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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 000-24643
DIGITAL RIVER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1901640
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9625 WEST 76TH STREET, SUITE 150
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices)
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(612) 253-1234
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes / / No /X/
Common Stock, $0.01 par value 16,734,047 shares
----------------------------- -----------------------------------
(Class) Outstanding as of October 26, 1998
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DIGITAL RIVER, INC.
Form 10-Q
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 1998 and December 31, 1997 . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
2.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $19,411 $2,126
Short-term investments 8,840 -
Accounts receivable, net 1,008 94
Prepaid expenses and other 464 100
----------- ---------
Total current assets 29,723 2,320
PROPERTY AND EQUIPMENT, NET 3,134 903
OTHER ASSETS 104 182
----------- ---------
$32,961 $3,405
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,655 $ 720
Accrued payroll 622 197
Other current liabilities 339 159
----------- ---------
Total current liabilities 3,616 1,076
----------- ---------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000
shares authorized; no shares issued and
outstanding - -
Common Stock, $.01 par value; 45,000,000
shares authorized; 16,734,047 and 9,241,881
shares issued and outstanding 167 92
Additional paid-in capital 44,415 6,562
Deferred compensation (1,620) -
Accumulated deficit (13,617) (4,325)
----------- ---------
Total stockholders' equity 29,345 2,329
----------- ---------
$32,961 $3,405
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3.
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DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data; Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------
1998 1997 1998 1997
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
SALES $ 5,758 $ 683 $11,504 $ 1,144
COST OF SALES 4,819 561 9,610 940
----------- ----------- --------- ----------
Gross profit 939 122 1,894 204
----------- ----------- --------- ----------
OPERATING EXPENSES:
Sales and marketing 3,105 246 6,538 875
Product development and operations 1,292 530 2,903 945
General and administrative 751 294 2,164 527
----------- ----------- --------- ----------
Total operating expenses 5,148 1,070 11,605 2,347
----------- ----------- --------- ----------
LOSS FROM OPERATIONS (4,209) (948) (9,711) (2,143)
INTEREST INCOME, NET 269 26 419 45
----------- ----------- --------- ----------
Net loss $(3,940) $ (922) $(9,292) $(2,098)
----------- ----------- --------- ----------
----------- ----------- --------- ----------
Basic and diluted net loss per share $ (.26) $ (.11) $ (.74) $ (.30)
----------- ----------- --------- ----------
----------- ----------- --------- ----------
Basic and diluted weighted average common shares
outstanding 14,894 8,418 12,484 7,098
----------- ----------- --------- ----------
----------- ----------- --------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4.
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DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands; Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1998 1997
---------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(9,292) $(2,098)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 439 112
Deferred compensation expense 959 -
Changes in assets and liabilities:
Accounts receivable and prepaid expense (1,278) (128)
Accounts payable 1,935 380
Other current liabilities 605 128
---------- ----------
Net cash used in operating activities (6,632) (1,635)
---------- ----------
INVESTING ACTIVITIES:
Purchases of short-term investments (10,840) -
Proceeds from sales of investments 2,000 -
Purchases of equipment (2,548) (783)
Patent acquisition costs (44) (60)
---------- ----------
Net cash used in investing activities (11,432) (843)
---------- ----------
FINANCING ACTIVITIES:
Sales of Preferred and Common Stock 35,393 3,300
Proceeds from convertible debentures - 147
Payment of debt issuance costs and other (44) -
---------- ----------
Net cash provided by financing
activities 35,349 3,447
---------- ----------
Net increase in cash and cash
equivalents 17,285 969
CASH AND CASH EQUIVALENTS, beginning of period 2,126 800
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $19,411 $ 1,769
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5.
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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments,
which in the opinion of management are necessary to fairly state the
Company's consolidated financial position, results of operations and cash
flows for the periods presented. These condensed consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's Registration
Statement on Form S-1, File No. 333-56787, declared effective on August 11,
1998. The results of operations for the period ended September 30, 1998 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending December 31, 1998. The December
31, 1997 balance sheet was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
2. PRINCIPLES OF CONSOLIDATION:
The condensed consolidated financial statements include the accounts of
Digital River, Inc. and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated.
