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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM __________ TO ___________
Commission File Number 0-26516
EUPHONIX, INC.
(Exact name of registrant as specified in its charter)
California 77-0189481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Portage Avenue, Palo Alto, CA 94306
(Address of principal executives, zip code)
(650) 855-0400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed (1) 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
_______________ _______________
The number of shares outstanding of the registrant's common stock as of
September 30, 1999 was 7,956,595 ($.001 par value).
EUPHONIX, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION ----
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998............3
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998...........................4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998..............5
Notes to Condensed Consolidated Financial Statements................6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................15
Signature....................................................................16
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Euphonix, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
Nets revenues..........$ 3,763,914 $ 4,500,091 $ 8,784,458 $ 12,221,364
Cost of sales.......... 2,182,412 2,364,545 5,772,007 6,727,616
-------------- ------------- ------------- -------------
Gross profit........... 1,581,502 2,135,546 3,012,451 5,493,748
Operating expenses:
Research & development 1,084,368 1,300,635 3,452,425 3,445,531
Sales & marketing..... 1,421,909 1,318,774 4,088,076 3,873,225
General & administrative 290,191 527,540 951,078 1,819,923
-------------- ------------- ------------- -------------
Total operating expenses 2,796,468 3,146,949 8,491,579 9,138,679
-------------- ------------- ------------- -------------
Operating loss.......... (1,214,966) (1,011,403) (5,479,128) (3,644,931)
Other income / (expense) (63,728) 3,538 (77,952) 45,517
-------------- ------------- ------------- -------------
Loss before income taxes (1,278,694) (1,007,865) (5,557,080) (3,599,414)
Tax provision .......... ---- ---- ---- ----
-------------- ------------- -------------- -------------
Net loss...............$ (1,278,694) $ (1,007,865) $ (5,557,080) $(3,599,414)
============== ============= ============== =============
Net loss per share:
Basic and diluted....$ (0.16) $ (0.15) $ (0.71) $ (0.57)
============== ============= ============== =============
Number of shares used in
computing per share amounts:
Basic and diluted.... 7,956,595 6,633,057 7,834,055 6,326,849
============== ============= ============== =============
See notes to condensed consolidated financial statements
3
Euphonix, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
1999 1998
-------------- ---------------
(unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.........................$ 153,952 $ 1,637,332
Short-term investments........................... ---- 601,146
Accounts receivable, net......................... 1,723,041 1,543,335
Inventories...................................... 6,505,627 5,558,637
Prepaid expenses and other current assets........ 352,755 237,512
-------------- ---------------
Total current assets.............................. 8,735,375 9,577,962
Property and equipment,
Property and equipment, net....................... 1,706,194 1,360,186
Deposits and other assets......................... 300,860 292,716
-------------- ---------------
Total assets .....................................$ 10,742,429 $ 11,230,864
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................$ 1,231,279 $ 1,636,357
Accrued payroll and related liabilities......... 525,035 548,926
Accrued warranty................................ 519,591 439,397
Accrued commissions............................. 81,123 126,094
Sales tax payable............................... 9,131 187,687
Deferred revenues............................... ---- 185,344
Other accrued liabilities....................... 493,799 401,118
Customer deposits............................... 328,517 97,914
Short term portion capital leases............... 4,713 29,691
-------------- --------------
Total current liabilities......................... 3,193,188 3,652,529
Long term portion capital leases.................. 2,282 2,282
Convertible notes(includes accrued interest of
$87,701)........................................ 4,187,701 ----
Deferred rent..................................... ---- 1,055
Deferred income taxes............................. 200,000 200,000
SHAREHOLDERS' EQUITY:
Preferred stock.................................. ---- ----
Common stock..................................... 7,957 6,636
Additional paid-in capital....................... 16,975,313 15,672,808
Accumulated other comprehensive income........... 62,989 74,975
Accumulated deficit.............................. (13,887,001) (8,329,921)
Deferred compensation............................ ---- (49,500)
-------------- --------------
Total shareholders' equity........................ 3,159,258 7,374,998
-------------- --------------
Total liabilities and shareholders' equity.......$ 10,742,429 $ 11,230,864
============== ==============
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
4
Euphonix, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
1999 1998
------------- -------------
