SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 2000 0-20706
DATA RACE, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-2272363
(State of Incorporation) (I.R.S. Employer Identification No.)
6509 Windcrest, Suite 120
Plano, Texas 75024
Telephone (972) 265-4000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- ----
On February 11, 2001, there were approximately 26,891,000 outstanding shares of
Common Stock, no par value.
1
DATA RACE, Inc.
INDEX TO FORM 10-Q
Page
Number
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PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Interim Condensed Financial Statements (Unaudited):
Condensed Balance Sheets as of December 31, 2000 and June 30, 2000.. 3
Condensed Statements of Operations for the Three Months
and Six Months Ended December 31, 2000 and 1999..................... 4
Condensed Statements of Cash Flows for the Six Months
Ended December 31, 2000 and 1999.................................... 5
Notes to Interim Condensed Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk........... 11
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.................................................. 12
Item 2. Changes in Securities.............................................. 12
Item 3. Defaults Upon Senior Securities.................................... 12
Item 4. Submission of Matters to a Vote of Security Holders................ 12
Item 5. Other Information.................................................. 13
Item 6. Exhibits and Reports on Form 8-K................................... 13
SIGNATURES.................................................................. 14
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2
PART I. FINANCIAL INFORMATION
ITEM 1. Interim Condensed Financial Statements
-----------------------------------------------
DATA RACE, Inc.
CONDENSED BALANCE SHEETS
UNAUDITED
As of
-------------------------------------------------
Dec. 31, 2000 June 30, 2000
----------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 2,176,176 $ 11,059,061
Accounts receivable, net....................................... 102,804 6,401
Inventory...................................................... 2,312,892 249,876
Notes receivable, current...................................... 346,667 233,333
Prepaid expenses and deposits.................................. 585,371 206,001
----------------------- ----------------------
Total current assets......................................... 5,523,910 11,754,672
Notes receivable, non-current.................................... - 116,667
Property and equipment, net...................................... 2,005,893 1,235,919
Other assets, net................................................ 84,630 84,630
----------------------- ----------------------
Total assets................................................. $ 7,614,433 $ 13,191,888
======================= ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 1,066,851 $ 504,001
Accrued expenses............................................... 844,813 960,346
Obligations under capital lease, current....................... 28,818 -
----------------------- ----------------------
Total current liabilities.................................... 1,940,482 1,464,347
Obligations under capital lease, non-current 62,570 -
Shareholders' equity:
Common stock............................................... 60,855,962 59,806,425
Additional paid in capital................................. 7,673,310 7,673,310
Retained deficit........................................... (62,917,891) (55,752,194)
----------------------- ----------------------
Total shareholders' equity................................... 5,611,381 11,727,541
Total liabilities and shareholders' equity.................. $ 7,614,433 $ 13,191,888
======================= ======================
See accompanying notes to interim condensed financial statements
3
DATA RACE, Inc.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
Three Months Ended Dec. 31, Six Months Ended Dec. 31,
-------------------------------------------- -------------------------------------------
2000 1999 2000 1999
--------------------- ------------------- ------------------- --------------------
Total revenue........................... $ - $ 79,897 $ 6,042 $ 263,065
Cost of revenue......................... 166,243 196,949 339,541 365,644
--------------------- ------------------- ------------------- --------------------
Gross profit...................... (166,243) (117,052) (333,499) (102,579)
Operating expenses:
Engineering and product
development.......................... 1,359,735 816,927 2,485,710 1,654,083
Sales and marketing................... 1,419,930 464,198 2,580,813 992,817
General and administration............ 1,072,586 688,232 2,076,253 1,930,227
--------------------- ------------------- ------------------- --------------------
Total operating expenses.......... 3,852,251 1,969,357 7,142,776 4,577,127
--------------------- ------------------- ------------------- --------------------
Operating loss.................... (4,018,494) (2,086,409) (7,476,275) (4,679,706)
Other income............................ 70,395 125,749 310,579 227,046
--------------------- ------------------- ------------------- --------------------
Loss from continuing operations (3,948,099) (1,960,660) (7,165,696) (4,452,660)
Income from discontinued operation - 57,094 - 170,553
