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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 1999
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
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Commission File Number 0-021403
VOXWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3934824
- ------------------------------- ------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
305 College Road East
Princeton, New Jersey 08540
609-514-4100
(Address, including zip code, and telephone
number (including area code) of registrant's
principal executive office)
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 last 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at November 12, 1999
- ----------------------------- ---------------------------------------
Common Stock, $.001 par value 13,396,782
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VOXWARE, INC.
INDEX
PART I - FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements (unaudited) Page No.
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Consolidated Statements of Operations
Three Months Ended September 30, 1999 and 1998............... 3
Consolidated Balance Sheets
September 30, 1999 and June 30, 1999......................... 4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1999 and 1998............... 5
Notes to Consolidated Financial Statements...................... 6
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition......................................... 8
PART II - OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders...... 15
Item 5. Other Information........................................ 16
Item 6. Exhibits and Reports on Form 8-K......................... 16
SIGNATURES................................................................. 17
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ITEM 1. FINANCIAL STATEMENTS
Voxware, Inc. and Subsidiary
Consolidated Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
------------ ------------
(In thousands, except per share data)
<S> <C> <C>
Revenues:
Product revenues:
Product sales.......................... $ 438 $ ---
License fees........................... 206 244
Royalties and recurring revenues....... 190 141
----------------- -------------------
Total product revenues............... 834 385
Service revenues........................ 117 166
----------------- -------------------
Total revenues......................... 951 551
----------------- -------------------
Cost of revenues:
Cost of product revenues............... 260 ---
Cost of service revenues............... 45 73
----------------- -------------------
Total cost of revenues................. 305 73
----------------- -------------------
Gross profit......................... 646 478
----------------- -------------------
Operating expenses:
Research and development................ 471 677
Sales and marketing..................... 570 645
General and administrative.............. 453 463
Amortization of purchased intangibles... 332 ---
----------------- -------------------
Total operating expenses............... 1,826 1,785
----------------- -------------------
Operating loss......................... (1,180) (1,307)
Interest income.......................... 63 184
Gain on sale of assets................... 3,799 ---
----------------- -------------------
Net income (loss.)....................... $ 2,682 $(1,123)
================= ===================
Basic and diluted net income (loss)
per common share........................ $0.20 $(0.08)
================= ===================
Shares used in computing net
income(loss) per common share:
Basic.................................. 13,395 13,302
================= ===================
Diluted................................ 13,420 13,302
================= ===================
</TABLE>
The accompanying notes are an integral part of these statements
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Voxware, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
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(unaudited)
(In thousands, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 5,958 $ 2,438
Short-term investments................................................ 2,066 2,008
Accounts receivable, net ............................................. 712 989
Inventory, net ....................................................... 384 249
Prepaid expenses and other current assets............................. 158 778
Restricted cash....................................................... 400 604
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Total current assets............................................... 9,678 7,066
Property and equipment, net............................................. 360 395
Intangible assets, net.................................................. 4,269 4,680
Other assets, net....................................................... 449 451
------------------ ------------------
$ 14,756 $ 12,592
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................. $ 1,778 $ 2,089
Deferred revenues..................................................... 330 531
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Total current liabilities.......................................... 2,108 2,620
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Deferred rent........................................................... 246 263
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
none issued and outstanding......................................... --- ---
Common stock, $.001 par value, 30,000,000 shares authorized;
13,396,782 and 13,381,367 shares issued and outstanding at
September 30, 1999 and June 30, 1999, respectively................. 13 13
Additional paid-in capital............................................ 30,007 29,995
Unrealized gain on available-for-sale securities...................... 3 4
Accumulated deficit................................................... (17,621) (20,303)
------------------ ------------------
Total stockholders' equity......................................... 12,402 9,709
------------------ ------------------
$ 14,756 $ 12,592
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
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Voxware, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
1999 1998
----------------- ---------------
(in thousands)
<S> <C> <C>
Operating Activities:
Net income (loss)....................................................... $ 2,682 $(1,123)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................................... 406 56
Provision for doubtful accounts........................................ 8 31
Changes in assets and liabilities:
Accounts receivable.................................................... 269 349
Inventory.............................................................. (56) ---
Prepaid expenses and other current assets.............................. 620 (45)
Restricted cash-current................................................ 204 ---
Other assets........................................................... 2 8
Accounts payable and accrued expenses.................................. (311) (70)
Deferred revenues...................................................... (201) 37
Deferred rent.......................................................... (17) (17)
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Net cash provided by (used in) operating activities.................. 3,606 (774)
---------------- ----------------
Investing Activities:
Purchases of short-term investments..................................... (7,658) (5,631)
Sales and maturities of short-term investments.......................... 7,599 4,002
Purchases of property and equipment..................................... (39) (47)
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Net cash used in investing activities................................ (98) (1,676)
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Financing Activities:
Proceeds from exercises of common stock options......................... 12 19
---------------- ----------------
Net cash provided by financing activities............................ 12 19
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Increase (decrease) in cash and cash equivalents......................... 3,520 (2,431)
Cash and cash equivalents, beginning of period........................... 2,438 9,149
---------------- ----------------
Cash and cash equivalents, end of period................................. 5,958 6,718
Short-term investments, end of period.................................... 2,066 6,025
---------------- ----------------
Cash, cash equivalents and short-term investments, end of period......... $ 8,024 $12,743
================ ================
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Unrealized gain (loss) on short-term investments..................... $ (1) $ 8
================ ================
Purchase accounting adjustment related to inventory acquired
from Verbex......................................................... $ (79) $ ---
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
5
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Voxware, Inc.
