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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
COMMISSION FILE NUMBER 0-10558
NQL INC.
(Exact name of registrant as specified in its charter)
(Formerly incorporated as Alpha Microsystems)
DELAWARE 33-0887356
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4 HUTTON CENTRE DRIVE, SUITE 500, SANTA ANA, CA 92707
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 338-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of May 7, 2001, there were 14,391,104 shares of the registrant's Common Stock
outstanding.
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NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
TABLE OF CONTENTS
PAGE NUMBER
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31,
2001 (Unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three-Months Ended
March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended March 31, 2001
and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 19
PART II-- OTHER INFORMATION
Item 4. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, 2001 December 31,
(Unaudited) 2000
-------------- ------------
(Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 1,328 $ 4,097
Accounts receivable, net of allowance for doubtful accounts of $46
at March 31, 2001 and December 31, 2000 3,132 3,021
Prepaid expenses and other current assets 796 769
Accounts receivable from Alpha Microsystems, LLC 230 230
-------- --------
Total current assets 5,486 8,117
Property and equipment, net of accumulated depreciation of $1,509 and
$1,232 at March 31, 2001 and December 31, 2000, respectively 2,963 2,760
Intangibles, net of accumulated amortization of $1,257 and $1,148
at March 31, 2001 and December 31, 2000, respectively 8,468 8,506
Other assets 223 261
-------- --------
Total assets $ 17,140 $ 19,644
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,868 $ 2,035
Accrued compensation 563 578
Other accrued liabilities 957 1,121
Deferred revenue 1,540 1,328
-------- --------
Total current liabilities 4,928 5,062
Deferred gain on sale of Businesses to Alpha Microsystems, LLC 485 601
Commitments and contingencies
Redeemable preferred stock, no par value; 2,501 shares issued and
outstanding at March 31, 2001 and December 31, 2000;
liquidation value $2,500 at March 31, 2001 2,345 2,322
Other stockholders' equity:
Exchangeable redeemable preferred stock, no par value; 5,000,000
shares authorized; 19,618 and 19,027 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively; liquidation value
$19,618 at March 31, 2001 18,293 17,526
Common stock, par value $0.001 per share; 40,000,000 shares authorized;
14,391,103 and 14,233,407 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively 14 14
Additional Paid in Capital 47,181 46,846
Warrants 2,655 2,655
Accumulated deficit (58,534) (55,416)
Note receivable from stockholder (261) --
Accumulated other comprehensive income 34 34
-------- --------
Total other stockholders' equity 9,382 11,659
-------- --------
Total liabilities and stockholders' equity $ 17,140 $ 19,644
======== ========
See accompanying notes.
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NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
-----------------------
March 31, March 31,
2001 2000
--------- ---------
Net sales:
IT Services $ 2,960 $ 2,734
IT Products 515 255
Software licenses 102 50
Software services 64 17
Managed services -- 1,563
-------- --------
Total net sales 3,641 4,619
-------- --------
Cost of sales:
IT Services 2,364 2,169
IT Products 400 113
Software licenses 31 17
Software services 37 --
Managed services -- 1,318
-------- --------
Total cost of sales 2,832 3,617
-------- --------
Gross margin 809 1,002
Operating expenses:
Selling, general and administrative 3,096 1,939
Engineering, research and development 164 171
-------- --------
Total operating expenses 3,260 2,110
-------- --------
Loss from operations (2,451) (1,108)
Other (income) expense:
Interest income (40) (7)
Interest expense 2 20
Gain on dispositions of businesses (117) (884)
Other (income) expense, net -- (12)
-------- --------
Total other (income) expense (155) (883)
-------- --------
Loss before taxes (2,296) (225)
Income tax expense 31 13
-------- --------
Net loss (2,327) (238)
Accretion on redeemable preferred stock (118) (116)
Dividends on redeemable preferred stock (673) (637)
-------- --------
Net loss attributable to common shares $ (3,118) $ (991)
======== ========
Basic and diluted net loss per common share $ (0.22) $ (0.08)
======== ========
Weighted average number of shares used in computing
basic and diluted per share amounts 14,337 11,787
======== ========
See accompanying notes.
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NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
-----------------------
March 31, March 31,
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss $(2,327) $ (238)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of businesses, net (117) (884)
Depreciation and amortization 387 345
Provision for losses on accounts receivable -- 22
Provision for losses on notes receivable 49 --
Other changes in operating assets and liabilities,
net of effects of acquisitions and disposals:
Accounts receivable (110) 976
Prepaid expenses and other current assets (27) (61)
Accounts payable and accrued liabilities (327) (358)
Accrued compensation (15) 125
Deferred revenue 212 (220)
Other, net 51 (61)
------- -------
Net cash used in operating activities (2,224) (354)
------- -------
Cash flows from investing activities:
Investment in marketable securities -- (6,970)
Purchases of equipment (513) (453)
Sale of Businesses -- 250
Capitalization of software development costs (93) (61)
Other, net 4 (1)
------- -------
Net cash used in investing activities (602) (7,235)
------- -------
Cash flows from financing activities:
Issuance of common stock, net -- 9,861
Principal repayments on debt -- (734)
Other, net 57 (24)
------- -------
Net cash provided by financing activities 57 9,103
Increase (decrease) in cash and cash equivalents (2,769) 1,514
Cash and cash equivalents at beginning of period 4,097 1,160
------- -------
Cash and cash equivalents at end of period $ 1,328 $ 2,674
======= =======
See accompanying notes.
