CONFORMED COPY
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 September 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from
-------------- to --------------
Commission File Number 0-021403
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.)
Lawrenceville Office Park
P.O. Box 5363
Princeton, New Jersey 08543
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 October 31, 2002
- ----------------------------- --------------------------------------
Common Stock, $.001 par value 23,097,711
VOXWARE, INC.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
Three Months Ended September 30, 2002 and 2001 (unaudited)....3
Consolidated Balance Sheets
September 30, 2002 (unaudited) and June 30, 2002..............4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 2002 and 2001 (unaudited)....5
Notes to Consolidated Financial Statements........................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.............................................................19
ITEM 4. CONTROLS AND PROCEDURES...........................................19
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................21
SIGNATURES...................................................................22
CERTIFICATIONS...............................................................23
2
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VOXWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
----- ----
(in thousands, except per share data)
Revenues:
Product revenues:
Product sales.................................. $ 679 $245
License fees................................... 457 41
Royalties and recurring revenues............... 107 89
------ -----
Total product revenues........................ 1,243 375
Service revenues.................................. 329 163
------ -----
Total revenues............................. 1,572 538
Cost of revenues:
Cost of product revenues........................ 425 117
Cost of service revenues........................ 170 89
------ -----
Total cost of revenues....................... 595 206
------ -----
Gross profit........................... 977 332
------ -----
Operating expenses:
Research and development........................ 438 470
Sales and marketing............................. 234 382
General and administrative...................... 396 723
Amortization of purchased intangibles........... 325 325
------ -----
Total operating expenses.................. 1,393 1,900
------ -----
Operating loss..................................... (416) (1,568)
------ -----
Interest income.................................... 2 5
Adjustment of warrants to fair
value.............................................. (1) 10
------ -----
Net loss........................................... $(415) $(1,553)
====== =======
Accretion of preferred stock to redemption
value.............................................. $(267) $(129)
====== =======
Beneficial conversion feature treated as a
dividend........................................... $(34) $--
====== =======
Warrants issued to preferred stockholders
treated as a dividend.............................. $-- $(139)
====== =======
Net loss applicable to common stockholders......... $(716) $(1,821)
====== =======
Basic and diluted net loss per share
applicable to common stockholders..................$(0.03) $(0.12)
====== =======
Weighted average number of common shares -
basic and diluted.................................. 21,766 14,938
====== =======
The accompanying notes are an integral part of these statements.
3
VOXWARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2002 2002
------------- ------------
(unaudited)
(In thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 69 $ 6
Accounts receivable, net............................... 1,161 1,315
Inventory, net......................................... 528 678
Prepaid expenses and other current assets.............. 73 82
------------- ------------
Total current assets................................ 1,831 2,081
Property and equipment, net............................... 224 297
Intangible assets, net.................................... 444 769
Other assets, net......................................... 54 44
------------- ------------
$ 2,553 $ 3,191
============= ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 1,874 $ 2,080
Deferred revenues...................................... 396 387
------------- ------------
Total current liabilities........................... 2,270 2,467
------------- ------------
Warrants to purchase common stock......................... 1 --
Series B mandatorily redeemable convertible
preferred stock (liquidation value
$2,929,310 and $2,894,375, respectively)............... 2,812 2,900
Series C mandatorily redeemable convertible
preferred stock (liquidation value
$1,909,766 and $1,839,904, respectively)............... 1,460 1,299
Stockholders' equity (deficit):
Common stock, $.001 par value,
180,000,000 shares authorized;
22,823,860 and 21,573,860 shares
issued and outstanding at
September 30, 2002 and June 30, 2002, respectively..... 23 21
Additional paid-in capital............................. 44,537 44,338
Accumulated deficit.................................... (48,550) (47,834)
------------- ------------
Total stockholders' deficit......................... (3,990) (3,475)
------------- ------------
Total liabilities and
stockholders' equity (deficit).................. $ 2,553 $ 3,191
============= ============
The accompanying notes are an integral part of these statements.
4
VOXWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------- ------------
(In thousands)
Operating activities:
Net loss............................................... $ (415) $ (1,553)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization.......................... 398 416
Provision for doubtful accounts........................ 33 --
Adjustment of warrants to fair value................... 1 (10)
Changes in operating assets and liabilities:
Accounts receivable.................................... 121 148
Inventory.............................................. 150 63
Prepaid expenses and other current assets.............. 9 229
Other assets, net...................................... (10) 28
Accounts payable and accrued expenses.................. (233) 442
Deferred revenues...................................... 9 40
------------- ------------
Net cash provided by (used in) operating activities. 63 (197)
------------- ------------
Investing activities:
Sales and maturities of short-term investments......... -- 17
------------- ------------
Net cash provided by investing activities........... -- 17
------------- ------------
Financing activities:
Proceeds from exercise of warrants..................... -- 1
------------- ------------
Net cash provided by financing activities........... -- 1
------------- ------------
Increase (decrease) in cash and cash equivalents.......... 63 (179)
Cash and cash equivalents, beginning of period............ 6 561
------------- ------------
Cash and cash equivalents, end of period.................. $ 69 $ 382
============= ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Accretion of preferred stock to redemption value.......... $ 267 $ 129
============= ============
Warrant issued to preferred stockholder
treated as a dividend.................................. $ -- $ 139
============= ============
Beneficial conversion feature treated as a dividend....... $ 34 $ --
============= ============
Exchange of Series A for Series B Preferred Stock......... $ -- $ 3,231
============= ============
Conversion of Series B Preferred Stock.................... $ 200 $ 91
============= ============
Reclassification of Preferred Stock dividend to
accrued liabilities.................................... $ 28 $ --
============= ============
The accompanying notes are an integral part of these statements.
5
VOXWARE, INC. AND SUBISIDIARY
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, 2002 and for the three month periods ended
September 30, 2002 and 2001, 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 October 15, 2002.
The results of operations and cash flows for the interim period ended
September 30, 2002 are not necessarily indicative of the results to be expected
for the fiscal year ending June 30, 2003 or any other future periods. The
Company has incurred significant operating losses historically, as well as
during the three months ended September 30, 2002. Management believes that
unless the Company is able to secure additional financing, obtain replacement
financing or extend the mandatory redemption dates on the preferred stock, its
cash and cash equivalents will not be adequate to meet the Company's cash
requirements over the next twelve months. The report of our independent
certified public accountants included a going concern modification in their
audit report for the year ended June 30, 2002.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result from
the outcome of this uncertainty.
