DDS Technologies USA (DDSU) 10QSB 2005 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2005

¨ Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to            

Commission File No. 000-30498

DDS Technologies USA, Inc.

(Exact name of small business issuer as specified in its charter)

Nevada	13-4253546
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

150 East Palmetto Park Road

Suite 510

Boca Raton, Florida 33432

(Address of Principal Executive Offices)

(561) 750-4450

(Issuer’s telephone number)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

State the number of shares outstanding of each of the issuer’s classes of common equity, as of May 05, 2005: 19,235,542 shares of common stock outstanding, $0.0001 par value per share.

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONTENTS

PAGE	1	CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004.
PAGE	2	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH MARCH 31, 2005 (UNAUDITED).
PAGES	3-5	CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH MARCH 31, 2005 (UNAUDITED).
PAGE	6	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH MARCH 31, 2005 (UNAUDITED).
PAGES	7-13	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2005 (UNAUDITED).
PAGES	14-15	MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PAGE	16	CONTROLS AND PROCEDURES
PAGES	17-18	PART II OTHER INFORMATION
PAGE	20	SIGNATURES

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL INFORMATION

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2005 (Unaudited)			December 31, 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	67,030		$	442,762
Inventory, net		220,536			220,536
Prepaid expenses		165,356			253,560
Total Current Assets		452,922			916,858
FIXED ASSETS, NET		37,925			39,666
PATENT		4,935,000			4,935,000
DEPOSITS ON PURCHASE OF MACHINERY		575,714			575,714
OTHER ASSETS		—			—
TOTAL ASSETS	$	6,001,561		$	6,467,238
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	501,568		$	358,474
Accrued professional fees		60,000			77,009
Total Current Liabilities		561,568			435,483
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $.0001 par value, 25,000,000 shares authorized, 19,235,542 shares issued and outstanding		1,923			1,923
Additional paid-in capital		18,171,587			18,171,587
Deferred consulting expense		(36,439	)		(72,879	)
Deficit accumulated during development stage		(12,697,078	)		(12,068,876	)
Total Stockholders’ Equity		5,439,994			6,031,755
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,001,561		$	6,467,238

See accompanying notes to the condensed consolidated financial statements.

1

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended March 31, 2005			For the Three Months Ended March 31, 2004			For the Period From July 17, 2002 (Inception) Through March 31, 2005
REVENUES	$	—		$	—		$	—
EXPENSES
Professional fees		302,089			985,980			7,024,680
Salaries and related taxes		134,032			168,991			995,688
General and administrative		159,123			224,398			1,715,189
Research and development		33,621			—			168,729
Merger costs		—			—			200,000
Machinery impairment		—			—			2,602,775
Total Expenses		628,865			1,379,369			12,707,061
OTHER INCOME
Interest income		663			922			9,983
Total Other Income		663			922			9,983
NET LOSS	$	(628,202	)	$	(1,378,447	)	$	(12,697,078	)
NET LOSS PER SHARE – BASIC AND DILUTED	$	(0.03	)	$	(0.07	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC AND DILUTED		19,235,542			18,725,433

See accompanying notes to the condensed consolidated financial statements.

2

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH MARCH 31, 2005

(UNAUDITED)

