SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 1999
Commission file number: 1-14831
DIGITAL LAVA INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4584080
-------- ----------
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
13160 Mindanao Way, Suite 350
Marina del Rey, CA 90292
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 577-0200
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, the Registrant had 4,636,887 shares of its $.0001 par
value Common Stock issued and outstanding.
<PAGE>
Digital Lava Inc.
Table of Contents
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet 3
Statement of Operations, Three Months ended September 30 4
Statement of Operations, Nine Months ended September 30 5
Statement of Cash Flows 6
Notes to Unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
DIGITAL LAVA INC.
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents ...................................................... $ 1,690,847 $ 30,893
Short term investments ......................................................... 4,740,561 --
Accounts receivable ............................................................ 456,383 204,196
Other current assets ........................................................... 198,212 16,731
Deferred offering costs ........................................................ -- 888,493
------------ ------------
Total current assets ................................................... 7,086,003 1,140,313
Fixed assets, net .................................................................... 516,637 59,647
Restricted cash ...................................................................... 551,510 --
Other assets ......................................................................... 27,119 16,965
------------ ------------
$ 8,181,269 $ 1,216,925
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable ............................................................... $ 235,617 $ 698,746
Accrued interest ............................................................... -- 998,619
Accrued expenses and other current liabilities ................................. 290,848 404,537
Notes payable, net of debt discount ............................................ -- 5,008,634
Deferred revenue ............................................................... 106,153 186,909
------------ ------------
Total current liabilities .............................................. 632,618 7,297,445
------------ ------------
Long term portion of capital lease ................................................... 23,744 --
Stockholders' equity/(deficit):
Convertible preferred stock - Series A, B, B-1
and C, $.0001 par value; 5,000,000 shares
authorized; 98,349 shares issued and outstanding
(liquidation preference of $1,626,965) at December 31,
1998; none issued and outstanding at September 30, 1999 ................... -- 9
Common stock, $0.0001 par value; 35,000,000 shares
authorized; 4,636,887 and 131,524 shares issued
and outstanding at September 30, 1999 and
December 31, 1998, respectively .......................................... 463 13
Additional paid-in capital ..................................................... 26,091,107 4,618,297
Accumulated deficit ............................................................ (18,652,395) (10,698,839)
Accumulated other comprehensive income ......................................... 85,732 --
------------ ------------
Total stockholders' equity/(deficit) ................................... 7,524,907 (6,080,520)
------------ ------------
$ 8,181,269 $ 1,216,925
============ ============
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE>
DIGITAL LAVA INC.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Software licenses ........................................ $ 63,073 $ 567,905
Services ................................................. 294,144 187,830
----------- -----------
Total revenues ................................... 357,217 755,735
----------- -----------
Cost of revenues:
Cost of software licenses ................................ 38,018 280
Cost of services ......................................... 66,134 152,192
----------- -----------
Total cost of revenues ........................... 104,152 152,472
----------- -----------
Gross profit ..................................... 253,065 603,263
----------- -----------
Operating costs and expenses:
Selling, general and administrative ...................... 1,754,946 770,176
Research and development ................................. 292,856 66,628
----------- -----------
Total operating costs and
expenses ..................................... 2,047,802 836,804
----------- -----------
Loss from operations ............................. (1,794,737) (233,541)
Other expense, net ............................................. (39,396) (247,666)
----------- -----------
Net loss ....................................................... ($1,834,133) ($ 481,207)
=========== ===========
Basic and diluted net loss per share ........................... $ (.40) $ (3.66)
=========== ===========
Weighed average common shares
used in basic and diluted loss per
share .................................................. 4,636,887 131,524
=========== ===========
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE>
DIGITAL LAVA INC.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Software licenses ........................................ $ 295,097 $ 832,090
Services ................................................. 434,418 315,542
----------- -----------
Total revenues ................................... 729,515 1,147,632
----------- -----------
Cost of revenues:
Cost of software licenses ................................ 40,267 7,708
Cost of services ......................................... 118,212 236,631
----------- -----------
Total cost of revenues ........................... 158,479 244,339
----------- -----------
Gross profit ..................................... 571,036 903,293
----------- -----------
Operating costs and expenses:
Selling, general and administrative ...................... 4,137,165 2,773,240
Research and development ................................. 648,423 334,142
----------- -----------
Total operating costs and
expenses ..................................... 4,785,588 3,107,382
----------- -----------
Loss from operations ............................. (4,214,552) (2,204,089)
Other expense, net ............................................. (66,345) (1,057,131)
----------- -----------
Loss before extraordinary item ................... (4,280,897) (3,261,220)
Extraordinary loss on extinguishment of debt ................... (3,672,656) --
----------- -----------
Net loss ........................................... (7,953,553) (3,261,220)
=========== ===========
Net loss available to common stockholders ...................... ($8,613,566) ($3,261,220)
=========== ===========
Basic and diluted loss per share:
Loss before extraordinary item ........................... $ (1.33) $ (24.80)
Extraordinary loss on extinguishment of debt ............. (.98) --
=========== ===========
Net loss ....................................................... $ (2.31) $ (24.80)
=========== ===========
Weighed average common shares
used in basic and diluted loss per
share .................................................. 3,722,284 131,524
=========== ===========
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE>
DIGITAL LAVA INC.
