<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the period from _______ to _______.
Commission File Number: 000-21751
Evoke Communications, Inc.
(Exact Name of Registrant as specified in its charter)
Delaware 84-1407805
____________________________________ _______________________________________
(State or jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1157 Century Drive
Louisville, CO 80027
(Address, including zip code, of principal executive offices)
(800) 878-7326
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
----- -----
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $0.0015 Par Value - 46,792,618 as of July 31, 2000.
<PAGE>
Evoke Communications, Inc.
Index
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000 3
(unaudited)
Condensed Consolidated Statements of Operations for the three and six months 5
ended June 30, 1999 and 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 7
1999 and 2000 (unaudited)
Notes to the Condensed Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 15
Operations
Additional Risk Factors that May Affect Our Operating Results and The Market 19
Price Our Common of Stock
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
</TABLE>
2.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EVOKE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
December 31, Pro Forma
1999 June 30, 2000 June 30, 2000 (1)
------------ ------------- -----------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................... $ 89,234 $ 38,343
Short term investments....,,,................................. -- 1,411
Accounts receivable, net of allowance for doubtful accounts of
$35 and $315 at December 31, 1999 and June 30, 2000,
respectively................................................. 805 2,090
Prepaid expenses and other current assets..................... 709 5,058
------------ -------------
Total current assets.......................................... 90,748 46,902
Property and equipment, net.................................... 19,539 35,619
Intangible assets, net......................................... -- 79,381
Other assets................................................... 121 3,780
------------ -------------
Total Assets $110,408 $165,682
============ =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable.............................................. $ 8,519 $ 12,146
Current portion of long term debt............................. 1,336 1,414
Accrued expenses.............................................. 586 1,952
Deferred revenue.............................................. 317 440
------------ -------------
Total current liabilities..................................... 10,758 15,952
Long term debt, less current portion........................... 2,260 1,590
------------ -------------
Total Liabilities 13,018 17,542
------------ -------------
Mandatorily Redeemable Preferred Stock
Series B...................................................... 1,064 1,064 --
Series C...................................................... 10,284 10,284 --
Series D...................................................... 99,794 99,794 --
Series E...................................................... -- 1,563 --
Warrants for the purchase of mandatorily redeemable preferred
stock........................................................ 180 4,280 --
------------ ------------- -------------
111,322 116,985 --
------------ ------------- -------------
Stockholders' Equity (Deficit)
Undesignated preferred stock, 964,365 shares authorized at
December 31, 1999 and June 30, 2000; none issued............. -- -- --
Series A preferred stock...................................... 503 503 --
Common stock, par value $.0015, 38,000,000 and 64,666,666 1 9 60
shares authorized at December 31, 1999 and June 30, 2000;
issued and outstanding 575,806 and 5,708,795 shares at
December 31, 1999 and June 30, 2000, respectively............
Additional paid-in capital.................................... 11,939 105,156 222,593
</TABLE>
3.
<PAGE>
<TABLE>
<CAPTION>
December 31, Pro Forma
1999 June 30, 2000 June 30, 2000 (1)
------------ ------------- -----------------
<S> <C> <C> <C>
Accumulated other comprehensive -- 52 52
income......................................................
Note receivable from officer.................................. -- (1,134) (1,134)
Unearned stock option compensation............................ (9,306) (17,324) (17,324)
Accumulated deficit........................................... (17,069) (56,107) (56,107)
------------ ------------- -----------------
Total stockholders' equity (deficit)......................... (13,932) 31,155 148,140
------------ ------------- -----------------
Commitments and contingencies
Total Liabilities and Stockholders' Equity (Deficit) $110,408 $165,682
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) - Reflects the conversion of all preferred shares into common stock upon the
completion of the Company's initial public offering on July 24, 2000.
4.
<PAGE>
EVOKE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue............................... $ 414 $ 2,892 $ 634 $ 4,751
Cost of revenue:
(exclusive of stock based
compensation expense of $21, $61,
$40 and $124, respectively, shown
below)............................... 702 3,481 1,189 6,135
-------- -------- -------- --------
Gross profit (loss)................ (288) (589) (555) (1,384)
-------- -------- -------- --------
Operating expenses:
Sales and marketing (exclusive of
stock based compensation expense of
$31, $308, $421 and $609,
respectively, shown below).......... 906 15,422 1,953 26,337
Research and development (exclusive
of stock based compensation expense
of $8, $229, $9 and $425,
respectively, shown below........... 152 1,817 300 2,921
General and administrative,
(exclusive of stock based
compensation expense of $11, $836,
$12 and $4,457, respectively, shown
below).............................. 342 1,952 598 3,240
Amortization of intangible assets.... -- 1,118 -- 1,118
Stock based compensation expense..... 71 1,434 482 5,615
-------- -------- -------- --------
Total operating expenses........... 1,471 21,743 3,333 39,231
-------- -------- -------- --------
Loss from operations............... (1,759) (22,332) (3,888) (40,615)
Other income (expense)................ (23) 642 26 1,577
-------- -------- -------- --------
Net loss........................... (1,782) (21,690) (3,862) (39,038)
Deemed dividend related to beneficial
conversion feature of preferred
stock................................ -- -- -- 1,181
Accretion of preferred stock to
redemption value..................... -- 313 -- 313
-------- -------- -------- --------
Net loss attributable to common
stockholders........................ $ (1,782) $(22,003) $ (3,862) $(40,532)
======== ======== ======== ========
Loss per share--basic and diluted..... $ (4.61) $ (11.74) $ (10.57) $ (30.34)
======== ======== ======== ========
Weighted average number of common
shares outstanding--basic and
diluted.............................. 387 1,874 365 1,336
======== ======== ======== ========
</TABLE>
5.
<PAGE>
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pro forma loss per share--basic and
diluted.............................. $(0.15) $(0.61) $(0.33) $(1.15)
======== ======== ======== ========
Weighted average number of pro forma
shares outstanding--basic and
diluted.............................. 11,736 35,904 11,715 35,144
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6.
<PAGE>
EVOKE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Six Months ended
June 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(3,862) $(39,038)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization...................................... 520 4,500
Loss on disposition of equipment................................... -- 33
Accrued interest on note receivable from officer................... -- (9)
Loss on foreign currency exchange.................................. -- 4
Common stock warrants issued for services.......................... -- 89
Stock based compensation........................................... 482 5,615
Changes in operating assets and liabilities:
Accounts receivable................................................ (226) (939)
Prepaid expenses and other current assets.......................... (65) (3,641)
Other assets....................................................... (34) (1,658)
Accounts payable and accrued expenses.............................. 1,026 1,126
-------- --------
Net cash used by operating activities............................... (2,159) (33,918)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................................. (3,668) (17,985)
Proceeds from disposition of equipment............................. -- 48
Proceeds from sales and maturities of investment securities........ 6,011 648
Purchase of investment securities.................................. (2,552) --
Purchase of investment in AudioTalk Networks, Inc.................. -- (2,000)
Loan to Contigo Software, Inc...................................... -- (300)
Cash paid for acquisition of Contigo, net of cash received......... -- (2,621)
-------- --------
Net cash used by investing activities............................... (209) (22,210)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock...................... -- 5,000
Proceeds from issuance of common stock............................. 11 882
Proceeds from debt................................................. 2,366 --
Payments on debt................................................... (298) (645)
-------- --------
Net cash provided by financing activities........................... 2,079 5,237
-------- --------
Decrease in cash and cash equivalents............................... (289) (50,891)
Cash and cash equivalents at beginning of period.................... 1,222 89,234
-------- --------
Cash and cash equivalents at end of period.......................... $ 933 $ 38,343
======== ========
Supplemental cash flow information - interest paid in cash.......... $ 75 $ 167
======== ========
Supplemental disclosure of noncash investing and financing
activities:
Short-term debt and accrued interest converted to preferred stock... $ 75 $ --
======== ========
</TABLE>
7.
<PAGE>
<TABLE>
<CAPTION>
Six Months ended
June 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
Loan to officer for common stock purchase........................... $ -- $ 1,125
======== ========
Accounts payable incurred for purchases of property and equipment... $ 79 $ 6,030
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8.
<PAGE>
EVOKE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Summary of Operations
Evoke Communications, Inc. (the Company), is an Internet communication
services provider that allows users to communicate and exchange voice, video and
visuals through web-based applications and technologies. The Company operates
in a single segment.
