<PAGE>
================================================================================
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 December 31, 1999
-----------------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________
Commission File Number 0-021403
VOXWARE, INC.
-------------
(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 January 31, 2000
- ----------------------------- --------------------------------------
Common Stock, $.001 par value 13,436,352
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VOXWARE, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements (unaudited) Page No.
--------
<S> <C>
Consolidated Statements of Operations
Three and Six Months Ended December 31, 1999 and 1998........................ 3
Consolidated Balance Sheets
December 31, 1999 and June 30, 1999.......................................... 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1999 and 1998.................................. 5
Notes to Consolidated Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................................... 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...................................................................... 16
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K................................................. 16
SIGNATURES...................................................................................... 17
- ----------
</TABLE>
2
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Item 1. Consolidated Financial Statements
Voxware, Inc. and Subsidiary
Consolidated Statements of Operation
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
------------- ------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Product revenues:
Product revenues............................ $ 218 $ -- $ 656 $ --
License fees................................ 752 207 958 451
Royalties and recurring revenues............ 8 181 198 322
------------- ------------- -------------- --------------
Total product revenues................... 978 388 1,812 773
Service revenues.............................. 34 324 150 490
------------- ------------- -------------- --------------
Total revenues........................... 1,012 712 1,962 1,263
------------- ------------- -------------- --------------
Cost of revenues:
Cost of product revenues...................... 137 -- 396 --
Cost of service revenues...................... 10 164 55 237
------------- ------------- -------------- --------------
Total cost of revenues................... 147 164 451 237
------------- ------------- -------------- --------------
Gross profit.......................... 865 548 1,511 1,026
------------- ------------- -------------- --------------
Operating expenses:
Research and development...................... 723 434 1,194 1,111
Sales and marketing........................... 604 725 1,174 1,370
General and administrative.................... 515 395 968 858
Amortization of purchased intangibles......... 308 -- 639 --
------------- ------------- -------------- --------------
Total operating expenses................ 2,150 1,554 3,975 3,339
------------- ------------- -------------- --------------
Operating loss........................... (1,285) (1,006) (2,464) (2,313)
Interest income................................. 119 171 182 355
Gain on sale of tax loss carryforwards.......... 501 -- 501 --
Gain on sale of assets.......................... -- -- 3,799 --
------------- ------------- -------------- --------------
Net income (loss)............................... $ (665) $ (835) $ 2,018 $ (1,958)
============= ============= ============== ==============
Basic and diluted net income (loss) per
common share.................................... $ (0.05) $ (0.06) $ 0.15 $ (0.15)
============= ============= ============== ==============
Shares used in computing net income
(loss) per common share:
Basic.................................... 13,423 13,318 13,409 13,310
============= ============= ============== ==============
Diluted.................................. 13,423 13,318 13,429 13,310
============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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Voxware, Inc. and Subsidiary
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ -------------
(In thousands, except share and
per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 1,053 $ 2,438
Short-term investments............................................. 6,017 2,008
Accounts receivable, net........................................... 720 989
Inventory, net..................................................... 542 249
Prepaid expenses and other current assets.......................... 205 778
Restricted cash.................................................... -- 604
---------- ----------
Total current assets.......................................... 8,537 7,066
Property and equipment, net............................................. 403 395
Intangible assets, net.................................................. 4,013 4,680
Other assets............................................................ 572 451
---------- ----------
$ 13,525 $ 12,592
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................. $ 1,102 $ 2,089
Deferred revenues.................................................. 441 531
---------- ----------
Total current liabilities..................................... 1,543 2,620
---------- ----------
Deferred rent........................................................... 228 263
---------- ----------
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;
13,436,352 and 13,381,367 shares issued and outstanding at
December 31, 1999 and June 30, 1999, respectively................ 13 13
Additional paid-in capital......................................... 30,027 29,995
Unrealized gain (loss) on available-for-sale securities............ (1) 4
Accumulated deficit................................................ (18,285) (20,303)
---------- ----------
Total stockholders' equity.................................... 11,754 9,709
---------- ----------
