SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended June 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 August 13, 1999, the Registrant had 4,634,387 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 June 30 4
Statement of Operations, Six Months ended June 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>
June 30,
1999 December 31,
As Restated 1998
------------ ------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................................ $ 639,430 $ 30,893
Short term investments ................................................... 7,823,530 --
Accounts receivable ...................................................... 226,966 204,196
Other current assets ..................................................... 193,859 16,731
Deferred Offering Costs .................................................. -- 888,493
------------ ------------
Total current assets ............................................. 8,883,785 1,140,313
Fixed assets, net .............................................................. 161,710 59,647
Restricted cash ................................................................ 437,500 --
Other assets ................................................................... 17,119 16,965
------------ ------------
$ 9,500,114 $ 1,216,925
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable ......................................................... $ 97,928 $ 698,746
Accrued interest ......................................................... -- 998,619
Accrued expenses and other current liabilites ............................ 28,027 404,537
Notes payable, net of debt discount ...................................... -- 5,008,634
Deferred revenue ......................................................... 243,874 186,909
------------ ------------
Total current liabilities ........................................ 369,829 7,297,445
------------ ------------
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 June 30, 1999 -- 9
Common stock, $0.0001 par value; 35,000,000 shares
authorized; 4,634,387 and 131,524 shares issued
and outstanding at June 30,1999 and December 31,
1998, respectively ................................................. 463 13
Additional paid-in capital ............................................... 26,085,901 4,618,297
Accumulated deficit ....................................................... (16,934,192) (10,698,839)
Accumulated other comprehensive loss ...................................... (21,887) --
------------ ------------
Total stockholders' equity (deficit) ............................. 9,130,285 (6,080,520)
------------ ------------
$ 9,500,114 $ 1,216,925
============ ============
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE>
DIGITAL LAVA INC.
Statement of Operations
(Unaudited)
Three Months Ended June 30,
-----------------------------
1999
As Restated 1998
----------- ------------
Revenues:
Software licenses ...................... $ 50,754 $ 224,835
Consulting and services ................ 61,202 50,835
----------- -----------
Total revenues ................. 111,956 275,670
----------- -----------
Cost of revenues:
Cost of software licenses .............. 205 7,428
Cost of consulting and services ........ 13,652 37,986
----------- -----------
Total cost of revenues ......... 13,857 45,414
----------- -----------
Gross profit ................... 98,099 230,256
----------- -----------
Operating costs and expenses:
Selling, general and administrative .... 1,321,172 1,257,048
Research and development ............... 221,104 128,028
----------- -----------
Total operating costs and
expenses ................... 1,542,276 1,385,076
----------- -----------
Loss from operations ........... (1,444,177) (1,154,820)
Other income(expense) ........................ 118,015 (352,724)
----------- -----------
Net loss ..................................... ($1,326,162) ($1,507,544)
=========== ===========
Basic and diluted net loss per share ......... $ (.29) $ (11.46)
=========== ===========
Weighed average common shares
used in basic and diluted loss per
share ................................ 4,634,387 131,524
=========== ===========
See accompanying notes to the unaudited financial statements.
<PAGE>
DIGITAL LAVA INC.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
1999
As Restated 1998
----------- -----------
<S> <C> <C>
Revenues:
Software licenses ............................. $ 142,912 $ 264,185
Consulting and services ....................... 145,923 127,712
----------- -----------
Total revenues ........................ 288,835 391,897
----------- -----------
Cost of revenues:
Cost of software licenses ..................... 2,249 7,558
Cost of consulting and services ............... 52,078 84,309
----------- -----------
Total cost of revenues ................ 54,327 91,867
----------- -----------
Gross profit .......................... 234,508 300,030
----------- -----------
Operating costs and expenses:
Selling, general and administrative ........... 2,382,219 2,003,058
Research and development ...................... 355,567 267,514
----------- -----------
Total operating costs and
expenses .......................... 2,737,786 2,270,572
----------- -----------
Loss from operations .................. (2,503,278) (1,970,542)
Other expense ....................................... (59,419) (809,465)
----------- -----------
Loss before extraordinary item ........ (2,562,697) (2,780,007)
Extraordinary loss on extinguishment of debt ........ (3,672,656) --
----------- -----------
Net loss ................................ (6,235,353) (2,780,007)
=========== ===========
Net loss available to common stockholders ........... ($6,895,366) ($2,780,007)
=========== ===========
Basic and diluted loss per share:
Loss before extraordinary item ................ $ (.98) $ (21.14)
Extraordinary loss on extinguishment of debt .. (1.13) --
=========== ===========
Net loss ............................................ $ (2.11) $ (21.14)
=========== ===========
Weighed average common shares
used in basic and diluted loss per
share ....................................... 3,263,223 131,524
=========== ===========
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE>
DIGITAL LAVA INC.