The condensed consolidated financial statements include the accounts of
Evoke and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
(b) Interim Results
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The accompanying condensed consolidated financial statements for the three
and six months ended June 30, 1999 and 2000 are unaudited and have been prepared
in accordance with generally accepted accounting principles on a basis
consistent with the December 31, 1999 audited financial statements and include
normal recurring adjustments which are, in the opinion of management, necessary
for a fair statement of the results of these periods. These consolidated
statements should be read in conjunction with our financial statements and notes
thereto included in our Registration Statement on Form S-1 (No. 333-30708), as
amended on July 24, 2000. Operating results for the three and six months ending
June 30, 2000 are not necessarily indicative of the results that may be expected
for the full year.
(c) Cash, Cash Equivalents and Investments
All highly liquid investments purchased with maturities of three months or
less are considered to be cash equivalents. Cash equivalents consist of money
market accounts at two financial institutions. Short-term investment consists of
an equity investment in a public company. This investment is classified as
"available for sale" in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This investment is carried at fair market value with any unrealized
gain or loss recorded as a separate element of stockholders' equity.
(d) Intangible Assets
Intangible assets consist primarily of goodwill, which is being amortized on
the straight line basis over an estimated useful life of three years.
(e) Revenue Recognition
Web conferencing customers are charged a per-minute fee based on each phone
participant's actual time on the conference, which is recognized as revenue upon
completion of the conference. Customers are charged a fee to upload visuals for
web conferences, which is also recognized as revenue upon completion of the
conference.
Web cast customers are charged for content encoding and hosting. Content
encoding is the conversion of the customer's media into formats which can be
accessed over the internet using widely available media players and, for some
customers, indexing the media to facilitate search and reporting capabilities.
Revenue from content encoding is recognized when the content is available for
viewing over the Internet. Hosting is the maintenance of the content on the
Company's servers and, for some customers, providing access to information about
content usage. Revenue related to content hosting is recognized ratably over
the hosting period.
9.
<PAGE>
EVOKE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Web collaboration customers are charged license, hosting and event fees.
Revenue from software license agreements are recognized upon shipment of the
software when all the following criteria have been met: persuasive evidence of
an arrangement exists; delivery has occurred; the fee is fixed or determinable;
collectibility is probable; and evidence is available of the fair value of all
undelivered elements. Hosting fees represent revenue from post-contract customer
support services and from hosting arrangements where the Company's software is
resident on a company server and are recognized ratably over the hosting period.
Event fees are recognized as the events take place.
(f) Loss Per Share
Loss per share is presented in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). Under
SFAS 128, basic earnings (loss) per share (EPS) excludes dilution for potential
common stock and is computed by dividing income or loss available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issued common stock were exercised or converted
into common stock. Basic and diluted EPS are the same for the three and six
months ended June 30, 1999 and 2000 as all potential common stock instruments
are antidilutive.
(g) Pro Forma Loss Per Share
Pro forma loss per share has been computed as described above and also gives
effect to the conversion of additional shares of convertible preferred stock not
included in the computation of basic and diluted loss per share, which shares
converted upon the completion of Evoke's initial public offering effective July
24, 2000 (using the if-converted method).
(2) PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(a) Mandatorily Redeemable Convertible and Convertible Preferred Stock
At June 30, 2000, the Company had five classes of preferred stock (Series A,
Series B, Series C, Series D and Series E) outstanding. The preferred stock was
convertible at any time, at the option of the holder, into common stock as
follows (unaudited):
<TABLE>
<CAPTION>
Preferred
Shares Conversion Common
Outstanding Rate Shares
-------------------------- ------------------- ----------------------
<S> <C> <C> <C>
Series A 5,025,000 0.67 3,350,000
Series B 10,635 128.21 1,363,461
Series C 9,953,935 0.67 6,635,956
Series D 33,333,333 0.67 22,222,222
Series E 686,813 0.67 457,875
</TABLE>
Series B, C, D and E shares were mandatorily redeemable. All preferred stock
had voting rights on an as converted basis and liquidation preferences equal to
the stated amount of the preferred shares issued.
Each share of preferred stock converted to common stock at the time of an
initial public offering, which occurred on July 24, 2000.
Series B, Series C and Series D preferred stock were issued in 1997, 1998
and 1999 for $100, $1.04 and $3.00 per share, respectively. All issuances were
for cash, except for 487,355 shares of Series C Preferred stock issued upon
conversion of $506,861 of convertible debt and related accrued interest. Based
on the beneficial conversion terms of the Series D preferred stock, assuming an
initial public offering price of $13.50 per share, the Company
10.
<PAGE>
EVOKE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded a deemed dividend related to the beneficial conversion feature and
increased net loss attributable to common stockholders by approximately $100
million in 1999, in accordance with Emerging Issues Task Force Bulletin 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios (EITF 98-5).
On March 29, 2000, the Company issued 686,813 shares of Series E preferred
stock at $7.28 per share and a warrant to purchase 858,416 shares of Series E
preferred stock for an aggregate purchase price of $5.0 million. The warrant is
exercisable upon issuance at the lesser of $10 per share or the initial public
offering price of the Company's common stock and expires in March 2003. The
fair value of the warrant is estimated to be $4.1 million, as determined using
the Black-Scholes option pricing model with the following assumptions: no
expected dividends, 75% volatility, risk-free interest rate of 6.5% and a term
of 3 years. The fair value of the warrant was separately recorded as warrants
for the purchase of mandatorily redeemable preferred stock and as a reduction in
the Series E preferred stock. In addition, $350,000 was recorded as prepaid
advertising costs related to future services to be provided to the Company by
the preferred stockholder. The preferred stock will be accreted to its issuance
price over the period from issuance to redemption in March 2003. Based on the
beneficial conversion terms of the preferred stock, assuming an initial public
offering price of $13.50 per share, the Company has recorded a deemed dividend
related to the beneficial conversion feature and increased net loss attributable
to common stockholders for the three months ended March 31, 2000 by $1,181,318
at the date of issuance in accordance with EITF 98-5.
(b) Stock Purchase Warrants
In January 1999, in the connection with obtaining a $3.0 million loan, the
Company issued warrants to purchase 86,538 shares of Series C Preferred stock.
The warrants are exercisable at $1.04 per share and expire on July 24, 2005.
Upon completion of the Company's initial public offering on July 24, 2000, the
warrants were converted into warrants to purchase 57,692 shares of common stock
at $1.56 per share. The fair value of the warrants was $75,000, as determined
using the Black-Scholes option pricing model with the following assumptions: no
expected dividends, 75% volatility, risk-free interest rate of 6% and an
expected life of 10 years. The fair value of the warrants will be included in
interest expense over the term of the agreement.
In September 1999, in connection with obtaining a $1.5 million master loan
and security agreement, the Company issued warrants to purchase 15,026 shares of
Series D Preferred stock. The warrants are exercisable at $3.00 per share and
will expire on September 29, 2004. Upon completion of the Company's initial
public offering on July 24, 2000, the warrants were converted into warrants to
purchase 10,017 shares of common stock at $4.50 per share. The fair value of the
warrants was $105,000, as determined using the Black-Scholes option pricing
model with the following assumptions: no expected dividends, 75% volatility,
risk-free interest rate of 6% and an expected life of 5 years. The fair value of
the warrants will be included in interest expense over the term of the
agreement.
In January 2000, the Company issued a warrant to purchase 3,703 shares of
common stock. The warrants are exercisable at $4.50 per share and were
scheduled to expire January 15, 2001. The warrant is in exchange for certain
marketing costs and were expensed as sales and marketing costs at the grant
date. The warrants were exercisable at the date of grant and are not contingent
on counterparty performance. The fair value of the warrant was $21,250 as
determined using the Black-Scholes option pricing model with the following
assumptions: no expected dividends, 75% volatility, risk-free interest rate of
6.5% and a term of one year. This warrant was exercised on April 10, 2000.
In June 2000, the Company issued a warrant to purchase 10,000 shares of
common stock. The warrants are exercisable at $8.00 per share and expire on June
30,2005. The warrant is in exchange for certain marketing costs and were
expensed as sales and marketing costs at the grant date. The warrants became
exercisable on July 24, 2000. The fair value of the warrant was $89,000 as
determined using the Black-Scholes option pricing model with the following
assumptions: no expected dividends, 75% volatility, risk-free interest rate of
6.5% and a term of five years.