$ 13,525 $ 12,592
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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Voxware, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1999 1998
------------- ------------
(in thousands)
<S> <C> <C>
Operating Activities:
Net income (loss) ................................................. $ 2,018 $ (1,958)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization...................................... 779 109
Provision for doubtful accounts.................................... 8 84
Gain on sale of tax loss carryforwards............................. (501) --
Gain on sale of assets............................................. (3,799) --
Compensation expense............................................... 20 --
Changes in assets and liabilities:
Accounts receivable.............................................. 261 342
Inventory........................................................ (214) --
Prepaid expenses and other current assets........................ 22 (119)
Restricted cash-current.......................................... 604 --
Other assets..................................................... (121) (35)
Accounts payable and accrued expenses............................ (783) (98)
Deferred revenues................................................ (90) (71)
Deferred rent.................................................... (35) (34)
----------- -----------
Net cash used in operating activities......................... (1,831) (1,780)
----------- -----------
Investing Activities:
Purchases of short-term investments................................ (12,645) (9,829)
Sales and maturities of short-term investments..................... 8,631 8,831
Purchases of property and equipment................................ (148) (51)
Proceeds form sale of tax loss carryforwards....................... 501 --
Proceeds from sale of assets....................................... 4,146 --
Payment of contingent purchase price to Verbex Voice Systems....... (51) --
----------- -----------
Net cash provided by (used in) investing activities........... 434 (1,049)
----------- -----------
Financing Activities:
Proceeds from exercises of common stock options.................... 12 19
Issuance of common stock pursuant to Employee Stock Purchase Plan.. -- 31
----------- -----------
Net cash provided by financing activities..................... 12 50
----------- -----------
Decrease in cash and cash equivalents................................. (1,385) (2,779)
Cash and cash equivalents, beginning of period........................ 2,438 9,149
----------- -----------
Cash and cash equivalents, end of period.............................. 1,053 6,370
Short-term investments, end of period................................. 6,017 5,382
----------- -----------
Cash, cash equivalents and short-term investments,
end of period...................................................... $ 7,070 $ 11,752
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Unrealized loss on short-term investments..................... $ (5) $ (4)
=========== ===========
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 December 31, 1999 and for the three month and six month
periods ended December 31, 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 December 31,
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
and six months ended December 31, 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 December 31, 1999. Diluted income per share for the six
months ended December 31, 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. Due to the
company's net loss for the three months ended December 31, 1999, the effect
of including outstanding common stock options in the calculation of net
loss per share would be anti-dilutive. 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 for the three months ended December 31, 1999. All common stock
equivalents consist of common stock options. For the six months ended
December 31, 1999, common stock options used in computing diluted income
per share totaled 14,000. As of December 31, 1999, the Company had stock
options outstanding to purchase 2,371,850 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 and six months ended December 31, 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 for the three and six
months ended December 31, 1998.
3. REVENUE RECOGNITION
The Company generates revenues from products and services. Product
revenues consist of product revenue, license fees, and royalties and
recurring revenues. Product sales represent shipments of portable and
stationary voice-based products and solutions for various industrial and
warehouse markets. Revenues from product sales are generally recognized
upon shipment, provided there are no significant post-delivery obligations.
The Company began shipping voice-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 voice-based software applications acquired in the Verbex
transaction. License fees are generally recognized upon shipment of the
6
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underlying technologies, 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
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. COMPREHENSIVE INCOME (LOSS)
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
losses on available-for-sale securities.
The following reconciles net income (loss) to comprehensive income
(loss) for the three and six month periods ended December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income (loss).... $ (665) $ (835) $ 2,018 $ (1,958)
Other comprehensive income:
Unrealized (loss) on
available-for-sale securities.. (4) (12) (5) (4)
--------- --------- --------- ---------
Comprehensive net income(loss).. $ (669) $ (847) $ 2,013 $ (1,962)
========= ========= ========= =========
</TABLE>
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 December 31,
1999, the escrow balance was released from 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.
7
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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.
7. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" during fiscal year 1999. Prior to the
Company's acquisition of Verbex in February 1999 (Note 5), the Company had
been managed in one operating segment. Since the Verbex acquisition, the
Company has been managed in two operating segments: industrial voice-based
and speech compression technologies. The voice-based solutions business
relates to the Company's current business focus since the Verbex
acquisition in February 1999. The speech compression technologies business
relates to the Company's business focus prior to the Verbex acquisition in
February 1999. In September 1999, the Company sold substantially all of the
assets related to the speech compression business to Ascend. In connection
with the sale to Ascend, the Company received a license back from Ascend to
service the Company's existing speech compression licensees, and to
continue to license the speech compression technologies for uses that are
not competitive with Ascend, subject to the consent of Ascend. The Company
does not expect to pro-actively market the speech compression technologies
in the future, and expects new licensing activity relating to the speech
compression technologies business to decrease significantly over time.
Business segment information for the six months ended December 31,
1999 is included in the table below. Corporate and administrative overhead
expenses, including costs related to executive management, accounting and
finance, information systems and human resources are included in the speech
compression technologies segment. Intangible assets and goodwill related to
the Verbex acquisition (Note 5), and the amortization of those assets, are
included in the industrial voice-based products segment.
<TABLE>
<CAPTION>
Voice Based Speech Compression
Products Segment Technologies Segment Total
---------------- -------------------- -----
<S> <C> <C> <C>
Revenues $ 731 $ 1,231 $ 1,962
Loss from operations (2,298) (166) (2,464)
Depreciation and amortization 655 124 779
Identifiable assets 5,096 8,429 13,525
</TABLE>
8
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Item 2. Management's discussion and analysis of results of operations and
financial condition
This report contains forward-looking statements. Such statements are
subject to certain factors that may cause Voxware's plans to differ or
results to vary form those expected including the risks associated with
Voxware's need to introduce new and enhanced products and services in order
to increase market penetration and the risk of obsolescence of its products
and services due to technological change; Voxware's need to attract and
retain key management and other personnel with experience in providing
integrated voice-based solutions for e-logistics, specializing in the
supply chain sector; the potential for substantial fluctuations in
Voxware's results of operations; competition from others; Voxware's
evolving distribution strategy and dependence on its distribution
channels"; the potential that speech products will not be widely accepted;
Voxware's need for additional capital; and a variety of risks set forth
from time to time in Voxware's filings with the Securities and Exchange
Commission. Voxware undertakes no obligation to publicly release results of
any of these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrences of
unexpected results.
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 is now focusing its efforts on
developing, marketing and selling integrated voice-based solutions to the
warehousing and manufacturing markets as well as other industrial markets.
In our industrial integrated voice-based solutions business, we
generate revenues primarily from product sales, licenses and development
services. Product sales consist of: portable devices and software used for
various mobile industrial and warehouse applications; stationary speech-
recognition devices, primarily used for warehouse receiving and package
sorting applications; and accessories that complement our product
offerings, including microphones, headsets and computer hardware.
Development services consist of providing technical resources and
assistance to customer-specific development. Revenues from product sales
are generally recognized when products are shipped.
Prior to our acquisition of Verbex, Voxware generated revenues
relating to its speech and audio coding business from fees for software
product licenses and fees for services provided. Product revenues consist
of 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,
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.
9
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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 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 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.
Furthermore, 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.
While we will continue to take advantage of favorable opportunities to
license our speech coding technologies in the future, we do not dedicate
significant resources to the development, marketing or licensing of our
speech coding technologies. The majority of our existing licensees of our
speech compression products compete in the multimedia internet software
market and we believe that a significant number of these licensees 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.
As described previously, since our acquisition of Verbex in February
1999, our primary business focus is developing, marketing and selling
industrial integrated voice-based solutions. As our business focus has
changed, we are developing new strategic alliances to market our
integrated voice-based solutions.
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 December 31, 1999, Voxware had an
accumulated deficit of $18,285,000. In at least the near term quarters, we
expect to incur net losses as we pursue the Verbex 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 customers that incorporate our products, the
introduction of new products or services by 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 customers and general economic
conditions.
