Annual Reports

 
Quarterly Reports

  • 10-Q (May 17, 2010)
  • 10-Q (Feb 12, 2010)
  • 10-Q (Nov 13, 2009)
  • 10-Q (May 15, 2009)
  • 10-Q (Feb 17, 2009)
  • 10-Q (Nov 17, 2008)

 
8-K

 
Other

Voxware 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
voxware_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
-------------
 
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from             to
Commission File Number 0-021403
 
VOXWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware 36-3934824
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization) Identification No.)
 
300 American Metro Blvd., Suite 155
Hamilton, NJ 08619
609-514-4100

(Address, including zip code and telephone number (including area code) of principal executive offices)
 
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 past 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 o
 
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes o   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated file” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
o Large accelerated filer o Accelerated filer
o Non-accelerated filer (Do not check if smaller reporting company) x Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act): Yes o   No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2010.
 
Class Number of Shares
Common Stock, $0.001 par value 8,075,328



VOXWARE, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
For Quarter Ended March 31, 2010
 
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION 1
       Item 1.        Financial Statements 2
              Consolidated Balance Sheets as of March 31, 2010 (unaudited) and June 30, 2009 2
              Consolidated Statements of Operations for the three and nine months ended March 31, 2010 and 2009
              (unaudited) 3
              Consolidated Statements of Cash Flows for the nine months ended March 31, 2010 and 2009 (unaudited) 4
              Notes to Consolidated Financial Statements (unaudited) 5
       Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
       Item 3.        Quantitative and Qualitative Disclosures About Market Risk 30
       Item 4(T).        Controls and Procedures 30
 
PART II. OTHER INFORMATION 31
       Item 1.        Legal Proceedings 31
       Item 1A.        Risk Factors 31
       Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds 35
       Item 3.        Defaults Upon Senior Securities 35
       Item 5.        Other Information 35
       Item 6.        Exhibits 35
 
SIGNATURES 36



PART I. FINANCIAL INFORMATION
 
This Quarterly Report on Form 10-Q contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 and information relating to us that are based on the beliefs of our management, as well as assumptions made by, and the information currently available to, our management. When used in this Quarterly Report, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in these forward-looking statements, including those risks discussed in this Quarterly Report. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. Except for special circumstances in which a duty to update arises when prior disclosure becomes materially misleading in light of subsequent circumstances, we do not intend to update any of these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report, or to reflect the occurrence of unanticipated events. You should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.
 
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Item 1. Financial Statements
 
Voxware, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
 
March 31, 2010       June 30, 2009
(unaudited)
ASSETS
CURRENT ASSETS
       Cash and cash equivalents $      3,353 $      4,342
       Accounts receivable, net of allowance for doubtful accounts of $174 and
              $158 at March 31, 2010 and June 30, 2009, respectively 2,639 3,350
       Inventory, net 373 564  
       Deferred project costs 10 33
       Prepaid expenses and other current assets 350 337
                     Total current assets> 6,725 8,626
 
       Property and equipment, net 373 454
       Capitalized software development costs 51 -
       Other assets 152 184
TOTAL ASSETS $ 7,301 $ 9,264
 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES  
       Current portion of long-term debt $ 150 $ 525
       Accounts payable and accrued expenses 1,992   2,541
       Current portion of deferred revenues 2,693   2,365
                     Total current liabilities> 4,835   5,431
       Long-term portion of deferred revenues 105 85
       Long-term debt, net of current maturities   50 163
                     Total liabilities> 4,990 5,679
 
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' EQUITY
       Common Stock, $0.001 par value, 15,000,000 shares authorized as of
              March 31, 2010 and 12,000,000 shares authorized at June 30, 2009;
              8,072,828 and 8,007,766 shares issued and outstanding at
              March 31, 2010 and June 30, 2009, respectively 8 8
       Additional paid-in capital 84,203 83,143
       Accumulated deficit (81,900 ) (79,566 )
                     Total stockholders' equity> 2,311 3,585
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,301 $ 9,264
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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Voxware, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
 
Three Months Ended March 31, Nine Months Ended March 31,
2010 2009 2010 2009
(unaudited)       (unaudited)       (unaudited)       (unaudited)
REVENUES
       Product revenues $      1,842 $      2,597 $      4,943 $      6,402
       Services revenues 1,512 1,424 4,522 4,322  
              Total revenues> 3,354 4,021 9,465 10,724
 
COST OF REVENUES
       Cost of product revenues 826 866 2,049   2,488
       Cost of services revenues 422 653 1,538 2,354
              Total cost of revenues> 1,248 1,519 3,587 4,842
 
GROSS PROFIT 2,106 2,502 5,878   5,882
 
OPERATING EXPENSES
       Research and development 799 864 2,303 2,889
       Sales and marketing 1,039 1,289 3,265 4,220
       General and administrative 854 898 2,599 2,977
              Total operating expenses> 2,692 3,051 8,167 10,086
 
OPERATING LOSS (586 ) (549 ) (2,289 ) (4,204 )
 
INTEREST EXPENSE, NET (5 ) (10 ) (45 ) (16 )
 
LOSS BEFORE INCOME TAXES (591 ) (559 ) (2,334 ) (4,220 )
 
PROVISION FOR INCOME TAXES - (1 ) - (3 )
 
NET LOSS $ (591 ) $ (560 ) $ (2,334 ) $ (4,223 )
 
NET LOSS PER SHARE  
       Basic $ (0.07 ) $ (0.09 )   $ (0.29 ) $ (0.65 )
       Diluted $ (0.07 )   $ (0.09 ) $ (0.29 ) $ (0.65 )
 
WEIGHTED AVERAGE NUMBER OF SHARES USED IN
       COMPUTING NET LOSS PER SHARE>
       Basic 8,063 6,541 8,030 6,517
       Diluted 8,063 6,541 8,030 6,517

The accompanying notes are an integral part of these consolidated financial statements.
 
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Voxware, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
 
Nine Months Ended March 31,
2010 2009
(unaudited)       (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net loss $      (2,334 ) $      (4,223 )
Adjustments to reconcile net loss to net cash used in operating activities:
       Depreciation and amortization 204 232
       Provision for doubtful accounts 19 55
       Share-based compensation charges 1,085 920
Changes in assets and liabilities:
       (Increase) decrease in assets:
       Accounts receivable 692 3,449
       Inventory 191 (35 )
       Deferred project costs 23 83
       Prepaid expenses and other current assets (13 ) 31
       Other assets 32 111
       Increase (decrease) in liabilities:
       Accounts payable and accrued expenses (549 )   (802 )
       Deferred revenues 348   (789 )
       Net cash used in operating activities> (302 ) (968 )
 
CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of property and equipment (123 ) (75 )
       Capitalized software development costs (51 ) -
       Net cash used in investing activities> (174 ) (75 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
       Proceeds from long-term debt - 451
       Repayment of long-term debt (488 ) (542 )
       Repurchase of restricted stock for income tax withholdings (44 ) -
       Proceeds from exercise of stock options and warrants   19 2
       Net cash used in financing activities> (513 )   (89 )
 
NET DECREASE IN CASH AND CASH EQUIVALENTS (989 ) (1,132 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,342 3,503
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,353 $ 2,371
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 47 $ 57

The accompanying notes are an integral part of these consolidated financial statements.
 
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Voxware, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
 
1. Basis of Presentation
 
The unaudited interim financial statements of Voxware, Inc. and Subsidiaries (“Voxware” or the “Company”) for the three and nine months ended March 31, 2010 and 2009 included herein, have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 8-03 of Regulation S-X under the Securities Act of 1933, as amended. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Accounting Standards Codification (“ASC”) issued by the Financial Accounting Standards Board (“FASB”) has become the source of authoritative U.S. GAAP. The ASC only changes the referencing of financial accounting standards and does not change or alter existing U.S. GAAP. In preparing the financial statements, the Company evaluated all events or transactions that occurred after March 31, 2010 through the date the Company issued these consolidated financial statements and determined there were no material events or transactions during this period.
 
The consolidated balance sheet at June 30, 2009 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009.
 
The consolidated statements of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the full fiscal year ended June 30, 2010, or any other future period.
 
The Company’s operating results may fluctuate significantly in the future as a result of a variety of factors, including the Company’s ability to compete in the voice-based logistics market, the budgeting cycles of existing and potential customers, the lengthy sales cycle of the Company’s solution, the volume of and revenues derived from sales of products utilizing the Company’s third-party partners network, the introduction of new products or services by the Company or its competitors, pricing changes in the industry, the degree of success of the Company’s efforts to penetrate its target markets, technical difficulties with respect to the use of products developed by the Company or its licensees and general economic conditions.
 
2. Significant Accounting Policies
 
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. However, future events are subject to change, and the best estimates and judgments routinely require adjustment. The amounts of assets and liabilities reported in the Company’s balance sheets, and the amounts of revenues and expenses reported for each of its fiscal periods, are affected by estimates and assumptions which are used for, but not limited to, the accounting for allowance for doubtful accounts, warranty costs, impairments, reserve for obsolete inventory, share-based compensation and income taxes. Actual results could differ from these estimates.
 
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of Voxware, Inc. and its wholly-owned subsidiaries, Verbex Acquisition Corporation and Voxware (UK) Limited. All significant inter-company balances and transactions have been eliminated in consolidation. Voxware (UK) Limited was established during fiscal year 2008 in conjunction with the Company’s decision to invest additional resources to sell to and service customers in Europe.
 
Revenue Recognition
Revenues are generated from licensing application software, selling related computer hardware and accessories and providing services, including professional deployment, configuration, customized application development, training services, software maintenance, extended hardware warranty and technical support services.  
 
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Product revenues consist of software license fees, sales of related computer hardware and accessories and extended hardware warranties. Revenues from the licensing of software are recognized when; (i) a signed contract or other persuasive evidence of an arrangement exists; (ii) the product has been shipped or electronically delivered; (iii) the license fee is fixed and determinable and (iv) collection of the resulting receivable is probable. This generally occurs upon shipment of software or completion of the implementation, if applicable, provided collection is determined to be probable and there are no significant post-delivery obligations. If an acceptance period is required to ensure satisfactory delivery of the application software solution, as may occur for the initial site implementation for new direct-sales customers, revenues are recognized upon customer acceptance. Revenues from the sale of hardware and accessories are generally recognized upon shipment, with no revenue being recognized until shipment of software. Agreements with most direct customers do not include an acceptance period, so revenues from the sale of hardware and accessories and licensing of software in these transactions are recognized upon shipment. Extended hardware warranty revenues are recognized ratably over the life of the contract, which is generally either one year or three years. Channel partner revenue is recognized when the four criteria set forth above are met. For the collectibility criteria, revenue from each channel partner is deferred until cash is collected unless a pattern of collectibility is established through actual transactions with each specific channel partner.
 
Services revenues consist of professional deployment, configuration, customized application development, training services, software maintenance and technical support services. Professional services revenues are generally recognized as the services are performed. For arrangements in which professional services are provided in conjunction with software, professional services revenues generated by services provided prior to delivery of software are deferred until delivery of all software. Revenues from maintenance and technical support, which typically consist of unspecified when-and-if-available product updates and customer telephone support services, are recognized ratably over the term of the service period, which is generally one year.
 
The Company recognizes revenue in accordance with the Software Revenue Recognition guidance of ASC 985, which requires that revenue recognized from multiple element arrangements that include software licenses be allocated to the various elements of the arrangement based on the fair values of the elements, such as hardware, deployment services and maintenance and technical support services. The Company follows the residual method of accounting as provided in ASC 985. Under the residual method, the aggregate arrangement fee is allocated to each of the undelivered elements in an amount equal to their fair values, with the residual arrangement fee allocated to the delivered elements. The fair value of the undelivered elements included in the Company’s multi-element sales arrangements is based on vendor specific objective evidence (“VSOE”).
 
The fair value of elements not essential to the functioning of the software, including hardware units and related accessories, are calculated in accordance with the Multiple Element Arrangements guidance of ASC 605. Under the ASC 605 guidance, the fair value of a hardware element is determined based on the price when it is sold separately by either the Company or a competitor.
 
The Company determines VSOE of the fair values of maintenance and technical support based on annual renewal rates provided to customers and for professional services based on standard hourly rates when such services are provided on a stand-alone basis. As of March 31, 2010, the Company believes that it has realized VSOE of the fair values for maintenance and professional services.
 