(3) JOINT VENTURES AND ACQUISITIONS
11.
<PAGE>
EVOKE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 9, 2000, the Company entered into an agreement with @viso Limited, a
European-based venture capital firm, to form Evoke Communications, B.V., a
Netherlands corporation (Evoke Europe). Pursuant to this agreement, the Company
will make net cash payments of approximately $5.5 million to Evoke Europe,
approximately $5.3 million of which are to be repaid under the terms of a
promissory note, grant a technology license to Evoke Europe and be issued common
stock representing a 51% ownership of Evoke Europe. This net payment is expected
to be made in the quarter ending September 30, 2000.
On June 16, 2000, the Company acquired Contigo Software, Inc. (Contigo) for
cash of $6.1 million and 4,425,176 shares of common stock in exchange for all
the outstanding shares of Contigo capital stock. The Company also issued
1,574,831 common stock options in exchange for outstanding Contigo stock
options. The purchase price of the acquisition was $83.9 million based on the
fair value of the consideration paid plus direct acquisition costs. The
acquisition has been accounted for using the purchase method. Accordingly, the
results of operations of Contigo Software subsequent to June 16, 2000 have been
included in Evoke's statement of operations for the three and six months ended
June 30, 2000. The purchase price allocation is as follows:
(IN MILLIONS)
Tangible net assets..................................... $ 2.8
Assumed unearned stock option compensation.............. 0.6
Goodwill and other intangible assets.................... 80.5
-----
Total purchase price allocation ........................ $83.9
=====
Goodwill and other intangibles are being amortized on a straight-line basis
over an estimated useful life of three years.
The summary table below, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations with Contigo's results of
operations as if the acquisition took place on January 1, 1999 (in thousands,
except per share data).
Six months ended June 30
-------------------------
1999 2000
------ -------
Revenue........................................ $ 2,023 $ 6,734
Net loss....................................... (4,554) (43,315)
Basic and diluted net loss per share........... (8.31) (22.35)
The pro forma results for 2000 combine the Company's results for the six
months ended June 30, 2000 with the results of Contigo for the period from
January 1, 2000 through the date of acquisition with the exception of a $5.0
million payment made by Contigo to one of its officers, which is excluded from
the pro forma net loss reflected above. This payment was made by Contigo prior
to the acquisition and was related to the consummation of the acquisition. The
pro forma results are not necessarily indicative of the results of operations
that would have occurred if the acquisition had been consummated on January 1,
1999. In addition, they are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from the combined
operations.
(4) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases office facilities under various operating leases that
expire through 2009. Two of the office facilities are leased from entities who
are controlled by either directors or former directors of the Company. A large
portion of the remaining facilities are satellite sales offices. Total future
minimum lease payments, under all operating leases, approximate $15.9 million.
12.
<PAGE>
(b) Purchase Commitments
As of June 30, 2000, purchase commitments, including software licenses
and maintenance agreements and sales and marketing expenses, including
advertising, totaled $28.6 million to be expended over the next two years.
(c) Litigation
From time to time, the Company has been subject to litigation and claims in
the ordinary course of business. In March 2000, a claim was filed against the
Company alleging trademark and service mark infringement. This litigation is
still at an early stage and it is therefore not possible to predict the outcome
of the litigation or any related motion with any degree of certainty.
(5) SUBSEQUENT EVENTS
On July 13, 2000, the Company completed a two-for-three reverse split of all
outstanding shares of common stock. All shares of common stock and per share
information in the accompanying financial statements has been adjusted to
reflect the reverse split.
On July 28, 2000, the Company closed its initial public offering of
7,000,000 shares of common stock at $8.00 per share, for net proceeds, after
expenses, of $50.9 million. At closing, all of the Company's issued and
outstanding shares of convertible preferred stock were converted into shares of
common stock.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin 101, "Revenue Recognition" (SAB 101), to
provide guidance on the recognition, presentation, and disclosure of revenues in
financial statements. On March 24, 2000 Staff Accounting Bulletin No. 101A -
Amendment (SAB101A) was released to effectively delay the implementation of
SAB101. On June 26, 2000, Staff Accounting Bulletin No. 101B- Second Amendment
(SAB101B) was issued and amends the transition provisions of SAB101 and
effectively supersedes the original extension provided for in SAB101A. SAB101B
further delays the required implementation date for SAB101 until the quarter
ending December 31, 2000. We believe that our revenue recognition practices are
currently in conformity with the guidelines in SAB101, as revised, and therefore
these pronouncements will have no impact on our financial statements.
In March 2000, the Financial Accounting Standards Board (FASB), released
FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25," which provides
clarification of Opinion 25 for certain issues such as the determination of who
is an employee, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. We believe the
adoption of Interpretation No. 44 will have no impact on our financial
statements.
In March 2000, the Emerging Issues Task Force of the FASB (EITF), issued
EITF 00-2, "Accounting for Website Development Costs." This issue addresses how
an entity should account for costs incurred to develop a website. We do not
believe this pronouncement will have a material impact on our financial
statements.
In March 2000, the EITF issued EITF 00-3, "Application of AICPA Statement of
Position 97-2 to Arrangements that Include the Right to Use Software Stored on
Another Entity's Hardware." This issue addresses situations where
13.
<PAGE>
EVOKE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
entities license software applications to a third party and also host those
applications. We do not expect this pronouncement to have a material impact on
our financial statements.
14.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report on Form 10-Q may contain forward-looking statements, including
statements regarding our strategy, financial performance, and revenue sources
that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the subsection entitled "Additional Risk Factors that May
Affect Our Operating Results and The Market Price of Our Common Stock." Readers
are urged to carefully review and consider the various disclosures made in this
report and in our other reports filed with the SEC that attempt to advise
interested parties of certain risks and factors that may affect our business.
The following discussion should be read in conjunction with our financial
statements and notes thereto.
Overview
We offer a suite of Internet communication services that currently consists
of Evoke Webconferencing and Collaboration, Live and On-Demand Evoke Webcasting,
Evoke Talking Email and Evoke Web Talk. We also recently launched our Evoke
Mobile Webconferencing service for commercial use. We believe that we offer the
broadest range of Internet communication services and that we are the only
provider that offers these services in an integrated manner. We market our
services to large and medium-sized corporations and high growth Internet-centric
businesses through our direct sales force, and to small businesses, home
offices, and personal users through our web site and our indirect sales
channels, including co-branding with leading Internet sites.
Since our inception in April 1997, our primary activities have consisted of
the following:
. assembling an experienced management team;
. creating and expanding our telephony and Internet infrastructure;
. acquiring and integrating various communication technologies;
. developing our various services, including Evoke Webconferencing, Evoke
Webcasting, Evoke Talking Email, Evoke Web Talk and Evoke Mobile
Webconferencing;
. establishing strategic partnerships with leading Internet companies; and
. expanding our direct sales force.
We have incurred losses since commencing operations and as of June 30, 2000,
we had an accumulated deficit of $56.1 million. We have not achieved
profitability on a quarterly or annual basis. We intend to invest significantly
in developing our proprietary systems and services, expanding our
infrastructure, building our direct sales force and account development team,
and developing our brand. As a result we expect to continue to incur losses at
least through 2002. The Internet communication services market is new and
evolving and, therefore, we are unable to quantify our competitive position
within the market. We will need to generate significantly higher revenues to
support expected increases in expenses and to achieve and maintain
profitability.
On June 16, 2000, we acquired Contigo Software, Inc. (Contigo) in exchange
for 4,425,176 shares of our common stock and $6.1 million in cash. We also
issued options to purchase 1,574,831 shares of common stock in exchange for
outstanding options of Contigo that we assumed. We have included the results of
operations of Contigo subsequent to June 16, 2000 in our statements of
operations for the three and six months ended June 30, 2000. This acquisition
was accounted for using the purchase method of accounting and we recorded $80.5
million of goodwill in the quarter ending June 30, 2000, which we will amortize
over a period of three years. To the extent we do not generate sufficient cash
flow to recover the amount of the investment recorded, the investment may be
considered impaired and could be subject to earlier write-off.
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In connection with the Contigo acquisition, we expect amortization expense
for the next four fiscal years as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Amortization Expense
----------------------- --------------------
<S> <C>
2000.................................................... $14,535
2001.................................................... 26,833
2002.................................................... 26,833
2003.................................................... 12,299
</TABLE>
We derive revenue from the sale of our Evoke Webconferencing, Evoke Web
Collaboration and Evoke Webcasting services. We currently use Evoke Talking
Email and Evoke Web Talk to promote brand awareness. At this time, we do not
generate significant revenue from Evoke Talking Email, Evoke Web Talk or Evoke
Mobile Webconferencing.