3. NET LOSS PER SHARE:
Net loss per share is computed in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"). FAS 128
requires the Company to report both basic loss per share, which is based on
the weighted-average number of common shares outstanding excluding
contingently issuable or returnable shares such as shares of unvested
restricted Common Stock, and diluted loss per share, which is based on the
weighted-average number of common shares outstanding and dilutive potential
common shares outstanding. As a result of the losses incurred by the Company
for the three months and nine months ended September 30, 1998 and 1997,
respectively, all potential common shares were anti-dilutive and were
excluded from the diluted net loss per share calculations.
The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be anti-dilutive:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Common Stock warrants 803,008 238,099
Common Stock options 2,321,093 750,142
</TABLE>
Each share of the Company's outstanding Series A Preferred Stock (the
"Preferred Stock") was convertible into Common Stock on a 2-for-3 basis. The
Preferred Stock automatically converted into Common Stock upon consummation of
the Company's initial public offering in August 1998 (the "IPO"). Pro forma net
loss per share for the three months and nine months ended September 30, 1998,
respectively, assuming the conversion of 1,500,000 shares of Preferred Stock
issued as of April, 1998 into 1,000,000 shares of Common Stock, which occurred
upon completion of the IPO, was $(0.26) and $(0.72), respectively.
6.
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4. SEGMENT REPORTING:
The Financial Accounting Standards Board has released SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 requires
disclosure of business and geographic segments in the consolidated financial
statements of the Company. The Company is currently analyzing the impact SFAS
No. 131 will have on the disclosures in its financial statements.
5. INITIAL PUBLIC OFFERING:
On August 11, 1998, the Company completed its IPO in which the Company sold
3,000,000 shares of Common Stock at an offering price of $8.50 per share. Net
proceeds to the Company after underwriting and other offering expenses was $22.7
million. The proceeds from the offering will be used for general corporate
purposes, including continued investment in product development, expansion of
sales and marketing activities and working capital.
On April 22, 1998, the Company issued a warrant to purchase 100,000 shares of
Common Stock at $3.00 per share to its former preferred stockholder, the
exercise of which was conditioned upon the consummation of the IPO. Because the
IPO occurred in August 1998, this warrant is exercisable through August 2003.
7.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE COMPANY NOTES THAT, EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED
HEREIN, THE MATTERS DISCUSSED BELOW CONTAIN FORWARD-LOOKING STATEMENTS WHICH
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY
RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE THIS INFORMATION OR
PUBLICLY RELEASE ANY REVISION OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
OF THIS REPORT. SUCH FACTORS INCLUDE, AMONG OTHERS: THE COMPANY'S LIMITED
OPERATING HISTORY AND VARIABILITY OF OPERATING RESULTS, EXPECTATION OF FUTURE
LOSSES, RISKS ASSOCIATED WITH ELECTRONIC SOFTWARE DELIVERY, DEPENDENCE ON THE
INTERNET AND GROWTH IN ELECTRONIC COMMERCE AND INTERNET INFRASTRUCTURE
DEVELOPMENT, DEPENDENCE ON SOFTWARE PUBLISHERS, DEPENDENCE ON ONLINE RETAILERS,
SYSTEM DEVELOPMENT AND ELECTRONIC COMMERCE SECURITY RISKS, RAPID TECHNOLOGICAL
CHANGES, COMPETITION IN THE ELECTRONIC COMMERCE INDUSTRY, THE IMPORTANCE OF
ATTRACTING AND RETAINING PERSONNEL, MANAGEMENT OF THE COMPANY'S GROWTH,
DEPENDENCE ON KEY EMPLOYEES AND OTHER RISK FACTORS REFERENCED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1, FILE NO. 333-56787, DECLARED EFFECTIVE ON
AUGUST 11, 1998.
OVERVIEW
The Company is a leading provider of comprehensive electronic commerce
outsourcing solutions to software publishers and online retailers. The Company
was incorporated in February 1994 and commenced offering products for sale
through its clients' Web stores in August 1996. From inception through August
1996, the Company had no sales, and its activities related primarily to the
development of its Commerce Network Server ("CNS") technology related to
electronic commerce. In 1996, the Company began to focus its business
development efforts on building its inventory of software products through
contracts with software publishers and had contracts with a total of 953 and
1,309 software publishers as of December 31, 1997 and September 30, 1998,
respectively. In 1997, the Company began to develop distribution relationships
and had contracts with a total of 105 and 762 online retailers as of December
31, 1997 and September 30, 1998, respectively.