Deferred revenues consist of unearned customer deposits, extended hardware warranties and post contract support (“PCS”) arrangements. Customer deposits are recognized as revenue upon customer acceptance of the underlying product and services in conjunction with the recognition of deferred project costs. PCS arrangements include software maintenance revenues. These arrangements, which sometimes include amounts bundled with initial revenues, are deferred upon invoicing and recognized as revenues over the term of the service period, which is typically one year. Revenues from extended hardware warranties are recognized over the term of the warranty, which is typically one year. Certain extended hardware warranty arrangements have a three year term.
 
The Company continues to generate royalty revenues from our legacy speech compression technology business, which was sold in 1999. Royalties are earned on technologies our customers incorporate into their products for resale pursuant to contracts that are renewable year to year. Revenues are recognized at the time of the customers’ shipment of those products, as estimated based upon reports received periodically from our customers.
 
Travel costs associated with professional services and billed to customers are recorded as services revenues at the time they are incurred by Voxware.
 
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30 days, depending on contractual terms. Unpaid accounts do not bear interest. Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoice.
 
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The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management reviews certain specific accounts receivable balances and, based on an assessment of the collectibility of specific customer accounts and an assessment of international and economic risk, estimates the portion, if any, of the balance that will not be collected. All other accounts have a general reserve percentage applied to their balance based on the age of the receivable.
 
Research and Development
Research and development expenditures are charged to operations as incurred. In accordance with ASC 985, development costs incurred in connection with the research and development of software products and enhancements to existing software products are charged to expense as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Technological feasibility is evidenced by a detailed program design or the point at which there is a completed working model of the software product, the completeness of which is to be confirmed by testing. According to ASC 985, the working model is generally deemed to exist with commencement of beta testing. The Company capitalized $0 and $51,000 of costs during the three and nine months ended March 31, 2010, respectively. No costs associated with the development of software products were capitalized during the three and nine months ended March 31, 2009.
 
Warranty Costs
The Company warrants all manufacturer defects on its voice-based solutions, generally commencing upon shipment, and extending for 12 months. The Company accrues warranty costs based on its estimate of expected repair cost per unit, service policies and specific known issues. Certain extended hardware warranty services are outsourced to a third-party in accordance with contracts that generally span three years. The costs associated with these contracts are prepaid and recognized ratably over the life of the contract. If the Company experiences claims or significant changes in costs of services, such as third-party vendor charges, materials or freight, which could be higher or lower than our historical experience, its cost of revenues could be affected.
 
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and trade receivables. The Company invests its excess cash in highly liquid investments (short-term bank deposits and commercial paper). The Company’s customer base principally comprises distribution and logistics companies in food service, grocery, retail, consumer packaged goods, third-party logistics providers, wholesale distributors, as well as value-added resellers. The Company does not typically require collateral from its customers.
 
One customer accounted for 15% and 18% of total revenues for the nine months ended March 31, 2010 and 2009, respectively and 13% of accounts receivable as at March 31, 2010. As of June 30, 2009, two separate customers accounted for 15% and 11% of accounts receivable.
 
Inventory
Inventory purchases and purchase commitments are based upon forecasts of future demand. Voxware values its inventory at the lower of average cost or net realizable value. If the Company believes that demand no longer allows it to sell inventory above cost, or at all, then the Company values its inventory at its net realizable value or writes off excess inventory levels. If customer demand subsequently differs from the Company’s forecasts, requirements for inventory write-offs could differ from its estimates.
 
Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC 718, which requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value. The values of the portions of the awards that are ultimately expected to vest are recognized as expense over the requisite service periods. Compensation expense associated with equity awards is determined based on the estimated fair value of the award itself, measured using either current market data or an established option pricing model. The Company uses the Black-Scholes option pricing model to determine the fair value of option awards and the market value on the date of the grant to determine the fair value of other equity awards. The measurement date for option and other equity awards is the date of grant.
 
Income Taxes
There are significant differences in calculating income or loss for accounting and tax purposes, primarily relating to charges that are recorded in the current period for accounting purposes, but are deferred for tax purposes. Furthermore, tax laws differ in each jurisdiction, yielding differing amounts of taxable income or loss in each jurisdiction. While Voxware has substantial net operating losses to offset taxable income in some taxing jurisdictions, certain restrictions preclude it from fully utilizing the benefit of these net operating losses. In addition, the expansion of the Company’s business requires it to file taxes in jurisdictions where it did not previously operate, and thus does not have established net operating losses to offset the tax liability.
 
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Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in the period that such tax rate changes are enacted.
 
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2010 and June 30, 2009, there was no accrued interest related to uncertain tax positions.
 
Net Loss Per Share
The Company computes net loss per share in accordance with ASC 260. Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding for the period, adjusted to reflect the dilutive impact of potential shares of common stock outstanding during the period. As the Company had a net loss during the three and nine months ended March 31, 2010 and 2009, the impact of the assumed exercise of in-the-money stock options and warrants in the aggregate amount of approximately 375,000 and 529,000 shares at March 31, 2010 and 2009, respectively, is anti-dilutive and as such, have been excluded from the calculation of diluted net loss per share.
 
Fair Value of Financial Instruments
Fair value is defined under ASC 820, as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third unobservable, that may be used to measure fair value which are the following:
  • Level 1 – Quoted prices in active markets for identical assets or liabilities.
  • Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
  • Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
At March 31, 2010, the Company held $1,424,000 in money market funds which are valued in accordance with Level 1 and are included in cash and cash equivalents. The Company has outstanding debt as of March 31, 2010 aggregating $200,000, which is at variable interest rates. The Company believes that the carrying value approximates fair value of the debt as of March 31, 2010.
 
Recently Issued Accounting Pronouncements
In June 2008, the FASB issued guidance now codified in ASC 815 which clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under ASC 815. We adopted the guidance effective July 1, 2009, and it did not have a material impact on our consolidated financial statements.
 
In July 2009, the FASB issued guidance now codified as ASC 105 with regard to U.S. GAAP. With the issuance of ASC 105, the ASC becomes the single source of authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the SEC. The ASC does not change current U.S. GAAP, but changes the referencing of financial standards, and is intended to simplify user access to authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The ASC is effective for interim and annual periods ending after September 15, 2009, and was effective for the Company’s first quarter of fiscal year 2010.
 
In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issue Task Force (“ASU No. 2009-13”). ASU No. 2009-13 replaces and significantly changes certain guidance in ASC 605. ASU No. 2009-13 modifies the separation criteria of ASC 605, by eliminating the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables meet both of the following criteria:
  • The delivered items have value to the customer on a standalone basis; and
  • If the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor.
ASU No. 2009-13 eliminates the use of the residual method of allocation and requires, instead, that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price (i.e., the relative selling price method). When applying the relative selling price method, a hierarchy is used for estimating the selling price for each of the deliverables, as follows:
  • VSOE of the selling price verifiable specific objective evidence;
  • Third-party evidence (“TPE”) of the selling price – prices of the vendor’s or any competitor’s largely interchangeable products or services, in standalone sales to similarly situated customers; and
  • Best estimate of the selling price.
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The Company will adopt ASU No. 2009-13 effective July 1, 2010. The Company is currently evaluating the impact to the Company’s consolidated financial statements.
 
In October 2009, the FASB issued ASU No. 2009-14, Software (“Topic 985”): Certain Revenue Arrangements That Include Software Elements - a consensus of the FASB Emerging Issue Task Force (“ASU No. 2009-14”). Per ASU No. 2009-14, all tangible products containing both software and non-software components, that function together to deliver the product’s essential functionality, will no longer be within the scope of ASC 985. In other words, entities that sell joint hardware and software products that meet the scope exception (i.e., essential functionality) will be required to follow the guidance in ASU No. 2009-14. ASU No. 2009-14 provides a list of items to consider when determining whether the software and non-software components function together to deliver a product’s essential functionality.
 
The Company will adopt ASU No. 2009-14 effective July 1, 2010. The Company is currently evaluating the impact to the Company’s consolidated financial statements.
 
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3. Gross Profit
 
The components of gross profit for the three and nine months ended March 31, 2010 and 2009 are as follows:
 
       Three Months Ended Nine Months Ended
March 31, March 31,
2010 2009 2010 2009
(in thousands) (in thousands)
Product revenues                     
       Software licenses $ 354 $ 1,006 $ 1,226 $ 1,785
       Hardware units and accessories 1,190 1,275 2,870 3,673
       Extended hardware warranties 235 266 719 759
       Royalties   63 50 128 185
  1,842 2,597 4,943 6,402
Cost of product revenues  
       Software licenses 6 12 14 32
       Hardware units and accessories 732     769 1,787 2,243
       Extended hardware warranties 88 85 248   213
    826 866 2,049   2,488
Gross Profit from product revenues 1,016 1,731   2,894 3,914
 
Services revenues
       Professional services 372 369 1,140 1,179
       Software maintenance services 1,084 1,024 3,250 3,010
       Billable travel 56 31 132 133
  1,512 1,424 4,522 4,322
Cost of services revenues
       Professional services 222 393 866 1,573
       Software maintenance services 174 216 585 635
       Billable travel 26 44 87 146
  422 653 1,538 2,354
Gross Profit from services revenues 1,090 771 2,984 1,968
 
Gross Profit $ 2,106 $ 2,502 $ 5,878 $ 5,882
 
4. Inventory
 
The components of our inventory as of March 31, 2010 and June 30, 2009 are:
 
       March 31, 2010               June 30, 2009
(in thousands)
Raw materials $ 13        $ 6
Work in process 13   15
Finished goods     369   558
Less: inventory reserve (22 ) (15 )
Inventory - net $ 373 $ 564  
 
- 10 -
 


5. Debt
 
The Company initially entered into a credit facility with Silicon Valley Bank (“SVB”) on December 30, 2003. The following facilities were outstanding during fiscal years 2009 and 2010:
 
On May 24, 2006, the Company entered into a Loan and Security Agreement with SVB (“2006 Facility”), providing an additional $3,000,000 credit facility comprised of a $1,500,000 revolving line of credit ("Revolver") and a $1,500,000 Non-Formula Term Loan ("2006 Term Loan") to fund the Company's anticipated working capital needs. The Revolver created by the 2006 Facility was initially available until October 31, 2007. It was extended to February 11, 2009 by the Second Loan Modification Agreement (“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, 2010, amounts outstanding under the Revolver bear interest at prime plus 2.25%. 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, 2010 or June 30, 2009. The 2006 Term Loan is to be repaid in 36 equal monthly payments of principle and interest, commencing on April 1, 2007, and had an outstanding balance of $0 at March 31, 2010 and $375,000 at June 30, 2009. Monthly principle payments had totaled approximately $42,000 prior to being fully repaid in March 2010. Amounts outstanding under the 2006 Term Loan bore interest at March 31, 2010 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 (“TLMA”) with SVB executed on November 17, 2008.
 
On February 13, 2008, with an effective date of December 27, 2007, the Company entered into the SLMA with SVB, providing for a new $600,000 revolving equipment line of credit (“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 is to be made in 36 equal monthly payments of principal and interest beginning August 1, 2008. Amounts outstanding under the Equipment Revolver bear interest at March 31, 2010 at a rate of 7%. The outstanding balance on the Equipment Revolver was $200,000 at March 31, 2010 and $313,000 at June 30, 2009.
 
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 Revolver, including minimum net loss thresholds. On May 12, 2009, with an effective date of March 31, 2009, the Company entered into a Fifth Loan Modification Agreement which extended the maturity of the Revolver until May 31, 2009, and set financial covenants for the period ended May 31, 2009.
 
On June 26, 2009, with an effective date of June 1, 2009, the Company entered into a Sixth Loan Modification Agreement which extended the Revolver until July 31, 2009. On September 9, 2009, the Company entered into a Seventh Loan Modification Agreement which extends the maturity, lowers the interest rate to prime plus 2.25% and provides covenants of the Revolver until July 30, 2010. The Company is in discussions with SVB to further extend the maturity, although there can be no assurance that such facility will be extended. The financial covenant is a minimum cash balance, as defined in the Revolver. The Company is in compliance with the covenant as of March 31, 2010.
 
Future minimum payments under the credit facility are as follows as of March 31, 2010 (in thousands):
 
         Silicon Valley Bank
    Equipment Revolver
Short Term
$
150
Long Term 50
Total Debt $ 200
        
6. Common Stock and Common Stock Warrants
 
The Company has 15,000,000 authorized shares (increased from 12,000,000 as approved by the Company’s stockholders in December 2009) of Common Stock, of which 8,072,828 and 8,007,766 were outstanding as of March 31, 2010 and June 30, 2009, respectively.
 
