<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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: 333-94755
ETINUUM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 84-1334615
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
5619 DTC Parkway, 12/th/ Floor
Englewood, Colorado 80111-3017
(303) 357-3000
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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.
(1) Yes [X] No [_]
(2) Yes [X] No [_]
On July 24, 2000, 18,373,651 shares of the registrant's Common Stock were
outstanding
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<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<S> <C>
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1999 and June 30, 2000................. 1
Consolidated Statements of Operations for the Three and Six Months Ended June 30,
1999 and June 30, 2000.......................................................... 2
Consolidated Statement of Stockholders' Equity (Deficit) for the Six Months Ended
June 30, 2000................................................................... 3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and
June 30, 2000................................................................... 4
Notes to Consolidated Financial Statements......................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................................ 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 18
Item 2. Changes in Securities and Use of Proceeds................................. 18
Item 3. Defaults Upon Senior Securities........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................... 18
Item 5. Other Information......................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 18
</TABLE>
Unless otherwise indicated, all references to "Etinuum," "we," "us" and
"our" refer to Etinuum, Inc., a Delaware corporation, and our predecessor
Colorado corporation. When used in the Report, the words "intend," "expects,"
"plans," "estimates," "anticipates," "projects," "believes," and similar
expressions are intended to identify forward-looking statements. Specifically,
statements included in this Report that are not historical facts, including
statements about our beliefs and expectations about our business and our
industry are forward looking statements. These statements are subject to risks
and uncertainties that could cause actual results to differ materially. Forward
looking statements included in this Report speak only as of the date of this
Report and we will not revise or update these statements to reflect events or
circumstances after the date of this Report or to reflect the occurrence of
unanticipated events.
All brand names and trademarks appearing in this filing are the property of
their holders.
<PAGE>
Item 1. Financial Statements
ETINUUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1999 2000
---------- --------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 6,204 $ 22,445
Restricted cash................................................................... 407 1,779
Short term investments............................................................ -- 14,422
Receivables, net of allowances of $464 and $203 respectively--
Trade............................................................................ 5,218 9,047
Unbilled......................................................................... 1,108 745
Other............................................................................ -- 116
Related party notes receivable.................................................... 690 737
Prepaid expenses.................................................................. 713 2,343
Other current assets.............................................................. 193 2,935
--------- --------
Total current assets............................................................ 14,533 54,569
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $5,223
and $6,380, respectively.......................................................... 7,982 9,433
GOODWILL AND OTHER INTANGIBLES, net of amortization of $5,062 and
$2,761, respectively.......................................................... 2,808 2,253
OTHER ASSETS....................................................................... 1,055 1,335
--------- --------
Total assets.................................................................... $ 26,378 $ 67,590
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable............................................................ $ 1,668 $ 2,333
Accrued compensation.............................................................. 1,347 1,371
Other accrued liabilities......................................................... 2,034 337
Customer deposits................................................................. 237 140
Current portion of notes payable and capital leases............................... 1,316 1,257
Related party notes payable....................................................... 398 398
--------- --------
Total current liabilities....................................................... 7,000 5,836
Deferred rent..................................................................... 245 210
Long-term notes payable and capital lease, net of current portion................. 1,722 1,781
--------- --------
Total liabilities............................................................... 8,967 7,827
--------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION, $.001 par value,
10,000,000 shares authorized....................................................... 59,408 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value, 100,000,000 shares authorized, 1,881,444
and 17,985,651 shares issued and outstanding as of December 31, 1999
and June 30, 2000, respectively................................................ 1 2
Additional paid-in capital........................................................ -- 113,968
Warrants for common stock......................................................... -- 1,254
Unearned compensation............................................................. (1,266) (4,274)
Accumulated deficit............................................................... (40,732) (51,187)
--------- --------
Total stockholders' equity (deficit)............................................ (41,997) 59,763
--------- --------
Total liabilities and stockholders' equity (deficit)............................ $ 26,378 $ 67,590
========= ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated balance sheets.