The Company derives its revenue primarily from sales of third-party software.
The Company has contractual relationships with its software publisher and online
retailer clients which obligate the Company to pay to the client a specified
percentage of each sale. Revenues from the sale of software products, net of
estimated returns, are recognized upon either delivery through electronic
software delivery ("ESD") or shipment of the physical product to the end-user.
The amount payable to the software publisher or online retailer is reported as
cost of sales. The Company bears full credit risk with respect to substantially
all sales. The Company determines reserves for charge-backs based on historical
experience.
The Company has a limited operating history upon which investors may evaluate
its business and prospects. Since inception, the Company has incurred
significant losses, and as of September 30, 1998, had an accumulated deficit of
approximately $13.6 million. The Company intends to expend significant financial
and management resources on the development of additional services, sales and
marketing, technology and operations to support larger-scale operations and
greater service offerings. As a result, the Company expects to incur additional
losses and continued negative cash flow from operations for the foreseeable
future, and such losses are anticipated to increase significantly from current
levels. There can be no assurance that the Company's sales will increase or even
continue at their current level or that the Company will achieve or maintain
profitability or generate cash from operations in future periods. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. To address these risks, the Company must, among other
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things, maintain existing and develop new relationships with software
publishers and online retailers, implement and successfully execute its
business and marketing strategy, continue to develop and upgrade its
technology and transaction-processing systems, provide superior customer
service and order fulfillment, respond to competitive developments, and
attract, retain and motivate qualified personnel. There can be no assurance
that the Company will be successful in addressing such risks, and the failure
to do so would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's current and
future expense levels are based largely on its planned operations and
estimates of future sales. Sales and operating results generally depend on
the volume and timing of orders received, which are difficult to forecast.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Accordingly, any significant shortfall
in sales would have an immediate adverse effect on the Company's business,
financial condition and results of operations. In view of the rapidly
evolving nature of the Company's business and its limited operating history,
the Company is unable to accurately forecast its sales and believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future
performance.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated condensed statements of operations as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------------
1998 1997 1998 1997
---------- -------- --------- -----------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.7 82.1 83.5 82.2
---------- -------- --------- -----------
Gross profit 16.3 17.9 16.5 17.8
---------- -------- --------- -----------
Operating expenses:
Sales and marketing 53.9 36.0 56.9 76.5
Product development and operations 22.5 77.6 25.2 82.6
General and administrative 13.0 43.1 18.8 46.1
---------- -------- --------- -----------
Total operating expenses (1) 89.4 156.7 100.9 205.2
---------- -------- --------- -----------
Loss from operations (73.1) (138.8) (84.4) (187.4)
---------- -------- --------- -----------
Interest income, net 4.7 3.8 3.6 3.9
---------- -------- --------- -----------
Net loss (68.4)% (135.0)% (80.8)% (183.5)%
---------- -------- --------- -----------
---------- -------- --------- -----------
</TABLE>
(1) Operating expenses include non-cash employee stock compensation charges of
$270,000 (4.7% of total sales) and $959,000 (8.3% of total sales) for the
three months and nine months ended September 30, 1998, respectively.
SALES
Sales increased to $5.8 million for the quarter ended September 30, 1998 up
from $683,000 for the quarter ended September 30, 1997 and sales increased to
$11.5 million for the nine months ended September 30, 1998 up from $1.1 million
for the nine months ended September 30, 1997. The increases
9.
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were primarily a result of significant growth in the number of the Company's
software publisher and online retailer clients as well as increasing market
acceptance of ESD. International sales represented approximately 29% and 31%
of sales for the nine months ended September 30, 1998 and 1997, respectively.
GROSS PROFIT
Cost of sales increased to $4.8 million in the quarter ended September 30,
1998 from $561,000 in the quarter ended September 30, 1997 and cost of sales
increased to $9.6 million in the nine months ended September 30, 1998 up from
$940,000 in the nine months ended September 30, 1997. The increase reflects the
Company's growth in sales. The Company's gross profit margin decreased in each
of the comparable periods as a result of the addition of certain lower margin
software publisher clients during the second half of 1997 and the higher cost
impact of increased physical shipments in 1998. The Company has historically
generated higher gross margins on sales through online retailer client Web
stores compared to sales through software publisher client Web stores, although
there can be no assurance that this will continue. In each of the nine months
ended September 30, 1998 and 1997, less than 6% of the Company's sales were
generated through online retailer client Web stores. The Company expects that an
increasing percentage of its sales will be generated through online retailers.
