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, 2002
Commission file number 000-28063
DELTATHREE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4006766
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
75 Broad Street 10004
New York, New York (Zip code)
(Address of principal executive offices)
(212) 500-4850
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No | |
As of May 9, 2002, the registrant had 29,143,206 shares of Class A
Common Stock, par value $0.001 per share, outstanding.
DELTATHREE, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................5
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................................8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................9
Item 2. Change in Securities and Use of Proceeds.................................................................9
Item 4. Submission of Matters to a Vote of Security Holders.....................................................10
Item 5. Other Information.......................................................................................10
Item 6. Exhibits and Reports on Form 8-K........................................................................11
Signatures.......................................................................................................12
Exhibit Index....................................................................................................13
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of As of
March 31, December 31
2002 2001
---- ----
(unaudited)
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents............................................ $13,593 $13,583
Short-term investments............................................... 11,214 14,192
Accounts receivable, net ............................................ 1,210 1,092
Prepaid expenses and other current assets ........................... 1,304 1,264
-------- --------
Total current assets.............................................. 27,321 30,131
-------- --------
Property and equipment, net........................................... 14,032 15,635
-------- --------
Deposits.............................................................. 101 103
-------- --------
Total assets..................................................... $41,454 $45,869
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $2,750 $3,417
Deferred revenues ................................................... 424 505
Other current liabilities ........................................... 2,607 2,835
-------- --------
Total current liabilities......................................... 5,781 6,757
-------- --------
Long-term liabilities:
Severance pay obligations ........................................... 142 191
-------- --------
Total liabilities................................................. 5,923 6,948
-------- --------
Commitments and contingencies
Stockholders' equity:
Class A common stock, - par value $0.001............................. 29 29
Class B common stock, - par value $0.001............................. - -
Additional paid-in capital........................................... 166,801 166,801
Deferred compensation................................................ (108) (270)
Accumulated deficit.................................................. (130,981) (127,429)
Treasury stock at cost: 257,600 shares of class A common stock as of
December 31, 2001................................................... (210) (210)
-------- --------
Total stockholders' equity....................................... 35,531 38,921
-------- --------
Total liabilities and stockholders' equity....................... $41,454 $45,869
======== ========
See notes to condensed consolidated financial statements
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
2002 2001
---- ----
(unaudited)
($ in thousands, except share data)
Revenues:
Affiliates................................................... $ - $ 1,446
Non-affiliates 3,337 4,580
-------- --------
Total revenues............................................ 3,337 6,026
Costs and operating expenses:
Cost of revenues, net........................................ 2,557 5,339
Research and development expenses, net ...................... 992 1,836
Selling and marketing expenses............................... 1,051 3,214
General and administrative expenses (exclusive of
non-cash compensation expense shown below)................ 610 2,050
Non-cash compensation expense................................ 162 268
Depreciation and amortization ............................... 1,635 1,971
-------- --------
Total costs and operating expenses........................ 7,007 14,678
-------- --------
Loss from operations........................................... (3,670) (8,652)
Interest income, net........................................... 129 732
-------- --------
Loss before income taxes....................................... (3,541) (7,920)
Income taxes................................................... 11 69
-------- --------
Net loss....................................................... $ (3,552) $ (7,989)
======== ========
Net loss per share - basic and diluted ........................ $ (0.12) $ (0.27)
======== ========
Weighted average shares outstanding -
basic and diluted (number of shares).......................... 28,885,606 29,056,413
=========== ===========
See notes to condensed consolidated financial statements
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
2002 2001
(unaudited)
Cash flows from operating activities:
Net loss $ (3,552) $ (7,989)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 1,635 1,970
Amortization of deferred compensation.......................... 162 268
Capital loss, net.............................................. - 5
Increase (decrease) in liability for severance pay, net........ (49) 29
Provision for losses on accounts receivable.................... - 563
Changes in assets and liabilities:
Decrease (increase) in accounts receivable..................... (118) (209)
Increase (decrease) in other current assets.................... (40) (700)
Increase (decrease) in accounts payable........................ (667) 805
Decrease in deferred revenues.................................. (81) (18)
Increase (decrease) in current liabilities..................... (228) (1,114)
---------- ----------
613 1,559
---------- ----------
Net cash used in operating activities............................... (2,939) (6,390)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment............................. (33) (754)
Proceeds from sale of property and equipment................... 1 454
Decrease (increase) in deposits................................ 2 (34)
---------- ----------
Net cash used in investing activities............................... (29) (334)
---------- ----------
Cash flows from financing activities:
Decrease (increase) in short-term investments.................. 2,978 2,320
---------- ----------
Net cash provided by (used in) financing activities................. 2,978 2,320
---------- ----------
Increase (decrease) in cash and cash equivalents...................... 10 (4,404)
Cash and cash equivalents at beginning of period...................... 13,583 20,857
---------- ----------
Cash and cash equivalents at end of period............................ $ 13,593 $ 16,453
========== ==========
See notes to condensed consolidated financial statements
DELTATHREE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The unaudited condensed consolidated financial statements of
deltathree, Inc. and its subsidiaries (collectively, "the Company"), of which
these notes are a part, have been prepared in accordance with generally
accepted accounting principles for interim financial information and pursuant
to the instructions of Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statements.