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (7,953,553) $ (3,261,220)
Adjustments to reconcile net loss
to net cash used in operating activities:
Extraordinary loss on extinguishment of debt ............... 3,672,656 --
Deferred revenues ......................................... (80,756) 186,254
Depreciation and amortization ............................. 63,343 147,526
Amortization of debt discount ............................. 130,758 544,905
Compensation from grant of
non-employee stock options
and warrants ........................................ -- 396,381
Changes in assets and liabilities
affecting operating cash flows:
Accounts receivable ................................... (252,187) (16,840)
Other assets .......................................... (195,150) (14,543)
Accounts payable ...................................... (463,129) 33,251
Accrued interest ...................................... (523,952) 634,737
Accrued expenses and other current liabilities ........ (124,935) 451,177
------------ ------------
Net cash used in operating activities ................................. (5,726,905) (898,372)
------------ ------------
Cash flows used in investing activities:
Purchases of short term investments ............................... (8,144,829) --
Sales of short term investments ................................... 3,489,997 --
Restricted cash ................................................... (551,510) --
Deferred offering costs ........................................... -- (289,112)
Acquisition of fixed assets ....................................... (481,828) (23,992)
------------ ------------
Net cash used in investing activities ................................. (5,688,170) (313,104)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable ....................................... -- 1,050,000
Repayment of notes payable ........................................ (3,923,500) --
Proceeds from issuance of common stock ............................ 19,831,011 --
Cost of common stock issuance ..................................... (2,832,482) --
------------ ------------
Net cash provided by financing activities ............................. 13,075,029 1,050,000
------------ ------------
Net increase/(decrease) in cash and cash equivalents .................. 1,659,954 (161,476)
Cash and cash equivalents at beginning of
period ............................................................ 30,893 173,262
------------ ------------
Cash and cash equivalents at end of period ............................ $ 1,690,847 $ 11,786
============ ============
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE>
DIGITAL LAVA INC.
Notes to (Unaudited) Financial Statements
1. The Company
Digital Lava Inc., a Delaware corporation (the "Company"), develops and
markets rich mixed media software applications for corporate training,
communications, distance learning, research and other applications. The
Company's technology allows users to organize and manage video content, link
video to other types of files and publish video with all of the linked
information on CD-ROM or DVD, corporate intranets or the public Internet.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of presentation
The accompanying balance sheet as of September 30, 1999 and the statements
of operations and cash flows for the three and nine month periods ended
September 30, 1999 and 1998 have been prepared by the Company without audit. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation have been included. The results
of operations for the three and nine month periods ended September 30, 1999 are
not necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Form 10-KSB for the year ended December 31, 1998.
