<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____.
Commission File Number: 000-26739
ITXC CORP.
(Exact name of registrant as specified in its charter)
Delaware 22-35-31960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 College Road East
Princeton, New Jersey 08540
(Address of principal executive office, including zip code)
(609) 419-1500
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At July 31, 2000, there were 38,534,067 shares of Common Stock, par value $.001
per share, outstanding.
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ITXC CORP.
INDEX
<TABLE>
<CAPTION>
Page
----
Part I. Financial Information
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000 (Unaudited).................................... 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 2000 (Unaudited).................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 2000 (Unaudited)......................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited). 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 17
Part II. Other Information
Item 1. Legal Proceedings................................................ 17
Item 2. Changes in Securities and Use of Proceeds........................ 18
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signatures................................................................ 20
</TABLE>
2
<PAGE>
ITXC CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
(Unaudited)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 49,017,768 $ 87,893,850
Short term investments 25,378,297 123,301,086
Accounts receivable, net 5,738,804 10,575,744
Prepaid expenses and other current assets 1,298,102 2,403,218
------------ ------------
Total current assets 81,432,971 224,173,898
Property and equipment, net 15,411,656 24,773,316
Deposits and other assets 66,232 80,930
Long-term investment - 7,924,000
Service contract rights, net of amortization 2,950,750 2,458,860
------------ ------------
Total assets $ 99,861,609 $259,411,004
============ ============
Accounts payable and accrued liabilities $ 13,560,456 $ 11,811,970
Customer deposits 442,240 865,928
Current portion of capital lease obligations 1,620,317 1,834,332
------------ ------------
Total current liabilities 15,623,013 14,512,230
Equipment note payable 1,723,191 1,723,191
Capital lease obligation, less current portion 2,149,177 2,795,062
Commitments and contingencies
Preferred Stock - -
Common Stock 35,816 38,532
Additional paid in capital 118,089,750 297,366,043
Deferred employee compensation (10,240,858) (8,120,225)
Accumulated other comprehensive income - 89,059
Accumulated deficit (27,518,480) (48,992,888)
------------ ------------
Total stockholders' equity 80,366,228 240,380,521
Total liabilities and stockholders' equity $ 99,861,609 $259,411,004
============ ============
</TABLE>
See accompanying notes.
3
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ITXC CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended June 30,
1999 2000
---------------------------------------------
<S> <C> <C>
Revenue:
Telecommunications revenue $ 4,335,015 $18,619,221
Consulting revenue 300,000 -
----------- -----------
Total revenue 4,635,015 18,619,221
Costs and expenses:
Data communications and telecommunications 4,362,292 16,542,925
Network operations 736,425 1,035,868
Selling, general and administrative 3,116,518 6,533,983
Depreciation and amortization 420,933 2,515,956
Non-cash employee compensation 470,539 1,065,121
----------- -----------
Total costs and expenses 9,106,707 27,693,853
Loss from operations (4,471,692) (9,074,632)
Interest income, net 114,023 3,245,841
----------- -----------
Net loss (4,357,669) (5,828,791)
Accretion of redemption value of mandatorily redeemable
convertible preferred stock (329,674) -
----------- -----------
Net loss applicable to common stockholders $(4,687,343) $(5,828,791)
=========== ===========
Basic and diluted net loss per share applicable to common
Stockholders $(0.53) $(0.15)
=========== ===========
Weighted average shares used in computation of basic and
diluted net loss per share applicable to common stockholders 8,846,941 38,503,812
Pro forma basic and diluted net loss per share $(0.16) $(0.15)
=========== ===========
Weighted average shares used in computation of pro forma basic
and diluted net loss per share 27,037,099 38,503,812
</TABLE>
See accompanying notes.