--------------------- ------------------- ------------------- --------------------
Net loss $ (3,948,099) $ (1,903,566) $ (7,165,696) $ (4,282,107)
===================== =================== =================== ====================
Per share data:
Net loss........................ (3,948,099) (1,903,566) (7,165,696) (4,282,107)
Effect of beneficial conversion
feature of convertible
preferred stock.............. - (79,723) - (159,445)
--------------------- ------------------- ------------------- --------------------
Net loss applicable to common
stock......................... $ (3,948,099) $ (1,983,289) $ (7,165,696) $ (4,441,552)
===================== =================== =================== ====================
Net basic/diluted loss from continuing
operations per common share $ (0.15) $ (0.09) $ (0.27) $ (0.21)
===================== =================== =================== ====================
Net basic/diluted loss per common
share $ (0.15) $ (0.09) $ (0.27) $ (0.21)
===================== =================== =================== ====================
Weighted average shares outstanding..... 26,682,000 21,145,000 26,445,000 20,738,000
--------------------- ------------------- ------------------- --------------------
See accompanying notes to interim condensed financial statements
4
DATA RACE, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
Six Months Ended Dec. 31,
----------------------------------------------------
2000 1999
------------------------- ----------------------
Cash flows from operating activities:
Net loss........................................................ $ (7,165,696) $ (4,282,107)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization.................................. 234,659 140,225
Non-cash consulting fee........................................ - 520,086
Gain on sale of assets......................................... (3,529)
Income from discontinued operations............................ - (170,553)
Changes in assets and liabilities:
Accounts and notes receivable.................................. (93,070) 34,374
Inventory...................................................... (2,063,016) 21,447
Prepaid expenses, deposits, and other assets................... (379,370) 145,702
Accounts payable............................................... 562,850 (131,866)
Accrued expenses............................................... (115,533) 6,921
------------------------- ----------------------
Net cash used in operating activities......................... (9,022,705) (3,715,771)
------------------------- ----------------------
Cash flows from investing activities:
Purchase of property and equipment.............................. (891,072) (107,273)
Proceeds from sale of property and equipment.................... 4,146 -
Provided by discontinued operations............................. - 317,334
------------------------- ----------------------
Net cash used in investing activities......................... (886,926) 210,061
------------------------- ----------------------
Cash flows from financing activities:
Payment on capital leases....................................... (22,791) -
Net proceeds from the issuance of common stock and related
warrants....................................................... 1,049,537 4,089,684
------------------------- ----------------------
Net cash provided by financing activities..................... 1,026,746 4,089,684
------------------------- ----------------------
Net increase (decrease) in cash and cash equivalents............. (8,882,885) 583,974
Cash and cash equivalents at beginning of period................. 11,059,061 7,654,978
------------------------- ----------------------
Cash and cash equivalents at end of period....................... $ 2,176,176 $ 8,238,952
========================= ======================
See accompanying notes to interim condensed financial statements
5
DATA RACE, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1) Summary of Significant Accounting Policies
----------------------------------------------
Description of Business
DATA RACE, Inc. d/b/a IP AXESS (the "Company") provides IP based remote worker
solutions over multiple access media. The Company's VocalWare IP client/server
product line provides users in remote locations with simultaneous access to
critical corporate resources including phone, fax, Internet, and E-mail over a
single connection via: DSL, cable modem, LAN, Frame Relay, ATM or high speed
dial up through VPN, local ISP POP, or PSTN. The Company, after exiting the
network multiplexer business, operates in one business segment.
Basis of Presentation
The unaudited interim financial statements reflect all adjustments (consisting
of normal recurring accruals) that in the opinion of management are necessary
for a fair presentation of the financial position, results of operations and
cash flows for such periods. These financial statements should be read in
conjunction with the Company's financial statements and notes thereto included
in the June 30, 2000 Annual Report on Form 10-K and the Quarterly Report on Form
10-Q for the quarter ended September 30, 2000. The condensed balance sheet data
as of June 30, 2000 included herein has been derived from such audited financial
statements. Interim period results are not necessarily indicative of the
results to be expected for any future periods or the full year.