. Evoke Webconferencing Revenue. Revenue for Evoke Webconferencing is based
upon the actual time that each participant is logged onto the conference.
Similarly, a customer is charged a per-minute, per-user fee for each
participant listening and viewing a live or recorded web cast. In
addition, we charge customers a one-time fee to upload visuals for a web
conference or a recorded web cast. We recognize revenue from our Evoke
Webconferencing services as soon as a call or web cast is completed.
. Evoke Web Collaboration Revenue. Revenue for Evoke Web Collaboration is
derived from license, hosting and event fees that we charge customers.
Revenue from software license agreements are recognized upon shipment of
the software when all the following criteria have been met: persuasive
evidence of an arrangement exists; delivery has occurred; the fee is
fixed or determinable; collectibility is probable; and evidence is
available of the fair value of all undelivered elements. Hosting fees
represent revenue from post-contract customer support services and from
hosting arrangements where our software is installed on a Company server
and are recognized ratably over the hosting period. Event fees are
recognized as the events take place.
. Evoke Webcasting Revenue. Prices and specific service terms are usually
negotiated in advance of service delivery. We recognize revenue from live
event streaming when the content is broadcast over the Internet. We
recognize revenue from encoding recorded content when the content becomes
available for viewing over the Internet. We recognize revenue from pre-
recorded content hosting ratably over the hosting period.
Our cost of revenue consists primarily of telecommunication expenses,
depreciation of network and data center equipment, Internet access fees and fees
paid to network providers for bandwidth, compensation and benefits for
operations personnel and allocated overhead. Our telecommunication expenses are
variable and directly correlate to the use of our services. Our depreciation,
Internet access and bandwidth expenses and compensation expenses generally
increase as we increase our capacity and build our infrastructure. We expect to
see significant increases in depreciation and Internet access and bandwidth
expense as we continue to build our infrastructure in anticipation of increased
demand for our services.
We incur sales and marketing expenses that consist primarily of the salaries
and benefits of our sales and marketing personnel, commissions, consulting fees,
tradeshow expenses, advertising and promotion expenses and allocated overhead.
We expect that sales and marketing expenses will increase in the future as we
hire additional personnel, initiate additional marketing programs and expand
current programs, including strategic partnerships, establish sales offices in
new locations and incur additional costs related to the growth of our business.
We incur research and development expenses that consist primarily of
salaries and benefits for research and development personnel, consulting fees
and allocated overhead. We expense research and development costs as they are
incurred, except for certain capitalized costs associated with internally
developed software. We expect to continue to make substantial investments in
research and development and anticipate that these expenses will continue to
increase.
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We incur general and administrative expenses that consist primarily of
expenses for finance, human resources, administrative and general management
activities, including legal, accounting and other professional fees and other
general corporate expenses. We expect increases in general and administrative
expenses as we expand executive management, finance, human resources and other
administrative functions required to support operations and incur additional
costs associated with being a publicly-held company.
Amortization of intangible assets consists of amortization of intangible
assets acquired in business combinations, including goodwill.
Since our inception, we have used stock based compensation for employees and
members of our board of directors to attract and retain strong business and
technical personnel. During the three and six months ending June 30, 2000 we
recorded $2.5 and $13.2 million of deferred stock option compensation,
respectively, and expensed $1.4 and $5.6 million, respectively, related to
stock based compensation. These amounts are based on the deemed excess of the
fair value of our common stock on the date of grant or sale over the option
exercise price or stock purchase price. Compensation expense related to stock
options is amortized over the vesting period of the options, which range from
one to four years. We expect to incur stock based compensation expense of
approximately $8.6 million in 2000, $6.0 million in 2001, $6.0 million in 2002
and $2.3 million in 2003 for common stock issued or stock options awarded
through June 30, 2000 under our stock compensation plans.
Results of Operations
Revenue. Total revenue increased by $2.5 million from $0.4 million for the
three months ended June 30, 1999 to $2.9 million for the three months ended June
30, 2000. Total revenue increased by $4.2 million from $0.6 million for the
six months ended June 30, 1999 to $4.8 million for the six months ended June 30,
2000. The increase was primarily due to the launch of our Evoke Webconferencing
service in April 1999 and the increased use of our Evoke Webcasting services.
Cost of Revenue. Cost of revenue increased $2.8 million from $0.7 million
for the three months ended June 30, 1999 to $3.5 million for the three months
ended June 30, 2000. Cost of revenue increased $4.9 million from $1.2 million
for the six months ended June 30, 1999 to $6.1 million for the six months ended
June 30, 2000. Depreciation expense increased $1.3 million in the second quarter
of 2000 and $2.4 million in the six months ended June 30, 2000 over the
respective periods in 1999 as we built out our data operation centers in both
Boulder and Louisville, Colorado. Telecommunication costs and Internet access
costs increased $0.9 million in the second quarter of 2000 and $1.8 million in
the six months ended June 30, 2000 over the respective periods in 1999 as we
incurred phone charges consistent with the launch of Evoke Webconferencing and
also increased our bandwidth to accommodate additional growth in our business.
Salaries and payroll related expenses increased $0.3 million in the second
quarter of 2000 and $0.3 million in the six months ended June 30, 2000 over the
respective periods in 1999 as we hired technical support, consulting and
education personnel to provide services to our customers. Maintenance expense
increased $0.3 million in the second quarter of 2000 and $0.4 million in the six
months ended June 30, 2000 over the respective periods in 1999 due primarily to
maintenance agreements that cover equipment located in our data operation
facility.
Sales and Marketing. Sales and marketing expense increased $14.5 million
from $0.9 million for the three months ended June 30, 1999 to $15.4 million for
the three months ended June 30, 2000. Sales and marketing expense increased
$24.3 million from $2.0 million for the six months ended June 30, 1999 to $26.3
million for the six months ended June 30, 2000. Advertising and promotion
increased $7.4 million in the second quarter of 2000 and $14.6 million in the
six months ended June 30, 2000 over the respective periods in 1999 as we focused
on creating brand awareness, which included advertising and promotional programs
with strategic partners. $4.3 million of the increase in the second quarter of
2000 and $5.5 million of the increase in the six months ended June 30, 2000 is
attributable to personnel and payroll related expenses of additional sales,
marketing and business development personnel that we hired to expand our sales
and distribution network.
Research and Development. Research and development expense increased $1.6
million from $0.2 million for the three months ended June 30, 1999 to $1.8
million for the three months ended June 30, 2000. Research and development
expense increased $2.6 million from $0.3 million for the six months ended June
30, 1999 to $2.9
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million for the six months ended June 30, 2000. The increase was primarily
related to personnel and payroll related expenses resulting from an increase in
headcount and to a lessor extent consulting fees.
General and Administrative. General and administrative expense increased
$1.7 million from $0.3 million for the three months ended June 30, 1999 to $2.0
million for the three months ended June 30, 2000. General and administrative
expense increased $2.6 million from $0.6 million for the six months ended June
30, 1999 to $3.2 million for the six months ended June 30, 2000. The increase is
primarily due to an increase in professional fees and an increase in personnel
and payroll related expenses. General and administrative expenses are expected
to continue to increase as we support a larger employee base and assume the
responsibilities and the costs associated with being a public company.
Goodwill amortization. Goodwill amortization was $1.1 million in the three
and six months ended June 30, 2000 as result of our acquisition of Contigo in
June 2000.
Stock Based Compensation Expense. Stock based compensation expense increased
$1.3 million from $0.1 million for the three months ended June 30, 1999 to $1.4
million for the three months ended June 30, 2000. Stock based compensation
expense increased $5.1 million from $0.5 million for the six months ended June
30, 1999 to $5.6 million for the six months ended June 30, 2000. In the three
and six months ended June 30, 2000, options were granted at less than the
estimated initial public offering price resulting in deferred compensation of
$3.1 million and $10.7 million, respectively, which is being recognized over
vesting periods ranging from three to four years. In addition, in the three and
six months ended June 30, 2000, stock purchase rights were granted for the
purchase of 46,296 and 398,296 shares of common stock, respectively, with
exercise prices below the estimated initial public offering price, resulting in
compensation expense of $0.1 million in the second quarter of 2000 and $3.2
million in the six months ended June 30, 2000.