4
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ITXC CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
1999 2000
---------------------------------------------
<S> <C> <C>
Revenue:
Telecommunications revenue $ 6,764,428 $ 33,685,300
Consulting revenue 988,232 -
----------- ------------
Total revenue 7,752,660 33,685,300
Costs and expenses:
Data communications and telecommunications 6,890,476 30,196,332
Network operations 1,282,738 2,422,938
Selling, general and administrative 5,674,648 12,466,098
Depreciation and amortization 699,069 4,352,911
Non-cash employee compensation 687,592 2,120,633
----------- ------------
Total costs and expenses 15,234,523 51,558,912
Loss from operations (7,481,863) (17,873,612)
Loss relating to joint venture - (8,195,000)
Interest income, net 155,513 4,594,203
----------- ------------
Net loss (7,326,350) (21,474,409)
Accretion of redemption value of mandatorily redeemable
convertible preferred stock (443,120) -
----------- ------------
Net loss applicable to common stockholders $(7,769,470) $(21,474,409)
=========== ============
Basic and diluted net loss per share applicable to common
Stockholders $(0.90) $(0.57)
=========== ============
Weighted average shares used in computation of basic and
diluted net loss per share applicable to common stockholders 8,602,658 37,545,618
Pro forma basic and diluted net loss per share $(0.29) $(0.57)
=========== ============
Weighted average shares used in computation of pro forma basic
and diluted net loss per share 24,840,634 37,545,618
</TABLE>
See accompanying notes.
5
<PAGE>
ITXC CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
1999 2000
----------------------------------------------
<S> <C> <C>
Operating activities
Net loss $(7,326,350) $ (21,474,409)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 699,070 4,352,911
Provision for doubtful accounts 719,528 1,437,854
Loss relating to joint venture - 8,195,000
Amortization for non-cash deferred employee compensation 687,592 2,120,633
Amortization of original issue discounts on marketable securities - (1,359,686)
Changes in operating assets and liabilities:
Increase in accounts receivable (2,660,207) (6,274,794)
Increase in prepaid expenses and other assets (346,242) (1,119,814)
Increase (decrease) in accounts payable and accrued 3,576,832 (1,748,486)
expenses
Increase (decrease) in customer deposits and deferred
revenue (769,240) 423,688
----------- -------------
Net cash used in operating activities (5,419,017) (15,447,103)
Investing activities
Purchase of property and equipment (3,938,447) (11,404,667)
Purchase of service contract rights - (8,110)
Purchase of available for sale securities (7,434) (272,412,372)
Maturities of available for sale securities - 175,938,019
----------- -------------
Net cash used in investing activities (3,945,881) (107,887,130)
Financing activities
Proceeds from equipment line of credit 523,191 -
Repayment of capital lease obligations (37,469) (949,695)
Issuance of convertible preferred stock 14,931,584 -
Proceeds from issuance of common stock in second public offering - 161,296,000
Proceeds from short swing sale - 1,208,777
Proceeds from exercise of stock options 50,813 260,717
Proceeds from issuance of common stock related to employee stock purchase plan - 394,516
Deferred costs of initial public offering (244,530) -
----------- -------------
Net cash provided by financing activities 15,223,589 162,210,315
----------- -------------
Increase in cash 5,858,691 38,876,082
Cash and cash equivalents at beginning of period 3,971,237 49,017,768
----------- -------------
Cash and cash equivalents at end of period $ 9,829,928 $ 87,893,850
=========== =============
</TABLE>
See accompanying notes.
6
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
-----------
1. Basis of Presentation
The June 30, 1999 and 2000 financial statements have been prepared by ITXC
Corp. (the "Company" or "ITXC") and are unaudited. In the opinion of the
Company's management, all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows for the interim periods have
been made. Certain information and footnote disclosures required under
generally accepted accounting principles have been condensed or omitted from
the consolidated financial statements and notes thereto presented herein
pursuant to the rules and regulations of the Securities and Exchange
Commission. The condensed consolidated financial statements and notes thereto
presented herein should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1999 and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 filed with the Securities and Exchange
Commission. The results of operations for the three and six months ended June
30, 2000 are not necessarily indicative of the results to be expected for any
other interim period or the entire fiscal year.
2. Joint Venture
In July 1998, the Company obtained a 49% interest in ITXC Comunicacoes Ltda
("ITXC Ltda"), a newly formed joint venture, in consideration of rights to
certain technology, which provided exchange carrier long-distance services in
certain countries in South America. The Company's ownership interest in ITXC
Ltda. was accounted for under the equity method of accounting. No investment
was recorded as no consideration was paid.
The ITXC Ltda joint venture agreement, as amended, provided the Company a
call option and provided TeleNova Communicacoes Ltda and its assignee
(collectively, "TeleNova") a put option which required the Company to acquire
TeleNova's interest in ITXC Ltda which option would be triggered upon the
occurrence of certain events, at a price based either on a formula, as
defined in the agreement, or an appraisal of ITXC Ltda's fair value.