In the opinion of management of the Company, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation of
the financial information have been included. The results for the interim
periods presented are not necessarily indicative of the results that may be
expected for any future period. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2001.
2. Net Loss Per Share
The shares issuable upon the exercise of stock options and warrants
are excluded from the calculation of net loss per share, as their effect would
be antidilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements and the Notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2001. This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties and actual results could differ
materially from those discussed in the forward-looking statements. All
forward-looking statements and risk factors included in this document are made
as of the date hereof, based on information available to us as of the date
thereof, and we assume no obligation to update any forward-looking statement
or risk factors.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues
Affiliates. There were no revenues from affiliates for the three
months ended March 31, 2002 compared to $1.5 million for the three months
ended March 31, 2001. The decrease in revenues from affiliates was due to the
sale of all of our Class B Common Stock, representing majority ownership of
us, on June 29, 2001 by RSL Communications, Ltd. ("RSL COM") and our
disconnection from the RSL COM network. After June 29, 2001, there were no
further revenues from affiliates, and we do not anticipate receiving revenues
from affiliates in the future.
Non-affiliates. Revenues from non-affiliates decreased approximately
$1.3 million or 27.1% to approximately $3.3 million for the three months ended
March 31, 2002 from approximately $4.6 million for the three months ended
March 31, 2001. Revenues from enhanced IP communications services (including
our Hosted Communications Solution) decreased by approximately $0.8 million or
22.5% to approximately $3.0 million for the three months ended March 31, 2002
from approximately $3.8 million for the three months ended March 31, 2001, due
to a lesser number of new Hosted Communications Solution partners, yielding
lower up-front integration fees, and partially offset by a greater number of
PC-to-Phone and Phone-to-Phone calls being placed by an increasing user base.
Revenues from carrier transmission services, for telecommunications
carriers other than RSL COM, decreased by approximately $0.4 million or 50.1%
to approximately $0.4 million for the three months ended March 31, 2002 from
approximately $0.8 million for the three months ended March 31, 2001, due
primarily to decreased demand from a smaller customer base. No customer (other
than RSL COM in 2001) accounted for greater than 10% of our revenues during
these periods.
Costs and Operating Expenses
Cost of revenues. Cost of revenues decreased by approximately $2.7
million or 52.1% to approximately $2.6 million for the three months ended
March 31, 2002 from approximately $5.3 million for the three months ended
March 31, 2001, due primarily to a decrease in the amount of traffic being
terminated.
Research and development expenses. Research and development expenses
decreased by approximately $0.8 million or 46.0% to approximately $1.0 million
for the three months ended March 31, 2002 from approximately $1.8 million for
the three months ended March 31, 2001, due to lower personnel costs associated
with the development of new services and enhancements to our existing
services.
Selling and marketing expenses. Selling and marketing expenses
decreased by approximately $2.2 million or 67.3% to approximately $1.1 million
for the three months ended March 31, 2002 from approximately $3.2 million for
the three months ended March 31, 2001, due to a significant decrease in our
branding and promotional activities.