Notes To Consolidated Financial Statements
1. BASIS OF PRESENTATION
The consolidated financial statements for Voxware, Inc. and its wholly-
owned subsidiary, Verbex Acquisition Corporation ("Voxware" or the
"Company"), as of September 30, 1999 and for the three month periods ended
September 30, 1999 and 1998 are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the consolidated
financial position and operating results for the interim periods. The
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, contained in
the Company's Annual Report on Form 10-K which was filed on September 28,
1999.
The results of operations for the interim periods ended September 30, 1999
are not necessarily indicative of the results to be expected for the fiscal
year ending June 30, 2000 or any other future periods.
2. NET INCOME (LOSS) PER SHARE
The Company has presented net income (loss) per share for the three
months ended September 30, 1999 and 1998 pursuant to Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings per Share." Basic net income
(loss) per share was computed by dividing the net income (loss) by the
weighted average number of common shares outstanding during the three months
ended September 30, 1999. Diluted income per share for the three months
ended September 30, 1999 was computed by dividing net income for the period
by the weighted average number of shares of common stock and common stock
equivalents outstanding using the treasury stock method. All common stock
equivalents consist of common stock options. For the three months ended
September 30, 1999, common stock options used in computing diluted income per
share totaled 25,000. As of September 30, 1999, the Company had stock
options outstanding to purchase 1,795,700 shares of common stock that were
not included in the computation of net income per share because to do so
would be anti-dilutive.
For the three months ended September 30, 1998, the effect of including
outstanding common stock equivalents in the calculation of net loss per share
would be anti-dilutive due to the Company's net loss. Therefore, outstanding
common stock equivalents have not been included in the calculation of net
loss per share, and as a result, basic net loss per share is the same as
diluted net loss per share the three months ended September 30, 1998.
3. REVENUE RECOGNITION
The Company generates revenues from products and services. Product
revenues consist of product sales, license fees, and royalties and recurring
revenues. Product sales represent shipments of portable and stationary
speech recognition-based products for industrial markets. Revenues from
product sales are generally recognized upon shipment. The Company began
shipping speech-recognition based products subsequent to its acquisition of
substantially all of the assets of Verbex Voice Systems, Inc. ("Verbex"),
which occurred on February 18, 1999. License fees are generated from
licensing the Company's speech compression technologies to customers in the
multimedia and consumer devices markets and from licensing the Company's
speech recognition-based software applications acquired in the Verbex
transaction. License fees are generally recognized upon shipment of the
underlying technolgies, provided that there are no significant post-delivery
obligations, persuasive evidence of an arrangement exists, pricing is fixed
or determinable, the payment is due within one year and collection of the
resulting receivable is deemed probable. Royalties and recurring revenues
include royalties, which are generally based on a percentage of
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licensees' sales or units shipped, and pre-determined periodic license fees.
Royalty revenues are recognized at the time of the customer's shipment of
products incorporating the Company's technology. Recurring product license
fees are generally recognized at the inception of the renewal period,
provided that there are no significant post-delivery obligations, persuasive
evidence of an arrangement exists, pricing is fixed or determinable, the
payment is due within one year and collection of the resulting receivable is
deemed probable. Service revenues from customer maintenance support,
including the amounts bundled with initial or recurring revenues, are
recognized over the term of the maintenance support period, which is
typically one year. Service revenues from engineering fees are recognized
upon customer acceptance or over the period in which services are provided if
customer acceptance is not required.
4. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has
not been recognized in the calculation of net income (loss). SFAS 130
requires that all items defined as comprehensive income, including changes in
the amounts of unrealized gains and losses on available-for-sale securities,
be shown as a component of comprehensive income. The only comprehensive
income item the Company has is unrealized gains and losses on available-for-
sale securities.