In February 2000, the Company recast this relationship. The Company issued
150,000 shares of its common stock to TeleNova and its affiliates in exchange
for: (1) equity in a private affiliate of TeleNova; (2) termination of the
puts and calls which previously could have required substantial cash or
equity outlays by the Company; and (3) certain contractual commitments by the
parties. As part of this transaction, the parties terminated the joint
venture agreement and a license agreement that the Company previously
furnished to the joint venture. During the three months ended March 31,
2000, the Company recorded a
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charge of $8.2 million, representing the difference between the value of the
Company's 150,000 shares issued by the Company and the value of the equity
received by the Company, valued as of the time of the transaction.
3. Public Offering
On March 15, 2000, the Company completed a public offering of its common
stock, selling 2 million shares at a price of $85.00 per share, generating
net proceeds to the Company of approximately $161.3 million. In addition,
certain stockholders sold 2 million previously unregistered shares. Certain
of these shares were sold by an executive officer of the Company within six
months after his minor children had acquired shares of the Company's common
stock. In accordance with SEC rules, the officer remitted $1.2 million to the
Company in April 2000. Such amount is included in additional paid in
capital.
4. Earnings Per Share
The Company's historical capital structure prior to the completion of its
initial public offering ("IPO") on October 1, 1999, is not indicative of its
ongoing structure due to the automatic conversion of all shares of the
Company's Series B and Series C Convertible Preferred Stock (the "Series B
and Series C Stock") upon closing of the IPO on October 1, 1999.
Accordingly, the unaudited pro forma net loss per share for the three and six
months ended June 30, 1999 assumes the conversion of the Series B and Series
C Stock to Common Stock as if it had been converted at the date of issuance,
even though the result is antidilutive.
The following table presents the calculation of basic and diluted net loss
per share and pro forma net loss per share:
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 2000
--------------------------------- -----------------------------------
Denominator Denominator
(Weighted (Weighted
Numerator Average Per Numerator Average Per
(Net Loss) Shares) Share (Net Loss) Shares) Share
---------- ----------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted net
loss per common share $(4,687,343) 8,846,941 $(0.53) $(5,828,791) 38,503,812 $(0.15)
Accretion of redemption
value of mandatorily
Redeemable convertible
preferred stock 329,674 - - - - -
Assumed conversion of
shares of mandatorily
redeemable convertible
preferred stock into
shares of common stock
at issuance - 18,190,158 - - - -
----------- ----------- ------ ----------- ----------- ------
Pro forma basic and
diluted net loss per
common share. $(4,357,669) 27,037,099 $(0.16) $(5,828,791) 38,503,812 $(0.15)
=========== =========== ====== =========== =========== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 2000
---------------------------------- ------------------------------------
Denominator Denominator
(Weighted (Weighted
Numerator Average Per Numerator Average Per
(Net Loss) Shares) Share (Net Loss) Shares) Share
---------- ----------- ------ ------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted net
loss per common share $(7,769,470) 8,602,658 $(0.90) ($21,474,409) 37,545,618 $(0.57)
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock 443,120 - - - - -
Assumed conversion of
shares of mandatorily
redeemable convertible
preferred stock into
shares of common stock
at issuance - 16,237,976 - - - -
----------- ----------- ------ ------------- ----------- ------
Pro forma basic and
diluted net loss per
common share. $(7,326,350) 24,840,634 $(0.29) $ (21,474,409) 37,545,618 $(0.57)
=========== =========== ====== ============= =========== ======
</TABLE>
5. Capital Stock
On May 3, 2000, the Company's stockholders approved an increase in the
authorized Common Stock to 400,000,000 shares.
9
<PAGE>
6. Subsequent Event
On July 25, 2000, the Company entered into a definitive merger agreement with
eFusion, Inc. ("eFusion"), a provider of voice-enabled applications to
service providers, e-commerce companies, and call centers to acquire its
outstanding common stock in exchange for 5,658,986 shares of the Company's
common stock, plus additional shares to cover eFusion's cash on hand at the
closing. The closing is expected to be completed before December 31, 2000,
and is subject to regulatory approval, approvals by both companies'
shareholders, and other customary closing conditions. The Company will
account for this transaction under the purchase method of accounting.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, the related Notes to Consolidated
Financial Statements and Management's Discussion and Analysis of Results of
Operations and Financial Condition included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (the "10-K") and the Unaudited
Condensed Consolidated Financial Statements and related Notes to Consolidated
Financial Statements included in Item 1 of Part 1 of this Quarterly Report on
Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, which involve risks and uncertainties. The
Company's actual results could differ significantly from the results discussed
in the forward-looking statements. Factors that could cause such a difference
are described in Exhibit 99.1 to the 10-K ("Exhibit 99.1"). Such factors may
also cause substantial volatility in the market price of the Company's common
stock.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of costs 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 reported
period. Actual results could differ from these estimates and assumptions.