General and administrative expenses. General and administrative
expenses (exclusive of non-cash compensation expenses) decreased by
approximately $1.5 million or 70.2% to approximately $0.6 million for the
three months ended March 31, 2002 from approximately $2.1 million for the
three months ended March 31, 2001, primarily due to decreased personnel costs.
Non-cash compensation expenses. Non-cash compensation expenses
decreased by approximately $106,000 or 39.6% to approximately $162,000 for the
three months ended March 31, 2002 from approximately $268,000 for the three
months ended March 31, 2001, due to the completed amortization of costs
incurred during 1998. Remaining amortization of costs related to the 1999
grants of options and warrants below the then fair market value will continue
to be reflected in our future financial statements.
Depreciation and amortization. Depreciation and amortization of
goodwill decreased by approximately $0.4 million or 17.1% to approximately
$1.6 million for the three months ended March 31, 2002 from approximately $2.0
million for the three months ended March 31, 2001, due to our impairment of
goodwill during 2001, and consequently there were no goodwill related expenses
during the three months ended March 31, 2002.
Loss from Operations
Loss from operations decreased by approximately $5.0 million or 57.6%
to approximately $3.7 million for the three months ended March 31, 2002 from
approximately $8.7 million for the three months ended March 31, 2001, due
primarily to the decrease in costs and operating expenses, including non-cash
compensation expenses and selling and marketing expenses. We expect to
continue to incur losses for the foreseeable future.
Interest Income, Net
Interest income, net decreased by approximately $0.6 million or 82.4%
to approximately $129,000 for the three months ended March 31, 2002 from
approximately $732,000 for the three months ended March 31, 2001, due
primarily to lower interest rates earned on the reduced balance of remaining
proceeds from our initial public offering.
Income Taxes, Net
We paid net income taxes of approximately $11,000 for the three
months ended March 31, 2002 compared to approximately $69,000 for the three
months ended March 31, 2001.
Net Loss
Net loss decreased by approximately $4.4 million or 55.5% to
approximately $3.6 million for the three months ended March 31, 2002 from
approximately $8.0 million for the three months ended March 31, 2001 due to
the foregoing factors.
Liquidity and Capital Resources
Since our inception in June 1996, we have incurred
significant operating and net losses, due in large part to the start-up and
development of our operations. As of March 31, 2002, we had an accumulated
deficit of approximately $131 million. We anticipate that we will continue to
incur operating and net losses as we implement our growth strategy.
As of March 31, 2002, we had cash and cash equivalents of
approximately $13.6 million, marketable securities and other short-term
investments of approximately $11.2 million and working capital of
approximately $21.5 million. We generated negative cash flow from operating
activities of approximately $2.9 million during the three months ended March
31, 2002 compared with approximately $6.4 million during the three months
ended March 31, 2001. Accounts receivable were approximately $1.2 million and
$1.1 million at March 31, 2002 and March 31, 2001, respectively.
Our capital expenditures decreased approximately $722,000 or
95.8% to approximately $32,000 in the three months ended March 31, 2002, from
approximately $754,000 in the three months ended March 31, 2001 as we improved
our utilization of our existing domestic and international network
infrastructure.
Short-term, we obtain our funding from our utilization of
the remaining proceeds from our initial public offering offset by positive or
negative cash flow from our operations. These proceeds are maintained as cash,
cash equivalents, and short-term investment with an original maturity of
twelve months or less. Based on current trends in our operations, these funds
will be sufficient to meet our working capital requirements, including
operating losses, and capital expenditure requirements for at least the next
fiscal year, assuming that our business plan is implemented successfully, and
that:
o our recent revenue trends, which reflected an increase in
our higher-margin (primarily PC-to-Phone) products and
services, continue to increase;
o our expense trends remain at or near the rates of our first
quarter 2002 rates, which were significantly reduced during
the past twelve months through reductions in personnel,
curtailment of discretionary expenditures, and reduced
network rent and termination rates from our carriers; and
o our net cash-burn rate, which was significantly reduced
during the past twelve months due to the foregoing factors
to approximately $3.0 million in the first quarter of 2002,
continues to improve throughout 2002 and beyond.