1
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
REVENUE..................................................... $ 4,879 $ 9,838 $ 10,311 $ 18,306
DIRECT COST OF SERVICES..................................... (3,420) (6,328) (7,058) (11,674)
---------- ----------- ---------- -----------
GROSS PROFIT................................................ 1,459 3,510 3,253 6,632
---------- ----------- ---------- -----------
OPERATING EXPENSES:
Selling, general and administrative....................... 3,182 7,402 6,093 13,810
Depreciation and amortization............................. 775 981 1,540 2,011
Research and development.................................. 344 -- 672 --
---------- ----------- ---------- -----------
Total operating expenses............................... 4,301 8,383 8,305 15,821
---------- ----------- ---------- -----------
LOSS FROM OPERATIONS........................................ (2,842) (4,873) (5,052) (9,189)
---------- ----------- ---------- -----------
OTHER (EXPENSES) INCOME:
Recovery from Spider...................................... -- 522 -- 522
Interest income........................................... 45 597 59 661
Interest expense.......................................... (6) (46) (11) (121)
Loss on disposal of equipment and other................... (1) (39) (1) (44)
---------- ----------- ---------- -----------
NET LOSS.................................................... $ (2,804) $ (3,839) $ (5,005) $ (8,171)
========== =========== ========== ===========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss.................................................. $ (2,804) $ (3,839) $ (5,005) $ (8,171)
Accretion of mandatorily redeemable convertible
preferred stock........................................... (130) -- (255) (882)
Cumulative dividends to preferred stockholders............ -- -- -- (1,402)
Guaranteed minimum return on series F preferred stock..... -- -- -- (13,366)
---------- ----------- ---------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.................. $ (2,934) $ (3,839) $ (5,260) $ (23,821)
========== =========== ========== ===========
BASIC AND DILUTED NET LOSS PER SHARE........................ $ (1.57) $ (0.21) $ (2.82) $ (2.24)
========== =========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING--BASIC AND DILUTED............................. 1,868,088 17,979,651 1,868,088 10,637,969
========== =========== ========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements
2
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
Additional Warrants in
Common Stock Paid-In Common Unearned
-------------- Accumulated
Shares Amount Capital Stock Compensation Deficit Total
------ ------ ------- ----- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1999.............................. 1,881,444 $1 $ $ -- $(1,266) $(40,732) $(41,997)
Accretion of preferred stock to liquidation and
Redemption value................................... -- -- -- -- -- (882) (882)
Cumulative dividends to preferred Stockholders.......... -- -- -- -- -- (1,402) (1,402)
Guaranteed minimum return to series F
preferred stockholders............................. -- -- (13,366) -- -- (13,366)
Warrants issued......................................... -- -- -- 1,254 -- -- 1,254
Option grants........................................... -- -- 4,306 -- (4,306) -- --
Option exercises........................................ 375 -- 1 -- -- -- 1
Amortization of unearned compensation................... -- -- -- -- 1,298 -- 1,298
Initial public offering, net of offering costs of $6,149 4,500,000 -- 47,851 -- -- -- 47,851
Preferred stock converted into common stock............. 11,593,832 1 75,057 -- -- -- 75,058
Issuance of common stock for the Acorn acquisition 10,000 -- 119 -- -- -- 119
Net loss................................................ -- -- -- -- -- (8,171) (8,171)
---------- -- -------- --------- ------- -------- --------
BALANCES, June 30, 2000 (unaudited)...................... 17,985,651 $2 $113,968 $ 1,254 $(4,274) $(51,187) $ 59,763
========== == ======== ========= ======= ======== ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements.
3
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 2000
------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $(5,005) $ (8,171)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization............................................... 1,540 2,011
Amortization of warrants.................................................... -- 702
Discount on short term investments.......................................... -- 92
Stock compensation expense.................................................. -- 1,298
Changes in assets and liabilities--
Receivables.............................................................. 1,241 (3,679)
Prepaids and other assets................................................ (546) (1,872)
Accounts payable......................................................... 139 665
Accrued expenses......................................................... 596 (1,673)
Other.................................................................... (234) (37)
------- --------
Net cash used in operating activities........................................ (2,269) (10,664)
Cash flows from investing activities:
Purchase of short term investments............................................ -- (14,514)
Purchase of property and equipment............................................ (1,727) (2,759)
Restricted cash............................................................... (258) (1,372)
Advances to Lighthouse and Riptide -- (2,254)
Notes receivables............................................................. (200) --
Related party loans........................................................... -- (47)
------- --------
Net cash used in investing activities........................................ (2,185) (20,946)
Cash flows from financing activities:
Proceeds from series E preferred stock offering, net.......................... 3,990 --
Proceeds from initial public offering, net of offering costs of $6,149........ -- 47,851
Borrowings.................................................................... 7 3,533
Repayment of borrowings....................................................... (13) (3,533)
------- --------
Net cash provided by financing activities.................................... 3,984 47,851
Net (decrease) increase in cash and cash equivalents.......................... (470) 16,241
------- --------
Cash and cash equivalents, beginning of period................................ 3,752 6,204
------- --------
Cash and cash equivalents, end of period...................................... $ 3,282 $ 22,445
======= ========
Supplemental disclosures of cash flow information:
Cash paid for interest........................................................ $ 5 $ 123
======= ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements.