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NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM ACCOUNTING POLICY
In the opinion of management of NQL Inc. (the "Company"), the accompanying
unaudited condensed consolidated financial statements contain all adjustments
necessary to fairly present the consolidated financial position of the Company
at March 31, 2001, and the consolidated results of its operations and its cash
flows for the three months ended March 31, 2001 and 2000. These condensed
consolidated financial statements do not include all disclosures normally
presented annually under generally accepted accounting principles and,
therefore, they should be read in conjunction with the Company's Annual Report
on Form 10-K for the year ended December 31, 2000. Certain prior period amounts
have been reclassified to conform to the current period presentation. The
results of operations for the period ended March 31, 2001 are not necessarily
indicative of the results to be expected for any future period.
The Company has incurred significant recurring operating losses and operating
cash flow deficits and is in active discussions to raise additional financing to
fund operations. Because the Company has not as yet raised the additional
financing, there is substantial doubt about its ability to continue as a going
concern.
The balance sheet at December 31, 2000 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
REVENUE RECOGNITION
The Company recognizes revenue on its information technology service sales and
post contract customer support on a straight-line basis over the contract
period, recognizes software license and service revenue in accordance with
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), as
amended by SOP 98-4 and 98-9. Under the terms of SOP 97-2, as amended, where an
arrangement to deliver software does not require significant production,
modification or customization, the Company recognizes license revenue when all
of the following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred; the fee is fixed or determinable; and collection is
probable.
The service portion of managed service revenues were recognized on a
straight-line basis over the contract period while product sales were recognized
on shipment. The operations of the managed service business, which included the
computer hardware manufacturing division, were sold on January 31, 2000. Prior
periods have been reclassified to reflect this realignment.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. The application of SAB 101, as amended, was
implemented in the fourth quarter of 2000 and did not have a material impact on
the Company's financial position, results of operations or cash flows.
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ADVERTISING COSTS
The Company expenses the production costs of advertising the first time the
advertising takes place in accordance with Statement of Position 93-7, Reporting
on Advertising Costs. The Company recognizes expenses related to advertising
costs in the period in which these costs are incurred. At March 31, 2001 the
Company reported $59,000 of advertising as prepaid expenses and $118,000 as
accounts payable. Advertising expense was $618,000 for the three months ended
March 31, 2001.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income requires foreign currency translation adjustments to be included in other
comprehensive income. For the three months ended March 31, 2001 and 2000, total
comprehensive loss amounted to $2,327,000 and $237,000, respectively.
LINE OF CREDIT
As of December 31, 1999, the Company had a loan facility with a bank under which
a $4 million accounts receivable line of revolving credit was designated for
working capital and $1 million was designated to finance acquisitions. The loan
facility was secured by substantially all of the Company's assets. On March 28,
2000, the Company terminated the revolving line of credit and on March 31, 2000,
the Company repaid in full the loan designated for acquisitions.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
Effective January 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). SFAS No. 133 establishes new standards for recording
derivatives in interim and annual financial reports requiring that all
derivative instruments be recorded as assets or liabilities, measured at fair
value. The Company does not have any derivative instruments nor does the Company
engage in hedging activities. Therefore, the adoption of SFAS No. 133 did not
have an impact on the Company's financial position, results of operations or
cash flows.
STOCKHOLDER NOTES RECEIVABLE
On January 18, 2001 the Company issued 157,696 shares of common stock to a
former director in exchange for a nonrecourse note receivable of $310,464 in
connection with the exercise of outstanding options under the Company's 1998
Stock Option and Award Plan. The note bears interest at 6 percent compounded
annually, is due on June 30, 2001 and is collateralized by the Company's stock.
As of March 31, 2001 the Company recorded a reserve of $49,000 to reflect the
decline in the market value of the collateral.
2. DIVESTITURES
On January 31, 2000, the Company completed the sale of substantially all of its
assets associated with its Alpha Micro Services Division ("AMSO") and its Alpha
Micro Operating System ("AMOS") computer hardware manufacturing division to
Alpha Microsystems, LLC for consideration of approximately $3.2 million,
consisting primarily of liabilities of the Businesses that were assumed by Alpha
Microsystems, LLC. The Company also
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received a ten percent contingent interest in gross cash and non-cash proceeds
that may be received by Alpha Microsystems, LLC upon the occurrence of certain
liquidity events, as defined in the asset purchase agreement, following Alpha
Microsystems, LLC's acquisition of the Businesses. Alpha Microsystems, LLC is
owned by Richard E. Mahmarian, who was a member of the Company's Board of
Directors until October 2000.
