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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
Commission file number 000-28063
DELTATHREE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4006766
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
75 Broad Street 10004
New York, New York (Zip code)
(Address of principal executive offices)
(212) 500-4850
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of May 13, 2005, the registrant had 29,961,086 shares of Class A Common
Stock, par value $0.001 per share, outstanding.
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DELTATHREE, INC.
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...............................................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.......................................................9
Item 4. Controls and Procedures............................................9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................10
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds..................................................10
Item 4. Submission of Matters to a Vote of Security Holders...............11
Item 6. Exhibits..........................................................11
Signatures.................................................................12
Exhibit Index..............................................................13
Certifications.............................................................14
ii
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of As of
March 31, December 31,
2005 2004
---- ----
(unaudited)
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 5,993 $ 3,905
Short-term investments ............................................ 598 2,723
Accounts receivable, net .......................................... 518 325
Prepaid expenses and other current assets ......................... 750 528
Inventory ......................................................... 151 193
----------- -----------
Total current assets ........................................... 8,010 7,674
----------- -----------
----------- -----------
Long -Term investments ............................................. 10,050 9,850
----------- -----------
----------- -----------
Property and equipment, net ........................................ 4,681 4,642
----------- -----------
Deposits ........................................................... 107 107
----------- -----------
----------- -----------
Total assets .................................................. $ 22,848 $ 22,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 2,835 $ 3,657
Deferred revenues ................................................. 1,384 453
Other current liabilities ......................................... 2,485 2,034
----------- -----------
Total current liabilities ...................................... 6,704 6,144
----------- -----------
Long-term liabilities:
Severance pay obligations ......................................... 183 104
----------- -----------
Total liabilities .............................................. 6,887 6,248
Commitments and contingencies ----------- -----------
Stockholders' equity:
Class A common stock, - par value $0.001 .......................... 30 29
Additional paid-in capital ........................................ 167,663 167,301
Accumulated deficit ............................................... (151,522) (151,095)
Treasury stock at cost: 257,600 shares of class A common stock as of
March 31, 2005 and December 31, 2004 ............................. (210) (210)
----------- -----------
Total stockholders' equity .................................... 15,961 16,025
----------- -----------
Total liabilities and stockholders' equity .................... $ 22,848 $ 22,273
=========== ===========
See notes to condensed consolidated financial statements.
DELTATHREE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
2005 2004
---- ----
(unaudited)
($ in thousands, except share data)
Revenues .......................................... 6,604 4,606
Costs and operating expenses:
Cost of revenues, net ........................... 4,210 3,009
Research and development expenses, net .......... 814 581
Selling and marketing expenses .................. 864 803
General and administrative expenses (exclusive of
non-cash compensation expense shown below) ... 610 597
Depreciation and amortization ................... 610 747
------------ ------------
Total costs and operating expenses ................ 7,108 5,737
------------ ------------
Loss from operations .............................. (504) (1,131)
Interest income (expense), net .................... 94 86
------------ ------------
Loss before income taxes .......................... (410) (1,045)
Income taxes ...................................... 17 38
------------ ------------
Net loss .......................................... $ (427) $ (1,083)
============ ============
Net loss per share - basic and diluted ............ $ (0.01) $ (0.04)
============ ============
Weighted average number of shares outstanding -
basic and diluted (number of shares) ............. 29,547,177 29,278,433
============ ============
See notes to condensed consolidated financial statements
2
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
2005 2004
---- ----
(unaudited)
Cash flows from operating activities:
Net loss ........................................................ $ (427) $ (1,083)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization ............................ 610 747
Increase (decrease) in liability for severance pay, net .. 79 8
Changes in assets and liabilities:
Increase in accounts receivable .......................... (193) (187)
Decrease (increase) in other current assets .............. (222) 143
Increase (decrease) in inventory ......................... 42 (91)
Increase (decrease) in accounts payable .................. (939) 68
Increase in deferred revenues ............................ 931 220
Increase (decrease) in current liabilities ............... 451 (99)
-------- --------
Net cash used in operating activities ......................... 332 (274)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ....................... (532) (74)
Increase in deposits ..................................... -- 1
Decrease (increase) in short-term investments, net ....... 2,125 11,220
Proceeds from sale of long-term investments .............. 500 --
Purchase of long-term investments ........................ (700) (4,750)
-------- --------
Net cash used in investing activities ......................... 1,393 6,397
-------- --------
Cash flows from financing activities:
Proceeds from exercise of employee options ............... 363 68
-------- --------
Net cash provided by (used in) financing activities ........... 363 68
-------- --------
Increase (decrease) in cash and cash equivalents ................ 2,088 6,191
Cash and cash equivalents at beginning of year .................. 3,905 1,682
-------- --------
Cash and cash equivalents at end of period ...................... $ 5,993 $ 7,873
======== ========
Supplemental schedule of cash flow information:
Taxes ........................................................... $ 9 $ 26
======== ========
Supplemental schedule of no cash investing and financing
activities:
Net cash provided by (used in) financing activities ........... $ 117 $ 0
======== ========
See notes to condensed consolidated financial statements
3
1. Basis of Presentation
The unaudited condensed consolidated financial statements of deltathree,
Inc. and its subsidiaries (collectively, "the Company"), of which these notes
are a part, have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the instructions of
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for annual financial statements. In the opinion of management of the
Company, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation of the financial information have
been included. The results for the interim periods presented are not necessarily
indicative of the results that may be expected for any future period. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2004.
