Voxware (VOXW)

Net cash used in investing activities totaled $75,000 during the nine months ended March 31, 2009 and $206,000 during the nine months ended March 31, 2008 due primarily to purchases of property and equipment.

Net cash used in financing activities totaled $89,000 during the nine months ended March 31, 2009, compared to $469,000 during the nine months ended March 31, 2008. During the nine months ended March 31, 2009, we borrowed $451,000 to fund the purchase of fixed assets and repaid $542,000 against term loans with SVB. We received net proceeds in the amount of $2,000 from the exercise of stock options during the nine months ended March 31, 2009. During the nine months ended March 31, 2008, we repaid $513,000 against term loans with SVB and received proceeds of $44,000 from the exercise of stock options.

We initially entered into a credit facility with SVB on December 30, 2003. The following facilities were outstanding during fiscal years 2008 and 2009:

A $1,000,000 equipment line of credit, or the Equipment Line, secured by all of the Company’s personal property was first drawn upon on December 16, 2005. The Company was required to make interest-only payments, at a rate of prime plus 1.75%, on the principal balance through May 9, 2006, at which point the Equipment Line was converted into a term loan with 30 fixed monthly payments of approximately $17,000. Effective May 9, 2006, the interest rate was fixed at 9.5%. The unpaid principal balance outstanding was $0 as of March 31, 2009 and $66,000 as of June 30, 2008.

On May 24, 2006, the Company entered into a Loan and Security Agreement with SVB, or the 2006 Facility, providing an additional $3,000,000 credit facility comprised of a $1,500,000 revolving line of credit, or the Revolver, and a $1,500,000 Non-Formula Term Loan, or the 2006 Term Loan, to fund the Company's anticipated working capital needs. The 2006 Term Loan is to be repaid in 36 equal monthly payments of principle and interest, commencing on April 1, 2007, and has an outstanding balance of $500,000 at March 31, 2009 and $875,000 at June 30, 2008. Monthly principle payments total approximately $42,000. Amounts outstanding under the 2006 Term Loan bear interest at March 31, 2009 at a rate of 7%, calculated as the greater of 7% or prime plus 3%, as established by the Waiver and Third Loan Modification Agreement, or the TLMA, with SVB executed on November 17, 2008.

On February 13, 2008, with an effective date of December 27, 2007, the Company entered into a second loan modification agreement, or the SLMA, with SVB, providing for a new $600,000 revolving equipment line of credit, or the Equipment Revolver. The availability under the Equipment Revolver was limited to a borrowing base advance rate that is equal to 100% against the invoice value of new Eligible Equipment (as defined in the SLMA). The draw down period for the Equipment Revolver expired May 31, 2008, but was extended by SVB to July 31, 2008. Originally, amounts advanced under the Equipment Revolver bore interest at a rate equal to the greater of (a) 6.75% and (b) the amount equal to the prime rate plus 1.0%. This rate was revised to the greater of 7% or prime plus 3% by the TLMA. The repayment of the funds drawn against the Equipment Revolver will be made in 36 equal monthly payments of principal and interest beginning August 1, 2008. The outstanding balance on the Equipment Revolver was $350,000 at March 31, 2009 and $0 at June 30, 2008.

The Revolver created by the 2006 Facility was initially available until October 31, 2007. It was extended to February 11, 2009 by the SLMA. The Revolver provides for a line of credit up to $1,500,000, with a $1,000,000 sub-limit to be established for cash management and foreign exchange requirements. As of March 31, 2009, amounts outstanding under the Revolver bear interest at the rate of 7%, calculated as the greater of 7% or prime plus 3%. In addition, a fee of 0.25% is charged against the unused portion of the Revolver. No funds were borrowed against the Revolver at March 31, 2009 or June 30, 2008.

On February 17, 2009, the Company entered into a Waiver and Fourth Loan Modification Agreement that, among other things, waived a loan covenant violation that existed at December 31, 2008 and extended the maturity of the Revolver until March 31, 2009. In addition, the Waiver and Fourth Loan Modification Agreement revised certain outstanding financial covenants under the Loan Agreement, including minimum net loss thresholds. On May 12, 2009, with an effective date pf March 31, 2009, the Company entered into a Fifth Loan Modification Agreement which extends the maturity of the Revolver until May 31, 2009, and sets financial covenants for the period ending May 31, 2009. The Company is currently in negotiations with SVB regarding an additional loan modification agreement extending the Revolver and establishing revised loan covenants.

