1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 1, 2000.
or
[ ] 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 0-22561
EFAX.COM
(Exact name of Registrant as specified in its charter)
Delaware 77-0182451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1378 Willow Road, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-0600
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 August 10, 2000 there were 13,520,895 shares of common stock, $.01 par
value, outstanding.
2
EFAX.COM AND SUBSIDIARIES
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2000
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999............................................ 3
Condensed Consolidated Statements of Operations - Three and
Six Months Ended June 30, 2000 and 1999...................... 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2000 and 1999................................. 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 23
Item 2. Changes in Securities.......................................... 23
Item 6. Exhibits and Reports on Form 8-K............................... 24
Signature...................................................... 25
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
2000 1999 (1)
---- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 175 $ 1,752
Short-term investments -- 2,988
Accounts receivable, net 1,451 2,414
Inventories 368 1,698
Prepaid expenses 1,168 507
---------- ----------
Total current assets 3,162 9,359
Property, net 2,156 2,253
Other assets 3,513 3,896
---------- ----------
Total assets $ 8,831 $ 15,508
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,505 $ 4,404
Accrued liabilities 1,277 2,044
Note payable - JFAX.COM, INC. 1,500 --
Restructuring reserve 413 605
Current deferred revenue 1,028 360
---------- ----------
Total current liabilities 6,723 7,413
Deferred revenue -- 25
Stockholders' equity:
Series A convertible preferred stock, $0.01 par
value; 5,000,000 shares authorized, shares
outstanding: none in 2000 and 1500 in 1999 -- 7,467
Series B convertible preferred stock, $0.01 par
value; 1,447 and none shares authorized, shares
outstanding in 2000 and 1999 respectively 11,886 --
Common stock, $0.01 par value; 35,000,000 shares
authorized, shares outstanding: 13,293,707 in
2000 and 13,012,130 in 1999 135 130
Additional paid-in capital 49,529 48,342
Warrants 7,816 7,098
Accumulated other comprehensive income -- (7)
Accumulated deficit (67,258) (54,960)
---------- ----------
Total stockholders' equity 2,108 8,070
---------- ----------
Total liabilities and stockholders' equity $ 8,831 $ 15,508
========== ==========
(1) Derived from the December 31, 1999 audited consolidated balance sheet
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
For presentation purposes, the periods ended July 1, 2000 and January 1, 2000
are referred to above as ending on June 30, 2000 and December 31, 1999,
respectively.
See notes to condensed consolidated financial statements.
3
4
EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Product $ 1,946 $ 4,962 $ 5,240 $ 11,159
eFax services 1,613 33 2,732 33
Software and technology license
Fees 1,083 1,035 2,182 2,181
Development fees -- 253 -- 679
-------- -------- -------- --------
Total revenues 4,642 6,283 10,154 14,052
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 1,296 3,421 3,753 7,725
Cost of eFax services 2,017 454 3,280 668
Cost of software and technology
license fees 78 115 193 279
Research and development 1,156 1,579 2,524 3,234
Selling and marketing 989 4,538 4,793 6,495
General and administrative 1,361 2,405 3,238 3,195
-------- -------- -------- --------
Total costs and expenses 6,897 12,512 17,781 21,596
-------- -------- -------- --------
Loss from operations (2,255) (6,229) (7,627) (7,544)
-------- -------- -------- --------
Other income (expense):
Interest income 3 88 34 142
Interest expense (234) -- (234) (1)
Other expense (70) (47) (99) (62)
-------- -------- -------- --------
Total other income (expense), net (301) 41 (299) 79
-------- -------- -------- --------
Loss before income taxes (2,556) (6,188) (7,926) (7,465)
Provision for income taxes 4 24 15 39
-------- -------- -------- --------
Net loss (2,560) (6,212) (7,941) (7,504)
Preferred stock dividends and
Accretion (4,058) (171) (4,358) (171)
-------- -------- -------- --------
Net loss applicable to common
Stockholders $ (6,618) $ (6,383) $(12,299) $ (7,675)
======== ======== ======== ========
Net loss per share:
Basic $ (0.50) $ (0.51) $ (0.93) $ (0.63)
======== ======== ======== ========
Diluted $ (0.50) $ (0.51) $ (0.93) $ (0.63)
======== ======== ======== ========
Shares used in computing net loss
per share:
Basic 13,294 12,538 13,198 12,273
======== ======== ======== ========
Diluted 13,294 12,538 13,198 12,273
======== ======== ======== ========
For presentation purposes, the periods ended July 1, 2000 and July 3, 1999 are
referred to above as ending on June 30, 2000 and 1999, respectively.
See Notes to condensed consolidated financial statements.
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EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
---------------------------
June 30, June 30,
2000 1999
---- ----
Cash flows from operating activities:
Net loss $ (7,941) $ (7,504)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 487 474
Loss (gain) on disposal of asset 26 (39)
Issuance of Common Stock for services -- 208
Non-cash interest expense 217 --
Additional value for change in exercise
price of warrants 32 --
Common Stock options - severance 225 1,367
Common Stock options - services -- 284
Changes in assets and liabilities:
Trade receivables 963 756
Inventories 1,330 1,781
Prepaid expenses (192) (174)
Accounts payable (1,899) 1,054
Deferred revenue 643 50
Accrued liabilities 2 (273)
Restructuring reserve (192) --
--------- ---------
Net cash used for operating activities (6,299) (2,016)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments -- (2,996)
Sale of short-term investments 2,995 2,808
Purchase of property (433) (921)
Proceeds from sale of property 17 -
(Increase) decrease in other assets 383 (733)
--------- ---------
Net cash provided by (used for)
investing activities 2,962 (1,842)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of note payable
- JFAX.COM, INC. 1,500 --
Proceeds from sale of Common Stock 260 1,034
Proceeds from sale of Series A Convertible
Preferred Stock, net -- 14,215
--------- ---------
Net cash provided by financing activities 1,760 15,249
--------- ---------
Increase (decrease) in cash and cash equivalents (1,577) 11,391
Cash and cash equivalents, beginning of period 1,752 1,305
--------- ---------
Cash and cash equivalents, end of period $ 175 $ 12,696
========= =========
Supplemental cash flow information:
Taxes paid - foreign withholding $ 4 $ 18
========= =========
Supplemental noncash investing and financial
information:
Warrant expense - service $ -- $ 197
========= =========
Valuation of warrants issued to JFAX.COM, INC. $ 686 $ --
========= =========
Conversion of accrued ESPP for purchase of
Common Stock $ -- $ 45
========= =========
Trademark settlement $ -- $ 2,000
========= =========
Cumulative dividends on Series A Convertible
Preferred Stock $ 315 $ 171
========= =========
Conversion of Series A Convertible Preferred
Stock to Series B Convertible Preferred Stock $ 7,467 $ --
========= =========
Conversion of accrued Series A Convertible
Stock dividends to Series B Convertible
Preferred Stock $ 1,084 $ --
========= =========
Redemption premium and accretion on Series B
Convertible Preferred Stock $ 4,042 $ --
========= =========
Conversion of Series B Convertible Preferred
Stock to Common Stock $ 707 $ --
========= =========
Issuance of Common Stock options - severance $ 225 $ --
========= =========
See notes to condensed consolidated financial statements.