3. Net loss per share:
The Company's net loss per share calculations are based upon the weighted
average number of shares of common stock outstanding. Because their effects are
anti-dilutive, net loss per share for the three and nine month periods ended
September 30, 1999 and 1998 does not include the effect of 1) 98,349 (983,490
shares of common stock on an as-if converted basis) shares of convertible
preferred stock outstanding as of September 30, 1998; 2) 712,570 and 59,618 of
stock options outstanding as of September 30, 1999 and 1998, respectively; 3)
17,125 (171,250 on an as-if converted basis) warrants to purchase outstanding
shares of a series A convertible preferred stock as of September 30, 1998, and
4) 2,272,575 and 446,254 warrants to purchase common stock as of September 30,
1999 and 1998, respectively.
Net loss available to common stockholders represents net loss for the nine
months ended September 30, 1999 increased by a dividend of $660,013 recorded in
February 1999 to the then holders of Series B and C convertible preferred stock
in conjunction with the change in conversion rates of such shares (Note 5).
4. Short Term Investments
During the first nine months of 1999, the Company purchased short-term
investments comprised of Euro Dollar bonds and medium and short term notes. The
Company accounts for short-term investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities which have readily
determinable fair values and all investments in debt securities. The Company's
short-term
<PAGE>
investments are classified as available-for-sale under SFAS 115 and are reported
at fair value. The net unrealized gains or losses on these investments are
reported as a separate component of stockholders' equity, net of tax, and
represented an unrealized gain of $85,732 at September 30, 1999. At September
30, 1999, available-for-sale securities were comprised of Euro Dollar bonds and
medium and short term notes of $3,112,083 and $1,628,478, respectively.
5. Underwritten public offering
On February 22, 1999, the Company completed an underwritten public offering
of 1,200,000 units at a price of $15.10 per unit. Each unit consists of two
shares of common stock and a warrant to purchase one share of common stock at a
price of $7.50 per share of common stock plus $.10 per warrant. Proceeds, net of
discounts and commissions of $1,514,832, and offering expenses of $2,008,722,
totaled $14,596,469. In addition, on March 30, 1999 the underwriter exercised
their over-allotment option to purchase an additional 113,312 units for total
proceeds, net of discounts and commissions of $143,113, and offering expenses of
$54,308, of $1,513,567. Upon completion of the Company's IPO, all shares of the
Company's convertible preferred stock and certain debt, accrued interest and
warrants converted into common stock of the Company. This transaction was
reflected in the Company's first quarter 1999 results as follows:
Return of shares by officers of the Company
In conjunction with the completion of the IPO, the Company cancelled 8,824
of series A convertible preferred stock (which converted to 88,222 shares of
common stock) and 11,030 shares of common stock returned by certain officers of
the Company. This resulted in the cancellation of 99,250 shares of common stock
and was recorded as contributed capital.
Conversion of series A and B-1 convertible preferred stock
Each share of the Company's series A and B-1 convertible preferred stock
outstanding converted into 797,600 and 20,411 shares of common stock,
respectively.
Conversion of series B and C convertible preferred stock
In conjunction with the completion of the IPO, the Company changed the
conversion rate for series B and C convertible preferred stock to 20.3099 to 1
and 19.3702 to 1, respectively. As such, each share of the Company's series B
and C convertible preferred stock outstanding converted into 112,763 and 63,586
shares of common stock, respectively. The value based on the IPO price of the
88,003 incremental common shares issued to Series B and C preferred holders
resulting from the change in conversion rates was recorded as a dividend to the
preferred stockholders in the amount of $660,013.
Conversion of outstanding warrants
In conjunction with the completion of the IPO, the Company canceled
warrants to acquire 148,434 shares of common stock in exchange for 45,005 shares
of common stock.
6. Extraordinary Loss
In conjunction with the completion of the IPO, the Company repaid
approximately $4,489,000 in principal of notes payable, accrued but unpaid
interest and other related fees. The Company also converted approximately
$1,891,000 of principal of notes payable, accrued interest and outstanding
<PAGE>
warrants into 849,600 shares of common stock and cancelled warrants to purchase
series A convertible preferred and common stock of 10,669 and 344,413,
respectively, at exercise prices ranging from $6.85 to $182.78. The Company
recorded an extraordinary loss of $3,672,656 on extinguishment of this debt
based on the difference between (a) cash paid and the value of stock issued and
(b) the book value of debt, accrued interest and warrants.
