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Nasdaq:RACE
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Recent Filings: Sep 1998 (Annual Rpt) | Nov 1998 (Qtrly Rpt) | Feb 1999 (Qtrly Rpt)
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February 16, 1999
DATA RACE INC (RACE)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
OF OPERATIONS
-
Results of Operations
Total revenue for the three months ended December 31, 1998 decreased 50% to $788,000 from
$1,574,000 in the comparable period of the prior fiscal year. Revenue for the six months ended
December 31, 1998 decreased 38% to $1,699,000 from $2,728,000 in the comparable period of
the prior fiscal year. These decreases were primarily due to the completion during the second
quarter of the prior year of substantially all shipments under existing custom modem contracts.
Gross profit margin was 30% and 32% for the three and six months ended December 31, 1998,
up from 25% and 20% from the comparable periods of the prior fiscal year. The increased gross
margins are primarily due to decreased manufacturing variances primarily attributable to reduced
manufacturing spending and inventory obsolescence reserve adjustments consistent with the
Company's current inventory levels and projected activity levels.
Engineering and product development expenses for the three and six months ended December 31,
1998 decreased 50% and 48% respectively from the comparable periods of the prior fiscal year.
These decreases were primarily due to reductions in outside development contracts for Be There!
products and reduced development payroll for the custom modem and network multiplexer
products.
Sales and marketing expenses for the three and six months ended December 31, 1998 decreased
53% and 48% respectively from the comparable periods of the prior fiscal year. These decreases
were primarily due to the Company's suspension of most outside advertising.
General and administrative expenses for the three and six months ended December 31, 1998
increased 138% and 111% respectively from the comparable periods of the prior fiscal year.
These increases were attributable to non-cash expenses associated with a consulting agreement,
and legal expenses associated with the patent infringement lawsuit. This was offset in part by
spending reductions over the six-month period, and accrual and reserve adjustments consistent
with the Company's current activity levels.
Income tax benefits related to the losses for the three and six months ended December 31, 1998
were not recognized because the utilization of such benefits is not assured. As of December 31,
1998, the Company had federal tax net operating loss carryforwards of approximately
$40,000,000, which expire beginning in 2009. The value of these net operating loss carryforwards
is dependent on future events and complex tax code provisions, and cannot be assured or stated
with certainty.
Liquidity and Capital Resources
Operating losses have had and continue to have a substantial negative effect on the Company's
cash balance. At December 31, 1998, the Company had approximately $3,726,000 in cash and
cash equivalents.
The Company received proceeds of approximately $2,200,000 from the issuance of the
November Private Placement of restricted common stock and warrants. See Item 2 of this report
for a more complete description of the terms of the transaction. In December 1998, the Company
completed the second closing of the private placement of the Series D Preferred Stock and related
Class A Warrants for an aggregate price of $1,000,000. In January 1999, the Company
completed the second closing of the private placement of the Series F Preferred Stock and related
Class B Warrants for an aggregate price of $750,000. The Preferred Stock is redeemable under
certain circumstances.
In January 1999, the Company had a hearing before the Nasdaq Listing Qualifications Panel
concerning non-compliance with the net tangible asset requirement for continued listing on the
Nasdaq National Market. In February 1999, the Company was notified that the Panel determined
that the Company had demonstrated compliance with all requirements for continued listing and the
Panel decided to continue the listing of the Company's securities on the Nasdaq National Market.
The Company's ability to sustain operations, make future capital expenditures and fund the
development and marketing of new or enhanced products is highly dependent on existing cash, the
ability to raise additional capital, and the ability to successfully attract a strategic partner. The
timing and amount of the Company's future capital requirements can not be accurately predicted.
The Company does not anticipate a return to profitability as long as its expenditures on the Be
There! system remain disproportionate to attendant revenue. The Company will likely require
additional financing in the future; the failure to obtain such financing when needed would have a
substantial adverse effect on the Company.
Year 2000 Compliance
The Company has been evaluating and adjusting all known date-sensitive systems and equipment
for the Year 2000 compliance. The assessment phase of the Year 2000 project is substantially
complete. Company personnel performed virtually all of the compliance. The total estimated cost
of the Year 2000 conversion is not deemed material to the Company and is being expensed as
incurred.
In addition to internal Year 2000 implementation activities, the Company is in communication with
certain third party suppliers, vendors and customers to determine the extent to which those
companies are addressing their Year 2000 compliance problems. There can be no assurance that
there will not be an adverse effect on the Company if third
parties, such as suppliers, service providers or customers, do not bring their systems into
compliance in a timely manner. However, management believes that ongoing communication with,
assessment of, and coordination with these parties will help minimize these risks.
Although the Company anticipates minimal business disruption will occur as a result of Year 2000
issues, possible consequences include, but are not limited to, disruption of voice mail
communications, purchase order processing, and other normal business activities. The Company
can not be certain that unexpected Year 2000 compliance problems of its products, or its
computer systems or the systems of its vendors, customers and service providers, will not
materially and adversely affect the Company's business, financial condition or operating results.
To date, the Company has not established a contingency plan for possible Year 2000 issues.
Where needed, the Company will establish contingency plans by June 30, 1999, based on its
actual testing experience and assessment of outside risks. The cost of and the completion dates are
based on management's best estimates and may be updated, as additional information becomes
available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
The Company does not believe that it is currently exposed to material risks associated with market
risk sensitive instruments.
Recent Filings: Sep 1998 (Annual Rpt) | Nov 1998 (Qtrly Rpt) | Feb 1999 (Qtrly Rpt)
More filings for RACE available from EDGAR Online
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