SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1 TO
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 2001 0-20706
DATA RACE, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-2272363
(State of Incorporation) (I.R.S.Employer Identification No.)
6509 Windcrest Drive, Suite 120
Plano, Texas 75024
Telephone (972) 265-4000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
On February 20, 2002, there were approximately 35,373,000 outstanding shares of
the Company's Common Stock, no par value.
The registrant hereby files this report on Form 10Q/A to amend its Quarterly
Report on Form 10-Q as filed on February 20, 2002 for the 2nd quarter ending
December 31, 2001, to amend Part I. Financial Information and Part II
Management's Discussion and Analysis of
1
Financial Condition and Results of Operations. No other items in the
registrant's Quarterly Report on Form 10-Q for the 2nd quarter ending December
31, 2001 have been amended.
DATA RACE, Inc.
INDEX TO FORM 10-Q
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Interim Condensed Financial Statements (Unaudited):
Condensed Balance Sheets as of December 31, 2001 and June 30, 2001.............................3
Condensed Statements of Operations for the Three Months and Six Months
Ended December 31, 2001 and 2000...............................................................4
Condensed Statements of Cash Flows for the Six Months
Ended December 31, 2001 and 2000...............................................................5
Notes to Interim Condensed Financial Statements................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................................11
Item 3. Quantitative and Qualitative Disclosure about Market Risk.......................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................15
Item 2. Changes in Securities..........................................................................15
Item 3. Defaults Upon Senior Securities................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................15
Item 5. Other Information..............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
SIGNATURES .............................................................................................17
2
PART I. FINANCIAL INFORMATION
ITEM 1. Interim Condensed Financial Statements
DATA RACE, Inc.
CONDENSED BALANCE SHEETS
As of
--------------------------------------
Dec. 31, 2001 June 30, 2001
-------------- ---------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents........................................ $ 9,332 $ 9,334
Accounts receivable, net......................................... 868 2,026
Inventory........................................................ 2,394,609 2,876,506
-------------- ---------------
Total current assets......................................... 2,404,809 2,887,866
Property and equipment, net.......................................... 406,204 674,798
Other assets......................................................... 61,741 84,630
-------------- ---------------
Total assets................................................. $ 2,872,754 $ 3,647,294
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 2,011,523 $ 2,327,133
Accrued expenses................................................. 737,735 638,167
Obligations under capital lease, current........................ 172,141 125,078
Convertible debentures.......................................... 1,739,166 1,071,667
-------------- ---------------
Total current liabilities.................................... 4,660,565 4,162,045
Non-current liabilities:
Obligations under capital lease, non-current.................... -- 47,063
-------------- ---------------
4,660,565 4,209,108
-------------- ---------------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value, 70,000,000 shares authorized
35,373,477 and 34,358,521 shares issued and outstanding
at Dec 31, 2001 and June 30, 2001 respectively ................ 62,466,062 62,420,978
Additional paid-in capital....................................... 10,785,717 9,545,152
Accumulated deficit.............................................. (74,563,339) (72,527,944)
Unamortized financing costs.................................... (476,251) --
Total shareholders' equity (deficit)......................... (1,787,811) (561,814)
-------------- ---------------
Total liabilities and shareholders' equity.................. $ 2,872,754 $ 3,647,294
============== ===============
See accompanying notes to financial statements
3
DATA RACE, Inc.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
Three Months Ended Dec. 31, Six Months Ended Dec. 31,
------------------------------------ -----------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Total revenue ...................................... $ -- $ -- $ 4,736 $ 6,042
Cost of revenue .................................... 3,896 166,243 22,760 339,541
----------- ----------- ----------- -----------
Gross profit (loss) .......................... (3,896) (166,243) (18,024) (333,499)
Operating expenses:
Engineering and product
development ...................................... 136,290 1,359,735 325,025 2,485,710
Sales and marketing .............................. 53,073 1,419,930 124,871 2,580,813
General and administration ....................... 345,449 1,072,586 796,057 2,076,253
----------- ----------- ----------- -----------
Total operating expenses ..................... 534,812 3,852,251 1,245,953 7,142,776