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EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
Interim Financial Information
- -----------------------------
The accompanying condensed consolidated financial statements of
eFax.com(tm) and its wholly-owned subsidiaries ("eFax" or the "Company") as of
June 30, 2000 and December 31, 1999 and for the three and six months ended June
30, 2000 and 1999 are unaudited. In the opinion of management, the condensed
consolidated financial statements include all adjustments (consisting of normal
recurring accruals) that management considers necessary for a fair presentation
of its financial position, operating results and cash flows for the interim
periods presented. Operating results and cash flows for interim periods are
not necessarily indicative of results for the entire year. References to "we",
"us" or "our" in this Report also refer to eFax.com
The condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates, among other things, the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company's net loss of $7.9 million for the six months ended June 30, 2000
and its negative working capital position of $3.6 million at June 30, 2000
raise substantial doubt regarding the Company's ability to continue as a going
concern. In the three and six months ended June 30, 2000, the Company's
revenues were not sufficient to support its operations, and revenues will not
be sufficient to support operations until such time, if any, that the Company's
revenues from fee generating Internet-based services gain substantial market
acceptance. On May 5, 2000, the Company entered into a loan agreement with
JFAX.COM, Inc. ("JFAX.COM") pursuant to which JFAX.COM is financing the Company
while the two parties seek their shareholders' consent to the merger of
eFax.com with a subsidiary of JFAX.COM. Under the loan agreement, the Company
may borrow up to $5.0 million, of which, as of August 14, 2000, the Company has
borrowed $3.25 million. No assurance can be given that approval of the merger
will be obtained, that the merger will ultimately be consummated or that the
proceeds of the loan agreement will be sufficient to sustain the Company until
the merger occurs, if ever. In the event that the merger is not consummated, is
consummated after the expiry of the term loan or is consummated after the
Company has exhausted all of the funds available under the term loan, the
Company will need to obtain additional financing to repay the loan from
JFAX.COM and/or to finance continuing operating losses. In such event, there
can be no assurance that the Company will be successful in obtaining additional
financing and any such failure to obtain financing would result in a material
adverse effect on our ability to meet our business objectives and continue as a
going concern. In light of the forgoing assumptions, the consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities or any other adjustments that might be necessary should the Company
be unable to continue as a going concern.
This financial data should be read in conjunction with the audited
financial statements and notes thereto included in eFax.com's Annual Report on
Form 10-K for the year ended December 31, 1999.
Certain prior quarter amounts have been reclassified to conform to the
current quarter presentation for cost of licenses and services as well as
selling and marketing expenses.
Fiscal Period End
- -----------------
The Company uses a 52-53 week fiscal year ending on the first Saturday on
or after December 31. For presentation purposes, the Company refers herein to
the 13-week periods ended July 1, 2000 and July 3, 1999 as the three months
ended June 30, 2000 and 1999, respectively, and the 26-week periods ended July
1, 2000 and July 3, 1999 as the six months ended June 30, 2000 and 1999,
respectively.
Per Share Information
- ---------------------
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average common shares outstanding for the period while diluted
earnings (loss) per share also includes the dilutive impact of stock options
and warrants. Common stock equivalents from options and warrants have been
excluded from the computation during all periods presented as their effect is
antidilutive due to eFax.com's net losses. Such options
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EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
and warrants will be included, using the treasury stock method, in periods
where eFax.com reports net income and the average fair market value of its
common stock exceeds the exercise price. The net loss and the shares used for
the computation of both basic and diluted loss per share are the same.
2. Inventories
-----------
Inventories consist of the following (in thousands):
June 30, December 31,
2000 1999
---- ----
Materials and supplies $ 63 $ 305
Work-in-process - 624
Finished goods 305 769
-------- --------
Total $ 368 $ 1,698
======== ========
3. Accrued Liabilities
-------------------
Accrued liabilities consist of (in thousands):
June 30, December 31,
2000 1999
---- ----
Compensation and related benefits $ 687 $ 684
Accrued Series A Convertible Preferred
Stock dividends - 769
Product warranty 59 59
Royalties 31 42
Other 500 490
-------- --------
Total $ 1,277 $ 2,044
======== ========
4. Note payable - JFAX.COM, INC.
-----------------------------
On May 5, 2000, the Company entered into a term loan agreement ("Term Loan
Agreement") with JFAX.COM under which JFAX.COM agreed to lend to the Company an
amount of up to $5.0 million. Borrowings under Term Loan Agreement are
evidenced by an executed note payable and bear an interest rate of 13% per
annum. As discuss above, unless the term of the Term Loan Agreement is
extended by JFAX.COM, the loan must be repaid on October 31, 2000; provided
that, under specified circumstances the Company may be required to repay the
loan as early as August 31, 2000. As of June 30, 2000, the outstanding
principal under the Term Loan Agreement was $1.5 million. As collateral for
the loan, the Company has given JFAX.COM a security interest in substantially
all of its assets, including all of its DID numbers. If the loan becomes due
and the Company is unable to timely repay any amounts outstanding, JFAX.COM may
exercise its rights in connection with the assets in which it has a security
interest. As consideration for entering into a loan commitment, the Company
granted JFAX.COM warrants to purchase 250,000 shares of Common Stock on April
5, 2000 at an exercise price of $4.4375. The warrants have a two year life. The
value of the warrants is being amortized over the life of the loan.
7
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EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. Comprehensive Income
--------------------
Effective January 1, 1998, eFax.com adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 requires an enterprise to report, by major components and as a single
total, the change in net assets during the period from non-owner sources. For
the three months ended June 30, 2000, there were no differences between
eFax.com's comprehensive loss and net loss. For the six months ended June 30,
2000, the eFax.com's comprehensive loss was $7,934,000 as compared to a net
loss of $7,941,000. For the three and six months ended June 30, 1999, there
were no differences between eFax.com's comprehensive loss and net loss.
6. Disclosures about Segments of an Enterprise and Related Information
-------------------------------------------------------------------
The Company reports segment data pursuant to SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's business segments
and related disclosures about its products, services, geographic areas and
major customers. The Company operates in one reportable segment, within which
are multiple product lines including Internet-related services and legacy
multifunction hardware products ("MFP"). Revenues and related costs of goods
and services are recorded for internal management purposes as reflected in the
accompanying Condensed Consolidated Statement of Operations. For internal
management purposes, expenses below that level and related assets are not
separately recorded and monitored.
7. Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair value,
and provides for hedging accounting when certain conditions are met. The
Company is required to adopt this statement in the first quarter of fiscal year
2001, with early adoption permitted. Although eFax.com has not fully assessed
the implications of this new statement, eFax.com does not believe adoption of
this statement will have a material impact on eFax.com's future financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin (SAB) No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". This bulletin summarizes certain interpretations and
practices followed by the Division of Corporation Finance and the Office of the
Chief Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the second quarter of 2000.
The Company has elected early adoption of SAB 101 and is in compliance with SAB
101 revenue recognition requirements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions involving
Stock Compensation" an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The Company believes that FIN 44 will not have a material effect on its
financial position or results of operations.
8. Discontinued Product Lines and Related Restructuring Charges
------------------------------------------------------------
During January 2000, we restructured our operations to focus on the
Internet communications services, which we introduced in February 1999, by
discontinuing efforts on the development and marketing of branded and licensed
products and software solutions for the MFP market. In connection with the
Company's announced decision to exit from the manufacturing of MFP products,
the Company recognized in the fourth quarter of 1999 a $1.1 million write-down
of inventory to reflect anticipated net realizable values of the inventory on
hand. Also in connection with the Company's decision to exit from manufacturing
MFP hardware products, the Company recognized in the fourth quarter of 1999 an
$872,000 restructuring charge for the write-down of capital equipment,
intellectual property and leasehold improvements, excess facilities accruals
and severance costs. As a result, the Company substantially reduced its
manufacturing work force and downsized its hardware manufacturing operations.