	Common Stock			Additional Paid-In Capital			Subscriptions Receivable			Deferred Consulting Expense			Note Receivable Related Party			Interest Receivable Related Party			Accumulated Deficit			Total
	Shares	Amount
Common stock issued for cash at inception	10,944,055	$	1,095	$	957,310		$	—		$	—		$	—		$	—		$	—		$	958,405
Common stock issued for license valued at $1.00 per share	3,500,000		350		3,499,650			—			—			—			—			—			3,500,000
Common stock issued for cash in December 2002 at $1.00 per share	100,000		10		99,990			—			—			—			—			—			100,000
Net loss, July 17, 2002 (inception) through December 31, 2002	—		—		—			—			—			—			—			(407,803	)		(407,803	)
Common stock issued for cash in January 2003 at $1.00 per share	200,000		20		199,980			—			—			—			—			—			200,000
Common stock issued for license in January 2003 at $1.00 per share	500,000		50		499,950			—			—			—			—			—			500,000
Note receivable – related party in February 2003	—		—		—			—			—			(235,000	)		—			—			(235,000	)
Interest receivable – related party	—		—		—			—			—			—			(3,074	)		—			(3,074	)
Common stock issued for cash in February, March and April 2003 at $1.00 per share	800,000		80		799,920			—			—			—			—			—			800,000
Recapitalization for merger in April 2003	429,000		43		(43	)		—			—			—			—			—			—
Common stock issued for cash in May 2003 at $1.00 per share	100,000		10		99,990			—			—			—			—			—			100,000
Common stock subscribed at $1.00 per share	1,500,000		150		1,499,850			(1,500,000	)		—			—			—			—			—
Collection of subscription receivable in July 2003	—		—		—			500,000			—			—			—			—			500,000
Warrants issued for consulting expense in April 2003	—		—		1,274,848			—			(1,274,848	)		—			—			—			—
Common stock issued for cash in July and August 2003 at $3.50 per share, net	502,714		50		1,020,444			—			—			—			—			—			1,020,494

See accompanying notes to the condensed consolidated financial statements.

3

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH MARCH 31, 2005

(UNAUDITED)

	Common Stock				Additional Paid-In Capital		Subscriptions Receivable	Deferred Consulting Expense		Note Receivable Related Party		Interest Receivable Related Party		Accumulated Deficit		Total
	Shares		Amount
Warrants issued with the sale of common stock in July and August 2003	—		—		563,056		—	—		—		—		—		563,056
Common stock issued for services in August and September 2003	175,000		17		1,298,233		—	(1,298,250	)	—		—		—		—
Common stock issued for settlement	60,000		6		464,994		—	—		—		—		—		465,000
Cancellation of subscription receivable	(1,000,000	)	(100	)	(999,900	)	1,000,000	—		—		—		—		—
Common stock issued for cash in October 2003 at $6.00 per share, net	904,334		90		2,896,206		—	—		—		—		—		2,896,296
Warrants issued with the sale of common stock in October 2003	—		—		1,962,114		—	—		—		—		—		1,962,114
Warrants issued for consulting expense in December 2003	—		—		29,761		—	(29,761	)	—		—		—		—
Options issued for consulting services in August and November 2003	—		—		181,010		—	(181,010	)	—		—		—		—
Amortization of deferred consulting expenses in 2003	—		—		—		—	1,427,336		—		—		—		1,427,336
Net loss, year ended December 31, 2003	—		—		—		—	—		—		—		(4,670,321	)	(4,670,321	)
BALANCE, December 31, 2003	18,715,103		1,871		16,347,363		—	(1,356,533	)	(235,000	)	(3,074	)	(5,078,124	)	(9,676,503	)
Common stock issued for accrued professional fees in February 2004 at $7.45 per share	10,000		1		74,499		—	—		—		—		—		74,500
Common stock issued for services in February 2004 at $4.30 per share	10,000		1		42,999		—	(43,000	)	—		—		—		—

See accompanying notes to the condensed consolidated financial statements.

4

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH MARCH 31, 2005

(UNAUDITED)