2. LOSS PER SHARE
Basic and diluted net loss per share applicable to common stockholders was
computed by dividing the net loss by the weighted average number of common
shares outstanding during each of the three months ended September 30, 2002 and
2001. As of September 30, 2002, stock options and warrants (3,599,000
outstanding as of September 30, 2002) have not been included in the diluted loss
per common share calculation, since the impact is anti-dilutive.
Three Months Ended
September 30,
2002 2001
---- ----
(in thousands, except per share data)
Net loss................................... $ (415) $ (1,553)
Accretion of preferred stock to
redemption value........................... (267) (129)
Beneficial conversion feature treated as
a dividend................................. (34) --
Warrants issued to preferred stockholders
treated as a dividend...................... -- (139)
---------- -----------
Net loss applicable to common
stockholders............................... $ (716) $ (1,821)
---------- -----------
Shares used in computing basic and diluted
loss per common share...................... 21,766 14,938
---------- -----------
Basic and diluted loss per common share.... $ (0.03) $ (0.12)
=========== ==========
6
3. REVENUE RECOGNITION
The Company generates revenues from products and services. The products and
services are sold separately as well as combined. The Company combines software,
hardware and professional services for installation, implementation and
maintenance as part of its industrial voice-based solutions (the "solution").
Product revenues consist of product sales, license fees, 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 or completion
of the implementation, if applicable, 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
generally derived from licensing new software products developed internally
since the acquisition of Verbex, from licensing the Company's voice-based
software applications acquired in the Verbex transaction, and from licensing the
Company's speech compression technologies to customers in the multimedia and
consumer devices markets. License fees are generally recognized upon delivery or
implementation of the underlying technologies, provided 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. 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 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. The Company
entered into and completed its initial solution arrangements during 2001.
4. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the SFAS issued SFAS No. 141, "Business Combinations" ("SFAS
141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators are apparent). However, separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives. The Company considers its intangible assets
to have finite lives and will continue to amortize such assets over their
remaining useful lives. As such, the adoption of SFAS 141 and 142 did not have a
material effect on the Company's results of operations or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Assets
Retirement Obligations." ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated assets retirement costs. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 was effective for
the quarter ended September 30, 2002 and the adoption of this pronouncement had
no effect on consolidated results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment for the Disposal of Long-lived Assets" ("SFAS 144"). This Statement
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-lived Assets to be Disposed of." However, SFAS 144 retains the fundamental
provisions of Statement No.121 for (a) recognition and measurement of the
impairment of long -lived assets to be held and used and (b)
7
measurement of long-lived assets to be disposed of by sale. SFAS 144 was
effective for the quarter ended September 30, 2002 and the adoption of this
pronouncement had no effect on the Company's consolidated results of operations
or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting costs associated with the exit or disposal
activities and nullifies EITF Issue No 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity (including
Certain Costs Incurred in a Restructuring)." It applies to costs associated with
an exit activity that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS 144. A liability for
costs associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the adoption of
this Statement to have a material impact its consolidated results of operations
or financial position.
5. COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income (loss) 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 Company does not have comprehensive income items in
the quarters ended September 30, 2002 and 2001.
6. SERIES A, SERIES B AND SERIES C MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND WARRANTS TO PURCHASE COMMON STOCK
The Company has authorized 10,000,000 shares of Preferred Stock with a
$0.001 par value per share. On August 29, 2001, all of the outstanding shares of
Series A Mandatorily Redeemable Convertible Preferred Stock ("Series A
Preferred") were exchanged for Series B Mandatorily Redeemable Convertible
Preferred Stock ("Series B Preferred"). The Company also issued Series C
Mandatorily Redeemable Convertible Preferred Stock ("Series C Preferred") in
December 2001 and February 2002. The Series B Preferred and Series C Preferred
shares have a stated value of $1,000 per share. As of September 30, 2002, 2,550
shares of Series B Preferred and 1,840 shares of Series C Preferred were issued
and outstanding.
On August 15, 2000 the Company completed a $4,000,000 private placement of
Series A Preferred and a warrant (the "Warrant") to purchase common stock Castle
Creek Technology Partners, LLC ("Castle Creek"). The Company sold 4,000 shares
of Series A Preferred, which shares are convertible into shares of common stock,
resulting in proceeds to the Company of approximately $3,660,000, net of cash
transaction costs. The Company is obligated to redeem the Series A Preferred 30
months from the closing. The Series A Preferred has a 7% dividend payable in
cash or equity, at the election of the holder, and is convertible into Voxware
common stock at an initial conversion price of $3.025 per share, subject to
adjustment, as defined. In addition, Castle Creek received a Warrant to purchase
727,273 shares of common stock at an initial exercise price of approximately
$3.44 per share, subject to adjustment set forth in the Warrant. The Company has
the right to require conversion of the Series A Preferred, and to redeem the
Warrant, if its common stock reaches certain price levels over a specified
period of time. The preferred stockholders have certain registration rights, as
defined.
The Company allocated the proceeds, net of cash and non-cash transaction
costs, to the Series A Preferred and Warrant sold to Castle Creek based on the
relative fair value of each instrument. The fair value of the Series A Preferred
was determined based on a discounted cash flow analysis and the fair value of
the Warrant was determined based on the Black-Sholes option-pricing model. As a
result, the Company initially allocated approximately $2,774,000 and $807,000 to
the Series A Preferred and Warrant, respectively. After considering the
allocation of the proceeds to the Series A Preferred and Warrant, the Company
determined that the Series A Preferred contained a beneficial conversion feature
(BCF). The Company recorded the BCF in the amount of approximately $1,244,000,
in a manner similar to a dividend during the quarter ended September 30, 2000.
The Warrant has been classified as a liability in the accompanying consolidated
balance
8
sheet because the Warrant gives the holder the choice of net cash settlement at
a time when other shareholders would not have such a choice (upon a merger or
change in control, as defined). As of September 30, 2002, the outstanding
Warrant was adjusted to its fair value based upon the closing stock price as of
that date. As a result, the Company adjusted the Warrant to $1,000, representing
the fair market value as of September 30, 2002, using the Black-Sholes
option-pricing model. The Series B Preferred are convertible into shares of
common stock on the date of issuance.