The Company believes that Internet commerce and related services will become
more competitive in the near future. Accordingly, the Company may reduce or
alter its pricing structure and policies in the future and any such change could
reduce gross margins.
SALES AND MARKETING
Sales and marketing expense increased to $3.1 million in the quarter ended
September 30, 1998 from $246,000 in the quarter ended September 30, 1997. Sales
and marketing expense increased to $6.5 million in the nine months ended
September 30, 1998 from $875,000 in the nine months ended September 30, 1997.
These increases resulted from expanding the sales and marketing infrastructure
required to increase the number of and provide support to software publisher and
online retailer clients. The primary components of this increase for the
comparable quarters ended September 30 were an increase in advertising and
marketing expenditures of $1.2 million and an increase in wages and benefits of
$395,000. As a percentage of sales, sales and marketing expense increased to
53.9% in the quarter ended September 30, 1998 from 36.0% in the quarter ended
September 30, 1997, primarily reflecting the Company's increased advertising and
marketing expenditures. The Company expects that sales and marketing expense
will continue to increase in absolute dollars as the Company continues to build
its sales and marketing infrastructure and to develop marketing programs.
PRODUCT DEVELOPMENT AND OPERATIONS
Product development and operations expense increased to $1.3 million in the
quarter ended September 30, 1998 from $530,000 in the quarter ended September
30,1997. Product development and operations expense increased to $2.9 million in
the nine months ended September 30, 1998 from $945,000 in the nine months ended
September 30, 1997. The increase was primarily related to increased personnel
and consulting costs related to developing, enhancing and maintaining the
Company's CNS and related facilities. The primary components of this increase
for the comparable quarters ended September 30, were an increase in wages and
benefits of $268,000 and an increase in consulting costs of $270,000. As a
percentage of sales, product development and operations expense decreased to
22.5% in the quarter ended September 30, 1998 from 77.6% in the quarter ended
September 30, 1997, primarily reflecting the Company's growth in sales. The
Company believes that continued investment in product development and operations
is critical to attaining its strategic objectives and, and as a result, expects
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product development and operations expenses will continue to increase in
absolute dollars. As a percentage of sales, these expenses are expected to
decrease as sales increase.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased to $751,000 in the quarter
ended September 30, 1998 from $294,000 in the quarter ended September 30, 1997.
General and administrative expense increased to $2.2 million in the nine months
ended September 30, 1998 from $527,000 in the nine months ended September 30,
1997. The increase was primarily due to increased personnel and related
expenses. The primary components of this increase for the comparable quarters
ended September 30 were an increase in deferred compensation expense of $270,000
and an increase in wages and benefits of $215,000. As a percentage of sales,
general and administrative expense decreased to 13.0% in the quarter ended
September 30, 1998 from 43.0% in the quarter ended September 30, 1997, primarily
reflecting the Company's growth in sales. The Company expects general and
administrative expense, excluding the impact of deferred compensation expense,
to increase in absolute dollars in the future, particularly as the Company
continues to build infrastructure to support growth and incurs costs associated
with being a public company. As a percentage of sales, these expenses are
expected to decrease as sales increase.
INTEREST INCOME, NET
Interest income, net consists of earnings on the Company's cash, cash
equivalents and short-term investments. The increase over prior periods was
attributable to interest received on higher average cash and cash equivalent
balances resulting from the IPO and private sales of Common and Preferred Stock
in 1998. The Company expects interest income to increase in the fourth quarter
of 1998 and then begin to decrease in the future as cash is used to fund
operations and is used for investments in infrastructure.
INCOME TAXES
The Company paid no income taxes in any reported period. The Company has
incurred a net loss for each period since inception. As of September 30, 1998,
the Company had approximately $12.0 million of net operating loss carryforwards
for federal income tax purposes, which expire beginning in 2009. Due to the
uncertainty of future profitability, a valuation allowance equal to the deferred
tax asset has been recorded. Certain changes in ownership that resulted from the
sales of Common and Preferred Stock will limit the future annual realization of
the tax net operating loss carryforwards to a specified percentage under Section
382 of the Internal Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
In August 1998, the Company completed its IPO in which the Company sold
3,000,000 shares of Common Stock. Net proceeds to the Company were $22.7
million after expenses.