- 11 -
 


As of March 31, 2010, the Company had warrants outstanding to purchase 1,298,331 shares of the Company’s Common Stock at exercise prices ranging from $0.15 per share to $5.76 per share. All of the warrants outstanding as of March 31, 2010 were granted in conjunction with private equity transactions occurring between 2003 and 2009. A summary of the Company’s outstanding warrants as of March 31, 2010 is presented below:
 
              Weighted
Average
Number of Exercise Price
Expiration Date Shares Per Share
       August 2010 43,527 $ 5.432
       June 2012   142,857 2.500
       June 2013 67,223 2.250
       December 2013 888,890     2.250
       April 2014 155,834 0.150
Total Warrants Outstanding 1,298,331 $ 2.132
 
7. Stock Options and Share-Based Compensation
 
Stock Option Plans
 
As of March 31, 2010, options to purchase 971,588 shares of Common Stock were outstanding under plans approved by the Company’s stockholders in 1994 and 2003 and amended by the Company’s stockholders in December 2007 and December 2009 (the “Option Plans”). In addition, 399,188 options are available for grant under the Option Plans.
 
On January 20, 2010, the Company commenced a formal tender offer which allowed its employees to exchange certain outstanding options to purchase shares of the Company’s common stock for new nonqualified options to purchase fewer shares of common stock with an exercise price per share equal to the closing price per share of the Company’s common stock on the new grant date. An option was eligible for exchange in the tender offer if it (i) was granted under the Company’s 2003 Stock Incentive Plan, as amended and restated, (ii) had an exercise price per share equal to or greater than $2.25, (iii) was held by an active employee of the Company or its subsidiaries, including its executive officers and non-employee members of its Board of Directors, but excluding those who had resigned or given or received a written notice of their termination at any time before the expiration of the tender offer and (iv) was outstanding on the expiration date of the tender offer. Each option that was eligible for exchange in the tender offer that was properly tendered was canceled and a replacement option to purchase that number of shares of the Company's common stock determined by dividing the number of shares of common stock underlying the canceled eligible option by 1.15 and rounding down to the next whole share was issued. The replacement options vest in accordance with the vesting schedule in place for the eligible option it replaced at the time of exchange. All eligible options that were tendered for exchange were canceled on February 25, 2010, and the replacement options were granted on February 26, 2010. Any eligible option not tendered for exchange in the tender offer remains outstanding in accordance with its terms. On February 26, 2010, pursuant to the offer, the Company cancelled options to purchase 806,596 shares of common stock and granted the replacement options to purchase 701,334 shares of common stock. Each option has a new seven-year term and has an exercise price of $1.50 per share. There was no additional compensation expense that had to be recognized in the financial statements on account of this transaction.
 
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Information regarding option activity for the nine months ended March 31, 2010 under the Option Plans is summarized below:
 
                     Weighted       
Weighted Average
Average Remaining Aggregate
Options Exercise Price Contractual Instrinsic
Outstanding Per Share Term in Years Value
Options outstanding as of June 30, 2009 1,108,216 4.839  
       Granted 15,000 1.607  
       Exercised (18,325 )     1.036  
       Forfeited (28,041 ) 2.851
       Cancelled under exchange program (806,596 ) 5.377
       Reissued under exchange program   701,334 1.500    
       Expired  -  -
Options outstanding as of March 31, 2010 971,588 $ 1.972 6.85 $ -
 
Options exercisable as of March 31, 2010 663,479 $ 2.264 6.92 $ -
 
Options exercisable as of March 31, 2010 and
       options expected to become exercisable
954,090 $ 1.985 7.28 $ -

Aggregate intrinsic value of $0 was calculated based on the Company’s closing Common Stock price as of March 31, 2010 of $1.50 per share. Options exercisable as of March 31, 2010 and options expected to become exercisable includes vested options and nonvested options less expected forfeitures.
 
A summary of the status of the Company’s nonvested options and restricted stock units as of March 31, 2010 and changes during the nine months then ended is presented below:
 
Weighted Weighted
Average Restricted Average
Options Grant-Date Stock Units Grant-Date
       Outstanding        Fair Value        Outstanding        Fair Value
Outstanding as of June 30, 2009 479,113   $ 1,547,812   150,714 $ 861,990
       Granted 15,000   23,981 30,000       46,800
       Vested (157,373 ) (651,957 ) (46,776 ) (291,811 )
       Net cancelled under exchange program   (20,506 )   - - -
       Forfeited (8,125 ) (17,944 ) (53,822 ) (200,859 )
Outstanding as of March 31, 2010 308,109 $ 901,892 80,116 $ 416,120  
                             
Share-Based Compensation
 
The Company awarded a total of 305,586 restricted stock units (“RSUs”) to certain officers during the year ended June 30, 2008. In addition 30,000 RSUs were granted in December 2009. The RSUs were granted pursuant to the 2003 Plan and vest on a monthly basis. The vesting periods on the RSU grants range from three to four years. The fair value of the RSUs range from $4.39 to $6.95 per share, for a total fair value of $1,936,000. Share-based compensation charges associated with the RSUs were recorded in the amount of $152,000 and $448,000 for the three and nine months ended March 31, 2010 and $148,000 and $444,000 for the three and nine months ended March 31, 2009.
 
The Company records the issuance of shares of Common Stock as RSUs vest. During the three and nine months ended March 31, 2010, 15,934 and 46,737 shares of Common Stock, respectively, were issued as a result of the vesting of RSUs. During the three and nine months ended March 31, 2009, 23,520 and 70,560 shares of Common Stock, respectively, were issued as a result of the vesting of RSUs.
 
- 13 -
 


The consolidated statements of operations include total share-based employee compensation charges resulting from stock option and RSU awards in the amount of $362,000 and $1,085,000, respectively, for the three and nine months ended March 31, 2010 and $310,000 and $920,000, respectively, for the three and nine months ended March 31, 2009, respectively. Amounts charged to operations are as follows:
 
Three Months Ended Nine Months Ended
March 31, March 31,
2010 2009 2010   2009
(in thousands) (in thousands)
Research and development        $ 40        $ 35        $ 113         $ 98
Sales and marketing   77 67 234 193
General and administrative   245     208     738 629
$ 362 $ 310 $ 1,085 $ 920
                         
8. Commitments and Contingencies
 
The Company leases its office facilities and certain equipment under operating leases with remaining non-cancelable lease terms generally in excess of one year. Rent expense, including escalations, was approximately $132,000 and $383,000 for the three and nine months ended March 31, 2010 and was approximately $129,000 and $394,000 for the three and nine months ended March 31, 2009, respectively. Future minimum rental payments for the Company’s office facilities and equipment under operating leases as of March 31, 2010 are as follows:
 
  Year ending June 30,          (in thousands)
  2010   $ 108
  2011     442
  2012   423
  2013   256
  2014   3
    $ 1,232
           
The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s business, operating results or financial condition.
 
The Company has a one-year employment agreement with one of its officers. The agreement extends annually unless terminated by either the employee or Company at least 90 days prior to the scheduled renewal date. The agreement provides for a minimum salary level, adjusted annually at the discretion of the Company’s Board of Directors, and a bonus based upon the Company’s performance as measured against a business plan approved by the Company’s Board of Directors.
 
9. Segment Information
 
Voxware’s international operations team headquartered in England serves all customers outside of North America, but historically focuses primarily on the United Kingdom. As of March 31, 2010, Voxware’s international operations team consisted of 8 employees, all of which are located in England and France. Long-lived assets supporting the international operations, consisting of computer hardware, furniture and fixtures were not a material component of total long-lived assets as of March 31, 2010.
 
- 14 -
 


The distribution of revenues between North American and International operations is as follows:
 
Three Months Ended Nine Months Ended
March 31, March 31,
2010 2009 2010 2009
($ in thousands) ($ in thousands)
Total revenues                                                 
       North American operations $ 2,338   70 %   $ 3,334 83 %   $ 6,915   73 %   $ 7,808   73 %
       International operations   1,016 30 %   687   17 %   2,550 27 %   2,916 27 %
$ 3,354 100 % $ 4,021 100 % $ 9,465 100 % $ 10,724 100 %
                                               
10. Cost Restructuring
 
In December 2008, the Company reduced its staff to bring costs more in line with anticipated revenues. In conjunction with the staff reduction, 13 positions were eliminated in December (including one part-time position) and one position was scheduled for elimination during the three months ending March 31, 2009. Employment termination charges totaling $81,000 were accrued during the three months ended December 31, 2008, all of which was paid during the period. $71,000 of the termination charges related to North American operations and $10,000 of the termination charges related to International operations.
 
The following charges associated with the December 2008 staff reduction are included in the Consolidated Statements of Operations:
 
Three Months Ended Nine Months Ended
March 31, March 31,
2010 2009 2010 2009
       (in thousands) (in thousands)
Cost of service revenues $ -        $ -        $ -        $ 35
Research and development   -   - - 27
Sales and marketing - - -     18
General and administrative   -   11     - 12
$ - $ 11 $ - $ 92
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This report contains forward-looking statements. Such statements are subject to certain factors that may cause our plans to differ, or results to vary from those expected, including: 
  • our evolving distribution strategy and increasing dependence on third-party distribution channels and hardware manufacturers;
  • the risks associated with our need to introduce new and enhanced products and services in order to increase market penetration;
  • the risk of obsolescence of our products and services due to technological change;
  • our need to attract and retain key management and other personnel with experience in providing integrated voice-based solutions for logistics, specializing in the supply chain sector;
  • the potential for substantial fluctuations in our results of operations;
  • the continuing negative impact of the current global economy on our target customer markets, including retail and food distribution;
  • competition from others;
  • the potential that voice-based products will not be widely accepted; and
  • a variety of risks set forth from time to time in our filings with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.
We undertake no obligation to publicly release results of any of these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrences of unexpected results.
 
Overview:
 
Voxware is a leading provider of software for voice recognition solutions that direct the work of the warehouse workforce. Warehouse workers, wearing headsets with microphones, speak back and forth to our voice applications. Since these workers can now work “hands and eyes free” when performing a wide array of tasks such as picking, putaway and receiving, worker productivity typically increases while errors can be reduced. Our customers typically increase productivity from 10 to 30% and reduce error rates by 30 to 50%. Our primary software product, Voxware 3, offers multiple languages so companies can leverage non-native speaking workers.
 
Voxware 3 is a unique product in the supply chain market as it combines (1) a studio for designing and configuring voice solutions, (2) an open, standards-based environment and (3) a patented software technology for managing speech recognition within a web browser architecture. By using technology that leverages open, web-centric standards to integrate voice solutions within their overall information technology infrastructures with a system that is configurable and adaptable, our customers can respond to change rapidly. Thus, we find our customers achieve benefits faster with less cost since they can implement our systems more rapidly with lesser resources.
 
A complete voice recognition solution combines software, hardware and professional services. The primary focus and the core of our business is the software component of the solution. Customers may choose from a variety of certified hardware devices, which may or may not be supplied by us. Customers may also choose to have solutions delivered by receiving services from us or from our certified partners that also resell the Voxware solution. Therefore, the software that both enables voice recognition and also facilitates the creation of voice applications or workflows is the foundation of our business.
 
We sell Voxware 3 primarily to large companies that operate warehouses and distribution centers. Our customers come from a variety of industry sectors, including food service, grocery, retail, consumer packaged goods, automotive parts, third-party logistics, publishing and wholesale distribution. Our technology has the ability to integrate easily with an external warehouse management system, or WMS.
 
Our revenues are generated primarily from software license fees, maintenance fees, professional services and hardware products sales to both our end customers and Value Added Resellers, or VAR.
 
Our sales are generated primarily by our own sales force working directly with the end users of the VoiceLogistics solution. Since our 2005 fiscal year, we have been transitioning from direct selling of custom solutions that included proprietary hardware and software to the sale, through both partners and direct channels, of productized, standards-based voice software that operates on open hardware platforms. Our transition to this sales approach and technology is an ongoing process that will continue in the future.
 