Assets of the Businesses initially sold to Alpha Microsystems, LLC include
certain accounts receivable, prepaid expenses, other current and non-current
assets, inventories, fixed assets, information technology service contracts and
capitalized software development costs. The Company has (i) granted Alpha
Microsystems, LLC the right to use the name "Alpha Microsystems" and associated
logos, marks and trade dress, (ii) transferred the rights to the trade names,
logos and trademarks associated with the Businesses that were sold, and (iii)
entered into a five year license agreement providing Alpha Microsystems, LLC the
right to use the Company's software technology for Alpha Microsystems, LLC's
internal use in continuing operations of the Businesses. Additionally, the
Company has agreed to sublease to Alpha Microsystems, LLC the portion of the
Santa Ana, California facility occupied by the Businesses at amounts equal to
cost. This sublease agreement ended on January 31, 2001 with Alpha Microsystems,
LLC assuming the facility lease effective February 1, 2001.
This sale indicates the assets sold to Alpha Microsystems, LLC were impaired
and, accordingly, as of December 31, 1999, the Company recognized a loss on the
sale of $6,728,000 and reclassified $2,726,000, representing deferred revenue at
December 31, 1999 related to contractual service obligations assumed by Alpha
Microsystems, LLC for which performance continues to be guaranteed by the
Company, to deferred gain on sale of Businesses to Alpha Microsystems, LLC. As
of March 31, 2001, the deferred gain had been reduced to $485,000 due to the
operations of Alpha Microsystems, LLC and a corresponding reduction in the
Company's contingent guarantee.
On March 15, 2000, the Company entered into another agreement whereby Alpha
Microsystems, LLC, in exchange for $500,000 cash and the assumption of the
remaining outstanding accounts payable of the Businesses, purchased the
remaining net accounts receivable of the Businesses it acquired in the sale
completed on January 31, 2000. During the year ended December 31, 2000 the
Company received payments of $270,000. On August 1, 2000, the terms of the
agreement were amended such that payment of the remaining balance of $230,000
was extended to be due in full by June 30, 2001, and that interest on the
outstanding balance will be paid monthly at an annualized rate of 10 percent.
Alpha Microsystems, LLC may prepay all or a portion of the remaining balance
prior to June 30, 2001 without penalty.
The results from operations during the three months ended March 31, 2000 include
a net loss of $290,000 or $0.02 per share on $1,563,000 of revenue related to
the Businesses.
3. PRIVATE PLACEMENT OF COMMON STOCK
On March 30, 2000, the Company completed a private placement of 2,342,000 shares
of common stock which were sold at $6.25 per share, generating gross proceeds to
the Company of $14,637,500 with net proceeds of approximately $13,500,000.
Hampshire Equity Partners II, L.P., the Company's preferred stockholder,
purchased 995,400 of the shares of the Company's common stock issued in the
private placement.
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4. CONTINGENCIES
The Company is currently involved in certain claims and litigation. The Company
does not consider any of these claims or litigation to be material. Management
has made provisions in the Company's financial statements for the settlement of
lawsuits for which unfavorable outcomes are both probable and estimable. In the
opinion of management, results of known existing claims and litigation will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
5. INDUSTRY SEGMENT INFORMATION
The Company currently operates in two business segments: (i) software licensing
and services based on the Company's Network Query Language and (ii) IT
professional services consisting of management and consulting services, as well
as network design, installation and maintenance. A third segment reflects the
results of operations of businesses which have been sold (managed service
business). The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies in the annual
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, except that certain expenses,
such as interest, amortization of certain intangibles, special charges and
general corporate expenses are not allocated to the segments. In addition,
certain assets including cash and cash equivalents, deferred taxes and certain
intangible assets are held at corporate. The effect of capitalizing software
costs is included in the software segment.
Prior to January 31, 2000, the Company evaluated its business according to the
following two segments: (i) the servicing of computer systems, networks and
related products; and (ii) the manufacture and sale of computer systems,
software and related products. The operations of the managed service business,
including the computer hardware manufacturing division, which were sold January
31, 2000, have been reclassified as the "businesses sold" segment. Prior periods
have been reclassified to reflect this realignment.