Other Income (Expense). Other income (expense), consists primarily of net
interest income. Interest income increased $0.7 million from $0.1 million for
the three months ended June 30, 1999 to $0.8 million for the three months ended
June 30, 2000. Interest income increased $1.7 million from $0.1 million for the
six months ended June 30, 1999 to $1.8 million for the six months ended June 30,
2000. The increase was related to higher cash balances for the three months and
six months ended June 30, 2000 as compared to June 30, 1999 due to the private
equity financing we completed in the fourth quarter of 1999 and first quarter of
2000. Interest expense increased $0.04 million for the three months ended June
30, 2000 and $0.1 million for the six months ended June 30, 2000 as compared to
the respective periods in 1999 as a result of an increase in our debt.
Liquidity and Capital Resources
Prior to our initial public offering, we financed our operations primarily
from sales of our preferred stock and, to a lesser extent, proceeds from loans.
Upon completion of our initial public offering of common stock, a total of
7,000,000 shares were sold to the public, which resulted in all redeemable
preferred stock converting to common stock and net proceeds to the Company,
after expenses of $50.9 million.
As of June 30, 2000, cash and cash equivalents were $38.3 million, a
decrease of $50.9 million compared with cash and cash equivalents held as of
December 31, 1999. Cash and cash equivalents at June 30, 2000 do not reflect the
receipt of the proceeds from our initial public offering which took place in
July 2000.
Net cash used in operations was $33.6 million for the six months ended June
30, 2000, and was related to operating losses and cash expended for prepaid
expenses and other assets and an increase in accounts receivable, and was
partially offset by an increase in accounts payable.
Net cash used by investing activities was $22.5 million for the six months
ended June 30, 2000. Net cash used by investing activities related primarily to
capital expenditures for equipment and software used in our data operations
center from which we operate our Internet communication platform and net
purchases and sales of investments. In June 2000, we made a cash payment of
$2.6 million, net of cash acquired, for the acquisition of Contigo.
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Net cash provided by financing activities was $5.2 million for the six
months ended June 30, 2000 and was primarily due to the sale of our Series E
preferred stock and the sale of common stock, net of payments made under our
debt financing arrangements.
In 1999, we entered into agreements to borrow approximately $4.5 million. As
of June 30, 2000, we had approximately $3.0 million in total debt obligations
outstanding, of which approximately $1.4 million was current.
We also receive funds from time to time from the exercise of options or
similar rights to purchase shares of our common stock. We have no other material
external sources of liquidity.
As of June 30, 2000, our purchase commitments, including software licenses
and maintenance agreements and sales and marketing expenses, including
advertising, totaled $28.6 million and are expected to be expended over the next
two years.
We lease office facilities under various operating leases that expire
through 2009. A large portion of these facilities are satellite sales offices
that typically average 3,000 square feet. Total future minimum lease payments,
under all operating leases, approximate $15.9 million.
We expect that existing cash resources and the net proceeds from our initial
public offering will be sufficient to fund our anticipated working capital and
capital expenditure needs for the foreseeable future. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional public or private equity securities or obtain additional debt
financing. There can be no assurance that additional financing will be available
at all or, if available, will be obtainable on terms favorable to us. If we are
unable to obtain additional financing, we may be required to reduce the scope of
our planned technology and product development and sales and marketing efforts,
which could harm our business, financial condition and operating results.
Additional financing may also be dilutive to our existing shareholders.
Additional Risk Factors That May Affect Our Operating Results and The Market
Price of Our Common Stock
You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones we face. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.
We have a history of losses, we expect significant continuing losses and we may
never attain profitability.
If we do not achieve or sustain profitability in the future, we may be
unable to continue our operations. Our operating costs have exceeded our
revenues in each quarter since our inception in April 1997. We have incurred
cumulative net losses of approximately $56.1 million from our inception through
June 30, 2000, and we anticipate significant net losses through at least 2002.
Our revenues may not continue to grow and we may not achieve or maintain
profitability in the future. In addition, we expect that our sales and
marketing, research and development, general and administrative and goodwill
amortization expenses will increase significantly in the future as compared to
prior periods. Accordingly, we must significantly increase our revenue to
achieve and maintain profitability and to continue our operations.
We have a limited operating history, which makes it difficult to evaluate our
business.
We have a limited operating history and you should not rely on our recent
results as an indication of our future performance. We were incorporated in
April 1997 and first recorded revenue from Evoke Webcasting in January 1998. We
only began commercially offering our flagship service, Evoke Webconferencing, in
April 1999. Due to our limited operating history and the rapidly changing
nature of the Internet communication services market, it is difficult or
impossible for us to predict future results, and you should not expect our
future revenue growth to equal or exceed our recent growth rates. Our business
strategy may be unsuccessful and we may be unable to address the risks we face
in a cost-effective manner, if at all.
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We may fail to meet market expectations because of fluctuations in our quarterly
operating results, which would cause our stock price to decline.
As a result of our limited operating history, the rapidly changing nature of
the Internet communication services market and the other risks described in this
section, our quarterly operating results have varied significantly from period
to period in the past and are likely to continue to vary significantly in future
periods. For example, our quarterly net loss ranged between $1.8 million and
$6.4 million in the four quarters of the year ended December 31, 1999, and our
net loss was $21.7 million for the three months ended June 30, 2000. Many of the
factors that may cause fluctuations in our quarterly operating results are
beyond our control. Accordingly, our quarterly operating results are difficult
to predict and may not meet the expectations of securities analysts or
investors. If this occurs, the price of our common stock would decline.
Additionally, we expect our results will fluctuate based on seasonal sales
patterns. Our operating results for the year ended 1999 show decreases in the
use of Evoke Webconferencing around the Thanksgiving, Christmas and New Year
holidays. We expect that our revenues during these holiday seasons and during
the summer vacation period will decrease as compared to other periods of the
year because of decreased use of our services by business customers.
We depend on single source suppliers for key components of our infrastructure,
the loss of which could cause significant delays and costs in providing services
to our existing and prospective customers.
We purchase key components of our telephony hardware infrastructure from a
single supplier. Any extended reduction, interruption or discontinuation in the
supply of these components would cause significant delays and costs in providing
services to our existing and prospective customers. These components form the
basis of our audio conferencing infrastructure, upon which the majority of our
services rely. In order to continue to expand our infrastructure capacity, we
must purchase additional components from this supplier. Because we do not have
any guaranteed supply arrangements with this supplier, it may unilaterally
increase its prices for these components, and as a result, we could face higher
than expected operating costs and impaired operating results. We could also
experience difficulties in obtaining alternative sources on commercially
reasonable terms, if at all, or in integrating alternative components into our
technology platform. We also rely on a single supplier for the majority of our
storage hardware, which store critical operations data and maintain the
reliability of our services. If we are required to find alternative sources for
such equipment, we may experience difficulty in integrating them into our
infrastructure.
If any of the third party technologies and services that we use become
unavailable to us, our services would be subject to significant delays and
increased costs.
The market for Internet communication services is rapidly evolving and we
need to license technologies to remain competitive. Our inability to obtain any
of these licenses could delay the development of our services until equivalent
technology can be identified, licensed and integrated. We are highly dependent
on the streaming software that we license from two suppliers in order to deliver
our streaming services. If these vendors change their streaming software, our
software may become inoperable, the functionality of our services would decline
and we would suffer significant delays and costs in attempting to reengineer our
services. We use technology that we license from HearMe, a provider of voice
communication services over the Internet, to provide our voice chat services. We
also rely on third party services, such as Internet access, transport and long
distance providers. These companies may not continue to provide services to us
without disruptions, at the current cost, if at all. The costs associated with a
transition to a new service provider would be substantial. We may be required to
reengineer our systems and infrastructure to accommodate a new service provider,
which would be both expensive and time-consuming. In addition, in the past, we
have experienced disruptions and delays in our services due to service
disruptions from these providers. Any interruption in the delivery of our
services would likely cause a loss of revenue and a loss of customers.
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A small number of our customers account for a high percentage of our revenue and
the loss of a major customer could harm our operating results and cause our
stock price to decline.