	Common Stock			Additional Paid-In Capital		Subscriptions Receivable		Deferred Consulting Expense			Note Receivable Related Party		Interest Receivable Related Party			Accumulated Deficit			Total
	Shares	Amount
Warrants issued for consulting expense in February 2004	—		—		42,454		—		(42,454	)		—		—			—			—
Warrants issued for consulting expense in April 2004	—		—		170,052		—		(170,052	)		—		—			—			—
Common stock issued for services in May 2004 at $2.55 per share	10,000		1		25,499		—		(25,500	)		—		—			—			—
Warrants issued for consulting expense in May 2004	—		—		12,165		—		(12,165	)		—		—			—			—
Common stock issued for cash in May 2004 at $3.30 per share, net	490,439		49		741,680		—		—			—		—			—			741,729
Warrants issued with the sale of common stock in May 2004	—		—		714,876		—		—			—		—			—			714,876
Amortization of deferred consulting expenses in 2004	—		—		—				1,576,825			—		—			—			1,576,825
Interest receivable related party in 2004	—		—		—		—		—			—		(1,844	)		—			(1,844	)
Forgiveness of note and interest receivable in July 2004	—		—		—		—		—			235,000		4,918			—			239,918
Net loss, year ended December 31, 2004	—		—		—		—		—			—		—			(6,990,752	)		(6,990,752	)
BALANCE, December 31, 2004	19,235,542	$	1,923	$	18,171,587	$	—	$	(72,879	)	$	—	$	—		$	(12,068,876	)	$	6,031,755
Amortization of deferred consulting expenses in 2005	—		—		—		—		36,440			—		—			—			36,440
Net loss, quarter ended March 31, 2005	—		—		—		—		—			—		—			(628,202	)		(628,202	)
BALANCE, March 31, 2005	19,235,542	$	1,923	$	18,171,587	$	—	$	(36,439	)	$	—	$	—		$	(12,697,078	)	$	5,439,993

See accompanying notes to the condensed consolidated financial statements.

5

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Three Months Ended March 31, 2005			For the Three Months Ended March 31, 2004			For the Period From July 17, 2002 (Inception) Through March 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(628,202	)	$	(1,378,447	)	$	(12,697,078	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		1,352			1,416			11,145
Machinery and deposits impairment		—			—			2,602,775
Amortization of deferred consulting expense		36,440			795,622			3,040,601
Settlement on legal payable		—			—			(350,000	)
Forgiveness of interest receivable		—			—			3,074
Common stock issued for services		—			—			465,000
Changes in operating assets and liabilities:
Prepaid expenses		88,204			50,655			(165,356	)
Accrued professional fees		(17,009	)		—			484,500
Accounts payable and accrued expenses		143,093			(198,064	)		501,567
Net Cash Used In Operating Activities		(376,122	)		(728,818	)		(6,103,772	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit on purchase of machinery		—			—			(4,011,976	)
Refund of deposit on purchase of machinery		—			—			741,000
Purchases of fixed assets		390			—			(177,118	)
Acquisition of license/Patent		—			—			(700,000	)
Note receivable and accrued interest –related party		—			(924	)		(238,074	)
Net Cash Provided by (Used In) Investing Activities		390			(924	)		(4,386,168	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock and warrants		—			—			10,556,970
Net Cash Provided By Financing Activities		—			—			10,556,970
NET (DECREASE) INCREASE IN CASH		(375,732	)		(729,742	)		67,030
CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD		442,762			1,174,281			—
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	67,030		$	444,539		$	67,030
NON CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for license valued at $1.00 per share	$	—		$	500,000		$	4,000,000
Warrants issued for deferred consulting services	$	—		$	—		$	1,509,519
Common stock issued for deferred consulting expenses	$	—		$	—		$	1,308,250
Common stock issued for accrued consulting expenses	$	—		$	—		$	74,500
Options issued for deferred consulting services	$	—		$	117,500		$	99,636
Common stock issued to consultant to settle contract dispute	$	—		$	—		$	60,000
Deposits transferred into fixed assets and inventory	$	—		$	—		$	1,307,087
Forgiveness and reclassification of note receivable to acquisition of patent	$	—		$	—		$	235,000

See accompanying notes to the condensed consolidated financial statements.

6

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2005

(UNAUDITED)

NOTE1 BACKGROUND

DDS Technologies USA, Inc. and subsidiary (collectively, the ”Company”) is a development stage company with no revenues since its inception on July 17, 2002. The Company has obtained the patent rights on a world wide basis for a dry disaggregation and micronization system that converts certain waste into value added products for further processing or resale.