Operating activities
Net loss........................................ $ (5,557,080) $ (3,599,414)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 478,532 348,209
Deferred compensation amortization............ 49,500 67,500
Changes in operating assets and liabilities:
Prepaid expenses, other current assets and
other assets................................ (135,374) (101,427)
Accounts receivable.......................... (179,706) 612,864
Inventories ................................. (946,990) (274,838)
Income tax receivable........................ ---- 244,000
Accounts payable, accrued liabilities, and
deferred rent............................... (578,319) 264,999
Customer deposits............................ 230,603 (46,579)
-------------- ------------
Total adjustments .............................. (1,081,754) 1,114,728
-------------- ------------
Net cash used in operating activities........... (6,638,834) (2,484,686)
Investing activities
Proceeds from sales of short-term investments... 601,146 1,120,725
Purchases of property and equipment............. (824,540) (464,707)
-------------- ------------
Net cash provided by (used for) investing activities (223,394) 656,018
Financing activities
Principal payments under capital lease obligations (24,978) (38,085)
Proceeds from issuance of convertible notes..... 4,100,000 ----
Proceeds from sale of common stock.............. 1,303,826 1,950,911
-------------- ------------
Net cash provided by financing activities....... 5,378,848 1,912,826
-------------- ------------
Net increase (decrease) in cash and cash equivalents (1,483,380) 84,158
Cash and cash equivalents at beginning of period. 1,637,332 1,880,093
-------------- ------------
Cash and cash equivalents at end of period....... $ 153,952 $ 1,964,251
============== ============
See notes to condensed consolidated financial statements
5
EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the nine-month
period ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1999.
For further information, refer to the audited financial statements and
footnotes thereto included in the Registrant Company's annual report on Form
10-K for the year ended December 31, 1998.
2. Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assump-
tions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Inventories
Inventories are stated at the lower cost (first-in, first-out) or market (net
realizable value). Inventories consist of the following:
September 30, December 31,
1999 1998
---------------- ----------------
Raw materials...................$ 2,581,705 $ 2,112,349
Work-in-process................. 1,997,339 1,390,931
Finished goods.................. 1,926,583 2,055,357
---------------- ----------------
$ 6,505,627 $ 5,558,637
================ ================
4. Comprehensive Loss
Total comprehensive loss for the three and nine month periods ended Sep-
tember 30, 1999 and 1998, respectively, was $1,279,202, $1,004,919, $5,569,066,
and $3,602,230.
6
EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements - Continued
5. Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which was
required to be adopted in years beginning after June 15, 1999. Subsequently,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133" ("SFAS 137"), which effectively delays the adop-
tion of SFAS 133 until fiscal years beginning after June 15, 2000. The adoption
of SFAS 133 is not expected to materially impact the Company's results of
operations, financial position or cash flows.
The American Institute of Certified Public Accountants issued Statement
of Position 98-1, "Accounting For the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), on March 4, 1998. SOP 98-1 provides
guidelines for accounting for costs of computer software developed for internal
use. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998. The adoption of SOP 98-1 did not impact the Company's
results of operations, financial position or cash flow.
6. Common Stock
In January 1999, the Company received proceeds of $1,303,676 from new
and existing investors in exchange for the issuance of 1,320,446 shares of
$0.001 par value common stock at $0.987 per share, 90% of the average closing
bid price per share on the NASDAQ, for the ten days immediately preceding
January 26, 1999. The authorized capital stock of the Company as of the date of
this agreement is 20,000,000 shares of common stock and 2,000,000 shares of
preferred stock, par value $0.001. As of September 30, 1999, there were
7,956,595 shares of common stock issued and outstanding, and there were no
issued and outstanding shares of preferred stock.
7. Long Term Debt
In April 1999, the Company executed a secured promissory note with
existing investors under which the Company may draw up to $2 million through
July 31, 1999. During the quarter ended June 30, 1999, the Company received
the entire $2 million under the agreement. The note is convertible into as
many shares of common stock as the outstanding principle and accrued interest
balance at the date of conversion yield when divided by the price per share of
$1.03, at the time of conversion into common stock. The note is due in April
2001, and bears interest at 7.75%. The interest is payable upon maturity of the
note and is convertible into common stock. At September 30, 1999, accrued
interest payable was $62,406, which is included in the convertible notes
line of the accompanying condensed consolidated balance sheet.