On April 19, 2001, the Company consummated a private placement of shares of
common stock and a common stock warrant to Castle Creek pursuant to the terms of
a Securities Purchase Agreement (the "Purchase Agreement"). Pursuant to the
private placement, the Company sold 714,000 shares (the "Common Shares") of
common stock and a warrant to purchase an additional 2,142,000 shares of its
common stock (the "Purchase Warrant"). The Common Shares were sold at a price of
$.34 per share. The exercise price of the Purchase Warrant is $1.25 per share in
the case of an optional exercise by Castle Creek, or 80% of the then market
value (as defined in the Purchase Warrant) of the common stock in the case of a
mandatory exercise required by the Company. Net proceeds to the Company from the
private placement were approximately $276,000. Pursuant to the terms of the
Purchase Agreement, the Company used $48,200 of such proceeds to repurchase 46
shares of the Company's Series A Preferred from Castle Creek. The balance of the
proceeds was used by the Company for general working capital purposes.
On August 29, 2001 the Company issued 708,656 remedy warrants to Castle
Creek. These remedy warrants allow Castle Creek to purchase shares of common
stock at $0.01 per share and expire on August 28, 2011. Using the Black-Scholes
option-pricing model, the Company determined the fair value of the remedy
warrants to be $139,000. The Company recorded the issuance of the remedy
warrants as a Preferred Stock dividend during the quarter ended September 30,
2001. Through September 30, 2002, Castle Creek exercised all of the remedy
warrants, resulting in gross proceeds of $7,087.
In August of 2001, the Company exchanged its Series A Preferred for shares
of Series B Preferred. As the term, rights and preferences of the Series B are
substantially similar to those of the Series A, the Company recorded the
exchange based upon the carrying value of the Series A Preferred. The Company
has accreted the Series A Preferred and is accreting Series B Preferred to their
redemption values using the effective interest method through the redemption
period of 30 months. Accordingly, the Company recorded $140,000 and $129,000 of
accretion during the quarters ended September 30, 2002 and 2001, respectively.
In addition, pursuant to the terms of the August 2000 Series A Preferred
transaction, any reset of the conversion price is treated as a dividend to the
holder of the Series A Preferred. Since the conversion price adjustment was part
of the August 2000 transaction, a contingent BCF existed at the August 15, 2000
commitment date. The contingent BCF was recorded upon resetting the conversion
price to $0.34 on April 19, 2001 and the dividend was recorded.
In August 2000, the contingent BCF was measured at zero. As a result, the
dividend was calculated based on the difference between the reduced conversion
price ($0.34) and the fair value of the common stock issuable upon conversion of
the Series A Preferred as of April 19, 2001. The charge for the BCF is limited
to the carrying value of the Series A Preferred after the initial allocation of
the cash proceeds received from the Series A Preferred and the Warrant. At April
19, 2001, the Company recorded a $1,669,000 dividend charge for the contingent
BCF. Through August 31, 2001, the Series A holders converted 319 shares of
Series A Preferred into 1,043,003 shares of common stock at an exercise price of
$0.34. Through September 30, 2002, Castle Creek elected to convert shares of
Series B Preferred into shares of common stock as follows:
9
SHARES
------------------------------------------------------
DATE SERIES B PREFERRED COMMON
- ---- ----------------------- -------------------------
November 8, 2001 40 271,826
November 19, 2001 50 340,208
November 26, 2001 40 272,653
November 29, 2001 75 511,497
December 11, 2001 106 724,462
June 21, 2002 50 312,500
July 8, 2002 50 312,500
July 22, 2002 50 312,500
August 7, 2002 50 312,500
September 13, 2002 50 312,500
----------------------- -------------------------
561 3,683,146
For all transactions through September 30, 2002, each share of Series A or
Series B Preferred converted into a number of common shares at conversion prices
ranging from $0.16 per share to $0.34 per share. At the August 2001 conversion,
the conversion price was re-adjusted to the average of the five lowest closing
bid prices during the last ten days before the conversion ($0.19). The
conversion price was again re-adjusted to $0.16 in accordance with the August
2000 agreement. As stipulated in the August 2000 agreement, any reset of the
conversion price would result in a BCF limited as defined above. As the limit
was reached on the April 2001 BCF, no BCF was recorded in conjunction with the
August 2001 or October 2001 resets. (Also see Note 8)
On December 12, 2001, the Company completed a $1,765,000 private placement
of Series C Preferred and common stock warrants to purchase 5,944,219 shares of
common stock to various accredited investors. On February 1, 2002, the Company
also received $100,000 in cash from an additional accredited investor in
connection with this private placement. In total, the Company issued 1,865
shares of Series C Preferred, which shares are convertible into shares of common
stock, resulting in proceeds to the Company of approximately $1,566,000, net of
transaction costs. In addition to the cash transaction costs, the Company issued
warrants to investment advisors as finder's fees to acquire 458,165 shares of
common stock. The exercise price for the warrants issued as finder's fees is
$0.1255 per share, and the warrants expire in five years. Using the
Black-Scholes option-pricing model, the Company determined the fair value of the
warrants to be $350,000. The Company is obligated to redeem the Series C
Preferred 36 months from the closing. The Series C Preferred have a 7% dividend
payable in cash or equity, at the election of Voxware, and are convertible into
Voxware common stock at an initial conversion price of $0.1255 per share,
subject to adjustment, as defined in the transaction documents. In addition, the
investors have received warrants to purchase 5,944,219 shares of common stock at
an exercise price of $0.1255 per share and expire five years from the date of
closing. The Series C Preferred stockholders have certain registration rights,
as defined in the transaction agreements.
The Company allocated the proceeds, net of cash and non-cash transaction
costs, to the Series C Preferred and the additional purchase warrants sold to
investors based on the relative fair value of each instrument. The fair value of
the Series C Preferred was determined based on a discounted cash flow analysis
and the fair value of the additional purchase warrants was determined based on
the Black-Scholes option-pricing model. As a result, the Company allocated
approximately $1,220,000 and $350,000 to the Series C Preferred and the
additional purchase warrants, respectively. The warrants have been classified as
additional paid-in capital in the accompanying consolidated balance sheet.
The Company is accreting the Series C Preferred to their redemption value
using the effective interest method through the redemption period of 36 months.
Accordingly, the Company recorded $127,000 of accretion during the quarter ended
September 30, 2002.
The Series C Preferred are convertible into shares of common stock on the
date of issuance. After considering the allocation of the proceeds to the Series
C Preferred and the additional purchase warrants, the Company determined that
the Series C Preferred contained a BCF. The Company recorded the BCF as a
10
reduction of the Series C and an increase to additional paid-in capital in the
amount of approximately $350,000. In accordance with Emerging Issues Task Force
00-27, the BCF is being amortized over the redemption period of 36 months using
the effective interest method, and is being recorded in a manner similar to a
dividend. As a result, the Company recorded approximately $34,000 as a BCF,
treated as a dividend, during the quarter ended September 30, 2002.