Since its inception, the Company has been dependent upon the receipt of capital investment to fund its continuing activities. In addition to the normal risks associated with a new business venture, there can be no assurance that the Company’s product development will be successfully completed or that it will be a commercial success. The Company’s ability to execute its business plan will depend on its ability to obtain additional financing and achieve a profitable level of operations. There can be no assurance that sufficient financing will be obtained. Nor can the Company give any assurance that it will generate substantial revenues or that its business operations will prove to be profitable.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of DDS Technologies USA, Inc. and its wholly owned subsidiary. All material intercompany accounts and transactions have been eliminated.

(B) Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses at March 31, 2005 and December 31 2004, approximate their fair value because of their relatively short-term nature.

(C) Research and Development

Research and development consists of consulting fees incurred on the development of the Company’s technology and are expensed as incurred.

For the three months ended March 31, 2005 and 2004, and for the period from July 17, 2002 (inception) through March 31, 2005, the Company incurred research and development expenses of $33,621, $0 and $168,729, respectively.

7

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2005

(UNAUDITED)

(D) Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(E) Loss Per Common Share

Net loss per common share (basic and diluted) is based on the net loss divided by the weighted average number of common shares outstanding during each period. Common stock equivalents were not included in the calculation of diluted loss per share as their effect would be anti-dilutive.

(F) Interim Consolidated Financial Statements

The condensed consolidated financial statements as of March 31, 2005 and for the three months ended March 31, 2005 and 2004, and for the period from July 17, 2002 (inception) through March 31, 2005, are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of December 31, 2004 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-KSB. The interim condensed consolidated financial statements should be read in conjunction with that report.

(G) Stock-Based Compensation

The Company accounts for its stock-based employee compensation plans using the intrinsic value based method, under which compensation cost is measured as the excess of the stock’s market price at the grant date over the amount an employee must pay to acquire the stock. Stock options and warrants issued to non-employees are accounted for using the fair value based method, under which the expense is measured as the fair value of the security at the date of grant based on the Black-Scholes pricing model.

SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, requires the Company to provide pro forma information regarding net income and earnings per share for each period presented as if compensation cost for the Company’s stock options had been determined in

8

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2005

(UNAUDITED)

accordance with the fair value based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions; no dividend yield for all years; expected volatility from 132% to 135%; risk-free interest rate of 3%, and an expected life of 10 years.

In January 2005, the Company granted stock options to two Board members to purchase a total of 400,000 shares at an exercise price of $1.00 per share. Of the options to purchase 400,000 shares, options to purchase 100,000 shares are exercisable immediately and the balance is exercisable over the following three years. All the options expire in January 2015.

In March 2005, the Company granted stock options to its President and Chief Executive Officer as part of his employment agreement. The Company issued stock options to purchase 400,000 shares at an exercise price of $1.00 per share. Of the options to purchase 400,000 shares, options to purchase 100,000 shares are exercisable immediately and the balance is exercisable over the following three years. All the options expire in March 2015.

Under the accounting provisions of SFAS No. 123, as amended by SFAS No. 148, the Company’s net loss and net loss per common share would have been as follows:

		For the Three Months Ended March, 31, 2005			For the Three Months Ended March 31, 2004
Net loss	As Reported	$	628,202		$	1,378,447
	Pro Forma	$	1,464,228		$	2,439,329
Net loss per common	As Reported	$	(.03	)	$	(.07	)
share - basic and diluted	Pro Forma	$	(.08	)	$	(.13	)

(H) Reclassifications

Certain amounts from prior periods have been reclassified to conform to current period presentation.

NOTE 3 RELATED PARTY TRANSACTIONS

For the three months ended March 31, 2005 and 2004, and for the period from July 17, 2002 (inception) through March 31, 2005, the Company incurred consulting expenses of $45,000, $127,500 and $971,500, respectively, from stockholders of the Company.