Revenue Recognition
Revenue is generally recognized upon shipment of products to customers or when
contractual services have been provided to customers, the fee and terms are
fixed or determinable, and collection is reasonably assured. Revenue from
service obligations and licensing agreements are deferred and recognized ratably
over the period of the obligation or agreement. The Company recognizes revenue
and gross profit from evaluation units shipped only upon receipt of payment or
upon customer acceptance and reasonably assured collection.
2) Liquidity and Capital Resources
----------------------------------
Operating losses have had and continue to have a substantial negative effect on
the Company's cash balance. The Company's goal of returning to profitability
and developing a more dependable revenue base depends on the success of the
VocalWare IP product line.
6
To successfully penetrate its target markets, the Company expects that
significant additional resources will need to be expended in order to expand its
sales and marketing infrastructure and operation systems, and to finance
inventory and receivables.
The Company's ability to sustain operations, make future capital expenditures,
and fund the development and marketing of new or enhanced products is highly
dependent on existing cash, the ability to raise additional capital, and the
ability to successfully develop and sustain strategic relationships. The
failure to obtain such financing when needed and to attract a strategic partner
would have a substantial adverse effect on the Company.
2) Earnings Per Share
---------------------
Net loss per share of common stock is presented in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. Under SFAS No. 128, basic earnings/loss per share excludes
dilution for potentially dilutive securities and is computed by dividing income
or loss available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings/loss per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Diluted loss per share and basic loss per share are the same, as no potential
common shares are to be included in the computation when a loss from continuing
operations available to common shareholders exists.
3) Inventory
------------
Inventory is valued at the lower of standard cost (approximates first-in, first-
out method) or market (net realizable value). Inventory consists of the
following:
December 31, June 30,
2000 2000
---------------------- ----------------------
Finished goods $ 1,940,104 $ 138,014
Work in process 68,683 80,151
Raw materials 304,105 31,711
---------------------- ----------------------
Total inventory $ 2,312,892 $ 249,876
====================== ======================
As of December 31, 2000, finished goods inventory included approximately
$391,000 shipped and billed to third parties that is not recorded as costs as
associated revenue has not been recognized and approximately $75,000 of
inventory shipped as evaluation units.
4) Warrants
------------
The following table summarizes the outstanding warrants as of the end of
December 31, 2000 and June 30, 2000, respectively.
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December 31, 2000 June 30, 2000 Price Expiration
June 2000 private placement 471,822 471,822 $ 5.45 Jun 2002
December 1999 private placement 571,429 571,429 3.00 Dec 2001
June 1999 private placement 693,888 693,888 4.02 Jun 2001
November 1998 private placement - 956,655 2.25 Nov 2000
Series C Warrants - 53,977 6.435 Nov 2000
Class A and B second close - 24,968 0.6625 Jul 2000
Class A and B first close - 35,400 0.6625 Jul 2000
--------- ---------
Total warrants outstanding 1,737,139 2,808,139
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In July 2000, remaining warrants for the class A and B first and second close
have expired.
In September 2000, the Company issued 210,222 shares of its common stock in
conjunction with the exercise of 210,222 warrants from the November 1998 private
placement. In a cashless exercise, the Company issued 297,313 shares of it's
common stock as a result of the exercise of 690,333 warrants. The remaining
warrants balance of the November 1998 private placement expired in November
2000.
In November 2000, the remaining balance of Series C warrants expired.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
Results of Operations
In March 2000, the Company sold its network multiplexer line to HT
Communications. Since the second quarter of 1999, the Company has not bid on
additional custom modem business. Therefore, the following discussion is
limited to the Company's continuing operations of its VocalWare IP business
segment. Discontinued operations are discussed separately below.