The loss of any of our major customers could result in lower than expected
revenue and cause our stock price to decline. Additionally, most customers do
not have any obligation to purchase additional services from us or to continue
to use our current services. As a result, we may face increased downward
pricing pressure that could cause a decrease in our gross margins. For the six
months ended June 30, 2000 sales to Microsoft Corporation represented
approximately 9% of our revenue by subsidizing third-party use of our services
in conjunction with the adoption of its technologies. We expect that sales to
Microsoft Corporation as a percentage of revenue will continue to decrease but
that during calendar year 2000 sales to Microsoft Corporation will continue to
represent a significant portion of our revenue. A small number of customers will
continue to account for a high percentage of our revenue. Our customers depend
on the reliability of our services and we may lose a customer if we fail to
provide reliable services for even a single communication event.
Our Internet communication services will not generate significant revenue if
businesses do not switch from traditional teleconferencing and communication
services to Internet communication services.
If businesses do not switch from traditional teleconferencing and
communication services, our Internet communication services will not generate
significant revenue. Businesses that have already invested substantial
resources in traditional or other methods of communication may be reluctant to
adopt new Internet communication services. If sufficient demand for our
services does not develop, we will have difficulty selling our services. As a
result, the price of our common stock would decline. Growth in profitability
from Evoke Webconferencing will depend in part on a significant increase in the
number of customers using Evoke Webconferencing's web-based features in addition
to our traditional conferencing features. In the second quarter of 2000, only a
small percentage of Evoke Webconferencing customers used the web in this way.
The growth of our business substantially depends on our ability to successfully
develop and introduce new services in a timely manner.
Our growth depends on our ability to develop leading-edge Internet
communication services. For example, we recently released Evoke Mobile
Webconferencing, a wireless web conferencing service, for commercial use, and
began integrating the advanced web collaboration tools we acquired from Contigo
into our platform. We also have several other services in development. We may
not successfully identify, develop and market these and other new services in a
timely and cost-effective manner. If the services we develop, such as Evoke
Mobile Webconferencing, fail to achieve widespread market acceptance or fail to
generate significant revenues to offset development costs, our net losses will
increase. In addition, our ability to introduce new services may depend on us
acquiring technologies or forming relationships with third parties and we may be
unable to identify suitable candidates or come to terms acceptable to us for any
such acquisition or relationship. We may not successfully alter the design of
our systems to quickly integrate new technologies.
We have experienced development delays and cost overruns in our development
efforts in the past and we may encounter these problems in the future. Delays
and cost overruns could affect our ability to respond to technological changes,
evolving industry standards, competitive developments or customer requirements.
Competition in the Internet communication services market is intense and we may
be unable to compete successfully.
The market for Internet communication services is relatively new, rapidly
evolving and intensely competitive. Competition in our market will continue to
intensify and may force us to reduce our prices, or cause us to experience
reduced sales and margins, loss of market share and reduced acceptance of our
services.
Many of our current and potential competitors have larger customer bases,
longer operating histories, greater name recognition, more employees and
significantly greater financial, technical, marketing, public relations and
distribution resources than we do. In addition, telecommunication providers,
for example, enjoy lower per-minute
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long distance costs as a result of their ownership of the underlying
telecommunication network. We expect that many more companies will enter this
market and invest significant resources to develop Internet communication
services. These competitors may offer or develop products or services that
perform better than ours.
In addition, the Internet industry has recently experienced substantial
consolidation and a proliferation of strategic transactions. We expect this
consolidation and strategic partnering to continue. Acquisitions or strategic
partnerships involving our current and potential competitors could harm us in a
number of ways. For example:
. competitors could acquire or partner with companies with which we have
strategic partnerships and discontinue our partnership, resulting in the
loss of distribution opportunities for our services or the loss of
certain enhancements or value-added features to our services;
. a competitor could be acquired by or enter into a strategic relationship
with a party that has greater resources and experience than we do,
thereby increasing the ability of the competitor to compete with our
services; or
. a competitor could acquire or partner with one of our key suppliers.
The termination of strategic partnerships, including with Excite@Home, Blue
Mountain Arts or Lycos, or the failure to form additional strategic partnerships
could limit our access to customers and harm our strategy to increase brand
awareness, thereby causing our revenues to be lower than expected.
Our strategic partnerships are critical to our success because they help us
strengthen our brand awareness and reach a broader customer base. The loss of
current strategic partnerships or our failure to find other strategic partners
in a timely manner could result in lower than expected revenues. For example,
Excite@Home and Lycos may terminate our strategic partnerships under various
circumstances, some of which may be beyond our control. Our agreements with
Excite@Home and Lycos require us to satisfy specific performance and
functionality requirements. Early termination of our partnerships with
Excite@Home and Lycos may harm our reputation, decrease the size of our user
base and cause our stock price to decline. Moreover, Excite@Home is controlled
by AT&T. AT&T's teleconferencing services currently compete with Evoke
Webconferencing, and AT&T may seek to expand its product offerings into Internet
communication in the future. Additionally, the loss of our strategic
relationship with Blue Mountain Arts would significantly harm our strategy to
increase brand awareness using Evoke Talking Email. Our strategic partnerships
with Blue Mountain Arts and Excite@Home currently account for a substantial
majority of the Evoke Talking Email messages processed by our systems. We may
become more reliant on strategic partners in the future, which would increase
the risk to our business of losing these partnerships. Additionally, we may not
be successful in forming strategic partnerships and the efforts of our strategic
partners may not be successful.
Our failure to manage our current and planned rapid growth could cause
substantial increases in our operating costs and harm our profitability and, if
we are not able to obtain adequate funds, we may not be able to compete
effectively.
We have rapidly expanded, and plan to continue to rapidly expand, our
operations and infrastructure. This expansion has placed, and is expected to
place, a significant strain on our managerial, operational and financial
resources, and we may not effectively manage this growth. For example, we
increased the number of our employees from 94 on December 31, 1999 to 460 on
June 30, 2000. Expanding our business requires us to invest significant amounts
of capital for our operations and resources, which substantially increases our
operating costs. As a result, our failure to manage our growth effectively
could cause substantial increases in our operating costs without corresponding
increases in our revenue. Also, our management may have to divert a
disproportionate amount of its attention away from our day-to-day activities and
devote a substantial amount of time expanding into new areas. In order to
expand our business we may need to raise additional funds. Any future financing
we require may not be available on a timely basis, in sufficient amounts or on
terms acceptable to us. If we cannot obtain adequate funds, we may not be able
to compete effectively.
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Additionally, our rapid growth requires us to order equipment, some of which
has substantial development and manufacturing lead times. If we do not order
equipment in a timely and efficient manner in order to support our growth, we
may not have enough capacity to support the demand for our services and the
delivery of our services may be interrupted. As a result, our operating results
and reputation would be materially harmed, which could negatively affect our
stock price.
Our planned international expansion, including our joint venture with @viso
Limited, may not be successful, which could harm our strategy to expand
internationally and cause our operating losses to increase.
We intend to expand into international markets and to spend significant
financial and managerial resources to do so. We have no experience in
international operations and may not be able to compete effectively in
international markets. We face certain risks inherent in conducting business
internationally, such as:
. varying technology standards from country to country;
. uncertain protection of intellectual property rights;
. inconsistent regulations and unexpected changes in regulatory
requirements;
. difficulties and costs of staffing and managing international operations;
. fluctuations in currency exchange rates;
. linguistic and cultural differences;
. difficulties in collecting accounts receivable and longer collection
periods;
. imposition of currency exchange controls; and
. potentially adverse tax consequences.
In particular, we recently formed a joint venture with @viso Limited, a
European-based venture capital firm, which will expand our operations to
continental Europe and the United Kingdom. This joint venture may not be
successful. If our revenues from this and other international operations do not
exceed the expense of establishing and maintaining these operations, our
operating losses will further increase.
In addition, our expansion into international markets may require us to
develop specific technology that will allow our current systems to work with
international telephony systems. We may not develop this technology in a timely
manner, in a way to prevent service disruptions or at all.
We may not achieve any benefits from the Contigo acquisition and we expect our
losses to increase significantly as a result of the acquisition.
We may not be able to successfully integrate Contigo's operations,
technologies, products and services, information systems and personnel into our
business. The acquisition may further strain our existing financial and
managerial controls, and divert management's attention away from our other
business concerns. There may also be unanticipated costs associated with the
acquisition that may harm our operating results and key Contigo personnel may
decide not to work for us. In addition, as a result of the acquisition, we will
have operations in multiple facilities in geographically diverse areas. We are
not experienced in managing facilities and operations in geographically diverse
areas. We may not sustain the financial results that Contigo has achieved in
the past because of integration problems, changes that we are making to
Contigo's operations and the potential loss of customers who may decide not to
continue their relationship with Contigo after the acquisition.