----------- ----------- ----------- -----------
Operating loss ............................... (538,708) (4,018,494) (1,263,977) (7,476,275)
Interest income ............................ -- 70,395 -- 250,431
Interest expense ........................... (386,027) -- (765,860) --
Other income (expense) ..................... -- -- (5,557) 60,148
----------- ----------- ----------- -----------
Net loss ................................... $ (924,735) $(3,948,099) $(2,035,394) $(7,165,696)
=========== =========== =========== ===========
Per share data:
Net basic and diluted loss per share
applicable to common stock .................. $ (0.03) $ (0.15) $ (0.06) $ (0.27)
----------- ----------- ----------- -----------
Weighted average shares outstanding ................ 35,373,000 26,682,000 35,317,000 26,445,000
----------- ----------- ----------- -----------
See accompanying notes to interim condensed financial statements
4
DATA RACE, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
Six Months Ended December 31,
----------------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss from operations ............................................................. $(2,035,394) (7,165,696)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................................................... 204,599 234,659
Amortized financing costs for July 2001 private placement ......................... 76,815 --
Compensatory shares-consulting and legal fees ...................................... 40,083 --
Loss (gain) on sale of property and equipment ...................................... 44,870 (3,529)
Non- cash beneficial conversion feature on June 2001convertible
debentures ........................................................................ 687,499 --
Changes in assets and liabilities:
Accounts and notes receivable ...................................................... 1,158 (93,070)
Inventory .......................................................................... -- (2,063,016)
Prepaid expenses, deposits and other assets ........................................ 22,889 (379,370)
Accounts payable ................................................................... 166,287 562,850
Accrued expenses ................................................................... 99,568 (115,533)
----------- -----------
Net cash (used) in operating activities .......................................... (691,626) (9,022,705)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ................................................... -- (891,072)
Proceeds from sale of property and equipment ......................................... 19,125 4,146
----------- -----------
Net cash provided (used) by investing activities ................................. 19,125 (886,926)
----------- -----------
Cash flows from financing activities:
Convertible debt .................................................................... 667,499 --
Payment on capital leases ............................................................ -- (22,791)
Net proceeds from issuance of common stock ........................................... 5,000 1,049,537
----------- -----------
Net cash provided by financing activities ........................................ 672,499 1,026,746
----------- -----------
Net decrease in cash and cash equivalents .............................................. (2) (8,882,885)
Cash and cash equivalents at beginning of period ....................................... 9,334 11,059,061
----------- -----------
Cash and cash equivalents at end of period ............................................. $ 9,332 2,176,176
----------- -----------
Supplemental Disclosure:
(i) Interest paid (received) $ 765,860 (250,431)
Taxes paid $ -- --
(ii) During the six-month period ending December 31, 2001 the Company issued 500000 shares of its common stock as a result of the
conversion of $20,000 debt.
(iii)During the six-month period ending December 31, 2001 the Company issued 16,366,612 warrants in conjunction with its July 2001
private placement resulting in the Company recording $553,066 financing cost that are being amortized on a straight line basis
over a three year period beginning July 31,2001. The Company amortized $76,815 financing costs relating to these warrants for
the six months ending December 31, 2001.
(iv) During the six months ending December 31, 2001 the Company returned $481,897 of inventory items to its vendor for credit.
See accompanying notes to interim condensed financial statements
5
DATA RACE, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1) Summary of Significant Accounting Policies
Description of Business
DATA RACE, Inc. ("Data Race", "we" or the "Company"), currently doing business
as IP AXESS, designs, manufactures, and markets a line of innovative
communications products to meet the needs of remote workers. The Company's lead
product, the VocalWare(TM) IP remote access system, provides virtual presence to
the corporate environment by allowing a remote worker to connect to the
corporate office over a normal dial-up telephone line or a number of broadband
access mediums such as digital subscriber lines (DSL), cable modems, integrated
services digital networks (ISDN), asynchronous transfer modes (ATM) and frame
relay, and simultaneously have full access to the corporate data network, the
office phone extension, and the office fax system.