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On May 24, 2006, we entered into a Loan and Security Agreement with SVB, or the 2006 Facility, providing an additional $3,000,000 credit facility comprised of a $1,500,000 revolving line of credit, or the Revolver, and a $1,500,000 Non-Formula Term Loan, or the 2006 Term Loan, to fund our anticipated working capital needs. The 2006 Term Loan is to be repaid in 36 equal monthly payments of principle and interest, commencing on April 1, 2007, and has an outstanding balance of $625,000 at December 31, 2008. Monthly principle payments total approximately $42,000. Amounts outstanding under the 2006 Term Loan bear interest at December 31, 2008 at a rate of 7%, calculated as the greater of 7% or prime plus 3%, as established by the Waiver and Third Loan Modification Agreement, or TLMA, with SVB executed on November 17, 2008.

On February 13, 2008, with an effective date of December 27, 2007, we entered into a second loan modification agreement, or SLMA, with SVB providing for a new $600,000 revolving equipment line of credit, or the Equipment Revolver. The availability under the Equipment Revolver was limited to a borrowing base advance rate that is equal to 100% against the invoice value of new Eligible Equipment (as defined in the SLMA). The draw down period for the Equipment Revolver expired May 31, 2008, but was extended by SVB to July 31, 2008. Originally, amounts advanced under the Equipment Revolver bore interest at a rate equal to the greater of (a) 6.75% and (b) the amount equal to the prime rate plus 1.0%. This rate was revised to the greater of 7% or prime plus 3% by the TLMA. The repayment of any funds drawn against the Equipment Revolver shall be made in 36 equal monthly payments following each new advance under the Equipment Revolver. The outstanding balance on the Equipment Revolver was $388,000 at December 31, 2008.

The Revolver created by the 2006 Facility was initially available until October 31, 2007. It was extended to February 11, 2009 by the SLMA. The Revolver provides for a line of credit up to $1,500,000, with a $1,000,000 sub-limit to be established for cash management and foreign exchange requirements. As of December 31, 2008, amounts outstanding under the Revolver bear interest at the rate of 7%, calculated as the greater of 7% or prime plus 3%. In addition, a fee of 0.25% is charged against the unused portion of the Revolver. No funds were borrowed against the Revolver at December 31, 2008.

As of December 31, 2008, we were in violation of a covenant of our Amended and Restated Loan and Security Agreement, dated as of December 29, 2006, or Loan Agreement, with Silicon Valley Bank, or SVB, as amended by the Third Loan Modification Agreement, dated as of November 17, 2008, or TLMA requiring that we not exceed certain net loss thresholds for the three months ended December 31, 2008, as defined by the terms of the TLMA.  The loan covenant violation represents an “Event of Default” under the Loan Agreement.  Accordingly, SVB may, among other actions, without notice or demand, declare all obligations outstanding under the agreements to be immediately due and payable, including amounts outstanding under the 2006 Term Loan, the Revolver and the Equipment Revolver.  We reclassified $125,000 due under the 2006 Term Loan and $238,000 due under the Equipment Revolver in the December 31, 2008 balance sheet from long term debt to current portion of long term debt in response to the loan covenant violation.  As of the date of this filing, we owe an aggregate of approximately $905,000 to SVB under the Loan Agreement (including $542,000 currently outstanding under the 2006 Term Loan and $363,000 currently outstanding under the Equipment Revolver).  There is no amount currently due under the Revolver, which terminated on February 11, 2009.  On February 17, 2009, we entered into a Waiver and Fourth Loan Modification Agreement that, among other things, waived the loan covenant violation and extended the maturity of the Revolver until March 31, 2009.  In addition, the Waiver and Fourth Loan Modification Agreement revised certain outstanding financial covenants under the Loan Agreement, including minimum net loss thresholds.  We are currently in negotiations with SVB regarding an additional loan modification agreement extending the Revolver and establishing revised loan covenants.  If agreement is not reached, we expect to repay all outstanding balances under the 2006 Term Loan and Equipment Revolver.  We have sufficient cash to repay the existing loan balances in full to the extent required.  We cannot, however, provide assurances that we will be able to reach agreement with SVB on an additional loan modification on terms favorable to us, if at all.