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------
1999
As Restated 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (6,235,353) $ (2,780,007)
Adjustments to reconcile net loss
to net cash used in operating activities:
Extraordinary loss on extinguishment of debt .. 3,672,656 --
Deferred costs ............................... (96,672)
Deferred revenues ............................ 56,965 733,121
Depreciation and amortization ................ 30,482 111,705
Amortization of debt discount ................ 130,758 293,785
Compensation from grant of
non-employee stock options
and warrants ........................... -- 392,420
Changes in assets and liabilities
affecting operating cash flows:
Accounts receivable ...................... (22,770) (458,742)
Other assets ............................. (180,799) (20,941)
Accounts payable ......................... (600,818) (87,824)
Accrued interest ......................... (523,954) 517,630
Accrued expenses ......................... (376,510) 240,442
------------ ------------
Net cash used in operating activities .................... (4,049,343) (1,155,083)
------------ ------------
Cash flows used in investing activities:
Purchases of short term investments .................. (8,144,829) --
Sales of short term investments ...................... 299,412 --
Restricted cash ...................................... (437,500) --
Acquisition of fixed assets .......................... (134,232) (23,992)
------------ ------------
Net cash used in investing activities .................... (8,417,149) (23,992)
------------ ------------
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 in cash and cash equivalents ................ 608,537 (129,075)
Cash and cash equivalents at beginning of
period ............................................... 30,893 173,262
------------ ------------
Cash and cash equivalents at end of period ............... $ 639,430 $ 44,187
============ ============
</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 June 30, 1999 and the statements of
operations and cash flows for the three and six month periods ended June 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 six month periods ended June 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. Restatement:
The company determined that it was necessary to revise its unaudited
results of operations as of and for the three and six month periods ended June
30, 1999. The revisions to the financial statements reflect the deferral of
$83,463 of revenue previously recognized in the second quarter of 1999 until the
first quarter of 2000. In addition, the company revised its amortization of
premiums and discounts on purchases of investments resulting in a reduction of
investment income of $32,470 for the second quarter of 1999.
A summary of the impact of such restatements on the unaudited financial
statements as of and for the three- and six-month periods ended June 30, 1999 is
as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
As previously As previously
Reported Restated Reported Restated
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Stockholders' equity $ 9,268,105 $ 9,130,285 $ 9,268,105 $ 9,130,285
Revenues 195,419 111,956 372,298 288,835
Other income/(expense) 150,485 118,015 (26,949) (59,419)
Net loss (1,210,229) (1,326,162) (6,119,420) (6,235,353)
Basic and diluted net loss
per share $ (.26) $ (.29) $ (2.08) $ (2.11)
</TABLE>
<PAGE>
4. 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 six month periods ended June
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 June 30, 1998; 2) 250,000 and 59,618 of stock options
outstanding as of June 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 June 30, 1998, and 2,272,694 and 446,254
warrants to purchase common stock as of June 30, 1999 and 1998, respectively.
Net loss available to common stockholders represents net loss for the six
months ended June 30, 1999 increased by a dividend of $660,013 issued 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).
5. Short Term Investments
During the first six 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 investments are classified as available-for-sale under SFAS 115 are
reported at fair value. At June 30, 1999, available-for-sale securities
comprised of Euro Dollar bonds and medium and short term notes of $4,823,547 and
$2,999,983, respectively.