Basis of Presentation
The unaudited interim, condensed financial statements reflect all adjustments
(consisting of normal recurring accruals) that in the opinion of management are
necessary for a fair presentation of the financial position, results of
operations and cash flows for such periods. These financial statements should be
read in conjunction with the Company's financial statements and notes thereto
included in the June 30, 2001 Annual Report on Amendment No. 1 to Form 10-K. The
condensed balance sheet data as of June 30, 2001 included herein has been
derived from such audited financial statements. Interim period results are not
necessarily indicative of the results to be expected for any future periods or
the full year.
Revenue Recognition
Revenue is generally recognized upon direct sale and shipment of products to
end-user customers or when contractual services have been provided to end-user
customers, title has passed to the end-user customer, the fee and terms are
fixed or determinable, and collectibility is reasonably assured. Such method is
in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition
in Financial Statements. Revenue is generally recognized upon reseller
(indirect) sale of products when title has passed to the reseller, a reseller
agreement exists, the fee and terms are fixed or determinable, and
collectibility is reasonably assured. The Company does have a reservation of
title on resellers where the products are delivered to reseller's location or
reseller's end-user location outside the United States. The Company reserves
title in the products until either: a) reseller pays in full for the products;
or b) reseller sells the product to a third party at which time title passes to
the third party. The Company, in most
6
reseller agreements, has an inventory balancing provision, which generally gives
the reseller the opportunity to balance its inventory by returning for credit up
to 20% of the value of the products shipped during a quarter. The Company will
record a liability for up to 20% on sales by resellers for the inventory
balancing provision. The Company also has price protection for most resellers
where products shipped to resellers whose price have been decreased will be
price protected if the resellers products are unopened and shipped to reseller
180 days or less prior to the effective date of price decrease. The reseller
must submit a claim within 30 days of the effective date of the price decrease
to receive credit in the amount of the price decrease multiplied by the
qualifying units.
Revenue from service obligations and licensing agreements are deferred and
recognized ratably over the period of the obligation or agreement. The Company
recognizes revenue and gross profit from evaluation units shipped only upon
receipt of payment or upon customer acceptance and reasonably assured
collection.
2) Going Concern Uncertainty
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern. The Company has
incurred substantial losses for its past three fiscal years. At December 31,
2001, current liabilities exceed current assets by approximately $2,300,000,
total liabilities exceed total assets by approximately $1,800,000 and the
accumulated deficit aggregated approximately $74,600,000. In view of these
matters, realization of a major portion of the assets in the accompanying
balance sheet is dependent upon the Company's ability to meet its financing
requirements, and the success of its future operations.
In addition, effective July 11, 2001, the Company's common stock was delisted by
The Nasdaq National Market due to a failure to pay overdue annual and additional
listing fees in the amount of $44,125 and the inability to meet the minimum bid
price requirements for continued listing.
Operating losses have had and continue to have a substantial negative effect on
the Company's cash balance. The Company's goal of returning to profitability and
developing a more dependable revenue base relies on the success of the VocalWare
IP product line. To successfully penetrate the target markets, the Company
expects that significant additional resources will need to be expended in order
to expand its sales and marketing infrastructure and operation systems, and to
finance inventory and receivables.
The Company has historically funded operations with the proceeds from the sale
of equity securities and has not generated positive cash flows from operations
for the past three years. The Company will need to raise more money to continue
to finance its operations and may not be able to obtain additional financing on
acceptable terms, or at all. Any failure to raise additional financing will
likely place the Company in significant financial jeopardy.
During July 2001, the Company decreased its overhead through payroll reductions
and related benefit costs (reducing its workforce from 77 employees to 6
employees). Management is also currently consolidating operations into one
location thereby effecting
7
savings on rent and associated facility costs. The Company believes that these
cost reductions and the raising of additional financing will allow them to
continue in existence.
3) Earnings (Loss) Per Share
Net loss per share of common stock is presented in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. Under SFAS No. 128, basic earnings/loss per share excludes
dilution for potentially dilutive securities and is computed by dividing income
or loss available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings/loss per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Diluted loss per share approximates basic loss per share, as no potential common
shares are to be included in the computation when a loss from continuing
operations available to common shareholders exists.