7. Comprehensive Loss
Statement of Financial Accounting Standards No. 130 requires disclosure of
the total non-stockholder changes in equity resulting from revenue, expense, and
gains and losses, including those that do not affect retained earnings. The
Company's accumulated other comprehensive loss included the following:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss ............................. $1,834,133 $ 481,207 $7,953,553 $3,261,220
Unrealized gain on
available for sale securities ...... 85,732 -- 85,732 --
---------- ---------- ---------- ----------
Comprehensive loss ................... $1,748,401 $ 481,207 $7,867,821 $3,261,220
========== ========== ========== ==========
</TABLE>
8. Recent Accounting Pronouncements
In December 1998, the Accounting Standards Executive Committee released
Statement of Position ("SOP") No. 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." This SOP amends SOP
97-2 to provide a limited exception to the full deferral of revenue that the
provisions of SOP 97-2 may require. Specifically, for software in which the
entity has a contracted price for the entire arrangement and vendor-speicific
objective evidence ("VSOE") of the fair value of each undelivered element
exists, revenue for the delivered element(s) may be recognized based on the
difference between the contract price and the VSOE of the fair value of the
undelivered element(s), provided that all other revenue-recognition criteria of
SOP 97-2 are met and the total fair value of the undelivered element(s) is less
than or equal to the price for the entire software arrangement. The provisions
of SOP 98-9 will be effective for transactions that are entered into in fiscal
years beginning after March 15, 1999. The Company does not believe that adoption
of SOP 98-9 will have a material impact on the Company's financial position or
results of operations.
9. Commitments and Contingencies
Operating and capital leases
The Company entered into a non-cancelable operating lease for its facility
which expires in August 2005. Under the terms of this agreement, a letter of
credit was created as security for the lease. Restricted cash of $437,500
invested in a certificate of deposit at September 30, 1999 secured that letter
of credit. As part of the facility transition, the former operating lease was
retired at a cost of $40,880. The Company entered into a non-cancelable capital
lease for furniture and equipment
<PAGE>
which expires in September 2002. Under the terms of this agreement, a letter of
credit was created as security for the lease. Restricted cash of $114,010
invested in a certificate of deposit at September 30, 1999 secured that letter
of credit . Future minimum lease payments required under non-cancelable leases
are $174,103, $515,385, $624,089, $560,751, $563,114 and $592,752 for the three
months ending December 31, 1999 and years ending December 31, 2000, through
2004, respectively.
10. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities is comprised of the
following:
1999 1998
-------- --------
Accrued salaries and wages $153,333 $189,628
Deferred rent 46,430 ---
Other current liabilities 91,085 214,909
-------- --------
Total $290,848 $404,537
======== ========
11. Non-Cash Supplemental Disclosure
Non-cash items occurring in the nine-month period ended September 30, 1999
included $1,690,556 related to conversion of debt and associated interest and
conversion of outstanding warrants into common stock which resulted in a
non-cash extraordinary loss of $3,672,656 (Note 6). Non-cash items occurring in
the nine-month period ended September 30, 1999 also included a purchase of a
capital lease of $34,988.
Non-Cash items occurring in the nine month period ended September 30, 1998
included the fair value of warrants issued to note holders of $294,245, and the
fair value of warrants issued to consultants in connection with debt offerings
$42,204. Both fair value amounts were determined using the Black-Scholes model.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements contained in this document that are not purely historical
are forward-looking statements concerning the business and products of the
Company. Actual results may differ from those projected or implied by such
forward-looking statements depending on a number of risks and uncertainties
including, but not limited to, the following: market acceptance of Digital
Lava's products and services, the amount of resources Digital Lava devotes to
investments in its products, the resources Digital Lava devotes to marketing and
selling its services and its brand promotions and other factors. Other risks
inherent in the business of the Company are described in the Company's
prospectus dated February 17, 1999 on Form SB-2. The Company undertakes no
obligation to revise or update any forward-looking statements after the date
hereof.