Overview
The Company is a leading global provider of Internet-based voice and fax
services. From the Company's inception in July 1997 through April 1998, its
operating activities were focused primarily on:
. developing monitoring and analysis software (the Company's BestValue Routing
software) to enable the Company to efficiently and cost effectively route
voice over the Internet;
. developing relationships with affiliates throughout the world to increase the
global reach of ITXC.net, the Company's network;
. developing additional business strategies to supplement the Company's
affiliate network; and
. hiring the Company's initial employee group.
In April 1998, the Company launched its first service delivered over
ITXC.net -- the Company's WWeXchange service. The Company's operations since
that time have included:
. increasing its voice traffic, from 2,746 minutes during April 1998 to
approximately 157.2 million minutes carried thorough its WWeXchange service
during the quarter ended June 30, 2000;
. refining its monitoring and analysis software in order to achieve BestValue
Routing;
. expanding its affiliate network and increasing the global reach of ITXC.net;
. increasing its employee headcount, from 29 employees on April 1, 1998 to 159
employees on June 30, 2000; and
. developing and, during the quarter ended March 31, 2000, implementing its
WebtalkNOW! Service, reaching 44.0 million minutes of voice traffic during
the three months ended June 30, 2000.
11
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The Company's primary sources of revenue have been the fees that it
receives from customers for terminating calls that they have originated on the
Internet. To date, the Company's revenue for terminating calls over ITXC.net has
depended primarily upon the following factors:
. the volume of voice traffic carried over ITXC.net, which is measured in terms
of minutes of voice traffic;
. the mix of voice traffic carried over ITXC.net, which reflects the fact that
calls made over certain routes will generate greater revenues than calls of a
similar duration made over other routes; and
. pricing pressures resulting from competitive conditions in the Company's
markets.
Increased competition from other providers of Internet telephony services
and traditional telephony services could materially adversely affect revenues in
future periods.
The Company has also received consulting revenue derived from a market
trial agreement that it entered into with a third-party shortly after its
inception in order to generate funds to sustain operations. Under that
agreement, the Company earned a portion of the revenue ratably over the term of
the agreement and the remainder of the revenue as it met specific milestones.
The Company does not consider it likely that consulting revenue will continue
beyond the year ended December 31, 1999.
To date, the Company has derived a significant portion of its revenue from
a small number of customers. The loss of a major customer could have a material
adverse effect on the Company's business, financial condition, operating results
and future prospects.
The Company's operating expenses have been primarily:
. Data Communications and Telecommunications Expenses. Communications expenses,
consisting primarily of:
. costs associated with sending voice traffic over the Internet,
primarily fees that the Company pays to its affiliates to terminate
or assist it in terminating calls, fees that the Company pays when it
finds it necessary to utilize the traditional telephone network or
private data networks to terminate calls and expenses incurred in
connecting the Company's customers to its network; these expenses are
largely proportional to the volume of voice traffic carried over the
Company's network; and
. costs associated with buying Internet access at ITXC-operated
locations; these costs are largely proportional to the bandwidth of
access available and do not typically vary based upon volume.
. Network Operations Expenses. Expenses associated with operating the network,
consisting primarily of the salaries, payroll taxes and benefits that the
Company pays for those employees directly involved in the operation of
ITXC.net and related expenses.
. Selling, General and Administrative Expenses. There are three components of
selling, general and administrative expenses, consisting of the following:
12
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. Sales and Marketing Expenses. Expenses relating to the salaries,
payroll taxes, benefits and commissions that the Company pays for
sales personnel and expenses associated with the development and
implementation of the Company's promotion and marketing campaigns.
The Company anticipates that sales and marketing expenses will
increase in the future as it expands its internal sales force, hires
additional marketing personnel and increases expenditures for
promotion and marketing. The Company expects that such expenses will
also increase as telecommunications revenue increases.