Selected financial information for the Company's reportable segments for the
three months ended March 31, 2001 and 2000 follows:
IT
(In thousands) Professional Corporate Businesses
Services Software Expenses Sold Consolidated
------------ -------- --------- ---------- ------------
THREE MONTHS ENDED
MARCH 31, 2001
Revenues from external
customers $ 3,475 $ 166 $ -- $ -- $ 3,641
Segment loss (204) (1,614) (509)(2) -- (2,327)
THREE MONTHS ENDED
MARCH 31, 2000
Revenues from external
customers $ 2,989 $ 67 $ -- $ 1,563 (1) $ 4,619
Segment income (loss) (111) (121) 284(3) (290)(1) (238)
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(1) In January 2000, the Company closed the sale of a significant portion of
the Company's operations to Alpha Microsystems LLC.
(2) Includes a gain of $117,000 for the three-month period ended March 31, 2001
from the sale of Businesses to Alpha Microsystems LLC.
(3) Includes a gain of $884,000 for the three-month period ended March 31, 2000
from the sale of Businesses to Alpha Microsystems LLC.
6. SUBSEQUENT EVENTS
On May 11, 2001, the Company received a commitment for a $1.5 million senior
secured credit facility from a lender. The loan is anticipated to close by May
31, 2001 and the commitment is subject to all requirements and conditions to be
contained in the final documentation prepared by the lender in the course of
closing the financing. The final documentation will be based on the conditions
outlined in the term sheet that has been approved by both the lender and the
Company and will contain such other terms and provisions agreed to by the
parties.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
which involve risks and uncertainties, and our actual results may differ from
our expectations. These forward-looking statements include, but are not limited
to, statements relating to: (i) the market acceptance of our products,
including, but not limited to, our Network Query Language-based infrastructure
software products and, and our information technology (IT) services, (ii) the
ability of the Company to raise funds through additional issuances of debt or
equity, (iii) the ability of the Company to close any currently contemplated
debt financing, (iv) the continued development of our technical, manufacturing,
sales, marketing and management capabilities, (v) anticipated competition, and
(vi) any future performance, achievements, or industry results expressed or
implied by such forward-looking statements.
The forward-looking statements included in this report are based on current
expectations that involve a number of risks and uncertainties. Forward-looking
statements included in this report regarding our results, performance and
achievements are dependent on a number of factors. Our ability to execute
Internet/intranet technology and marketing agreements with key companies and our
ability to derive revenues from the sale of product, licensing of technology, or
revenue sharing relationships depends on: (i) our ability to develop, produce
and market products and services that incorporate new technology, are priced
competitively and achieve significant market acceptance, (ii) whether our
products and information technology services will be commercially successful or
sufficiently technically advanced to keep pace with rapid improvements in
computer technology and resulting product obsolescence, (iii) our ability to
deliver commercial quantities of new products in a timely manner, (iv) our
ability to manage risks associated with our Internet operating strategies, (v)
changes in our operating strategy and capital expenditure plans, and (vi) the
economic and competitive environment of the Internet/intranet industry in
general. Our ability to expand our information technology professional services
division through new service contracts, expansion of time and materials
servicing, and alliances with third-party information technology service
providers, to realize revenues from existing service contract alliances and to
develop opportunities to service products manufactured by third parties depends
on: (i) our ability to develop, produce and market services that are priced
competitively, (ii) whether our information technology services will be
commercially successful or sufficiently technically advanced to keep pace with
rapid improvements in computer technology and resulting product obsolescence,
(iii) changes in the cost of information technology services, (iv) our ability
to manage risks associated with our information technology services operating
strategies, (v) changes in our operating and capital expenditure plans, and (vi)
our ability to manage our expenses in relation to our revenues.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, all of which
are difficult or impossible to predict accurately and many of which are beyond
our control. In addition, our business and operations are subject to substantial
risks, which increase the uncertainty inherent in forward-looking statements. In
light of the significant uncertainties inherent in the forward-looking
information included in this report, the inclusion of such information should
not be regarded as a representation by us or any other person that our
objectives or plans will be achieved. We disclaim any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained in this report to reflect future events or
developments.
GENERAL
We are a provider of content integration and networking solutions. Our two
operating divisions are (1) our NQL software division that develops and markets
Network Query Language-based software products and services which
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are designed to access, excavate, gather, organize and convert into desired
formats the massive amounts of data that are located on the web and legacy-based
systems, and (2) our DCi information technology (IT) professional services
division that provides network installation, support and consulting services.
Software Division
The software division provides bot and intelligent agent technologies to the
global Internet/Intranet business-to-business market. Bots are software robots
designed to excavate, gather and organize the data proliferating on the web, and
automate many of these computing processes. Intelligent agents are personalized
bots that can make their own decisions and thus use their own "artificial
intelligence" to improve their abilities to search, retrieve and organize data.
Intelligent agents access and search multiple types of information systems in
various locations, including the Internet, and perform computing tasks that are
difficult, inefficient or impossible to conduct manually. Bots and intelligent
agents can also be used to monitor and report on the status of data and systems.
