<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
Commission File Number 0-22561
EFAX.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0182451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1378 Willow Road, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-0600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of November 12, 1999 there were 12,900,632 shares of common stock, $.01 par
value, outstanding.
This Report on Form 10-Q includes 25 pages with the Index to Exhibits located on
page 23.
<PAGE> 2
EFAX.COM, INC. AND SUBSIDIARIES
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED OCTOBER 2, 1999
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 1999
and December 31, 1998........................................ 3
Condensed Consolidated Statements of Operations - Three
Months and Nine Months Ended September 30, 1999 and 1998..... 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1999 and 1998..................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities.......................................... 23
Item 6. Exhibits and Reports on Form 8-K............................... 23
Signature...................................................... 24
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1999 1998 (1)
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,009 $ 1,305
Short-term investments 2,996 2,808
Accounts receivable, net 3,287 4,402
Inventories 2,386 4,519
Prepaid expenses 589 247
-------- --------
Total current assets 17,267 13,281
Property, net 2,224 1,339
Other assets 4,110 1,595
-------- --------
Total assets $ 23,601 $ 16,215
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,605 $ 777
Accrued liabilities 1,671 1,576
Current deferred revenue 124 -
-------- --------
Total current liabilities 5,400 2,353
Deferred revenue 25 25
Stockholders' equity:
Series A convertible preferred stock, $0.01 par
value; 5,000,000 shares authorized, shares
outstanding: 1,500 in 1999 and none in 1998 - -
Common stock, $0.01 par value; 35,000,000 shares
authorized, shares outstanding: 12,878,092
in 1999 and 11,873,711 in 1998 129 119
Additional paid-in capital 62,568 42,946
Accumulated deficit (44,521) (29,228)
-------- --------
Total stockholders' equity 18,176 13,837
-------- --------
Total liabilities and stockholders' equity $ 23,601 $ 16,215
======== ========
</TABLE>
(1) Derived from the December 31, 1998 audited consolidated balance sheet
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
See notes to condensed consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product $ 4,649 $ 5,986 $ 15,808 $ 18,092
Licenses and services 1,258 1,366 3,472 3,781
Development fees 242 396 921 1,296
-------- -------- -------- --------
Total revenues 6,149 7,748 20,201 23,169
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 3,444 4,186 11,169 12,314
Cost of licenses and services 918 151 1,864 600
Research and development 1,545 1,267 4,779 4,055
Selling and marketing 6,841 1,749 13,337 5,660
General and administrative 877 480 4,072 1,884
-------- -------- -------- --------
Total costs and expenses 13,625 7,833 35,221 24,513
-------- -------- -------- --------
Loss from operations (7,476) (85) (15,020) (1,344)
-------- -------- -------- --------
Other income (expense):
Interest income 184 86 325 248
Interest expense - - - (2)
Other income (expense) (6) 46 (68) 22
-------- -------- -------- --------
Total other income 178 132 257 268
-------- -------- -------- --------
Income (loss) before income taxes (7,298) 47 (14,763) (1,076)
Provision for income taxes 21 10 61 59
-------- -------- -------- --------
Net income (loss) (7,319) 37 (14,824) (1,135)
Series A Convertible Preferred
stock dividends (299) - (470) -
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders $ (7,618) $ 37 $(15,294) (1,135)
======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.59) $ 0.00 $ (1.23) $ (0.10)
======== ======== ======== ========
Diluted $ (0.59) $ 0.00 $ (1.23) $ (0.10)
======== ======== ======== ========
Shares used in computing net
income (loss) per share:
Basic 12,854 11,806 12,467 11,767
======== ======== ======== ========
Diluted 12,854 12,838 12,467 11,767
======== ======== ======== ========
</TABLE>
For presentation purposes, the periods ended October 2, 1999 and October 3,
1998 are referred to above as ending on September 30, 1999 and 1998,
respectively.
4
<PAGE> 5
<TABLE>
<CAPTION>
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(14,824) $ (1,135)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 872 295
Loss on disposal of asset (39) -
Issuance of Common Stock for service 208 -
Common Stock options - severance 1,367 -
Common Stock options - services 302 -
Changes in assets and liabilities:
Trade receivables 1,115 568
Inventories 2,133 (717)
Prepaid expenses (342) 6
Accounts payable 2,828 (469)
Deferred revenue 124 (24)
Accrued liabilities (330) (17)
-------- --------
Net cash used for operating activities (6,586) (1,493)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments (2,996) (1,537)
Sale of short-term investments 2,808 -
Purchase of property (1,301) (346)
Increase in other assets (594) (258)
-------- --------
Net cash used for investing activities (2,083) (2,141)
-------- --------
Cash flows from financing activities:
Proceeds from sale of Common Stock 1,158 3
Repurchase of Common Stock - (112)
Proceeds from sale of Series A Convertible
Preferred Stock, net 14,215 -
-------- --------
Net cash provided by (used for) financing activities 15,373 (109)
-------- --------
Increase (decrease) in cash and cash equivalents 6,704 (3,743)
Cash and cash equivalents, beginning of period 1,305 4,200
-------- --------
Cash and cash equivalents, end of period $ 8,009 $ 457
======== ========
Supplemental cash flow information:
Interest paid $ - $ 2
======== ========
Taxes paid - foreign withholding $ 29 $ 38
======== ========
Supplemental noncash investing and financial information:
Warrant expense - service $ 337 $ -
======== ========
Conversion of accrued ESPP for purchase of Common Stock $ 45 $ 76
======== ========
Trademark settlement $ 2,000 $ -
======== ========
Cumulative dividends on Series A Convertible
Preferred Stock $ 470 $ -
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Interim Financial Information
The accompanying condensed consolidated financial statements of
eFax.comTM, Inc. and its wholly-owned subsidiaries ("eFax.com" or "eFax" or the
"Company") as of September 30, 1999 and for the three and nine months ended
September 30, 1999 and 1998 are unaudited. In the opinion of management, the
condensed consolidated financial statements include all adjustments (consisting
of normal recurring accruals) that management considers necessary for a fair
presentation of its financial position, operating results and cash flows for
the interim periods presented. Operating results and cash flows for interim
periods are not necessarily indicative of results for the entire year.
This financial data should be read in conjunction with the audited
financial statements and notes thereto included in eFax.com's Annual Report on
Form 10-K for the year ended December 31, 1998.
Certain prior quarter amounts have been reclassified to conform to the
current quarter presentation for cost of licenses and services as well as
selling and marketing expenses.
Fiscal Period End
The Company uses a 52-53 week fiscal year ending on the first Saturday on
or after December 31. For presentation purposes, the Company refers herein to
the 13-week and 39-week periods ended October 2, 1999 and October 3, 1998 as
the three and nine months ended September 30, 1999 and 1998, respectively.