- 16 -
 


As part of our business transition, we stopped manufacturing our own proprietary hardware and, instead, have partnered with major mobile computing equipment manufacturers such as Motorola, Inc. and LXE, Inc., a subsidiary of EMS Technologies, Inc. One implication of this strategy is that we expect the portion of our revenues associated with proprietary hardware sales to diminish as a percentage of total revenues over time as we transition to a software-centric business model. In addition, we expect that a greater percentage of our hardware revenues will be derived from the sales of accessories, rather than hardware units. However, we can provide no assurance as to the rate of this anticipated shift of revenue sources, and we expect the rate to continue to fluctuate from period to period.
 
We have also developed partnerships with key VAR, and WMS companies, both in the United States and in international markets, who are incorporating our voice technology, most notably our Voxware 3 product, into their offerings. The first deliveries of solutions by partners to end customers occurred during fiscal year 2007. However, we believe it takes on average a year or more before new partners begin generating sales to end user customers, because partners must complete product integration efforts, become certified to deliver Voxware-based voice solutions and secure customer acceptance of their initial deployments.
 
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 quarterly revenues in fiscal 2009 and the first three quarters of fiscal 2010 were adversely affected and the remaining quarter in fiscal 2010 could be lower than the corresponding period in 2009.
 
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 for at least the remainder of fiscal year 2010, 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 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.
 
On June 29, 2009, with an effective date of June 1, 2009, we entered into a Sixth Loan Modification Agreement with Silicon Valley Bank, (“SVB”), which, among other things extended the maturity of a $1,500,000 revolving line of credit, or the Revolver, until July 31, 2009. On September 9, 2009, we entered into a Seventh Loan Modification Agreement that, among other things, lowered the interest rate to prime plus 2.25% and extended the maturity of the Revolver until July 30, 2010. In addition, this modification revised certain financial covenants under the Loan Agreement entered into between us and SVB in 2006.
 
On June 29, 2009, we received an equity infusion of $2.5 million from our two principal investors. On June 29, 2009, we entered into a Securities Purchase Agreement with Co-Investment Fund II, L.P. (a Cross Atlantic Technology Fund entity) and Edison Venture Fund V, L.P., pursuant to which we issued and sold an aggregate of 1,428,571 shares of the our Common Stock, at a purchase price of $1.75 per share, and warrants to purchase up to 142,857 shares of Common Stock, which became exercisable six months after the date of issuance and shall expire three years from the date of issuance at an exercise price of $2.50 per share.
 
Under the terms of the Securities Purchase Agreement, Edison Venture Fund V, L.P. purchased 285,714 shares of Common Stock and Warrants to purchase 28,571 shares of Common Stock and Co-Investment Fund II, L.P. purchased 1,142,857 shares of Common Stock and Warrants to purchase 114,286 shares of Common Stock. The private placement closed on June 30, 2009. We received gross proceeds equal to $2,500,000. The securities sold in this private placement have not been registered under the Securities Act of 1933, as amended, or Securities Act, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.
 
The Company is in discussions with SVB to further extend the maturity of the Revolver with SVB, although there can be no assurance that such facility will be extended. We may need 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. 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. However, due to a general trend providing greater emphasis on sales of higher margin product and given our efforts to reduce costs, as well as having $3.4 million in cash and $1.5 million in debt availability, we believe that we have adequate capital resources available to fund our operations through March 31, 2011.
 
Critical Accounting Policies:
 
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change, and the best estimates and judgments routinely require adjustment. The amounts of assets and liabilities reported in our consolidated balance sheets, and the amounts of revenues and expenses reported for each of our fiscal periods, are affected by estimates and assumptions which are used for, but not limited to, the accounting for allowance for doubtful accounts, warranty costs, impairments, inventory, share-based compensation and income taxes. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of our consolidated financial statements.
 
- 17 -
 


Revenue Recognition
Revenues are generated from licensing application software, selling related computer hardware and accessories and providing services, including professional deployment, configuration, customized application development, training services, software maintenance, extended hardware warranty and technical support services.
 
Product revenues consist of software license fees, sales of related computer hardware and accessories and extended hardware warranties. Revenues from the licensing of software are recognized when; (i) a signed contract or other persuasive evidence of an arrangement exists; (ii) the product has been shipped or electronically delivered; (iii) the license fee is fixed and determinable and (iv) collection of the resulting receivable is probable. This generally occurs upon shipment of software or completion of the implementation, if applicable, provided collection is determined to be probable and there are no significant post-delivery obligations. If an acceptance period is required to ensure satisfactory delivery of the application software solution, as may occur for the initial site implementation for new direct-sales customers, revenues are recognized upon customer acceptance. Agreements with most direct customers do not include an acceptance period, so revenues from the sale of hardware and accessories and licensing of software in these transactions are recognized upon shipment. Extended hardware warranty revenues are recognized ratably over the life of the contract, which is generally either one year or three years. Channel partner revenue is recognized when the four criteria set forth above in clauses (i) through (iv) are met. For the collectibility criteria, revenue from each channel partner is deferred until cash is collected unless a pattern of collectibility is established through actual transactions with each specific channel partner.
 
Services revenues consist of professional deployment, configuration, customized application development, training services, software maintenance and technical support services. Professional services revenues are generally recognized as the services are performed. For arrangements in which professional services are provided in conjunction with software, professional services revenues generated by services provided prior to delivery of software are deferred until delivery of all software. Revenues from maintenance and technical support, which typically consist of unspecified when-and-if-available product updates and customer telephone support services, are recognized ratably over the term of the service period, which is generally one year.
 
We recognize revenue in accordance with the Software Revenue Recognition guidance of ASC 985, which requires that revenue recognized from multiple element arrangements that include software licenses be allocated to the various elements of the arrangement based on the fair values of the elements, such as hardware, deployment services and maintenance and technical support services. We follow the residual method of accounting as provided in ASC 985. Under the residual method, the aggregate arrangement fee is allocated to each of the undelivered elements in an amount equal to their fair values, with the residual arrangement fee allocated to the delivered elements. The fair value of the undelivered elements included in our multi-element sales arrangements is based on vendor specific objective evidence, or VSOE.
 
The fair value of elements not essential to the functioning of the software, including hardware units and related accessories, are calculated in accordance with the Multiple Element Arrangements guidance of ASC 605. Under the ASC 605 guidance, we determine the fair value of hardware elements based on the price when it is sold separately by either us or a competitor.
 
We determine VSOE of the fair values of maintenance and technical support based on annual renewal rates provided to customers and for professional services based on standard hourly rates when such services are provided on a stand-alone basis. As of March 31, 2010, we believe that we have realized VSOE of the fair values for maintenance and professional services.
 
Deferred revenues consist of unearned customer deposits, extended hardware warranties and post contract support, or PCS arrangements. Customer deposits are recognized as revenue upon customer acceptance of the underlying product and services in conjunction with the recognition of deferred project costs. PCS arrangements include software maintenance revenues. These arrangements, which sometimes include amounts bundled with initial revenues, are deferred upon invoicing and recognized as revenues over the term of the service period, which is typically one year. Revenues from extended hardware warranties are recognized over the term of the warranty, which is typically one year; however, certain extended hardware warranty arrangements have a three year term.
 
Travel costs associated with professional services and billed to customers are recorded as services revenues at the time they are incurred by us.
 
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and an assessment of international and economic risk, as well as the aging of the accounts receivable. If there is a change in a major customer’s credit worthiness or if actual defaults differ from historical experience, our estimates of recoverability of amounts due could be affected.
 
- 18 -
 


Research and Development
Research and development expenditures are charged to operations as incurred. In accordance with ASC 985, development costs incurred in connection with the research and development of software products and enhancements to existing software products are charged to expense as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. We define technological feasibility as the point at which there is a completed working model of the software product, the completeness of which is to be confirmed by testing. According to ASC 985, the working model is generally deemed to exist with commencement of beta testing.
 
Warranty Costs
Our standard warranty policy generally allows customers or end users to return defective products for repair or replacement, provided that we are notified of the defective product generally within 90 days from delivery of the product to the end user in the case of software, and up to a one year in the case of hardware. We accrue for warranty costs based on our estimate of expected repair cost per unit, service policies and specific known issues. Certain extended hardware warranty services are outsourced to a third-party in accordance with contracts that generally span three years. The costs associated with these contracts are prepaid and recognized ratably over the life of the contract. If we experience claims or significant changes in costs of services, such as third-party vendor charges, materials or freight, which could be higher or lower than our historical experience, our cost of revenues could be affected.
 
Inventory
Inventory purchases and purchase commitments are based upon forecasts of future demand. We value our inventory at the lower of average cost or net realizable value. If we believe that demand no longer allows us to sell our inventory above cost, or at all, then we write down that inventory to net realizable value or write-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory write-offs could differ from our estimates.
 
Share-Based Compensation
We account for share-based compensation in accordance with ASC 718, which requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value. The values of the portions of the awards that are ultimately expected to vest are recognized as expense over the requisite service periods. Compensation expense associated with equity awards is determined based on the estimated fair value of the award itself, measured using either current market data or an established option pricing model. We use the Black-Scholes option pricing model to determine the fair value of option awards and the market value on the date of the grant to determine the fair value of other equity awards. The measurement date for option and other equity awards is the date of grant. Changes to the underlying assumptions may have significant impact on the underlying fair value of option and other equity awards, which could have a material impact on our consolidated financial statements.
 
Income Taxes
There are significant differences in calculating income or loss for accounting and tax purposes, primarily relating to charges that are recorded in the current period for accounting purposes, but are deferred for tax purposes. Furthermore, tax laws differ in each jurisdiction, yielding differing amounts of taxable income or loss in each jurisdiction. While we have substantial net operating losses to offset taxable income in some taxing jurisdictions, certain restrictions preclude us from fully utilizing the benefit of these net operating losses. In addition, the expansion of our business requires us to file taxes in jurisdictions where we did not previously operate, and thus do not have established net operating losses to offset the tax liability.
 
Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in the period that such tax rate changes are enacted.
 
We recognize interest and penalties related to uncertain tax positions in income tax expense.
 
Our key accounting estimates and policies are reviewed with the Audit Committee of our Board of Directors.
 
Off-Balance Sheet Arrangements:
 
We do not have any off-balance sheet arrangements.
 
- 19 -
 


Results of Operations
 
Three months ended March 31, 2010 compared to the three months ended March 31, 2009
(dollars in table are presented in thousands)
 
      Three Months             Three Months                  
Ended % of Total Ended % of Total
March 31, 2010 Revenue March 31, 2009 Revenue $ Change % Change
Product revenues $                 1,842 55%   $                 2,597 65%   $        (755 ) (29% )
Services revenues 1,512 45%   1,424 35%   88 6%  
Total revenues 3,354 100%   4,021 100%   (667 ) (17% )
 
Cost of product revenues 826 24%   866 22%   (40 ) (5% )
Cost of services revenues 422 13%   653 16%   (231 ) (35% )
Total cost of revenues 1,248 37%   1,519 38%   (271 ) (18% )
 
Gross profit 2,106 63%   2,502 62%   (396 ) (16% )
 
Research and development 799 24%   864 22%   (65 ) (8% )
Sales and marketing 1,039 31%   1,289 32%   (250 ) (19% )
General and administrative 854 25%   898 22%   (44 ) (5% )
Total operating expenses 2,692 80%   3,051 76%   (359 ) (12% )
 
Operating loss (586 ) (17% ) (549 ) (14% ) (37 ) (7% )
 
Interest (expense) income, net (5 ) (1% ) (10 ) (0% ) 5 50%  
Loss before income taxes (591 ) (18% ) (559 ) (14% ) (32 ) (6% )
 
Provision for income taxes - 0%   (1 ) (0% ) 1          100%  
 
Net loss   $ (591 )            (18% )   $ (560 )            (14% )   $ (31 )   (6% )
 
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The components of gross profit for the three months ended March 31, 2010 and 2009 are as follows:
 
Three Months Ended      
March 31, Difference
2010       2009 $       %
(in thousands) (in thousands)
Product revenues
    Software licenses $       354 $       1,006 $                  (652 )        (65 %)
    Hardware units and accessories 1,190 1,275 (85 ) (7 %)
    Extended hardware warranties 235 266 (31 ) (12 %)
    Royalties 63 50 13 26 %
1,842 2,597 (755 ) (29 %)
 
Cost of product revenues
    Software licenses 6 12 (6 ) (50 %)
    Hardware units and accessories 732 769 (37 ) (5 %)
    Extended hardware warranties 88 85 3 4 %
826 866 (40 ) (5 %)
 
Gross Profit from product revenues 1,016 1,731 (715 ) (41 %)
 
Services revenues
    Professional services 372 369 3 1 %
    Software maintenance services 1,084 1,024 60 6 %
    Billable travel 56 31 25 81 %
1,512 1,424 88 6 %
 
Cost of services revenues
    Professional services 222 393 (171 ) (44 %)
    Software maintenance services 174 216 (42 ) (19 %)
    Billable travel 26 44 (18 ) (41 %)
422 653 (231 ) (35 %)
 
Gross Profit from services revenues 1,090 771 319 41 %
 
Gross Profit $ 2,106   $ 2,502   $ (396 )   (16 %)
 
Revenues
 
Total revenues were $3,354,000 for the three months ended March 31, 2010 compared to total revenues of $4,021,000 for the three months ended March 31, 2009. The $667,000 (17%) decrease in total revenues is primarily due to decreases of $652,000 (65%) in licensing of software, $85,000 (7%) in revenues generated from the sale of hardware units and related accessories and $31,000 (12%) in extended hardware warranties offset in part by an increase of $60,000 (6%) in software maintenance services. Product revenues accounted for 55% of revenues during the three months ended March 31, 2010 as compared to 65% during the three months ended March 31, 2009. Service revenues accounted for 45% of revenue during the three months ended March 31, 2010 as compared to 35% during the three months ended March 31, 2009.
 