10
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Results of Operations
Revenues
Voxware recorded revenues of $1,012,000 for the three months ended
December 31, 1999 compared to revenues of $712,000 for the three months
ended December 31, 1998. The $300,000 increase in total revenues reflects
$218,000 of voice-based product sales (which we began selling in February
1999 as a result of our purchase of Verbex) and a $545,000 increase in
license fees, offset by decreases of $290,000 in service revenues and
$173,000 in royalties and recurring revenues from the speech compression
business. On a year to date basis, total revenue increased $699,000 from
$1,263,000 for the six months ended December 31, 1998 to $1,962,000 for the
six months ended December 31, 1999. This increase can be attributed to
$500,000 which was obtained through amending an existing customer contract
to license some of our speech coding technologies. This customer accounted
for 49% and 25%, respectively, of total revenues in the three and six month
periods ended December 31, 1999, and 8% and 4% of total revenues in the
three and six month period ended December 31, 1998. While we will continue
to take advantage of favorable opportunities to license our speech coding
technologies in the future, we do not dedicate significant resources to the
development, marketing or licensing of our speech coding technologies.
Total product revenues increased $590,000 from $388,000 in the three
months ended December 31, 1998 to $978,000 in the three months ended
December 31, 1999. In the six month period ended December 31, 1999, product
revenues totaled $1,812,000, reflecting an increase of $1,039,000 from
product revenues of $773,000 for the six months ended December 31, 1998.
The increase in product revenues for the six month period reflects $656,000
in industrial voice-based product sales (which we began selling in February
1999 as a result of our purchase of Verbex) and a $507,000 increase in
license fees, offset by a decrease of $124,000 in royalties and recurring
revenue from the speech compression business. For the three month periods
ended December 31, 1999 and 1998, approximately 22% and none of the
Company's product revenues were attributable to voice-based sales,
respectively, 77% and 53% were attributable to license fees, respectively,
and 1% and 47% were attributable to royalties and recurring revenues,
respectively. For the six month periods ended December 31, 1999 and 1998,
approximately 36% and none of the Company's product revenues were
attributable to integrated voice-based solutions, respectively, 53% and
58% were attributable to license fees, respectively, and 11% and 42% were
attributable to royalties and recurring revenues, respectively. Since our
acquisition of Verbex in February 1999, our primary business focus is
developing, marketing and selling integrated voice-based solutions to the
warehousing, manufacturing and other industrial markets. As a result of
this change in business focus, we anticipate sales of these voice-based
products to become a more significant part of our product revenues.
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 December 31, 1999,
service revenues totaled $34,000, reflecting a decrease of $290,000 from
service revenues of $324,000 for the three months ended December 31, 1998.
For the six months ended December 31, 1999, service revenues totaled
$150,000, reflecting a decrease of $340,000 from service revenues of
$490,000 for the six months ended December 31, 1998. The decrease in
service revenues is primarily attributable to a decline in customer
maintenance support revenues because the Company had a smaller portfolio of
customers for these services during the three and six months ended December
31, 1999 than it did for the three and six months ended December 31, 1998,
and a decline in development services revenues as a result of the shift in
focus away from a custom development-based OEM business to the operation of
Verbex's business.
11
<PAGE>
Cost of Revenues
Cost of revenues decreased $17,000 from $164,000 for the three months
ended December 31, 1998 to $147,000 for the three months ended December 31,
1999. The decrease in cost of revenues was attributable to the decrease in
cost of service revenues, partially offset by an increase in cost of
product revenues. Cost of revenue increased $214,000 to $451,000 for the
six months ended December 31, 1999 compared to $237,000 for the six months
ended December 31, 1998. This increase is attributable to our acquisition
of Verbex in February 1999 and the change in our primary business focus to
selling integrated voice-based solutions. An increase in cost of product
revenues, offset by a decrease in cost of service revenues is reflective of
the change in composition of our revenues.
Cost of product revenues of $137,000 and $396,000 for the three and
six months ended December 31, 1999, respectively, reflect costs associated
with shipment of voice-based hardware products related to the Verbex
business. As the Verbex acquisition occurred during February 1999, no such
products were sold during the three and six month period ended December 31,
1998. As of December 31, 1999, Voxware had a manufacturing staff of four
compared to none at December 31, 1998.