Overview
Digital Lava invested significant resources in sales, marketing, and
development activities during the quarter ended September 30, 1999. Digital Lava
believes that its success depends largely on building superior technology and
quality into its products, extending its technological lead on the competition
and developing brand recognition early in a product's life cycle. Accordingly,
Digital Lava expects to continue spending heavily on these activities in the
near future. Despite these heavy investments in marketing and product
development, growth in software license fees and service revenue may not occur
in the future. In light of Digital Lava's limited operating history, rapid
changes in technology and increased marketing of its products, Digital Lava
believes that period-to-period comparisons of its revenues and operating
results, including its gross profit and operating expenses as a percentage of
total net revenues, are not necessarily meaningful and should not be relied upon
as indications of future performance.
Digital Lava has incurred significant net losses and negative cash flows
from operations since inception, and as of September 30, 1999, had an
accumulated deficit of $18,652,395. Digital Lava intends to continue to invest
heavily in technology and infrastructure development, and marketing and
promotion. As a result, Digital Lava believes that it will continue to incur
operating losses and negative cash flows from operations for the foreseeable
future and that the rate at which these losses will be incurred may increase
from current levels. There can be no assurance that Digital Lava will be able to
achieve or sustain revenue growth, profitability, or positive cash flow on
either a quarterly or annual basis.
Results of Operations
Comparison of the three and nine months ended September 30, 1999 to the three
and nine months ended September 30, 1998
Revenues
Revenues decreased to $357,217 for the quarter ended September 30, 1999
from $755,735 for the quarter ended September 30, 1998. The decrease of $398,518
or 52.7% was primarily due to a decrease in sales of software licenses,
reflective of a large non-recurring sale of software licenses in the quarter
ended September 30, 1998, partially offset by an increase in services revenue.
Software license revenues accounted for approximately 17.7% and 75.1% of
revenues for the quarter ended September 30, 1999 and 1998, respectively.
Consulting and services revenues accounted for approximately 82.3% and 24.9% of
revenues for the quarter ended September 30, 1999 and 1998, respectively.
Digital Lava's largest customer accounted for 31.8% and 89.0% of revenues for
the three
<PAGE>
months ended September 30, 1999 and 1998, respectively. Digital Lava anticipates
that services revenue will continue to account for an increasing share of
revenues for the foreseeable future as the Company's focus will be on the sale
of services related to the Company's VideoVisor Pro and VideoVisor Web .
For the nine months ended September 30, 1999, revenues decreased to
$729,515 from $1,147,632 for the nine months ended September 30, 1998. The
decrease of $418,117 or 36.4% was due to a decrease in software license sales,
reflective of a large non-recurring sale of software licenses in 1998, partially
offset by increased services revenue. Software license revenues accounted for
approximately 40.4% and 72.5% of revenues for the nine months ended September
30, 1999 and 1998, respectively. Services revenues accounted for approximately
59.6% and 27.5% of revenues for the nine months ended September 30, 1999 and
1998, respectively.
Cost of Revenues
Cost of revenues consist primarily of the cost of materials, freight and
applicable labor incurred for the delivery of the product or service. Costs of
revenues decreased to $104,152, or 29.2% of revenues, for the quarter ended
September 30, 1999 from $152,472, or 20.2% of revenues, for the quarter ended
September 30, 1998. This decrease in absolute dollars was primarily due to the
reduced level of revenue during the quarter.
Costs of revenues decreased to $158,479, or 21.7% of revenues, for the nine
months ended September 30, 1999 from $244,339, or 21.3% of revenues, for the
same period in 1998. This decrease was primarily due to the reduced level of
revenue during the nine month period.
Operating Costs and Expenses
Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of salaries, taxes and benefits and
related costs for general corporate functions, including executive management,
finance, accounting, facilities, legal, fees for professional services and
depreciation and amortization. Selling, general and administrative expenses
increased to $1,754,946 for the quarter ended September 30, 1999 from $770,176
for the quarter ended September 30, 1998. The increase was primarily due to
increased spending on trade shows and additional personnel and professional fees
required to build an infrastructure to support Digital Lava's products and
anticipated growth. Digital Lava expects that selling, general and
administrative expenses will increase in absolute dollars as Digital Lava
continues to hire personnel and incurs expense related to the anticipated growth
of the business and its operation as a public company ; however, selling,
general and administrative expense are presently anticipated to decline as a
percentage of revenues.