9

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2005

(UNAUDITED)

NOTE 4 STOCK OPTIONS

A summary of the status of the Company’s option plans as of and for the three months ended March 31, 2005 is presented below:

	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2004		1,800,000	$	5.23
Granted		800,000	$	1.00
Outstanding at March 31, 2005		2,600,000	$	3.93
Options exercisable at March 31, 2005		1,200,000	$	2.54
Weighted average fair value of options granted to employees during the period from July 17, 2002 (Inception) through March 31, 2005	$	2.67

The following table summarizes information about the stock options outstanding at March 31, 2005:

Options Outstanding					Options Exercisable
Exercise Price	Number Outstanding at March 31, 2005	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at March 31, 2005	Weighted Average Exercise Price
$3.40	300,000	10.25	$	3.40	—	$	3.40
$3.96	200,000	10.00	$	3.96	200,000	$	3.96
$5.00	600,000	8.08	$	5.00	600,000	$	5.00
$7.00	400,000	2.58	$	7.00	—	$	7.00
$8.00	200,000	8.58	$	8.00	200,000	$	8.00
$3.40	50,000	9.25	$	3.40	—	$	3.40
$0.63	50,000	9.50	$	0.63	—	$	0.63
$1.00	400,000	9.83	$	1.00	100,000	$	1.00
$1.00	400,000	10.00	$	1.00	100,000	$	1.00

10

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2005

(UNAUDITED)

NOTE 5 CONSULTING AND MARKETING AGEEMENTS

On April 26, 2004, the Company entered into a 14 month agreement with a marketing company. The marketing company provides business advisory and various other investment and marketing services to the Company. The Company paid the marketing company $25,000 upon signing the agreement and pays a monthly fee of $5,000. In addition, the Company issued warrants for the purchase of 400,000 shares of common stock at exercise prices of $3.75 and $4.25 per share. The warrants are exercisable until April 26, 2007. The warrants were valued using the Black-Scholes pricing model and resulted in a fair value of $170,052. The amount is amortized over the life of the agreement resulting in consulting expense of $36,440 for the quarter ended March 31, 2005. The remaining unamortized balance of $36,439 is presented in the condensed consolidated balance sheet as deferred consulting expense.

NOTE 6 CONTINGENCIES

(A) Litigation

The Company is a defendant in a lawsuit whereby the plaintiff contends that it is entitled to a commission for allegedly procuring financing for a transaction. The Company filed an Answer and Affirmative Defenses. The plaintiff seeks damages totaling $175,584, plus interest from December 31, 2002. The Company believes the suit is without merit and is vigorously defending its position. In the opinion of management, this suit will not have a material adverse effect on the Company’s consolidated financial position or results of operations. The Company does not believe a provision is necessary at March 31, 2005 for this matter.

The Company received a potential claim from two shareholders alleging that the Company failed to register their shares for re-sale in the Company’s last registration statement, filed on Form S-1 under the Securities Act of 1933, as amended on November 12, 2003 and an amendment thereto on December 13, 2003. In addition, these shareholders have alleged that they were induced erroneously into surrendering shares of DDS Holdings, Inc. in connection with the reorganization into Black Diamond Industries, Inc. Although the Company believes that it has defenses to these alleged actions, the Company is attempting to reach an amicable settlement for these claims. There can be no assurance that these disputes will be favorably resolved, if at all, or that these claims will not have a material adverse effect on the Company. The Company does not believe a provision is necessary at March 31, 2005 for this matter.

The Company is a defendant in a lawsuit whereby a stockholder and former president of the Company contends that he is entitled to receive consulting fees under a consulting agreement. The Company suspended payments and terminated the consulting agreement due to non compliance by the plaintiff with the terms of the agreement. The Company has filed a counterclaim against the plaintiff for breach of contract and breach of fiduciary duty.

