February 15, 2002
DATA RACE INC (RACE)
Quarterly Report (SEC form 10-Q)
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.
Revenue for the three months ending September 30, 2001 decreased 22% to $4,700 from $6,000 for the same period of the prior fiscal year.
Gross profit loss for the three months ending September 30, 2001 decreased by 91.6% to $14,128 from a loss of $167,256 for the same period of the prior fiscal year. The decrease in gross profit loss is attributable to the Company's reduction of manufacturing overhead through the closing of its San Antonio facility in August of 2000 and in July 2001, reducing its production support staff from 7 employees to 1 employee.
Engineering and product development expenses for the three months ended September 30, 2001 decreased 83% from the comparable period for the prior fiscal year. This decrease was primarily due to the reduction in staff on July 10, 2001. The company currently has two employees sustaining development effort.
Sales and marketing expenses for the three months ended September 30, 2001 decreased 94% from the comparable period of the prior fiscal year. This decrease was primarily due to the company reducing its sales staff down to one person.
General and administrative expenses for the three months ended September 30, 2001 decreased 57% primarily due to reduced staffing. The Company currently has three employees performing administrative functions.
Income tax benefits related to the losses for the three months ended September 30, 2001 were not recognized because the realization of such benefits is not assured. As of September 30, 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 $1,080,000 for the three months ended September 30, 2001 and has incurred losses for each of the preceding 3 years. At September 30, 2001 current liabilities exceed current assets by approximately $1,818,000 and total liabilities exceed total assets by approximately $1,226,000 and the accumulated deficit aggregated approximately $73,607,000. 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. 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 thru 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 September 30, 2001, the Company had approximately $2,000 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 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.
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.
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Recent filings: Jan 12, 2001 (form8-K) | Feb 14, 2001 (Qtrly Rpt) | Mar 07, 2001 (form8-K) | May 15, 2001 (Qtrly Rpt) | Jul 24, 2001 (form8-K) | Dec 04, 2001 (form8-K) | Dec 12, 2001 (Annual Rpt) | Feb 15, 2002 (Qtrly Rpt) | Feb 15, 2002 (form10-K/A)
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