In addition, we expect that our losses will increase significantly because of
additional costs and expenses related to:
. an increase in the number of our employees;
. an increase in sales and marketing activities;
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. additional facilities and infrastructure;
. assimilation of operations and personnel; and
. goodwill amortization.
We may acquire other businesses, form joint ventures and make investments in
other companies that could negatively affect our operations and financial
results and dilute existing stockholders.
The pursuit of additional business relationships through acquisitions, joint
ventures, or other investment prospects is a key aspect of our business
strategy. We may not identify or complete these transactions in a timely
manner, on a cost effective basis or at all, and we may not realize the benefits
of any acquisition, joint venture, or other investment.
We have limited experience in acquisition activities and may have to devote
substantial time and resources in order to complete acquisitions. There may
also be risks of entering markets in which we have no or limited prior
experience. Further, these potential acquisitions entail risks, uncertainties
and potential disruptions to our business similar to those associated with the
Contigo acquisition, which could harm our operating results and cause our stock
price to decline.
In addition, if we were to make any acquisitions, we could:
. issue equity securities that would dilute our stockholders;
. incur debt;
. assume unknown or contingent liabilities; or
. experience negative effects on our reported results of operations from
acquisition-related charges and of amortization of acquired technology,
goodwill and other intangibles.
Our Evoke Webconferencing services may become subject to traditional
telecommunications carrier regulation by federal and state authorities, which
would increase the cost of providing our services and may subject us to
penalties.
We believe our Evoke Webconferencing services are not subject to regulation
by the Federal Communications Commission or any state public service commission
because the services integrate traditional voice teleconferencing and added
value Internet services. The FCC and state public service commissions, however,
may require us to submit to traditional telecommunications carrier regulations
for our Evoke Webconferencing services under the Communications Act of 1934, as
amended, and various state laws or regulations as a provider of
telecommunications services. If the FCC or any state public service commission
seeks to enforce any of these laws or regulations against us, we could be
prohibited from providing the voice aspect of our Evoke Webconferencing services
until we have obtained various federal and state licenses and filed tariffs. We
believe we would be able to obtain those licenses, although in some states,
doing so could significantly delay our ability to provide services. We also
would be required to comply with other aspects of federal and state laws and
regulations. Subjecting our Evoke Webconferencing services to these laws and
regulations would increase our operating costs, could require restructuring of
those services to charge separately for the voice and Internet components, and
would involve on-going reporting and other compliance obligations. We also might
be subject to fines or forfeitures and civil or criminal penalties for non-
compliance.
Our business will suffer if our systems fail or become unavailable.
A reduction in the performance, reliability or availability of our systems
will harm our ability to distribute our services to our users, as well as our
reputation. Some of our customers have experienced interruptions in our
services in the past due to network outages, periodic system upgrades and
internal system failures. Similar interruptions may occur from time to time in
the future. Because our revenue depends largely on the number of users
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and the amount of minutes consumed by users, our business will suffer if we
experience frequent or extended system interruptions.
We maintain our primary data facility and hosting servers at our
headquarters in Louisville, Colorado, and a secondary data facility in Boulder,
Colorado. Our operations depend on our ability to protect these facilities and
our systems against damage or interruption from fire, power loss, water,
telecommunications failure, vandalism, sabotage and similar unexpected events.
In addition, a sudden and significant increase in traffic on our systems or
infrastructure could strain the capacity of the software, hardware and systems
that we use. This could lead to slower response times or system failures. The
occurrence of any of the foregoing risks could cause service interruptions and,
as a result, materially harm our reputation and negatively affect our revenue.
If our security system is breached, our business and reputation could suffer.
We must securely receive and transmit confidential information over public
networks and maintain that information on internal systems. Our failure to
prevent security breaches could damage our reputation, and expose us to risk of
loss or liability. Our internal systems are accessible to a number of our
employees. Although each of these employees is subject to a confidentiality
agreement, we may be unable to prevent the misappropriation of this information.
Our servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions, which could lead to interruptions, delays or loss of
data. We may be required to expend significant capital and other resources to
license encryption technology and additional technologies to protect against
security breaches or to alleviate problems caused by any breach.
Our competitors may be able to create systems with similar functionality to ours
and third-parties may obtain unauthorized use of our intellectual property.
The success of our business is substantially dependent on the proprietary
systems that we have developed. To protect our intellectual property rights, we
currently rely on a combination of trademarks, service marks, trade secrets,
copyrights, confidentiality agreements with our employees and third parties, and
protective contractual provisions. We also acquired a patent as a result of the
Contigo Acquisition that relates to the web collaboration software developed by
Contigo. These measures may not be adequate to safeguard the technology
underlying our Internet communication services and other intellectual property.
Unauthorized third-parties may copy or infringe upon aspects of our technology,
services or other intellectual property. Except for the patent we acquired as a
result of the Contigo acquisition, our proprietary systems are not currently
protected by any patents and we may not be successful in our efforts to secure
patents for our proprietary systems. Regardless of our efforts to protect our
intellectual property, our competitors and others may be able to develop similar
systems and services without infringing on any of our intellectual property
rights. In addition, employees, consultants and others who participate in the
development of our proprietary systems and services may breach their agreements
with us regarding our intellectual property and we may not have any adequate
remedies. Furthermore, the validity, enforceability and scope of protection for
intellectual property such as ours in Internet-related industries is uncertain
and still evolving. We also may not be able to effectively protect our
intellectual property rights in certain countries. In addition, our trade
secrets may become known through other means not currently foreseen by us. If
we resort to legal proceedings to enforce our intellectual property rights, the
proceedings could be burdensome and expensive and the outcome could be
uncertain.
We may be subject to claims alleging intellectual property infringement.
We may be subject to claims alleging that we have infringed upon third party
intellectual property rights. Claims of this nature could require us to spend
significant amounts of time and money to defend ourselves, regardless of their
merit. If any of these claims were to prevail, we could be forced to pay
damages, comply with injunctions, or halt distribution of our services while we
re-engineer them or seek licenses to necessary intellectual property, which
might not be available on commercially reasonable terms or at all. On March 17,
2000, a trademark infringement suit was filed against us in the United States
District Court for the Northern District of California by Evoke Software
Corporation, alleging, among other things, that our new brand infringes the
trademarks and service marks of the company filing this suit and seeks, among
other relief, an injunction barring us from continuing any use the designation
Evoke. On August 22, 2000, Evoke Software Corporation filed a motion for
preliminary injunction, which, if granted, could require us to immediately
discontinue using the designation Evoke and the domain name evoke.com. We expect
that the court will issue a ruling on these motions
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in the Fall of 2000. Loss of the motion for preliminary injunction could
substantially impair our business operations, materially and adversely affect
our results of operations, diminish our goodwill among customers, employees and
investors, and could adversely affect the market price of our common stock. We
could also be subject to claims for indemnification resulting from infringement
claims made against our customers and strategic partners, which could increase
our defense costs and potential damages. Any of these events could harm our
business.
If we do not increase the capacity of our infrastructure in excess of customer
demand, customers may experience service problems and choose not to use our
services.
We must continually increase our capacity in excess of customer demand. Our
plans to rapidly expand our operations and to add customers also requires a
significant increase in the capacity of our infrastructure. If we fail to
increase our capacity, customers may experience service problems, such as busy
signals, improperly routed calls and messages, and slower-than-expected download
times. Service problems such as these would harm our reputation, cause us to
lose customers and decrease our revenue. Conversely, if we overestimate our
capacity needs, we will pay for more capacity than we actually use, resulting in
increased costs without a corresponding increase in revenue, which would harm
our operating results.
We rely on the adoption of multimedia technology by corporations and our ability
to transmit our services through corporate security measures.
In order to receive streamed media adequately, our users generally must have
multimedia personal computers with certain microprocessor requirements, at least
28.8 kbps Internet access, a standard media player and a sound card. If
streaming media technology fails to achieve broad commercial acceptance or
acceptance is delayed, customers may not purchase our Internet communication
services. Installing and configuring the necessary streaming media components
may require technical expertise that some users do not possess. Furthermore,
because of bandwidth constraints on corporate intranets and concerns about
security, some information systems managers may block reception of streamed
media within their corporate environments. In order for users to receive
streaming media over corporate intranets and corporate firewalls, information
systems managers may need to reconfigure these intranets and firewalls.