The software division serves the growing needs of a broad range of businesses
for improved bot and intelligent agent technologies. This division created and
developed Network Query Language technology, a proprietary scripting programming
language that streamlines the development of intelligent agents, bots and web
applications. Network Query Language technology can also be used to convert data
on the web into desired formats for other databases and documents. Currently, we
believe Network Query Language technology is one of the only programming
languages designed exclusively for the development of bots and intelligent
agents. Network Query Language technology attempts to provide an efficient
development environment for bots, intelligent agents and web applications in
much the same way as Structured Query Language (SQL) provided a common
development environment for database applications. As a result, the Network
Query Language technology delivers added value to information management.
We license the Network Query Language technology to businesses so they can
create and use their own bots and intelligent agents in real time. The current
target market for Network Query Language technology-based bot and intelligent
agent technology includes Internet integrators, information technology
departments of Fortune 1000 and other large companies, Internet communities and
marketplaces (portals and vortals) and independent software vendors. These
businesses use Network Query Language-based products and services to create
their own intelligent agents to search a variety of resources for specific
information and then gather and organize that information for internal or
external use. Using Network Query Language-based products and services,
companies and individuals can create and deploy customized bot and intelligent
agent applications in a matter of hours or days rather than the weeks or months
common with other development environments. Network Query Language technology
contains more than 500 common English language verbs and is designed to be
non-cryptic. We also develop and market custom software applications for
gathering and organizing information from a variety of resources.
Information Technology Professional Services Division
Our information technology professional services division provides Internet and
intranet consulting, design implementation, circuit procurement, installation,
maintenance, help desk services, premise wiring services, network installation
and administration and on-site technical management and consulting services. DCi
also cross-markets Network Query Language-based products and services.
Additionally, this division provides a wide array of computer systems, data
communications and LAN/WAN information technology services and products to a
customer base encompassing many industries. Specifically, this division serves
large financial institutions, major
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accounting firms, pharmaceutical companies, hospitals and universities. Most
customers are located in the Northeast, but our customer base also reaches as
far as Florida and the West Coast.
While we maintain our corporate headquarters in Santa Ana, California, our main
center for information technology professional services is located in Teterboro,
New Jersey. The Northeast and Mid-Atlantic regions are also serviced from a
satellite office in Delaware, while other areas of the country are supported
through the corporate home office and carefully selected, monitored and managed
sub-contractors.
EBITDA
We had negative earnings before interest, taxes, depreciation and amortization
("EBITDA") of $1,947,000 (including a gain on sale of Businesses of $117,000)
for the three-month period ended March 31, 2001 compared to EBITDA of $133,000
(including negative EBITDA of $267,000 from the managed services division and a
gain on sale of Businesses of $884,000) during the same period of the prior
year.
RESULTS OF OPERATIONS
Net Revenues
Our total net revenue decreased $978,000, or 21.2 percent, to $3,641,000 for the
three-month period ended March 31, 2001 from $4,619,000 for the respective prior
year period. The decrease in total net revenue results from a $1,563,000
decrease due to the January 31, 2000 sale of our managed services and computer
hardware manufacturing divisions offset by an increase of $585,000 or 19.1
percent in our ongoing operations. All categories of revenue from our ongoing
operations increased as compared to the prior year period.
Information Technology Services Revenue
Our information technology service revenue increased $226,000, or 8.3 percent,
to $2,960,000 for the three-month period ended March 31, 2001 from $2,734,000
for the respective prior year period. The increase in information technology
services revenue is primarily due to entering into additional maintenance
contracts prior to and during the quarter ended March 31, 2001.
Information Technology Product Revenue
Our information technology product revenue increased $260,000, or 102.0 percent,
to $515,000 for the three-month period ended March 31, 2001 from $255,000 for
the respective prior year period. The increase in information technology product
revenue is primarily due to increased product sales to existing service
customers.
Software Licenses Revenue
Our total software license revenue increased $52,000, or 104.0 percent, to
$102,000 for the three-month period ended March 31, 2001 from $50,000 for the
respective prior year period. The increase is due to the commercial release of
Network Query Language licenses in April 2000 and higher revenues under a
revenue share agreement.
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Software Services Revenue
Our total software service revenues increased $47,000 or 276.5 percent to
$64,000 for the three-month period ended March 31, 2001 from $17,000 for the
respective prior year period. The increase is principally due to revenue derived
from one customer for developing a customized application utilizing our core
Network Query Language.
Gross Margin
Our total gross margin for the first three months of 2001 increased to 22.2
percent compared to 21.7 percent as compared to the same period of the prior
year. After adjusting for the sale of our managed services and computer hardware
manufacturing divisions, total gross margin decreased to 22.7 percent compared
to 24.8 percent for the three-month period ended March 31, 2001 as compared to
the same period of the prior year. The decrease is primarily due to lower gross
margin on information technology product sales.
