SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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
March 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, 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 May 11, 2001, there were approximately 29,983,700 outstanding shares of
Common Stock, no par value.
1
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 March 31, 2001 and June 30, 2000................... 3
Condensed Statements of Operations for the Three Months
and Nine Months Ended March 31, 2001 and 2000..................................... 4
Condensed Statements of Shareholders Equity for the Nine Months
Ended March 31, 2001.............................................................. 5
Condensed Statements of Cash Flows for the Nine Months
Ended March 31, 2001 and 2000..................................................... 6
Notes to Interim Condensed Financial Statements................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk......................... 13
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings................................................................. 14
Item 2. Changes in Securities............................................................. 14
Item 3. Defaults Upon Senior Securities................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............................... 14
Item 5. Other Information................................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................................. 14
SIGNATURES.................................................................................. 15
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2
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS
-----------------------------------------------
DATA RACE, Inc.
CONDENSED BALANCE SHEETS
As of
-------------------------------------------------
March 31, 2001 June 30, 2000
----------------------- ----------------------
Unaudited Audited
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 542,293 $ 11,059,061
Accounts receivable, net....................................... 15,511 6,401
Inventory...................................................... 3,341,679 249,876
Prepaid expenses and deposits.................................. 467,597 206,001
----------------------- ----------------------
Total current assets......................................... 4,367,080 11,521,339
Notes receivable, non-current.................................... 343,667 350,000
Property and equipment, net...................................... 1,912,449 1,235,919
Other assets, net................................................ 84,630 84,630
----------------------- ----------------------
Total assets................................................. $ 6,707,826 $ 13,191,888
======================= ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 2,291,923 $ 504,001
Accrued expenses............................................... 517,159 625,558
Obligations under capital lease, current....................... 12,572 -
----------------------- ----------------------
Total current liabilities.................................... 2,821,654 1,129,559
Obligations under capital lease, non-current..................... 62,570 -
Deferred gain.................................................... 331,602 334,788
Shareholders' equity:
Common stock............................................... 62,079,803 59,806,425
Additional paid in capital................................. 8,702,295 7,673,310
Retained deficit........................................... (67,290,098) (55,752,194)
----------------------- ----------------------
Total shareholders' equity................................... 3,492,000 11,727,541
----------------------- ----------------------
Total liabilities and shareholders' equity.................. $ 6,707,826 $ 13,191,888
======================= ======================
See accompanying notes to interim condensed financial statements
3
DATA RACE, Inc.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
Three Months Ended Mar. 31, Nine Months Ended Mar. 31,
-------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ------------ -----------
Total revenue........................... $ 45,801 $ 45,077 $ 52,118 $ 308,142
Cost of revenue......................... 475,147 219,135 817,017 584,779
----------- ----------- ------------ -----------
Gross profit...................... (429,346) (174,058) (764,899) (276,637)
Operating expenses:
Engineering and product
development.......................... 1,490,001 763,496 3,975,711 2,417,579
Sales and marketing................... 1,188,659 717,231 3,767,440 1,710,048
General and administration............ 1,275,250 593,959 3,351,547 2,524,186
----------- ----------- ------------ -----------
Total operating expenses.......... 3,953,910 2,074,686 11,094,698 6,651,813
----------- ----------- ------------ -----------
Operating loss.................... (4,383,256) (2,248,744) (11,859,597) (6,928,450)
Other income............................ 11,048 100,775 321,693 327,821
----------- ----------- ------------ -----------
Loss from continuing operations......... (4,372,208) (2,147,969) (11,537,904) (6,600,629)
Income from discontinued operation...... - 47,181 - 217,734
----------- ----------- ------------ -----------
Net loss........................ $(4,372,208) $(2,100,788) $(11,537,904) $(6,382,895)
=========== =========== ============ ===========
Per share data:
Net loss........................ (4,372,208) (2,100,788) (11,537,904) (6,382,895)
Effect of beneficial conversion