Product revenues include licensing of software, sales of hardware units and accessories, extended hardware warranties and royalties from our speech compression technology. Total product revenues decreased $755,000 (29%) to $1,842,000 during the three months ended March 31, 2010 from $2,597,000 in the three months ended March 31, 2009. The decrease in product revenues during the three months ended March 31, 2010 was primarily due to decreases in software licenses sold compared to the three months ended March 31, 2009. The decrease in software licenses sold was primarily due to fewer new customer sites purchasing software during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. Software licenses contributed 19% of product revenues during the three months ended March 31, 2010 as compared to 39% during the three months ended March 31, 2009. We believe this decrease was due to a few potential customers delaying their purchase during the three months ended March 31, 2010 due to budget constraints. Additionally, the 2009 fiscal quarter included a large sale to one customer that included $341,000 of software revenue. Hardware units and accessories accounted for 65% of product revenues during the three months ended March 31, 2010 as compared to 49% during the three months ended March 31, 2009. Accessories generally provide higher gross margin percentages than hardware unit sales. Accessories accounted for 73% of hardware revenues during the three months ended March 31, 2010 as compared to 44% of hardware revenues for the three months ended March 31, 2009.
 
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Services revenues are derived from professional services fees relating to voice-based solutions, ongoing customer support activities and travel charges billed to customers for costs incurred while providing services. For the three months ended March 31, 2010, services revenues totaled $1,512,000, an increase of $88,000 (6%) from services revenues of $1,424,000 for the three months ended March 31, 2009. Professional services increased $3,000 (1%) from $369,000 during the three months ended March 31, 2009 to $372,000 during the three months ended March 31, 2010. Software maintenance support services increased $60,000 (6%) from $1,024,000 during the three months ended March 31, 2009 to $1,084,000 during the three months ended March 31, 2010. Revenues from software maintenance support services tend to grow over time as additional software licenses are sold and remain in effect.
 
Cost of Revenues
 
Total cost of revenues decreased $271,000 (18%) from $1,519,000 for the three months ended March 31, 2009 to $1,248,000 for the three months ended March 31, 2010.
 
Cost of product revenues decreased $40,000 (5%) from $866,000 in the three months ended March 31, 2009, to $826,000 in the three months ended March 31, 2010. Such costs reflect materials, labor and overhead associated with the sale of our voice-based products. Included in our cost of product revenues is the cost associated with our team responsible for testing, shipping, supporting and managing third party hardware. This team was comprised of three individuals as of March 31, 2010 and four individuals as of March 31, 2009. The decrease in cost of product revenues is primarily attributable to a decrease of $13,000 for direct material costs and freight charges. These cost reductions were primarily due to a decrease in sales of computer hardware units and related accessories during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.
 
Cost of services revenues consists primarily of the expenses associated with customer maintenance support and professional services, including employee compensation, outside consulting services and travel expenditures. Professional services costs include labor charges for custom application design and development, customer training and assisting customers to implement our voice-based solutions. Professional services costs are tracked by project and are deferred until the related project revenue is recognized. Costs of customer support and professional services staff performed in support of our sales and research and development activities are recorded as operating expenses, while the cost of customer support or professional service activities performed by our research and development staff are recorded as cost of services revenues. Our customer support and professional services staff was comprised of 10 individuals as of March 31, 2010, as compared to 17 individuals as of March 31, 2009. Four positions were eliminated in December 2008 in response to the decline in our revenues during the period and others departed during fiscal year 2010. Cost of services revenues decreased $231,000 (35%) from $653,000 in the three months ended March 31, 2009 to $422,000 in the three months ended March 31, 2010. Expenses related to professional services accounted for the majority of the decrease as it decreased $171,000 (44%) from $393,000 in the three months ended March 31, 2009 to $222,000 in the three months ended March 31, 2010.
 
Operating Expenses
 
Total operating expenses decreased by $359,000 (12%) to $2,692,000 in the three months ended March 31, 2010 from $3,051,000 in the three months ended March 31, 2009 due in part to lower average head count for the periods and lower commission expense. The number of employees associated with operating expenses (research and development, sales and marketing, general and administrative) totaled 44 individuals as of March 31, 2010 and 45 as of March 31, 2009.
 
Research and development expenses primarily consist of employee compensation, consulting fees and other costs associated with our voice recognition technology, hardware platform and VoiceLogistics software suite development efforts. In addition, costs incurred by our customer support and professional services teams relating to the development of our VoiceLogistics software suite are charged to research and development, while the cost of customer support or professional service activities performed by our research and development staff are recorded as cost of services revenues. Our research and development team was comprised of 19 individuals as of March 31, 2010 and 18 individuals as of March 31, 2009. Our research and development expenses decreased $65,000 (8%) to $799,000 in the three months ended March 31, 2010, from $864,000 in the three months ended March 31, 2009. The majority of the decrease related to a reduction of $66,000 for labor related costs.  
 
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Sales and marketing expenses primarily consist of employee compensation (including direct sales commissions), third-party partnership fees, travel expenses and trade show and other lead generation expenses. Our sales and marketing staff was comprised of 16 individuals as of March 31, 2010 compared to 17 individuals as of March 31, 2009. Sales and marketing expenses decreased $250,000 (19%) to $1,039,000 in the three months ended March 31, 2010 from $1,289,000 in the three months ended March 31, 2009. The decrease in sales and marketing expenses is due primarily to decreases during the three months ended March 31, 2010 of $20,000 in marketing costs, $59,000 in sales meeting and travel expenses and $140,000 in lower commissions expense due to lower product revenues and changes in sales mix as of March 31, 2010. In light of reduced revenues caused by global economic conditions, we undertook steps to reduce sales and marketing expenses. We anticipate that sales and marketing expenses during fiscal year 2010 may be less than those costs incurred during fiscal year 2009.
 
General and administrative expenses consist primarily of employee compensation and fees for insurance, rent, office expenses, professional services, public company related charges and income and expenses related to fluctuations in foreign currency exchange rates. The general and administrative staff was comprised of 9 full time employees as of March 31, 2010 compared to 10 full time employees as of March 31, 2009. General and administrative expenses decreased $44,000 (5%) to $854,000 in the three months ended March 31, 2010 from $898,000 in the three months ended March 31, 2009. The decrease related to a decrease in labor costs of $149,000, offset by an increase in stock option expense of $36,000 and depreciation and amortization of $17,000.
 
Interest Income and Expense
 
Interest expense is reported net of interest income earned. Net interest expense was $5,000 for the three months ended March 31, 2010, compared to net interest expense of $10,000 for the three months ended March 31, 2009, a decrease of $5,000. Interest income decreased $6,000 from $6,000 during the three months ended March 31, 2009 to $0 during the three months ended March 31, 2010 due primarily to declining interest rates and lower balances of invested funds. Interest expense decreased $11,000 from $16,000 during the three months ended March 31, 2009 to $5,000 during the three months ended March 31, 2010 due primarily to an interest charge related to a sales tax discount related to previous years.
 
Income Taxes
 
There are significant differences in calculating income or loss for accounting and tax purposes, primarily relating to charges that are recorded in the current period for accounting purposes, but are deferred for tax purposes. Furthermore, tax laws differ in each jurisdiction, yielding differing amounts of taxable income or loss in each jurisdiction. While we have substantial net operating losses to offset taxable income in some taxing jurisdictions, certain restrictions preclude us from fully utilizing the benefit of these net operating losses. In addition, the expansion of our business requires us to file taxes in jurisdictions where we did not previously operate, and thus do not have established net operating losses to offset the tax liability.
 
The provision for income taxes was $0 for the three months ended March 31, 2010 and $1,000 for the three months ended March 31, 2009. We had a loss before taxes of $591,000 for accounting purposes during the three months ended March 31, 2010, compared to a loss before taxes of $559,000 during the three months ended March 31, 2009.
 
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Nine months ended March 31, 2010 compared to the nine months ended March 31, 2009
(dollars in table are presented in thousands)
 
      Nine Months       Nine Months
Ended % of Total       Ended       % of Total      
March 31, 2010 Revenue March 31, 2009 Revenue $ Change       % Change
Product revenues $              4,943 52 % $              6,402 60 % $       (1,459 ) (23 %)
Services revenues 4,522 48 % 4,322 40 % 200 5 %
Total revenues 9,465 100 % 10,724 100 % (1,259 ) (12 %)
 
Cost of product revenues 2,049 22 % 2,488 23 % (439 ) (18 %)
Cost of services revenues 1,538 16 % 2,354 22 % (816 ) (35 %)
Total cost of revenues 3,587 38 % 4,842 45 % (1,255 ) (26 %)
   
Gross profit 5,878 62 % 5,882 55 % (4 ) (0 %)
 
Research and development 2,303 24 % 2,889 27 % (586 ) (20 %)
Sales and marketing 3,265 34 % 4,220 39 % (955 ) (23 %)
General and administrative 2,599 28 % 2,977 28 % (378 ) (13 %)
Total operating expenses 8,167 86 % 10,086 94 % (1,919 ) (19 %)
 
Operating loss (2,289 ) (24 %) (4,204 ) (39 %) 1,915 46 %
 
Interest (expense) income, net (45 ) (1 %) (16 ) (0 %) (29 )         (181 %)
Loss before income taxes (2,334 ) (25 %) (4,220 ) (39 %) 1,886 45 %
 
Provision for income taxes - 0 % (3 ) (0 %) 3 100 %
 
Net loss   $ (2,334 )            (25 %)   $ (4,223 )          (39 %)   $ 1,889     45 %
 
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The components of gross profit for the nine months ended March 31, 2010 and 2009 are as follows:
 
      Nine Months Ended      
March 31, Difference
2010 2009 $ change       % change
(in thousands) (in thousands)
Product revenues       
    Software licenses $       1,226 $      1,785 $             (559 )           (31 %)
    Hardware units and accessories 2,870 3,673 (803 ) (22 %)
    Extended hardware warranties 719 759 (40 ) (5 %)
    Royalties 128 185 (57 ) (31 %)
4,943 6,402 (1,459 ) (23 %)
 
Cost of product revenues
    Software licenses 14 32 (18 ) (56 %)
    Hardware units and accessories 1,787 2,243 (456 ) (20 %)
    Extended hardware warranties 248 213 35 16 %
2,049 2,488 (439 ) (18 %)
 
Gross Profit from product revenues 2,894 3,914 (1,020 ) (26 %)
 
Services revenues
    Professional services 1,140 1,179 (39 ) (3 %)
    Software maintenance services 3,250 3,010 240 8 %
    Billable travel 132 133 (1 ) (1 %)
  4,522 4,322 200 5 %
 
Cost of services revenues
    Professional services 866 1,573 (707 ) (45 %)
    Software maintenance services 585 635 (50 ) (8 %)
    Billable travel 87 146 (59 ) (40 %)
1,538 2,354 (816 ) (35 %)
 
Gross Profit from services revenues 2,984 1,968 1,016 52 %
 
Gross Profit   $ 5,878   $ 5,882   $ (4 )   (0 %)
  
Revenues
 
Total revenues were $9,465,000 for the nine months ended March 31, 2010 compared to total revenues of $10,724,000 for the nine months ended March 31, 2009. The $1,259,000 (12%) decrease in total revenues is primarily due to decreases of $803,000 (22%) in revenues generated from the sale of hardware units and related accessories, and $559,000 (31%) in licensing of software and $57,000 (31%) in royalties, offset by an increase of $240,000 (8%) in software maintenance services. Product revenues accounted for 52% of revenues during the nine months ended March 31, 2010 as compared to 60% during the nine months ended March 31, 2009. Service revenues accounted for 48% of revenue during the nine months ended March 31, 2010 as compared to 40% during the nine months ended March 31, 2009.
 
