UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 27, 2004
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 000-26137
drugstore.com, inc.
(Exact name of registrant as specified in its charter)
| Delaware | 04-3416255 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
13920 Southeast Eastgate Way, Suite 300, Bellevue, Washington 98005
(Address of principal executive offices including zip code)
(425) 372-3200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨.
As of July 30, 2004, the registrant had 79,768,389 shares of common stock outstanding.
FORM 10-Q
For the three and six months ended June 27, 2004
INDEX
| Page | ||||
| Item 1. |
Financial Statements (unaudited): | |||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
| Item 3. |
Qualitative and Quantitative Disclosures About Market Risk | 25 | ||
| Item 4. |
Controls and Procedures | 25 | ||
| Item 1. |
Legal Proceedings | 26 | ||
| Item 2. |
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 26 | ||
| Item 3. |
Defaults Upon Senior Securities | 26 | ||
| Item 4. |
Submission of Matters to a Vote of Security Holders | 26 | ||
| Item 5. |
Other Information | 26 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 27 | ||
| 28 | ||||
| Certifications |
||||
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 27, 2004 |
June 29, 2003 |
June 27, 2004 |
June 29, 2003 |
|||||||||||||
| Net sales |
$ | 87,844 | $ | 58,224 | $ | 172,206 | $ | 115,307 | ||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of sales |
70,283 | 46,267 | 136,528 | 92,874 | ||||||||||||
| Fulfillment and order processing |
9,560 | 7,065 | 18,817 | 14,228 | ||||||||||||
| Marketing and sales |
6,339 | 3,907 | 12,462 | 7,752 | ||||||||||||
| Technology and content |
2,069 | 2,325 | 4,389 | 4,389 | ||||||||||||
| General and administrative |
3,392 | 2,923 | 7,055 | 5,644 | ||||||||||||
| Amortization of intangible assets |
1,032 | 343 | 2,084 | 709 | ||||||||||||
| Stock-based compensation (1) |
207 | 119 | 559 | 275 | ||||||||||||
| Total costs and expenses |
92,882 | 62,949 | 181,894 | 125,871 | ||||||||||||
| Operating loss |
(5,038 | ) | (4,725 | ) | (9,688 | ) | (10,564 | ) | ||||||||
| Interest income, net |
78 | 174 | 159 | 378 | ||||||||||||
| Net loss |
$ | (4,960 | ) | $ | (4,551 | ) | $ | (9,529 | ) | $ | (10,186 | ) | ||||
| Basic and diluted net loss per share |
$ | (0.07 | ) | $ | (0.07 | ) | $ | (0.13 | ) | $ | (0.15 | ) | ||||
| Weighted average shares outstanding used to compute basic and diluted net loss per share |
75,470,099 | 69,328,478 | 74,965,835 | 68,940,194 | ||||||||||||
| (1) | Set forth below are the amounts of stock-based compensation that, if recorded by operating function, would be classified in the Statements of Operations as follows: |
| Fulfillment and order processing |
$ | 12 | $ | 35 | $ | 29 | $ | 79 | ||||
| Marketing and sales |
2 | 9 | 62 | 20 | ||||||||
| Technology and content |
11 | 41 | 32 | 98 | ||||||||
| General and administrative |
182 | 34 | 436 | 78 | ||||||||
| Total |
$ | 207 | $ | 119 | $ | 559 | $ | 275 | ||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| June 27, 2004 |
December 28, 2003 |
|||||||
| (unaudited) | (audited) | |||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 14,265 | $ | 5,285 | ||||
| Marketable securities |
23,581 | 38,287 | ||||||
| Accounts receivable, net of allowances |
30,258 | 24,896 | ||||||
| Inventories |
14,674 | 13,647 | ||||||
| Prepaid marketing expenses |
2,291 | 2,291 | ||||||
| Other current assets |
4,666 | 3,231 | ||||||
| Total current assets |
89,735 | 87,637 | ||||||
| Fixed assets, net |
12,744 | 14,280 | ||||||
| Intangible assets, net |
16,630 | 19,011 | ||||||
| Goodwill, net |
53,633 | 53,077 | ||||||
| Prepaid marketing expenses |
9,014 | 10,305 | ||||||
| Deposits and other assets |
102 | 102 | ||||||
| Total assets |
$ | 181,858 | $ | 184,412 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 52,590 | $ | 46,964 | ||||
| Accrued compensation |
2,289 | 2,932 | ||||||
| Accrued marketing expenses |
1,926 | 1,870 | ||||||
| Other current liabilities |
2,640 | 3,043 | ||||||
| Current portion of capital lease obligations |
798 | 785 | ||||||
| Total current liabilities |
60,243 | 55,594 | ||||||
| Capital lease obligations, less current portion |
524 | 600 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $.0001 par value, 10,000,000 shares authorized, no shares outstanding |
||||||||
| Common stock, $.0001 par value, stated at amounts paid in: |