feature of convertible
preferred stock............... - - - (159,445)
----------- ----------- ------------ -----------
Net loss applicable to common
stock......................... $(4,372,208) $(2,100,788) $(11,537,904) $(6,542,340)
=========== =========== ============ ===========
Net basic/diluted loss from continuing
operations per common share $ (0.16) $ (0.09) $ (0.43) $ (0.32)
Net basic/diluted loss per common
share $ (0.16) $ (0.09) $ (0.43) $ (0.31)
=========== =========== ============ ===========
Weighted average shares outstanding..... 27,880,747 22,819,767 26,916,718 21,421,480
----------- ----------- ------------ -----------
See accompanying notes to interim condensed financial statements
4
DATA RACE, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
Number of Common Total
Shares Common Stock Additional Paid-In Accumulated Deficit Shareholders'
Outstanding Capital Equity
------------------- ------------- ------------------- -------------------- ----------------
Balances at July 1, 2000 26,083,364 $59,806,425 $7,673,310 $(55,752,194) $ 11,727,541
Net loss for the nine months
ended March 31, 2001 - - - (11,537,904) (11,537,904)
Issuance of common stock in
exercise of warrants relating to
Class A and B preferred stock 210,222 472,999 - - 472,999
Issuance of common stock in
cashless exercise of warrants
related to November 1998
private placement 297,313 - - - -
Issuance of common stock and
warrants in connection of
March 2001 private placement,
net of offering costs 3,047,620 1,147,888 164,718 - 1,312,606
Modification of warrant terms
to acquire common stock in
connection with the sale of
common stock in the March 2001
private placement - - 687,394 - 687,394
Stock option compensation - - 176,873 - 176,873
Exercise of stock options and
warrants 249,024 560,483 - - 560,483
Employee stock purchase plan 87,100 92,008 - - 92,008
-----------------------------------------------------------------------------------------------
Balances at March 31, 2001 29,974,643 $62,079,803 $8,702,295 $(67,290,098) $ 3,492,000
===============================================================================================
See accompanying notes to interim condensed financial statements
5
DATA RACE, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
Nine Months Ended Mar. 31,
----------------------------
2001 2000
------------ -----------
Cash flows from operating activities:
Net loss........................................................ $(11,537,904) $(6,382,895)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................. 383,595 217,452
Non-cash consulting fee........................................ 729,110
Non-cash stock option compensation............................. 176,873
Gain (loss) on sale of assets.................................. 19,400 3,773
Income from discontinued operations............................ - (217,734)
Changes in assets and liabilities:
Accounts and notes receivable.................................. (2,777) 44,886
Inventory...................................................... (3,091,803) 11,235
Prepaid expenses, deposits, and other assets................... (261,596) 145,702
Accounts payable............................................... 1,787,922 (123,774)
Accrued expenses and other liabilities......................... (111,585) 18,223
------------ -----------
Net cash used in operating activities......................... (12,637,875) (5,554,022)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment.............................. (1,102,102) (133,245)
Proceeds from sale of property and equipment.................... 136,755 -
Provided by discontinued operations............................. -
------------ -----------
Net cash used in investing activities......................... (965,347) (133,245)
------------ -----------
Cash flows from financing activities:
Payment on capital leases....................................... (39,036) -
Net proceeds from the issuance of common stock and related
warrants....................................................... 3,125,490 4,735,645
------------ -----------
Net cash provided by financing activities..................... 3,086,454 4,735,645
------------ -----------
Net decrease in cash and cash equivalents........................ (10,516,768) (540,353)
Cash and cash equivalents at beginning of period................. 11,059,061 7,654,978
------------ -----------
Cash and cash equivalents at end of period....................... $ 542,293 $ 7,114,625
============ ===========
See accompanying notes to interim condensed financial statements
6
DATA RACE, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1) Summary of Significant Accounting Policies
----------------------------------------------
Description of Business
DATA RACE, Inc. d/b/a IP AXESS (the "Company") provides integrated IP based
remote worker solutions over multiple access media. The Company's VocalWare IP
client/server product line provides out-of-office employees with simultaneous
access to critical corporate resources including phone, fax, Internet, and E-
mail over a single connection via: DSL, cable modem, LAN, Frame Relay, ATM or
high speed dial up through VPN, local ISP POP, or PSTN. VocalWare's primary
markets are telecommuters, who can establish a virtual office presence with just
one line, and call centers that use VocalWare to connect part-time workers to
customers and corporate databases simultaneously over a single line. The
Company, after exiting the network multiplexer business, operates in one
business segment.