. Development Expenses. Salary, payroll tax and benefit expenses that
the Company pays for employees and consultants who work on the
development of the Company's network management approaches and future
applications of its technology. The Company believes that investing
in the enhancement of its technology is critical to its future
success. The Company expects that its development expenses will
increase in future periods, based upon various factors, including:
. the importance to the Company of BestValue Routing;
. the pace of technological change in the Company's industry;
and
. the Company's goal of expanding the applications of its
technology.
. General and Administrative Expenses. Salary, payroll tax and benefit
expenses and related costs for general corporate functions, including
executive management, administration, facilities, information
technology and human resources. The Company expects that general and
administrative expenses will increase in the future as it hires
additional personnel and incurs additional costs related to the
growth of its business and operations. In addition, the Company
expects to expand its facilities and incur associated expenses to
support its anticipated growth.
. Non-cash Employee Compensation Expenses. Non-cash employee compensation
represents compensation expense incurred in connection with the grant of
certain stock options to employees with exercise prices less than the fair
value of the Company's Common Stock at the respective dates of grant. During
1999, but prior to the Company's initial public offering, the Company granted
options to purchase 3,413,500 shares of common stock at exercise prices equal
to or less than fair value, resulting in non-cash charges of approximately
$12.4 million. Such charges will be expensed, generally over the next three
to seven years, in connection with the underlying vesting periods of the
options granted.
The Company believes that the services that it provides over the Internet
are not currently actively regulated in the United States. Several efforts have
been made, however, to enact federal legislation that would regulate certain
aspects of the Internet. If adopted, such legislation could increase the
Company's costs significantly and could materially adversely affect its
business, operating results, financial condition and future prospects.
As ITXC.net continues to grow, the Company anticipates that from time to
time its operating expenses may increase on a per minute basis. This increase is
related to the Company's decision to route additional traffic over the
traditional telephone network or private data networks in order to maintain
quality transmissions during relatively short periods of time as the Company
transitions its network to increased levels of capacity. During these periods,
the Company occasionally experiences reductions in volume from certain
customers. Historically,
13
<PAGE>
the Company has satisfactorily resolved these transition issues. However, the
Company anticipates that in the future other anticipated or unanticipated
operating problems associated with the growth of ITXC.net may develop.
Since the Company's inception in July 1997, it has experienced operating
losses in each quarterly and annual period and negative cash flows from
operations in each quarter since it commenced offering services over ITXC.net in
April 1998. As of June 30, 2000, the Company had an accumulated deficit of $49.0
million. The profit potential of the Company's business is unproven, and the
Company's limited operating history makes an evaluation of it and its prospects
difficult. The Company may not achieve profitability or, if it achieves
profitability, the Company might not sustain profitability.
Results of Operations - Comparison of the Three and Six Months Ended June 30,
1999 and 2000
Revenues
Telecommunications revenues of $18.6 million during the quarter ended June
30, 2000 and $33.7 million during the six months ended June 30, 2000 represented
increases of 330% and 398%, respectively, from the comparable periods in 1999.
The Company carried 201 million minutes of traffic over ITXC.net in the second
quarter of 2000 and 332 million minutes of traffic over ITXC.net in the first
six months of 2000, as compared with 24.5 million minutes and 35.6 million
minutes during the comparable 1999 periods. Of the 332 million minutes, 279
million minutes were carried through the Company's WWeXchange service, which
provides international call completion to the Company's customers and enables
them to offer their own customers phone-to-phone global voice service. The
remaining 53 million minutes were provided through the Company's recently
initiated WebtalkNOW! Service, a PC-to-telephone service which allows Internet
portals, Internet service providers and web sites to offer web-to-phone calling
to their customers under their own brands. During the quarter ended June 30,
2000, the Company's average revenues per minute were 11.2 cents per minute for
WWeXchange and 2.1 cents per minute for WebtalkNOW!.
The Company recorded consulting revenues of $300,000 during the quarter
ended June 30, 1999 and $988,000 during the first six months of 1999. As of June
30, 1999, the Company had satisfied all of the performance requirements under
its market trial agreement and had received all consulting payments required by
that agreement. Accordingly, the Company did not recognize any such revenues the
first six months of 2000. The Company does not expect to earn significant
consulting revenue in subsequent periods.