Per Share Information
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average common shares outstanding for the period while diluted
earnings (loss) per share also includes the dilutive impact of stock options
and warrants. Common stock equivalents from options and warrants have been
excluded from the computation for all periods presented with net losses as
their effect is antidilutive. Such options and warrants will be included,
using the treasury stock method, in periods where eFax.com reports net income
and the average fair market value of its common stock exceeds the exercise
price. The net income (loss) and the shares used for the computation of both
basic and diluted income (loss) per share are shown in the table below.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) applicable to
Shareholders $ (7,618) $ 37 $(15,294) $ (1,135)
======== ======== ======== ========
SHARES USED IN COMPUTATION:
Weighted average common shares
outstanding used in computation
of basic earnings(loss) per share 12,854 11,806 12,467 11,767
Dilutive effect of stock options
and warrants - 1,032 - -
-------- -------- -------- --------
Shares used in computation of
diluted net income (loss) per share 12,854 12,838 12,467 11,767
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ (0.59) $ 0.00 $ (1.23) $ (0.10)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.59) $ 0.00 $ (1.23) $ (0.10)
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Materials and supplies $ 1,074 $ 1,982
Work-in-process 256 93
Finished goods 1,056 2,444
-------- --------
Total $ 2,386 $ 4,519
======== ========
</TABLE>
3. Accrued Liabilities
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Compensation and related benefits $ 904 $ 632
Product warranty 44 78
Royalties 42 62
Other 681 804
-------- --------
Total $ 1,671 $ 1,576
======== ========
</TABLE>
4. Comprehensive Income
Effective January 1, 1998, eFax.com adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 requires an enterprise to report, by major components and as a single
total, the change in net assets during the period from non-owner sources. For
the three and nine months ended September 30, 1999 and 1998, there were no
differences between eFax.com's comprehensive loss and net loss.
5. Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of this statement does not
impact eFax.com's consolidated financial position, results of operations or
cash flows. It is eFax.com's opinion that its business is a single reportable
segment, which addresses the communication and handling of electronic and paper
documents. Organizational structure and internal management reporting are not
segmented, nor are there specific segment profitability responsibilities within
management.
7
<PAGE> 8
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. Effect Of Changes In Accounting Principles
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair value,
and provides for hedging accounting when certain conditions are met. The
Company is required to adopt this statement in the first quarter of fiscal year
2001, with early adoption permitted. On a forward-looking basis, although
eFax.com has not fully assessed the implications of this new statement,
eFax.com does not believe adoption of this statement will have a material
impact on eFax.com's financial position or results of operations.
8
<PAGE> 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (the ''Securities Act'') and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), including statements
regarding eFax.com's expectations, hopes, intentions or strategies regarding
the future. When used herein, the words ''may,'' ''will,'' ''expect,''
''anticipate,'' ''continue,'' ''estimate,'' ''project,'' ''intend'' and similar
expressions are intended to identify forward-looking statements within the
meaning of the Securities Act and the Exchange Act. Forward-looking statements
include: statements regarding events, conditions and financial trends that may
affect eFax.com's future plans of operations, business strategy, results of
operations and financial position. All forward-looking statements included in
this document are based on information available to eFax.com on the date
hereof, and eFax.com assumes no obligation to update any such forward-looking
statements. Investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. These forward-
looking statements are made in reliance upon the safe harbor provision of The
Private Securities Litigation Reform Act of 1995. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below, under the heading "Factors That May Affect Operating Results" and
elsewhere in this Report on Form 10-Q.
On February 8, 1999, the corporate name of JetFax, Inc., a Delaware
Corporation was changed to "eFax.com, Inc." All filings and reports made after
February 8, 1999 bear the name "eFax.com, Inc."
eFax.com, Inc. is a leading provider of Internet unified messaging
services. eFax.com currently provides its free and fee-base Internet unified
messaging services to more than 1.4 million users. In February 1999, eFax.com
launched its unified messaging services that incorporate fax-to-email,
voicemail and voice-to-email capabilities. Prior to entering this market,
eFax.com had developed and marketed branded and OEM products and software
solutions for the multifunction product ("MFP") market, which consists of
electronic office devices that combine print, fax, copy and scan capabilities
in a single unit. In addition, eFax.com has licensed its embedded systems
technology and software to a number of manufacturers of MFPs. eFax.com
recently announced that it will discontinue its branded product sales and
dealer channel in order to increase its focus on Internet services and OEM
opportunities in the MFP market.
The Company operates on a 52-53 week reporting year ending on the first
Saturday on or following December 31. The 13-week periods from July 4, 1999 to
October 2, 1999 and from July 5, 1998 to October 3, 1998 are referred to herein
as the three months ended September 30, 1999 and September 30, 1998,
respectively. The 39-week periods from January 3, 1999 to October 2, 1999 and
from January 4, 1998 to October 3, 1998 are referred to herein as the nine
months ended September 30, 1999 and September 30, 1998, respectively.
eFax.com's revenues are derived from three sources: (i) product revenues
consisting of sales of JetFax branded MFPs, OEM branded MFPs, consumables and
upgrades; (ii) licenses and services fees, which include eFax(R) Service
revenues (introduced during the quarter ended June 30, 1999) and software and
technology license fees related to both its embedded system technology for MFPs
and its desktop software; and (iii) development fees for the customization and
integration of eFax.com's embedded system technology and desktop software in
OEM products. Historically, product revenues have accounted for the majority
of eFax.com's total revenues. For the three months ended September 30, 1999,
product revenues, licenses and services revenues, and development fees as a
percentage of total revenues were 76%, 20%, and 4%, respectively, as compared
to 77%, 18%, and 5% for the comparable period in the prior year. For the nine
months ended September 30, 1999, product revenues, licenses and services
revenues, and development fees as a percentage of total revenues were 78%,
17%, and 5%, respectively, as compared to 78%, 16%, and 6% for the comparable
period in the prior year.
Overall product revenues for the three month period ended September 30,
1999 have declined from prior quarters as a result of the transition to an OEM
business model. Shipments of the new OEM platform MFP are anticipated to begin
in the fourth quarter, but are not expected reach the historical volume of the
established JetFax branded MFPs in that period.
The new emphasis on Internet services has resulted in increased
expenditures for both external promotions and other marketing expenses. The
majority of these costs are related to media and Internet advertising promoting
both
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
the basic service and new products and features as introduced. Similarly
infrastructure costs to support the planned expansion of services have
increased. These infrastructure costs include the cost of delivery of the
service such as telephony charges and depreciation on capital equipment, as
well as technical and operational support personnel.
eFax.com has experienced, and may continue to experience, significant
fluctuations in quarterly operating results that have been or may be caused by
many factors including: the timing of introductions of new products or product
enhancements; initiation, expansion, reduction or termination of arrangements
between eFax.com and significant OEM customers; the size and timing of and
fluctuations in end user demand; currency fluctuations; and general economic
conditions. eFax.com expects that its operating results will continue to
fluctuate significantly as a result of these and other factors discussed under
the heading "Factors That May Affect Operating Results".