The following reconciles net income (loss) to comprehensive income (loss)
for the three month periods ended September 30, 1999 and 1998:
Three Months Ended
September 30,
-----------------------------------
1999 1998
---------------- -----------------
(in thousands)
Net income (loss)..................... $2,682 $(1,123)
Other comprehensive income:
Unrealized gain (loss) on
available-for-sale securities.... (1) 8
------ -------
Comprehensive income (loss)............. $2,681 $(1,115)
====== =======
5. ACQUISITION OF ASSETS OF VERBEX VOICE SYSTEMS, INC.
On February 18, 1999, the Company acquired substantially all of the
assets of Verbex for a total of $5,422,000, which consists of $4,800,000 paid
upon closing, a purchase price adjustment of $272,000, which was paid in
October 1999, and transaction costs of $350,000. Upon payment in October
1999, the purchase price adjustment was released from an account which was
established at the closing of the Verbex transaction. As of September 30,
1999, the escrow balance totaled $400,000 and was included in restricted
cash. The acquisition was accounted for under the purchase method of
accounting, whereby the purchase price is allocated to the assets acquired
and liabilities assumed of Verbex based on their fair market values at the
acquisition date. The excess of purchase price over the fair value of net
assets acquired was assigned to identifiable intangibles and goodwill.
Intangible assets acquired from Verbex include capitalized software and
underlying intellectual property rights, value added reseller agreements and
relationships, customer lists and engineering workforce. These intangibles
and goodwill are being amortized over four years, which represents the
estimated economic life of these assets. Verbex's results of operations have
been included in the Company's consolidated financial statements from the
date of the acquisition.
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6. SALE OF ASSETS TO ASCEND
On September 21, 1999, the Company's stockholders approved an agreement
with Ascend Communications, Inc. ("Ascend", which is now a wholly owned
subsidiary of Lucent Technologies, Inc.), to sell to Ascend for approximately
$5.1 million in cash substantially all of the Company's assets relating to
what has historically been the Company's primary business of developing and
licensing speech compression technologies and products. Upon closing in
September 1999, the Company received $4,146,000 in cash. The Company had
previously received $204,000 of the purchase price. The remaining $750,000
is being held in escrow for 18 months (until March 21, 2001) to secure
Voxware's indemnification provisions under the agreement with Ascend. As a
result of the sale, the Company recorded a gain of $3,799,000 during the
quarter ended September 30, 1999. Such gain does not include the $750,000
held in escrow. The sale to Ascend did not include the Company's rights and
obligations under its existing license agreements and, as part of the sale,
the Company received a license back from Ascend to use the technology
necessary to service the Company's existing licensees in the speech
compression business. With the consent of Ascend, the Company may also
license the speech coding technologies to new licensees for uses that are not
competitive with Ascend.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This report contains forward-looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may
cause the Company's plans and results to differ. Factors that may cause such
differences include, but are not limited to, the Company's ability to compete
in its industrial speech recognition products business, which is a new line
of business for the Company, the rate of progress, if any, of the Company's
product development programs and the uncertainty of acceptance of the
Company's products in the marketplace, the highly competitive nature of the
Company's industry and the Company's ability to compete successfully, the
Company's ability to attract and retain qualified personnel, the Company's
ability to successfully enter into and maintain relationships with third
parties and the Company's dependence on such third parties to develop and
market products using the Company's technology and to develop a recurring
revenue stream to the Company, the Company's ability to manage its growth,
the costs involved in obtaining and enforcing patents and any necessary
licenses, the Company's ability to obtain additional funds as necessary, and
those other risks discussed Exhibit 99 in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1999.
Overview
On February 4, 1999, we entered into an asset purchase agreement with
Ascend (which at the time was publicly owned but since then was acquired by
Lucent Technologies, Inc. and is now a wholly owned subsidiary of Lucent) to
sell to Ascend substantially all of our assets relating to what had
historically been our primary business of developing and selling speech
compression technologies and products. The sale to Ascend was consummated on
September 21, 1999. Also on February 4, 1999, we entered into a definitive
agreement with Verbex to acquire substantially all of the assets of Verbex.
The Verbex transaction was consummated on February 18, 1999. Since our
acquisition of Verbex, Voxware has been focusing its efforts on Verbex's
business of developing and selling speech recognition products for the
warehousing and manufacturing markets as well as other industrial markets.
In our industrial speech recognition products, we generate revenues
primarily from product sales, licenses and development services. Product
sales consist of: portable devices used for mobile industrial speech-
recognition applications (Verbex's MVP product line); stationary speech-
recognition devices, primarily used for warehouse receiving and package
sorting applications; and accessories that complemented its product
offerings, including microphones, headsets and computer hardware. Development
services consist of providing technical
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resources and assistance to customer-specific development efforts. Revenues
from product sales are generally recognized when products are shipped.
Prior to its acquisition of Verbex, Voxware generated revenues relating to
its speech and audio coding business from two sources: fees from software
product licenses and fees for services provided. Product revenues consist of
two components: software license fees, and royalties and recurring revenues.
Voxware licensed its products primarily to software and hardware companies
which incorporated Voxware's products and technologies into their products.