2. Net Loss Per Share
The shares issuable upon the exercise of stock options and warrants are
excluded from the calculation of net loss per share, as their effect would be
antidilutive.
3. Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and in accordance with FASB Interpretation No. 44. Pursuant to these
accounting pronouncements, the Group records compensation for stock options
granted to employees over the vesting period of the options based on the
difference, if any, between the exercise price of the options and the market
price of the underlying shares at that date. Deferred compensation is amortized
to compensation expense over the vesting period of the options. See below a pro
forma disclosure required in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148.
If the Company had elected to recognize compensation expense for the
issuance of options to employees of the Company based on the fair value method
of accounting prescribed by SFAS No. 123, net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts as follows (in
thousands, except per share amounts):
4
Three Months Ended
March 31,
------------------------------
2 0 0 5 2 0 0 4
------- -------
Net Income (Loss):
Reported net income (loss) $ (427) $ (1,083)
Add stock-based employee compensation expense, included in
reported net income, net of tax -- --
Deduct stock-based employee compensation expense determined
under fair value method, net of tax (110) (94)
---------- ----------
Pro forma net income (loss) $ (537) $ (1,177)
=========== ===========
Net income (loss) per share:
Basic and diluted, as reported $ (0.01) $ (0.04)
Basic and diluted, pro forma $ (0.02) $ (0.04)
For the purpose of presenting pro forma information required under SFAS
123, the fair value option grant has been estimated on the date of grant using
the Black-Scholes option pricing model for grants made after the Company became
a public entity.
There were no grants in the three months periods ended March 31, 2005 and March
31, 2004.
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and the Notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2004. This quarterly report
on Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements involve risks
and uncertainties and actual results could differ materially from those
discussed in the forward-looking statements. All forward-looking statements and
risk factors included in this document are made as of the date hereof, based on
information available to us as of the date thereof, and we assume no obligation
to update any forward-looking statement or risk factors.
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Revenues
Revenues increased approximately $2.0 million or 43.4% to approximately
$6.6 million for the three months ended March 31, 2005 from approximately $4.6
million for the three months ended March 31, 2004. Revenues from enhanced IP
communications services (primarily PC-to-Phone and Broadband Phone) through
iConnectHere decreased slightly by $0.1 million or 5% to approximately $1.7
million for the three months ended March 31, 2005 from approximately $1.8 for
the three months ended March 31, 2004 due primarily to a slightly reduced volume
of PC-to-Phone and Broadband Phone calls. Revenues from enhanced IP
communications services through our reseller and service provider sales efforts
(including sales of our Hosted Communications Solution) increased approximately
$2.1 million or 75% to approximately $4.9 million for the three months ended
March 31, 2005 from approximately $2.8 million for the three months ended March
31, 2004, due primarily to an increasing PC-to-Phone and Broadband Phone user
base. One "Master Reseller/Service Provider" accounted for approximately 11% of
our sales in aggregate during the first quarter of 2005.
Costs and Operating Expenses
Cost of revenues. Cost of revenues increased by approximately $1.2 million
or 39.9% to approximately $4.2 million for the three months ended March 31, 2005
from approximately $3.0 million for the three months ended March 31, 2004, due
primarily to a increase in the amount of traffic being terminated.
Research and development expenses. Research and development expenses
increased slightly by approximately $0.2 million or 40.1% to approximately $0.8
million for the three months ended March 31, 2005 from approximately $0.6
million for the three months ended March 31, 2004, due to higher personnel costs
associated with the development of new services and enhancements to our existing
services.