The discontinuation and restructuring was substantially completed in the first
quarter of 2000, during which period an additional charge of $450,000 was
recognized for certain executive severance costs incurred in January 2000. The
Company recorded total charges of $ approximately 1.9 million as follows:
Total
Restructuring Balance at
(in thousands) Charge Utilized June 30, 2000
------ -------- -------------
Write-down of inventory $ 826 $ 826 $ -
Reserve for estimated cost of
purchase commitments 234 35 199
-------- -------- --------
Subtotal 1,060 861 199
-------- -------- --------
Write-down of machinery and equipment 312 312 -
Reserve for estimated lease costs 171 10 161
Reserve for estimated severance costs 169 169 -
Write-down of acquired technology 167 167 -
Reserve for estimated post-warranty
technical support costs 53 - 53
-------- -------- --------
Subtotal 872 658 214
-------- -------- --------
$ 1,932 $ 1,519 $ 413
======== ======== ========
The Company anticipates substantially all accrued severance and benefits
will be paid within one year.
Included in the fourth quarter 1999 write-downs are charges of $312,000
related to the net loss on disposal of machinery and equipment and leasehold
improvements which was written down to fair market value in accordance with
SFAS No. 121, "Accounting for Impairment of Long-Live Assets and for Long-Lived
Assets to be Disposed of."
Additionally, from time to time, the Company is or may become a party to
suits, actions and proceedings in the ordinary course of its business. The
Company does not believe that any of its current ordinary course of business
suits, actions or proceedings will result in a material adverse impact on the
Company.
9. Litigation
----------
On June 20, 2000, Jerry Kirsch filed a lawsuit against the Company in the
United States District Court for the Eastern District of Michigan asserting the
ownership of certain United States patents and claiming that the Company is
infringing these patents as a result of the Company's sale of multifunction
hardware products. The suit requests unspecified damages, treble damages due to
willful infringement, and preliminary and permanent injunctive relief. We have
reviewed the Kirsch patents with our business and technical personnel and
outside patent counsel and have concluded that we do not infringe these
patents. As a result, we are confident of our position in this matter and
9
10
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
intend to defend the suit vigorously; however if such suit is successful, it
could have a material adverse effect on the Company and even if unsuccessful
could require the substantial expenditure of time and costs in its resolution.
10. Subsequent Events
-----------------
Merger Agreement
- ----------------
On July 13, 2000, the Company entered into a merger agreement (the "Merger
Agreement") with JFAX.COM, a unified Internet communications company, and
JFAX.COM Merger Sub, Inc., a newly formed subsidiary of JFAX.COM (the "Merger
Sub"). Under the terms of the Merger Agreement, the Company has agreed to merge
with the Merger Sub (the "Merger") and become a wholly-owned subsidiary of
JFAX.COM. As consideration for the Merger, the Company's stockholders would
receive the following:
o For each share of the Company's common stock, par value $.01 per share
(the "Common Stock"), its holder would receive a fraction of a share of
JFAX.COM.
o Common Stock, par value $0.01 per share ("JFAX.COM Common Stock"),
determined by a conversion number formula included in this report (the
"Conversion Number").
o Subject to certain limitations, for each share of the Company's Series D
Convertible Preferred Stock, par value $0.01 per share (the "Series D
Shares"), outstanding at the time of the Merger, its holder would receive
4,938.50 shares of JFAX.COM Common Stock (collectively if all 1,447 Series
D Shares are outstanding at the time of the Merger, 7,146,009 shares),
which amount will increase between August 14, 2000 and the time of the
Merger at an annualized rate of 3.5%.
o The holders of the Series D Shares (the "Investors") have agreed to
receive a warrant to acquire shares of JFAX.COM Common Stock under the
circumstances described below under "Agreement with Investors" instead of
a portion of the JFAX.COM Common Stock which they would otherwise have a
right to receive as consideration for the Merger.
o The holders of the Common Stock and the Series D Shares will receive cash
in lieu of fractional shares of JFAX.COM Common Stock.
Because the consideration to be received by the Investors is a fixed
amount, subject to the 3.5% annualized rate of increase, any increase or
decrease in the total consideration received in the Merger will only affect the
holders of the Common Stock. The Conversion Number will vary depending on,
among other things:
o The amount outstanding under the term loan agreement between the Company
and JFAX.COM (the "Term Loan Agreement") on the closing date for the
Merger. Under the Term Loan Agreement, the Company, subject to satisfying
the conditions contained in the Term Loan Agreement, may borrow up to $5
million from JFAX.COM.
o The closing date of the Merger, the amount of cash which the Company has
(other than cash from the sale of certain assets of the Company), the
amount of certain of the Company's prepaid expenses and the amount of the
Company's overdue payables.
o The number, if any, of the shares of Common Stock into which the Series D
Shares are converted prior to the time of the Merger.
and
o The timing of the Merger.
10
11
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
For example only, for each share of Common Stock, a stockholder of the
Company would receive 0.281 shares of JFAX.COM Common Stock (collectively,
3,801,645 shares) if:
o $5.0 million is outstanding under the Term Loan Agreement on the closing
date for the Merger.
o On the closing date of the Merger, the Company has no cash on hand and it
has no prepaid expenses or accounts payable which affect the Conversion
Number.
o No Series D shares are converted into shares of Common Stock and other
shares of Common Stock are issued prior to the Merger.
o the Merger occurs on October 31, 2000.
As of August 14, 2000, the Company has borrowed $3.25 million under the
Term Loan Agreement.
In the event that the Merger does not occur and the Company, within two
years of the termination of the Merger discussions with JFAX.COM, is acquired
by another entity or the Company receives at least $5.0 million from a
securities offering or offerings, the Company will be required to pay JFAX.COM
an amount equal to:
o 1,750,000, times
o The fair market value of one share of the Common Stock at the time of the
acquisition or the securities offering, less $0.10.
The 1,750,000 amount will be reduced to 750,000 if the termination of the
Merger Agreement occurs because JFAX.COM's stockholders do not approve the
Merger or if JFAX.COM materially breaches the Merger Agreement.
If the Company is acquired by another entity, it must pay the amount to
JFAX.COM promptly following the consummation of the acquisition. If the Company
does a securities offering, it is required to make the payment within 270 days
of the offering. In addition, the Company is required to pay JFAX.COM for any
of JFAX.COM's out-of pocket expenses related to the Merger Agreement or the
Term Loan Agreement between the two parties if the Merger Agreement is
terminated because of a failure of the Company's stockholders to approve the
Merger Agreement or as a result of any action by eFax.com's board of directors
or eFax.com's material breach of the merger agreement.
The consummation of the Merger will depend upon the approval of the Merger
by both the holders of a majority of the outstanding shares of Common Stock and
the holders of a majority of the JFAX.COM Common Stock being voted at the
meeting to approve the Merger. To complete the Merger, the Company and JFAX.COM
must also fulfill the other conditions required by the Merger Agreement. Prior
to the stockholders' meetings, a registration statement on Form S-4 must be
filed with the Securities and Exchange Commission and be declared effective. If
all of the required conditions are met, the Merger is expected to be completed
in the fourth quarter of 2000.
Agreements with Investors
- -------------------------
On July 13, 2000, the Company entered into an exchange agreement (the
"Exchange Agreement") with the Investors and the Company and JFAX.COM entered
into a side agreement (the "Side Agreement") with the Investors. Under the
terms of the Exchange Agreement, the shares of Series B Convertible Preferred
Stock held by the Investors were converted into an equal number of Series D
Shares on July 17, 2000.
11
12
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Under the terms of the Side Agreement, each Investor has agreed that as
consideration for the Merger it would receive:
o Shares of JFAX.COM Common Stock to the extent that such shares held by the
Investor and its affiliates do not exceed 10% (the "10% Limitation") of
the total outstanding shares of JFAX.COM Common Stock immediately
following the Merger.
o A warrant, exercisable for JFAX.COM Common Stock at $0.01 per share, to
acquire the number of shares of JFAX.COM Common Stock which could not be
acquired because of the 10% Limitation.
The Conversion Number will be unaffected by whether the Investors receive
shares of JFAX.COM Common Stock or a warrant to acquire shares of JFAX.COM
Common Stock.
