To all; 11-08-96
Product Revenue. Product revenue consists primarily of revenue from the
sale of tangible products, such as Asymmetric Digital Subscriber Line ("ADSL")
modems and video editing chipset products, which are manufactured by the Company
or third party suppliers. Product revenue increased by 281% from $99,720 in the
third quarter of 1995 to $379,926 in the current year quarter. Product revenue
as a percentage of total revenue was 25% in the third quarter of 1996 as
compared to 10% in the corresponding quarter of 1995. The dollar increase, as
well as the increase as a percentage of total revenue, is primarily due to the
following reasons. Revenue in the third quarter of 1995 consisted primarily of
revenue from the sale of video editing chipset products, which the Company
discontinued in the fourth quarter of 1995. Revenue in the third quarter of 1996
consisted primarily of revenue from the sale of ADSL modems, which the Company
began shipping in the first quarter of 1996. Accordingly, a comparison of
product revenue on a year over year basis is not particularly meaningful due to
differences in the composition of product revenue.
For the nine months ended September 30, product revenue increased by 63%
from $324,521 in 1995 to $529,945 in 1996. Product revenue as a percentage of
total revenue was 15% for the first nine months of 1996 as compared to 14% in
the corresponding period in 1995. A comparison of product revenue on a nine
month period over period basis is not particularly meaningful due to differences
in the composition of product revenue.
License and Royalty Revenue. License and royalty revenue consists primarily
of revenue from the sale of intellectual property, such as hardware and software
technology licenses, compression software licenses, and royalties from the sale
of chipsets by customers who have licensed the Company's technology. As such
revenue has only a nominal cost of sale associated with it, the Company does not
report a separate cost of license and royalty revenue line in its Statements of
Operations.
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License and royalty revenue increased by 124% from $349,729 in the third quarter
of 1995 to $782,047 in the current year quarter. License and royalty revenue as
a percentage of total revenue was 52% in the third quarter of 1996 as compared
to 36% in the corresponding quarter of 1995. For the nine months ended September
30, license and royalty revenue increased by 199% from $742,240 in 1995 to
$2,221,652 in 1996. License and royalty revenue as a percentage of total revenue
was 62% for the first nine months of 1996 as compared to 33% in the
corresponding period of 1995. The dollar increase as well as the increase as a
percentage of total revenue, in both the three and nine month periods, is
primarily due to an increase in the sale of ADSL and other broadband technology
licenses to telephone company equipment suppliers, and sales of compression
software licenses.
Research and Development Revenue. Research and development revenue consists
primarily of revenue from commercial contract engineering and development, and
government research contracts. Research and development revenue decreased by 33%
from $514,049 in the third quarter of 1995 to $343,847 in the current year
quarter. Research and development revenue as a percentage of total revenue was
23% in the third quarter of 1996 as compared to 53% in the corresponding quarter
of 1995. The dollar decrease is primarily due to lower revenue from commercial
research and development contracts, as well as lower revenue from U.S.
government research contracts.
For the nine months ended September 30, research and development revenue
decreased by 30% from $1,208,688 in 1995 to $844,701 in 1996. Research and
development revenue as a percentage of total revenue was 24% for the first nine
months of 1996 as compared to 53% in the corresponding period of 1995. The
dollar decrease is primarily due to lower revenue from commercial research and
development contracts.
For both the three and nine month periods, the decrease in research and
development revenue as a percentage of total revenue was driven by the Company's
decision to shift its business away from contract research activities toward the
sale of commercial technology licenses, which resulted in lower research and
development revenue and higher product and license and royalty revenue.
Cost of Product Revenue. Cost of product revenue consists primarily of
direct material, direct labor and overhead costs to produce the Company's
products, and cost of goods for purchases of finished goods inventory from third
party suppliers. Cost of product revenue as a percentage of product revenue was
70% in the third quarter of 1996 as compared to 46% in the prior year quarter.
Cost of product revenue as a percentage of product revenue was 69% for the first
nine months of 1996 as compared to 45% in the corresponding 1995 period. In the
three and nine month periods in 1996, the percentages primarily reflect the cost
of modem revenue. In the three and nine month periods in 1995, the percentages
primarily reflect the cost of video editing chipset revenue. Accordingly, a
comparison of cost of product revenue on a year over year basis is not
particularly meaningful due to differences in the composition of product
revenue.
Cost of Research and Development Revenue. Cost of research and development
revenue consists primarily of direct labor, direct material and travel expenses
associated with commercial contract engineering and development, and government
research contracts. As a percentage of research and development revenue, related
costs increased from 50% in the third quarter of 1995 to 63% in the current year
quarter. The increase in cost as a percentage of research and
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development revenue is primarily attributable to the mix of commercial and U.S.
government research contracts, and the profitability of individual contracts.
The cost of research and development revenue as a percentage of research and
development revenue was unchanged at 72% for the nine month periods in 1995 and
1996.
Research and Development Expense. Research and development expense consists
primarily of employee and consultant costs, supplies and allocated facilities
costs related to the development and enhancement of the Company's products and
technology. Research and development expense increased by 151% from $236,960 in
the third quarter of 1995 to $593,570 in the current year quarter. For the nine
month period ended September 30, research and development expense increased 46%
from $944,876 in 1995 to $1,383,067 in 1996. For the three and nine month
periods, the increase in research and development expense is primarily
attributable to higher spending on projects to develop, enhance, and
commercialize the Company's ADSL and Hybrid Fiber Coaxial technology. Higher
spending on these projects was partially offset by lower spending as a result of
the discontinuance of research involving audio compression technology and lower
facilities costs as a result of the relocation of the Company's facilities in
June 1995.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel, travel, product
advertising, and allocated facilities expense. Selling and marketing expense
increased 76% from $101,282 in the third quarter of 1995 to $178,568 in the
current year quarter. For the nine month period ended September 30, sales and
marketing expense increased 68% from $303,880 in 1995 to $509,117 in 1996. For
the three and nine month periods, the increase is primarily due to the addition
of sales personnel and increased product advertising related to the introduction
of the Company's ADSL modem.
General and Administrative Expense. General and administrative expense
consists primarily of salaries for administrative officers and support
personnel, allocated facilities costs, and professional services, such as legal
and audit expenses. General and administrative expense increased by 51% from
$164,832 in the third quarter of 1995 to $248,051 in the current year quarter.
For the nine month period ended September 30, general and administrative expense
increased 28% from $540,222 in 1995 to $691,366 in 1996. For the three and nine
month periods, the increase is primarily due to additions to the Company's
management team, legal expenses, and, with respect to the three month period,
expenses associated with becoming a public company.
Interest Income. Interest income increased from $24,931 in the third
quarter of 1995 to $257,433 in the current year quarter, primarily as a result
of higher cash balances due to the investment of net proceeds from the Company's
initial public offering ("IPO"). For the nine months ended September 30,
interest income increased from $85,787 in 1995 to $311,301 in 1996, also
primarily as a result interest earned on the IPO proceeds.
Income Taxes. The Company has not provided for income taxes as it has a
history of net losses, which has resulted in tax loss carryforwards. As of
December 31, 1995, the Company had net operating loss carryforwards of
approximately $9,700,000 and approximately $576,000 of research and development
tax credit carryforwards to offset future federal taxable income. To the extent
not utilized, the net operating loss and tax credit carryforwards expire between
2003 and 2010. |