7. SEGMENT INFORMATION
Prior to the Company's acquisition of Verbex in February 1999, 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
solutions and speech compression technologies. The voice-based solutions
business relates to the Company's current business focus since the Verbex
acquisition. The speech compression technologies business relates to the
Company's business focus prior to the Verbex acquisition. 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 proactively 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 periods ended September 30, 2002 and
2001 is included in the table below. Costs associated with corporate and
administrative overhead expenses are included in the speech compression
technologies segment. Intangible assets and goodwill related to the Verbex
acquisition, and the amortization of those assets, are included in the
industrial voice-based products segment.
September 30, 2002
------------------------------------------
Speech
Compression
Voice-Based Technologies
Segment Segment Total
------------ ----------- ------------
Revenues $ 1,451 $ 121 $ 1,572
Loss from operations $ (307) $ (108) $ (415)
Depreciation and amortization $ 330 $ 68 $ 398
Identifiable assets $ 1,527 $ 1,026 $ 2,553
September 30, 2001
------------------------------------------
Speech
Compression
Voice-Based Technologies
Segment Segment Total
------------ ----------- ------------
Revenues $ 453 $ 85 $ 538
Loss from operations $ (1,277) $ (291) $ (1,568)
Depreciation and amortization $ 327 $ 89 $ 416
Identifiable assets $ 3,142 $ 1,591 $ 4,733
For the periods ended September 30, 2002 and 2001, revenues included
approximately $91,000 and $31,000, respectively, of sales to customers related
to the speech compression technologies segment outside the United States.
8. SUBSEQUENT EVENTS:
Pursuant to the terms of the August 2001 Series B Preferred Transaction
(see Note 6), in October 2002 Castle Creek elected to convert 43 additional
shares of Series B Preferred into 273,851 shares of common stock. Each share of
Series B Preferred converted into a number of common shares at a conversion
price of $0.16 per share.
11
On October 2, 2002, the Company issued a series of 10% Convertible
Debentures due July 1, 2003 (the "Debentures") in the aggregate principal amount
of (euro)300.699,32 Euro. The proceeds of the Debentures are to be used to fund
the Company's capital investment in Voxware NV, a limited liability company
organized under Belgian law, founded by Creafund NV ("Creafund") and the Company
on July 1, 2002 and to fund the operational expenses of Voxware NV, excluding
expenses or invoices generated by the Company (other than the acquisition of the
Company's voiced based solutions). Voxware NV was established to market the
Company's products in Europe. The holders of the Debentures own two-thirds of
the equity of Voxware NV and the Company owns the remaining one-third of equity.
The Debentures are mandatorily convertible into shares of capital stock of
the Company issued upon the closing of a Qualifying Fundraising (as specifically
defined in the debentures). A Qualifying Fundraising requires the execution, on
or before November 30, 2002, of subscription agreements providing for the
issuance of at least U.S.$2,500,000 of equity of the Company, and the closing of
such financing by February 28, 2003. In the event the subscription agreements
are not executed by November 30, 2002 or the Qualifying Fundraising is not
consummated by February 28, 2003, each of the holders of the Debentures has the
right, at any time prior to the close of business on July 1, 2003, to convert
any or all of the outstanding principal amount and accrued interest of the
Debenture into shares of preferred stock of the Company, with new rights,
preferences and privileges senior to the Company's existing preferred stock. The
conversion price for such senior preferred stock shall be 33% of the average
share price for the Company's common stock for the 30 trading days prior to the
date of the exercise of the conversion option, or, if the Company's securities
are not listed or traded on a stock exchange, a regulated market or the
Over-The-Counter Bulletin Board, 33% of the intrinsic value of the Company's
equity on the date of the exercise of the conversion option, as determined by an
independent expert.
In the event the subscription agreements for the Qualifying Fundraising are
not executed by November 30, 2002 or the Qualifying Fundraising is not
consummated by February 28, 2003, the Debentures are redeemable at the option of
the Debenture holders. The redemption price is one hundred percent (100%) of the
principal amount so redeemed, plus accrued and unpaid interest.
Simultaneously with the execution of the Debentures, the Company, Creafund
and the other holders of equity in Voxware NV (which parties are also the
holders of the Debentures) executed a Shareholders Agreement pursuant to which
Creafund and the other equity holders have the option to convert their shares of
Voxware NV into shares of capital stock of the Company issued upon the closing
of a Qualifying Fundraising. In the event subscription agreements for the
Qualifying Fundraising are not executed by November 30, 2002 or the Qualifying
Fundraising is not consummated by February 28, 2003, the equity holders of
Voxware NV (other than the Company) have the right to convert their shares of
Voxware NV into shares of preferred stock of the Company, with new rights,
preferences and privileges senior to the Company's existing preferred stock. The
conversion price for such senior preferred stock shall be 33% of the average
share price for the Company's common stock for the 30 trading days prior to the
date of the exercise of the conversion option, or, if the Company's securities
are not listed or traded on a stock exchange, a regulated market or the OTC-BB,
33% of the intrinsic value of the Company's equity on the date of the exercise
of the conversion option, as determined by an independent expert. The exchange
rights described in this paragraph expire on December 31, 2004. The value of the
shares of Voxware NV for purposes of determining the exchange ratios is based
upon the net sales of Voxware NV.
12
The Company has granted Voxware NV a royalty free license to distribute
Voxware's voice-based solutions for the logistics, distribution and package
sorting industries in Europe on mutually acceptable commercially reasonable
terms. In the event that the Qualifying Financing is not consummated, such
license shall convert to a royalty-bearing license on such terms and conditions
as mutually agreed upon by the parties to the Shareholders Agreement.
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 from those expected, including the risks associated with Voxware's need
to raise additional capital in order to meet the Company's cash requirements
over the next twelve months and continue as a going concern; 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 voice-based products will not be
widely accepted; 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
Voxware designs, develops, markets and sells voice-based products for the
logistics, fulfillment, distribution, and package and mail sorting industries.
Until February 1999, our business was developing, marketing and selling speech
compression technologies and products to be used in websites, Internet telephony
and consumer devices. In February 1999, we acquired from Verbex Voice Systems
the assets and technology on which our current voice-based products are based.