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
items in eFax.com's statements of operations for the periods indicated.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product 75.6% 77.3% 78.3% 78.1%
Licenses and services 20.5 17.6 17.2 16.3
Development fees 3.9 5.1 4.5 5.6
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 56.0 54.0 55.3 53.2
Cost of licenses and services 14.9 1.9 9.2 2.6
Research and development 25.1 16.4 23.7 17.5
Selling and marketing 111.3 22.6 66.0 24.4
General and administrative 14.3 6.2 20.2 8.1
-------- -------- -------- --------
Total costs and expenses 221.6 101.1 174.4 105.8
-------- -------- -------- --------
Loss from operations (121.6) (1.1) (74.4) (5.8)
Other income, net 2.9 1.7 1.3 1.2
-------- -------- -------- --------
Income (loss) before income taxes (118.7) 0.6 (73.1) (4.6)
Provision for income taxes 0.3 0.1 0.3 0.3
-------- -------- -------- --------
Net income (loss) (119.0) 0.5 (73.4) (4.9)
Series A Convertible Preferred stock
Dividends (4.9) - (2.3) -
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders (123.9)% 0.5% (75.7)% (4.9)%
======== ======== ======== ========
</TABLE>
Three and Nine Months Ended September 30, 1999 Compared to Three and Nine
Months Ended September 30, 1998
Revenues. Total revenues decreased 21% to $6.1 million from $7.7 million
--------
for the three months ended September 30, 1999 and September 30, 1998,
respectively. For the nine-month periods ended September 30, 1999 and
September 30, 1998, respectively, total revenues declined 13% to $20.2 million
from $23.2 million.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Product revenues decreased 22% to $4.6 million from $6.0 million for the
three months ended September 30, 1999 and September 30, 1998, respectively, and
dropped 6% from the preceding three months ended June 30, 1999. Revenue from
shipments of MFPs declined 26% from the preceding three months, as final
domestic units of the JetFax branded Series M900 product were sold. Final
sales for the Series M900 product internationally are expected during the
fourth quarter. Product revenues also reflected the continued erosion in
average selling prices, driven by both the level of OEM business and
general market pressures. Average selling prices for the three months ended
September 30, 1999 declined 14% from the year ago period, and dropped 4% from
the preceding three months ended June 30, 1999. Unit sales for the three months
ended September 30, 1999 decreased also, down 30% from the three months ended
September 30, 1998, and 5% from the preceding quarter. Once discontinuation of
JetFax branded products is complete, the hardware business will focus
exclusively on OEM channels. As a result, hardware product revenues are
expected to decline for the remainder of the year as this move to a new
business model is implemented. Consumable revenue increased 25% in the third
quarter versus the year ago period, declining only slightly from the preceding
quarter. For the nine months ended September 30, 1999 and September 30, 1998,
overall product revenues declined 13% to $15.8 million from $18.1 million, a
reflection of the factors related to the Company's JetFax branded products.
Licensing and services revenues were down slightly for the three months
ended September 30, 1999 as compared to the year ago three months ended
September 30, 1998. Anticipated declines for: a) per unit royalties for the
Hewlett-Packard SureStore CD-Writer, due to a product transition and; b)
software revenues due to the withdrawal of PaperMaster products from the retail
distribution channel were offset by revenues recognized from the eFax Service.
Licensing and services revenues increased 18% from the preceding three month
period ended June 30,1999. eFax Service revenue totaled $442,000, up
significantly from $33,000 in the preceding quarter, and consisted primarily of
recurring monthly subscription fees, signup fees, usage-based charges and
revenues from advertising activities. For the nine-month period, licensing and
services revenues declined 8% to $3.5 million from $3.8 million for the
comparable year ago period, the result of the aforementioned anticipated
decline.
Development fees dropped 39% to $242,000 from $396,000 for the three
months ended September 30, 1999 and September 30, 1998, respectively, as
current projects neared completion. For the nine-month period, development
revenues declined 29% to $921,000 from $1.3 million for the prior year period,
reflecting the completion of current projects and conversion of development
fees to per unit royalties.
International revenue increased to 19% of total revenues for the three
months ended September 30, 1999 from 17% for the comparable period in 1998,
primarily as a result of overall revenue declines, attributable to the refocus
and transition of efforts in the US to an OEM model. One customer, Hewlett-
Packard, accounted for $770,000 (13%) of total revenues for the current
quarter, compared with $1.3 million (17%) for the year ago period.
Cost of Product Revenues. Cost of product revenues decreased 18% to
------------------------
$3.4 million from $4.2 million for the three months ended September 30, 1999
and September 30, 1998, respectively, and decreased 9% to $11.2 million from
$12.3 million for the nine months ended September 30, 1999 and September 30,
1998, respectively. Product gross margin was 26%, down from 30% for the year
ago period. This decrease was attributable to volume and average selling price
declines and the absence of favorable foreign exchange rates experienced on
inventory purchases in the third quarter of 1998. For the nine-month periods
ended September 30, 1999 and September 30, 1998, margins were 29% and 32%,
respectively.
Print engines are purchased for the Series M900 product line in Yen from
OkiData Corporation. For the nine months ended September 30, 1999 the average
exchange rate for purchases weakened to 113 from 136 Yen to the dollar for the
same year ago period. As a result of this rate change, cost of goods sold was
increased by $455,000, a major component of the margin decline.
Cost of Licenses and Services. Cost of licenses and services climbed
-----------------------------
508% to $918,000 from $151,000 for the three months ended September 30, 1999
and September 30, 1998, respectively, and increased 150% to $1.5 million from
$600,000 for the nine months ended September 30, 1999 and September 30, 1998,
respectively. Costs related to software and licensing for the current quarter
were essentially flat with the year ago period. Direct costs for the eFax
Service totaled $751,000 for the three months ended September 30, 1999, up
significantly from the preceding quarter. Planned expansion in support of the
business growth included service delivery costs such as telephony
11
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
charges, depreciation on capital equipment, operations personnel as well as all
technical and customer support related expenses.
Research and Development. Research and development expenses rose 22% to
------------------------
$1.5 million from $1.3 million for the three months ended September 30, 1999
and September 30, 1998, respectively, driven by higher personnel costs related
to headcount growth, as well as an increase in prototype and tooling charges in
support of the next generation OEM MFP platform. Average headcount for the
current quarter rose 9% over the year ago period. Research and development
expenses grew 18% to $4.8 million from $4.1 million for the nine months ended
September 30, 1999 and September 30, 1998, respectively. Increased costs for
the nine-month period included software development charges in support of the
new eFax Service as well as the impact of headcount growth.
Selling and Marketing. Selling and marketing expenses climbed 291% to
---------------------
$6.8 million from $1.7 million for the three months ended September 30, 1999
and September 30, 1998, respectively. Increased promotional activity in
support of the new eFax Service accounted for effectively all of the increase,
more than offsetting the elimination of external marketing efforts related to
the branded hardware business. Selling and marketing expenses rose 135% to
$13.3 million from $5.7 million for the nine months ended September 30, 1999
and September 30, 1998, respectively, the result of these same activities.
Selling and marketing expenses are expected to continue at the same level on a
dollar basis for the fourth quarter of fiscal 1999.