Operating Expenses
Data Communications and Telecommunications Expenses. During the three
months ended June 30, 1999 and 2000, data communication expenses amounted to
$4.4 million and $16.5 million, respectively, or 100% and 89% of
telecommunications revenues, respectively. During the six months ended June 30,
1999 and 2000, data communication expenses amounted to $6.9 million and $30.2
million, respectively, or 102% and 90% of telecommunications revenues,
respectively. The increase in the dollar amount of such costs primarily
reflected the increased traffic during 2000, as well as costs associated with
establishing a new network hub in Jersey City, New Jersey during the first
quarter of 2000, a new network hub in London during the second quarter of 2000,
and establishing and increasing capacity at the Company's other hubs in
anticipation of future growth in traffic.
Network Operations Expenses. Network operations expenses increased from
$736,000 during the three months ended June 30, 1999 to $1.0 million during the
three months ended June 30, 2000 and from $1.3 million during the six months
ended June 30, 1999 to $2.4 million during the six months ended June 30, 2000 .
Such expenses primarily reflected the cost of operating the Company's 24-hours-
a-day, 7 days-a-week network operations center, as well as start-up costs
associated with the Jersey City, New Jersey and London hubs. Such
14
<PAGE>
costs represented 17% and 6% of telecommunications revenues during the three
months ended June 30, 1999, and 2000, respectively, and, 19% and 7% of
telecommunications revenues during the six months ended June 30, 1999 and 2000,
respectively
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased from $3.1 million during the three
months ended June 30, 1999 to $6.5 million during the three months ended June
30, 2000 and from $5.7 million during the six months ended June 30, 1999 to
$12.5 million during the six months ended June 30, 2000. These increases were
due primarily to the hiring of additional sales and marketing, development and
administrative personnel, commissions paid on the Company's increased
telecommunications revenue, expanded sales and marketing campaigns and increased
facilities expenses associated with the Company's growth. Such increase
reflected not only the expansion of the Company's core business, but also the
development and deployment of the WebtalkNOW! Service. As a percentage of
revenues, SG&A expenses decreased from 67% to 35% over the comparable three
month periods and from 73% to 37% over the comparable six month periods,
reflecting the leveraging of such expenses over the Company's significantly
increased revenue base. As the Company's revenues continue to grow, the Company
expects SG&A expenses to decrease as a percentage of revenues. Such expectation
represents a forward-looking statement under the Private Securities Litigation
Reform Act of 1995. Actual results could differ from such expectation as a
result of a number of factors, including the extent to which the Company incurs
unanticipated expenses associated with revenue growth and other factors referred
to in Exhibit 99.1.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased from $0.4 million during the three months ended June 30, 1999
to $2.5 million during the three months ended June 30, 2000 and from $0.7
million during the six months ended June 30, 1999 to $4.4 million during the six
months ended June 30, 2000. This increase reflects the expansion of the
Company's network and hubs and the addition of new technologies deployed
throughout the Company's network. In addition, amortization in the current year
includes charges for the Company's acquisition of the contractual rights and
software of OzEmail, which acquisition occurred during the fourth quarter of
1999.
Non-cash Employee Compensation Expenses. Non-cash employee compensation
expense increased from $0.5 million during the three months ended June 30, 1999
to $1.1 million during the three months ended June 30, 2000 and from $0.7
million during the six months ended June 30, 1999 to $2.1 million during the six
months ended June 30, 2000, representing amortization of deferred compensation
incurred in connection with the grant of options at exercise prices less than
fair value.
Loss From Operations
The Company incurred operating losses of $4.5 million and $9.1 million,
respectively, during the three months ended June 30, 1999 and 2000,
respectively, and operating losses of $7.5 million and $17.9 million,
respectively, during the six months ended June 30, 1999 and 2000, respectively.
The Company anticipates that it will incur additional operating and net losses
for the foreseeable future. The amount of these losses may exceed the amount of
the losses that the Company has incurred in prior periods.
Loss Relating to Joint Venture. During the quarter ended March 31, 2000,
the Company incurred a one-time non-cash charge of $8.2 million relation to the
modifications made in the Company's South America joint venture. See Note 2 of
the Notes to the Company's Consolidated Financial Statements.
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Interest Income, Net
The Company's interest income, net principally represents income from cash
and investments which, in turn, were derived from capital contributions made by
the Company's investors. In addition to the capital invested near the inception
of its business, the Company raised (a) net proceeds of $9.9 million and $14.9
million from a group of investors in private transactions completed during April
1998 and February 1999, (b) net proceeds of $78.4 million from the Company's
initial public offering completed on October 1, 1999 and (c) net proceeds of
$161.3 million from the Company's follow-on offering completed on March 15,
2000. The interest generated from these capital contributions exceeded the
interest that the Company paid on its line of credit by $0.1 million and $3.2
million, respectively, during the three months ended June 30, 1999 and 2000,
respectively, and by $0.2 million and $4.6 million, respectively, during the six
months ended June 30, 1999 and 2000, respectively.