Product revenues include licensing of software, sales of hardware units and accessories, extended hardware warranties and royalties from our speech compression technology. Total product revenues decreased $1,459,000 (23%) to $4,943,000 during the nine months ended March 31, 2010 from $6,402,000 in the nine months ended March 31, 2009. The decrease in product revenues during the nine months ended March 31, 2010 was primarily due to decreases in software licenses and related hardware units and accessories sold compared to the nine months ended March 31, 2009. The decrease in hardware units and hardware accessories sold was primarily due to less new customer sites purchasing software and related hardware units during the nine months ended March 31, 2010 as compared to the nine months ended March 31, 2009. Software licenses contributed 25% of product revenues during the nine months ended March 31, 2010 as compared to 28% during the nine months ended March 31, 2009. Hardware units and accessories accounted for 58% of product revenues during the nine months ended March 31, 2010 as compared to 57% during the nine months ended March 31, 2009. Accessories generally provide higher gross margin percentages than hardware unit sales. Accessories accounted for 75% of hardware revenues during the nine months ended March 31, 2010 as compared to 60% of hardware revenues for the nine months ended March 31, 2009.
 
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Services revenues are derived from professional services fees relating to voice-based solutions, ongoing customer support activities and travel charges billed to customers for costs incurred while providing services. For the nine months ended March 31, 2010, services revenues totaled $4,522,000, an increase of $200,000 (5%) from services revenues of $4,322,000 for the nine months ended March 31, 2009. Professional services decreased $39,000 (3%) from $1,179,000 during the nine months ended March 31, 2009 to $1,140,000 during the nine months ended March 31, 2010. Software maintenance support services increased $240,000 (8%) from $3,010,000 during the nine months ended March 31, 2009 to $3,250,000 during the nine months ended March 31, 2010. Revenues from software maintenance support services tend to grow over time as additional software licenses are sold and remain in effect.
 
Cost of Revenues
 
Total cost of revenues decreased $1,255,000 (26%) from $4,842,000 for the nine months ended March 31, 2009 to $3,587,000 for the nine months ended March 31, 2010.
 
Cost of product revenues decreased $439,000 (18%) from $2,488,000 in the nine months ended March 31, 2009 to $2,049,000 in the nine months ended March 31, 2010. Such costs reflect materials, labor and overhead associated with the sale of our voice-based products. Included in our cost of product revenues is the cost associated with our team responsible for testing, shipping, supporting and managing third party hardware. This team was comprised of three individuals as of March 31, 2010 and four individuals as of March 31, 2009. The decrease in cost of product revenues is primarily attributable to a decrease of $427,000 for direct material costs and freight charges. These cost reductions were primarily due to a decrease in sales of computer hardware units and related accessories during the nine months ended March 31, 2010 as compared to the nine months ended March 31, 2009.
 
Cost of services revenues consists primarily of the expenses associated with customer maintenance support and professional services, including employee compensation, outside consulting services and travel expenditures. Professional services costs include labor charges for custom application design and development, customer training and assisting customers implement our voice-based solutions. Professional services costs are tracked by project and are deferred until the related project revenue is recognized. Costs of customer support and professional services staff performed in support of our sales and research and development activities are recorded as operating expenses, while the cost of customer support or professional service activities performed by our research and development staff are recorded as cost of services revenues. Our customer support and professional services staff was comprised of 10 individuals as of March 31, 2010, as compared to 17 individuals as of March 31, 2009. Four positions were eliminated in December 2008 in response to the decline in our revenues during the period and others departed during fiscal year 2010. Cost of services revenues decreased $816,000 (35%) from $2,354,000 in the nine months ended March 31, 2009 to $1,538,000 in the nine months ended March 31, 2010. Expenses related to professional services accounted for the majority of the decrease as it decreased $707,000 (45%) from $1,573,000 in the nine months ended March 31, 2009 to $866,000 in the nine months ended March 31, 2010.
 
Operating Expenses
 
Total operating expenses decreased by $1,919,000 (19%) to $8,167,000 in the nine months ended March 31, 2010 from $10,086,000 in the nine months ended March 31, 2009 due in part to lower average head count during the period and reasons discussed below. The number of employees associated with operating expenses (research and development, sales and marketing, general and administrative) totaled 44 individuals as of March 31, 2010 and 45 as of March 31, 2009.
 
Research and development expenses primarily consist of employee compensation, consulting fees and other costs associated with our voice recognition technology, hardware platform and VoiceLogistics software suite development efforts. In addition, costs incurred by our customer support and professional services teams relating to the development of our VoiceLogistics software suite are charged to research and development, while the cost of customer support or professional service activities performed by our research and development staff are recorded as cost of services revenues. Our research and development team was comprised of 19 individuals as of March 31, 2010 and 18 individuals as of March 31, 2009. Our research and development expenses decreased $586,000 (20%) to $2,303,000 in the nine months ended March 31, 2010, from $2,889,000 in the nine months ended March 31, 2009. The majority of the decrease related to a reduction of $178,000 for outside consultants, $229,000 for labor costs, $44,000 for depreciation costs and $55,000 for recruitment costs.
 
Sales and marketing expenses primarily consist of employee compensation (including direct sales commissions), third-party partnership fees, travel expenses and trade show and other lead generation expenses. Our sales and marketing staff was comprised of 16 individuals as of March 31, 2010 compared to 17 individuals as of March 31, 2009. Sales and marketing expenses decreased $955,000 (23%) to $3,265,000 in the nine months ended March 31, 2010 from $4,220,000 in the nine months ended March 31, 2009. The decrease in sales and marketing expenses is due primarily to decreases during the nine months ended March 31, 2010 of $191,000 in marketing costs, $171,000 in sales meeting and travel expenses, $62,000 in labor costs due to the smaller sales staff and $449,000 in lower commission expense due to reduction in the revenues and changes in the sales mix. In light of reduced revenues caused by global economic conditions, we undertook steps to reduce sales and marketing expenses. We anticipate that sales and marketing expenses during fiscal year 2010 may be less than those costs incurred during fiscal year 2009.
 
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General and administrative expenses consist primarily of employee compensation and fees for insurance, rent, office expenses, professional services, public company related charges and income and expenses related to fluctuations in foreign currency exchange rates. The general and administrative staff was comprised of 9 full time employees as of March 31, 2010 compared to 10 full time employees as of March 31, 2009. General and administrative expenses decreased $378,000 (13%) to $2,599,000 in the nine months ended March 31, 2010 from $2,977,000 in the nine months ended March 31, 2009. The decrease related to a decrease in labor costs of $248,000, provision for doubtful accounts of $37,000 and fluctuations in foreign currency exchange rates generated losses of $74,000 during the nine months ended March 31, 2010 compared to losses of $418,000 during the nine months ended March 31, 2009, a change of $341,000 offset by increases of $109,000 for stock-based compensation expense and $28,000 for professional services.
 
Interest Income and Expense
 
Interest expense is reported net of interest income earned. Net interest expense was $45,000 for the nine months ended March 31, 2010 compared to net interest expense of $16,000 for the nine months ended March 31, 2009, an increase of $29,000. Interest income decreased $39,000 from $41,000 during the nine months ended March 31, 2009 to $2,000 during the nine months ended March 31, 2010 due primarily to declining interest rates and lower balances of invested funds. Interest expense decreased $10,000 from $57,000 during the nine months ended March 31, 2009 to $47,000 during the nine months ended March 31, 2010 due primarily to an interest charge related to a sales tax discount related to previous years.
 
Income Taxes
 
There are significant differences in calculating income or loss for accounting and tax purposes, primarily relating to charges that are recorded in the current period for accounting purposes, but are deferred for tax purposes. Furthermore, tax laws differ in each jurisdiction, yielding differing amounts of taxable income or loss in each jurisdiction. While we have substantial net operating losses to offset taxable income in some taxing jurisdictions, certain restrictions preclude us from fully utilizing the benefit of these net operating losses. In addition, the expansion of our business requires us to file taxes in jurisdictions where we did not previously operate, and thus do not have established net operating losses to offset the tax liability.
 
The provision for income taxes was $0 for the nine months ended March 31, 2010 and $3,000 for the nine months ended March 31, 2009. We had a loss before taxes of $2,334,000 for accounting purposes during the nine months ended March 31, 2010, compared to a loss before taxes of $4,220,000 during the nine months ended March 31, 2009.
 
Liquidity and Capital Resources
 
As of March 31, 2010, we had $3,353,000 in cash and cash equivalents, compared to $4,342,000 in cash and cash equivalents as of June 30, 2009, a decrease of $989,000 (23%). Our working capital as of March 31, 2010 was $1,890,000 compared to $3,195,000 as of June 30, 2009, a decrease of $1,305,000 (41%).
 
Net cash used in operating activities totaled $302,000 for the nine months ended March 31, 2010, primarily consisting of a net loss of $2,334,000 and decreases of $549,000 in accounts payable and accrued expenses, offset by a decrease of $692,000 in accounts receivable and non-cash charges totaling $1,308,000, consisting of $1,085,000 of share-based compensation, $204,000 of depreciation and amortization and a $19,000 adjustment to the provision for doubtful accounts. The reduction in accounts payable and accrued expenses is primarily a function of payments of commissions and bonuses accrued as of June 30, 2009. Changes in accounts receivable are the function of the timing of invoicing and collections throughout the period. Share-based compensation charges relate to grants of restricted stock units and stock options. For the nine months ended March 31, 2009, net cash used in operating activities totaled $968,000, primarily consisting of a net loss of $4,223,000 and decreases of $802,000 in accounts payable and accrued expenses and $789,000 in deferred revenues. Cash used in operating activities was offset by a decrease of $3,449,000 in accounts receivable and non-cash charges totaling $1,207,000, consisting of $920,000 of share-based compensation, $232,000 of depreciation and amortization, and a $55,000 adjustment to the provision for doubtful accounts. The reduction in accounts payable and accrued expenses is primarily a function of payments of inventory and bonuses accrued as of June 30, 2008. The decrease in deferred revenues is due primarily to the timing of maintenance billings throughout the year, and the completion of customer implementation projects. Changes in accounts receivable are the function of the timing of invoicing and collections throughout the period.
 
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Net cash used in investing activities totaled $174,000 during the nine months ended March 31, 2010 and $75,000 during the nine months ended March 31, 2009 due primarily to purchases of property and equipment and $51,000 of capitalized software development costs during the nine month period ended March 31, 2010.
 
Net cash used in financing activities totaled $513,000 during the nine months ended March 31, 2010 compared to net cash used in financing activities of $89,000 during the nine months ended March 31, 2009. During the nine months ended March 31, 2010, we repaid $488,000 against term loans with SVB, paid $44,000 related to employee taxes for certain cashless exercises of restricted stock units and received proceeds of $19,000 from the exercise of stock options. 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.
 
We initially entered into a credit facility with SVB on December 30, 2003. The following facilities were outstanding during fiscal years 2009 and 2010:
 
On May 24, 2006, we entered into a Loan and Security Agreement with SVB, or 2006 Facility, providing an additional $3,000,000 credit facility comprised of a $1,500,000 revolving line of credit, or Revolver and a $1,500,000 Non-Formula Term Loan, or 2006 Term Loan to fund our anticipated working capital needs. The Revolver created by the 2006 Facility was initially available until October 31, 2007. It was extended to February 11, 2009 by the Second Loan Modification Agreement, or 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, 2010, amounts outstanding under the Revolver bear interest at prime plus 2.25%. 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, 2010 or June 30, 2009.
 