General and Administrative. General and administrative expenses rose
--------------------------
83% to $877,000 from $480,000 for the three months ended September 30, 1999 and
September 30, 1998, respectively. Amortization of trademarks, legal expenses,
expenses related to external reporting for public companies, and, to a lesser
degree, hiring and compensation expenses were primarily responsible for this
increase. General and administrative expenses rose 116% to $4.1 million from
$1.9 million for the three months ended September 30, 1999 and September 30,
1998, respectively, driven primarily by $1.4 million of stock-based severance
charges related to changes in executive management in the second quarter, as
well as the aforementioned expenses.
Interest and Other Income (Expense). Interest and other income, net,
-----------------------------------
increased to $178,000 from $132,000 for the three months ended September 30,
1999 and September 30, 1998, respectively, driven by interest income from
investments. For the six-month period, interest and other income, net,
decreased slightly to $257,000 from $268,000, the result of increased interest
income, offset by unfavorable foreign currency fluctuations and loss on
disposals of fixed assets.
Provision for Income Tax. Due to eFax.com's net losses, there were no
------------------------
provisions for federal or state income taxes for three months ended September
30, 1999 and September 30, 1998, respectively. Income tax provisions of
$21,000 and $10,000, respectively, relate primarily to foreign withholding
taxes on certain royalty fees, but also include minimum state and franchise
taxes.
Net Income (Loss). The net loss applicable to common shareholders for
-----------------
the three months ended September 30, 1999 was $7.6 million or $0.59 per share
compared to net income for the three months ended September 30, 1998 of $37,000
or $0.00 per share. The net loss for the nine months ended September 30, 1999
was $15.3 million or $1.23 per share compared to $1.1 million or $0.10 per
share for the nine months ended September 30, 1998. Significant drivers to the
current year loss include: 1) heavy spending on external promotions for the new
eFax Service, 2) a shift in the hardware business model from branded products
to OEM channels, and 3) costs associated with changes in management.
Liquidity and Capital Resources
eFax.com has financed its operations to date principally through private
placements of debt and equity securities, proceeds from borrowings under a bank
line of credit, debt associated with the Crandell Acquisition, and sales of
common stock. The total amount of equity raised through September 30, 1999 was
$62 million through a series of private financing rounds at both eFax.com and
DocuMagix, and sales of common and preferred stock.
12
<PAGE> 13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's revolving line of credit terminated on August 23, 1999 and
negotiations are now in progress to establish a new line of credit. There can
be no assurance that a new line of credit will be established on terms
favorable to the Company or at all.
On May 10, 1999, eFax.com entered into a purchase agreement with an
investor for the private placement of $15.0 million of Series A Convertible
Preferred Stock, convertible into Common Stock at $21.1375 per share. The
conversion price is subject to an adjustment after one year to the greater of
the then current market price of the Common Stock or 60% of the initial
conversion price if the current market price is less than the initial
conversion price. The agreement also includes 300,000 warrants exercisable at a
10% premium to the Series A Convertible Preferred Stock conversion price. The
Series A Convertible Preferred Stock includes an 8% dividend payable in cash or
common stock at the option of eFax.com. The closing occurred on May 13, 1999.
eFax.com has agreed to file a registration statement for the resale of the
shares of Common Stock acquired on conversion of the Convertible Preferred
Stock and upon exercise of the warrants.
Cash, cash equivalents and short-term investments rose to $11.0 million at
September 30, 1999 from $4.1 million at December 31, 1998, a result of proceeds
from the private placement, partially offset by expenditures for external
promotions of the eFax Service. Inventories of $2.4 million at September 30,
1999 decreased from $4.5 million at December 31, 1998 due to improved inventory
management and end-of-product life cycle for the Series M900. Accounts
receivable also declined to $3.3 million at September 30, 1999 from $4.4
million, the result of the lowered sales volume and continuing improved
collection on aged accounts. Accounts payable rose to $3.6 million at
September 30, 1999 from $777,000 at December 31, 1998, driven primarily by
commitments for external promotions in support of the eFax Service.
Investing activities for the nine months ended September 30, 1999 consumed
$2.1 million of cash: $1.3 million for property purchases, $594,000 for
investment in other assets and $188,000 for net purchases of short-term
investments.
Financing activities for the nine months ended September 30, 1999 provided
$15.4 million of cash: $14.2 million in proceeds from the sale of Series A
Convertible Preferred Stock, and $1.2 million in proceeds from the sale of
Common Stock.
eFax.com currently believes that its cash and equivalents, together with
proceeds from the recent private placement of convertible preferred stock, the
expected renewal of its line of credit, and funds from current and anticipated
operations, will be sufficient to meet eFax.com's working capital and capital
expenditure requirements for the next twelve months. If eFax.com acquires one
or more businesses or products, eFax.com's capital requirements could increase
substantially. To raise additional capital, the Company may issue equity
securities which could dilute existing investors.
Factors That May Affect Operating Results
eFax.com operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some,
but not all, of those risks and uncertainties which may have a material adverse
effect on eFax.com's business, financial condition or results of operations.
This section should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and Notes thereto included in Part I - Item 1
of this Quarterly Report on Form 10-Q and the audited Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1998, contained in eFax.com's Annual Report on Form 10-K for the year ended
December 31, 1998.
This Quarterly Report on Form 10-Q and the documents incorporated by
reference into this Quarterly Report on Form 10-Q may contain projections of
results of operations and financial condition or other "forward-looking
statements" which involve risks and uncertainties. The words "anticipate,"
"believe," "estimate," and "expect" and similar expressions when used in this
prospectus in relation to eFax.com or its management are intended to identify
such forward-looking statements. eFax.com's actual results, performance, or
achievements could differ
13
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
materially from these projections or forward-looking statements as a result of
many factors, including those discussed in this "Factors That May Affect
Operating Results" section of the Quarterly Report on Form 10-Q.
WE HAVE EXPERIENCED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
eFax.com in the past has experienced, and in the future may experience,
significant fluctuations in its quarterly operating results. These fluctuations
have been or may be caused by many factors, including:
o acceptance and timing of new products combining fax technology with the
Internet;
o the size and timing of development or software licensing agreements;
o the timing of new introductions or phase-out of eFax.com's brand
products;
o fluctuations in consumer demand for eFax.com's brand products and for
products which are made by eFax.com's manufacturing customers incorporating
eFax.com's products; and
o seasonal trends, competition and pricing.
eFax.com expects that its operating results will continue to fluctuate as
a result of these and other factors.
eFax.com has often received a substantial portion of its quarterly
revenues during the last month of a quarter. These revenues frequently
concentrate in the last weeks or days of a quarter. One reason for this is
that eFax.com's brand products are primarily sold through dealers, and these
dealers often place orders for products at or near the end of a quarter. The
booking and shipping of one or more key orders at the end of a quarter may be
delayed until the beginning of the next quarter or it may be cancelled. As a
result, we are not able to predict future revenues with any significant degree
of accuracy. For these and other reasons, we believe that period-to-period
comparisons of eFax.com's results of operations are not necessarily meaningful.