In the second quarter ended December 31, 2000, the Company shipped VocalWare IP
product and billed approximately $625,000 to third party resellers. Revenue
was not recognized on the shipped servers and clients, as these transactions did
not meet the Company's criteria for revenue recognition. As a result, total
revenue from continuing operations for the three and six months ended December
31, 2000 decreased 100% and 98%, respectively, from the comparable periods for
prior fiscal year.
8
Engineering and product development expenses for the three and six months ended
December 31, 2000 increased 66% and 50%, respectively, from the comparable
periods for the prior fiscal year. This increase was primarily due to outside
contract engineering expenditures and workforce increases for continued
development and enhancements of the VocalWare IP products.
Sales and marketing expenses for the three and six months ended December 31,
2000 increased 206% and 160%, respectively, from the comparable periods of the
prior fiscal year. This increase was primarily due to increased headcount in
the sales staff and travel that are necessary to properly market, coordinate,
distribute, and service VocalWare IP products.
General and administrative expenses for the three and six months ended December
31, 2000 increased 56% and 8%, respectively, from the comparable periods of the
prior fiscal year. This increase reflects increased staffing that management
believes are necessary to support recent organizational growth.
Income tax benefits related to the losses for the three and six months ended
December 31, 2000 were not recognized because the realization of such benefits
is not assured. As of December 31, 2000, the Company had Federal tax net
operating loss carryforwards of approximately $54,000,000 that expire beginning
in 2008. Internal Revenue Code Section 382 limits NOL carryforwards when an
ownership change of more than 50% of the value of stock in a loss corporation
occurs within a three-year period. Accordingly, the ability to utilize
remaining NOL carryforwards may be significantly restricted.
Discontinued Operations
The majority of the Company's revenue in the three and six months of fiscal 2000
resulted from operations that the Company has now exited. Income from
discontinued operations in first two quarters of fiscal 2000 was approximately
$171,000. There was no income from discontinued operations for the
corresponding six months ended December 31, 2000 as the Company exited that and
other related business in March 2000.
Liquidity and Capital Resources
Operating losses have had and continue to have a significant negative effect on
the Company's cash balance. At December 31, 2000, the Company had approximately
$2,176,000 in cash and cash equivalents.
Historically, the majority of the Company's revenue was derived from shipments
of custom modem and network multiplexer products. Revenue from shipments of
custom modems has ended as the market has shifted away from custom modem
products. The Company sold its network multiplexer products business to HT
Communications, Inc in March 2000. The Company has focused all of its resources
on the VocalWare IP product line since May 2000.
9
The Company's strategy is to focus its sales efforts on developing an increasing
number of larger customers using the VocalWare IP products, to develop a new
generation of products that will address the market's need for an easy-to-
install software client that can operate over the new broadband communications
services, including DSL, cable modems, and IP networks, and to establish one or
more strategic partnerships with well-established companies that would enhance
the Company's market presence and credibility and provide financial assistance.
The ability of the Company to successfully execute its strategy to increase
sales is subject to numerous risks and such success cannot be assured. The
Company's return to profitability and development of a more dependable revenue
base depends on the success of the VocalWare IP product line. The Company does
not anticipate a return to profitability as long as its expenditures on the
VocalWare IP system remain disproportionate to revenue.
In February 2001, the Company has received non-binding commitments for
additional financing. Portions of these commitments are expected to be funded
by the end of February 2001.
The Company's ability to sustain operations, make future capital expenditures,
and fund the development and marketing of new or enhanced products is highly
dependent on existing cash, the ability to raise additional capital, and the
ability to successfully develop and sustain strategic relationships. The
failure to obtain such financing when needed and to attract a strategic partner
would have a substantial adverse effect on the Company. The timing and amount
of the Company's future capital requirements cannot be accurately predicted.
The Company believes its current cash balances and commitments for additional
financing will be sufficient to meet its anticipated cash needs for the next 12
months.
In October 2000, the Company entered into a nonbinding agreement to acquire
substantially all the assets of Voiceboard Corporation ("Voiceboard"), a
significant component supplier to the Company. In December 2000, the Company
terminated its offer to acquire VoiceBoard. On January 11, 2001, the Company
notified the Escrow Agent that Voiceboard was in default of the OEM Purchase
Agreement between the Company and Voiceboard and a condition of release of the
escrowed materials had occurred. Voiceboard has disputed the default notice and
the Company is starting the process for a dispute resolution.