4
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Nature of Business
Etinuum is an eBusiness Service Provider, delivering integrated end-to-end
customer relationship management (CRM) solutions. We enable our clients to
increase the lifetime value of their customers and streamline customer
interactions in order to become more effective customer-centric enterprises.
Etinuum focuses on the design and integration of technologies required for
organizations to harness the power of the customer-centric business model. We
offer Internet Professional and Operational ASP services that help transform
businesses into customer-centric enterprises. Etinuum designs, integrates and
operates the technological and operational infrastructures that enable our
clients to manage their direct-to-customer relationships effectively and
efficiently. These services include the integration and customization of
customer interactions systems, including transaction platforms, communications
systems, web site interfaces and content management programs. Beyond systems
design, integration and customization, Etinuum also manages and analyzes
customer data. Our Operational ASP Services team operates and manages CRM
related technical and operation infrastructures, including software and data
hosting and ongoing customer communication programs.
(2) Interim Financial Data
The consolidated balance sheet at June 30, 2000, the consolidated
statements of operations for the three and six months ended June 30, 1999 and
2000, the consolidated statement of stockholders' equity (deficit) and
consolidated statements of cash flows for the six months ended June 30, 2000
have been prepared by us without an audit. In our opinion, all adjustments,
consisting of normal recurring adjustments necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for this interim period are not necessarily
indicative of the results for the full year.
The accompanying financial statements should be read with our consolidated
financial statements included in our Registration Statement filed on Form S-1
with the Securities and Exchange Commission on March 24, 2000.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
(3) Short Term Investments
All short-term investments are currently classified as held to maturity in
accordance with Financial Accounting Standards Board ("FASB") No. 115,
"Accounting
5
<PAGE>
for Certain Investments in Debt and Equity Securities." Realized gains and
losses, dividends, and interest income for these securities are included in
earnings.
(4) Recently Adopted Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition. SAB
No. 101 provides guidance on the measurement and timing of revenue recognition
in financial statements of public companies. The early adoption by us in January
2000 of SAB No. 101, had an immaterial effect on our consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretations ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN No. 44
provides clarification and guidance on applying Accounting Principles Board
("APB") No. 25. FIN No. 44 generally provides for prospective application for
grants or modifications to existing stock options or awards made after June 30,
2000. Effective April 1, 2000, we adopted FIN No. 44, which had no material
effect on our consolidated financial statements.
(5) Net Loss Per Share
Effective March 2, 2000, we amended our Certificate of Incorporation to
change the automatic conversion of our preferred stock (other than our series A
preferred stock) to provide that all such preferred stock, including unpaid
dividends, automatically converted into common stock on a four for one basis
upon completion of an initial public offering of common stock resulting in
aggregate proceeds to Etinuum of at least $25 million and a per share price of
at least $10.00.
Our outstanding preferred stock, including unpaid dividends, automatically
converted to in the aggregate 11,034,615 shares of common stock upon the
completion of our initial public offering on March 24, 2000. Periodic charges
to net loss applicable to common stockholders of $882,000 were recognized for
the period December 31, 1999 through March 24, 2000 to accrete the value of each
series of preferred stock to its liquidation and redemption value.
The terms of the series F preferred stock financing provided that we would
issue additional shares upon conversion of the series F preferred stock to
common stock so that the price per share of series F preferred stock would not
exceed one-half of the initial public offering price. As a result, we issued
559,217 additional shares of common stock and recognized a one-time charge of
approximately $13.4 million net loss applicable to common stockholders upon
consummation of our initial public offering.