We believe that you should not rely upon these comparisons as indicators of
future performance. It is likely that in future quarters, eFax.com's operating
results will sometimes be below the expectations of public market analysts and
investors. This could have a material adverse effect on the price of eFax.com's
common stock.
We believe that the accuracy of eFax.com's report of its quarterly license
revenues received from its manufacturing customers has been, and will continue
to be, dependent on the timing and accuracy of product sales reports which we
receive from these manufacturing customers. Our manufacturing customers only
provide these reports on a quarterly basis and this quarterly basis may not
coincide with eFax.com's quarter. Our manufacturing customers may also delay or
revise these reports. Therefore, we are required to estimate all of the
recurring license revenues from manufacturing customers for each quarter. As a
result, we will record an estimate of such revenues prior to public
announcement of eFax.com's quarterly results. In the event the product sales
reports we receive from our manufacturing customers are delayed or subsequently
revised, we may be required to restate eFax.com's recognized revenues or adjust
revenues for subsequent periods. This restatement or adjustment of revenues
could have a material adverse effect on eFax.com's business, financial
condition and results of operations and, as a result, the price of eFax.com's
common stock.
THE PRICE OF EFAX.COM STOCK MAY BE VOLATILE DUE TO MANY FACTORS, INCLUDING OUR
STATUS AS AN INTERNET-RELATED COMPANY, FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS, THE RAPID PACE OF TECHNOLOGICAL CHANGE, THE UNCERTAINTY OF OUR
BUSINESS TRANSACTIONS AND THE CONTENTS OF NEWS AND SECURITY ANALYST REPORTS.
The trading price of eFax.com's common stock is likely to be highly
volatile. The price could be subject to wide fluctuations in response to
factors such as:
o actual or anticipated variations in eFax.com's quarterly operating
results;
o announcements of technological innovations or new services by eFax.com
or its competitors;
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
o announcements of significant acquisitions or strategic partnerships by
eFax.com or its competitors;
o changes in financial estimates and recommendations by securities
analysts; and
o news reports relating to trends in eFax.com's markets.
In addition, the stock market in general, and the market prices for
Internet- related companies in particular, have experienced extreme volatility
that is often unrelated to the operating performance of these companies. These
broad market and industry fluctuations may adversely affect the price of
eFax.com's common stock, regardless of eFax.com's actual operating performance.
ALTHOUGH WE TAKE STEPS TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY
BECOME SUBJECT TO TIME-CONSUMING AND COSTLY LITIGATION WHERE WE ARE ACCUSED OF
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHER PARTIES. IN FACT, WE WERE
RECENTLY SUED FOR INFRINGING A TRADEMARK OF E-FAX COMMUNICATIONS.
eFax.com's success is heavily dependent upon its intellectual property. To
protect its proprietary rights, eFax.com relies on a combination of copyright,
trade secret and trademark laws, patents, nondisclosure agreements and other
contractual restrictions. As part of its confidentiality procedures, eFax.com
generally enters into nondisclosure agreements with its employees, consultants,
manufacturing customers and strategic partners. eFax.com also limits access to
and distribution of its designs, software and other proprietary information.
Despite these efforts, eFax.com may be unable to effectively protect its
proprietary rights. In addition, enforcement of eFax.com's proprietary rights
may be expensive. We cannot assure you that eFax.com's means of protecting its
proprietary rights will be adequate. Nor can we assure you that eFax.com's
competitors will not independently develop similar technology.
As the number of patents, copyrights, trademarks and other intellectual
property rights in eFax.com's industry increases, eFax.com's intellectual
property may increasingly become the subject of infringement claims. In the
past, eFax.com has received communications from other parties claiming that
eFax.com's trademarks or products infringe the proprietary rights of these
parties. eFax.com has also received communications asking for
"indemnification" against such infringement. "Indemnification" means that
eFax.com would promise to repay or reimburse the other party for loss or
damages suffered by that other party as a result of infringement. eFax.com's
manufacturing customers generally require eFax.com to reimburse or "indemnify"
the manufacturing customers for claims of infringement from third parties. We
can give you no assurance that third parties will not make infringement claims
against eFax.com or its manufacturing customers in the future. Any of these
claims, even if they have no legal merit, could be time consuming (especially
for key management and technical personnel), result in costly litigation or
cause delays in revenues. In addition, these claims could require eFax.com to
enter into royalty or licensing agreements on terms unacceptable to eFax.com.
If eFax.com fails to develop a substitute technology, or to license a
substitute technology on acceptable terms, this could have a material adverse
effect on eFax.com's business, financial condition and results of operations.
As an example, eFax.com was recently sued by E-Fax Communications which claimed
that the use of the name "eFax.com" infringed this party's trademark rights. In
settlement of the matter, eFax.com has agreed to pay E-Fax Communications a
combination of cash and Common Stock in an amount not exceeding $2.5 million
based on the average share price of the Common Stock just prior to the stock
registration becoming effective.
OUR REVENUES MAY NOT GROW AS ANTICIPATED BECAUSE THE MARKET FOR OUR INTERNET-
RELATED SERVICES IS NEW, RAPIDLY CHANGING AND UNCERTAIN.
The market for Internet-related document communication and handling
services is very new and is evolving rapidly. eFax.com expects to rely
significantly in the future on revenues generated through its "eFax" service, a
free fax-to-e-mail service, and products which support this service. We cannot
assure you, however, that the base of customers subscribing to our eFax(c)
service will continue to expand rapidly. Nor can we assure you that users will
be willing to pay fees for premium services or that the subscriber base will
grow large enough to be capable of
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
generating advertising revenue. As a result, our revenues may not grow as
anticipated, which would have a negative effect on our business.
WE HAVE CHANGED THE FOCUS OF OUR BUSINESS TO INTERNET-RELATED SERVICES,
PRODUCTS AND TECHNOLOGIES AND GROWTH OF BUSINESS IN THIS NEW FOCUS AREA IS
UNCERTAIN.
Historically, eFax.com has focused primarily on the development,
manufacture and sale of its brand multifunction products. eFax.com currently
derives a substantial portion of its revenues from the sale of these brand
multifunction products. However, eFax.com expects that its future revenue
growth will be dependent, in part, on expansion of its recently introduced
Internet-based document services, such as its fax-to-e-mail service, and on
further licensing of eFax.com's hardware and software technologies and software
products. However, we cannot assure you that eFax.com will realize growth in
revenues from such sales. If such growth in revenues does not occur and if
revenues from the sale of eFax.com's brand multifunction products does not to
continue at past growth rates, it could have a material adverse effect on
eFax.com's business, financial condition and results of operations.
