potential answers. o Greater Mobility: When business intelligence was a function confined to a small cadre of analysts and specialists, it was acceptable for business intelligence systems to reside in a single, central location. In contrast, because QueryObjects can reside on desktops, laptops and Web servers, or be distributed over local area networks, they allow businesses to deploy complex data marts to thousands of users in an enterprise, using existing information technology infrastructure.The QueryObject Strategy The Company's objective is to establish the QueryObject System technology as a ubiquitous data mart standard for information analysis in data intensive industries such as telecommunications, healthcare and insurance and financial services. Key elements of the Company's strategy include: Establish Technology Leadership. The Company has developed a number of technologies specifically designed to meet the scalability, capacity, usability and functionality requirements of data mart software. In particular, the Company has developed a proprietary high performance mathematical algorithm suite to compute and represent all possible answers, univariates, uniques and intermediates across very large databases. These answers are stored in highly compact formats that do not require significant server memory or processing power to provide instantaneous query response. The Company intends to continue to develop what it believes are innovative technologies and features to -5-address the specific business requirements of data marts in the areas of performance, scalability, data integrity, system administration and decision analysis capabilities. The Company intends to continue to invest in its technology in order to enhance its existing data mart products. Develop Strategic Relationships. To accelerate the adoption of the QueryObject System as a standard platform business intelligence application, the Company has begun to form strategic relationships with many providers of business intelligence software applications, tools and services. The Company has established license agreements and VAR ("value-added resellers") relationships with several companies that have resulted in revenue for the years ended December 31, 2000 and 1999, including EDS, AmerInd, Inc., and CZ Solutions S.p.A. Expand Open Systems Approach. The Company seeks to maximize the market for its products by designing them to adhere to industry standards, which allows the sharing of data across platforms and software applications. QueryObject technology operates with a wide range of third-party front-ends, databases and operating systems via an open architecture that supports Microsoft's open database connectivity (ODBC), object linking and embedding database (OLE/DB) standards, the Java Data Base Connectivity standard (JDBC) designed for Internet tools and Microsoft's multi-dimensional query standard (ODBO). The Company believes that its open systems approach represents a competitive advantage versus competing solutions that are more proprietary in nature, and as such intends to continue to adhere to industry standards. Leverage Existing Investments in Information Technology. The Company believes that it has designed QueryObject System to take advantage of customers' existing IT investments, thereby accelerating the acceptance of such software. QueryObject System is designed to leverage investments in personal computer hardware and software and to integrate data from existing relational databases, legacy repositories and emerging data warehouses. The Company also leverages third party-based consulting services and distribution capabilities to enable it to focus on providing industry leading business intelligence data delivery software. Target Horizontal Markets/New Applications and Markets. Because the delivery of relevant data to business intelligence applications is a critical corporate function in a wide variety of industries, the Company believes that its solutions are potentially applicable in a broad range of markets. The Company is currently targeting customers in telecommunications, financial services, insurance and health care and retail. Provide Superior Customer Service. The Company believes that providing superior customer service is critical for customer success. The Company's strategy is to deliver technology and services that enable its customers to implement, in a timely and cost-effective manner, integrated data mining/data mart applications. The Company provides its customers with a comprehensive array of services, including software updates, documentation updates, product maintenance and emergency response. The Company intends to maintain its focus and to continue to invest in service and support to extend its customer service advantage. Expand Sales and Marketing Capabilities. The Company intends to expand its sales and marketing capabilities, both domestically and internationally, by increasing the size of its direct sales organization and developing an indirect channel of distributors such as original equipment manufacturers ("OEMs") and VARs.Products The Company's QueryObject System is a highly scalable and efficient solution for providing business intelligence applications and users with all the relevant information from corporate data. QueryObject System is a powerful OLAP data mart solution that transforms mainframe size databases into highly compact and portable mathematical representations that fit onto standard PC laptops. The following lists the components of the QueryObject System: -6- QueryObject DBA (Data Base Administrator) provides administrators in a Windows based environment with a tool to manage the process of reading, synchronizing and staging source, atomic level data in QueryObject System. Using standard drag and drop actions, data administrators can map their source data into the QueryObject System repository, the QueryObject Ready File. The Company believes that QueryObject DBA users benefit from working with a graphical tool that understands the complexities of both legacy and