6
<PAGE>
Components of our net loss per share of ($2.24) for the six months ended
June 30, 2000 are as follows:
Net loss.............................................................. $(0.77)
Accretion of mandatorily redeemable convertible preferred stock....... (0.08)
Cumulative dividends to preferred stockholders........................ (0.13)
Guaranteed minimum return on series F preferred stock................. (1.26)
------
Net loss applicable to common stockholders............................ $(2.24)
======
(6) Stockholders' Equity (Deficit)
Employee Stock Purchase Plan
In June 2000, we delayed the implementation of our 2000 Employee Stock
Purchase Plan. The plan will be implemented in eight semiannual offerings of
250,000 shares of common stock each, commencing on October 1, 2000; 2,000,000
shares in aggregate are available to be sold under the plan. Eligible employees
may withhold up to 10% of their base salary during the semiannual period to be
used to purchase shares under the plan in exchange for 85% of the lesser of the
closing price at the beginning or end of the purchase period.
2000 Stock Incentive Plan
In January 2000, we adopted the 2000 Stock Incentive Plan and reserved
2,750,000 shares of common stock for issuance upon stock grants or exercise of
options granted under this plan. As of June 30, 2000, we had granted 695,862
options under this plan. Compensation expense related to these grants and other
grants under our 2000, 1998 and 1997 plans for the six months ended June 30,
2000 was approximately $1,298,000.
Warrant
In January 2000, Etinuum granted a warrant to a major customer to purchase
181,250 shares of common stock at an exercise price of $8.52 per share. The
value of the warrant at the date of the grant was approximately $1.1 million and
is being amortized over one year. Sales to this customer as a percentage of
revenue were 31% and 30% for the three and six months ended June 30, 2000,
respectively.
(7) Borrowings
In June 2000, we entered into an equipment lease facility agreement, which
provides us with up to $10 million in financing on purchases of new equipment
and furniture. The facility is available to draw upon through June of 2001 and
provides for leasing terms of between three and five years. The cost of funds
is determined at the date of funding and the facility is secured by the
equipment purchased and up to an equal amount in restricted cash. As of June
30, 2000 we had approximately $690,000 outstanding under this line of credit.
(8) Commitments and Contingencies
On October 1, 1999, we acquired Acorn Information Systems, Inc. ("Acorn").
On March 20, 2000, the contingent earn-out provision relating to the Acorn
acquisition was amended. As a result, four former stockholders of Acorn, who are
now our employees, will collectively receive a total of $200,000, on each of the
first and second anniversaries
7
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of the acquisition, assuming all four employees remain employed when these
amounts become due. On the third anniversary of the Acorn acquisition, the
former Acorn stockholders will be entitled to receive an additional $400,000
aggregate payment so long as they are employed by Etinuum on that date or, if
approved by our Chief Executive Officer, at least two of them are employed by
Etinuum on that date. These payments will be accounted for as compensation
expense in the years earned. These four employees were also granted a total of
400,000 stock options at an exercise price of $10.00 per share one-third of
which vested immediately and the remainder vesting monthly over the next thirty
months. A former stockholder of Acorn, who is not an Etinuum employee, was
issued 10,000 shares of our common stock, which was accounted for as additional
purchase consideration.
Additionally, we transferred 1,000,000 shares of Spider Technologies, Inc.
("Spider") common stock to the former Acorn stockholders. These shares were
acquired through our exercise of a warrant we had been granted upon completion
of the Spider spin-off in the fourth quarter of 1999. These shares are
restricted and will vest at the same rate as the stock options for the four
employee former stockholders. Any unvested shares will be forfeited to us if
the vesting requirements are not satisfied. The transfer of these shares will
be charged to compensation expense over the vesting period based upon the fair
value of the shares as they vest. The one non-employee former Acorn stockholder
received his Spider shares without restriction.
(9) Subsequent Events
On July 21, 2000, we completed a merger with Lighthouse Consulting Group, a
content, knowledge, and document management consulting firm based in Kansas
City, Missouri. We paid $754,000 in cash, and issued 388,000 shares of common
stock that were assigned a value of approximately $2.0 million for accounting
purposes. The acquisition of Lighthouse has allowed us to expand our
capabilities in Professional Services and expand our presence in major
metropolitan areas such as New York and Chicago.
On July 12, 2000, we paid approximately $1.6 million in cash and acquired
certain assets and assumed certain liabilities of Riptide Communications, Inc.,
a web design and hosting company based in New York City, New York. The
acquisition of Riptide has allowed us to expand our abilities in providing web
services to our clients.
8
<PAGE>
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 our consolidated financial
statements and accompanying notes included elsewhere in this Quarterly Report.