Liquidity and Capital Resources
Prior to the Company's initial public offering, the Company financed its
operations primarily through the private placement of its capital stock and, to
a lesser extent, through equipment financing, and for the period after June 30,
1999, through capital leases. Net proceeds from the Company's initial public
offering, including proceeds resulting from the exercise by the underwriters of
their over-allotment option, were $78.4 million. This capital was supplemented
by net proceeds of $161.3 million raised upon consummation of the Company's
March 2000 follow-on offering of common stock.
Net cash provided by financing activities amounted to $162.2 million for
the six months ended June 30, 2000 and was primarily attributable to net
proceeds from the Company's follow-on offering.
Net cash used in operating activities amounted to $15.4 million for the six
months ended June 30, 2000. Cash used in operating activities was primarily the
result of net operating losses, increased accounts receivable and decreased
accounts payable and accrued liabilities, partially offset by the one-time
charge of $8.2 million relating to the modification of the Company's joint
venture arrangement in South America and deprecation and amortization.
Net cash used in investing activities amounted to $107.8 million for the
six months ended June 30, 2000. Cash used in investing activities was primarily
related to the purchases of property and equipment and purchases of investments
with the proceeds of the Company's public offerings.
As of June 30, 2000, the Company's principal commitments consisted of
obligations outstanding under operating and capital leases. At that date, future
minimum payments for non-cancelable leases includes required payments of $3.2
million during 2000 and $8.4 million for years after 2000 under all leases. The
Company anticipates a substantial increase in capital expenditures and lease
commitments consistent with the anticipated growth in operations, infrastructure
and personnel, including the deployment of additional networks hubs and SNARCs
(a proprietary device which allows customers to access the Company's network
directly from their premises, eliminating the costs of special traditional
telephone connections dedicated to connecting with network hubs and improving
the economics of the Company's services to them). As the Company matures and
improvements in technology impact the Company's equipment base, the Company
expects that it will also be required to fund the replacement of obsolescent
equipment.
The Company maintains a credit agreement that provides a committed line of
credit from a financial institution in the aggregate amount of $10.0 million.
The Company is permitted to use any portion of that commitment under a revolving
line of credit for working capital or under an equipment sub-line for the
purchase of certain capital equipment and related software. This credit
agreement is collateralized by substantially all of the Company's assets. The
Company is permitted to borrow under the credit agreement until February 2001.
At that
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time, the Company must repay the outstanding working capital loans unless that
revolving line is extended. Loans outstanding under the equipment sub-line are
due and payable 36 months after the final draw under the equipment sub-line.
Interest accrues at a floating rate per annum equal to the higher of the
lender's published prime rate and the weighted average federal funds rate
available to the Company's lender plus 0.5%. The credit agreement contains
customary financial and other covenants and may be terminated by the lender 45
days after the occurrence of certain mergers, acquisitions and investments.
The Company has also arranged for financing in the ordinary course for
gateway equipment, switching equipment and general office equipment, from
vendors such as Lucent and Cisco.
The Company's capital requirements depend on numerous factors, including
market acceptance of ITXC's services, the responses of its competitors, the
resources allocated to ITXC.net and the development of future applications of
the Company's technology, the Company's success in marketing and selling its
services, and other factors. The Company has experienced substantial increases
in its capital expenditures since its inception, consistent with growth in its
operations and staffing, and anticipates that its capital expenditures will
continue to increase in the future. In addition to its pending acquisition of
eFusion, Inc., the Company will evaluate possible acquisitions of, or
investments in, complementary businesses, technologies or services and plan to
expand its sales and marketing programs. Any such possible acquisition may be
material and may require the Company to incur a significant amount of debt or
issue a significant number of equity securities. Further, any businesses that
the Company acquires will likely have their own capital needs, which may be
significant, which the Company would be called upon to satisfy independent of
the acquisition price. The Company currently believes that its available cash
and cash equivalents will be sufficient to meet its anticipated needs for
working capital and capital expenditures for at least the next 12 months. This
statement represents a forward-looking statement under the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from the
Company's expectations. The Company may need to raise additional funds in order
to fund more rapid expansion, to develop new or enhance existing services, to
respond to competitive pressures or to acquire or invest in complementary
business, technologies or services. Additional funding may not be available on
favorable terms or at all.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company had investments of $181.0 million as of June 30, 2000 in
certain marketable securities, which primarily consist of short-term fixed
income investments. Due to the short-term nature of the Company's investments,
the Company believes that the effects of changes in interest rates are limited
and would not have a material impact on the Company's financial condition or
operating results.