warehouse data. QueryObject Designer enables end users to design and build their own QueryObjects. Working in a familiar Windows environment, users create QueryObjects by selecting a subset of the fields from the QueryObject Ready file using a drag and drop interface. The Company believes that the end user benefits from an environment that requires no programming, gives a visual representation of the QueryObject, and is able to process hundreds of millions of data records. QueryObject Engine is designed to (i) work with large quantities of data, (ii) read a variety of data formats and (iii) process the data into an analytical repository, and then into multiple QueryObjects. From this staging area, multiple QueryObjects are produced in an efficient manner on the server. The Company believes that users are protected from the server environment by using QueryObject DBA and QueryObject Designer, yet they gain the power of a server behind their business intelligence system. QueryObject Engine runs on a wide variety of server platforms. The resulting QueryObject can be moved to a user's individual personal computer or managed by the QueryObject Server. Unlike other data mart systems that require significant amounts of preprocessing and data aggregation, QueryObject Engine is able to perform these tasks automatically for each QueryObject. The Company believes that the ability to store and build a QueryObject from detail level data allows the user to explore his data without the constraints of pre-aggregated data sets that might not represent the data in the manner that the user requires for a particular business challenge. QueryObject Server allows the enterprise to locate and manage QueryObjects on a centralized server infrastructure. QueryObject Server provides enhanced security and performance across multiple QueryObjects over corporate internets (Web Edition) or corporate LANs (Enterprise Edition). Users may also download QueryObjects to their individual personal computers (QueryObject Server, Personal Edition). QueryObject Analyzer is a small JAVA based OLAP analysis tool. It is automatically downloaded to a users WEB Browser and allows them to quickly and easily analyze QueryObjects hosted on a customers WEB Server. Analyzer provides a zero administration client and can be used on any JAVA Browser, Windows, UNIX or Apple Macintosh. QueryObject contains ODBC, JDBC and OLE/DB interfaces that allow end users to work within a familiar environment of industry standard business intelligence data navigation and display tools.Sales and Marketing The Company markets and sells QueryObject System through its direct sales organization and intends to increase the proportion of sales through indirect channel parties such as VARs and OEMs. The direct sales process involves the generation of sales leads through direct mail and telemarketing or requests for proposal from prospects. The Company's field sales force conducts multiple presentations and demonstrations of its products to management and users at the customer site as part of the direct sales effort. Sales cycles generally range from three months to six months or longer. The sales staff is based at the Company's corporate headquarters in Roslyn Heights, New York. To support its sales force, the Company engages in direct mail solicitations, telesales and public relations and presents its products at trade shows. -7- The Company employs sales and technical personnel who are teamed to support a designated account territory within a specified vertical market. The team is responsible for creating and maintaining local partner relationships and resolving channel conflicts. To ensure the appropriate level of channel support, the direct sales force is compensated for sales that are made through indirect channel partners and those that are made directly to end users. A separate partnering and business development function is responsible for the recruitment and maintenance of OEMs and national and global VARs and business partners. The Company believes that a high level of customer support is important to the successful marketing and sale of QueryObject System. Maintenance and support contracts, which are typically for 12 months, are offered with the initial license, and may be renewed annually at a cost equal to a fixed percentage of the total license fee. Telephone hotline support will be complemented by an internet site that provides an interactive forum and a repository for technical tips and skills.internetQueryObject Corporation The Company formed IQO in March 1999 and in April 2000 IQO consummated a private placement of units consisting of Series A Preferred Stock and Common Stock Purchase Warrants. As of March 23, 2001, the Company owns all the outstanding IQO Common Stock. Assuming the conversion of all of the Series A Preferred Stock into Common Stock, the Company would own 53.3% of the outstanding IQO Common Stock. In March 2000, IQO and the Company entered into a exclusive licensing agreement, with a stated term through December 31, 2005 (the "License Term") under which IQO was granted the exclusive license to resell the Company's database, data streaming and data distribution technology to Internet based businesses. For calendar years 2000 and 2001, IQO is obligated to pay to the Company a Percentage Royalty as follows; 20% on the first $1,000,000 of Adjusted Net Sales (as defined), 18% on Adjusted Net Sales from $1,000,001 to $2,000,000, 15% on Adjusted Net Sales from $2,000,001 to $5,000,000, and 12% on Adjusted Net Sales over $5,000,000. The Company and IQO will use their best efforts to renegotiate these royalty rates for calendar years 2002 and beyond. In the event that the Company and IQO are unable to agree on Percentage Royalty rates for the remaining License Term, the Percentage Royalty rates will remain the same. IQO must also pay to the Company fees in an amount equal to 25% of its revenue derived from the sale of maintenance services relating to the licensed technology to its customers. IQO has developed and will develop