This discussion and analysis contains certain forward-looking statements that
are based on current expectations and involve risks, uncertainties and
assumptions. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of the uncertainty of several
factors.
Overview
Etinuum is an eBusiness Service Provider, delivering integrated end-to-end
customer relationship management (CRM) solutions. We enable our clients to
increase the lifetime value of their customers and streamline customer
interactions in order to become more effective customer-centric enterprises.
Etinuum focuses on the design and integration of technologies required for
organizations to harness the power of the customer-centric business model. We
offer Internet Professional and Operational ASP services that help transform
businesses into customer-centric enterprises. Etinuum designs, integrates and
operates the technological and operational infrastructures that enable our
clients to manage their direct-to-customer relationships effectively and
efficiently. These services include the integration and customization of
customer interactions systems, including transaction platforms, communications
systems, web site interfaces and content management programs. Beyond systems
design, integration and customization, Etinuum also manages and analyzes
customer data. Our Operational ASP Services team operates and manages CRM
related technical and operation infrastructures, including software and data
hosting and ongoing customer communication programs.
Description of Financial Components
Our revenues are generated both from our internet professional services
practice groups, including web site design and creative strategies, knowledge
management, data management, and analytics and technology services, as well as
from our operational services group, including transaction processing and
communications services, e-mail, live chat, voice, and other programs.
Direct cost of services consists primarily of compensation and benefits to
our employees engaged in the direct delivery of professional services related to
the development, implementation and support of programs for our clients. Direct
cost of services also includes materials, training, and telecommunications
expenses necessary for execution of our clients' programs.
9
<PAGE>
Selling, general and administrative expenses have increased, and we expect
them to continue to increase as we recruit additional support personnel for
continued growth. These expenses consist primarily of salaries, commissions,
benefits, and related expenses for personnel engaged in sales and client
support; salaries and related expenses of executive management, human resources,
finance and administrative personnel; expenses related to our facilities;
marketing and branding expenses, including trade shows and promotional events;
and other general corporate expenses. During the second quarter of 2000, we
recognized $276,000 and $404,000 in compensation expense related to warrants and
stock option grants, respectively.
Depreciation and amortization expenses consist of the depreciation of
equipment used in our operations, including phone switches and computer
equipment at our facilities. These expenses will continue to increase as we
build out our additional operations service centers. Depreciation and
amortization also consists of amortization of goodwill and other intangibles. We
had $2.3 million of goodwill and other intangibles, net of amortization at June
30, 2000. We amortize our goodwill over five years and other intangibles over
three years.
Research and development expenses consist of charges, including labor and
materials, related to the development and enhancement of software and technology
platforms used in providing services to our clients. In 2000 and going forward,
we anticipate these expenses to be immaterial as a result of our transferring
the rights to the proprietary software that we had developed to a newly formed
subsidiary, Spider Technologies, Inc. ("Spider"), and spinning off the stock of
Spider to our stockholders in the fourth quarter of 1999 to form a separate
company.
Interest income is primarily earned on cash balances in our bank accounts
and short-term investments, and will decrease as we use the proceeds of our
initial public offering for working capital requirements. Interest expense is
incurred on our debt and capital lease obligations that we use to finance a
portion of our capital expenditures. In June 2000, we entered into a $10 million
equipment lease facility. As of June 30, 2000, $9.3 million was available under
this facility. Use of this facility will increase our interest expense in future
periods.
10
<PAGE>
Results of Operations
The following table sets forth data for the three and six months ended June
30, 1999 and 2000 taken from our consolidated statements of operations. We
evaluate our business based on numerous factors, including revenue and gross
profit as a percentage of our revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
-------- -------- -------- ---------
(Dollars in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Revenue....................................... $ 4,879 9,838 10,311 18,306
Direct cost of services....................... (3,420) (6,328) (7,058) (11,674)
-------- -------- -------- ---------
Gross profit.................................. 1,459 3,510 3,253 6,632
Operating expenses:
Selling, general and administrative....... 3,182 7,402 6,093 13,810
Depreciation and amortization............. 775 981 1,540 2,011
Research and development.................. 344 -- 672 --
-------- -------- -------- ---------
Total operating expenses............... 4,301 8,383 8,305 15,821
-------- -------- -------- ---------
Loss from operations.......................... (2,842) (4,873) (5,052) (9,189)
Other (expense) income:
Recovery from Spider...................... -- 522 -- 522
Interest income........................... 45 597 59 661
Interest expense.......................... (6) (46) (11) (121)
Loss on disposal of equipment and other... (1) (39) (1) (44)
-------- -------- -------- ---------
Net loss...................................... $ (2,804) $ (3,839) $ (5,005) $ (8,171)
======== ======== ======== =========
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenue. Revenue for the second quarter of 2000 was $9.8 million, which was
102% greater than revenue of $4.9 million for the second quarter of 1999. The
increase was primarily due to internal revenue growth from two existing clients,
and the generation of 16 new clients, as well as revenue from clients acquired
through our Acorn acquisition.