4) Inventory
Inventory is valued at the lower of cost (principally standard cost which
approximates first-in, first-out) or market (net realizable value). Costs
include materials, labor, overhead, and subcontract charges as applicable. If in
the ordinary course of business, management determines that the utility of its
inventory is no longer as great as its cost, due to obsolescence, physical
deterioration, changes in price levels, etc., the Company will recognize a
reduction in the value of its inventory and record a corresponding charge to
income. No significant inventory adjustments where made during the quarter and
six months ending December 31, 2001.
Inventory consists of the following:
December 31, June 30,
2001 2001
---------- ----------
Finished goods $ 572,660 $1,054,557
Work in process 322,797 322,797
Raw materials 1,499,152 1,499,152
---------- ----------
Total inventory $2,394,609 $2,876,506
========== ==========
8
5) Convertible Debt
May 2001 Private Placement
In May 2001, the Company issued one year, 10% secured convertible promissory
notes and 1,166,667 common stock purchase warrants for $700,000. The notes are
convertible at any time at the holders' option into common stock at $0.30 per
share. The warrants are exercisable at a price of $0.30 per share through May
2006. As of February 20, 2002, there have been no conversions on the notes.
June 2001 Private Placement
On June 12, 2001, the Company signed an agreement to place up to $1 million in
6% convertible debentures and warrants to two institutional investors. The
parties amended the agreement on July 17, 2001, October 18, 2001, and December
19, 2001. The convertible debentures have an interest rate of 6% per annum and
mature 3 years from their date of issuance. Under the terms of the convertible
debentures, the holders can elect at any time prior to maturity to convert the
balance outstanding on the debentures into shares of Company common stock at the
lesser of a fixed price that represents a 10% premium to the closing bid price
of common stock at the time the debentures were issued and 50% of the average of
the 5 lowest closing bid prices of Company common stock during the 25 business
days immediately preceding the conversion date. Under the agreements, and
pursuant to Section 4(2) of the Securities Act of 1933, amended, the Company
issued to the investors $500,000 principal amount of convertible debentures on
June 18, 2001, $240,000 principal amount of convertible debentures on July 30,
2001, $130,000 principal amount of convertible debentures on September 6, 2001,
$277,499, principal amount of convertible debentures on October 18, 2001,
$40,000, principal amount of convertible debentures on December 19, 2001 and
$88,000, principal amount of convertible debentures on January 22, 2002. On June
18, 2001, the Company also issued to the investors common stock purchase
warrants to purchase up to 1,000,000 shares of common stock at an exercise price
of $0.14. On October 18, 2001 the parties amended the agreement to increase the
investment amount by $147,499 and the Company granted to the investors a
security interest in all of the assets of the Company covering all prior and
future indebtedness of the Company to the investors. On December 19, 2001 and
January 22, 2002 the parties increased the investment amount by $40,000 and
$88,000, respectively, by the issuance of additional 6% convertible debentures.
The Company used the proceeds from the private placement primarily for general
corporate purposes. The Company is obligated to file a registration statement
for the shares issuable upon conversion of the convertible debentures and
warrants with the SEC. The Company was also obligated to cause the registration
statement to be declared effective by October 2, 2001 and is currently accruing
liquidated damages at the rate of 2% of the outstanding principal amount of the
convertible debentures per month. These penalties may be paid in cash or, at the
investors' option, in common stock. In addition, if the Company issues
additional shares of common stock, then antidilution provisions contained in the
convertible debentures may reduce the conversion price of the shares issued to
the investors so as to prevent dilution of the their investment in the Company.
For the six months ending December 31, 2001 , there have been $20,000 principal
conversions on the notes.
9
6) Warrants
The following table summarizes the outstanding warrants as of the end of
December 31, 2001 and June 30, 2001, respectively. Each warrant in the table is
convertible into one share of the Company's common stock for the indicated
price.