Basis of Presentation
The unaudited interim 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, 2000 Annual Report on Form 10-K and the Quarterly Report on Form
10-Q for the quarters ended September 30, 2000 and December 31, 2000. The
condensed balance sheet data as of June 30, 2000 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 shipment of products to end
user customers or when contractual services have been provided to end user
customers, the fee and terms are fixed or determinable, and collectibility is
reasonably assured. Revenue is generally recognized upon reseller (indirect)
sale of products when 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 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. 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
7
evaluation units shipped only upon receipt of payment or upon customer
acceptance and reasonably assured collection.
2) Liquidity and Capital Resources
----------------------------------
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 depends on the success of the
VocalWare IP product line. To successfully penetrate its 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'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 develop and sustain strategic relationships. The failure
to obtain such financing when needed and to attract a strategic partner would
have a substantial adverse effect on the Company.
2) Earnings 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 and basic loss per share are the same, as no potential
common shares are to be included in the computation when a loss from continuing
operations available to common shareholders exists.
3) Inventory
------------
Inventory is valued at the lower of standard cost (approximates first-in, first-
out method) or market (net realizable value). Inventory consists of the
following:
March 31, June 30,
2001 2000
------------- -------------
Finished goods $ 1,578,591 $ 138,014
Work in process 287,673 80,151
Raw materials 1,475,415 31,711
------------- -------------
Total inventory $ 3,341,679 $ 249,876
============= =============
8
As of March 31, 2001, finished goods inventory included approximately $388,000
of inventory shipped and billed to third parties not yet recorded as revenue and
approximately $186,000 of inventory shipped as evaluation units.
4) March 2001 Private Placement
-------------------------------
On March 2, 2001, Data Race, Inc. (the "Company") completed a private placement
of 3,047,620 shares of its common stock (the "Common Shares"), and warrants to
purchase 304,762 shares of common stock (the "Warrants") to Protius Overseas
Limited, Keyway Investments Ltd., and Lionhart Investments Ltd. (the
"Investors"), for an aggregate price of $2,000,000. The Warrants are exercisable
at a price of $0.9875 per share through March 2, 2006. The Company intends to
use the proceeds from the private placement primarily for general corporate
purposes.
The Company has agreed to file a registration statement under the Securities Act
of 1933, covering the resale of the Common Shares and the shares of common stock
issuable upon exercise of the Warrants. The Company will incur certain penalties
if the registration statement, which has been filed, is not declared effective
by May 31, 2001. 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 prior to the effective date of the registration statement, then
antidilution provisions contained in the securities purchase agreement may
require the Company to issue additional shares of common stock to the Investors
so as to prevent dilution of the Investors' investment in the Company.
In connection with the private placement, (i) the Company granted to the
Investors a right of first refusal to purchase additional securities issued by
the Company (subject to certain exceptions) prior to August 29, 2001 and (ii)
agreed to reduce to $0.9875 the exercise price of warrants to purchase an
aggregate of 1,265,317 shares of the Company's Common Stock issued in connection
with the Company's June 1999 and December 1999 private placements and to extend
the term of these warrants for two years to December 10, 2003.
5) Warrants
------------
The following table summarizes the outstanding warrants as of March 31, 2001 and
June 30, 2000, respectively.