6. 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 $14,596,446. 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 $1,513,590. 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 88,240 shares of
common stock) and 11,028 shares of common stock returned by certain officers of
the Company. This resulted in the cancellation of
<PAGE>
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.
7. 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
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.
8. 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 Six Months
Ended June 30 Ended June 30
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Net loss ($1,326,162) ($ 481,207) ($6,235,353) ($3,261,220)
Unrealized loss on
available for sale securities (21,887) -- (21,887) --
----------- ----------- -----------
Comprehensive loss ($1,348,049) ($ 481,207) ($6,257,240) ($3,261,220)
=========== =========== =========== ===========
</TABLE>
<PAGE>
9. 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.
10. Commitments and Contingencies
Operating 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
secured that letter of credit at June 30, 1999. As part of the facility
transition, the former operating lease was retired at a cost of $40,880. Future
minimum lease payments required under the non-cancelable operating leases are
$198,017, $526,393, $593,895, $613,235, $625,584 and $623,114 for the six months
ending December 31, 1999 and years ending December 31, 2000, through 2004,
respectively.
11. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities is comprised of the
following:
1999 1998
---- ----
Accrued salaries and wages $ -- $189,628
Sales Tax Payable 27 --
Other current liabilities 28,000 214,909
-------- --------
Total $ 28,027 $404,537
======== ========
12. Non-Cash Items
Non-cash items occurring in the six-month period ended June 30, 1999
included, unrealized loss on available-for-sale securities of $21,887,conversion
of debt and associated interested in conjunction with the initial public
offering in the first quarter of 1999 of $1,690,556, and an extraordinary loss
of $3,672,656 in conjunction with the conversion of the debt, conversion of
warrants to purchase series A convertible preferred stock and common stock..
Non-Cash items occurring in the six month period ended June 30, 1998
included the fair value
<PAGE>
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: development and market acceptance.
Other risks inherent in the business of the company are described in Securities
and Exchange Commission filings, including 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 June 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 be
sustainable in the future. In light of Digital Lava's limited operating history
and 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 June 30, 1999, had an accumulated
deficit of $16,934,192. 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 six months ended June 30, 1999 to the three and six
months ended June 30, 1998
Revenues
Revenues decreased to $111,956 for the quarter ended June 30, 1999 from
$275,670 for the quarter ended June 30, 1998. The decrease of $163,714 or 59.4%
was primarily due to a decrease in sales of software licenses. Software license
revenues accounted for approximately 45.3% and 81.6% of revenues for the quarter
ended June 30, 1999 and 1998, respectively. Consulting and services revenues
accounted for approximately 54.7% and 18.4% of revenues for the quarter ended
June 30, 1999 and 1998, respectively. Digital Lava's largest customer accounted
for 22.3% and 71.8% of revenues for the three months ended June 30, 1999 and
1998, respectively. Digital Lava anticipates that services revenue will account
for an increasing share of revenues for the foreseeable future.
For the six months ended June 30, 1999, revenues decreased to $288,835 from
$391,897 for the
<PAGE>
six months ended June 30, 1998. The decrease of $103,062 or 26.3% was due to a
decrease in software license sales. Software license revenues accounted for
approximately 49.5% and 67.4% of revenues for the six months ended June 30, 1999
and 1998, respectively. Consulting and services revenues accounted for
approximately 50.5% and 32.6% of revenues for the six months ended June 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 $13,857, or 7.1% of revenues, for quarter ended June 30,
1999 from $45,414, or 16.5% of revenues, for the quarter ended June 30, 1998.
This decrease was primarily due to decreased costs associated with consulting
and services revenue during the quarter. Digital Lava expects its cost of
revenue to increase in dollar amount while declining as a percentage of revenue
as Digital Lava expands its customer base.