We continue to expand our partnership channel, with particular emphasis on the development of relationships with mobile computer equipment manufacturers and vendors, VARs, logistics consultants and WMS vendors. Using Voxware 3 and VoxBrowser, independent third-party partners are able to develop and deliver voice-enabled logistics solutions on other manufacturers’ hardware. As a result of the partner relationships and product offerings, a greater percentage of revenue is likely to be derived in the future from software than has occurred historically, with a lower percentage of total revenue derived from hardware and professional services. The gross margin generated by software revenue is higher than that earned on hardware and professional services revenue. For the six months ended December 31, 2008, we earned gross margin from software licenses of 97%, as compared to 39% for sales of hardware units and related accessories. Partnership channel sales accounted for 13% of our revenues during the six months ended December 31, 2008, as compared to 16% during the six months ended December 31, 2007. Software licenses contributed 12% of revenues for the six months ended December 31, 2008, compared to 26% of revenue for the six months ended December 31, 2007. Decreases in the percentage of revenues generated through partnership channels and the percentage of revenues derived from software licenses during the six months ended December 31, 2008 represent a departure from trends noted in recent periods. These decreases are primarily attributable to decisions by customers and prospective customers to delay major capital expenditures in light of tight credit markets associated with general worldwide economic conditions. We expect that recent coordinated efforts by federal authorities throughout the world will gradually lead to a general loosening of international credit markets, thus enabling customers and prospective customers to increase levels of capital expenditures. In addition, given the volume and quality of prospective transactions in our sales pipeline, we anticipate a resumption of the trend towards a more profitable mix of revenue prior to the end of fiscal year 2009. However, we can provide no assurance with respect to the timing of this expected long-term trend or whether the trend will be true in any specific period.

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On February 13, 2008, with an effective date of December 27, 2007, we entered into a second loan modification agreement, or the SLMA, with SVB, renewing the existing Revolver, to expire on February 11, 2009, revising the terms of the existing Term Loan, and providing for a new $600,000 revolving equipment line of credit, or the Equipment Revolver. The terms to the Revolver remained materially the same, except that the borrowing base advance rate was increased from 75% to 80% of Eligible Accounts (as defined in the SLMA). Amounts outstanding under the Revolver bear interest at a rate equal to prime plus 0.5%. The terms to the 2006 Term Loan remained materially the same, except the interest rate was adjusted such that amounts outstanding under the 2006 Term Loan will bear interest at a rate of prime plus 1.75%. The availability under the Equipment Revolver is limited to a borrowing base advance rate that is equal to 100% against the invoice value of new Eligible Equipment (as defined in the SLMA), and such borrowing base shall include up to 25% of "soft" costs (e.g., shipping, installation, taxes, warranty charges and freight discounts). Under the Equipment Revolver, minimum advance amounts are $100,000 each, with the exception that three advances may be less than $100,000. At the time of an advance under the Equipment Revolver, at our choice, amounts outstanding under the Equipment Revolver bear interest at a rate equal to either (i) the greater of (a) 6.75% and (b) the amount equal to the prime rate plus 1.0%; or (ii) a fixed rate equal to 8.25%. The draw down period for the Equipment Revolver expires May 31, 2008, and repayment shall be made in 36 equal monthly payments following each new advance under the Equipment Revolver. The outstanding balance on the Equipment Revolver was $425,000 at September 30, 2008.

The Revolver provides for a line of credit up to $1,500,000, with a $1,000,000 sub-limit to be established for cash management and foreign exchange requirements. As of September 30, 2008, amounts outstanding under the Revolver bear interest at the rate of 5.50%, calculated as prime plus 0.5%. In addition, a fee of 0.25% is charged against the unused portion of the Revolver. No funds were borrowed against the Revolver at September 30, 2008.