Arrangements with customers, which were negotiated on a case-by-case basis,
historically included one or more of the following: initial license fees,
quarterly license fees, annual license fees or royalties based on the
licensee's revenue generated or units shipped of products incorporating
Voxware's technologies. As a result, the timing and amount of our revenues
have been substantially dependent on the timing and efforts of our licensees
in developing and marketing products incorporating our products and
technologies. Software product revenues are generally recognized upon
shipment, provided that there are no significant post-delivery obligations,
persuasive evidence of an arrangement exists, pricing is fixed or
determinable, the payment is due within one year and collection of the
resulting receivable is deemed probable. If an acceptance period is
required, revenues are recognized upon customer acceptance. Royalty revenues
are recognized in the period of customer shipment. Service revenues consist
of customer maintenance support and engineering fees. Customer maintenance
support revenues are recognized over the term of the support period, which
typically lasts for one year. Engineering fees are generally recognized upon
customer acceptance or upon delivery if customer acceptance is not required.
All research and development costs are expensed as incurred.
The sale to Ascend did not include Voxware's rights and obligations under
its existing license agreements. We will continue to have revenue from
existing licensees of our speech coding technology in the multimedia and
consumer devices markets after the sale to Ascend, in the form of periodic
license renewal fees, royalties and service fees. With the consent of
Ascend, we may also license our speech coding technologies after the sale
for uses that are not competitive with Ascend. Although we do not have any
agreements or arrangements with Ascend relating to any general or specific
guidelines for obtaining Ascend's consent, we believe that Ascend will
consent to our licensing the speech coding technologies in the multimedia
and consumer devices markets. We do not believe that we will have any
revenues from new licensees in the Internet Protocol ("IP") telephony
market. Our revenue from licensing speech coding technologies and audio
compression technologies has been decreasing over the last two years.
Therefore, we expect that, even if Ascend is willing to give its consent,
our new licensing activity relating to the speech coding technologies will
decrease significantly over time. Further, over time, as we focus on the
Verbex business, we expect that revenues from licenses of speech coding
technologies will become a less significant part of our revenues.
During October 1999, we amended an existing customer contract to license
some of our speech coding technologies for $500,000 to a customer, which has
previously been a major customer of Voxware. The license fees relating to
this transaction will be recognized during the quarter ending December 31,
1999. As described previously, since our acquisition of Verbex in February
1999, our primary business focus is developing, marketing and selling
industrial speech recognition products. While we will continue to take
advantage of favorable opportunities to license our speech coding
technologies in the future, we do not expect to dedicate significant
resources to the development, marketing or licensing of our speech coding
technologies in the future.
The majority of our existing licensees of our speech compression products
compete in the multimedia Internet software market, which is a relatively new
market, and many of the companies compete against much more established
companies and/or have businesses that are relatively immature. We believe
that a significant number of our licensees which compete in this market have
not incorporated, and may never incorporate, Voxware's technologies into
their products. Therefore, we may never derive royalties or other recurring
revenues from many of our existing license agreements in the multimedia
Internet software market. With respect to Internet Protocol ("IP")
telephony, deployments in that market have primarily utilized standardized
codec technologies (and not Voxware's proprietary codec technologies).
In addition, deployments in IP telephony have been characterized by
bandwidth-rich managed networks (Intranets), which networks generally do
not benefit significantly from low bandwidth solutions such as Voxware's
technologies. As a result of these factors, demand for Voxware's
technologies in the IP telephony market has not been significant. In
connection with the sale to Ascend, we have discontinued our activities in
the IP telephony market.
Voxware has only a limited operating history upon which an evaluation of
Voxware and its prospects can be based. Since its inception, Voxware has
incurred significant losses and, as of September 30, 1999,
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Voxware had an accumulated deficit of $17,621,000. In at least the near term
quarters, we expect to incur net losses as we pursue a new line of business.
The recent sale of our speech compression technologies business to Ascend and
recent acquisition of the speech recognition systems business of Verbex make
the prediction of future results of operations extremely difficult.
Therefore, Voxware's historical revenues should not be taken as indicative of
future revenues. In addition, Voxware's operating results may fluctuate
significantly in the future as a result of a variety of factors, including,
but not limited to, the entrance into a new line of business, the budgeting
cycles of potential customers, the volume of, and revenues derived from sales
of products by our licensees that incorporate our products, the rate of new
licensing activity, as well as the termination of existing license
agreements, the introduction of new products or services by the Voxware or
its competitors, pricing changes in the industry, the degree of success of
Voxware's efforts to penetrate its target markets, technical difficulties
with respect to the use of products developed by Voxware or its licensees,
the level of usage of the Internet, and general economic conditions.
Results of Operations
Three Months Ended September 30, 1999 Versus Three Months Ended September 30,
1998
Revenues
Voxware recorded revenues of $951,000 for the three months ended September
30, 1999 compared to revenues of $551,000 for the three months ended
September 30, 1998. The $400,000 increase in total revenues reflects
$438,000 in industrial speech recognition product sales (which we began
selling in February 1999 as a result of our purchase of Verbex), and a
$49,000 increase in royalties and recurring revenues from the speech
compression business, offset by decreases of $38,000 in license fees and
$49,000 in service revenues primarily related to our speech compression
technology products.