Warrants outstanding as of Dec 31, 2001 June30, 2001 Price Expiration
-------------------------- ------------ ------------ ----- ----------
June 2001 6% convertible debentures 1,000,000 1,000,000 $ 0.14 Jun. 2004
Equity Line of Credit 16,366,612 -- 0.07027 Jul. 2004
May 2001 10% convertible notes 1,166,667 1,166,667 0.30 May 2006
March 2001 private placement 304,762 304,762 0.9875 Mar. 2006
June 2000 private placement 471,822 471,822 5.45 Jun. 2002
December 1999 private placement 571,429 571,429 0.9875 Dec. 2003
June 1999 private placement 693,888 693,888 0.9875 Dec. 2003
------------ ------------
Total warrants outstanding 20,575,180 4,208,568
=========== ============
7) Shareholders Equity
Equity Line of Credit
On July 26, 2001, the Company signed what is sometimes termed an equity line of
credit or an equity draw down facility with Grenville Finance Ltd. In general,
Grenville has committed up to $30 million to purchase our common stock over a 36
month period beginning after and during the period a resale registration
statement registering the shares purchased pursuant to the equity line of credit
is effective. During the periods the resale registration statement is effective,
the Company may request a draw of up to $1 million of that money, subject to a
formula based on average stock prices and average trading volumes, setting the
maximum amount of any request for any given draw. The amount of money that
Grenville will provide and the number of shares to be issued to Grenville in
return for that money is settled twice during a 22-day trading period following
the draw down request based on the formula in the stock purchase agreement.
Grenville receives a 17.5% discount to the market price of Company common stock
during the 22-day period and the Company receives the settled amount of the draw
down, less 8% of such amount to Hadrian Investments Limited for placement agent
fees. Additionally, we issued to Hadrian 500,000 shares in lieu of a cash
payment of $25,000 for services rendered to the Company by Hadrian. In addition,
the Company issued a warrant to Grenville to purchase up to 16,366,612 shares of
Company common stock at an exercise price of $0.07027 and paid Grenville $20,000
for its legal fees and expenses incurred in connection with the equity line of
credit. The Company recorded unamortized financing cost of $553,066 and
additional paid in capital related to the issuance of these warrants. The
financing cost are being amortized over a three year period beginning July, 31,
2001 on a straight line basis resulting in the Company amortizing $76,815 for
the six months ending December 31, 2001. The issuances of the securities to the
accredited investors are made pursuant to Section 4(2) of the Securities Act.
The Company will use the proceeds from the equity line for general corporate
purposes. On November 6, 2001, the Company was dropped from the OTCBB. The
Company notified Grenville Finance of this occurrence and received from
Grenville Finance a waiver of Article 6 section 6.2 (a) (ii) of the Common Stock
Purchase Agreement on termination of the agreement based on the de-listing from
a principal market.
10
Beneficial conversion features of convertible debt
The beneficial conversion features of the convertible debentures issued in
October and December 2001 have been recognized by recording additional paid in
capital and interest expense for the three months and six months ending December
31, 2001. The amount of the beneficial conversion and interest expense is
calculated as of the date of issuance as the difference between the conversion
price and the fair value of the common stock into which the note is convertible.
The Company recognized beneficial conversion interest expense and corresponding
additional paid in capital for approximately $317,000 and $687,000 for the three
and six months ending December 31, 2001, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
During July 2001 the Company decreased its overhead through payroll reductions
and related benefit costs by reducing its workforce from 77 employees to 6
employees. Management is also currently consolidating operations into one
location thereby effecting savings on rent and associated facility costs. The
Company believes that these cost reductions and the raising of additional
financing will allow them to continue in existence. All dollar amounts discussed
below are approximate unless otherwise noted.
Revenue for the three months ending December 31, 2001 where unchanged in the
amount of $0 compared to the same period of the prior fiscal year. Revenue for
the six months ending December 31, 2001 decreased 22% to $4,700 from $6,000 for
the same period of the prior fiscal year.
Gross profit (losses) decreased by 97.7% and 94.6% to $3,900 and $18,000 for the
three and six months ending December 31, 2001 from losses of $166,000 and
$333,000 for the comparable periods of the prior fiscal year. These decreases in
gross profit (losses) are attributed to the Company's reduction of manufacturing
overhead through the closing of its San Antonio facility in August of 2000. In
July 2001, the Company reduced its production support staff from 7 employees to
1 employee and relies upon contract manufacturing resources when necessary.
Engineering and product development expenses decreased by 90% and 87% to
$136,000 and $325,000 for the three and six months ending December 31, 2001
respectively from $1,360,000 and $2,486,000 compared to the same periods for the
prior fiscal year. These decreases were primarily due to the reduction in staff
on July 10, 2001. The company currently has two employees sustaining development
effort.