As of September 30, 2008, we were in violation of certain covenants of the SLMA requiring us to maintain minimum levels of quarterly profits, as defined by the terms of the SLMA. The Company and SVB entered the Waiver and Third Loan Modification Agreement (“TLMA”) effective November 17, 2008 to restructure the terms of the Revolver. In accordance with the TLMA, funds available under the Revolver are reduced by amounts outstanding under the 2006 Term Loan and Equipment Revolver (“Term Loan Reserve”). Amounts outstanding under the TLMA, including the Revolver, the 2006 Term Loan and the Equipment Revolver, bear interest at a rate equal to the greater of 7% or prime interest plus 3%. After two consecutive quarters of profitability, the Term Loan Reserve will not be required. In addition, the TLMA waived our non-compliance with the covenant requiring a minimum level of profitability for the quarter ended September 30, 2008 and established revised covenants for future minimum levels of liquidity and results of operations.

We continue to expand our partnership channel, with particular emphasis on the development of relationships with mobile computer equipment manufacturers and vendors, VARs, logistics consultants and WMS vendors. Using Voxware 3 and VoxBrowser, independent third-party partners are able to develop and deliver voice-enabled logistics solutions on other manufacturers’ hardware. As a result of the partner relationships and product offerings, a greater percentage of revenue is likely to be derived in the future from software than has occurred historically, with a lower percentage of total revenue derived from hardware and professional services. The gross margin generated by software revenue is higher than that earned on hardware and professional services revenue. For the three months ended September 30, 2008, we earned gross margin from software licenses of 99%, as compared to 37% for sales of hardware units and related accessories. Partnership channel sales accounted for 13% of our revenues during the three months ended September 30, 2008, as compared to 14% during the three months ended September 30, 2007. Software licenses contributed 7% of revenues for the three months ended September 30, 2008, compared to 36% of revenue for the three months ended September 30, 2007. Decreases in the percentage of revenues generated through partnership channels and the percentage of revenues derived from software licenses during the three months ended September 30, 2008 represent a departure from trends noted in recent periods. These decreases are primarily attributable to decisions by customers and prospective customers to delay major capital expenditures in light of tight credit markets associated with general worldwide economic conditions. We expect that recent coordinated efforts by federal authorities throughout the world will gradually lead to a general loosening of international credit markets, thus enabling customers and prospective customers to increase levels of capital expenditures. In addition, given the volume and quality of prospective transactions in our sales pipeline, we anticipate a resumption of the trend towards a more profitable mix of revenue prior to the end of fiscal year 2009. However, we can provide no assurance with respect to the timing of this expected long-term trend or whether the trend will be true in any specific period.

The recent deterioration of general worldwide economic conditions has negatively impacted certain vertical markets, including retail and food distribution, that are significant to our operations. As a result of these general economic conditions, our revenue during the second quarter of fiscal 2009 will likely be lower than quarterly revenues reported for fiscal 2008. In response to the changing economic environment, we eliminated five positions during the three months ended September 30, 2008 and scaled back certain planned costs, new hires and capital purchases. However, our customer base continues to expand, with existing customers expected to implement our products in additional sites as they experience favorable results with our offerings and new customers brought to us through direct sales efforts, VARs and other channel partners. We expect the majority of revenues will come from existing customers in fiscal year 2009, but that revenues from new customers, including those brought to us through VARs and other channel partners, will grow faster than revenues from existing customers. We expect revenues will generally increase over revenues for the three months ended September 30, 2008, although we can provide no assurances that revenues earned in any given fiscal quarter or year will exceed the preceding fiscal quarter or year. Furthermore, we anticipate that in some fiscal quarters and years, costs will exceed revenues. Also, $1,042,000 was available under the Revolver with SVB as of September 30, 2008, which is available for short-term operating needs. The Revolver, which is scheduled to expire in February 2009, can provide funds of up to $1,500,000, depending on the make-up of accounts receivable and the principle balance outstanding on the Term Loan and Equipment Revolver. We are in discussions with SVB and anticipate extending the Revolver beyond its current expiration date. In addition, we may be able to raise additional capital through either new equity or debt financing arrangements and may elect to utilize such an arrangement to fund further expansion of our operations. However, due to the recent downturn in the economy, there can be no assurances that financing will be available on terms acceptable to us, if at all. Due to a greater emphasis on sales of higher margin product and the availability of cash through existing relationships with SVB, and given the current economic conditions, we believe that we have adequate capital resources available to fund our operations through September 30, 2009.

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