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 $0 at March 31, 2010 and $375,000 at June 30, 2009. Monthly principle payments had totaled approximately $42,000 prior to being fully repaid in March 2010. Amounts outstanding under the 2006 Term Loan bore interest at March 31, 2010 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 the SLMA with SVB, providing for a new $600,000 revolving equipment line of credit, or 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. Amounts outstanding under the Equipment Revolver bear interest at March 31, 2010 at a rate of 7%. The outstanding balance on the Equipment Revolver was $200,000 at March 31, 2010 and $313,000 at June 30, 2009.
 
On February 17, 2009, we 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 of March 31, 2009, the Company entered into a Fifth Loan Modification Agreement which extended the maturity of the Revolver until May 31, 2009, and set financial covenants for the period ended May 31, 2009.
 
On June 26, 2009, with an effective date of June 1, 2009, we entered into a Sixth Loan Modification Agreement which extended the Revolver until July 31, 2009. On September 9, 2009, the Company entered in to a Seventh Loan Modification Agreement which extends the maturity, lowers the interest rate to prime plus 2.25% and provides covenants of the Revolver until July 30, 2010. The Company is in discussions with SVB to further extend the maturity, although there can be no assurance that such facility will be extended.
 
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 may 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 nine months ended March 31, 2010, we earned gross margin from software licenses of 99%, compared to 38% for sales of hardware units and related accessories. Partnership channel sales accounted for 9% of our revenues during the nine months ended March 31, 2010 compared to 10% during the nine months ended March 31, 2009.
 
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Software licenses contributed 13% of revenues for the nine months ended March 31, 2010 compared to 17% of revenue for the nine months ended March 31, 2009. Decreases in the percentage of revenues generated through partnership channels during the nine months ended March 31, 2010 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 2010. 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.
 
On June 29, 2009, we received an equity infusion of $2.5 million from our two principal investors. On June 29, 2009, we entered into a Securities Purchase Agreement with Co-Investment Fund II, L.P. (a Cross Atlantic Technology Fund entity) and Edison Venture Fund V, L.P., pursuant to which we issued and sold an aggregate of 1,428,571 shares of our Common Stock, at a purchase price of $1.75 per share, and Warrants to purchase up to 142,857 shares of Common Stock, which became exercisable six months after the date of issuance and shall expire three years from the date of issuance, at an exercise price of $2.50 per share.
 
Under the terms of the Securities Purchase Agreement, Edison Venture Fund V, L.P. purchased 285,714 shares of Common Stock and Warrants to purchase 28,571 shares of Common stock and Co-Investment Fund II, L.P. purchased 1,142,857 shares of Common Stock and Warrants to purchase 114,286 shares of Common Stock. The private placement closed on June 30, 2009. We received gross proceeds equal to $2,500,000. The securities sold in this private placement have not been registered under the Securities Act, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.
 
We may need 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. 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. However, due to a general trend providing greater emphasis on sales of higher margin product and given our efforts to reduce costs, as well as having $3.4 million in cash and $1.5 million in debt availability we believe that we have adequate capital resources available to fund our operations through March 31, 2011.
 
Dilutive Effect of Options and Warrants
 
As of March 31, 2010, 15,000,000 shares of our Common Stock were authorized, of which 8,072,828 were issued and outstanding. The following table summarizes the potential dilutive impact in the event of the exercise of all options and warrants to purchase stock, including options and warrants whose strike prices exceed the market value of our Common Stock as of March 31, 2010.
 
Dilutive Effect of Options and Warrants as of March 31, 2010
 
Common stock issued and outstanding as of March 31, 2010       8,072,828
 
Dilutive instruments:
    Outstanding warrants to purchase common stock * 1,298,331
    Outstanding options to purchase common stock * 971,588
    Unissued restricted stock units 80,116
   
Common stock plus dilutive instruments outstanding      10,422,863
 
Options to purchase common stock available to issue  
    pursuant to various stock option plans 399,188
 
Common stock outstanding if all dilutive instruments  
    are converted and exercised   10,822,051
 
  *      Includes all "in-the-money" and "out-of-the-money" warrants and options.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate Risk
 
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without assuming significant risk. This is accomplished by investing in diversified investments, consisting primarily of short-term investment-grade securities. We do not use derivative financial instruments in our investment portfolio. Due to the nature of our investments, we believe that we are not exposed to material risk of interest rate changes. A hypothetical 100 basis point change in interest rates, either positive or negative, would not have had a significant effect on either (i) our cash flows and reported results of operations in the nine month periods ended March 31, 2010 and 2009, or (ii) the fair value of our investment portfolios at March 31, 2010 and June 30, 2009.
 
At March 31, 2010, our cash and cash equivalents consisted entirely of money market investments with remaining maturities of 90 days or less when purchased and non-interest bearing checking accounts. Investments in marketable debt securities with maturities greater than 90 days and less than one year are classified as held-to-maturity short-term investments and are recorded at amortized cost. Under current investment guidelines, maturities on short-term investments are restricted to one year or less. Investments in auction rate securities, with maturities which can be greater than one year but for which interest rates reset in less than 90 days, are classified as available for sale securities and stated at fair market value. At March 31, 2010 and June 30, 2009, we held no auction rate securities.
 
At March 31, 2010, our outstanding debt consisted of an Equipment Revolver with SVB in the aggregate amount of $200,000. Interest at March 31, 2010 was 7%, with the interest rate calculated as the greater of 7% or a rate of prime plus 3%. A hypothetical 100 basis point increase in interest rates would not have had a significant effect on our annual interest expense.
 
Foreign Currency Exchange Risk
 
We do not use foreign currency forward exchange contracts or purchased currency options to hedge local currency cash flows or for trading purposes. Sales arrangements with international customers are generally denominated in foreign currency, typically British pounds or Euros. For the nine month period ended March 31, 2010, approximately 27% of our overall revenue resulted from sales to customers outside the United States. Accounts receivable at March 31, 2010 included balances denominated in British pounds valued at $690,000 and balances denominated in Euros valued at $144,000. During the nine months ended March 31, 2010, we recognized a loss of $74,000 from transactions denominated in foreign currency. A hypothetical 10% increase in the value of the U.S. dollar relative to British pound and Euro as of March 31, 2010 would have resulted in an increase to the operating loss of approximately $76,000 for the nine months ended March 31, 2010, while a 10% decrease in the value of the U.S. dollar relative to British pound and Euro as of March 31, 2010 would have resulted in a reduction of the operating loss of approximately $93,000.
 
Item 4(T). Controls and Procedures
 
Disclosure Controls and Procedures
 
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2010. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2010, our disclosure controls and procedures were (1) effective in that they were designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our principal executive officer and principal financial officer by others within those entities, as appropriate to allow timely decisions regarding required disclosures, and (2) effective in that they ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
Changes in Internal Controls
 
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes.
 
There were no changes during the quarter ended March 31, 2010 in our internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
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PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any of these legal matters will have a material adverse effect on our business, operating results or financial condition.
 
Item 1A. Risk Factors
 
We operate in a rapidly changing business environment that involves substantial risk and uncertainty. The following discussion addresses some of the risks and uncertainties that could cause, or contribute to cause, actual results to differ materially from expectations. We caution all readers to pay particular attention to the descriptions of risks and uncertainties described below and in other sections of this report and our other filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.
 
If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our Common Stock could decline, and we may be forced to consider additional alternatives.
 
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this Quarterly Report on Form 10-Q.
 
Risks Relating to Our Business and Operations
If we continue to incur operating losses, we may be unable to continue our operations. With the exception of fiscal year 2008, we have incurred operating losses since we started our company in August 1993. The accumulated deficit at March 31, 2010 was $81,900,000. 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, we incurred a net loss of $2,334,000 for the first nine months of fiscal 2010. If we incur operating losses and consistently fail to be a profitable company, we may be unable to continue our operations. Our future profitability depends on our ability to obtain significant customers for our products, to identify, engage and support significant partners to sell our products, to respond to competition, to introduce new and enhanced products and to successfully market and support our products. We cannot assure you that we will achieve or sustain significant sales or profitability in the future.
 
If we cannot raise adequate capital in the future, we may be unable to continue our product development, marketing and business, generally. We anticipate investing significant resources to fund future operations, including product development and marketing. 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, we may need to raise additional capital to fund future operations. Funding in the form of either debt or equity, from any source, may not be available when needed or on favorable terms, particularly in light of the recent tightening of worldwide credit markets. If we cannot raise adequate funds to satisfy our capital requirements, we may have to limit, delay, scale-back or eliminate product development programs, marketing or other activities. We might be forced to sell or license our technologies. Any of these actions might harm our business. If additional financing is obtained, the financing may be dilutive to our current stockholders.
 
We rely substantially on key customers. Our customer base is highly concentrated. One customer accounted for 15% of our total revenues for the nine months ended March 31, 2010. We believe that a substantial portion of our net sales will continue to be derived from a concentrated group of customers. However, the volume of sales to a specific customer is likely to vary from period to period, and a significant customer in one period may not purchase our products in a subsequent period. In general, there are no ongoing written commitments by customers to purchase our products. Our net sales in any period generally have been, and likely will continue to be, in the near term, derived from a relatively small number of sales transactions. Therefore, the loss of one or more major customers, or a delay in their orders, could have a material adverse affect on our results of operations.
 
If our Voxware 3 family of products is not successful in the market, we will not be able to generate substantial revenues or achieve sustained profitability. Our success is substantially dependent on the success of our VoiceLogistics family of products. If the market accepts our Voxware 3 products, these products will account for the vast majority of our net revenue in the future. If our Voxware 3 products are unsatisfactory, or if we are unable to generate significant demand for these products, or if we fail to develop other significant products or applications, our business will be materially and adversely affected.
 
We have a sole source vendor for our primary hardware products. One vendor supplies us with our primary wearable computer hardware products. Any disruption in supply by this vendor would prohibit us from shipping our products, and thus recognizing revenue. In addition, other vendors provide custom-made components that would take time to reproduce with other suppliers should a current vendor fail to deliver quality product in a timely manner. Any disruptions in our supply chain could have a material adverse effect on our results of operations.
 
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We are relying on third-party hardware manufacturers to develop and bring to market portable voice-compatible computer equipment on which to run our software. Sales of our Voxware 3 and VoxBrowser software products depend, in part, upon the delivery by third-party hardware manufacturers of robust Voxware-certified mobile computing devices with sufficient memory, voice capabilities and form factor. While we anticipate the entrance of additional Voxware-certified devices in the marketplace in the future, our customers seeking best-of-breed hardware units to drive our software currently have a limited selection from which to choose. We cannot assure you that third-party manufacturers will develop and market hardware units compatible with our software on a timely basis, if at all.
 
If we do not develop or acquire and introduce new and enhanced products on a timely basis, our products may be rendered obsolete. The markets for our speech recognition products and voice-based technologies are characterized by rapidly changing technology. The introduction of products by others based on new or more advanced technologies could render our products obsolete and unmarketable. Therefore, our ability to build on our existing technologies and products to develop and introduce new and enhanced products in a cost effective and timely manner will be a critical factor in our ability to grow and compete. We cannot assure you that we will develop new or enhanced products successfully and bring them to market in a timely manner. Further, we cannot assure you that the market will accept new or enhanced products. Our failure to develop new or enhanced products, including our failure to develop or acquire the technology necessary to do so, would have a material adverse effect on our business.
 
If our competitors introduce better or less expensive products, our products may not be profitable to sell or to continue to develop. The business in which we engage is highly competitive. Advances in technology, product improvements and new product introductions, as well as marketing and distribution capabilities and price competition influence success. Failure to keep pace with product and technological advances could adversely affect our competitive position and prospects for growth. Our products compete with those being offered by larger, traditional computer industry participants who have substantially greater financial, technical, marketing and manufacturing resources than we do. We cannot assure you that we will be able to compete successfully against these competitors, or that competitive pressures faced by us would not adversely affect our business or operating results.
 
If we cannot integrate our speech recognition products with other components of customer systems, we may not be able to sell our products. Although state-of-the-art speech recognition technology is important to generating sales in our target markets, other components of a voice-based system are also necessary. Our products must be easily integrated with customers’ asset management and information systems. The ability to incorporate speech recognition products into customers’ systems, quickly and without excessive cost or disruption, will be a key factor in our success. We do not now possess all the necessary components for system integration. Acquisitions, joint ventures or other strategic relationships may be required for us to develop or obtain access to the necessary components to achieve market penetration. The development of strategic relationships with other software vendors can be a lengthy process as potential partners evaluate the benefit to their business of integrating voice-based solutions, and in particular, our software, into their product offerings. We cannot assure you that our efforts will be successful and, to the extent we are unsuccessful, our business may be materially adversely affected.
 