Widespread adoption of streaming media technology depends on overcoming these
obstacles, improving voice and video quality and educating customers and users
in the use of streaming media technology.
We are subject to risks associated with governmental regulation and legal
uncertainties.
It is likely that a number of laws and regulations may be adopted in the
United States and other countries with respect to the Internet that might affect
us. These laws may relate to areas such as:
. changes in telecommunications regulations;
. copyright and other intellectual property rights;
. encryption;
. personal privacy concerns, including the use of "cookies" and individual
user information;
. e-commerce liability; and
. email, network and information security.
Changes in telecommunications regulations could substantially increase the
costs of communicating on the Internet. This, in turn, could slow the growth in
Internet use and thereby decrease the demand for our services. Several
telecommunications carriers are advocating that the Federal Communications
Commission regulate the Internet in the same manner as other telecommunications
services by imposing access fees on Internet service providers. Recent events
suggest that the FCC may begin regulating the Internet in such a way. In
addition, we
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operate our services throughout the United States and state regulatory
authorities may seek to regulate aspects of our services as telecommunication
activities.
Other countries and political organizations are likely to impose or favor
more and different regulations than those which have been proposed in the United
States, thus furthering the complexity of regulation. The adoption of such laws
or regulations, and uncertainties associated with their validity and
enforcement, may affect the available distribution channels for and costs
associated with our services, and may affect the growth of the Internet. Such
laws or regulations may therefore harm our business.
We may be subject to assessment of sales and other taxes for the sale of our
services, license of technology or provision of services, for which we have not
accounted.
We may have to pay past sales or other taxes that we have not collected from
our customers. We do not currently collect sales or other taxes on the sale of
our services. Our business would be harmed if one or more states or any foreign
country were to require us to collect sales or other taxes from current or past
sales of services, particularly because we would be unable to go back to
customers to collect sales taxes for past sales and may have to pay such taxes
out of our own funds.
Internet-related stock prices are especially volatile and this volatility may
depress our stock price.
The stock market in general, and the stock prices of Internet-related
companies in particular, have experienced extreme price and volume fluctuations.
This volatility is often unrelated or disproportionate to the operating
performance of these companies. Because we are an Internet-related company, we
expect our stock price to be similarly volatile. These broad market and
industry factors may reduce our stock price, regardless of our operating
performance.
You should not rely on forward-looking statements because they are inherently
uncertain.
This document contains certain forward-looking statements that involve risks
and uncertainties. We use words such as "anticipate," "believe," "expect,"
"future," "intend," "plan" and similar expressions to identify forward-looking
statements. These statements are only predictions. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
we cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this document. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us and described on
the preceding pages and elsewhere in this document.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to predict
accurately or over which we have no control. The risk factors listed above, as
well as any cautionary language in this document, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in these risk factors and elsewhere in this document could have
a material adverse effect on our business, operating results, financial
condition and stock price.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2000, we had long-term debt, including current portion, in the
aggregate amount of $3.0 million with interest rates ranging from 7.41% to
13.33% with payments due through 2004. We may incur additional debt in the
future. A change in interest rates would not affect our obligations related to
long-term debt existing as of June 30, 2000, as the interest payments related to
that debt are fixed over the term of the debt. Increases in interest rates
could, however, increase the interest expense associated with future borrowings.
Additionally, the net proceeds from our initial public offering may be invested
in investment vehicles that may decline as a result of changes in equity markets
and interest rates.
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At June 30, 2000, we had $1.4 million in short-term investments. The Company
is exposed to changes in stock prices as a result of its holdings in publicly
traded securities. Changes in stock prices can be expected to vary as a result
of general market conditions, technological changes, specific industry changes
and other factors.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we have been subject to legal proceedings and claims in
the ordinary course of business. On March 17, 2000, Evoke Software Corporation,
a California corporation, filed a claim against us in the United States District
Court for the Northern District of California, alleging trademark and service
mark infringement, among other claims, such as trademark and service mark
dilution, unfair competition. Evoke Software seeks punitive and compensatory
damages, an injunction barring us from continuing to use the brand Evoke and
attorneys fees and costs. We believe that we have meritorious defenses to these
claims and intend to defend against them. On May 10, 2000, we filed our answer
to the complaint, denying all material allegations. On August 22, 2000, Evoke
Software Corporation filed a motion for preliminary injunction, which, if
granted, would, among other things, require us to immediately discontinue using
the brand Evoke and domain name evoke.com. On August 24, 2000, we filed a motion
with the court for leave to file an amended answer to add affirmative defenses
and counterclaims along with the amended answer. On August 24, 2000, we also
filed a motion to enforce a settlement agreement and related promises and to
dismiss the complaint. We expect that the court will issue a ruling on these
motions in the Fall of 2000. Loss of the motion for preliminary injunction could
substantially impair our business operations, materially and adversely affect
our results of operations, diminish our goodwill among customers, employees and
investors, and could adversely affect the market price of our common stock. This
litigation is still at an early stage, and it is therefore not possible to
predict the outcome of the litigation or any related motion with any degree of
certainty. Other than this matter, we are not currently involved in any material
legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
(a) During the month ended April 30, 2000, the Company issued to employees
558,500 options to purchase Common Stock at an average exercise price of $10.80
per share; during the month ended May 31, 2000, the Company issued to employees
149,500 options to purchase Common Stock at an average exercise price of $10.80
per share; during the month ended June 30, 2000, the Company issued to employees
448,248 options to purchase Common Stock at an average exercise price of $10.80
per share. These securities were issued under Section 4(2) of the Securities
Act of 1933 and/or Rule 701 thereunder. All options issued during the quarter
ended June 30, 2000 have been adjusted for the stock split which became
effective on July 13, 2000.
(b) On July 25, 2000, we commenced our initial public offering, which
consisted of 7,000,000 shares of our Common Stock at $8.00 per share pursuant to
a registration statement (No. 333-30708) declared effective by the Securities
and Exchange Commission on July 24, 2000. The offering has been terminated and
all shares have been sold. The managing underwriters for the initial public
offering were Salomon Smith Barney Inc., FleetBoston Robertson Stephens Inc.,
Thomas Weisel Partners LLC and CIBC World Markets Corp. Aggregate gross
proceeds from the offering were $56,000,000.
We incurred the following expenses in connection with the offering:
underwriters' discounts and commissions of $3.9 million and approximately $1.2
million in other expenses, for total expenses of approximately $5.1 million.
After deducting expenses of the offering, we received net offering proceeds of
approximately $50.9 million. The net proceeds were invested in short-term
financial instruments.
No payments constituted direct or indirect payments to any of our directors,
officers or general partners or their associates, to persons owning 10% or more
of any class of our equity securities or to any of our affiliates.
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Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
During the fiscal quarter ended June 30, 2000, we solicited written consent
(effective April 27, 2000) from our stockholders regarding the approval of the
Company's name change to Evoke Communications, Inc. and the filing of a Restated
Certificate of Incorporation to reflect such name change.
During this quarter, we also solicited written consent (effective June 21,
2000) from our stockholders regarding the approval of: (a) the Certificate of
Amendment to the Restated Certificate of Incorporation which provided for a 2-
for-3 reverse stock split of all of our outstanding shares, pursuant to which
every three outstanding shares of Common and Preferred Stock were converted into
two shares of Common or Preferred Stock, as applicable, (b) the Restated
Certificate of Incorporation and Amended and Restated Bylaws which provided for
certain changes in connection with our initial public offering of Common Stock
(c) the form of Indemnity Agreement that we will enter into with our executive
officers and directors, (d) the appointment of a classified board of directors,
(e) the adoption of the 2000 Equity Incentive Plan, including the reservation of
11,666,666 shares to be issued under the plan, and (f) the adoption of the 2000
Employee Stock Purchase Plan, including the reservation of 400,000 shares to be
issued under the plan.
Item 5. Other Information
The management of the Company is not aware of any events required to be
reported hereunder.
Item 6. Exhibits and Reports on Form 8-K
(A.) Exhibits
27.1 Financial Data Schedule
(B.) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVOKE COMMUNICATIONS, INC.
Date: September 6, 2000 By: /s/ Terence G. Kawaja
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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