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DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2005

(UNAUDITED)

On August 1, 2003, the Company entered into a nonbinding Pre-Formation Agreement with Xethanol Corporation (“Xethanol”), a company involved in the biomass waste-to-ethanol industry. In May 2004 the Company delivered one of its dry disaggregation machines to Xethanol’s plant in Iowa, for testing. The Company subsequently delivered to Xethanol a notice of termination with respect to the nonbinding Pre-Formation Agreement and demanded a return of its machine. Xethanol refused to return the machine. On October 22, 2004, the Company filed a Verified Complaint for injunctive relief. Amongst various requests, the Complaint requested the return of the machine to the Company. Xethanol filed a petition for arbitration with the American Arbitration Association (the “AAA”) in late October 2004. The petition seeks money damages for breach of contract, tortuous interference with a contract, fraud, and declaratory judgment. The Company believes that the petition for arbitration is groundless. On November 3, 2004, the Company filed a response opposing Xethanol’s arbitration petition. In December 2004 the Company filed an amended Verified Complaint for injunctive relief. An arbitration hearing has been set to commence in the end of June, 2005 pending the completion of certain actions by both parties.

(B) Commitments

The Company has a commitment to make a final payment for each remaining machine for which it will take delivery. While the final amount per machine is not determinable at this time, it is expected that the final payment, per machine, may range between $125,000 and $200,000. Currently there are three additional machines that are due to be delivered at a future time to be determined by the Company.

NOTE 7 OTHER AGREEMENTS

On February 18, 2005 the Company entered into a five year agreement with a Canadian company whereby the Company granted an exclusive license to the Canadian company for the purpose of processing and extracting sulfur and sulfur derivative materials in North America. If the machine operates within certain parameters, the Company will be paid a negotiated purchase price plus royalties. Additional machines will be purchased at a negotiated higher price.

NOTE 8 SUBSEQUENT EVENTS

On April 12, 2005, the Company entered into a Securities Purchase Agreement with certain accredited investors for the sale of Series A convertible preferred stock. The Company issued 2,175 shares of its Series A Convertible Preferred Stock for a purchase price of $2,175,000 ($1,957,500 net of commissions) and the Company may raise up to an additional $1.8 million through the sale of additional shares of Series A Preferred Stock. The proceeds were received through April 14, 2005 by the Company. The Series A Preferred Stock is initially convertible into approximately 3.1 million shares of the Company’s common stock at a conversion rate of $.70 per share and has a 6% annual dividend rate payable quarterly in arrears in cash or, subject to standard equity conditions, in common stock, at the Company’s option.

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DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2005

(UNAUDITED)

Each investor also received two warrants, a long-term warrant exercisable for a period of five years to acquire shares of common stock and a short-term warrant exercisable for a period of one year to acquire additional shares of Series A Preferred Stock and long term warrants. The long term warrants in the aggregate are exercisable for approximately 2.3 million shares of common stock at a price of $.875 per share. The short term warrants in the aggregate are exercisable for (i) the same number of shares of convertible preferred stock (the “Short Term Warrant Preferred Stock”) as shares of Series A Preferred Stock were issued in the offering and (ii) long term warrants for a number of shares of common stock equal to 35% of the number of shares of common stock issuable upon conversion of the short term warrant preferred stock. The Short Term Warrant exercise price is $1,000 per share of Short Term Warrant Preferred Stock together with the accompanying long term warrants. The Short Term Warrant Preferred Stock has the same rights and preferences as the Series A Preferred Stock, except the conversion price of the Short Term Warrant Preferred Stock is initially $0.85 per share.

Among the purchasers in the offering were James R. von der Heydt, Marc Mallis, Leo P. Koulos and Charles F. Kuoni III, members of the Company’s Board of Directors, who purchased units either directly or indirectly for purchase amounts of $25,000, $20,000, $20,000 and $20,000 respectively.