WE DEPEND ON THE CONTINUED GROWTH OF INTERNET COMMERCE. WE FACE THE RISKS THAT
INTERNET COMMERCE MAY NOT GROW AS RAPIDLY AS ANTICIPATED AND THAT THE INTERNET
MAY EXPERIENCE TECHNICAL PROBLEMS DUE TO INSUFFICIENT INFRASTRUCTURE AND
INADEQUATE TECHNOLOGICAL IMPROVEMENTS.
eFax.com intends to derive a significant portion of its revenues from its
fax-to-e-mail service, called "eFax", and related products. Rapid growth in the
use of and interest in the Internet and online Internet services is a recent
phenomenon. As a result, a sufficiently broad base of consumers may not adopt
and continue to use the Internet and other online services as a way of
purchasing and conducting business. Internet web-based advertising and the
sales of premium Internet services are relatively new. It is difficult to
predict the extent that these will grow, or if they will grow at all. In
addition, the Internet may not prove to be a viable commercial marketplace for
reasons such as potentially inadequate development of:
o Internet network infrastructure;
o technologies which enable use of the Internet; and
o performance improvements to support increased levels of Internet
activity.
If any of the following take place, it could have a material adverse
effect on eFax.com's business, financial condition and results of operation:
o if the use of the Internet and other online services does not continue
to increase or increases more slowly than expected;
o if the infrastructure for the Internet and online services proves to be
inadequate to effectively support expansion; or
o if the Internet does not become a viable commercial marketplace.
OUR MANUFACTURING CUSTOMERS, WHICH PROVIDE A SIGNIFICANT PORTION OF OUR
REVENUES, MAY NOT CONTINUE TO DEVELOP, MARKET OR SELL PRODUCTS INCORPORATING
EFAX.COM'S TECHNOLOGY.
eFax.com has derived a significant portion of its revenues from licensing
of its software and hardware and software technologies to other parties and
from providing development services to manufacturing customers. eFax.com
currently has manufacturing relationships with Hewlett-Packard Company, Oki
Data Corporation, and Konica Business Systems. eFax.com anticipates that it
will derive a significant portion of its revenues in the future from its
manufacturing customers and that eFax.com's revenues will be dependent upon,
among other things, the ability and willingness of its manufacturing customers
to develop and promote multifunction products that
16
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
incorporate eFax.com's technology. The ability and willingness of these
manufacturing customers to do this is based upon a number of factors, including
eFax.com's ability to complete timely development of designs for them. We
cannot give you any assurances regarding the ability or willingness of
eFax.com's manufacturing customers to continue developing, marketing and
selling products incorporating eFax.com's technology. The loss of any of
eFax.com's significant manufacturing customers could have a material adverse
effect on eFax.com's business, financial condition and results of operations.
OUR DEALERS AND DISTRIBUTORS MAY REDUCE OR DELAY SALES OR STOP MARKETING
EFAX.COM'S PRODUCTS WITH A RESULTING LOSS OF REVENUES.
eFax.com has derived a substantial portion of its revenues from sales of
its JetFax brand multifunction products through dealers and distributors.
eFax.com expects that sales of these products through its dealers and
distributors will continue to account for a substantial portion of eFax.com's
revenues for the foreseeable future. eFax.com currently maintains distribution
relationships with dealers associated with IKON Office Solutions, a national
group of office equipment dealers, and A. Messerli AG, one of eFax.com's office
equipment dealers located in Switzerland. Each of eFax.com's dealers and
distributors can stop marketing eFax.com's products with only limited notice to
eFax.com and with little or no penalty. The loss of one or more of eFax.com's
major dealers or distributors could have a material adverse effect on
eFax.com's business, financial condition and results of operations. eFax.com's
dealers and distributors also offer competing products manufactured by third
parties. We can give no assurance that eFax.com's dealers and distributors will
give priority to the marketing of eFax.com's products as compared to the
marketing of our competitors' products. Any reduction or delay in sales of
eFax.com's products by our dealers and distributors could have a material
adverse effect on eFax.com's business, financial condition and results of
operations.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT.
eFax.com has had annual net losses since the company was formed.
eFax.com's historical losses and certain preferred stock dividends have
resulted in an accumulated deficit of approximately $44.5 million as of
September 30, 1999. We can give you no assurance that eFax.com will achieve
profitability on a quarterly or annual basis in the future.
WE MAY FAIL TO ADAPT TO OUR MARKET'S RAPIDLY CHANGING TECHNOLOGY AND EVOLVING
INDUSTRY STANDARDS AND WE MAY LOSE COMPETITIVENESS AND REVENUES AS A RESULT.
The market for eFax.com's products and services is characterized by
rapidly changing technology, evolving industry standards and needs, and
frequent new product introductions. As the market for Internet-based document
communication and handling services grows, this market will begin to exert more
pressure on companies to develop advanced features at more economical pricing.
The multifunction product market already expects the continued development and
release of new products with better performance and improved features at
competitive prices. As product development increases in complexity and the
expected time to bring a product to market continues to decrease, the risk and
difficulty in meeting these development schedules increases and the costs to
eFax.com and its manufacturing customers also increases. In addition, eFax.com,
its manufacturing customers and their competitors may, from time to time,
announce new products, capabilities or technologies that may replace or shorten
the life cycles of eFax.com's brand products and software and the life cycles
of manufacturing customers' products incorporating eFax.com's technology.
eFax.com's success will depend on, among other things:
o market acceptance of eFax.com's product offerings; and
o the ability of eFax.com and its manufacturing customers to respond to
industry changes and market demands.
Any failure of eFax.com to anticipate or respond adequately to the rapidly
changing technology and evolving industry standards and needs could result in a
loss of our competitiveness or revenues. Any significant delay in our
development or introduction of new and enhanced products and services could
also result in a loss of
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
competitiveness or revenues. Such a loss of competitiveness or revenues could
have a material adverse effect on eFax.com's business, financial condition and
results of operations.
WE FACE A HIGH LEVEL OF COMPETITION IN OUR INTERNET-RELATED INDUSTRY.
The market for Internet-related document communication and handling
services, such as eFax.com's fax-to-e-mail service, is a newly emerging market
and competitors are just beginning to appear. eFax.com anticipates that it
will need to:
o provide good service and grow its business rapidly to meet demand;
o create name recognition for eFax.com in advance of competitors;
o build its subscriber base prior to any significant entry by the
competition; and
o continue to expand and improve on its eFax fax-to-e-mail service
offerings.
eFax.com's technology, development services and software primarily compete
with solutions developed internally by manufacturing customers. Virtually all
of eFax.com's manufacturing customers have significant investments in their
existing solutions. These manufacturing customers have the substantial
resources necessary to develop competing multifunction technologies and
software that may be implemented into their own products.
eFax.com also competes with technologies, software and development
services provided in the multifunction product market by other systems and
software suppliers to manufacturing customers.
With respect to hardware and software technologies for multifunction
products, eFax.com competes with Peerless Systems Corporation, Personal
Computer Products, Inc. and Xionics Document Technologies, Inc., among others.
With respect to desktop software, eFax.com competes with Caere Corporation,
Simplify Development Corporation, Smith Micro Software, Inc., Visioneer Inc.,
Wordcraft International and Xerox, among others. In the newly evolving market
for fax- to-e-mail services, competitors include JFAX.com, Inc., an established
business, and CallWave, a start-up that is just introducing its product.