Cost of services revenues decreased $154,000 from $164,000 in the
three months ended December 31, 1998 to $10,000 in the three months ended
December 31, 1999. Cost of service 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 $182,000 from $237,000 in the six months
ended December 31, 1998 to $55,000 for the six months ended December 31,
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 $596,000 (38%) from $1,554,000
in the three months ended December 31, 1998 to $2,150,000 in the three
months ended December 31, 1999. In the six month period ended December 31,
1999, operating expenses totaled $3,975,000, reflecting a $636,000 (19%)
increase from total operating expenses of $3,339,000 for the six month
period ended December 31, 1998. Excluding amortization of purchased
intangibles totaling $308,000 and $639,000 for the three and six months
ended December 31, 1999, respectively, and none for the three and six
months ended December 31, 1998, operating expenses increased by $288,000
(19%) and decreased by $3,000 for the respective three and six month
periods. The increase for the three month period ended December 31, 1999
from the three months ended December 31, 1998 is due to higher costs in
research and development reflecting the impact of product development costs
on the integrated voice-based solutions business. Total operating costs for
the six month period ended December 31, 1999 remained relatively unchanged
from the six months ended December 31, 1998. As of December 31, 1999, the
Company's headcount totaled 35, compared to a total headcount of 33 as of
December 31, 1998.
Research and development expenses primarily consist of employee
compensation and equipment depreciation and lease expenditures related to
product research and development. Reflecting Voxware's continued commitment
to development of its voice-based products, research and development
expenses increased $289,000 (67%) from $434,000 in the three months ended
December 31, 1998 to $723,000 in the three months ended December 31, 1999.
New product development and a 25% increase in workforce have created this
increase. In the six month period ended December 31, 1999 research and
development expenses totaled $1,194,000, reflecting an increase of $83,000
(7%) from research and development expenses of $1,111,000 for the six month
period ended December 31, 1998. The current fiscal year includes costs
associated with the development of voice-based products and solutions,
which were not incurred through the six months ended December 31, 1998.
12
<PAGE>
Sales and marketing expenses primarily consist of employee
compensation (including direct sales commissions), travel expenses and
trade shows. Sales and marketing expenses decreased $121,000 (17%) from
$725,000 in the three months ended December 31, 1998 to $604,000 in the
three months December 31, 1999. In the six month period ended December 31,
1999, sales and marketing expenses totaled $1,174,000, reflecting a
decrease of $196,000 (14%) from sales and marketing expenses of $1,370,000
for the six months ended December 31, 1998. The decrease in sales and
marketing expense is reflective of the Company's change in business focus
since the acquisition of Verbex in February 1999, to developing, marketing
and selling integrated voice-based solutions to warehousing, manufacturing
and other industrial markets. While the Company has been in the process of
developing their voice-based product, a decrease of sales and marketing
expense has resulted.
General and administrative expenses consist primarily of employee
compensation and fees for insurance, rent, office expenses and professional
services. General and administrative expenses increased $120,000 (30%) from
$395,000 in the three months ended December 31, 1998 to $515,000 in the
three months ended December 31, 1999. General and administrative expenses
increased $110,000 (13%) from $858,000 for the six months ended December
31, 1998 to $968,000 for the six months ended December 31, 1999. As of
December 31, 1999, we had a general and administrative staff of 6 compared
to 8 at December 31, 1998. The increase in general and administrative
expense is due to costs associated with the addition of our Cambridge
office and consulting fees related directly to our acquisition of the
Verbex business, which are partly offset by a reduction in headcount.
Amortization of purchased intangibles totaled $308,000 and
$639,000, respectively, for the three and six month periods ended December
31, 1999. These intangibles related to the acquisition of Verbex in
February 1999. Intangibles capitalized from the Verbex acquisition
approximated $5,131,000, and those intangibles are being amortized over
four years.
Interest Income
Interest income decreased $52,000 to $119,000 for the three months
ended December 31, 1999 from $171,000 for the three months ended December
31, 1998. The decrease is primarily related to the decrease in 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 $5,102,000 plus
transaction costs in February 1999. As of December 31, 1999, Voxware's
cash, cash equivalents and short-term investments portfolio totaled
$7,070,000 compared to $11,752,000 at December 31, 1998.
Income Taxes
As of December 31, 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 December 31, 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.
Gain on Sale of Tax Loss Carryforwards
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 net operating loss carryforwards. Voxware received a
determination letter from the State of New Jersey to sell $7,420,000 of its
New Jersey State net operating losses which, upon the
13
<PAGE>
sale provided Voxware $501,000 in cash as of December 31, 1999. The
remaining $7,480,000, if approved and sold, could provide Voxware with up
to an additional $500,000.