In addition, the Side Agreement provides that JFAX.COM will file a resale
registration statement to permit the Investors to resell any shares of JFAX.COM
Common Stock which the Investors may acquire upon the exercise of the warrant.
The Investors also have agreed to waive any appraisal rights which they may
have in connection with the Merger.
Under the terms of the Certificate of Designations, Preferences and Rights
of the Series D Shares, the holders of the Series D Shares have the right to
require the Company to redeem the Series D Shares for cash in certain events,
including if the total Merger consideration to be received by the holders of
the Common Stock and Series D Shares exceeds 12 million shares of JFAX.COM
Common Stock.
Agreement with IGC
- ------------------
On June 30, 2000, the Company and JFAX.COM entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
Concepts, Inc. ("IGC"). IGC has been providing the Company with development and
co-location services necessary for the Company's operations. The Agreement of
Understanding provides that at the time of the closing of the Merger:
o IGC will grant the Company a license to certain software developed by IGC
which the Company uses in its operations.
o IGC will waive all claims which it may have against the Company in
connection with development services it has previously provided to the
Company.
o JFAX.COM will issue 2,000,000 shares of JFAX.COM Common Stock to IGC. In
addition, the Agreement of Understanding provides that JFAX.COM will file
a resale registration statement to permit IGC to resell the shares of
JFAX.COM Common Stock which it is acquiring.
For more information concerning the Merger Agreement, the Agreement with
Investors and the Agreement with IGC, see the Company's Current Report of Form
8-K dated July 14, 2000.
Intuit Relationship
- -------------------
On July 21, 2000, JFAX.COM entered into an agreement with Intuit Inc.
("Intuit") pursuant to which JFAX.COM will enable certain Intuit small business
products with fax sending and receiving capabilities. These fax capabilities
will be made available to Intuit's customers and JFAX.COM and Intuit will share
revenues from this arrangement. The launch date for these Intuit products will
be determined by Intuit at a later date.
In connection with the Intuit transaction, JFAX.COM and the Company
entered into a separate agreement whereby JFAX.COM and the Company will share
responsibilities for developing and servicing the customized faxing products
for Intuit's customers. JFAX.COM will compensate the Company for its
development efforts on a
12
13
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
monthly basis, as well as share a portion of the revenues from the JFAX.COM-
Intuit agreement with the Company. JFAX.COM anticipates that the Merger will
close prior to the launch date of the Intuit products containing the fax
sending and receipt capabilities described above.
Nasdaq National Market Listing
On August 9, 2000, the Company's Common Stock was delisted from The Nasdaq
National Market. The delisting was as a result of the Company's failure to meet
Nasdaq's continued listing requirements.
The Current Stock is currently trading on the over-the-counter electronic
bulletin board sponsored by Nasdaq.
Because the Company is no longer listed on The Nasdaq National Market,
stockholders of the Company who comply with the required procedures, including
not voting in favor of the Merger, will have appraisal rights if the Merger is
completed. Under the terms of the Merger Agreement, if 5% or more of the
Company's stockholders seek appraisal rights JFAX.COM will have the right to
not complete the Merger.
If the Merger does not occur, the Company believes that it is likely that
its preferred stockholders will have the right to require the Company to redeem
all or part of their preferred stock for cash. The current redemption value of
all of the outstanding preferred shares is approximately $19.6 million on
August 10, 2000.
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
- --------
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), including statements
regarding eFax.com's expectations, hopes, intentions or strategies regarding
the future. When used herein, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend" and similar expressions are
intended to identify forward-looking statements within the meaning of the
Securities Act and the Exchange Act. Forward-looking statements include:
statements regarding events, conditions and financial trends that may affect
eFax.com's future plans of operations, business strategy, results of operations
and financial position. All forward-looking statements included in this
document are based on information available to eFax.com on the date hereof, and
eFax.com assumes no obligation to update any such forward-looking statements.
Investors are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that
actual results may differ materially from those included within the forward-
looking statements as a result of various factors. These forward-looking
statements are made in reliance upon the safe harbor provision of The Private
Securities Litigation Reform Act of 1995. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below, under the heading "Factors That May Affect Operating Results" and
elsewhere in this Quarterly Report on Form 10-Q.
eFax.com is a leading provider of Internet communications services.
eFax.com currently provides its free and fee-based Internet communications
services to more than 2.0 million users. In February 1999, eFax.com launched
its Internet communications services, which incorporate fax-to-email, voicemail
and voice-to-email capabilities. Prior to developing this market, eFax.com had
developed and marketed branded and licensed products and software solutions for
the multifunction product ("MFP") market, which consisted of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
In addition, we have licensed our embedded systems technology and software to a
number of manufacturers of multifunction products. On January 10, 2000, we
announced that we will focus exclusively on expanding our position as a leading
provider of enhanced Internet communications services and solutions. In
connection with this refocus of our business, we discontinued manufacturing and
sales of MFP products in the three months ended March 31, 2000.
eFax.com's revenues have been historically derived from four sources: (i)
product revenues consisting of sales of JetFax branded MFPs, original equipment
manufacturer ("OEM") branded MFPs, consumables and upgrades; (ii) eFax(
services revenues derived from the Company's Internet-based services introduced
during the quarter ended June 30, 1999; (iii) software and technology license
fees related to both the Company's embedded system technology for MFPs and
desktop software; and (iv) development fees for the customization and
integration of eFax.com's embedded system technology and desktop software in
OEM products. Historically, product revenues have accounted for the majority of
eFax.com's total revenues. For the three months ended June 30, 2000, product
revenues, eFax services revenues, software and technology licenses and
development fees, as a percentage of total revenues were 42.0%, 34.7%, 23.3%,
and 0.0%, respectively, as compared to 79.0%, 0.5%, 16.5%, and 4.0%,
respectively, for the similar period in the prior year. For the six months
ended June 30, 2000, product revenues, eFax services revenues, software and
technology licenses and development fees, as a percentage of total revenues
were 51.6%, 26.9%, 21.5%, and 0.0%, respectively, as compared to 79.5%, 0.2%,
15.5%, and 4.8%, respectively, for the similar period in the prior year.
Shipments of the new OEM platform MFP began in the fourth quarter of 1999.
We made our final OEM shipments during the first quarter of 2000. Overall
product revenues for the three and six months ended June 30, 2000 declined from
the prior year as a result of the Company's transition to an Internet-based
business model.
The new emphasis on Internet services resulted in increased expenditures
for both external promotions and other marketing expenses. The majority of
these costs were related to media and Internet advertising promoting both the
basic service and new products and features as introduced. Similarly
infrastructure costs to support the expansion of services also increased.
These infrastructure costs included the cost of delivery of the service such as
telephony charges and depreciation on capital equipment, as well as technical
and operational support personnel.
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Recent Developments
- -------------------
On July 13, 2000, eFax.com entered into a merger agreement (the "Merger
Agreement") with JFAX.COM, a unified Internet communications company, and
JFAX.COM Merger Sub, Inc., a newly formed subsidiary of JFAX.COM. On July 21,
2000, the Company entered into an agreement with JFAX.COM pursuant to which it
will help to develop and service certain customized faxing products for Intuit
Inc. On August 9, 2000, the Company's Common Stock was delisted from the Nasdaq
National Market. The terms of the Merger Agreement and certain related
agreements, the terms of the agreement relating to Intuit and the delisting of
the Company's Common Stock are described in Note 9-Subsequent Events to the
Company's financial statements.