To the extent that these trends do not remain steady, or if
in the longer-term we are not able to successfully implement our business
strategy, we may be required to raise additional funds for our ongoing
operations. Additional financing may not be available when needed or, if
available, such financing may not be on terms favorable to us. If additional
funds are raised through the issuance of equity securities, our existing
stockholders may experience significant dilution. In addition, while the
indentures governing the outstanding indebtedness of RSL COM were cancelled
and no longer restrict our ability to incur indebtedness, we cannot assure you
that any third party will be willing or able to provide additional capital to
us on favorable terms or at all.
Forward-Looking Statements
Certain matters discussed in this Report under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" contain certain forward-looking
statements which involve risks and uncertainties and depend upon certain
assumptions, some of which may be beyond our control, including, but not
limited to, uncertainty of financial estimates and projections, the
competitive environment for Internet telephony, our limited operating history,
changes of rates of all related telecommunications services, the level and
rate of customer acceptance of new products and services, legislation that may
affect the Internet telephony industry, rapid technological changes, as well
as other risks referenced from time to time in our filings with the Securities
and Exchange Commission, and, accordingly, there can be no assurance with
regard to such statements. All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to us as of the date thereof, and we assume no obligation to update
any forward-looking statement or risk factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Securities and Exchange Commission's rule related to market risk
disclosure requires that we describe and quantify our potential losses from
market risk sensitive instruments attributable to reasonably possible market
changes. Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments (such as investments and debt)
that are sensitive to future changes in interest rates, currency exchange
rates, commodity prices or other market factors. We believe that our exposure
to market risk is immaterial. We currently do not invest in, or otherwise
hold, for trading or other purposes, any financial instruments subject to
market risk.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A.
commenced a suit against us, RSL COM and an RSL COM subsidiary in the United
States District Court for the Southern District of New York. Aerotel alleges
that we are infringing on a patent issued to Aerotel in November 1987 by
making, using, selling and offering for sale prepaid telephone card products
in the United States. Aerotel seeks an injunction to stop us from using the
technology covered by this patent, monetary damages in an unspecified amount
and reimbursement of attorneys' fees. We have answered the complaint, and the
parties are currently engaged in pre-trial discovery. As we continue to
evaluate these claims, we believe that we have meritorious defenses to the
claims and we intend to defend the lawsuit vigorously. However, the outcome of
the litigation is inherently unpredictable and an unfavorable result may have
a material adverse effect on our business, financial condition and results of
operations. Regardless of the ultimate outcome, the litigation could result in
substantial expenses to us and significant diversion of efforts by our
managerial and other personnel.
We, as well as certain of our former officers and directors,
have been named as a defendant in a number of purported securities class
actions in Federal District Court for the Southern District of New York,
arising out of our initial public offering in November 1999 (the "IPO").
Various underwriters of the IPO also are named as defendants in the actions.
The complaints allege, among other things, that the registration statement and
prospectus filed with the Securities and Exchange Commission for purposes of
the IPO were false and misleading because they failed to disclose that the
underwriters allegedly (i) solicited and received commissions from certain
investors in exchange for allocating to them shares of our stock in connection
with the IPO and (ii) entered into agreements with their customers to allocate
such stock to those customers in exchange for the customers agreeing to
purchase additional shares in the aftermarket at predetermined prices. On
August 8, 2001, the court ordered that these actions, along with hundreds of
IPO allocation cases against other issuers, be transferred to Judge Scheindlin
for coordinated pre-trial proceedings. By Order dated October 12, 2001, Judge
Scheindlin adjourned all defendants' time to respond to or answer any of the
complaints until further order of the Court. These cases remain at a
preliminary stage and no discovery proceedings have taken place. We believe
that the claims asserted against us in these cases are without merit and
intend to defend vigorously against them.
We are not a party to any other material litigation and are
not aware of any other pending or threatened litigation that could have a
material adverse effect on us or our business taken as a whole.