799,370 | 797,534 | ||||||
| Deferred stock-based compensation |
(69 | ) | (635 | ) | ||||
| Accumulated deficit |
(678,210 | ) | (668,681 | ) | ||||
| Total stockholders’ equity |
121,091 | 128,218 | ||||||
| Total liabilities and stockholders’ equity |
$ | 181,858 | $ | 184,412 | ||||
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended |
||||||||
| June 27, 2004 |
June 29, 2003 |
|||||||
| Operating Activities: |
||||||||
| Net loss |
$ | (9,529 | ) | $ | (10,186 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Non-cash expenses: |
||||||||
| Depreciation |
3,488 | 3,175 | ||||||
| Amortization of marketing and sales agreements |
1,145 | 1,145 | ||||||
| Loss on disposal of fixed assets |
(7 | ) | 32 | |||||
| Amortization of intangible assets |
2,084 | 709 | ||||||
| Stock-based compensation |
559 | 275 | ||||||
| Changes in: |
||||||||
| Accounts receivable |
(5,362 | ) | (103 | ) | ||||
| Inventories |
(1,027 | ) | (1,191 | ) | ||||
| Prepaid marketing expenses |
146 | 229 | ||||||
| Other current assets |
(1,435 | ) | 302 | |||||
| Accounts payable and accrued expenses |
4,251 | (3,579 | ) | |||||
| Other |
— | 106 | ||||||
| Net cash used in operating activities |
(5,687 | ) | (9,086 | ) | ||||
| Investing Activities: |
||||||||
| Purchases of marketable securities |
(17,353 | ) | (22,715 | ) | ||||
| Sales of marketable securities |
32,059 | 30,718 | ||||||
| Business acquisition, net of cash received |
— | (1,535 | ) | |||||
| Proceeds from the sale of fixed assets |
11 | — | ||||||
| Purchase of fixed assets |
(1,412 | ) | (983 | ) | ||||
| Net cash provided by investing activities |
13,305 | 5,485 | ||||||
| Financing Activities: |
||||||||
| Proceeds from exercise of stock options and employee stock purchase plan |
1,839 | 717 | ||||||
| Proceeds from asset financing |
— | 615 | ||||||
| Principal payments on capital lease obligations |
(477 | ) | (553 | ) | ||||
| Net cash provided by financing activities |
1,362 | 779 | ||||||
| Net increase (decrease) in cash and cash equivalents |
8,980 | (2,822 | ) | |||||
| Cash and cash equivalents at beginning of period |
5,285 | 19,384 | ||||||
| Cash and cash equivalents at end of period |
$ | 14,265 | $ | 16,562 | ||||
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of the Business
drugstore.com, inc. is a leading online provider of health, beauty, vision and pharmacy solutions. We sell health, beauty, wellness, personal care, sexual well-being, and pharmacy products through our Web site at www.drugstore.com and prestige beauty products through our Web site located at www.beauty.com, which is also accessible through the drugstore.com Web site. As of April 28, 2003, we offer customized nutritional supplement programs through our wholly owned subsidiary, Custom Nutrition Services, Inc. (CNS). Additionally, as of December 8, 2003, we sell contact lenses and other vision products through our wholly owned subsidiary International Vision Direct Corp. and its subsidiaries (collectively, Vision Direct), through its Web sites located at www.visiondirect.com, www.lensmart.com and www.lensquest.com.
All customer orders are processed through our Web stores or via telephone through our toll-free telephone numbers, 1-800-DRUGSTORE and 1-800-VISIONDIRECT. We operate two distribution centers, one that provides fulfillment capabilities for all of our pharmaceutical and non-pharmaceutical orders delivered by mail, and another that fulfills our vision orders delivered by mail. Under the terms of an agreement with Rite Aid Corporation (Rite Aid), customers are also able to order existing drugstore.com and Rite Aid refill prescriptions for pickup at any Rite Aid store.
2. Basis of Presentation
The accompanying unaudited condensed, consolidated, financial statements have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, these financial statements include all adjustments, consisting only of normal and recurring adjustments, necessary for the fair presentation of our financial condition and results of operation for the interim periods presented. In addition, the accompanying balance sheet data at December 28, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, and accompanying notes, included in our annual report on Form 10-K for the fiscal year ended December 28, 2003. Our results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation, with no effect on our financial position, cash flows or net income.
Comprehensive loss