Selling and marketing expenses. Selling and marketing expenses increased
slightly by approximately $0.1 million or 7.6% to approximately $0.9 million for
the three months ended March 31, 2005 from approximately $0.8 million for the
three months ended March 31, 2004 due to slightly higher personnel related costs
associated with the sales and marketing of our products and services.
6
General and administrative expenses. General and administrative expenses
were essentially unchanged at approximately $0.6 million for the three months
ended March 31, 2005 and for the three months ended March 31, 2004.
Depreciation and amortization. Depreciation and amortization decreased by
approximately $0.1 million or 18.3% to approximately $0.6 million for the three
months ended March 31, 2005 from approximately $0.7 million for the three months
ended March 31, 2004 primarily due to a lower level of certain assets purchased
in prior years being included in the computation of depreciation expense in 2005
compared to 2004 as they have already been fully depreciated in prior periods.
Loss from Operations
Loss from operations decreased by approximately $0.6 million or 55.4% to
approximately $0.5 million for the three months ended March 31, 2005 from
approximately $1.1 million for the three months ended March 31, 2004, due
primarily to the increase in revenues and decrease in in-direct operating
expenses, including depreciation and amortization expenses.
Interest Income, Net
Interest income, net increased by approximately $8,000 or 9.3% to
approximately $94,000 for the three months ended March 31, 2005 from
approximately $86,000 for the three months ended March 31, 2004, due primarily
to higher interest rates earned on the reduced balance of the remaining proceeds
from our initial public offering.
Income Taxes, Net
We paid net income taxes of approximately $17,000 for the three months
ended March 31, 2005 compared to approximately $38,000 for the three months
ended March 31, 2004.
Net Loss
Net loss decreased by approximately $0.7million or 60.6% to approximately
$0.4 million for the three months ended March 31, 2005 from approximately $1.1
million for the three months ended March 31, 2004 due to the foregoing factors.
Liquidity and Capital Resources
Since our inception in March 1996, we have incurred significant operating
and net losses, due in large part to the start-up and development of our
operations. As of March 31, 2005, we had an accumulated deficit of approximately
$152 million.
As of March 31, 2005, we had cash and cash equivalents of approximately
$6.0 million, marketable securities and other short-term investments of
approximately $0.6 million, long-term investments of $10.0 million and working
capital of approximately $1.3 million. We generated positive cash flow from
operating activities of approximately $0.3 million during the three months ended
March 31, 2005 compared with negative cash flow from operating activities of
approximately $0.3 million during the three months ended March 31, 2004.
Accounts receivable were approximately $0.5 million and $0.3 million at March
31, 2005 and March 31, 2004, respectively.
7
Our capital expenditures were approximately $649,000 expended in the three
months ended March 31, 2005 compared to approximately $74,000 expended in the
three months ended March 31, 2004 as we continued to both make moderate
investments and optimize our overall utilization of our existing domestic and
international network infrastructure.
Short-term, we obtain our funding from our utilization of the remaining
proceeds from our initial public offering offset by positive or negative cash
flow from our operations. These proceeds are maintained as cash, cash
equivalents, and short-term investments with an original maturity of twelve
months or less. Based on current trends in our operations, we believe that these
funds will be sufficient to meet our working capital requirements, including
operating losses, and capital expenditure requirements for at least the next
fiscal year, assuming that our business plan is implemented successfully, and
that:
o our recent revenue trends, which reflected an increase in our
higher-margin (primarily PC-to-Phone and Broadband Phone) products
and services, continue to increase;
o our indirect expense trends remain at or near the rates of our first
quarter 2005 rates, which were moderately increased compared to the
past twelve months as we make moderate increases in personnel to
support increased revenue generation activities and through the
continued curtailment of discretionary expenditures, and reduced
network rent and termination rates from our carriers; and
o our net cash-burn rate, which was reduced during the past twelve
months due to the foregoing factors, and eliminated in the first
quarter of 2005, continues to improve throughout the remainder of
2005 and beyond.
To the extent that these trends do not remain steady, or if in the
longer-term we are not able to successfully implement our business strategy, we
may be required to raise additional funds for our ongoing operations. Additional
financing may not be available when needed or, if available, such financing may
not be on terms favorable to us. If additional funds are raised through the
issuance of equity securities, our existing stockholders may experience
significant dilution. In addition, we cannot assure you that any third party
will be willing or able to provide additional capital to us on favorable terms
or at all.