Information Technology Services Gross Margin
Our information technology services gross margin decreased slightly to 20.1
percent for the three-month period ended March 31, 2001 from 20.7 percent as
compared to same period of the prior year. The decrease is due to increased
costs of providing services, including personnel costs.
Information Technology Products Gross Margin
Our information technology products gross margin decreased to 22.3 percent for
the three-month period ended March 31, 2001 from 55.7 percent as compared to the
same period of the prior year. The decrease is due to changes in the mix of
products sold. We believe that the current period gross margin percentage is
more indicative of information technology products gross margin percentages
expected in future periods as compared to the gross margin percentage attained
in the three-month period ended March 31, 2000.
Software License Gross Margin
Our software license gross margin increased to 69.6 percent for the three-month
period ended March 31, 2001 compared to 66.0 percent for the comparable
three-month period of the prior year. The three-month gross margin increase is
primarily the result of increased revenue coupled with a smaller increase in
cost of sales as compared to the same period of the prior year.
Software Services Gross Margin
Our software service gross margin decreased to 42.2 percent for the three-month
period ended March 31, 2001 compared to 100.0 percent for the comparable prior
year period. The three-month margin decrease is primarily the result of the
establishment of a technical support department after March 31, 2000 and costs
associated with the sale of a customized application in the quarter ended March
31, 2001.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $1,157,000 to
$3,096,000 for the three-month period
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ended March 31, 2001 compared to $1,939,000 for the three-month period ended
March 31, 2000. The increase in selling, general and administrative expenses for
the three-month period ending March 31, 2001 is due to increased expenses in
connection with the infrastructure established to promote our software products
and services as well as increased advertising costs.
Research and Development Expenses
Our research and development expenses decreased slightly to $164,000 for the
three-month period ended March 31, 2001 compared to $171,000 for the three-month
period ended March 31, 2000. The decrease in research and development for the
three-month period ending March 31, 2001 is due to the utilization of
development personnel for revenue-producing activities.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant recurring operating losses and operating cash flow
deficits. We are in active discussions to raise additional financing to fund
operations. Because we have not as yet raised the additional financing, there is
substantial doubt about our ability to continue as a going concern.
On May 11, 2001, we received a commitment for a $1.5 million senior secured
credit facility from a lender. The loan is anticipated to close by May 31, 2001
and the commitment is subject to all requirements and conditions to be contained
in the final documentation prepared by the lender in the course of closing the
financing. The final documentation will be based on the conditions outlined in
the term sheet that has been approved by both the lender and us and will contain
such other terms and provisions agreed to by the parties.
We believe that we will be successful in raising additional financing and that
our current cash and cash equivalents balance combined with the net proceeds of
the contemplated additional financing, the senior secured credit facility, cash
expected to be generated by our information technology professional services
division, and continued revenue growth in our software division will provide
sufficient resources to allow us to maintain our operations at least through
December 31, 2001. After that date, we may need to obtain additional capital,
and we cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. If we cannot raise additional capital on acceptable
terms, we may not be able to develop or enhance our products and services, take
advantage of future opportunities or respond favorably to competitive pressures
or unanticipated events. We commercially released a new software product in
February 2001 which is expected to contribute to revenue growth in our software
division. In addition, should we not obtain growth in revenue, expenditures will
be scaled back in the areas of marketing, advertising, product development,
salaries, bonuses and commissions.
During the three months ended March 31, 2001, our working capital decreased
$2,497,000 from $3,055,000 at December 31, 2000 to $558,000 at March 31, 2001.
This decrease was primarily due to $2,224,000 net cash used in operating
activities and purchases of equipment of $513,000.
A March 30, 2000 private placement of common stock generated gross proceeds to
us of $14,637,500 with net proceeds of approximately $13,500,000. Hampshire
Equity Partners II, L.P., our preferred stockholder, purchased 995,400 of the
shares of our common stock issued in the private placement.
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As of December 31, 1999, we had a loan facility with a bank under which a $4
million accounts receivable line of revolving credit was designated for working
capital and $1 million was designated to finance acquisitions. The loan facility
was secured by substantially all of our assets. On March 28, 2000, we terminated
the revolving line of credit and, on March 31, 2000, we repaid in full the loan
designated for acquisitions.
Our software division based products and services are all in early stages of
commercialization and, as a result, it is difficult to predict the level of
market acceptance that our NQL based products and services will attain. We
expect to continue to incur significant costs developing and introducing
enhancements to our software division based products and technologies, and
expanding our sales and marketing activities. We expect this strategy to result
in losses for our software division and the Company on a consolidated basis at
least through the next three to four quarters.
We had no material commitments for capital expenditures as of March 31, 2001,
however we incur expenditures for information technology service parts on a
routine ongoing basis in order to perform services associated with maintaining
customers' computer networks.