Results of Operations
- ---------------------
The following table sets forth, as a percentage of total revenues, certain
items in eFax.com's statements of operations for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Product 42.0% 79.0% 51.6% 79.5%
eFax services 34.7 0.5 26.9 0.2
Software and technology license fees 23.3 16.5 21.5 15.5
Development fees - 4.0 - 4.8
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Cost of product revenues 27.9 54.4 37.0 55.1
Cost of eFax services 43.5 7.2 32.3 4.8
Cost of software and technology
license fees 1.7 1.8 1.9 2.0
Research and development 24.9 25.1 24.9 23.0
Selling and marketing 21.3 72.2 47.2 46.2
General and administrative 29.3 38.3 31.9 22.7
----- ----- ----- -----
Total costs and expenses (148.6) 199.1 175.1 153.7
----- ----- ----- -----
Loss from operations (48.6) (99.1) (75.1) (53.7)
Other income (expense), net (6.5) 0.7 (2.9) 0.6
----- ----- ----- -----
Loss before income taxes (55.1) (98.5) (78.1) (53.1)
Provision for income taxes - 0.4 0.1 (0.3)
----- ----- ----- -----
Net loss (55.1)% (98.9)% (78.2)% (53.4)%
===== ===== ===== =====
Three and Six Months Ended June 30, 2000 Compared to Three and Six Months Ended
June 30, 1999
Revenues. Total revenues decreased 26% to $4.6 million from $6.2 million
--------
for the three months ended June 30, 2000 and 1999, respectively. Total revenues
decreased 28% to $10.2 million from $14.1 million for the six months ended June
30, 2000 and 1999, respectively. The declines resulted primarily from a decline
in product revenues as the Company transitioned to an Internet-based business
model.
Product revenues decreased 61% to $1.9 million from $5.0 million for the
three months ended June 30, 2000 and 1999, respectively. Product revenues
decreased 53% to $5.2 million from $11.2 million for the six months ended June
30, 2000 and 1999, respectively. These declines reflected the factors related
to the discontinuation of the Company's MFP products. Revenue from shipments of
MFP products for the three and six months ended June 30,
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
2000 declined 99% and 47%, respectively, from the similar periods in the
preceding year, as final domestic and international units of the Company's MFP
products were sold. Product revenues also reflected the continued erosion in
average selling prices, driven by the level of OEM business, product
discontinuation and general market pressures. Unit sales for the three and six
months ended June 30, 2000 also decreased, down 100% and 79%, respectively,
from the similar periods in the prior year. As a result, product revenues
declined for the three and six months ended June 30, 2000 as the move to a new
business model was implemented. During the second quarter of 2000, we no longer
shipped MFP product inventory to our OEM customer and do not intend to sell any
MFP products in the future. Revenues associated with the sale of consumables
decreased 15% for the three months ended June 30, 2000 versus the similar
period in the prior year. Consumable revenues decreased 7% for the six months
ended June 30, 2000 versus the similar period in the prior year. We anticipate
that we will continue to sell consumables to our installed base of hardware
customers. However, as this base will not continue to grow, we expect
consumable revenues will continue to decline over the next several quarters.
eFax Services revenue totaled $1.6 million for the three months ended June
30, 2000 as compared to $33,000 for the similar period in 1999. eFax Services
revenue totaled $2.7 million for the six months ended June 30, 2000 as compared
to $33,000 for the similar period in 1999. These increases reflected the
Company's transition to an Internet-based business model. eFax Services revenue
consisted primarily of recurring monthly subscription fees, signup fees, usage-
based charges and revenues from advertising activities. eFax Services revenue
began in June 1999.
Software and technology license fees result from licensing the Company's
proprietary embedded system technology and desktop software to OEMs for
integration into their products. The recurring license revenues reported by the
Company are dependent on the timing and accuracy of product manufacturing or
quarterly sales reports received from the Company's OEM customers. The
quarterly sales reports, as well as any verbal estimates, are subject to delay
and potential revision by the OEM. In such an event, the Company may
subsequently be required to adjust revenues for subsequent periods due to the
change in estimate, which could have a material adverse effect on the Company's
business, financial condition, and results of operations and on the price of
the Company's Common Stock.
Software and technology licensing fees increased 5% to $1.1 million for
the three months ended June 30, 2000 from $1.0 million for the similar period
in the prior year. Software and technology licensing fees remained unchanged at
$2.2 million for the six months ended June 30, 2000 and 1999. Royalty fees from
sales of the Hewlett-Packard 3150 increased by 27% and 42% for the three and
six months ended June 30, 2000 from the similar periods in the prior year. We
anticipate that we will continue to receive royalties over the life of this
product.
Development fees declined 100% to zero from $253,000 for the three months
ended June 30, 2000 and 1999, respectively. Development fees declined 100% to
zero from $679,000 for the six months ended June 30, 2000 and 1999,
respectively. These declines reflected the completion of current projects and
conversion of development fees to per unit royalties. Currently, we have no
plans for new development projects and as a result do not anticipate future
development fees.
International revenues accounted for 7% and 14% of total revenues for the
three months ended June 30, 2000 and 1999, respectively. International revenues
accounted for 6% and 13% of total revenues for the six months ended June 30,
2000 and 1999, respectively. Historically, international revenues were derived
primarily from product sales and consumables. International revenues are likely
to further decline in the near term due to the discontinuation of hardware
production. All of the development fees and software and technology license
revenues, and most of the product revenues, have been denominated and collected
in United States dollars. The Company has not hedged the foreign currency
exposure related to product sales denominated in foreign currencies as the
impact has not been significant.
Two customers, Hewlett-Packard and Konica Business Technologies accounted
for $1.8 million (17%) and $1.5 million (15%) of total revenues for the six
months ended June 30, 2000, respectively. Three customers, Hewlett-Packard,
Konica Business Technologies and IKON Office Solutions, accounted for $2.2
million in software and technology license fees (16%), $1.7 million in OEM
product sales (12%) and $1.7 million in product sales (12%), respectively, of
total revenues for the six months ended June 30, 1999.
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Cost of Product Revenues. Cost of product revenues consists primarily of
------------------------
purchased materials; direct production labor and supervision for assembly and
testing; subcontracted manufacturing, mainly for printed circuit boards;
indirect labor for inventory management, shipping and receiving, purchasing,
manufacturing engineering, document control and operations management; and
related facility and support costs. Cost of product revenues may vary as a
percentage of total revenues in the future as a result primarily of the cost of
consumables.
Cost of product revenues decreased 62% to $1.3 million from $3.4 million
for the three months ended June 30, 2000 and 1999, respectively. Cost of
product revenues decreased 51% to $3.8 million from $7.7 million for the six
months ended June 30, 2000 and 1999, respectively. The gross margins for the
Company's branded MFP products were constrained by the competitive nature of
the marketplace, pricing pressures and the greater name recognition of the
larger companies with which eFax.com competes. The margins on consumables, such
as toner cartridges and drums, and on upgrades, such as the two-line upgrade,
were typically higher than on the base unit. Product gross margin was 33% for
the three months ended June 30, 2000, as compared to 31% for the similar period
in the prior year. Product gross margin was 28% for the six months ended June
30, 2000, down from 31% for the similar period in the prior year. The increase
for the three months ended June 30, 2000 was attributable to decreases in
direct and indirect labor due to the transition from a manufacturing to
internet-based business model. The decrease for the six months ended June 30,
2000 was attributable to decreased sales volume and average selling price
declines.
Cost of eFax Services. Direct costs of providing the eFax Services
---------------------
totaled $2.0 million for the three months ended June 30, 2000 as compared to
$454,000 for the similar period in the prior year. Direct costs of providing
the eFax Services totaled $3.3 million for the six months ended June 30, 2000
as compared to $668,000 for the similar period in the prior year. The increase
in cost of eFax Services resulted from expansion in support of the Company's
planned business growth including service delivery costs such as telephony
charges, depreciation on capital equipment, hiring operations personnel as well
as all technical and customer support related expenses.