The market for multifunction products and related technology and software
is highly competitive. This market is characterized by continuous pressure to
improve performance, to introduce new features and to accelerate the release of
new products. eFax.com's brand products compete primarily with the dominant
vendors in the fax market, all of whom have substantially greater resources
than eFax.com. These dominant vendors include Canon Inc., Panasonic, a
division of Matsushita Electrical Industrial Co., Ltd., Pitney Bowes Inc.,
Ricoh Co. Ltd., Sharp Electronics Corporation and Xerox, among others. eFax.com
also competes on the basis of vendor name and recognition, technology and
software expertise, product functionality, development time and price.
eFax.com anticipates increasing competition for its multifunction
products, technologies, software under development and Internet services. Most
of eFax.com's existing competitors, many of its potential competitors and all
of eFax.com's manufacturing customers have substantially greater financial,
technical, marketing and sales resources than eFax.com. In the event that
price competition increases, competitive pressures could cause eFax.com to:
o reduce the cost of its eFax Service offerings;
o reduce the price of its brand products;
o reduce the amount of royalties received on new licenses; and
o reduce the fees for its development services in order to maintain
existing business and generate additional product sales and license and
development revenues.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
In turn, these reductions could reduce eFax.com's profit margins and
result in losses and a decrease in market share, which would have a material
adverse effect on eFax.com's business, financial condition and results of
operations.
WE ARE DEPENDENT ON KEY PERSONNEL AND COULD BE AFFECTED BY THE LOSS OF THEIR
SERVICES.
eFax.com is largely dependent upon the skills and efforts of its senior
management, particularly Edward R. Prince, III, known as ''Rudy", its Chief
Executive Officer, and Lon Radin, its Vice President of Engineering, as well as
other officers and key employees, some of whom only recently have joined
eFax.com. eFax.com maintains key person life insurance policies on Rudy Prince
and Lon Radin. None of eFax.com's officers or key employees have an employment
agreement with eFax.com. eFax.com believes that its future success will depend
in large part upon its ability to attract and retain highly skilled
engineering, managerial, sales, marketing and operations personnel, many of
whom are in great demand. Competition for such personnel, especially
engineering personnel, has recently increased significantly. The loss of key
personnel or the inability to hire or retain qualified personnel could have a
material adverse effect on eFax.com's business, financial condition and results
of operations.
OUR RAPID GROWTH PLACES A STRAIN ON OUR OPERATIONS AND FINANCIAL RESOURCES AND
WE MAY FAIL TO MANAGE OUR GROWTH EFFECTIVELY. IN ADDITION, WE MAY FACE RISKS
ASSOCIATED WITH ANY POTENTIAL ACQUISITION OF OTHER COMPANIES WHICH WE MAY
CHOOSE TO UNDERTAKE.
eFax.com has grown rapidly in recent years. A continuing period of rapid
growth could place a significant strain on eFax.com's management, operations
and other resources. eFax.com's ability to manage its growth will require
eFax.com to continue to invest in its operational, financial and management
information systems, procedures and controls, and to attract, retain, motivate
and effectively manage its employees. We can give no assurance that eFax.com
will be able to manage its growth effectively. Failure to manage growth
effectively would have a material adverse effect on eFax.com's business,
financial condition and results of operations. eFax.com may, from time to time,
pursue the acquisition of other companies, assets or product lines that
complement or expand its existing business. Acquisitions involve a number of
risks that could adversely affect eFax.com's operating results. These risks
include:
o the diversion of management's attention from day-to-day business;
o the difficulty of combining and assimilating the operations and
personnel of the acquired companies;
o charges to the company's earnings as a result of the purchase of
intangible assets; and
o the potential loss of key employees as a result of an acquisition.
eFax.com has no present commitments nor is it engaged in any discussions
or negotiations regarding possible acquisitions. However, should any
acquisition by eFax.com take place, we can give no assurance that this
acquisition will not materially and adversely affect eFax.com or that any such
acquisition will enhance eFax.com's business.
WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS AND MAY BE AFFECTED BY
CHANGES, DELAYS OR INTERRUPTIONS IN SUPPLY OF COMPONENTS OF OUR PRODUCTS FROM
THESE SUPPLIERS.
eFax.com relies on various suppliers of components for its products.
eFax.com generally buys components under purchase orders and does not have
long-term agreements with its suppliers. Alternate suppliers may be readily
available for some of these components. However, for other components, we do
not know how long it would take to find a replacement supplier and to receive
replacement components. If we need to find another supplier of those components
which we now purchase from a single source, we may not have sufficient
inventory to fill customer orders without interruption. Although we believe we
could develop other sources for these single source components, no alternative
source currently exists and the process of finding an alternate source could
take several
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
months or longer. Therefore, any interruption in the supply of these components
could have a material adverse effect on eFax.com's business, financial
condition and results of operations.
eFax.com purchases many of the components used in its products from
suppliers located outside the United States. Foreign manufacturing facilities
are subject to the risk of changes in governmental policies, imposition of
tariffs and import restrictions and other factors beyond eFax.com's control. We
can give you no assurance that United States or foreign trading policies will
not restrict the availability of components or increase their cost. Any
significant increase in component prices or decrease in component availability
could have a material adverse effect on eFax.com's business, financial
condition and results of operations.
Certain components used in eFax.com's products are available only from one
source. eFax.com is dependent on Oki America, Inc., as the supplier of major
components, contained in eFax.com's Series M900, one of eFax.com's most
important products. Oki America is also a competitor of eFax.com. eFax.com is
also dependent on:
o American Microsystems, Inc. to provide customized integrated circuits
incorporating eFax.com's imaging and logic circuitry;
o Motorola, Inc. to provide microprocessors;
o Pixel Magic, Inc., a subsidiary of Oak Technology, Inc., to provide a
specialized imaging processor;
o Conexant Systems, Inc., to provide modem chips.
Given our dependence on single source suppliers, any of the following
events could have a material adverse effect on eFax.com's business, financial
condition and results of operations:
o if any of these companies were to limit or reduce the sale of such
components to eFax.com;
o if these suppliers were to experience financial difficulties or other
problems which prevented them from supplying eFax.com with necessary
components;
o any shortage or interruption in the supply of any of the components
used in eFax.com's products; or
o the inability of eFax.com to obtain these components from alternate
sources on acceptable terms.
WE GENERATE A SIGNIFICANT PORTION OF OUR REVENUES FROM OUR INTERNATIONAL
ACTIVITIES AND WE ARE SUBJECT TO MANY RISKS AS A RESULT OF THESE ACTIVITIES.
A significant portion of eFax.com's total revenues come from sales to
eFax.com's customers outside the United States. The international market for
eFax.com's brand products and products incorporating eFax.com's technology and
software is highly competitive. Risks inherent in eFax.com's international
business activities also include:
o currency fluctuations and restrictions;
o the burdens of complying with a wide variety of foreign laws and
regulations;
o longer accounts receivable cycles;
o the imposition of government controls;
o risks of localizing and internationalizing products to local
requirements in foreign countries;
o trade restrictions;
o tariffs and other trade barriers;
20
<PAGE> 21
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
o restrictions on bringing earnings back into the United States; and
o potentially adverse tax consequences.