Since our acquisition of Verbex, we have significantly curtailed our speech
compression technology business, and in September 1999 we sold substantially all
of the assets relating to that business. Our solutions are designed specifically
for use in warehouses, distribution centers and other industrial settings, to
enable workers to perform, through an interactive speech interface, the least
automated logistics and fulfillment tasks such as picking, receiving, returns
processing, cycle counting, cross-docking and order entry, more efficiently and
effectively than with alternative technologies or methods. Voxware solutions are
designed to be used in the logistics and fulfillment operations of most major
market industry sectors, including consumer goods manufacturers, consumer
packaged goods, direct to consumer (e-commerce and catalog), food and grocery,
retail, third party logistics providers, and wholesale distribution. Voxware's
products are also deployed in package handling, mail sorting and manufacturing,
inspection and military combat applications. Revenues are generated 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 voice-based devices, primarily used for warehouse
receiving and package sorting applications; and accessories that complement our
product offerings, including microphones, headsets and computer hardware. We
still generate some license fees from licensing our former speech compression
products. We also generate some royalty revenues from our former speech
compression business. Professional services consist of providing technical
resources and assistance for customer-specific applications. Revenues from
product sales are generally recognized when products are deployed for their
intended use, or when they are shipped to a specific third party partner.
Software product revenues are generally recognized upon shipment, provided
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 Company combines software, hardware and professional services for
installation, implementation and maintenance as part of its industrial
voice-based solutions (the "Solution").
13
The Company entered into and completed Solution arrangements during the
quarters ended September 30, 2002 and 2001. Solution revenue for hardware,
software and professional services has been recorded upon the completion of
installation and customer acceptance.
The sale to Ascend of the assets relating to the speech and audio coding
business did not include Voxware's rights and obligations under its then
existing license agreements. We continue to derive 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. Our new licensing activity relating to the speech
coding technologies has been decreasing prior to the sale to Ascend, and we
expect this trend to continue. Furthermore, as we focus on voice-based systems
for industrial markets, revenues from licenses of speech coding technologies
will become a less significant portion of our revenues. For the quarter ended
September 30, 2002, revenues related to the speech coding business accounted for
8% of total revenues for the quarter, while revenue from our voice-based
solutions accounted for 92% of quarterly revenues. For the quarter ended
September 30, 2001, revenues related to the speech coding business accounted for
16% of total revenues for the quarter, while revenue from our voice-based
solutions accounted for 84% of quarterly revenues. While we may continue to take
advantage of favorable opportunities to license our speech coding technologies
in the future, we are not dedicating significant resources to the development,
marketing or licensing of our speech coding technologies.
Results of Operations
Three Months Ended September 30, 2002 Versus Three Months Ended September 30,
2001
Revenues
Voxware recorded revenues of $1,572,000 for the three months ended
September 30, 2002 compared to revenues of $538,000 for the three months ended
September 30, 2001. The $1,034,000 increase in total revenues reflects a
$434,000 increase in speech recognition product sales, an increase of $416,000
in license fees, an $18,000 increase in royalties and recurring revenues, and a
$166,000 increase in service fees related to the implementation and development
fees relating to our voice logistics product offering. In the course of focusing
on the development of new products for the logistics, fulfillment, distribution,
and package and mail sorting industries, the Company has not aggressively
pursued new opportunities to sell legacy speech compression products. Compared
to prior periods, our voice-based product lines have resulted in increased
product revenues as we fulfill orders for our voice-based solutions.
Total product revenues increased $868,000 from $375,000 in the three months
ended September 30, 2001 to $1,243,000 in the three months ended September 30,
2002. This increase is due to an $850,000 increase in voice-based product sales
and license fees, and an $18,000 increase in royalties and recurring revenues.
The increase in product sales is reflective of our change in business focus
towards the development, marketing and sale of our VoiceLogistics(TM) product
suite, a voice-based solution set of software, hardware and professional
services designed specifically for use in warehouses, distribution centers and
other industrial settings to enable workers to perform typical logistics task
such as picking, receiving, returns processing, cycle counting and order entry
through a speech interface. Royalties and recurring revenues are primarily
related to the Company's speech compression business that was sold to Ascend, as
discussed previously. We anticipate that revenues from the speech coding
business will continue to decline. For the three months ended September 30, 2002
and 2001, 55% and 65% of the Company's product revenues were attributable to
industrial speech recognition product sales, respectively, 37% and 11% were
attributable to license fees, respectively, and 8% and 24% were attributable to
royalties and recurring revenues, respectively.
14
Service revenues are primarily attributable to professional service and
development fees from our VoiceLogistics(TM) product offering, and to customer
maintenance support relating to our speech coding technologies business and
VoiceLogistics(TM) product offering. For the three months ended September 30,
2002, service revenues totaled $329,000, reflecting a $166,000 increase from
service revenues of $163,000 for the three months ended September 30, 2001.
Cost of Revenues
For the three months ended September 30, 2001, cost of revenues increased
$389,000 from $206,000 to $595,000 for the three months ended September 30,
2002. The increase in cost of revenues reflects an increase in revenues.
Cost of product revenues increased $308,000 to $425,000 for the three
months ended September 30, 2002 from $117,000 for the three months ended
September 30, 2001. This increase in cost of product revenues is a direct result
of the increase in product sales for the three months ended September 30, 2002
as compared to the three months ended September 30, 2001. Cost of product
revenues, as a percentage of product sales for the quarters ended September 30,
2002 and 2001 was 63% and 48%, respectively.
Cost of service revenues consists primarily of the expenses associated with
professional service and development fees from our VoiceLogistics(TM) product
offering. Cost of service revenues increased $81,000 from $89,000 in the three
months ended September 30, 2001 to $170,000 in the three months ended September
30, 2002. The increase in cost of service revenues is directly attributable to
the increase in service revenues described above.
Operating Expenses
Total operating expenses decreased by $507,000 (27%) from $1,900,000 in the
three months ended September 30, 2001 to $1,393,000 in the three months ended
September 30, 2002. Non-cash amortization of purchased intangibles totaled
$324,000 for the three months ended September 30, 2002 and $325,000 for the
three months ended September 30, 2001. This decrease primarily reflects a
decrease in headcount related to the re-organization of our sales force and the
redesign of the Company's business objectives. In the prior year quarter, there
were more non-reimbursed expenses incurred for VoiceLogistics(TM) pilots
compared to the quarter ended September 30, 2002. As of September 30, 2002, our
headcount totaled 40, compared to a total headcount of 47 as of September 30,
2001.