An investment in our Common Stock involves a high degree of risk. Before making
an investment decision, you should carefully consider all the risks described in
this report in addition to the other information contained in this report
(including the Exhibits referenced in this report). Our business, operating
results and financial condition all could be materially and adversely affected
by any of the following risks. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business,
operating results and financial condition. The market price of our Common Stock
could decline due to the occurrence of any of such risks and you could lose all
or part of your investment. This report also contains certain forward-looking
statements that involve risks and uncertainties. Certain factors, including the
risks described below and elsewhere in this report, could cause our actual
results to differ materially from anticipated results reflected in the
forward-looking statements.
We recently changed the focus of our business to concentrate on software
products and services, and information technology professional services;
therefore, our past business and financial results may not provide a reliable
basis for assessing the prospects for the new focus of our business, which
largely depends on new technologies and emerging markets. Our historic principal
business lines were (1) the sale of computer and networking hardware and
software products, and (2) the service of our products, the service of
third-party hardware and software products, and installation, training and
consulting services with respect to these products. On January 31, 2000, we
completed a sale of these business lines to R.E. Mahmarian Enterprises, LLC,
which changed its name to Alpha Microsystems, LLC in November 2000 and which is
owned by Richard E. Mahmarian, a former member of our Board of Directors. We now
focus exclusively on our remaining operations, which are segmented into two
operating units - our software division, which focuses on Network Query
Language-based infrastructure software products, customized software
applications and services, and our information technology (IT) professional
services subsidiary, Delta CompuTec, Inc. ("DCi"). Accordingly, our business and
financial results prior to February 1, 2000 do not reflect the new focus of our
business. Analyzing those past results will not provide an accurate picture of
our current risks or anticipated returns. The future for our business will
depend almost exclusively on elements that made up a relatively smaller portion
of our prior business and financial activities. Also, the future of our software
division will depend mostly on new technologies and emerging markets, both of
which are in the early stages of commercial development.
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Our software division has a history of losses and expects losses in the near
future. If the division does not achieve or sustain profitability, our viability
could be in doubt and the market price of our Common Stock could decline
significantly. To date, our software division has not had a profitable quarter
and there is no assurance that this division will attain or sustain
profitability in the future. To date, we have funded the operations of our
software division primarily from revenue generated by outside investors. We
expect to continue to incur significant costs developing and introducing
enhancements to our Network Query Language-based products and technologies,
improving and expanding our IT services and expanding our sales and marketing
activities. We expect this strategy to result in losses for our software
division at least through the next three to four quarters. These losses could
impede the our ability to compete effectively by creating doubt among our
current and potential customers as to our long-term viability, and could cause
the market price of our Common Stock to decline significantly and may also
impair our ability to raise funds if our path to profitability is not clear.
Our quarterly operating results for our software division are volatile and
difficult to predict and if we do not meet the expectations of analysts or
investors, the market price of our Common Stock could decline significantly. Our
quarterly operating results for our software division have varied in the past
and may vary significantly in the future. Because our business is evolving
rapidly and our Network Query Language technology is in the early stages of
commercial development, we have little experience in forecasting revenues for
this division. Since our operating results for our software division are
volatile and difficult to predict, we believe that period-to-period comparisons
of the operating results from this division are not a reliable indication of
this unit's likely future performance. Investors should not rely on the results
of one quarter as an indication of future performance. Our future quarterly
operating results may be below the expectations of public market analysts and
investors. In this event, the market price of our Common Stock may decline
significantly. Our future quarterly operating results may vary for several
reasons, including, but not limited to, the numerous risk factors discussed in
this report. As we work to further develop our products and services and expand
our business, we may be unable to adjust spending in a timely manner to
compensation for any unexpected revenue shortfall. Such inability to adjust
spending could accentuate any negative effects on our quarterly results.
Our revenue primarily depends on our information technology professional
services subsidiary. The majority of our revenue currently comes from providing
information technology services. In 2000 and the first quarter of 2001, our IT
services division generated over 95% of our consolidated revenue excluding
revenues generated by businesses sold. We anticipate that our IT professional
services division will generate the majority of our revenue for at least the
next three to seven quarters. If our IT professional services subsidiary fails
to grow its profits as expected, that could negatively impact our ability to
develop and expand our Software business division and significantly adversely
affect our business, financial results and the market price of our Common Stock.
We do not have a long history of operating our IT professional services
subsidiary. We acquired our IT professional services subsidiary in September of
1998. Although the key management personnel of this subsidiary continued with us
after our acquisition, we have owned and operated this subsidiary for only ten
quarters. Therefore, we may not yet be fully aware of the risks and prospects
for this division or our industry in general. The short length of our experience
with our IT professional services subsidiary could negatively impact our ability
to evaluate and effectively oversee our operation, and this could significantly
adversely affect our business, financial results and the market price of our
Common Stock.