In July 1999, the Company executed a secured promissory note with
existing investors under which the Company may draw up to $2.1 million through
October 31, 1999. During the quarter ended September 30, 1999, the Company
received the entire $2.1 million under the agreement. The note is convertible
into as many shares of common stock as the outstanding principle and accrued
interest balance at the date of conversion yield when divided by the price per
share of $0.75, at the time of conversion into commom stock. At September 30,
1999, accrued interest payable was $25,295, which is included in the convertible
notes line of the accompanying condensed consolidated balance sheet.
7
EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements - Continued
8. Subsequent Events
In October 1999, the Company converted the April 1999 secured
promissory note of $2.0 million principal and $66,990 accrued interest into
1,981,014 shares of common stock of the Company at $1.03 per share.
In November 1999, existing and new investors purchased $1.75 million
of 1,581,706 shares of common stock of the Company at $1.1064 per share.
8
Item 2. Management's Discussion & Analysis of Financial Condition & Results of
Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Factors Affecting Future Operating
Results."
Results of Operations
Net Revenues. Net revenues were $3.8 million for the third quarter of
1999, which was 16.4% below 1998 revenues of $4.5 million. Net revenues for the
first nine months of 1999 were $8.8 million, which represents a 28.1% decrease
from net revenues of $12.2 million for the first nine months of 1998. The
Company's decrease in net revenues for the third quarter and nine months of
1999, as compared to 1998 resulted primarily from reduced sales in Asia Pacific
due to continued sluggishness in the PacRim market. The Company made a formal
announcement at the Audio Engineeering Society (AES)Tradeshow of its new System
5 digital audio mixing console in the third quarter of 1999 and as a result,
expects an increasing percentage of revenues to be derived from System 5 in the
future.
Domestic sales of the Company's products for the third quarter of 1999
and 1998 were $2.7 million and $1.6 million, respectively, comprising
approximately 72.2% and 35.5% of the Company's net revenues. Domestic sales were
$6.0 million and $6.3 million comprising approximately 68.8% and 51.9% of the
Company's net revenues for the first nine months of 1999 and 1998, respectively.
Export sales were $1.0 million and $2.9 million comprising approximately 27.8%
and 64.5% of the Company's revenues for the third quarter of 1999 and 1998,
respectively. Export sales were $2.7 million and $5.9 million comprising
approximately 31.2% and 48.1% of the Company's revenues for the first nine
months of 1999 and 1998, respectively. Export sales as a percent of net revenues
and in absolute dollars decreased in the third quarter and first nine months of
1999 due to fewer sales in the Pacific Rim due to the continued sluggishness in
the PacRim market, as compared to the third quarter and first nine months of
1998.
Gross Margin. The Company's gross margin decreased from 47.5% in the third
quarter of 1998 to 42.0% in the third quarter of 1999. The Company's gross
margin was $1.6 million in the third quarter of 1999 as compared to $2.1 million
in the third quarter of 1998. The decrease is due to unfavorable overhead
absorption because of lower sales volumes, and start-up costs associated with
the introduction of System 5 consoles, which began shipping in volume during the
third quarter of 1999. For the first nine months of 1999, gross margin was $3.0
million, or 34.3% of net revenues, compared with $5.5 million , or 45% of net
revenues, for the first nine months of 1998. The decrease in the first nine
months of 1999 from the first nine months of 1998 is associated with start-up
costs related to the R-1 recorder which began shipping in the first quarter of
1999, and the new System 5 digital console which began shipping in the second
quarter of 1999. It is also due to unfavorable overhead absorption caused by
lower than anticipated sales volumes.
Research and Development Expenses. Research and development expenses
decreased to $1.1 million in the third quarter of 1999, down from $1.3 million
in the third quarter of 1998, representing a decrease of 16.6% in 1999. For the
first nine months of 1999, research and development expenses of $3.5 million
increased 0.2% from $3.4 million in 1998. Research and development expenses
constituted 28.8%, 28.9%, 39.3%, and 28.2% of net revenues in the third quarter
of 1999 and 1998 and the first nine months of 1999 and 1998, respectively. The
decrease in absolute spending in the third quarter of 1999 from the same
quarter a year ago resulted from winding down of the new R-1 Multitrack Recorder
9
and new System 5 digital console, both of which were under development in 1998
and began shipment in the first and second quarter of 1999 respectively. The
increase in the first nine months of 1999 from the first nine months of 1998 is
associated with consulting, test, demo equipment, and expense supplies related
with the final release of the R-1 recorder and new System 5 digital console.