Direct cost of services. Direct cost of services for the second quarter of
2000 was $6.3 million, compared to $3.4 million for the second quarter of 1999.
Direct costs as a percentage of revenue decreased from 70% to 64% primarily as a
result of larger proportionate increase in revenue, our focus on consistent
utilization of our people, and our efforts to consolidate similar customer
services into the same operations service centers.
11
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses were $7.4 million, or 75% of revenue, in the second
quarter of 2000, compared to $3.2 million, or 65% of revenue, in the second
quarter of 1999. Most of this increase resulted from personnel and recruiting
expenses incurred to continue to grow the foundation of our business as well as
costs from build outs of our San Diego and Denver office locations, and our
additional focus on our sales and marketing efforts. In addition, we incurred
approximately $404,000 in compensation expense for incentive stock options and
$276,000 for warrant grants.
Depreciation and amortization expenses. Depreciation and amortization
expenses in the second quarter of 2000 were $981,000, compared to $775,000 in
the second quarter of 1999. The increase resulted from approximately $7.0
million of capital expenditures from July 1, 1999 to June 30, 2000 primarily
relating to the opening of our Fort Scott operations service center in the third
quarter of 1999, and expansion of infrastructure for existing centers.
Research and development expenses. Research and development expenses in the
second quarter of 2000 were negligible compared to $344,000 in the second
quarter of 1999. The decrease in research and development expenses was a result
of our transferring proprietary software used in the Etinuum WebDirect System to
Spider prior to our spin-off of Spider in the fourth quarter of 1999. Nearly all
of our research and development expenses were attributable to the development of
this proprietary software.
Recovery from Spider. Effective October 1, 1999, Etinuum distributed 100%
of the shares of Spider Technologies, Inc. to its stockholder on a pro-rata
basis. As a result of advances given to Spider by Etinuum during the fourth
quarter of 1999 and the probability of realization of payment at that time,
Etinuum recorded a valuation allowance of approximately $1,055,000 for the year
ended December 31, 1999. During the second quarter of 2000, Spider was able to
complete a series A financing and approximately $522,000 was recorded as a
recovery.
Interest income. Interest income in the second quarter of 2000 was $597,000
compared to $45,000 in the second quarter of 1999. Fluctuations in interest
income from year to year are due to varying rates of interest when we invest our
cash in short-term financial instruments. The substantial increase for the
second quarter of 2000 compared to the same period in 1999 resulted largely from
the investment of the proceeds of our initial public offering.
Interest expense. Interest expense in the second quarter of 2000 was
$46,000, compared to $6,000 in the second quarter of 1999. Interest expense in
both quarters resulted from our borrowings under our credit facilities and
capitalized leases for office equipment and furniture.
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Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue. Revenue for the six months ended June 30, 2000 was $18.3 million
which was 78% greater than revenue of $10.3 million for the six months ended
June 30, 1999. This increase was due primarily to revenue growth from existing
clients in our operational service centers, and maintenance of our current
client base.
Direct cost of services. Direct cost of services for the six months ended
June 30, 2000 was $11.7 million, compared to $7.1 million for the six months
ended June 30, 1999. Direct costs as a percentage of revenue decreased from 69%
to 64% primarily as a result of larger proportionate increase in revenue, our
focus on consistent utilization of our people, our efforts to consolidate
similar customer services into the same operations service centers, and lower
than average telecommunication expenses experienced in the first quarter of
2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $13.8 million, or 75% of revenue, for the six
months ended June 30, 2000, compared to $6.1 million, or 59% of revenue, for the
six months ended June 30, 1999. Most of this increase resulted from hiring
additional management and support personnel in the areas of finance, legal,
sales and marketing, increased personnel costs as a result of the half-year
impact of our opening a 300-seat operational service center in Fort Scott,
Kansas in the third quarter of 1999, and the impacts of our acquisition of Acorn
in the fourth quarter of 1999. Additionally, during the first half of 2000, we
continued build outs of our San Diego and Denver office locations. We also
incurred approximately $1,298,000 in compensation expense for incentive stock
options, $702,000 for warrant grants and approximately $200,000 of one-time
hiring bonuses.