Total product revenues increased $449,000 from $385,000 in the three
months ended September 30, 1998 to $834,000 in the three months ended
September 30, 1999. The increase in product revenues reflects $438,000 in
industrial speech recognition product sales (which we began selling in
February 1999 as a result of our purchase of Verbex), and a $49,000 increase
in royalties and recurring revenues from the speech compression business,
offset by decreases of $38,000 in license fees. For the three month periods
ended September 30, 1999 and 1998, 53% and none of the Company's product
revenues were attributable to industrial speech recognition product sales,
respectively, 25% and 63% were attributable to license fees, respectively,
and 22% and 37% were attributable to royalties and recurring revenues,
respectively.
Service revenues were primarily attributable to customer maintenance
support and fees for engineering services relating to our speech coding
technologies business. For the three months ended September 30, 1999,
service revenues totaled $117,000, reflecting a decrease of $49,000 from
service revenues of $166,000 for the three months ended September 30, 1998.
The decrease in service revenues is primarily attributable to (i) a decline
in customer maintenance support revenues because the Company had a much
smaller portfolio of customers to which it provided maintenance support
services during the three months ended September 30, 1999 than it did for
the three months ended September 30, 1998, and (ii) a decline in
development services revenues because of the shift in focus away from a
custom development-based OEM business to the operation of Verbex's business.
Cost of Revenues
Cost of revenues increased $232,000 from $73,000 for the three months
ended September 30, 1998 to $305,000 for the three months ended September 30,
1999. The increase in cost of revenues reflects an increase in cost of
product revenues, partially offset by a decrease in cost of service revenues.
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Cost of product revenues increased from none for the three months ended
September 30, 1998 to $260,000 for the three months ended September 30, 1999,
reflecting costs associated with shipments of speech-recognition-based
hardware products related to the Verbex business. As the Verbex acquisition
occurred during February 1999, no such products were sold during the three
months ended September 30, 1998. As of September 30, 1999, Voxware had a
manufacturing staff of four compared to none at September 30, 1998.
Cost of services revenues consists primarily of the expenses associated
with customer maintenance support and engineering services, including
employee compensation and equipment depreciation. Cost of service revenues
decreased $28,000 from $73,000 in the three months ended September 30, 1998
to $45,000 in the three months ended September 30, 1999. The decrease in
cost of service revenues is directly attributable to the decrease in service
revenues described above.
Operating Expenses
Total operating expenses increased by $41,000 (2%) from $1,785,000 in the
three months ended September 30, 1998 to $1,826,000 in the three months ended
September 30, 1999. Excluding noncash amortization of purchased intangibles
totaling $332,000 for the three months ended September 30, 1999 and none for
the three months ended September 30, 1998, operating expenses decreased by
$291,000 (16%). This decrease primarily reflects headcount reductions in
each of research and development, sales and marketing and administration, and
other cost reductions associated with the restructuring of Voxware's business
focus over the past several quarters prior to the Ascend and Verbex
agreements. As of September 30, 1999, our headcount totaled 29, compared to
total headcount of 40 as of September 30, 1998.
Research and development expenses primarily consist of employee
compensation and equipment depreciation and lease expenditures related to
product research and development. Research and development expenses
decreased $206,000 (30%) from $677,000 in the three months ended September
30, 1998 to $471,000 in the three months ended September 30, 1999. As of
September 30, 1999, we had a research and development staff of 10 compared to
21 at September 30, 1998.
Sales and marketing expenses primarily consist of employee compensation
(including direct sales commissions), travel expenses and trade shows. Sales
and marketing expenses decreased $75,000 (12%) from $645,000 in the three
months ended September 30, 1998 to $570,000 in the three months September 30,
1999. As of September 30, 1999, Voxware had a sales and marketing staff of 9
compared to 10 at September 30, 1998.
General and administrative expenses consist primarily of employee
compensation and fees for insurance, rent, office expenses and professional
services. General and administrative expenses decreased $10,000 (2%) from
$463,000 in the three months ended September 30, 1998 to $453,000 in the
three months ended September 30, 1999. As of September 30, 1999, we had a
general and administrative staff of 6 compared to 9 at September 30, 1998.
Amortization of purchased intangibles totaled $332,000 for the three
months ended September 30, 1999. These intangibles related to the
acquisition of Verbex in February 1999. The total amount of intangibles
capitalized from the Verbex acquisition approximated $5,079,000, and those
intangibles are being amortized over four years.
Interest Income
Interest income decreased $121,000 to $63,000 for the three months ended
September 30, 1999 from $184,000 for the three months ended September 30,
1998. The decrease is primarily related to the decrease in
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Voxware's total cash, cash equivalents and short-term investments portfolio
balance as a result of cash used for operations and the acquisition of
substantially all of the assets of Verbex for approximately $5,200,000 plus
transaction costs in February 1999. As of September 30, 1999, Voxware's
cash, cash equivalents and short-term investments portfolio totaled
$8,024,000 compared to $12,743,000 at September 30, 1998.