Sales and Marketing Expenses. Sales and marketing expenses
increased to $1.4 million in the third quarter of 1999, from $1.3 million in the
third quarter of 1998, representing an increase of 7.8%. For the first nine
months of 1999, sales and marketing expenses of $4.1 million increased 5.5% from
$3.9 million in 1998. Sales and marketing expenses constituted 37.8%, 29.3%,
46.5%, and 31.7% of net revenues in the third quarter of 1999 and 1998 and the
first nine months of 1999 and 1998, respectively. The increase in the third
quarter and first nine months of 1999 as compared with 1998 resulted primarily
from increases in spending for advertising, tradeshows, travel, other
professional fees, and product demonstrations to support new product
introductions.
General and Administrative Expenses. General and administrative
expenses decreased to $290,000 in the third quarter of 1999 from $528,000 in the
third quarter of 1998, representing a decrease of 45%. For the first nine months
of 1999, general and administrative expenses of $1.0 million decreased 47.7%
from $1.8 million in the first nine months of 1998. General and administrative
expenses constituted 7.7%, 11.7%, 10.8%, and 14.9% of net revenues in the third
quarter of 1999 and 1998 and the first nine months of 1999 and 1998,
respectively. The decrease in the third quarter and first nine months of 1999 as
compared with 1998 was mostly attributable to a decrease in the allowance for
doubtful accounts reserve primarily due to collections of previously reserved
account balances. The remainder of the decreases are due to a reduction in
headcount, the sublease of a portion of the premises located at corporate
headquarters, and a reduction in insurance and other professional fees.
Provision / (benefit) for Income Taxes. For the third quarter of 1999
and 1998, the Company did not recognize the tax benefit of its operating losses.
Management believes the resulting deferred tax assets are not realizable on a
more likely than not basis. The Company's effective tax rate was 0% in the third
quarter and nine month periods ended September 30, 1999 and 1998, and differs
from the federal statutory rate primarily due to the limitations controlling the
timing for realization of net operating losses and tax credits established by
the Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash
flows from operations, the private sale of equity securities, and the initial
public offering of Common Stock completed in September 1995. In March 1998, the
Company received proceeds of $1,950,000 from existing investors in exchange for
the issuance of 1,040,000 shares of $0.001 par value common stock at $1.875 per
share, the closing price of the Company's common stock on the NASDAQ on the date
the common stock purchase agreement was executed. In January 1999, the Company
received proceeds of $1,303,676 from new and existing investors in exchange for
the issuance of 1,320,446 shares of $0.001 par value common stock at $0.987 per
share. In April 1999, the Company executed a secured promissory note with
existing investors under which the Company was authorized to draw up to $2
million through July 31, 1999. In October 1999, the Company converted the April
1999, secured promissory note of $2.0 million principal and $66,990 accrued
interest into $1,981,014 shares of stock of the Company at $1.03 per share.
In July 1999, the Company executed a secured promissory note led by an existing
investor under which the Company was authorized to draw up to $2.1 million
through October 31, 1999. The note is convertible into common stock of the
Company under certain circumstances and is secured by the assets of the Company.
In November 1999, the Company received proceeds of $1.75 million for 1,581,706
shares of common stock of the Company. For the nine months ended September 30,
1999, cash, cash equivalents and short-term investments decreased by $2.1
million to approximately $154,000. Also, during this period, working capital
decreased by $383,000 to approximately $5.5 million.
10
As of September 30, 1999, the Company's sources of liquidity included
cash totaling approximately $153,952. Management believes that cash on hand
combined with approximately $1.75 million of additional financing from existing
investors and others received in the fourth quarter ended December 31, 1999, and
a forecasted increase in sales due to the introduction of new products in 1999
will be sufficient to support its operations through the foreseeable future. If
anticipated sales levels are not achieved, the Company may need to delay or
significantly reduce other operating expenditures, which could have a material
adverse effect on its business, results of operations and business prospects.
The Company's operating activities used cash of approximately $6.6
million and $2.5 million for the nine months ended September 30, 1999 and 1998,
respectively. Cash used in operating activities for 1999 was comprised primarily
of net loss, an increase in accounts receivable, an increase in inventories, an
increase in prepaid expenses, other current assets and other assets, and a
decrease in accounts payable and other accrued liabilities, offset partially by
an increase in customer deposits, deferred compensation, and depreciation and
amortization. Cash used in operating activities for 1998 was comprised primarily
of net loss, an increase in inventories, an increase in prepaid expenses, other
current assets and other assets, a decrease in customer deposits, offset
partially by an increase in accounts payable and other accrued liabilities, and
a decrease in accounts receivable.