applications that capture, store, manage, distribute and analyze data for CRM (Customer Relationship Management). IQO's product, CustomerView, is a turnkey analytical application for the retail industry. Its particular focus is on optimizing the buying decisions of retail chains to best meet the demand needs of their customers while maximizing customer retention and stimulation. CustomerView seeks to differentiate itself from its competitors by focusing on the planning aspects of store buying based on customer profiles rather than on sales volume. IQO offers CustomerView as both an installable product and as an ASP offering. To date, IQO has generated limited revenue. There can be no assurance of market acceptance by Internet- based businesses of the Company's database, data streaming and data distribution technology.Research and Development The Company believes that its future success will depend in large part on its ability to maintain and enhance its leadership in business intelligence software technology and develop new products that meet an expanding range of customer requirements. The Company's research and development organization is divided into teams consisting of development engineers and quality assurance engineers. The market addressed by the Company is very sensitive to product quality and therefore the process is aimed at continuous improvement of product quality. The product definition is based upon a consolidation of the requirements from existing customers, from technical support and from engineering. These are prioritized by the Company's management to fit business priorities and to meet the Company's vision. -8- The market for the Company's software is characterized by rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Therefore, the life cycles of the Company's products are difficult to estimate. The Company's future success will depend upon its ability to enhance on a timely basis its current products, develop and introduce new products that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. The Company utilizes independent contractors located in Europe to assist in development activities. During 2000 and 1999, research and development expenses were $2,751,038 and $2,282,910 or 160% and 129% of total revenues, respectively. The Company will continue to commit substantial resources to research and development in the future.Proprietary Rights The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential in establishing and maintaining a technology leadership position. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company currently has several registered trademarks, and may seek additional legal protection for its products and trade names. The Company has invested substantial resources in registering the trademarks and developing branded products and product lines. There can be no assurance that the steps taken by the Company to protect these intellectual property assets will be sufficient to deter misappropriation. Failure to protect these intellectual property assets could have a material adverse effect on the Company's business operations. Moreover, although the Company is not aware of any lawsuit alleging the Company's infringement of intellectual property rights, there can be no assurance that any such lawsuit will not be filed against the Company in the future or, if such lawsuit is filed, that the Company would ultimately prevail. While the Company has applied for a patent for its internet streaming technology, the Company is unable to predict whether it will receive such patent and the Company currently has no other United States patents or corresponding patent applications pending elsewhere. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or design around any patents that may be owned in the future by the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its products or to obtain and use information that it regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technology. The Company has entered into source code escrow agreements with a limited number of its customers and VARs requiring release of source code. Such agreements provide that such parties will have a limited, non-exclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do business or if the Company fails to meet its contractual obligations. The provision of source code may increase the likelihood of misappropriation by third parties. The Company is not aware that it is infringing any proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to QueryObject System or enhancements thereto. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the -9-functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays and require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology, the Company's business, operating results and financial condition could be materially adversely affected.Competition The market in which the Company competes is intensely competitive, highly fragmented and characterized by rapidly changing technology and a lack of standards. The Company's current and prospective competitors offer a variety of multidimensional data mart software solutions and generally fall within five categories: (i) vendors of relational database products sold for analytical (data warehouse and data mart) purposes such as Oracle, Informix, Sybase, and Microsoft; (ii) vendors of multidimensional database and analysis software such as Hyperion (Essbase) and Microsoft (OLAP Services); (iii) vendors of OLAP/relational database software such as Informix (Red Brick), Computer Associates (Decision Suite) and Chrystal Decisions (Holos); (iv)vendors of query acceleration products such as Nucleus (Sand Technology) and IQ (Sybase);and (v) vendors of vertical software applications for budgeting and financial consolidation, such as Hyperion Software Corporation (Hyperion and FYPlan) and consulting vendors such as Accenture, formerly known as Andersen Consulting, and Deloitte & Touche, who focus on customer applications in the telecommunications, banking, insurance and retail industries. The Company has experienced and expects to continue to experience increased competition from current and potential competitors, many of whom have significantly greater financial, technical, marketing and other resources than the Company. Such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sales of their products than the Company. Also, certain current and potential competitors may have greater name recognition or more extensive customer bases that could be leveraged, thereby gaining market share to the Company's detriment. The Company expects additional competition as other established and emerging companies enter into the OLAP software market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would materially adversely affect the Company's business, operating results and financial condition. Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's prospective customers. The Company's current or future indirect channel partners may establish cooperative relationships with current or potential competitors of the Company, thereby limiting the Company's ability to sell its products through particular distribution channels. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could materially adversely affect the Company's ability to obtain new contracts and maintenance and support renewals for existing contracts on terms favorable to the Company. Further, competitive pressures may require the Company to reduce the price of QueryObject System, which would materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon its business, operating results and financial condition. The Company competes on the basis of certain factors, including product quality, first-to-market product capabilities, product performance, ease of use and customer support. The Company believes it presently competes favorably with respect to each of these factors. However, the Company's market is still evolving and there can be no assurance that the Company will be able to compete successfully against current and future competitors and the failure to do so successfully will have a material adverse affect upon the its business, operating results and financial condition. -10-Employees As of December 31, 2000, the Company had a total of 56 full time employees (of which 16 are employed by IQO), including 19 in research and development (of which four are employed by IQO), 32 in sales and marketing and related customer support services (of which 11 are employed by IQO) and five in administration (of which one is employed by IQO). None of the Company's employees is represented by a collective bargaining agreement, nor has the Company experienced any work stoppage. The Company considers its relations with its employees to be good. The Company's future operating results depend in significant part upon the continued service of its key technical and senior management personnel. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will retain its key managerial or technical personnel or attract such personnel in the future. The Company has at times experienced and continues to experience difficulty in recruiting qualified personnel and there can be no assurance that the Company will not experience such difficulties in the future. The Company, either directly or through personnel search firms, actively recruits qualified research and development, financial and sales personnel. If the Company is unable to hire and retain qualified personnel in the future, such inability could have a material adverse effect on its business, operating results and financial condition. -11-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 and application services company, have not made significant sales of our products and services and our revenues are difficult to predict. Our total revenues for the years ended December 31, 2000 and December 31, 1999 were $1,715,841 and $1,774,109, respectively. In February 2001, we received net proceeds of approximately $837,000 from the initial closing of a private placement and we anticipate that we will receive approximately an additional $1,500,000 in net proceeds from the final closing of such private placement which is scheduled for on or about April 5, 2001. However, given our continued operating losses, we anticipate that, even with the anticipated proceeds from the final closing of the private placement, our cash and cash equivalent balance may not be sufficient to satisfy our cash flow requirements until December 31, 2001. Accordingly, we may need additional financing to continue operations after December 31, 2001. We may also seek additional financing prior to December 31, 2001. We cannot predict whether we would be successful in raising additional funds. We have no commitments, agreements or understandings regarding additional financings and we may be unable to obtain additional financing on satisfactory terms or at all.We have had a history of operating losses and project future losses; therefore we have doubt about our ability to continue as a going concern. At December 31, 2000, our accumulated deficit was $51,578,413. For the fiscal years ended December 31, 2000 and 1999, we incurred net losses of $10,240,366 and $5,925,591, 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, 2000 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 that keep pace with technological developments and emerging industry standards o the percentage of our revenues that is derived from indirect channel partners o our ability to control costsOur revenues depend on sales of QueryObject System and the successful development of the IQO application service offering. We are uncertain whether there will be broad market acceptance of these products. Substantially all of our revenue for the foreseeable future is expected to be derived from sales of QueryObject System and from our subsidiary, IQO. Through December 31, 2000, we had software product revenue from the sale of only 46 QueryObject Systems, including those sold pursuant to reseller agreements for the resellers' own use. Our future financial performance will depend upon customer acceptance of the QueryObject System and the development of new and enhanced versions of the product, such as the IQO service offering, that meet an expanding range of -12-customer requirements. If we fail to achieve broad market acceptance of QueryObject System or fail to successfully develop the IQO or other service offerings and achieve broad market acceptance, we will not be able to continue operating.