In the first nine months of 1998, the Company used $6.7 million of cash to
fund operations and made additions of equipment and software totaling $2.5
million. The Company also purchased $10.8 million in short-term investments
which were partially offset by $2.0 million in sales of investments. Prior to
the IPO, the Company had also received proceeds from sales of Common and
Preferred Stock totaling $12.6 million in 1998.
As of September 30, 1998 the Company had approximately $19.4 million of
cash and cash equivalents and $8.8 million of short-term investments. The
Company's principal commitments consisted of obligations outstanding under
operating leases. Although the Company has no material commitments for capital
expenditures, it anticipates an increase in the rate of capital expenditures
consistent with its anticipated growth in operations, infrastructure and
personnel. The Company anticipates that it will
11.
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expend approximately $2.0 million over the next 21 months on capital
expenditures based on the Company's current anticipated growth rate. The
Company further anticipates that it will expend approximately $6.0 million
over the next 21 months on product development based on the Company's current
anticipated growth rate in operations. The Company may also use cash to
acquire or license technology, products or businesses related to the
Company's current business. The Company also anticipates that it will
continue to experience significant growth in its operating expenses for the
foreseeable future and that its operating expenses will be a material use of
the Company's cash resources.
The Company believes that the net proceeds from its IPO, together with
existing sources of liquidity, will provide adequate cash to fund its operations
for at least the next 21 months.
YEAR 2000 COMPLIANCE
Like many other companies, Year 2000 computer issues create certain risks
for the Company. If the Company's internal management information systems and
external electronic commerce information systems do not correctly recognize and
process date information beyond the Year 1999, there could be an adverse impact
on the Company's operations. To address these Year 2000 issues with its internal
and external systems, the Company has evaluated such systems. Remediation is
proceeding, and the Company currently plans to have changes to these systems
completed and tested by March 31, 1999. These activities are intended to
encompass all major categories of systems used by the Company, including
electronic commerce, sales processing, sales and financial systems. The initial
assessment indicated that certain internal systems should be upgraded or
replaced as part of a solution to the Year 2000 problem. The costs incurred to
date related to these programs have not been material. The cost which will be
incurred by the Company prospectively is not expected to exceed $10,000. The
total cost estimate does not include potential costs related to any customer or
other claims or the cost of internal software and hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of the projects and is subject to change as the project progresses.
The Company is also working with key suppliers of products and services to
determine that their operations and products are Year 2000 compliant or to
monitor their progress toward Year 2000 compliance, as appropriate. The failure
of a major supplier to become Year 2000 Compliant on a timely basis, or a
conversion that is incompatible with the Company's systems could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition the Company's business, financial condition and results
of operations may be materially adversely affected to the extent its end-users
are unable to use their credit cards due to the Year 2000 issues that are not
rectified by their credit card vendors.
In addition, the Company has begun internal discussions concerning
contingency planning to address potential problem areas with internal systems
and with suppliers and other third parties. It is expected that assessment,
remediation and contingency planning activities will be on-going throughout
calendar year 1998 and 1999 with the goal of appropriately resolving all
material internal and external systems and third party issues.
As used by the Company, "Year 2000 Compliant" shall mean software that can
individually, and in combination and in conjunction with all other systems,
products or processes with which they are required or designed to interface,
continue to be used normally and to operate successfully (both in functionality
and performance in all material respects) over the transition into the twenty
first century when used in accordance with the documentation relating to such
software, including being able to, before, on and after January 1, 2000
substantially conform to the following: (i) use logic pertaining to dates which
allow users to identify and/or use the century portion of any date fields
without special processing; and (ii) respond to all date elements and date input
so as to resolve any ambiguity as to
12.
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century in a disclosed, defined and pre-determined manner and provide date
information in ways which are unambiguous as to century, either by permitting
or requiring the century to be specified or where the data element is
represented without a century, the correct century is unambiguous for all
manipulations involving that element. Based on currently available
information, the Company does not believe that the Year 2000 matters
discussed above related to internal systems or products sold to customers
will have a material adverse impact on the its financial condition or overall
trends in results of operations; however, it is still uncertain to what
extent the Company may be affected by such matters. In addition, customers
may delay purchase decisions because of uncertainty about Year 2000 issues.