Selling, general and administrative expenses increased to $4,137,165 for
the nine months ended September 30, 1999 from $2,773,240 for the same period in
1998. The increase was primarily due to increased spending on additional
personnel and sales and marketing expenses required to build an infrastructure
to support Digital Lava's products and anticipated growth.
Research and Development Expenses. Research and development expenses
consist of expenditures related to technology and software development expenses.
Research and development expenses increased to $292,856, or 82.0% of revenues,
for the quarter ended Septembr 30, 1999 from $66,628, or 8.8% of revenues, for
the quarter ended September 30, 1998. The dollar increase was primarily due to
the increased level of personnel employed in 1999. Digital Lava believes that
significant investments in technology and content development are required to
maintain a technological lead
<PAGE>
and remain competitive and, therefore, expects that its research and development
expenses will increase in absolute dollars for the foreseeable future; however,
research and development expenses are presently anticipated to decline as a
percentage of revenues.
Research and development expenses increased to $648,423, or 88.9% of
revenues, for the nine months ended September 30, 1999 from $334,142, or 29.1%
of revenues, for the same period in 1998. The increase was primarily due to the
increased personnel hired during the first nine months of the year.
Other Expense, net. Other income includes income earned from the short term
investments of cash balances. Other expense includes gains and losses on sales
of investments, interest expense related to Digital Lava's financing obligations
and the amortization of debt discount in 1998. Other expense decreased to a net
expense of $39,396 for the quarter ended September 30, 1999 from a net expense
level of $247,666 for the quarter ended September 30, 1998. The decrease was
primarily due to reduced interest expense and amortization of debt discount due
to the retirement of notes payable issued by Digital Lava in conjunction with
the completion of the initial public offering offset by a loss on the sale of
investment's in short term marketable securities in 1999. Interest expense for
the quarter ended September 30, 1998 included amortization of debt discount of
$251,120.
Other expense decreased to $66,345 for the nine month period ended
September 30, 1999 from $1,057,131 in the first nine months of 1998. The
decrease was primarily due to the retirement of notes payable in the first
quarter of 1999 in conjunction with the completion of the initial public
offering and the investment of cash in short term marketable securities.
Interest expense for the nine months ended September 30, 1998 included
amortization of debt discount of $544,905.
Loss from Operations. For the quarter ended September 30, 1999, Digital
Lava's loss from operations totaled $1,834,133 as compared to $481,207 for the
quarter ended September 30, 1998.
For the nine months ended September 30, 1999, Digital Lava's loss from
operations totaled $4,280,897 as compared to $3,261,220 for the same period
ended September 30, 1998.
Extraordinary Item. In the quarter ended March 31, 1999, the Company
recorded an extraordinary charge of $3,672,656 associated with the
extinguishment of debt.
Liquidity and Capital Resources
On February 22, 1999, Digital Lava completed an initial public offering of
1,200,000 units, each unit consisting of two shares of common stock and one
redeemable warrant, and received aggregate proceeds of $18,120,000 and net
proceeds of $14,596,446. On March 30, 1999 Digital Lava completed the exercise
by its underwriter of the over allotment option of 113,312 units and received
aggregate proceeds of $1,711,011 and net proceeds of $1,513,590. During the
period from completion of the Offering through September 30, 1999, Digital Lava
has used approximately 1) $4,489,000 of the proceeds to repay notes; 2) $648,000
for product development expenses; 3) $1,509,000 for sales and marketing
expenses; 4) $954,000 for facilities and other capital expenditures; and 5)
$2,079,000 for working capital and general corporate purposes.
Net cash used in operating activities was $5,726,905 for the nine months
ended September 30, 1999 as compared to $898,372 for the nine months ended
September 30, 1998. The increase in use of cash from operations was primarily
due to the net loss incurred and payment of accrued expenses
<PAGE>
partially offset by the non-cash extraordinary loss.
Cash flows used in investing activities was $5,688,170 for the nine months
ended September 30, 1999 as compared to $313,104 for the nine months ended
September 30, 1998 resulting primarily from the purchase of short term
securities, restriction of cash related to the Company's new operating lease and
purchase of fixed assets.