The Company's investing activities used $223,000 of cash in the first
nine months of 1999 and provided $656,000 in the same period in 1998. In 1998
the Company received $1.1 million in proceeds from the sales of short term
investments as compared to $601,146 in proceeds received in 1999. In 1999 the
Company purchased $824,540 of property and equipment as compared to $464,707
in 1998.
The Company's financing activities provided $5.4 million in the first
nine months of 1999 and $1.9 million in the first nine months of 1998. Proceeds
from the sale of common stock provided $1.3 million in 1999 and $1.95 million
in 1998. Proceeds from the issuance of convertible promissory notes provided
$4.1 million in the first nine months of 1999.
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000.
Based on recent assessments, the Company determined that it would not be
required to upgrade, modify, and/or replace portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that the Year 2000 issue is resolved
without modifications or replacements of existing software and certain hardware.
The Company's plan in resolving the Year 2000 issue involved the following
four phases: inventory, assessment, remediation, and testing/implementation.
Both information technology ("IT") and non-information technology ("Non-IT")
systems were addressed. The Company has completed its assessment of IT and
Non-IT systems that could have been significantly affected by the Year 2000. The
11
completed assessment indicated that all of the Company's significant IT systems
would not be affected, particularly the order entry, general ledger, billing,
and inventory systems. The assessment also indicated that Non-IT systems would
not be affected.
Based on a review of its product lines, the Company has determined that
most of the products it has sold and will continue to sell do not require
remediation to be Year 2000 compliant. Based on the results of product review
and testing completed, the Company believes its programming software for its
audio consoles, R-1 Multi-track Recorders, and new System 5 digital con-
sole to be compliant as defined by the British Standards Institute DISC
PC-2000-1 definition. Accordingly, the Company does not believe that the
Year 2000 presents a material exposure as it relates to the Company's products.
The Company has queried all of its significant suppliers and
subcontractors systems with the Company ("suppliers"). To date, the Company is
not aware of any supplier with a Year 2000 issue that would materially impact
the Company's results of operations, liquidity, or capital resources. However,
the Company has no means of ensuring that its suppliers will be Year 2000 ready.
The inability of suppliers to complete their Year 2000 resolution process in a
timely fashion could materially and adversely impact the Company. However many
significant suppliers have been second sourced and the Company is currently
taking steps to assess whether these suppliers are currently taking steps to
address any Year 2000 issues they may have.
To date, the Company has incurred costs of less than $5,000 on the Year
2000 project, and estimates that there will be no material future costs.
As noted above, the Company has completed all necessary phases of the
Year 2000 program. The Company believes that it is more likely to experience
Year 2000 problems with the systems of key suppliers rather than with the
Company's internal systems or products. The Company's Year 2000 program includes
efforts to assess the Year 2000 compliance of its key suppliers.
The Company currently has a contingency plan in place to deal with Year
2000 issues that may materially adversely affect its business processes.
Factors Affecting Future Operating Results
Historically, the Company has derived virtually all of its revenues from
sales of its digitally controlled audio mixing console system, which system is
based upon its hardware platform. The Company believes that sales of this
system, along with enhancements thereof, and the R-1 recorder and new System 5
digital console will continue to constitute a significant portion of the
Company's revenues. It is expected for the foreseeable future that a greater
portion of the Company's revenue will come from the new System 5 digital
console. Accordingly, any factor adversely affecting the Company's base system,
whether technical, competitive or otherwise, could have a material adverse
effect on the Company's business and results of operations.
The Company has expended and will continue to expend substantial funds to
launch its new product developments in the fourth quarter of fiscal 1999. The
Company's ability to fund operations through December 31, 1999 is dependent upon
achievement of its operating plan. If the Company did not attain its operating
plan it would obtain additional financing or cut expenses. The Company believes
that additional debt or equity financing will be available from existing
investors and others. However, there can be no assurance as to the terms and
conditions of any such financing and no certainty that funds would be available
12
when needed. The inability to obtain additional financing, if needed, would be
likely to have a material adverse effect on the Company. To the extent that any
future financing involves the sale of the Company's equity securities, the
Company's then existing shareholders could be substantially diluted.