Any of these risks could have a material adverse effect on eFax.com's
business, financial condition and results of operations. Substantially all of
eFax.com's international sales are currently made in U.S. dollars. Therefore,
increases in the value of the U.S. dollar relative to foreign currencies could
make eFax.com's products less competitive in foreign markets. Because of
eFax.com's international activities, it faces currency exposure and currency
exchange risks. For example, eFax.com purchases some of its key components
pursuant to purchase contracts which require payment in foreign currency which
results in currency exchange risks.
OUR ONLY MANUFACTURING FACILITY AND SEVERAL OF OUR SUPPLIERS ARE LOCATED IN ONE
GEOGRAPHIC AREA. A DISRUPTION OF OUR MANUFACTURING FACILITY AND OUR SUPPLIERS
IN THE SAME GEOGRAPHIC AREA WOULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS.
eFax.com's manufacturing operations are located in its facility in
Northern California. In addition, eFax.com relies on several suppliers of
components for eFax.com's products and a number of companies which assemble
eFax.com products which are located in Northern California. eFax.com does not
currently operate multiple facilities in different geographic areas and does
not have alternative sources for many of its components or assembly processes.
As a result, a disruption of eFax.com's manufacturing operations, or the
operations of its suppliers, could cause eFax.com to cease or limit its
manufacturing operations. Consequently, this would have a material adverse
effect on eFax.com's business, financial condition and results of operations.
WE MAY BE ADVERSELY AFFECTED IF OUR COMPUTER SYSTEMS OR THOSE OF OUR
DISTRIBUTORS, SUPPLIERS AND CUSTOMERS FAIL BECAUSE OF YEAR 2000 PROBLEMS.
Readiness for the year 2000 refers to the issue surrounding computer
programs that use two digits rather than four to define a given year. These
programs might read a date using "00" as the year 1900 rather than the year
2000, which could cause a system failure or a miscalculation.
We do not believe eFax.com's manufacturing facilities are vulnerable in
any significant way to year 2000 system failures involving non-information
technology. In August 1998, eFax.com renovated its existing telephone system at
a cost of approximately $40,000, which made the phone system ready for the year
2000. eFax.com has invested approximately $367,000 and will continue to make
certain investments, estimated not to exceed $50,000, in its software systems
and applications to ensure eFax.com's information systems are ready for the
year 2000. The necessary funds to support these renovations have come from
eFax.com's operating budget and eFax.com does not anticipate that it will need
to allocate special future funding outside of historical levels for this item.
The financial impact of eFax.com's year 2000 readiness effort has not been and
is not anticipated to be material to eFax.com's financial position or results
of operations in any given year. For example, during 1997 and 1998, eFax.com
purchased and implemented new manufacturing and accounting information systems
with a total capitalized cost of $338,000. eFax.com has obtained written
assurances from the vendor, QAD Inc., that the systems are ready for the year
2000. However, eFax.com has not conducted internal testing of the systems'
readiness.
eFax.com believes that its current products are ready for the year 2000.
Certain of eFax.com's older products, which may not be year 2000 ready, are no
longer under warranty. eFax.com believes it has no obligation related to these
products. If eFax.com is mistaken in this assessment, eFax.com could incur
expenses in defending legal actions for breach of contract or other causes of
action. We can give you no assurance that these expenses will not be material
to eFax.com's financial position or results of operations.
As discussed above, eFax.com has recently implemented new information
systems and accordingly does not anticipate any internal year 2000 problems
from those information systems, databases or programs. However, year 2000
problems faced by major distributors, suppliers, customers and financial
service organizations with which we interact could adversely impact eFax.com.
Our assessment of the potential impact of these additional issues was completed
in October 1999. We can give you no assurance that we were able to detect all
potential failures of eFax.com's computer systems or the computer systems of
third parties. A significant failure of eFax.com's or a third
21
<PAGE> 22
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
party's computer system could have a material adverse effect on eFax.com's
business, financial condition and results of operations. eFax.com has completed
its contingency plan, detailing actions that would be taken in the event that
such a failure occurs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No change has occurred since the filing by the Registrant on Form 10-K for
the year ended December 31, 1998. Reference is made to Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(c) During the quarter ended September 30, 1999, eFax.com sold the
following unregistered securities:
In April 1999, the Company issued 45,506 shares of common stock to E-
Fax Communications, Inc. as part of a settlement agreement for
trademark rights entered into on April 9, 1999 between E- Fax
Communications, Inc. and eFax.com, Inc. In July 1999, an additional
82,086 shares were issued per the terms of the agreement in order to
provide aggregate consideration of $2.0 million at the time the
registration statement was declared effective. The average value of
the shares used in the computation was $15.675.
In November 1999, the Company issued warrants to purchase 22,500
shares of common stock to Global NAPS, Inc., in connection with the
completion and acceptance of project milestones in September 1999.
The warrant exercise price is $8.625. These warrants may be exercised
immediately.
The issuance and sale of all such securities was intended to be
exempt from registration and prospectus delivery requirements under
the Securities Act of 1933, as amended (the "Securities Act"), by
virtue of Section 4(2) thereof due to, among other things, (i) the
limited number and nature of persons to whom the securities were
issued, (ii) the fact that such persons represented and warranted to
the Company, among other things, that such persons were acquiring the
securities for investment only and not with a view to the resale or
distribution thereof, and (iii) the fact that a certificate
representing the securities was issued with a legend to the effect
that such securities had not been registered under the Securities Act
or any state securities laws and could not be sold or transferred in
the absence of such registration or an exemption therefrom.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit
Number Description
----- ---------------------------------------------------------
27.1 Financial Data Schedule.
-----------------------
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
-------------------
during the quarter ended September 30, 1999.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EFAX.COM, INC.
----------------------
(Registrant)
Date: November 16, 1999 By: /s/ TODD J. KENCK
-----------------------
Todd J. Kenck
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
24
<PAGE> 25
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS <F1>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,009
<SECURITIES> 2,996
<RECEIVABLES> 3,287 <F2>
<ALLOWANCES> 0
<INVENTORY> 2,386
<CURRENT-ASSETS> 17,267
<PP&E> 2,224 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,601
<CURRENT-LIABILITIES> 5,400
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 18,047
<TOTAL-LIABILITY-AND-EQUITY> 23,601
<SALES> 15,808
<TOTAL-REVENUES> 20,201
<CGS> 11,169
<TOTAL-COSTS> 13,033
<OTHER-EXPENSES> 4,779 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,763)
<INCOME-TAX> 61
<INCOME-CONTINUING> (14,824)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,824)
<EPS-BASIC> (1.23) <F4>
<EPS-DILUTED> (1.23)
<FN>
<F1> The 13-week period from July 4, 1999 to October 2, 1999 is referred to
herein as the three months ended September 30, 1999. The 39-week period
from January 3, 1999 to October 2, 1999 is referred to herein as the nine
months ended September 30, 1999. Year-to-date data is for quarters
presented.
<F2> Item shown net of allowance, consistent with the balance sheet
presentation.
<F3> Item consists of research and development.
<F4> Item consists of basic earnings per share.
</FN>
</TABLE>