March 31, 2001 June 30, 2000 Price Expiration
March 2001 private placement 304,762 - $ .98 Mar 2006
June 2000 private placement 471,822 471,822 5.45 Jun 2002
December 1999 private placement 571,429 571,429 .98 Dec 2003
June 1999 private placement 693,888 693,888 .98 Dec 2003
November 1998 private placement - 956,655 2.25 Nov 2000
-----------------------------------------------------------------------------------------
9
Series C Warrants - 53,977 6.435 Nov 2000
Class A and B second close - 24,968 0.6625 Jul 2000
Class A and B first close - 35,400 0.6625 Jul 2000
--------- ---------
Total warrants outstanding 2,041,901 2,808,139
-----------------------------------------------------------------------------------------
In July 2000, remaining warrants for the class A and B first and second close
expired.
In September 2000, the Company issued 210,222 shares of its common stock in
conjunction with the exercise of 210,222 warrants from the November 1998 private
placement. In a cashless exercise, the Company issued 297,313 shares of its
common stock as result of the exercise of 690,333 warrants. The remaining 56,110
warrants balance of the November 1998 private placement expired in November
2000.
In November 2000, the remaining balance of Series C Warrants expired.
In March 2001, the Company issued 304,762 warrants to acquire its common stock
in conjunction with its private placement.
Also, in connection with the private placement of common stock and warrants to
acquire common stock for proceeds of $2 million in March 2001, the Company
agreed to modify the terms of pre-existing warrants to acquire an aggregate of
1,265,317 shares of the Company's common stock. The Company reduced the strike
price of these warrants from a weighted-average amount of $3.56 to $0.98 per
share, and extended the expiration date of the warrants from December 2001 to
December 2003. The change in the fair value of these warrants as a result of the
modifications is $687,394, which has been recorded as a cost of the issuance
of the common stock and related warrants.
6) Subsequent Events
----------------------
In May 2001, the Company issued 10% secured convertible promissory notes and
common stock purchase warrants for $700,000. The notes are convertible into
common stock at $0.30 per share and the company issued 1,166,667 warrants. The
warrants are exercisable at a price of $0.30 per share through May 2006.
In April 2001, the Company entered into a nonbinding letter of intent with an
investor to invest $8,000,000 in cash and $22,000,000 in prepaid media in
exchange for equity at a price of $0.30 per share. The consumation of this
transaction is subject to a number of contingencies, including board approval
and shareholder approval.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
In March 2000, the Company sold its network multiplexer line to HT
Communications. Since the second quarter of 1999, the Company has not bid on
additional custom modem business. Therefore, the following discussion is limited
to the Company's continuing operations of its VocalWare IP business segment.
Discontinued operations are discussed separately below.
In May 2001, the Company reduced its current workforce by approximately 15% in
all areas of the Company. As a result, certain engineering and product
development, sales and marketing and general and administration expenses will
decline in the upcoming quarters.
In the third quarter ended March 31, 2001, the Company had approximately $46,000
in recognizable revenue. As of March 31, 2001, $625,000 in revenue shipments was
not recognized on shipped servers and clients, since these transactions do not
meet the Company's criteria for revenue recognition. The servers shipped prior
to December 2000 have extended terms over normal reseller agreements. As a
result, total revenue from continuing operations for the three and nine months
ended March 31, 2001 increased 2% and decreased 83 %, respectively, from the
comparable periods for prior fiscal year.
10
Engineering and product development expenses for the three and nine months ended
March 31, 2001 increased 77 % and 59%, respectively, from the comparable periods
for the prior fiscal year. This increase was primarily due to outside contract
engineering expenditures and workforce increases for continued development and
enhancements of the VocalWare IP products.
Sales and marketing expenses for the three and nine months ended March 31, 2001
increased 66% and 120%, respectively, from the comparable periods of the prior
fiscal year. This increase was primarily due to increased headcount in the sales
staff and travel that are necessary to properly market, coordinate, distribute,
and service VocalWare IP products.
General and administrative expenses for the three and nine months ended March
31, 2001 increased 115% and 33%, respectively, from the comparable periods of
the prior fiscal year. This increase reflects increased staffing that management
believes is necessary to support recent organizational growth.