Cost of Software and Technology License Fees. Cost of software and
--------------------------------------------
technology license fees consists primarily of royalties paid for licensed
technology included in the Company's products and amortization of purchased
technology. Cost of software and technology license fees revenues decreased 32%
to $78,000 from $115,000 for the three months ended June 30, 2000. Cost of
software and technology license fees revenues decreased 31% to $193,000 from
$279,000 for the six months ended June 30, 2000.
Research and Development. Research and development expenses declined 27%
------------------------
to $1.2 million from $1.6 million for the three months ended June 30, 2000 and
1999, respectively. Research and development expenses declined 22% to $2.5
million from $3.2 million for the six months ended June 30, 2000 and 1999,
respectively. These declines resulted from lower software development charges
in support of the new eFax Service, reduced outside development services and a
eliminated prototype and tooling charges in support of the OEM/MFP platform.
Selling and Marketing. Selling and marketing expenses decreased 78% to
---------------------
$989,000 from $4.5 million for the three months ended June 30, 2000 and 1999,
respectively. Selling and marketing expenses decreased 26% to $4.8 million from
$6.5 million for the six months ended June 30, 2000 and 1999, respectively.
Decreased promotional activity in support of the eFax services accounted for
substantially all of the decrease combined with the elimination of external
marketing efforts related to the branded hardware business. Selling and
marketing expenses included approximately $0.5 million in expenses associated
with advertising for the three months ended June 30, 2000 as compared to $3.9
million for the similar period in 1999. Selling and marketing expenses included
approximately $3.8 million in expenses associated with advertising for the six
months ended June 30, 2000 as compared to $4.8 million for the similar period
in 1999. In anticipation of the consummation of the merger with JFAX.COM, very
limited discretionary selling and marketing expenses are expected in the third
and fourth quarters of 2000.
General and Administrative. General and administrative expenses
--------------------------
decreased 43% to $1.4 million from $2.4 million for the three months ended June
30, 2000 and 1999, respectively. General and administrative expenses remained
unchanged at $3.2 million for the six months ended June 30, 2000 and 1999,
respectively. The decrease for the three months ended June 30, 2000 primarily
resulted from cost containment efforts combined with reductions in personnel.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Interest and Other Income (Expense), Net. Interest and other income
----------------------------------------
(expense), net, decreased to net other expenses of $301,000 from net other
income of $41,000 for the three months ended June 30, 2000 and 1999,
respectively. Interest and other income (expense), net, decreased to net other
expenses of $299,000 from net other income of $79,000 for the six months ended
June 30, 2000 and 1999, respectively. These declines reflect primarily a
decrease in interest income from interest-bearing investments and an increase
in interest expense payable under the loan agreement with JFAX.COM.
Provision for Income Tax. Due to eFax.com's net losses, there were no
------------------------
provisions for federal or state income taxes for the three and six months ended
June 30, 2000 and 1999, respectively. Income tax provisions of $4,000 and
$15,000 for the three and six months ended June 30, 2000, respectively, relate
primarily to foreign withholding taxes on certain royalty fees, but also
include minimum state and franchise taxes.
Liquidity and Capital Resources
- -------------------------------
In the three and six months ended June 30, 2000, the Company's revenues
were not sufficient to support its operations, and revenues will not be
sufficient to support operations until such time, if any, that the Company's
revenues from technology licensing agreements and fee generating Internet-based
services gain substantial market acceptance. eFax.com has financed its
operations to date principally through private placements of debt and equity
securities, proceeds from borrowings under a bank line of credit, debt
associated with the Crandell Acquisition, and sales of Common Stock. The total
amount of equity raised through August 3, 2000 was approximately $70 million
through a series of private financing rounds at eFax.com, and sales of common
and Preferred Stock. All of such equity capital was raised prior to December
31, 1999. On May 5, 2000, the Company entered into a loan agreement with
JFAX.COM pursuant to which JFAX.COM is financing the Company while the two
parties seek their shareholders' consent to the merger of eFax.com with a
subsidiary of JFAX.COM. Under the loan agreement, the Company may borrow up to
$5.0 million, of which, as of August 14, 2000, the Company has borrowed $3.25
million. No assurance can be given that the approval of the merger will be
obtained, that the merger will ultimately be consummated or that the proceeds
of the loan agreement will be sufficient to sustain the Company until the
merger occurs, if ever. In the event that the merger is not consummated, is
consummated after the expiry of the term loan or is consummated after the
Company has exhausted all of the funds available under the term loan, the
Company will need to obtain additional financing to repay the loan from
JFAX.COM and/or to finance continuing operating losses. In such event, there
can be no assurance that the Company will be successful in obtaining additional
financing and that would result in a material adverse effect on the Company's
ability to meet its business objectives and continue as a going concern. See
Notes 1 and 10 to the Condensed Consolidated Financial Statements.
Cash, cash equivalents and short-term investments decreased to $175,000 at
June 30, 2000 from $4.7 million at December 31, 1999. Net cash used for
operating activities was $6.3 million for the six months ended June 30, 2000,
resulting primarily from the Company's net loss of $7.9 million partially
offset by noncash charges of $987,000. In addition, inventories decreased to
$368,000 from $1.7 million at June 30, 2000 and December 31, 1999,
respectively, a result of reduced stocking levels related to the discontinuance
of the Company's MFP product line and an associated write-down of $1.0 million.
Accounts receivable decreased to $1.5 million from $2.4 million at June 30,
2000 and December 31, 1999, respectively, which was principally the result of
the withdrawal from the MFP market. Accounts payable decreased $1.9 million to
$2.5 million at June 30, 2000 from $4.4 million at December 31, 1999. Other
changes in working capital items also partially offset the net loss by
approximately $261,000.
Investing activities for the six months ended June 30, 2000 provided $2.9
million of cash as $3.0 million in proceeds from the sale of short-term
investments and a $383,000 decrease in other assets were partially offset by
$433,000 in purchases of property.
Financing activities for the six months ended June 30, 2000 provided $1.8
million of cash primarily in $1.5 million in proceeds from the issuance of a
note payable to JFAX.COM and $260,000 in proceeds from the sale of Common Stock
resulting from the exercise of employee stock options.
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Factors That May Affect Operating Results
- -----------------------------------------
eFax.com operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. This section should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements and
Notes thereto contained in the Report and the audited Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended January 1,
2000 contained in eFax.com's Annual Report on Form 10-K for the year ended
January 1, 2000.
EFAX.COM MAY BE UNABLE TO OBTAIN SUFFICIENT FUNDS TO CONTINUE OPERATIONS
To the extent our revenues are not sufficient to fund our operations, our
only current source of financing is pursuant to the Term Loan Agreement with
JFAX.COM. Under the Term Loan Agreement, we may borrow up to $5.0 million of
which $3.25 million has already been borrowed. As of August 10, 2000, eFax.com
had cash and borrowings available under the Term Loan Agreement, which amount
is sufficient to continue our current operations for approximately 12 weeks.
In order to receive additional advances under the Term Loan Agreement, we
must comply with the conditions to funding required by the Term Loan Agreement
or JFAX.COM must waive those conditions. One of the conditions is a
requirement that we provide documents necessary to protect JFAX.COM's security
interests in some of our assets. To date, we have been unsuccessful in
obtaining these documents, but JFAX.COM has continued to make advances to us
under the Term Loan Agreement. There can be no assurance that JFAX.COM will
continue to waive the conditions to additional funding or that we will be able
to meet these or any other funding conditions in the future.
The Merger is currently anticipated to be completed in the fourth quarter
of 2000. At present, we are uncertain whether we will have sufficient funds to
enable us to continue to operate until the Merger occurs even if JFAX.COM
continues to fund us under the present terms of the Term Loan Agreement.