11
Sales and marketing expenses decreased by 96% and 95% to $53,000 and $125,000
for the three and six months ending December 31, 2001 from $1,420,000 and
$2,581,000 for the comparable periods of the prior fiscal year. These decreases
were primarily due to the company reducing its sales staff down to one person
and using contract-marketing consultants while concentrating specifically on
focused sales opportunities.
General and administrative expenses decreased 67.8% and 61.7% to $346,000 and
$796,000 for the three and six months ending December 31, 2001 from $1,073,000
and $2,076,000 respectively, compared to the same periods for the prior fiscal
year. The reductions in expense are directly attributable to reduced staffing
and facilities savings through the closing of the San Antonio facility in August
2001. The Company has three employees performing administrative functions.
Income tax benefits related to the losses for the six months ended December 31,
2001 were not recognized because the realization of such benefits is not
assured. As of December 31, 2001, the Company had Federal tax net operating loss
carryforwards of approximately $71,200,000 that expire beginning in 2008. The
Company also has research and experimentation credit carryforwards for federal
income tax purposes of approximately $678,000, which began expiring in 2000, and
alternative minimum tax credit carryforwards of approximately $84,000. The
Internal Revenue Code section 382 limits NOL and tax credit carryforwards when
an ownership change of more than fifty percent of the value of stock in a loss
corporation occurs within a three-year period. In fiscal 1999, 1998 and 1997 the
Company issued preferred stock that has since been converted into common stock.
Accordingly, the ability to utilize remaining NOL and tax credit carryforwards
may be significantly restricted.
Liquidity and Capital Resources
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern. As shown in the
financial statements, the Company incurred a loss of approximately $925,000 and
$2,035,000 for the three and six months ended December 31, 2001 respectively and
has incurred losses for each of the preceding 3 years. At December 31, 2001
current liabilities exceed current assets by approximately $2,300,000, and total
liabilities exceed total assets by approximately $1,800,000 and the accumulated
deficit aggregated approximately $74,600,000. In view of these matters,
realization of a major portion of the assets in the accompanying balance sheet
is dependent upon the Company's ability to meet its financing requirements, and
the success of its future operations.
12
In addition, effective July 11, 2001, the Company's common stock was delisted by
The Nasdaq National Market due to a failure to pay overdue annual and additional
listing fees in the amount of $44,125 and the inability to meet the minimum bid
price requirements for continued listing. Effective November 6, 2001, our common
stock was dropped from the OTCBB for failure to timely file reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934. Our
common stock continues to be traded in the "pink sheets" under the symbol
"RACE". We can provide no assurance that an active public trading market for our
common stock will be re-established.
Operating losses have had and continue to have a substantial negative effect on
the Company's cash balance. The Company's goal of returning to profitability and
developing a more dependable revenue base relies on the success of the VocalWare
IP product line. To successfully penetrate the target markets, the Company
expects that significant additional resources will need to be expended in order
to expand its sales and marketing infrastructure and operation systems, and to
finance inventory and receivables.
The Company has historically funded operations with the proceeds from the sale
of equity securities and has not generated positive cash flows from operations
for the past three years. The Company will need to raise more money thru its
equity line of credit to continue to finance its operations and pay its existing
creditors. Any failure to raise additional funds through its equity line of
credit will likely place the Company in significant financial jeopardy as the
Company does not believe that current cash will be sufficient to meet the
Company's current and ongoing operating expenses.
At December 31, 2001, the Company had approximately $9,000 in cash and cash
equivalents.
Equity Line of Credit
In July 2001, the Company signed what is sometimes termed an equity line of
credit or an equity draw down facility with Grenville Finance Ltd. In general,
Grenville has committed up to $30 million to purchase our common stock over a 36
month period beginning after and during the period a resale registration
statement registering the shares purchased pursuant to the equity line of credit
is effective. During the periods the resale registration statement is effective,
the Company may request a draw of up to $1 million of that money, subject to a
formula based on average stock prices and average trading volumes, setting the
maximum amount of any request for any given draw. The amount of money that
Grenville will provide and the number of shares to be issued to Grenville in
return for that money is settled twice during a 22-day trading period following
the draw down request based on the formula in the stock purchase agreement.