A limited number of the Company's system sales typically account for a
substantial percentage of the Company's quarterly revenue because of the
relatively high average sales price of such systems. Moreover, the Company's
expense levels are based in part on its expectations of future revenue.
Therefore, if revenue is below expectations, the Company's operating results are
likely to be adversely affected. In addition, the timing of revenue is
influenced by a number of other factors, including the timing of individual
orders and shipments, industry trade shows, seasonal customer buying patterns,
changes in product development and sales and marketing expenditures, custom
financing arrangements, production limitations and international sales activity.
Because the Company's operating expenses are based on anticipated revenue levels
and a high percentage of the Company's expenses are relatively fixed in the
short term, variations in the timing of recognition of revenue could cause
significant fluctuations in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses.
The markets for the Company's system are characterized by changing
technologies and new product introductions. The Company's future success will
depend in part upon its continued ability to enhance its base system with
features including new software and hardware add-ons and to develop or acquire
and introduce new products and features which meet new market demands and
changing customer requirements on a timely basis. The Company is currently
designing and developing new products, primarily in the areas of recording,
editing and mixing functions of sound production as well as digital audio
processing and networking systems. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
products or technologies non-competitive or obsolete. See "Business".
Historically, the Company's primary market success was in the music
segment of the professional audio market. In order for the Company to grow, the
Company believes that it must continue to gain market share in the music market
segment, as well as in its other targeted market segments. There can be no
assurance that the Company will be able to compete favorably in any market
segments. The Company's inability to compete favorably could have a material
adverse effect on its business and results of operations. The markets for the
Company's products are intensely competitive and characterized by significant
price competition. The Company believes that its ability to compete depends on
elements both within and outside its control, including the success and timing
of new product development and introduction by the Company and its competitors,
product performance and price, distribution, availability of lease or other
financing alternatives, resale of used systems and customer support. See
"Business--Competition".
Currently, the Company uses many sole or limited source suppliers, certain
of which are critical to the integrated circuits included in the Company's base
system. Major delays or terminations in supplies of such components could have a
significant adverse effect on the Company's timely shipment of its products,
which in turn would adversely affect the Company's business and results of
operations. The Company also relies on single vendors to manufacture major
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subassemblies for its products. Any extended interruption in the future supply
or increase in the cost of subassemblies manufactured by its primary or other
third party vendors could have a material adverse effect on the Company's
business and results of operations. See "Business--Manufacturing and Suppliers".
In addition,as different electrical, radiation or other standards
applicable to the Company's products are adopted in countries, including the
United States, or groups of countries in which the Company sells its products,
the failure of the Company to modify its products, if necessary, to comply with
such standards would likely have an adverse effect on the Company's business and
results of operations. See "Business--Sales and Distribution".
The Company generally relies on a combination of trade secret, copyright
law and trademark law, contracts and technical measures to establish and protect
its proprietary rights in its products and technologies. However, the Company
believes that such measures provide only limited protection of its proprietary
information, and there is no assurance that such measures will be adequate to
prevent misappropriation. In addition, significant and protracted litigation may
be necessary to protect the Company's intellectual property rights, to determine
the scope of the proprietary rights of others or to defend against claims of
infringement. There can be no assurance that third-party claims alleging
infringement will not be asserted against the Company in the future. Any such
claims could have a material adverse effect on the Company's business and
results of operations. See "Business--Proprietary Rights".
The Company's success depends, in part, on its ability to retain key
management and technical employees and its continued ability to attract and
retain highly skilled personnel. In addition, the Company's ability to manage
any growth will require it to continue to improve and expand its management,
operational and financial systems and controls. If the Company's management is
unable to manage growth effectively, its business and results of operations will
be adversely affected.
As a result of these and other factors, the Company has experienced
significant quarterly fluctuations in operating results and anticipates that
these fluctuations will continue in future periods. There can be no assurance
that the Company will be successful in maintaining or improving its
profitability or avoiding losses in any future period. Further, it is likely
that in some future period the Company's net revenues or operating results will
be below the expectations of public market securities analysts and investors. In
such event, the price of the Company's Common Stock would likely be materially
adversely affected. See "Factors Affecting Future Operating Results."
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PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K/A
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (page 16)
The exhibit listed on the accompanying index immediately
following the signature page is filed as part of this report.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Euphonix, Inc.
Date: November 11, 1999 By: /s/ BARRY MARGERUM
------------------ ------------------
Barry L. Margerum, Chief Executive
Officer, President
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