Part II
Item 1. Legal Proceedings
From time to time, the Company is involved in various legal proceedings
relating to claims arising in the ordinary course of business.
On May 23, 2000, Connectel, LLC filed suit against the Company in the
United States Federal District Court for the Eastern District of Pennsylvania.
Connectel alleges in its complaint that the Company is infringing on the claims
of a patent owned by Connectel by, acting alone or with others, assembling,
offering to sell or selling "communications networks or switching systems"
within the United States and for export worldwide without license from
Connectel. The Company believes that the Connectel claims are without merit and
intends to defend the lawsuit vigorously. However,
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should a judge issue an injunction against the Company, such action could have a
material adverse effect on the Company's operations.
The Company is not a party to any other legal proceeding, the adverse
outcome of which is expected to have a material adverse effect on its financial
condition, operating results or liquidity.
Item 2. Changes in Securities and Use of Proceeds
Pursuant to the rules of the Securities and Exchange Commission, the
Company has provided the following information with respect to its initial
public offering (comparable disclosures are not required with respect to the
Company's follow-on offering).
The Company's initial public offering was effected pursuant to a
registration statement on Form S-1 (No. 333-80411) declared effective by the SEC
on September 27, 1999. The offering commenced on September 27, 1999 and
terminated after all securities registered were sold. The managing underwriters
of the initial public offering in the United States were Lehman Brothers, CIBC
World Markets and First Analysis Securities Corporation and the managing
underwriters of the initial public offering outside of the United States were
Lehman Brothers International (Europe), CIBC World Markets International Limited
and First Analysis Securities Corporation .
The sole class of capital stock registered in the Company's public offering
was the Company's Common Stock. The total amount of Common Stock registered was
$93,437,500. In the initial public offering, a total of 7,187,500 shares were
sold at an offering price of $12 per share, for total gross proceeds of
$86,250,000. All of the shares were sold for the account of the Company.
The expenses incurred by the Company (for underwriters' discounts and
commissions, finders' fees, expenses paid to or for underwriters, other expenses
and total expenses) during the period from September 27, 1999 through June 30,
2000 (the "Reporting Period") in connection with the initial public offering
were (based on reasonable estimates) as follows:
Underwriters' discounts and commissions................. $6,037,500
Finders' fees........................................... 0
Expenses paid to or for underwriters.................... 0
Other expenses.......................................... 1,812,500
Total expenses.......................................... 7,850,000
None of such amounts represented direct or indirect payments to directors,
officers or general partners of ITXC or their associates, to persons owning 10%
percent or more of any class of equity securities of ITXC or to any affiliates
of ITXC or direct or indirect payments to persons other than the underwriters
and persons indicated in Part II of our registration statement.
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The net offering proceeds to ITXC after deducting total expenses amounted
to $78.4 million. The following table indicates (based on reasonable estimates)
the manner in which such net proceeds have been allocated during the Reporting
Period:
Construction of plant, building and facilities......... 0
Purchase and installation of machinery and equipment.. 0
Purchase of real estate................................ 0
Acquisition of other businesses........................ 0
Repayment of indebtedness.............................. 0
Working capital (including investments and capital expenditures)...$78,400,000
None of such amounts represented direct or indirect payments to directors,
officers or general partners of ITXC or their associates, to persons owning 10%
percent or more of any class of equity securities of ITXC or to any affiliates
of ITXC or direct or indirect payments to other persons.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
99.1 Risk Factors (incorporated by reference to Exhibit 99.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999)
(b) There were no Current Reports on Form 8-K filed by the Registrant
during the quarter ended June 30, 2000.
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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.
ITXC CORP.
By: /s/ Edward B. Jordan
----------------
Edward B. Jordan
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
Dated: August 11, 2000
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EXHIBIT INDEX
27.1 Financial Data Schedule
99.1 Risk Factors (incorporated by reference to Exhibit 99.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999)
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