Factors which could determine the sufficiency of our potential cash resources
include:
o The timing of the Merger. If the Merger is delayed for any significant
period of time, it is unlikely that revenues generated from operations,
our current cash and the remaining amounts which we may potentially borrow
under the Term Loan Agreement will be sufficient.
o Any substantial litigation costs prior to the Merger.
o Increased costs in completing the Merger. To date, we have incurred
substantial costs in completing the Merger, including legal costs,
financial advisor fees and costs related to transitioning our operations
system so that it will be compatible with JFAX.COM's.
o Unforeseen contingencies.
If our current financial resources are insufficient, JFAX.COM may be
unwilling to lend us any additional funds. If the Term Loan Agreement is
amended to increase the amount of principal which we may borrow and our
borrowing from JFAX.COM is in excess of $5 million, the Merger consideration to
be received by our common stockholders will be reduced. The fraction of a
share of JFAX.COM Common Stock which will be received for each share of our
common stock is based on a conversion number formula (the "Conversion Number").
Additional borrowings under the Term Loan Agreement would cause a decrease in
the Conversion Number (and a corresponding decrease in the amount of Merger
consideration to be paid to our common stockholders) unless the borrowings are
offset by our having additional cash at the time of the Merger. Because the
number of shares of JFAX.COM common stock, which our preferred stockholders
will received in the Merger, is unaffected by our additional borrowings from
JFAX.COM, any amounts, which we borrow from JFAX.COM, will only affect the
amount of Merger consideration to be received by our common stockholders.
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Under the terms of the Merger Agreement, we are not permitted to sell any
equity securities to third parties or to incur any indebtedness except in the
ordinary course of business. We also have granted JFAX.COM a security interest
in almost all of our assets. As a result, without JFAX.COM's approval, it may
be difficult for us to obtain financing from any party other than JFAX.COM.
Potential lenders to, and investors in, eFax.com also may be unwilling to
finance us because the funds may primarily be used to make redemption payments
to our preferred stockholders or to repay the Term Loan Agreement instead of
funding our ongoing operations.
No assurances can be given that eFax.com will have sufficient funds to
complete the Merger and/or continue its operations in the event that the Merger
is not completed.
If the Merger does not occur, there can be no guarantee that additional
financing will be available or, if available, will be sufficient to fund our
continued operations. If eFax.com remains independent, we anticipate that we
will continue to have quarterly losses and negative cash flow for the
foreseeable future. We may require additional capital to fund any of the
following:
o Continuing operating losses.
o Unanticipated opportunities.
o Litigation costs.
o Strategic alliances.
o Changing business conditions.
o Unanticipated competitive pressures.
Obtaining additional financing will be subject to a number of factors,
including the fact our Common Stock is no longer traded on The Nasdaq National
Market; that restrictions placed on us by our creditors and our preferred
stockholders; market conditions; our operating performance; and investor
sentiment. These factors may make the timing, amount, terms and conditions of
additional financings unattractive to us and could have terms that could dilute
the interests of our common stockholders. If we are unable to raise additional
capital in the event that the Merger does not occur, we will have to consider
significantly curtailing our current operations and taking other actions,
including declaring bankruptcy and/or liquidating the Company.
THERE ARE SIGNIFICANT RISKS IN CONNECTION WITH THE MERGER
The Merger will not be effective, if ever, until a registration statement
filed by JFAX.COM with the Securities and Exchange Commission is declared
effective and unless the stockholders of eFax.com and JFAX.COM both approve
resolutions related to the Merger and other conditions, to the Merger are met.
There can be no assurance that either the eFax.com or the JFAX.COM stockholders
will vote for approval of the resolutions required to complete the Merger or
that the other conditions necessary to complete the Merger will be satisfied.
As a result of entering into the Merger Agreement and our preparations in
connection with the Merger:
o Prior to the Merger, the prices of eFax.com and JFAX.COM Common Stock may
be linked, subject to other factors affecting the Conversion Number. If
the prices are linked, events, the price of JFAX.COM Common Stock and over
which eFax.com has no control, could affect the price of eFax.com Common
Stock. In addition, some of the factors which effect the price of
JFAX.COM Common Stock, may be different from, or in addition to, factors
which would normally affect the price of our Common Stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
o The potential Merger may affect employee morale. Since the initial
announcement on April 6, 2000 that eFax.com and JFAX.COM were considering
a merger, eFax.com has had a significant number of employees leave. On
April 6, 2000, eFax.com had 107 employee and on August 4, 2000 the number
of employees was 69. Josh Mailman, Vice President of Operations, and
Michael C Tonneson, Vice President of Business Development, two of our
five executive officers, have left eFax.com since the April 6th
announcement and have not been replaced.
o eFax.com must obtain JFAX.COM's permission to make significant changes to
our operations. Under the terms of the Merger Agreement, eFax.com is
required to conduct the Company's business in the ordinary course and use
all reasonable efforts to maintain existing relationships with third
parties. In addition, without JFAX.COM's permission, eFax.com is unable
to sell any of the Company's securities or pledge any of the Company's
property as collateral. As a result, without JFAX.COM's consent, eFax.com
is unlikely to be able to raise any additional capital. The Merger
Agreement prohibits us from increasing compensation for any of our
employees and this may make it difficult to take actions which would
enable eFax.com to retain key personnel. There can be no assurance that
eFax.com will be able to obtain JFAX.COM's approval to undertake any
activity prohibited by the Merger Agreement and in the absence of such
approval we may be unable to perform the activities necessary to maximize
our business, prospects, financial condition and results of operations.
o A significant amount of eFax.com's current efforts relate to completing
the Merger. eFax.com's efforts in connection with the Merger affect the
amount of time which our management and other employees have to devote to
the daily operations of the Company. In addition, a substantial amount of
our cash flow is being dedicated to completing the Merger and these
expenditures may limit the cash available to ongoing operations. We
currently estimate that our out-of-pocket expenses related to the Merger
will be approximately $800,000, excluding amounts expended to integrate
our operating systems with JFAX.COM's. The amount of these expenditures
may vary substantially depending on events occurring prior to the Merger.
The allocation of our resources to the Merger may have a material adverse
effect on our business, prospects, financial conditions and results of
operations.
o Terms of the Merger Agreement may preclude other offers. Under the terms
of the Merger Agreement, we may not solicit additional offers to acquire
the Company, but may accept a superior offer by another party to acquire
us. If the Merger does not occur, we will be required to make the
termination payment to JFAX.COM and pay JFAX.COM's out-of-pocket expenses
incurred in connection with the Merger Agreement and the Term Loan
Agreement. eFax.com's potential obligations to JFAX.COM may reduce the
likelihood that any third party would make an offer to acquire us and
could have an effect on the potential price of eFax.com's Common Stock.
o Any substantial change to the Merger Agreement or substantial increase in
the Merger consideration will require approval of our preferred
stockholders. Under the terms of the Exchange Agreement, we can only
require the preferred stockholders to receive equity securities of
JFAX.COM if the Merger occurs on substantially the same terms as currently
set forth in the Merger Agreement. The preferred stockholders will have a
right to require a cash redemption for the Series D Shares if the total
Merger consideration to be received by the eFax.com common stockholders
and the eFax.com preferred stockholders exceeds 12,000,000 shares of
JFAX.COM Common Stock. The cash redemption amount of the Series D Shares
on August 10, 2000 was $19.6 million. In calculating the 12 million share
figure, each share of JFAX.COM Common Stock which can be acquired upon the
exercise of any warrant received by a preferred stockholder as Merger
consideration will be included. While our current estimation is that the
total consideration will be less than 12.0 million shares of JFAX.COM
Common Stock, no assurances can be given that the total Merger
consideration will not exceed 12.0 million shares of JFAX.COM Common Stock
under the Conversion Number. If events occur which would cause the Merger
consideration to exceed 12.0 million shares, there can be no assurance
that the preferred stockholders would not exercise their cash redemption
rights or would not require additional consideration in order to permit
the completion of the Merger.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
WE WILL HAVE SIGNIFICANT RISKS IF THE MERGER DOES NOT OCCUR
If the Merger Agreement is terminated and eFax.com's board of directors
determines that it is in our best interests to seek another merger or business
combination, it is not certain that we will be able to find a partner willing
to pay an equivalent or more attractive price than that which would be paid in
the Merger.