Income Taxes
As of September 30, 1999, we had approximately $15,300,000 of federal net
operating loss carryforwards which will begin to expire in 2009 if not
utilized. As of September 30, 1999, we have provided a full valuation
allowance on the net deferred tax asset because of the uncertainty regarding
realization of the deferred asset, primarily as a result of considering such
factors as our limited operating history, the volatility of the market in
which we compete, the operating losses incurred to date and the operating
losses anticipated in future periods.
In addition, during 1999, the State of New Jersey passed legislation
which allows New Jersey technology companies to apply for the transfer or
sale of unused New Jersey state net operating losses and research and
development tax credits for cash. Profitable companies can buy these losses
and credits at a discount, thereby reducing their state tax obligation.
Voxware applied to the State of New Jersey to sell up to approximately
$14,900,000 of its New Jersey State net operating losses which, if approved,
could provide Voxware up to approximately $1,000,000 cash. In addition, we
have entered into an agreement with a broker who specializes in identifying
buyers of New Jersey net operating losses and tax credits. We are currently
awaiting a determination from the State of New Jersey to determine what
amount, if any, of Voxware's State of New Jersey net operating losses qualify
to be sold. We cannot assure you that these net operating losses will
qualify to be sold or, if they qualify to be sold, that Voxware will be
able to identify a buyer for these net operating losses.
Gain on Sale of Assets
During the quarter ended September 30, 1999, we completed the sale of
substantially all of the assets relating to our speech coding technology
business for $5,100,000, of which $750,000 has been placed in escrow for a
period of 18 months from the closing date to secure our indemnification
obligations under the agreement with Ascend. Upon closing, we received
$4,146,000 from Ascend. We had previously received a payment of $204,000 of
the purchase price. During the quarter ended September 30, 1999, we recorded
a gain on the sale of the speech coding assets totaling $3,799,000, which
reflects the total proceeds received to date totaling $4,350,000, less
transaction costs of $517,000 and equipment transferred to Ascend totaling
$34,000.
Liquidity and Capital Resources
As of September 30, 1999, we had a total of $8,024,000 in cash, cash
equivalents and short-term investments consisting of $5,958,000 of cash and
cash equivalents and $2,066,000 in short-term investments. Included in our
cash, cash equivalents and short-term investments balance is $4,146,000
received upon the closing of the Ascend transaction. We also had received a
deposit of $204,000 from Ascend in January 1999 which was restricted until
the closing of the transaction. On the closing date in September 1999,
$750,000 of the sale price was placed in escrow for a period of 18 months to
secure our indemnification obligations. Our cash, cash equivalents and
short-term investments portfolio is liquid and investment grade, consisting
of high-grade money-market funds, United States Government-backed securities
and commercial paper and corporate obligations. Since inception, we have
primarily financed our operations through the sale of equity securities.
For the three months ended September 30, 1999, cash provided by operating
activities totaled $3,606,000. Cash provided by operating activities was
primarily attributable to net income of $2,682,000, which was comprised of:
the $3,799,000 gain on the sale of substantially all of the assets of our
speech
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coding business to Ascend, offset by a loss from operations totaling
$785,000 excluding the gain on the sale of assets and non cash amortization
totaling $332,000, and changes in operating assets and liabilities.
For the three months ended September 30, 1998, cash used to fund
operations totaled $774,000. Cash used to fund operations was primarily
attributable to the net loss of $1,123,000, offset by the effect of non cash
charges for depreciation and changes in operating assets and liabilities.
For the three months ended September 30, 1999, cash used in investing
activities totaled $98,000, which consisted of $59,000 in net purchases of
short-term investments and $39,000 in purchases of property and equipment.
For the three months ended September 30, 1998, cash used by investing
activities totaled $1,676,000, which reflected $1,629,000 in net purchases of
short-term investments and $47,000 in equipment purchases. For the three
months ended September 30, 1999 and 1998, cash provided by financing
activities totaled $12,000 and $19,000, respectively, which amounts represent
proceeds from exercises of common stock options.
We have a $2,000,000 revolving line of credit with Silicon Valley Bank.
Borrowings under the credit facility will bear interest at the bank's prime
lending rate. As amended on February 1, 1999, the credit facility requires
Voxware to secure all indebtedness with cash held at the bank's offices in an
amount not less than 100% of the outstanding amount of all indebtedness we
owe to the bank. The credit facility requires payment of all outstanding
principal, if any, plus all accrued interest on March 30, 2000. In
connection with the lease of our office facility, we have outstanding a
$300,000 standby letter of credit at September 30, 1999 naming the lessor of
the office facility beneficiary of the standby letter of credit in the event
that we default on the lease. As required by the credit facility, we have
secured the $300,000 standby letter of credit with cash that is included in
"other assets, net" in the September 30, 1999 balance sheet.
