Digital River 2002 Annual Report Download - page 33

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The Company is a leading provider of comprehensive electronic commerce outsourcing solutions. 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 proprietary technology platform, known as CNS. In
1996, the Company began to focus its business development efforts on the software industry, building its inventory of software products through
contracts with software publishers. In 1997, the Company began to develop software distribution relationships through contracts with online
retailers. As of March 1, 2003, the Company had approximately 14,000 software publisher clients and online retailer clients served by the
Software and Digital Commerce Services Division. In late 1998, the Company began to offer its comprehensive electronic commerce
outsourcing services in the form of a transaction fee-based e-commerce service to clients outside of the software industry. As of March 1, 2003,
the Company was operating approximately 20,000 sites under its E-Business Services Division.
The Company has approximately six years of operating history upon which investors may evaluate its business and prospects. Since inception,
the Company has incurred significant losses, and as of December 31, 2002, had an accumulated deficit of approximately $104 million. The
Company intends to expend 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. Although the Company expects to generate positive cash flow
from operations in 2003, there can be no assurance that the Company’ s revenue will increase or even continue at its 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 new and
rapidly evolving markets such as electronic commerce. To address these risks, the Company must, among other things, attract and retain
software publishers and online retailers as clients, attract and retain E-Business clients, introduce new Web sites, Web stores or services,
continue to upgrade and develop our systems and infrastructure to meet emerging market needs and remain competitive in our service offerings,
and retain and attract personnel commensurate with our business needs. There can be no assurance that the Company will be successful in
addressing these risks, and any failure to do so could 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 revenue. Revenue 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 revenue could
have an immediate adverse effect on the Company’ s business, financial condition and results of operations. The Company is also likely to
continue to see revenue fluctuate on a seasonal basis, which is typical for the software publishing market in general and its current E-Business
Service clients. The Company believes that its first and fourth quarters tend to be seasonally stronger than its second and third quarters due to
the timing of demand for tax preparation software and the holiday season selling period. In addition, it is the Company’ s belief that software
publishers avoid new product releases in the summer months. In view of the rapidly evolving nature of the Company’ s business, the Company is
unable to accurately forecast its revenue 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.