Research and development expenses primarily consist of employee
compensation, equipment and depreciation expenditures related to product
research and development. Research and development expenses decreased $32,000
(7%) from $470,000 in the three months ended September 30, 2001 to $438,000 in
the three months ended September 30, 2002. As of September 30, 2002, we had a
research and development staff of 27 compared to 26 at September 30, 2001.
Sales and marketing expenses primarily consist of employee compensation
(including sales commissions), travel expenses and trade shows. Sales and
marketing expenses decreased $148,000 (39%) from $382,000 in the three months
ended September 30, 2001 to $234,000 in the three months September 30, 2002.
These cost decreases are due primarily to the reorganization of our sales force
and redesign of our marketing objectives. As of September 30, 2002, Voxware had
a sales and marketing staff of 7 compared to 10 at September 30, 2001.
General and administrative expenses consist primarily of employee
compensation, insurance, rent, office expenses and professional services.
General and administrative expenses decreased $327,000 (45%) from $723,000 in
the three months ended September 30, 2001 to $396,000 in the three months ended
September 30, 2002. The decrease in general and administrative expense is
reflective of organizational cost containment, offset by the addition of an
information technology division added in September 2000, as well as other costs
related to the growth of the organization and improvement of our infrastructure
in order to facilitate future expansion. As of September 30, 2002, Voxware had a
general and administrative staff of 6 full-time employees compared to 8 at
September 30, 2001.
15
Amortization of purchased intangibles totaled $325,000 for the three months
ended September 30, 2002 and 2001.
Interest Income
Interest income decreased $3,000 (60%) to $2,000 for the three months ended
September 30, 2002 from $5,000 for the three months ended September 30, 2001.
Interest income decreased from the quarter ended September 30, 2002 as a result
of the reduction in the Company's total cash, cash equivalents and short-term
portfolio balance. As of September 30, 2002, Voxware's cash, cash equivalents
and short-term investments portfolio totaled $69,000 compared to $382,000 at
September 30, 2001.
Income Taxes
As of September 30, 2002, we had approximately $27,500,000 of federal net
operating loss carryforwards which will begin to expire in 2009 if not utilized.
As of September 30, 2002, a full valuation allowance has been provided on the
net deferred tax asset because of uncertainties regarding the Company's ability
to realize the deferred asset, primarily as a result of the operating losses
incurred to date.
Adjustment of Warrants to Fair Value
On August 15, 2000, the Company completed a $4,000,000 private placement of
Series A Preferred Stock and Warrants to Castle Creek Technology Partners, LLC.
The Company allocated the proceeds, net of cash and non-cash transaction costs,
to the Series A Preferred and Warrants sold to Castle Creek based on the
relative fair value of each instrument. The fair value of the warrants was
determined based on the Black-Sholes option-pricing model. As a result, the
Company allocated approximately $807,000 to the warrants as of September 30,
2000. The Warrants are classified as a liability in the accompanying
consolidated balance sheets because the Warrants give the holder the choice of
net cash settlement at a time when other shareholders would not have such a
choice (upon a merger or change in control, as defined). As of September 30,
2002, the outstanding Warrants were adjusted to the fair value of the Warrants
based upon the closing stock price as of that date. As a result, the Company
adjusted the Warrants to $1,000, representing the fair market value as of
September 30, 2002, using the Black-Sholes option-pricing model, and recorded a
loss on the writedown of Warrants to fair value of $1,000 for the quarter ended
September 30, 2002.
Liquidity and Capital Resources
As of September 30, 2002, we had a total of $69,000 in cash and cash
equivalents. Since inception, we have primarily financed our operations through
the sale of preferred stock and equity securities.
For the three months ended September 30, 2002, cash provided by operating
activities totaled $63,000. Cash provided by operating activities was
attributable to a net loss of $415,000, offset by non-cash amortization of
purchased intangibles and depreciation totaling $398,000, and changes in
operating assets and liabilities.
For the three months ended September 30, 2001, cash used in operating
activities totaled $197,000. Cash used in operating activities was primarily
attributable to a net loss of $1,553,000, which was comprised of a loss from
operations totaling $1,253,000 excluding the non-cash amortization of purchased
intangibles totaling $325,000, and changes in operating assets and liabilities.
For the three months ended September 30, 2002, there was no cash provided
by investing activities. For the three months ended September 30, 2001, cash
provided by investing activities totaled $17,000, which consisted of net sales
and maturities of short-term investments. For the three months ended September
30, 2002, there were no financing activities. For the three months ended
September 30, 2001, cash provided by financing activities totaled $1,000, which
represents proceeds from the exercise of warrants.
On April 19, 2001, the Company consummated a private placement of shares of
common stock and common stock warrants to Castle Creek pursuant to the terms of
a Securities Purchase Agreement (the "Purchase
16
Agreement"). Pursuant to the private placement, the Company sold 714,000 shares
(the "Common Shares") of common stock and a warrant to purchase an additional
2,142,000 shares of its common stock (the "Purchase Warrant"). The Common Shares
were sold at a price of $.34 per share. The exercise price of the Purchase
Warrant is $1.25 per share in the case of an optional exercise by Castle Creek,
or 80% of the then market value (as defined in the Purchase Warrant) of the
common stock in the case of a mandatory exercise required by the Company. Net
proceeds to the Company from the private placement were approximately $276,000.
Pursuant to the terms of the Purchase Agreement, the Company used $48,200 of
such proceeds to repurchase 46 shares of the Company's Series A Preferred from
Castle Creek. The balance of the proceeds is to be used by the Company for
general working capital purposes.
On August 29, 2001 the Company issued 708,656 remedy warrants to Castle
Creek. These remedy warrants allow Castle Creek to purchase shares of common
stock at $0.01 per share and expire on August 28, 2011. Using the Black-Scholes
option-pricing model, the Company determined the fair value of the remedy
warrants to be $139,000. The Company recorded the issuance of the remedy
warrants as a Preferred Stock dividend during the quarter ended September 30,
2001. On September 26, 2001, Castle Creek exercised 100,000 of the remedy
warrants, resulting in gross proceeds of $1,000.
In August of 2001, the Company exchanged its Series A Preferred for shares
of Series B Preferred to Castle Creek. As the term, rights and preferences of
the Series B are substantially similar to those of the Series A, the Company
recorded the exchange based upon the carrying value of the Series A Preferred.