In addition, if the Merger Agreement is terminated:
o The holders of our Series D Shares are expected to have the right to
require us to redeem all of the outstanding preferred stock in cash
(approximately, $19.6 million on August 10, 2000). At present, eFax.com
would not have sufficient cash to redeem our outstanding preferred stock.
o We will be required to repay to JFAX.COM the amount outstanding under the
Term Loan Agreement, including interest. As discuss above, unless the
term of the Term Loan Agreement is extended by JFAX.COM, the loan must be
repaid on October 31, 2000; provided that, under specified circumstances
we may be required to repay the loan as early as August 31, 2000. As of
the date of this Report, the outstanding principal under the Term Loan
Agreement is $3.25 million. As collateral for the loan, we have given
JFAX.COM a security interest in substantially all of our assets, including
all of our DID numbers. If the loan becomes due and we are unable to
timely repay any amounts outstanding, JFAX.COM may exercise its rights in
connection with the assets in which it has a security interest.
o We will need substantial amounts of cash to enable us to continue our
operations as they are currently being conducted.
At present, we do not have sufficient cash to redeem our outstanding
preferred stock or to repay the outstanding principal and interest under the
Term Loan Agreement. We also do not currently have any prospects for obtaining
significant additional financing and no assurance can be given that we will be
able to obtain the necessary cash to pay any amounts we owe or to continue our
business. If sufficient cash cannot be obtained, we may be required to
significantly curtail our operation and to take other actions including
declaring bankruptcy and/or liquidating the company.
ADDITIONAL RISKS
For additional risks effecting the ongoing operations of the Company on a
stand alone basis, reference is made to the risk factors set forth in the
Company's Annual Report on Form 10-K for the year ended January 1, 2000 and
Quarterly Report on Form 10-Q for the period ended April 1, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No change has occurred since the filing by the Company of its Annual
Report on Form 10-K for the year ended January 1, 2000. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
in the Registrant's Annual Report on Form 10-K for the year ended January 1,
2000.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 20, 2000, Jerry Kirsch filed a lawsuit against the Company in the
United States District Court for the Eastern District of Michigan asserting the
ownership of certain United States patents and claiming that the Company is
infringing these patents as a result of the Company's sale of multifunction
hardware products. The suit requests unspecified damages, treble damages due to
willful infringement, and preliminary and permanent injunctive relief. We have
reviewed the Kirsch patents with our business and technical personnel and
outside patent counsel and have concluded that we do not infringe these
patents. As a result, we are confident of our position in this matter and
intend to defend the suit vigorously; however if such suit is successful, it
could have a material adverse effect on the Company and even if unsuccessful
could require the substantial expenditure of time and costs in its resolution.
See Note 9 to Notes to Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES
(a) On April 5, 2000, the Company entered into an exchange agreement with
the holders of the Company's Series A Convertible Preferred Stock under which
the holders agreed to exchange all of their outstanding shares of the Series A
Convertible Preferred Stock for a new Series B Convertible Preferred Stock. The
exchanged occurred on April 7, 2000 and the preferred stockholders received one
share of Series B Convertible Preferred Stock for each of the 1,500 shares of
Series A Convertible Preferred Shares. The Series B Shares which on July 17,
2000 were converted into shares of a new Series D Convertible Preferred Stock,
had a stated value which reflected the 25% premium that the holders would have
had the right, under the Series A Convertible Preferred Stock, to receive in
cash at the time of the Merger with JFAX.COM. The Series B Convertible
Preferred Stock was convertible into shares of the Company's Common Stock based
on the average closing bid price of the Company's Common Stock for the 20
trading days beginning on April 7, 2000 and ending on May 5, 2000. The average
closing bid price of the Company's common stock for this period was $2.31.
Holders of the preferred shares had no voting rights, except as required by
law, including, but not limited to, the General Corporation Laws of the State
of Delaware. The Company could not declare or pay any cash dividend or
distribution on the Common Stock without the prior express written consent of
the holders of not less than two-thirds of the then outstanding preferred
shares. In the event of a liquidation of the Company, the holders of the
Series B Convertible Preferred Stock would have been entitled to receive
distributions in preference to the holders of the Common Stock.
(b) In April 2000, the Company issued warrants to purchase 250,000 shares
of Common Stock to JFAX.COM in connection with the execution of term loan
commitment letter. The warrant exercise price is $4.4375 which reset to $1.00
per share if the Merger does not occur. These warrants may be exercised
immediately.
The issuance and sale of all such securities was intended to be exempt
from registration and prospectus delivery requirements under the Securities Act
of 1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof
due to, among other things, (i) the limited number and nature of persons to
whom the securities were issued, (ii) the distribution of disclosure documents
to the investors, (iii) the fact that such persons represented and warranted to
the Company, among other things, that such persons were acquiring the
securities for investment only and not with a view to the resale or
distribution thereof, and (iv) the fact that a certificate representing the
securities was issued with a legend to the effect that such securities had not
been registered under the Securities Act or any state securities laws and could
not be sold or transferred in the absence of such registration or an exemption
therefrom. In addition, the exchange of the Series A Convertible Preferred
Stock into the Series B Convertible Preferred Stock was exempt under Section
3(a)(9) of the Securities Act.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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Exhibit
Number Description
------- ---------------------------------------------------------------
10.56 Gross Rent Real Property Lease by and between Patterson
Associates, LLC and the Company for Santa Barbara facilities
dated February 3, 2000.
10.57 Security Agreement between JFAX.COM, Inc. and the Company dated
May 5, 2000.
10.58 Term Loan Agreement by and between JFAX.COM, Inc. and the
Company dated May 5, 2000.
10.59 Promissory Note between JFAX.COM, Inc. and the Company dated
May 5, 2000.
10.60 Collateral Assignment of Copyrights (Security Agreement) between
the Company as Pledgor and JFAX.COM, Inc. as Pledgee dated
May 5, 2000.
10.61 Collateral Assignment of Patents (Security Agreement) between
the Company as Pledgor and JFAX.COM, Inc. as Pledgee dated
May 5, 2000.
10.62 Collateral Assignment of Trademarks (Security Agreement) between
the Company as Pledgor and JFAX.COM, Inc. as Pledgee dated
May 5, 2000.
27.1 Financial Data Schedule.
-----------------------
(b) Reports on Form 8-K. On April 6, 2000, the Company filed a Current Report
on Form 8-K, concerning the execution of a letter of intent by the Company
and JFAX.COM relating to the Merger and of the entry into an exchange
agreement pursuant to which the shares of Series B Convertible Preferred
Stock would be exchanged for shares of Series D Convertible Preferred
Stock. On July 14, 2000, the Company filed a Current Report on Form 8-K, as
amended, pertaining to the execution of a merger agreement between the
Company and JFAX.COM, Inc., pursuant to which the Company will merge with a
subsidiary of JFAX.COM and become a subsidiary of JFAX.COM and certain
related matters. On August 9, 2000, the Company filed a Current Report on
Form 8-K, related to the delisting of the Company's Common Stock from The
Nasdaq National Market.
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SIGNATURE
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.
EFAX.COM, INC.
------------------------------
(Registrant)
Date: August 15, 2000 By: /s/ TODD J. KENCK
------------------------------
Todd J. Kenck
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
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