Item 2. Change in Securities and Use of Proceeds
On November 22, 1999, we offered 6,000,000 shares of our
class A common stock in an initial public offering. These shares were
registered with the Securities and Exchange Commission on a registration
statement on Form S-1 (file no. 333-86503), which became effective on November
22, 1999. We received net proceeds of approximately $96,255,000 from the sale
of 6,900,000 shares at the initial public offering price of $15.00 per share
after deducting underwriting commissions and discounts and expenses of
approximately $6,300,000. The managing underwriters for our initial public
offering were Lehman Brothers Inc., Merrill Lynch & Co., U.S. Bancorp Piper
Jaffray, Lazard Freres & Co. LLC and Fidelity Capital Markets.
As of March 31, 2002, we had used approximately $30 million of the
net proceeds for sales, marketing and promotional activities, $20 million for
capital expenditures and $11 million for general corporate purposes. Pending
use of the remaining net proceeds, we have invested the remaining net proceeds
in interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the
first quarter of 2002.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and Exchange
Commission.
Exhibit
Number Description
3.1.1* Form of Restated Certificate of Incorporation of deltathree,
Inc.
3.1.2*** Form of Amendment to Restated Certificate of Incorporation
of deltathree, Inc.
3.2* Form of Amended and Restated By-laws of deltathree, Inc.
4.1* Specimen Certificate of Common Stock.
4.2* Specimen Certificate of Class B Common Stock.
10.1* Form of deltathree, Inc. 1999 Stock Incentive Plan.
10.2* Form of deltathree, Inc. 1999 Employee Stock Purchase Plan.
10.3* Form of deltathree, Inc. 1999 Performance Incentive Plan.
10.4* Form of deltathree, Inc. 1999 Directors' Plan.
10.5* Employment Agreement, effective as of April 1, 1999, between
Noam Bardin and deltathree, Inc.
10.6** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Noam Bardin and deltathree, Inc.
10.7* Employment Agreement, effective as of April 1, 1999, between
Shimmy Zimels and deltathree, Inc.
10.8** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Shimmy Zimels and deltathree, Inc.
10.9** Employment Agreement, effective as of August 28, 2000,
between Paul White and deltathree, Inc.
* Incorporated by reference to the Company's registration statement on Form
S-1 (Registration No. 333-86503).
** Incorporated by reference to the Company's quarterly report on Form 10-Q
filed on November 14, 2000.
*** Incorporated by reference to the Company's annual report on Form 10-K/A
filed on April 30, 2001.
(b) Reports on Form 8-K.
On February 13, 2002, we filed a current report on Form 8-K
to file under Item 5 a stock performance chart comparing cumulative total
stockholder return on our class A common stock from our initial public
offering through December 31, 2001 with the cumulative total return on The
Nasdaq Stock Market (U.S.) Index and the Nasdaq Telecommunications Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.
DELTATHREE, INC.
Date: May 10, 2002 By: /s/ Paul C. White
----------------------------------
Name: Paul C. White
Title: Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
3.1.1* Form of Restated Certificate of Incorporation of deltathree,
Inc.
3.1.2*** Form of Amendment to Restated Certificate of Incorporation
of deltathree, Inc.
3.2* Form of Amended and Restated By-laws of deltathree, Inc.
4.1* Specimen Certificate of Common Stock.
4.2* Specimen Certificate of Class B Common Stock.
10.1* Form of deltathree, Inc. 1999 Stock Incentive Plan.
10.2* Form of deltathree, Inc. 1999 Employee Stock Purchase Plan.
10.3* Form of deltathree, Inc. 1999 Performance Incentive Plan.
10.4* Form of deltathree, Inc. 1999 Directors' Plan.
10.5* Employment Agreement, effective as of April 1, 1999, between
Noam Bardin and deltathree, Inc.
10.6** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Noam Bardin and deltathree, Inc.
10.7* Employment Agreement, effective as of April 1, 1999, between
Shimmy Zimels and deltathree, Inc.
10.8** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Shimmy Zimels and deltathree, Inc.
10.9** Employment Agreement, effective as of August 28, 2000,
between Paul White and deltathree, Inc.
* Incorporated by reference to the Company's registration statement on Form
S-1 (Registration No. 333-86503).
** Incorporated by reference to the Company's quarterly report on Form 10-Q
filed on November 14, 2000.
*** Incorporated by reference to the Company's annual report on Form 10-K/A
filed on April 30, 2001.