Depreciation and amortization expenses. Depreciation and amortization
expenses in the six months ended June 30, 2000 were $2.0 million, compared to
$1.5 million for the six months ended June 30, 1999. The increase resulted from
approximately $7.0 million of capital expenditures from July 1, 1999 to June 30,
2000 primarily relating to the opening of our Fort Scott operations service
center, and expansion of infrastructure for existing centers.
Research and development expenses. Research and development expenses in the
six months ended June 30, 2000 were negligible compared to $672,000 for the six
months ended June 30, 1999. The decrease in research and development expenses
was a result of our transferring proprietary software used in the
EtinuumWebDirect System to Spider prior to our spin-off of Spider in the fourth
quarter of 1999. Nearly all of our research and development expenses were
attributable to the development of this proprietary software.
Recovery from Spider. Effective October 1, 1999, Etinuum distributed 100%
of the shares of Spider Technologies, Inc. to its stockholder on a pro-rata
basis. As a result
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of advances given to Spider by Etinuum during the fourth quarter of 1999 and the
probability of realization of payment at that time, Etinuum recorded a valuation
allowance of approximately $1,055,000 for the year ended December 31, 1999.
During the second quarter of 2000, Spider was able to complete a series A
financing and approximately $522,000 was recorded as a recovery.
Interest income. Interest income in the six months ended June 30, 2000 was
$661,000, compared to $59,000 in the six months ended June 30, 1999.
Fluctuations in interest income from year to year are due to varying rates of
interest when we invest our cash in short-term financial instruments. The
increase for the first six months of 2000 compared to the same period in 1999
resulted largely from the investment of the proceeds of our initial public
offering in March 2000.
Interest expense. Interest expense in the six months ended June 30, 2000
was $121,000, compared to $11,000 in the first six months of 1999. Interest
expense in both quarters resulted from our borrowings under our credit
facilities and capitalized leases for office equipment and furniture.
Operating results for any quarter are not necessarily indicative of results
for any future period. The following factors have affected our operations in the
past and may affect our operations in the future, which could cause quarterly
fluctuations:
. beginning, ending or deferring of significant services for clients
during a quarter, particularly if we must add personnel and other
resources in advance of new client initiatives;
. variations in the number, size and scope of our clients' direct-to-
customer initiatives, which in the past have ranged from small pilot
programs involving only a few of our employees to nationwide programs
using many new employees;
. utilization of our employees and operational facilities, which can be
affected significantly, for example, by reassigning or terminating
personnel following the completion of a client's initiative or by
opening a new facility in anticipation of future business;
. fluctuations in demand for our clients' products, which are beyond our
control but which directly affect our revenue as a substantial portion
of our client billings depends upon the time our personnel devote to a
client's customers or, under a new contract with a major client, are
based on the client's sales generated from our operation of its
direct-to-customer initiative;
. expenses incurred in connection with strategic acquisitions, such as
our recent acquisitions of Riptide Communications, LLC and Lighthouse
Consulting
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Group Inc., which are part of our strategy to broaden and expand our
service offerings; and
. expenses related to our sales and marketing efforts, which have
increased in 2000.
Liquidity and Capital Resources
Since we were first capitalized, we have raised $98.9 million of equity
capital from the sale of common and preferred stock, including $47.9 million in
proceeds, net of offering costs, from our initial public offering completed on
March 24, 2000.
Cash and cash equivalents at the end of the six months ended June 30, 2000
were $22.4 million compared to $3.3 million at the end of the six months ended
June 30, 1999. This increase excludes approximately $14.4 million in cash which
was invested in short-term investments with original maturities between ninety
days and one year. The increase compared to June 30, 1999 is primarily
attributable to the net proceeds of our initial public offering.