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. For the six months ended December 31, 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 December 31, 1999, we had a total of $7,070,000 in cash, cash
equivalents and short-term investments consisting of $1,053,000 of cash and
cash equivalents and $6,017,000 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. As of December 31 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 six months ended December 31, 1999, cash used in operating
activities totaled $1,831,000. Net income for the period totaled
$2,018,000, which was comprised of : loss from operations totaling
$1,643,000, offset by $3,799,000 gain on the sale of substantially all of
the assets of our speech coding business to Ascend and a gain on the sale
of tax credits of $501,000, amortization totaling $639,000 and changes in
operating assets and liabilities. For the six months ended December 31,
1998, cash used to fund operations totaled $1,780,000. Cash used to fund
operations was primarily attributable to the net operating loss of
$1,958,000.
For the six months ended December 31, 1999, cash provided by investing
activities totaled $434,000, which consisted of $4,014,000 in net purchases
of short-term investments, $148,000 in purchases of property and equipment,
proceeds from the sale of net operating loss carryforwards totaling
$501,000, proceeds from the sale of assets to Ascend for $4,146,000 and a
payment of $51,000 for a contingent purchase price adjustment to Verbex
Voice Systems for the purchase of substantially all of the assets in
February 1999. For the six months ended December 31, 1998, cash used by in
investing activities totaled $1,049,000, which reflected $998,000 in net
purchases of short-term investments and $51,000 in equipment purchases. For
the six months ended December 31, 1999 and 1998, cash provided by financing
activities totaled $12,000 and $50,000, 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 December 31, 1999 naming
the lessor of the office facility beneficiary of the standby letter of
credit in the event that we default on the
14
<PAGE>
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"
in the December 31, 1999 balance sheet.
We have no material commitments for capital expenditures except for
those under operating leases for our facilities and leased equipment. At
December 31, 1999, our working capital totaled approximately $6,994,000. 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 December 31, 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 evaluated our Internal Programs and Systems to identify potential
Year 2000 compliance problems. While we are not currently aware of any
internal Year 2000 failures impacting our operations, we continue to
monitor the compliance of our Internal Programs and Systems.
In addition to our Internal Programs and Systems, the products we sell
and license externally to our 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. We have tested our
Verbex products and while we are not currently aware of any problems
impacting the use of these products, we continue to advise the users of
those products to take precautions to mitigate Year 2000 issues. Voxware is
not aware of any Year 2000 issues with our External Programs. We will
continue to monitor internal systems and external parties to ensure that
possible Year 2000 interruptions are identified and resolved.
Based on management's best estimates, the total cost of these efforts and
upgrades were approximately $50,000, consisting primarily of upgrading our
inventory system, testing new computers and upgrade of third party software
programs.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We do not engage in significant activity with respect to market risk
sensitive instruments. Accordingly, our risk with respect to market risk
sensitive instruments is immaterial.
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
27.1 Financial Data Schedule (FDS) for current reporting
periods ended December 31, 1999.
(b) Reports on Form 8-K. Current Report on Form 8-K filed October 6,
1999 announcing the closing of our sale to Ascend Communications,
Inc. (a subsidiary of Lucent Technologics, Inc.) of substantially
all of the assets of our speech coding business and including our
unaudited pro forma condensed combined statements of operations
for the year ended June 30, 1999 and unaudited pro forma
condensed combined balance sheet as of June 30, 1999, reflecting
our acquisition of substantially all of the assets of Verbex
Voice Systems, Inc. and our sale of substantially all or our
speech coding assets to Ascend.
___________________________________________________________________________
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 11, 2000
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. CONSOLIDATED FINANCIAL STATEMENTS FOR THE 3 AND 6 MONTHS ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> OCT-01-1999 JUL-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 1,053 1,053
<SECURITIES> 6,017 6,017
<RECEIVABLES> 1,089 1,089
<ALLOWANCES> 369 369
<INVENTORY> 542 542
<CURRENT-ASSETS> 8,537 8,537
<PP&E> 1,324 1,324
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