We have no material commitments for capital expenditures except for those
under operating leases for our facilities and leased equipment. At September
30, 1999, our working capital totaled approximately $7,570,000. We believe
that our current cash, cash equivalents and short-term investments balances
will be sufficient to fund our working capital and capital expenditures
requirements, exclusive of cash required for possible acquisitions of, or
investments in businesses, products and technologies for at least twelve
months beyond September 30, 1999.
Year 2000 Compliance
The efficient operation of Voxware's business is dependent in part on
computer software programs and operating systems which it uses internally
(collectively, the "Internal Programs and Systems"). Voxware's Internal
Programs and Systems consist of our accounting system, inventory system,
payroll system, electronic mail system, telephone and PBX systems, and UNIX
and Microsoft Windows NT servers. All of these systems are based in-house,
with the exception of the payroll system, which is based at the vendor's
facility.
We have been evaluating our Internal Programs and Systems to identify
potential Year 2000 compliance problems. We have primarily conducted these
evaluations and assessments using Voxware's information technology personnel,
including coordinating evaluations and assessments with the respective
vendors of these computer software programs and operating systems. These
actions are necessary to ensure that the Internal Programs and Systems will
be Year 2000 compliant. Based on present information, we believe that we
will be able to achieve Year 2000 compliance through a combination of
modification of some existing Internal Programs and Systems and the
replacement of other Internal Programs and Systems with new programs and
systems that are already Year 2000 compliant.
We are currently in the process of updating our accounting system to
achieve Year 2000 compliance. The vendor of our accounting system has
informed us that the procedures currently being performed will make the
system Year 2000 compliant.
13
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We have recently completed the upgrade of our inventory system to one
that is Year 2000 compliant at a cost of approximately $10,000, which was
paid for by Verbex prior to the acquisition of Verbex. Voxware did not have,
and had no need for an inventory system until the acquisition of Verbex.
We have been informed by ADP, our outside payroll processor, that our
payroll system is Year 2000 compliant.
We have been informed by the vendor of our e-mail system that the system
is Year 2000 compliant. We are conducting our own internal assessment of the
e-mail system and we expect that assessment to be completed by the third
calendar quarter of 1999. We believe that, to the extent that e-mail system
is not Year 2000 compliant, we can receive an upgrade from the vendor or
replace the system on a timely basis at no cost or at minimal cost.
Our telephone and PBX systems have been upgraded to be Year 2000
compliant.
We have no reason to believe that UNIX and Microsoft Windows NT servers
are not Year 2000 compliant or, to the extent that they are not compliant,
that the vendors will not make appropriate upgrades available to all of their
customers at no cost or at minimal cost.
In addition to our Internal Programs and Systems, the products we sell
and license externally to customers (collectively, the "External Programs"),
have been assessed for Year 2000 compliance. With respect to the speech
compression technologies and products historically sold by Voxware, we are
not aware of any Year 2000 issues. Verbex had assessed its products, the
MVP, Speech Commander and our stationary boards. Verbex concluded that it
could be advisable for the users of those products to take precautions to
mitigate possible Year 2000 issues, such as not operating the product during
the period of time when the calendar changes from December 31, 1999 to
January 1, 2000. We have hired the director of engineering at Verbex in
connection with the Verbex acquisition and we have commenced our own review
of the Year 2000 compliance of Voxware's External Programs. While Voxware is
not aware of any Year 2000 issues with our External Programs that are
expected to have a material financial impact on Voxware as a result of our
assessments to date, we continue to assess our External Programs. Should we
identify any material Year 2000 problems, we are currently setting up a
process that will enable us to contact our customers promptly so that we can
provide instructions to mitigate or avert Year 2000 issues related to the
External Programs. We cannot assure you however, that in the event that we
encounter Year 2000 issues, we will be able to provide adequate instructions,
or that our instructions will mitigate or avert Year 2000 issues related to
our External Programs. We may need to recall products and undertake to
modify, upgrade or replace the products. Any such undertaking could be
expensive and could have a material adverse effect on Voxware and its
financial condition.
To date, costs incurred in evaluating our Internal Programs and Systems
and External Programs have not been material. Anticipated costs necessary to
complete evaluations of our Internal Programs and Systems and complete
modifications and/or replacements are not expected to be material. We expect
that the total cost of these efforts and upgrades should not exceed $50,000,
including the cost of the upgraded inventory system described above. Voxware
further estimates that less than $20,000 of internal labor costs have been
incurred to date for personnel working to resolve Year 2000 issues. We
cannot assure you that our efforts and the efforts of our vendors will be
successful in making all of our systems and products Year 2000 compliant
or that the cost and time required to achieve Year 2000 compliance will not
exceed our current estimates. As a result, and due to uncertainty of the
potential impact that Year 2000 issues may have on Voxware, there can be no
assurance that Year 2000 issues will not have a material impact on our
future results of operations or financial condition.