Net cash provided by financing activities was $13,075,029 for the nine
months ended September 30, 1999 as compared to $1,050,000 for the six months
ended September 30, 1998. The increase was due to net proceeds received due to
the completion of the Company's initial public offering and the underwriter's
exercise of their over-allotment option offset by repayment of notes payable.
Digital Lava's capital requirements depend on numerous factors, including
market acceptance of Digital Lava's products and services, the amount of
resources Digital Lava devotes to investments in its products, the resources
Digital Lava devotes to marketing and selling its services and its brand
promotions and other factors. Digital Lava has experienced a substantial
increase in its operations and capital expenditures since its inception
consistent with the growth in Digital Lava's operations and staffing, and
anticipates that this will continue for the foreseeable future. Additionally,
Digital Lava will continue to evaluate possible investments in businesses,
products and technologies, and plans to expand its sales and marketing programs
and conduct more aggressive brand promotions.
Digital Lava currently anticipates that current cash balances, short-term
investments and cash provided by operations will be sufficient to meet its
anticipated needs for working capital and capital expenditures for at least the
next 12 months. Digital Lava anticipates it will be required to seek additional
funding either through additional public or private sales of its securities or
through debt financing. Such options are currently under consideration, however
the outcome of such efforts to raise working capital cannot be assured.
Year 2000 Risk
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results. We believe that our products and
internal systems are currently year 2000 compliant. We have confirmed our year
2000 compliance by obtaining representations by third party vendors of their
products' year 2000 compliance, as well as specific testing of our products. We
have not incurred significant costs to date complying with year 2000
requirements and we do not believe that we will incur significant costs for
these purposes in the foreseeable future. However, should products or systems
maintained by third parties or our products and systems fail to be year 2000
compliant, despite the representations of third parties and the testing of our
products, we could incur significant expenses to remedy any problems and our
business could be seriously damaged.
<PAGE>
Part II
Other Information
Item 1 Legal Proceedings NONE
Item 2 Changes in Securities NONE
Item 3 Defaults upon Senior Securities NONE
Item 4 Submission of Matters to Vote of Security Holders
At Digital Lava's annual meeting of stockholders held on July
21, 1999, the stockholders of the company elected the
following persons as directors of the company (each receiving
the votes listed below), to hold office until the next annual
meeting of stockholders and until their successors are duly
elected and qualified: James W. Stigler (3,271,145 votes for,
and 29,205 votes withheld); Robert F. Greene (3,271,145 votes
for, and 29,205 votes withheld); Roger Berman (3,104,981 votes
for, and 195,369 votes withheld); Gerald Porter (3,271,145
votes for, and 29,205 votes withheld); and John Carrington
(3,271,145 votes for, and 29,205 votes withheld). The
stockholders of the company also voted in favor (944,557 votes
for, 310,344 votes against, and 20,998 abstentions) of a
resolution adopting an amendment to the company's 1996
Incentive and Non-Qualified Stock Option Plan increasing the
aggregate number of shares issuable under the plan from
250,000 to 1,000,000.
Item 5 Other Information NONE
Item 6 Exhibits and Reports on Form 8-K NONE
<PAGE>
SIGNATURE PAGE
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.
DIGITAL LAVA INC.
Dated: November 12, 1999
by: /s/ Danny Gampe
--------------------------------------------
Danny Gampe
Chief Financial Officer
(Principal Accounting and Financial Officer)
and Vice President, Finance
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,690,847
<SECURITIES> 4,740,561
<RECEIVABLES> 456,383
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,086,003
<PP&E> 701,947
<DEPRECIATION> (185,310)
<TOTAL-ASSETS> 8,181,269
<CURRENT-LIABILITIES> 632,618
<BONDS> 0
0
0
<COMMON> 463
<OTHER-SE> 7,524,444
<TOTAL-LIABILITY-AND-EQUITY> 7,524,907
<SALES> 0
<TOTAL-REVENUES> 729,515
<CGS> 158,479
<TOTAL-COSTS> 158,479
<OTHER-EXPENSES> 4,785,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,345
<INCOME-PRETAX> (4,280,897)
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<INCOME-CONTINUING> (4,280,897)
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<EXTRAORDINARY> (3,672,656)
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