There also can be no assurance that the failure to ensure Year 2000
Compliance by a supplier or another third party would not have a material
adverse effect on the Company.
13.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) The effective date of the Company's registration statement, filed on Form
S-1 under the Securities Act of 1933 (File No. 333-56787), was August 11, 1998
(the "Registration Statement"). The class of securities registered was Common
Stock and all securities registered were sold in the offering. The managing
underwriters for the offering were BT Alex. Brown, BancAmerica Robertson
Stephens and Bear, Stearns & Co. Inc. Pursuant to the Registration Statement,
the Company sold 3,000,000 shares of its Common Stock for an aggregate gross
offering price of $25.5 million.
In connection with the IPO, the Company incurred expenses of approximately
$2.8 million, of which approximately $1.8 million represented underwriting
discounts and commissions and approximately $1 million represented other
expenses related to the offering. All such expenses were direct or indirect
payments to others. The net offering proceeds to the Company were $22.7
million.
Through September 30, 1998, the Company has used $700,000 of the net
proceeds from the IPO to purchase equipment and software and $1.9 million of the
net proceeds for working capital and general corporate purposes. The Company
has invested the net proceeds in short-term, investment-grade, interest bearing
financial instruments. The use of the proceeds from the offering does not
represent a material change in the use of the proceeds described in the
Registration Statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In connection with the IPO, On July 27, 1998, the Company received
appropriate stockholder approval, in the form of written consents, of the
following actions: (i) to amend and restate the Company's stock option plan
including the increase in the aggregate number of shares of Common Stock
authorized for issuance under the stock option plan by 1,500,000 shares; (ii) to
amend and restate the Company's Certificate of Incorporation, as amended, to
effect a 2-for-3 reverse split of the outstanding shares of the Company's Common
Stock; to became effective prior to the closing of the IPO; (iii) to amend and
restate the Company's Certificate of Incorporation, to become effective upon the
closing of the IPO; (iv) to amend and restate the Company's Bylaws, to become
effective upon the closing of the IPO; and (v) to adopt a form of indemnity
agreement to be entered into by the Company with each of its directors and
executive officers.
ITEM 5. OTHER INFORMATION.
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 annual meeting of
stockholders (the "1999 Annual Meeting") must provide specified information to
the Company not earlier than the close of business on the 90th day prior to the
1999 Annual Meeting and not later than the close of business on the 60th day
prior to the 1999 Annual Meeting, or, in the event that a public announcement of
the date of the 1999 Annual Meeting is first made by the Company fewer than 70
days prior to the date of the 1999 Annual Meeting, not later than the close of
business on the 10th day following public announcement of the date of such
meeting (unless such matters are included in the Company's proxy statement
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended).
14.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ------------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
11.1(2) Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-1, File No. 333-56787, declared effective on August 11, 1998,
incorporated herein by reference.
(2) See Note 3 to Condensed Consolidated Financial Statements.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1998.
15.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1998 DIGITAL RIVER, INC.
By: /s/ Robert E. Strawman
-----------------------
Robert E. Strawman
Chief Financial Officer
(Principal Financial and Accounting Officer)
16.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------------ ------------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
11.1(2) Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1,
File No. 333-56787, declared effective on August 11, 1998, incorporated
herein by reference.
(2) See Note 3 to Condensed Consolidated Financial Statements.
17.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,411
<SECURITIES> 8,840
<RECEIVABLES> 1,052
<ALLOWANCES> 44
<INVENTORY> 207
<CURRENT-ASSETS> 29,723
<PP&E> 3,543
<DEPRECIATION> 409
<TOTAL-ASSETS> 32,961
<CURRENT-LIABILITIES> 3,616
<BONDS> 0
0
0
<COMMON> 167
<OTHER-SE> 29,178
<TOTAL-LIABILITY-AND-EQUITY> 32,961
<SALES> 11,504
<TOTAL-REVENUES> 11,504
<CGS> 9,610
<TOTAL-COSTS> 9,610
<OTHER-EXPENSES> 11,430
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,292)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,292)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,292)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