Voxware expects to identify and resolve all Year 2000 problems that could
materially adversely affect its business operations. However, Voxware
believes that it is not possible to determine with complete
14
<PAGE>
certainty that all Year 2000 problems affecting Voxware or its customers have
been identified or corrected. The number of devices that could be affected
and the interactions among these devices are simply too numerous. In
addition, no one can accurately predict how many Year 2000-related failures
will occur or the severity, duration, or financial consequences of these
perhaps inevitable failures. As a result, Voxware believes that the
following consequences are possible:
. a significant number of operational inconveniences and
inefficiencies for Voxware and its customers that will divert
management's time and attention and financial and human resources
from ordinary business activities;
. a lesser number of serious system failures that will require
significant efforts by Voxware or its customers to prevent or
alleviate material business disruptions;
. several routine business disputes and claims for pricing
adjustments or penalties due to Year 2000 problems by customers,
which will be resolved in the ordinary course of business; and
. a few serious business disputes alleging that Voxware failed to
comply with the terms of contracts or industry standards of
performance, some of which could result in litigation or contract
termination.
Voxware is currently formulating contingency plans for each of its
material systems. We believe that our accounting and inventory systems are
our most important Internal Systems for which to ensure Year 2000 compliance.
We believe that the inventory system is Year 2000 compliant and that the
accounting system can be made Year 2000 compliant or replaced at a reasonable
cost as set forth above. We will continue to work closely with the vendors
of these systems to assure Year 2000 compliance.
Item 4. Submission of Matters to a Vote of Security Holders
On September 21, 1999, we held our Annual Meeting of Stockholders. At the
meeting, our stockholders approval and adopted an agreement dated February 4,
1999, as amended, between Ascend Communications, Inc., a Delaware
corporation, and Voxware, pursuant to which we proposed to sell to Ascend for
cash substantially all of the assets of our digital speech coding business.
Our stockholders also elected the following three directors to serve until
the next Annual Meeting of Stockholders or until their respective successors
shall have been duly elected and qualified to serve: Bathsheba J. Malsheen,
Ph.D; David B. Levi; and Eli Porat. The results of the voting on the Ascend
transaction and in the election of directors are set forth below.
Proposal to approve and adopt an agreement dated as of February 4, 1999, as
amended, between Ascend Communications, Inc., a Delaware corporation, and
Voxware, pursuant to which we proposed to sell to Ascend for cash
substantially all of our digital speech coding business:
For Against Abstain Not Voted
--- ------- ------- ---------
8,258,723 135,353 19,130 3,872,200
Election of Directors:
Nominee For Withheld
------- --- --------
Bathsheba J. Malsheen, Ph.D 12,042,447 242,959
David B. Levi 12,007,727 277,679
Eli Porat 12,008,227 277,179
Although the Company has a classified Board of Directors, due to recent
resignations from the Board of Directors each of the incumbent directors agreed
to stand for re-election at the September 21, 1999 annual meeting of
stockholders and, having been elected, to serve until the next annual meeting of
stockholders or until his or her successor shall have been duly elected and
qualified to serve.
15
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
27.1 Financial Data Schedule (FDS) for current reporting
periods ended September 30, 1999.
(b) Reports on Form 8-K.
Amendment to previously filed Form 8-K filed on August 12,
1999 (relating to the sale of the Company's speech coding
technology to Ascend Communications, Inc. and the purchase
of certain assets and liabilities of Verbex Voice Systems,
Inc.).
Current Report on Form 8-K filed on October 6, 1999
(relating to the sale of the Company's speech coding
technology to Ascend Communications, Inc. and the purchase
of certain assets and liabilities of Verbex Voice Systems,
Inc.).
16
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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.
Date: November 12, 1999
VOXWARE, INC.
(Registrant)
By: /s/ Bathsheba J. Malsheen
-------------------------
Bathsheba J. Malsheen, President and
Chief Executive Officer
By: /s/ Nicholas Narlis
-------------------
Nicholas Narlis, Vice President,
Chief Financial Officer, Treasurer and
Secretary
(Principal Financial Officer and Principal
Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VOXWARE
INC. FINANCIAL STATEMENTS FOR THE 3 MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,958
<SECURITIES> 2,066
<RECEIVABLES> 1,080
<ALLOWANCES> 368
<INVENTORY> 384
<CURRENT-ASSETS> 9,678
<PP&E> 1,214
<DEPRECIATION> 854
<TOTAL-ASSETS> 14,756
<CURRENT-LIABILITIES> 2,108
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 12,389
<TOTAL-LIABILITY-AND-EQUITY> 14,756
<SALES> 951
<TOTAL-REVENUES> 951
<CGS> 260
<TOTAL-COSTS> 305
<OTHER-EXPENSES> 1,826
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 2,682
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<NET-INCOME> 2,682
<EPS-BASIC> 0.20
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</TABLE>