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 affect our business. For the fiscal years ended December 31, 2000 and December 31, 1999, five customers and four customers accounted for 73% and 72% of our total revenues, respectively. We have no long-term contracts with any of these customers and we are unsure if we will realize significant future revenues from any of them. We also expect for the foreseeable future a relatively small number of customers and value-added resellers will account for a significant percentage of our revenues. The loss of any such customer would have a material adverse effect on our operating results and financial condition.We are dependent on a few key personnel and we need to attract and retain highly qualified technical, sales, marketing, development and management personnel. Our future performance depends in significant part upon the continued service of key technical, sales and senior management personnel. The loss of the services of one or more of our key employees, in particular, Robert Thompson, our Chief Executive Officer, Joseph M. Valley, Jr., our new President and Chief Operating Officer, and Daniel M. Pess, our Chief Financial Officer, could have a material adverse effect on our business, operating results and financial condition. We have employment agreements with Mr. Thompson and Mr. Pess that expire in December 2001 and an employment agreement with Mr. Valley that expires November 2001. We are currently negotiating to extend the term of the employment agreements of Messrs. Thompson, Pess and Valley. We are uncertain whether we will be successful in extending any or all of such employment agreements. Our future success also depends on our continuing ability to attract, train and retain highly qualified technical, sales, marketing, development and managerial personnel. Competition for such personnel is intense, and we may be unable to retain key technical, sales, development and managerial employees or attract, assimilate or retain other highly qualified technical, sales, development and managerial personnel in the future. If we are unable to hire such personnel on a timely basis, our business, operating results and financial condition could be materially adversely affected.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 -13-information to execute confidentiality agreements and restricting access to our source code. These steps afford only limited protection. While we have applied for a patent for our Internet streaming technology, we are unable to predict whether we will receive such patent and we have no other patents or patent applications pending. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products may be difficult and costly, and software piracy may become a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. We are unable to predict whether we have adequately protected our proprietary rights or if competitors will independently develop the same technology. From time to time, third parties may assert patent, copyright and other intellectual property claims against us. If we are unable to license protected technology that may be used in our products, we could be prohibited from manufacturing and marketing such products. We also could incur substantial costs to redesign our products, to defend any legal action taken against us or to pay damages to any infringed party. Litigation, which could result in substantial cost to and diversion of our resources, may be necessary to enforce our other intellectual property rights or to defend us against claimed infringement of the rights of others.Our international sales have declined significantly and we may be unable to successfully establish foreign operations. Our international sales for the fiscal years ended December 31, 2000 and December 31, 1999, were approximately 17% and 49% of our total revenue, respectively. As a result, we have closed our office in the United Kingdom and intend to pursue a partner distribution model rather than a direct sales model. We are unsure whether this new approach will enable us to increase our international sales. We anticipate that expanded international sales, if any, will continue to 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 cyclesWe 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.We have a significant amount of authorized but unissued preferred stock, which may affect the likelihood of a change of control in our company. Our Board of Directors has the authority, without further action by the stockholders, to issue up to 4,000,000 shares of preferred stock on such terms and with such rights, preferences and designations, including, without limitation -14-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.Outstanding options and warrants. As of March 23, 2001 we have outstanding options to purchase an aggregate of 3,118,677 shares of Common Stock at a weighted average exercise price of $3.83 per share and outstanding warrants to purchase an aggregate of 4,552,860 shares of Common Stock at a weighted average exercise price of $2.52 per share. The exercise of all of outstanding warrants and options would dilute the then-existing stockholders' percentage ownership of Common Stock, and any sales in the public market of the Common Stock issuable upon such exercise could adversely affect prevailing market prices for the Common Stock. Moreover, the terms upon which we would be able to obtain additional equity capital could be adversely affected because the holders of such securities can be expected to exercise or convert them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable than those provided by such securities.