There are a number of factors which may cause substantial variability in our quarterly operating results. Our revenues, gross profit, operating income or loss and net income or loss may vary substantially from quarter-to-quarter due to a number of factors. Many factors, some of which are not within our control, may contribute to fluctuations in operating results. These factors include, but are not limited to, the following:
  • market acceptance of our products;
  • timing and levels of purchases by customers;
  • interruption and delays in production caused by vendor delays;
  • new product and service introductions by our competitors or us;
  • market factors affecting the availability or cost of qualified technical personnel;
  • timing and customer acceptance of our new product and service offerings;
  • effectiveness of sales efforts by third-party partners;
  • length of sales cycle;
  • introduction and application of new generally accepted accounting principles; and
  • industry and general economic conditions, including the recent slowdown of the global economy.
We cannot assure you that any of these factors will not substantially influence our quarterly operating results.
 
If our third-party partners do not effectively market and service our products, we may not generate significant revenues or profits from sales of our products. We utilize third parties, such as hardware system vendors, WMS companies, distributors, consultants, VARs and system integrators, to sell and/or assist us in selling our products. To date we have signed agreements with several of these third-party partners, and we expect these partners to contribute an increasing percentage of overall revenues in the future. We believe that the establishment of a network of third-party partners, with extensive and specific knowledge of the various applications critical in the industrial market, is important for us to succeed in that market. Some third-party partners also purchase products from us at a discount and incorporate them into application systems for various target markets, and/or consult with us in the development of application systems for end users. Once signed, new partners must be trained in the development and sale of voice-based logistics solutions. Accordingly, there can be a significant lead time between the signing of agreements with partners and the recognition of revenues generated by the partners. For the foreseeable future, we may sell fewer products if we cannot attract and retain third-party partners to sell and service our products effectively and provide timely and cost-effective customer support. An increasing number of companies compete for access to the types of partners we use. Additionally, we may experience conflicts between our distribution channel partners who may compete against one another. Our sales may suffer as a result of these conflicts.
 
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Either party generally may terminate our current arrangements with third-party partners at any time upon 30 days prior written notice. We cannot assure you that our partners will continue to purchase and re-sell our products, or provide us with adequate levels of support. If our partner relationships are terminated or otherwise disrupted, our operating performance and financial results may be adversely affected.
 
If we cannot attract and retain management and other personnel with experience in the areas of our business focus, we will not be able to manage and grow our business. We have been developing and selling our speech recognition products and voice-based technologies since February 1999. Since that time, we have been hiring personnel with skills and experience relevant to the development and sale of these products and technologies. If we cannot continue to hire such personnel and to retain personnel hired, our ability to operate our business will be materially adversely affected. On June 30, 2006, the Company accelerated the vesting of outstanding stock options to all of its employees, thereby eliminating a possible reason for employees to remain with us. As of March 31, 2010, 399,188 options to purchase shares of our Common Stock were available for grant to employees. Competition for qualified personnel is intense, and we cannot assure you that we will be able to attract, assimilate or retain qualified personnel.
 
If the export of our technology is deemed a violation of the regulations of the United States Department of Commerce, Bureau of Industry and Security, our business will be substantially harmed. The Bureau of Industry and Security, or BIS, oversees implementation and enforcement of the Export Administration Regulations, or EAR, which control the export of most commercial items. The BIS regulates "dual-use" items that have both commercial and military or proliferation applications; however, purely commercial items without an obvious military use are also subject to the EAR. The EAR prohibits the export of certain technologies, while the export of other technologies is restricted in certain geographical regions or to certain entities. Exporters deemed in violation of the EAR are subject to substantial penalties. We are developing international channels for the distribution of our speech recognition and voice-based technology, and anticipate increasing our dependence upon revenue derived from foreign sources. If some or all of our products are classified as a restricted technology under the EAR, our ability to generate revenue from international sources will be materially adversely affected.
 
If we cannot protect our proprietary rights and trade secrets, or if we are found to be infringing on the patents and proprietary rights of others, our business would be substantially harmed. Our success depends in part on our ability to protect the proprietary nature of our products, preserve our trade secrets and operate without infringing upon the proprietary rights of others. If others obtain and copy our technology, or claim that we are making unauthorized use of their proprietary technology, we may become involved in lengthy and costly disputes to resolve questions of ownership of the technology. If we are found to be infringing on the proprietary rights of others, we could be required to seek licenses to use necessary technology. We cannot assure you that licenses of third-party patents or proprietary rights would be made available to us on acceptable terms, if at all. In addition, the laws of certain countries may not protect our intellectual property because the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary rights in these foreign countries. To protect our proprietary rights, we seek patents and we enter into confidentiality agreements with our employees and consultants with respect to proprietary rights and unpatented trade secrets. We cannot assure you those patent applications in which we hold rights will result in the issuance of patents. We cannot assure you that any issued patents will provide significant protection for our technology and products. In addition, we cannot assure you that others will not independently develop competing technologies that are not covered by our patents. We cannot assure you that confidentiality agreements will provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosures. Any unauthorized disclosure and use of our proprietary technology could have a material adverse effect on our business.
 
Risks Relating to Our Securities
The price of our Common Stock has been highly volatile due to factors that will continue to affect the price of our stock. Our Common Stock traded as high as $2.99 and as low as $1.19 per share between July 1, 2009 and March 31, 2010. Historically, the over-the-counter markets and NASDAQ Capital Market for securities such as our Common Stock have experienced extreme price fluctuations. Some of the factors leading to this volatility include:
 
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  • fluctuations in our quarterly revenue and operating results;
  • announcements of product releases by us or our competitors;
  • announcements of acquisitions and/or partnerships by us or our competitors;
  • increases in outstanding shares of our Common Stock upon exercise or conversion of derivative securities, and the issuances of our Common Stock pursuant to our private placement transactions;
  • delays in producing finished goods inventory for shipment; and
  • the small public float of our outstanding Common Stock in the marketplace.
There is no assurance that the price of our Common Stock will not continue to be volatile in the future.
 
A significant portion of our total outstanding shares of Common Stock may be sold in the market in the near future. This could cause the market price of our Common Stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our Common Stock in the public market could occur at any time. These sales, or the perception in the market of such sales, may have a material adverse effect on the market price of our Common Stock. We previously registered all shares of Common Stock that we may issue under our employee benefit plans. Sales of outstanding shares, when sold, could reduce the market price of our Common Stock.
 
Future sales of our Common Stock in the public market could adversely affect the price of our Common Stock. Sales in the public market of substantial amounts of our Common Stock that are not currently freely tradable, or even the potential for such sales, could impair the ability of our stockholders to recoup their investments or make a profit. As of April 30, 2010, these shares include:
  • approximately 2,999,000 shares of our Common Stock owned by Edison Venture Fund and 2,047,000 shares of our Common Stock owned by Cross Atlantic Technology Fund Entities; and
  • approximately 301,000 shares of our Common Stock owned by our executive officers and directors; and
  • approximately 2,346,000 shares of our Common Stock issuable to warrant holders, option holders and RSU holders, which may be sold under various prospectuses filed under the Securities Act of 1933, as amended, or the Securities Act.
The sale of substantial amounts of our Common Stock by certain affiliates, including our largest stockholders, or the sale of substantial amounts of our Common Stock received through the exercise of outstanding options and/or warrants, or the perception of such sales, may have a material adverse effect on our stock price.
 
If the holders of the warrants and options to purchase our Common Stock elect to have their collective holdings assumed by a potential acquirer of us, the potential acquirer could be deterred from completing the acquisition. Also, if the holders of the warrants and options to purchase our Common Stock elect to have their holdings remain outstanding after an acquisition of us, the potential acquirer could be deterred from completing the acquisition.
 
Our management and other affiliates have significant control of our Common Stock and could control our actions in a manner that conflicts with our interests and the interests of other stockholders, as well as impacting the price of our Common Stock. As of April 30, 2010, our executive officers, directors and affiliated entities together beneficially own approximately 7,088,000 shares of our Common Stock, assuming the exercise of options, warrants and other Common Stock equivalents, which are currently exercisable, held by these stockholders with Edison Venture Fund, or Edison, beneficially owning approximately 3,800,000 shares of our Common Stock and Cross Atlantic Technology Fund Entities, or Cross Atlantic, beneficially owning approximately 2,419,000 shares of our Common Stock. As a result, these stockholders, acting together, will be able to exercise considerable influence over matters requiring approval by our stockholders, including the election of directors, and may not always act in the best interests of other stockholders. Such a concentration of ownership may have the effect of delaying or preventing a change in our control, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, because Edison and Cross Atlantic are each Venture Capital Funds, they may require liquidity which could result in transfers and sales of large blocks of our Common Stock. Such transfers and sales could negatively impact the price at which our Common Stock trades on the NASDAQ Capital Market.
 
If we are unable to maintain our listing on the NASDAQ Capital Market, the marketability of our Common Stock could be adversely affected. Our Common Stock is currently listed on the NASDAQ Capital Market under the symbol “VOXW”. In order for our Common Stock to continue trading on the NASDAQ Capital Market, we must meet certain minimum financial requirements. Among other requirements, the minimum bid price of our Common Stock must remain at least $1.00 per share and the market value of publicly held shares, as defined by the NASDAQ Capital Market, must remain at least $1,000,000. In addition, we must continue to meet at least one of the following three requirements:
 
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  • Stockholders’ equity must be at least $2,500,000;
  • Market value of our Common Stock must be at least $35,000,000; or
  • Net income from continuing operations in the latest fiscal year or in two of the last three fiscal years must be at least $500,000.
We do not currently satisfy the requirements for continued listing on the NASDAQ Capital Market as of March 31, 2010. As a result we could be subject to delisting if we continue to fail to satisfy the requirements for continued listing on the NASDAQ Capital Market. Trading, if any, of our Common Stock would thereafter be conducted on the OTC Bulletin Board or in the so-called “Pink Sheets”. As a consequence, it would be far more difficult for our stockholders to trade in our Common Stock, and it may be more difficult to obtain accurate and current information concerning market prices for our Common Stock.
 
Risks Relating to Accounting Rules and Internal Controls
Changes in, or interpretations of, accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results, and may even retroactively affect previously reported transactions.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Not applicable.
 
Item 3. Defaults Upon Senior Securities
 
Not applicable.
 
Item 5. Other Information
 
On January 20, 2010, the Company commenced a formal tender offer which allowed its employees to exchange certain outstanding options to purchase shares of the Company’s common stock for new nonqualified options to purchase fewer shares of common stock with an exercise price per share equal to the closing price per share of the Company’s common stock on the new grant date. An option was eligible for exchange in the tender offer if it (i) was granted under the Company’s 2003 Stock Incentive Plan, as amended and restated, (ii) had an exercise price per share equal to or greater than $2.25, (iii) was held by an active employee of the Company or its subsidiaries, including its executive officers and non-employee members of its Board of Directors, but excluding those who had resigned or given or received a written notice of their termination at any time before the expiration of the tender offer and (iv) was outstanding on the expiration date of the tender offer. Each option that was eligible for exchange in the tender offer that was properly tendered was canceled and a replacement option to purchase that number of shares of the Company's common stock determined by dividing the number of shares of common stock underlying the canceled eligible option by 1.15 and rounding down to the next whole share was issued. The replacement options vest in accordance with the vesting schedule in place for the eligible option it replaced at the time of exchange. All eligible options that were tendered for exchange were canceled on February 25, 2010, and the replacement options were granted on February 26, 2010. Any eligible option not tendered for exchange in the tender offer remains outstanding in accordance with its terms. On February 26, 2010, pursuant to the offer, the Company cancelled options to purchase 806,596 shares of common stock and granted the replacement options to purchase 701,334 shares of common stock. Each option has a new seven-year term and has an exercise price of $1.50 per share.
 
Item 6. Exhibits
 
(a) Exhibits
   
Exhibit Number      Description of Document
31.1   Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.
 
Dated: May 17, 2010
 
VOXWARE, INC.
(Registrant)
 
 
By: /s/ Scott J. Yetter
Scott J. Yetter, President and
Chief Executive Officer
(Principal Executive Officer)
 
 
By: /s/ William G. Levering III
William G. Levering III
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)


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