In addition, pursuant to the terms of the August 2000 Series A Preferred
transaction, any reset of the conversion price is treated as a dividend to the
holder of the Series A Preferred. Since the conversion price adjustment was part
of the August 2000 transaction, a contingent beneficial conversion feature
("BCF") existed at the August 15, 2000 commitment date. The contingent BCF was
recorded upon resetting the conversion price to $0.34 on April 19, 2001. At this
date, the dividend is recorded as the greater of the contingent BCF measured as
of the commitment date or the actual resulting BCF.
In August 2000, the contingent BCF was measured at zero. As a result, the
dividend was calculated based on the difference between the reduced conversion
price ($0.34) and the fair value of the common stock issuable upon conversion of
the Series A Preferred as of April 19, 2001. The charge for the BCF is limited
to the carrying value of the Series A Preferred after the initial allocation of
the cash proceeds received to the Series A and the warrants. At April 19, 2001,
the Company recorded a $1,669,000 dividend charge for the contingent BCF.
Through June 30, 2002, the Series A Preferred and Series B Preferred holders
converted 361 shares of Series A Preferred and Series B Preferred into 2,433,146
shares of common stock at an exercise price of $0.34. During the quarter ended
September 30, 2002, Castle Creek elected to convert shares of Series B Preferred
into shares of common stock as follows:
Series B
Date Preferred Common
------------ -------------- ---------
July 8, 2002 50 312,500
July 22, 2002 50 312,500
August 7, 2002 50 312,500
September 13, 2002 50 312,500
--------- --------
200 1,250,000
========= =========
For all transactions through September 30, 2002, each share of Series B
Preferred converted into a number of common shares at a conversion price ranging
from $0.16 to $0.34 per share. At the August conversion, the conversion price
was re-adjusted to the average of the five lowest closing bid prices during the
last ten days before the conversion ($0.19). Per the August 2000 agreement, any
reset of the conversion price would result in a BCF limited as defined above. As
the limit was reached on the April 2001 BCF, no BCF was booked in conjunction
with the August 2001 reset.
On October 2, 2002, the Company issued a series of 10% Convertible
Debentures due July 1, 2003 (the "Debentures") in the aggregate principal amount
of (euro)300.699,32 Euro. The proceeds of the Debentures are to be used to fund
the Company's capital investment in Voxware NV, a limited liability company
organized under Belgian law, founded by Creafund NV ("Creafund") and the Company
on July 1, 2002 and to fund the operational expenses
17
of Voxware NV, excluding expenses or invoices generated by the Company (other
than the acquisition of the Company's voiced based solutions). Voxware NV was
established to market the Company's products in Europe. The holders of the
Debentures own two-thirds of the equity of Voxware NV and the Company owns the
remaining one-third of equity.
The Debentures are mandatorily convertible into shares of capital stock of
the Company issued upon the closing of a Qualifying Fundraising (as specifically
defined in the debentures). A Qualifying Fundraising requires the execution, on
or before November 30, 2002, of subscription agreements providing for the
issuance of at least U.S.$2,500,000 of equity of the Company, and the closing of
such financing by February 28, 2003. In the event the subscription agreements
are not executed by November 30, 2002 or the Qualifying Fundraising is not
consummated by February 28, 2003, each of the holders of the Debentures has the
right, at any time prior to the close of business on July 1, 2003, to convert
any or all of the outstanding principal amount and accrued interest of the
Debenture into shares of preferred stock of the Company, with new rights,
preferences and privileges senior to the Company's existing preferred stock. The
conversion price for such senior preferred stock shall be 33% of the average
share price for the Company's common stock for the 30 trading days prior to the
date of the exercise of the conversion option, or, if the Company's securities
are not listed or traded on a stock exchange, a regulated market or the OTC-BB,
33% of the intrinsic value of the Company's equity on the date of the exercise
of the conversion option, as determined by an independent expert.
In the event the subscription agreements for the Qualifying Fundraising are
not executed by November 30, 2002 or the Qualifying Fundraising is not
consummated by February 28, 2003, the Debentures are redeemable at the option of
the Debenture holders. The redemption price is one hundred percent (100%) of the
principal amount so redeemed, plus accrued and unpaid interest.
Simultaneously with the execution of the Debentures, the Company, Creafund
and the other holders of equity in Voxware NV (which parties are also the
holders of the Debentures) executed a Shareholders Agreement pursuant to which
Creafund and the other equity holders have the option to convert their shares of
Voxware NV into shares of capital stock of the Company issued upon the closing
of a Qualifying Fundraising. In the event subscription agreements for the
Qualifying Fundraising are not executed by November 30, 2002 or the Qualifying
Fundraising is not consummated by February 28, 2003, the equity holders of
Voxware NV (other than the Company) have the right to convert their shares of
Voxware NV into shares of preferred stock of the Company, with new rights,
preferences and privileges senior to the Company's existing preferred stock. The
conversion price for such senior preferred stock shall be 33% of the average
share price for the Company's common stock for the 30 trading days prior to the
date of the exercise of the conversion option, or, if the Company's securities
are not listed or traded on a stock exchange, a regulated market or the OTC-BB,
33% of the intrinsic value of the Company's equity on the date of the exercise
of the conversion option, as determined by an independent expert. The exchange
rights described in this paragraph expire on December 31, 2004. The value of the
shares of Voxware NV for purposes of determining the exchange ratios is based
upon the net sales of Voxware NV.
The Company has only a limited operating history upon which an evaluation
of the Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties, frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. Since its inception, the Company
has incurred significant losses and, as of September 30, 2002, the Company had
an accumulated deficit of $48,550,000. Management believes that unless the
Company is able to secure additional financing, obtain replacement financing or
extend the mandatory redemption dates on preferred stock in the short-term, its
cash and cash equivalents will not be adequate to meet the Company's cash
requirements over the next twelve months. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of this
uncertainty. The Company has minimal cash on hand as of September 30, 2002, and
management is in current negotiations to secure a portion of its financing
required for the next twelve months. There can be no assurance that the
negotiations will be successful and result in financing for the Company. If such
financing is not obtained, the Company will have to curtail a significant
portion or all of its operations.