Income tax benefits related to the losses for the three and nine months ended
March 31, 2001 were not recognized because the realization of such benefits is
not assured. As of March 31, 2001, the Company had Federal tax net operating
loss carryforwards of approximately $54,000,000 that expire beginning in 2008.
Internal Revenue Code Section 382 limits NOL carryforwards when an ownership
change of more than 50% of the value of stock in a loss corporation occurs
within a three-year period. Accordingly, the ability to utilize remaining NOL
carryforwards may be significantly restricted.
Discontinued Operations
The majority of the Company's revenue in the three and nine months of fiscal
2000 resulted from operations that the Company has now exited. The Company sold
its network multiplexer business to HT Communications in March 2000 for
$350,000. The Company to date has received approximately $6,000 in principal
payments and $4,500 in royalty payments. The Company is in the process of
negotiating revised terms on the remaining principal balance owed and has
classified the balance owed and the deferred gain as long-term on the balance
sheet. Income from discontinued operations in the first three quarters of fiscal
2000 was approximately $218,000. There was no income from discontinued
operations for the corresponding nine months ended March 31, 2001 as the Company
exited the network multiplexer business and other related business in March
2000.
Liquidity and Capital Resources
Operating losses have had and continue to have a significant negative effect on
the Company's cash balance. At March 31, 2001, the Company had approximately
$542,000 in cash and cash equivalents.
Historically, the majority of the Company's revenue was derived from shipments
of custom modem and network multiplexer products. Revenue from shipments of
custom modems has ended as the market has shifted away from custom modem
products. The Company sold its network multiplexer products business to HT
Communications, Inc in March 2000. The Company has focused all of its resources
on the VocalWare IP product line since May 2000.
11
The Company's strategy is to focus its sales efforts on developing an increasing
number of larger customers using the VocalWare IP products, to develop a new
generation of products that will address the market's need for an easy-to-
install software client that can operate over the new broadband communications
services, including DSL, cable modems, and IP networks, and to establish one or
more strategic partnerships with well-established companies that would enhance
the Company's market presence and credibility and provide financial assistance.
The ability of the Company to successfully execute its strategy to increase
sales is subject to numerous risks and such success cannot be assured. The
Company's return to profitability and development of a more dependable revenue
base depends on the success of the VocalWare IP product line. The Company does
not anticipate a return to profitability as long as its expenditures on the
VocalWare IP system remain disproportionate to revenue.
In March 2001, the Company received net proceeds of approximately $2,000,000
from the issuance of common stock and warrants.
On May 11, 2001, the Company issued 10% secured convertible promissory notes and
common stock purchase warrants for $700,000. The notes are convertible into
common stock at $0.30 per share and the company issued 1,166,667 warrants.
In April 2001, the Company received a nonbinding letter of intent from an
investor to invest $8,000,000 in cash and another $22,000,000 in prepaid media
in exchange for equity at a price of $0.30 per share. The Company hopes to
close this transaction by the end of May 2001, although no assurance can be
provided that closing will occur.
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 develop and sustain strategic relationships. The failure
to obtain such financing when needed and to attract a strategic partner would
have a substantial adverse effect on the Company. The timing and amount of the
Company's future capital requirements cannot be accurately predicted. The
Company believes its current cash balances and commitments for additional
financing will be sufficient to meet its anticipated cash needs on a short-term
and long-term basis. However, if the Company does not close on its nonbinding
letter of intent for $30,000,000 in cash and prepaid media, the company may
cease to be viable as an ongoing entity.
In October 2000, the Company entered into a nonbinding agreement to acquire
substantially all of the assets of Voiceboard Corporation ("Voiceboard"), a
significant component supplier to the Company. In December 2000, the Company
terminated its offer to acquire Voiceboard. On January 11, 2001, the Company
notified the Escrow Agent that Voiceboard was in default of the OEM Purchase
Agreement between the Company and Voiceboard and a condition of release of the
escrowed materials had occurred. In March 2001, Voiceboard cured the default
under the OEM Purchase Agreement and the Company terminated its condition of
release of the escrowed materials.