Forward-Looking Statements
Certain matters discussed in this Report under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources" contain certain forward-looking statements
which involve risks and uncertainties and depend upon certain assumptions, some
of which may be beyond our control, including, but not limited to, uncertainty
of financial estimates and projections, the competitive environment for Internet
telephony, our limited operating history, changes of rates of all related
telecommunications services, the level and rate of customer acceptance of new
products and services, legislation that may affect the Internet telephony
industry, rapid technological changes, as well as other risks referenced from
time to time in our filings with the Securities and Exchange Commission, and,
accordingly, there can be no assurance with regard to such statements. All
forward-looking statements and risk factors included in this document are made
as of the date hereof, based on information available to us as of the date
thereof, and we assume no obligation to update any forward-looking statement or
risk factors.
8
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Securities and Exchange Commission's rule related to market risk
disclosure requires that we describe and quantify our potential losses from
market risk sensitive instruments attributable to reasonably possible market
changes. Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments (such as investments and debt) that
are sensitive to future changes in interest rates, currency exchange rates,
commodity prices or other market factors. We believe that our exposure to market
risk is immaterial. We currently do not invest in, or otherwise hold, for
trading or other purposes, any financial instruments subject to market risk.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our principal executive officer and principal financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the
period covered by this Quarterly Report on Form 10-Q, have concluded that, based
on such evaluation, our disclosure controls and procedures were adequate and
effective to ensure that material information relating to us was made known to
them by others within deltathree, particularly during the period in which this
Quarterly Report on Form 10-Q was being prepared.
(b) Changes in Internal Controls.
There were no changes in our internal control over financial reporting,
identified in connection with the evaluation of such internal control that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
9
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Final settlement documentation for litigation relating to a number of
initial public offerings, including our own, is in the process of being
approved. We do not presently expect to make any payments under the pending
settlement. The history of this litigation is as follows:
We, as well as certain of our former officers and directors, have been
named as defendants in a number of purported securities class actions in Federal
District Court for the Southern District of New York, arising out of our initial
public offering in November 1999 (the "IPO"). Various underwriters of the IPO
also are named as defendants in the actions. The complaints allege, among other
things, that the registration statement and prospectus filed with the Securities
and Exchange Commission for purposes of the IPO were false and misleading
because they failed to disclose that the underwriters allegedly (i) solicited
and received commissions from certain investors in exchange for allocating to
them shares of our stock in connection with the IPO and (ii) entered into
agreements with their customers to allocate such stock to those customers in
exchange for the customers agreeing to purchase additional shares in the
aftermarket at predetermined prices.
In July 2002, omnibus motions to dismiss the complaints based on common
legal issues were filed on behalf of all issuers and underwriters. On February
19, 2003, the Court issued an opinion granting in part and denying in part those
motions to dismiss. The complaint against the Company was not dismissed as a
matter of law. A final settlement agreement between the plaintiffs and issuer
defendants has been executed and submitted to the Court for approval. Under the
terms of the proposed settlement agreement, we are not conceding any liability
and we will not bear any expenses associated with the settlement, other than
legal fees we may incur.
We are not a party to any other material litigation and are not aware of
any other pending or threatened litigation that could have a material adverse
effect on us or our business taken as a whole.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 22, 1999, we offered 6,000,000 shares of our class A common
stock in an initial public offering. These shares were registered with the
Securities and Exchange Commission on a registration statement on Form S-1 (file
no. 333-86503), which became effective on November 22, 1999. We received net
proceeds of approximately $96,255,000 from the sale of 6,900,000 shares at the
initial public offering price of $15.00 per share after deducting underwriting
commissions and discounts and expenses of approximately $6,300,000. The managing
underwriters for our initial public offering were Lehman Brothers Inc., Merrill
Lynch & Co., U.S. Bancorp Piper Jaffray, Lazard Freres & Co. LLC and Fidelity
Capital Markets.
As of March 31, 2005, we had used approximately $38 million of the net
proceeds for sales, marketing and promotional activities, $26 million for
capital expenditures and $18 million for general corporate purposes. Pending use
of the remaining net proceeds, we have invested the remaining net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
Item 4. Submission of Matters to a Vote of Security Holders
10
No matter was submitted to a vote of the Company's security holders during
the first quarter of 2005.
Item 6. Exhibits
The following exhibits are filed herewith:
Exhibit
Number Description
- ------ -----------
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
DELTATHREE, INC.
Date: May 13, 2005 By: /s/ Paul C. White
--------------------------------------
Name: Paul C. White
Title: Chief Financial Officer
12
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13