Cash used in operations for the six months ended June 30, 2000 was $10.7
million, compared to $2.3 million for the six months ended June 30, 1999. Our
change in operating cash flow resulted primarily from our increased net loss, as
well as additional prepayments which were primarily for insurance. In addition,
increases in receivables resulted from our expanding customer base, and
decreases in accrued liabilities resulted from the pay down of outstanding
liabilities with the proceeds from our initial public offering.
Cash used in investing activities for the six months ended June 30, 2000
was $20.9 million compared to $2.2 million for the six months ended June 30,
1999. This increase is due primarily to our investing part of the proceeds from
our initial public offering in short term commercial paper, advances made
related to our strategic acquisitions of Lighthouse and Riptide and also as a
result of our continued focus on investing in and expanding our infrastructure
to provide the volume of services necessary for our increasing client base.
Additionally, in the first quarter of 2000, we added internal infrastructure as
a consequence of our increase in management and support personnel. During the
first quarter of 1999, we began preparing to open our operations service center
in Fort Scott, Kansas and we moved our headquarters from Denver to Englewood,
Colorado, which resulted in some capital investments in computer systems,
facility expansion, and furniture and fixtures, but to a significantly lesser
extent than in first quarter 2000.
Our financing activities have generated cash of $47.9 million and $4.0
million for the six month periods ended June 30, 2000 and 1999, respectively.
The majority of our financing activities in the first half of 2000 resulted from
the net proceeds of our initial
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public offering, which occurred in the first quarter, whereas the majority of
our financing activities in 1999 resulted from our series E preferred stock
offering, which occurred in the second quarter.
Our business plan will continue to require substantial capital to fund
expansion. Our business plan includes the following:
. developing our sales organization and marketing initiatives;
. expanding our Internet Professional Services;
. expanding internal infrastructure related to our operations centers in,
Yukon Oklahoma and Denver Colorado;
. evaluating potential acquisitions and investments; and
. funding operating losses.
We believe that the proceeds from our initial public offering, together
with our cash from operations and investments and borrowing capacity will be
sufficient to fund our activities for at least the next 12 months. We could,
however, require capital funding sooner, if we have shortfalls in operating and
financial performance or expand more quickly than currently anticipated. If this
occurs, we may need to seek additional financing sources to fund our planned
business expansion efforts, which may be dilutive to existing investors.
Recent Accounting Pronouncements
See note 4 to the consolidated financial statements.
Income Taxes
We have historically concluded that there exists substantial doubt as to
the recoverability of our deferred tax assets. As a result, we have recorded a
full valuation allowance against those deferred tax assets. Our view as to the
ultimate recoverability of our deferred tax assets may change in the near term
based principally upon the successful execution of our business plan.
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Item 3. Quantitative and Qualitative Disclosures about Market Risks
Market risks represent the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
market prices and rates. We are exposed to market risks from changes in United
States interest rates. Historically, and as of June 30, 2000, we have not used
derivative instruments or engaged in hedging activities.
We had long-term borrowings, including current maturities, of $3.0 million
as of June 30, 2000. Of this amount, $1.8 million bears interest at a fixed rate
of 13.9%. The fair value of the fixed-rate debt would change approximately
$9,000 in the event of a 0.50% change in the level of interest rates. The
remaining $1.2 million is variable rate debt. The annual interest expense would
change by approximately $6,000 in the event of a 0.50% change in the level of
interest rates on the variable rate debt.
We temporarily invest our excess cash in money market funds and short term
commercial paper. Changes in interest rates would not significantly affect the
fair value of these cash investments due to their short term nature.
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PART II
Item 1. Legal Proceedings.
We are involved in legal proceedings from time to time, none of which we
believe, if decided adversely to us, would have a material adverse effect on our
business, financial condition or results of operations.
Item 2. Changes in Securities.
(c) Securities sold
On March 25, 2000, we issued 10,000 shares of common stock to a former
shareholder of Acorn in reliance on Section 4(2) of the Securities Act of 1933,
as amended.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ETINUUM, INC.
By: /s/ TIMOTHY C. O'CROWLEY
Timothy C. O'Crowley
Chairman and Chief Executive
Officer
Signature Title Date
--------- ----- ----
/s/ TIMOTHY C. O'CROWLEY Chairman and
------------------------ Chief Executive, August 9, 2000
Timothy C. O'Crowley Officer
(Principal
Executive Officer)
/s/ STEVEN Q. HANSEN Chief Financial
------------------------ Officer (Principal August 9, 2000
Steven Q. Hansen Financial and
Accounting Officer)
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