18
New Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators are apparent). However, separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives. The Company considers its intangible assets
to have finite lives and will continue to amortize such assets over their
remaining useful lives. As such, the adoption of SFAS 141 and 142 did not have a
material effect on the Company's results of operations or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Assets
Retirement Obligations." ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated assets retirement costs. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 was effective for
the quarter ended September 30, 2002 and the adoption of this pronouncement had
no effect on consolidated results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment for the Disposal of Long-lived Assets" ("SFAS 144"). This Statement
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-lived Assets to be Disposed of." However, SFAS 144 retains the fundamental
provisions of Statement No.121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 was effective for the
quarter ended September 30, 2002 and the adoption of this pronouncement had no
effect on the Company's consolidated results of operations or financial
position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting costs associated with the exit or disposal
activities and nullifies EITF Issue No 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity (including
Certain Costs Incurred in a Restructuring)", It applies to costs associated with
an exit activity that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS 144. A liability for
costs associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the adoption of
this Statement to have a material impact its consolidated results of operations
or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not usually utilize derivative financial instruments in
our investment portfolio. However, in conjunction with the Castle Creek
transaction, the Company issued derivative financial instruments in the form of
warrants, which are indexed to the Company's own stock. The value of the
warrants fluctuates with the market value of the Company's common stock.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-Q,
the Company's President and Chief Executive Officer (principal executive
officer) and Senior Vice President and Chief Financial Officer (principal
financial officer and principal accounting officer) have concluded that the
Company's disclosure on controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
19
PART II -- OTHER INFORMATION
- ----------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Pursuant to the terms of the August 2001 Series B Preferred Transaction,
Castle Creek elected to convert additional shares of Series B Preferred into
shares of common stock. Each share of Series B Preferred, plus the applicable
dividend, converted into a number of common shares at a conversion price of
$0.16 per share. The following table details the subsequent conversions:
SHARES
------------------------------------------------------
DATE SERIES B PREFERRED COMMON
- ---- ----------------------- -------------------------
November 8, 2001 40 271,826
November 19, 2001 50 340,208
November 26, 2001 40 272,653
November 29, 2001 75 511,497
December 11, 2001 106 724,462
June 21, 2002 50 312,500
July 8, 2002 50 312,500
July 22, 2002 50 312,500
August 7, 2002 50 312,500
September 13, 2002 50 312,500
----------------------- -------------------------
561 3,683,146
On October 2, 2002, the Company issued a series of 10% Convertible
Debentures due July 1, 2003 (the "Debentures") in the aggregate principal amount
of (euro)300.699,32 Euro. The proceeds of the Debentures are to be used to fund
the Company's capital investment in Voxware NV, a limited liability company
organized under Belgian law, founded by Creafund NV ("Creafund") and the Company
on July 1, 2002 and to fund the operational expenses of Voxware NV, excluding
expenses or invoices generated by the Company (other than the acquisition of the
Company's voiced based solutions). Voxware NV was established to market the
Company's products in Europe. The holders of the Debentures own two-thirds of
the equity of Voxware NV and the Company owns the remaining one-third of equity.
The Debentures are mandatorily convertible into shares of capital stock of
the Company issued upon the closing of a Qualifying Fundraising (as specifically
defined in the debentures). A Qualifying Fundraising requires the execution, on
or before November 30, 2002, of subscription agreements providing for the
issuance of at least U.S.$2,500,000 of equity of the Company, and the closing of
such financing by February 28, 2003. In the event the subscription agreements
are not executed by November 30, 2002 or the Qualifying Fundraising is not
consummated by February 28, 2003, each of the holders of the Debentures has the
right, at any time prior to the close of business on July 1, 2003, to convert
any or all of the outstanding principal amount and accrued interest of the
Debenture into shares of preferred stock of the Company, with new rights,
preferences and privileges senior to the Company's existing preferred stock. The
conversion price for such senior preferred stock shall be 33% of the average
share price for the Company's common stock for the 30 trading days prior to the
date of the exercise of the conversion option, or, if the Company's securities
are not listed or traded on a stock exchange, a regulated market or the OTC-BB,
33% of the intrinsic value of the Company's equity on the date of the exercise
of the conversion option, as determined by an independent expert.
In the event the subscription agreements for the Qualifying Fundraising are
not executed by November 30, 2002 or the Qualifying Fundraising is not
consummated by February 28, 2003, the Debentures are redeemable at the option of
the Debenture holders. The redemption price is one hundred percent (100%) of the
principal amount so redeemed, plus accrued and unpaid interest.
Simultaneously with the execution of the Debentures, the Company, Creafund
and the other holders of equity in Voxware NV (which parties are also the
holders of the Debentures) executed a Shareholders Agreement pursuant to which
Creafund and the other equity holders have the option to convert their shares of
Voxware NV into shares of capital stock of the Company issued upon the closing
of a Qualifying Fundraising. In the event subscription agreements for the
Qualifying Fundraising are not executed by November 30, 2002 or the Qualifying
Fundraising is not consummated by February 28, 2003, the equity holders of
Voxware NV (other than the Company) have the right to convert their shares of
Voxware NV into shares of preferred stock of the Company, with new rights,
preferences and privileges senior to the Company's existing preferred stock. The
conversion price for such senior preferred stock shall be 33% of the average
share price for the Company's common stock for the 30 trading days prior to the
20
date of the exercise of the conversion option, or, if the Company's securities
are not listed or traded on a stock exchange, a regulated market or the OTC-BB,
33% of the intrinsic value of the Company's equity on the date of the exercise
of the conversion option, as determined by an independent expert. The exchange
rights described in this paragraph expire on December 31, 2004. The value of the
shares of Voxware NV for purposes of determining the exchange ratios is based
upon the net sales of Voxware NV.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99.1 Statement Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K.
On August 28, 2002 and August 30, 2002, the Company filed a Form 8-K and
Form 8-K/A, respectively, reporting on Item 4 of Form 8-K, Change in
Registrant's Certifying Accountant. Such reports reported the Company's
dismissal of Arthur Andersen LLP as the Company's independent auditors and the
engagement of WithumSmith + Brown, PC as the Company's new auditors.
21
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 15, 2002
VOXWARE, INC.
(Registrant)
By: /s/ Bathsheba J. Malsheen
---------------------------------------
Bathsheba J. Malsheen, President and
Chief Executive Officer
By: /s/ Nicholas Narlis
---------------------------------------
Nicholas Narlis, Senior Vice President,
Chief Financial Officer, Treasurer and
Secretary
(Principal Financial Officer and Principal
Accounting Officer)
22
CERTIFICATION
I, Bathsheba Malsheen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Voxware, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Bathsheba J. Malsheen, Ph.D.
------------------------------------
Dated: November 15, 2002 Bathsheba J. Malsheen, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
23
CERTIFICATION
I, Nicholas Narlis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Voxware, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Nicholas Narlis
----------------------------------------------
Dated: November 15, 2002 Nicholas Narlis
Senior Vice President, Chief Financial Officer
Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
24