Grenville receives a 17.5% discount to the market price of Company common stock
during the 22-day period and the Company receives the settled amount of the draw
down, less 8% of such amount to Hadrian Investments Limited for placement agent
fees. Additionally, we issued to Hadrian 500,000 shares in lieu of a cash
payment of $25,000 for services rendered to the Company by Hadrian. In addition,
the Company issued a warrant to Grenville to purchase up to 16,366,612 shares of
Company common stock at an exercise price of $0.07027 and paid Grenville $20,000
for its legal fees and expenses incurred in connection with the equity line of
credit. . The Company recorded unamortized financing cost of $553,066 and
additional paid in capital related to the issuance of these warrants.
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The financing cost are being amortized over a three year period beginning July,
31, 2001 on a straight line basis resulting in the Company amortizing $76,815
for the six months ending December 31, 2001. The issuances of the securities to
the accredited investors are made pursuant to Section 4(2) of the Securities
Act. The Company will use the proceeds from the equity line for general
corporate purposes. On November 6, 2001, the Company was dropped from the OTCBB.
The Company notified Grenville Finance of this occurrence and received from
Grenville Finance a waiver of Article 6 section 6.2 (a) (ii) of the Common Stock
Purchase Agreement on termination of the agreement based on the de-listing from
a principal market.
Disclosure Regarding Forward Looking Statements
Except for the historical information, this report contains various
"forward-looking statements" which represent the Company's expectations or
beliefs concerning future events, including expectations regarding the rate of
use of existing cash and regarding the success of the Company's strategy to
increase sales and return to profitability. The Company cautions that these
forward-looking statements involve a number of risks and uncertainties and are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements. Such factors include
lack of adequate capital; changing market trends and market needs; uncertainty
regarding the breadth of market acceptance of the teleworker products;
uncertainty regarding the length of the sales process; rapid or unexpected
technological changes; new or increased competition from companies with greater
resources than the Company; inability to resolve technical issues or overcome
other development obstacles and the Company's success in developing new
strategic and financial partnerships. Additional factors which qualify
forward-looking statements are set forth in the Company's other SEC filings,
including the Form 10-K for fiscal 2001. The Company's failure to succeed in its
efforts, including its development of new strategic and financial partnerships,
could have a material adverse effect on the Company's financial condition and
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the Company's exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties.
At December 31, 2001, the Company had approximately $1,700,000 of interest
bearing indebtedness. The interest rates are fixed and therefore, we do not have
any significant interest rate risk.
At December 31, 2001, the Company did not own any equity investments. Therefore,
the Company did not have any direct equity price risk.
Substantially all Company revenues are realized in U.S. dollars and no
significant asset or cash account balances are maintained in currencies other
than the United States dollar. Therefore, the Company does not have significant
direct currency exchange rate risk.
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DATA RACE, Inc.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 18, 2001, the Company, executive officers, Michael McDonnell, previously
the President and Chief Executive Officer (resigned in July 2001), and James
Scogin, Acting President and Chief Financial Officer and John Liviakis, one of
our significant shareholders were sued in the United States District Court for
the Northern District of Illinois, Eastern Division, by Robert Plotkin, a
Chicago-based attorney, and several of Mr. Plotkin's relatives and family
trusts, who are all shareholders of the Company. The amount of the monetary
damages being sought is $20,000,000. The complaint alleges that the plaintiffs
were induced to purchase shares of our common stock based upon alleged
misrepresentations and omissions of material fact. The proceeding has been moved
to the United States District Court for the Eastern District of Texas, Sherman
Division in October 11, 2001. Discovery has not commenced, but we believe the
lawsuit is without merit and intend to vigorously defend the Company against
these allegations.
ITEM 2. CHANGES IN SECURITIES
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
None
b) Reports on Form 8-K.
A report on Form 8-K was filed on November 20, 2001 to report a change in
certifying accountant
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATA RACE, INC.
By: /s/ James G. Scogin
---------------------------------
James G. Scogin, Acting President
and Chief Financial Officer
Date: April 3, 2002
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