Disclosure Regarding Forward Looking Statements
12
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 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 remote worker products; uncertainty
regarding the length of the sales process; uncertainty regarding the supply of
components; 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 2000 and
Forms 10-Q for the quarters ended September 30, 2000 and December 31, 2000. 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 Company does not believe that it is currently exposed to material risks
associated with market risk sensitive instruments.
13
PART II - OTHER INFORMATION
DATA RACE, Inc.
ITEM 1. LEGAL PROCEEDINGS
---------------------------
None.
ITEM 2. CHANGES IN SECURITIES
------------------------------
On March 2, 2001, the Company completed a private placement of 3,047,620 shares
of its common stock (the "Common Shares") and warrants to purchase 304,762
shares of common stock (the "Warrants") to Protius Overseas Limited, Keyway
Investments Ltd., and Lionhart Investments Ltd. (the "Investors") for an
aggregate price of $2,000,000. The Warrants are exercisable at a price of
$0.9875 per share through March 2, 2006. The Company intends to use the proceeds
from the private placement primarily for general corporate purposes.
The Company has filed a registration statement under the Securities Act covering
the resale of the Common Shares and the shares of common stock issuable upon
exercise of the Warrants. The Company will incur certain penalties if the
registration statement is not declared effective by May 31, 2001. 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 prior to the
effective date of the registration statement, then antidilution provisions
contained in the securities purchase agreement may require the Company to issue
additional shares of common stock to the Investors so as to prevent dilution of
the Investors' investment in the Company.
In connection with the private placement, the Company (i) granted to the
Investors a right of first refusal to purchase additional securities issued by
the Company (subject to certain exceptions including securities issued for a
merger, consolidation, acquisition, or under existing stock option plans and
outstanding convertible securities) to prevent dilution of the Investors'
investment in Company stock prior to August 29, 2001 and (ii) agreed to reduce
to $0.9875 the exercise price of warrants to purchase an aggregate of 1,265,317
shares of the Company's Common Stock issued in connection with the Company's
June 1999 and December 1999 private placements and to extend the term of these
warrants for two years to December 10, 2003.
THE SUMMARY OF THE MARCH PRIVATE PLACEMENT SET FORTH ABOVE IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PURCHASE AGREEMENTS AND THE OTHER DOCUMENTS
EXECUTED BY THE COMPANY IN CONNECTION WITH THE PRIVATE PLACEMENT. SUCH DOCUMENTS
ARE FILED (OR INCORPORATED BY REFERENCE) AS EXHIBITS TO THIS FORM 10-Q.
14
The offer and sale by the Company of the securities in the March Private
Placement was made in reliance upon Section 4(2) of the Securities Act, the non-
public offering exemption from the registration requirements of the Securities
Act.
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.
--------------
Exhibit Description
------- -----------
10.1 Securities Purchase Agreement dated March 2, 2001, by and among DATA
RACE, Inc. and Protius Overseas Limited, Keyway Investments Ltd., and
Lionhart Investments Ltd., as the Investors. (a)
10.2 Registration Rights Agreement dated March 2, 2001, by and among DATA
RACE, Inc. and Protius Overseas Limited, Keyway Investments Ltd., and
Lionhart Investments Ltd., as the Investors. (a)
10.3 Warrant Agreement, dated March 2, 2001, issued to Protius Overseas
Limited. (a)
10.4 Warrant Agreement, dated March 2, 2001, issued to Keyway Investments
Ltd. (a)
10.5 Warrant Agreement, dated March 2, 2001, issued to Lionhart Investments
Ltd. (a)
-----------------
(a) Filed as an exhibit to Form 8-K Current Report filed on March 7, 2001.
(b) Filed herewith
(b) Reports on Form 8-K.
-------------------------
A report on Form 8-K was filed on March 7, 2001 to report the completion of a
private placement of common stock and common stock purchase warrants.
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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, Vice President,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Date: May 15, 2001
16