Costs of revenues decreased to $54,327, or 14.6% of revenues, for the six
months ended June 30, 1999 from $91,867, or 23.4% of revenues, for the same
period in 1998. This decrease was primarily due to decreased costs associated
with consulting and services revenue during the six 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 $1,321,172 for the quarter ended June 30, 1999 from $1,257,048 for
the quarter ended June 30, 1998. The increase was primarily due to increased
spending on, trade shows, 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 further growth of the business and its
operation as a public company.
Selling, general and administrative expenses increased to $2,382,219 for
the six months ended June 30, 1999 from $2,003,058 for the same period in 1998.
The increase was primarily due to increased spending on additional personnel,
sales and marketing 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 $221,104, or 113.1% of revenues,
for the quarter ended June 30, 1999 from $128,028, or 46.4% of revenues, for the
quarter ended June 30, 1998. The dollar increase was primarily due to the
increased personnel hired during the second quarter of 1999. Digital Lava
believes that significant investments in technology and content development are
required to maintain a technological lead 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 continue to decline as a percentage of revenues.
Research and development expenses increased to $355,567, or 95.5% of
revenues, for the six
<PAGE>
months ended June 30, 1999 from $267,514, or 68.3% of revenues, for the same
period in 1998. The increase was primarily due to the increased personnel hired
during the first six months of the year.
Other Income/(Expense). Other income includes interest earned and gains and
losses from the sale of the short term investments of cash balances. Other
expense includes interest expense related to Digital Lava's financing
obligations and the amortization of debt discount in 1998. Other income
(expense) increased to income of $118,015 for the quarter ended June 30, 1999
from an expense level of $352,724 for the quarter ended June 30, 1998. The
increase in income and decrease in expense was primarily due to the retirement
of notes payable issued by Digital Lava in conjunction with the completion of
the initial public offering and the investment of cash in short term marketable
securities. Interest expense for the quarter ended June 30, 1998 included
amortization of debt discount of $153,373.
Other expense decreased to $59,419 for the six month period ended June 30,
1999 from $809,465 in the first six 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
six months ended June 30, 1998 included amortization of debt discount of
$293,789.
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. Digital Lava used approximately $4,489,000 of the
proceeds to repay bridge notes. 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 June 30, 1999, Digital Lava
has used approximately 1) $4,489,000 of the proceeds to repay bridge notes; 2)
$356,000 for product development expenses; 3) $785,000 for sales and marketing
expenses; 4) $278,000 for facilities and other capital expenditures; and 4)
$1,685,000 for working capital and general corporate purposes.
Net cash used in operating activities was $4,049,343 for the six months
ended June 30, 1999 as compared to $1,155,083 for the six months ended June 30,
1998 resulting primarily from the net loss and payment of accrued expenses
partially offset by the non-cash extraordinary loss.
Cash flows used in investing activities was $8,417,149 for the six months
ended June 30, 1999 as compared to $23,992 for the six months ended June 30,
1998 resulting primarily from the purchase of short term securities.
Net cash provided by financing activities was $13,075,029 for the six
months ended June 30, 1999 as compared to $1,050,000 for the six months ended
June 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
<PAGE>
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 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.
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 NONE
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: August 13, 1999
by: /s/ Danny Gampe
----------------------------------
Danny Gampe
Chief Financial Officer
(Principal Accounting and Financial Officer)
and Vice President, Finance
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 639,430
<SECURITIES> 7,823,530
<RECEIVABLES> 226,966
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,883,785
<PP&E> 319,362
<DEPRECIATION> (157,652)
<TOTAL-ASSETS> 9,500,114
<CURRENT-LIABILITIES> 369,829
<BONDS> 0
0
0
<COMMON> 463
<OTHER-SE> 9,129,822
<TOTAL-LIABILITY-AND-EQUITY> 9,500,114
<SALES> 0
<TOTAL-REVENUES> 288,835
<CGS> 54,327
<TOTAL-COSTS> 54,327
<OTHER-EXPENSES> 2,737,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,419
<INCOME-PRETAX> (2,562,697)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,562,697)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,672,656)
<CHANGES> 0
<NET-INCOME> (6,235,353)
<EPS-BASIC> (2.11)
<EPS-DILUTED> (2.11)
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