We face increasing competition in the market for our Network Query
Language-based products and services and for our IT services. The markets for
Network Query Language-based products and services and for IT services are
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intensely competitive and the competition is increasing. There are no
substantial barriers to entry for Internet services and products or for IT
services, so we expect competition in these markets to increase and remain both
strong and persistent. Competitors include on-line service and content
providers, web site operators, other Internet services and products that
incorporate data retrieval, conversion and delivery or "push" technology, and
numerous information technology service providers. Unknown to us, another
company could now be developing one or more products or services superior to our
products or services. Such a company could, to our detriment, rapidly acquire
market share for competitive Internet products and services or information
technology services. In short, competitive forces could rapidly, severely and
adversely affect our business, financial results and the market price of our
Common Stock. Many of our competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition and a larger installed base of customers
than we have. Many of our competitors have well-established relationships with
our current and potential customers, have extensive knowledge of our industries
and may be capable of offering alternative solutions. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products and services than we can. In
addition, many of our current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties that
may improve their ability to address the needs of customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could negatively impact our ability to sell our products or services at
the price levels required to support our continuing operations.
Variable sales cycles make it difficult to predict the timing of sales, making
quarterly operating results less predictable. Because customers have differing
views on the strategic importance of acquiring products for gathering and
organizing information on the web, intranets and legacy systems and using custom
software applications for improving their information technology networks, the
time required to educate customers and sell our products and services can vary
widely. As a result, the evaluation, testing, implementation and acceptance
procedures undertaken by customers can vary, resulting in a variable sales
cycle, which typically can range from six to nine months. While our customers
are evaluating our products and services before placing an order, we may incur
substantial sales and marketing expenses and expend significant management
efforts after which customers still may not place an order with us. Sales cycles
for our products and services sold to larger companies have been longer than
sales cycles for our products that are sold to comparatively smaller companies.
We expect that our sales to larger companies may increase as a percentage of our
total sales over time, and, accordingly, we may experience longer average sales
cycles for our products and services. In addition, purchases of our products and
services will frequently be subject to unplanned processing and other delays,
particularly with respect to larger customers for whom our products and services
represent a very small percentage of their overall purchase activity. Large
customers typically require approvals at a number of management levels within
their organizations, and, therefore, frequently have longer sales cycles.
If a significant number of web sites block bots and intelligent agents from
searching, gathering and organizing information from their sites that would
reduce the marketability of our Network Query Language-based products. Our
Network Query Language-based products are designed to enable others to create
and use bots and intelligent agents for automatically searching, gathering,
filtering, organizing, converting and monitoring information on web sites. If a
significant number of web sites block bots and intelligent agents from taking
one or more of these actions or any other actions for which Network Query
Language-based bots and intelligent agents may be deployed, that would
substantially reduce the marketability of our Network Query Language-based
products.
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We may be unable to devote enough funds and resources to sufficiently develop
our products and services in order to sustain and grow our business. Developing
and improving our products and services requires large amounts of funds and
resources. There are no assurances that we will be able to provide enough funds
and resources to sufficiently develop our products and services in order to
sustain and grow our business. If we lack funds and resources for product and
service development, our business, financial results and the market price of our
Common Stock could be significantly adversely affected.
We could be adversely affected if we are unable to secure license agreements
with beta users of our NQL ContentAnywhere platform. We recently concluded a
beta program for our NQL ContentAnywhere platform involving several U.S. and
European companies. The initial beta group included a cross section of
industries representing the Company's target markets. The Company released the
full version of the platform in the first quarter of 2001 however the beta
program may or may not result in actual licensees of the platform.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates primarily
to the interest income generated by excess cash invested in short term money
market accounts and certificates of deposit. We have not used derivative
financial instruments in our investment portfolio. Interest earning instruments
carry a degree of interest rate risk. We have not been exposed nor do we
anticipate being exposed to material risks due to changes in interest rates.
However, our future interest income may fall short of expectations due to
changes in interest rates.
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PART II. OTHER INFORMATION
Item 4. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
10.45 Indemnification Agreement by and between Registrant and Guy
Durrett dated February 28, 2001
10.46 Amendment No. 2 to Lease between Forsgate Industrial Complex and
Registrant dated March 29, 2001
10.47 Indemnification Agreement by and between Registrant and David
Pallmann dated March 30, 2001
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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.
NQL INC.
(Registrant)
Date: May 15, 2001 By: /s/ Douglas J. Tullio
--------------------------------
Chairman, CEO and President
Date: May 15, 2001 By: /s/ Robert O. Riiska
--------------------------------
Vice President, Chief Financial
Officer and Secretary
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.45 Indemnification Agreement by and between Registrant and Guy
Durrett dated February 28, 2001
10.46 Amendment No. 2 to Lease between Forsgate Industrial Complex and
Registrant dated March 29, 2001
10.47 Indemnification Agreement by and between Registrant and David
Pallmann dated March 30, 2001