Disclosure Regarding Forward Looking Statements
Except for the historical information, this report contains various "forward-
looking statements" which represent the Company's expectations or beliefs
concerning future events, including expectations regarding the rate of use of
existing cash and the success of the Company's strategy to increase sales and
return to profitability. The Company cautions that these forward-looking
statements involve a number of risks and uncertainties and are qualified by
important factors that could cause actual results to differ
10
materially from those in the forward-looking statements. Such factors include
lack of adequate capital; changing market trends and market needs; uncertainty
regarding the breadth of market acceptance of the remote worker products;
uncertainty regarding the length of the sales process; uncertainty regarding the
supply of components; rapid or unexpected technological changes; new or
increased competition from companies with greater resources than the Company;
inability to resolve technical issues or overcome other development obstacles
and the Company's success in developing new strategic and financial
partnerships. Additional factors which qualify forward-looking statements are
set forth in the Company's other SEC filings, including the Form 10-K for fiscal
2000 and the Form 10-Q for the quarter ended September 30, 2000. The Company's
failure to succeed in its efforts, including its development of new strategic
and financial partnerships, could have a material adverse effect on the
Company's financial condition and operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
------------------------------------------------------------------
The Company does not believe that it is currently exposed to material risks
associated with market risk sensitive instruments.
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Part II - Other Information
DATA RACE, Inc.
Item 1. Legal proceedings
---------------------------
None.
Item 2. Changes in securities
------------------------------
None.
Item 3. Defaults upon senior securities
----------------------------------------
None.
Item 4. Submission of matters to a vote of security holders
------------------------------------------------------------
An annual meeting of shareholders of the Company was held on November 9, 2000.
Tom Bishop, Jeffery P. Blanchard, George R. Grumbles, Matthew A. Kenny, Michael
A. McDonnell and Byron Smith were elected as directors of the Company, each to
hold office until the next annual meeting of shareholders or until his successor
has been elected and qualified, subject to earlier resignation or removal.
Additionally, the shareholders approved the DATA RACE, Inc. 2000 Stock Option
Plan, approved the amendment to the Company's Articles of Incorporation to
change its name from DATA RACE, Inc. to IP AXESS, Inc. and ratified the
appointment of KPMG LLP as independent accountants for the 2001 fiscal year.
The results of the voting at the annual shareholders meeting held on November 9,
2000 were as follows:
Proposal No. 1
(Election of Directors)
Company Nominee For Against Non- Votes
--------------- --- ------- -----------
Tom Bishop 21,290,170 - 125,162
Jeffery P. Blanchard 21,303,655 - 111,677
George R. Grumbles 21,296,890 - 118,442
Matthew A. Kenny 21,298,890 - 118,442
Michael A. McDonnell 21,299,570 - 115,762
Byron Smith 21,286,370 - 128,962
12
Proposal No. 2
(Approval of DATA RACE, Inc. 2000 Stock Option Plan)
For Against Abstain Non-Votes
--- ------- ------- ---------
20,819,705 390,564 205,063 -
Proposal No. 3
(Approval of amendment to the Company's Articles of Incorporation to change its
name from DATA RACE, Inc. to IP AXESS, Inc)
For Against Abstain Non-Votes
--- ------- ------- ---------
21,036,277 346,689 32,366 -
Proposal No. 4
(Ratification of KPMG LLP as independent accountants)
For Against Abstain Non-Votes
--- ------- ------- ---------
21,294,191 72,682 48,459 -
Item 5. Other information
--------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits.
-------------
None
(b) Reports on Form 8-K.
-------------------------
A report on Form 8-K was filed on November 20, 2000, to report the resignation
of the Company's independent accountants KPMG L.L.P.
13
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.
DATA RACE, INC.
By: /s/ James G. Scogin
-------------------
James G. Scogin, Vice President,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Date: February 14, 2001
14