In April, 2005 by a majority vote of the shareholders, the Board approved the increase of the number of authorized shares of common stock of the Company to 50 million shares.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Background

DDS Technologies USA, Inc. and subsidiary (the ”Company”) is a development stage company with no revenues since its inception on July 17, 2002. The Company has obtained the patent rights on a world wide basis for a dry disaggregation and micronization system that converts certain waste into value added products for further processing or resale.

On November 14, 2002, Black Diamond Industries, Inc., a public Florida corporation conducting no business other than to seek a suitable acquisition partner, acquired all of the outstanding shares of common stock of DDS Holdings, Inc., a Nevada corporation pursuant to a securities exchange agreement dated October 27, 2002. Under the terms of the securities exchange agreement, the stockholders of DDS Holdings, Inc. agreed to transfer all of the issued and outstanding shares of common stock of DDS Holdings, Inc. in exchange for an aggregate of 12,915,525 shares of common stock, or approximately 93%, of Black Diamond Industries. Immediately prior to, and in conjunction with the transaction, the sole director and officer and majority shareholder of Black Diamond Industries returned 13,564,350 shares of common stock to treasury.

In December 2002, Black Diamond Industries changed its name to DDS Technologies USA, Inc. and reincorporated in the state of Delaware.

Under a share exchange agreement dated April 4, 2003, FishtheWorld Holdings, Inc., a public Florida corporation conducting no business other than to seek a suitable acquisition partner, acquired 88.5% of DDS Technologies USA, Inc. in exchange for 15,367,255 shares of common stock, or approximately 97% of the then issued and outstanding shares, of FishtheWorld Holdings. Immediately prior to the share exchange, the majority shareholder of FishtheWorld Holdings returned 8,571,000 shares to treasury and resigned as the sole director and officer. The members of the Board of Directors of DDS Technologies USA, Inc. became members of the Board of Directors of FishtheWorld.

In May 2003, FishtheWorld Holdings changed its name to DDS Technologies, USA, Inc. and reincorporated in the State of Nevada.

Generally accepted accounting principles in the United States of America require that a company whose stockholders retain a majority interest in a business combination be treated as the acquirer for accounting purposes. Since Black Diamond Industries and FishtheWorld Holdings were public shells and DDS Holdings, Inc. is a development stage company with no revenues, the transactions were treated as recapitalizations of DDS Technologies USA, Inc.

DDS Technologies USA, Inc. was formed in July 2002 for the purpose of commercializing certain technology which had been licensed from DDS Technologies Ltd., a United Kingdom company and a principal stockholder of DDS Technologies USA, Inc. The license had provided for the exclusive North, South, Central American and Caribbean (excluding Cuba) rights to the pending patent, # 02425336.1, which was filed with the European Patent Office on May 28, 2002.

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Subsequently, the Company entered into a Memorandum of Understanding, dated July 31, 2004, with Umberto Manola (“Manola”), Haras Engineering Corp. (“HEC”), High Speed Fragmentation B.V. (“HSF”), and Intel Trust S.A. (“Intel”) and an Amended and Restated Memorandum of Understanding, dated as of July 31, 2004 with HEC, HSF, Intel, Giancarlo Lo Fiego (“Lo Fiego”) and Adriano Zapparoli (“Zapparoli”).

Pursuant to terms of the Memorandum of Understanding, the Company, whose original license to the dry disaggregation technology was previously restricted to North, South and Central America, the Caribbean (excluding Cuba) and Africa, acquired sole ownership of the patents for the dry disaggregation technology. Following the assignment to the Company of the patents, the Company filed the assignments with the United States Patent and Trademark Office. The Company also plans to file the assignments in the corresponding offices in the foreign jurisdictions where the patents have been applied for or obtained.

The patent relates to the Longitudinal Micrometric Separator For Classifying Solid Particulate Materials. Management believes that this Disaggregation Dry System (DDS) technology system is a unique process, in which fragments of organic and inorganic matter are “crushed to collision” enduring violent accelerations and decelerations causing the disaggregation of the structure. This technology and its end results are believed by the various companies that we have contacted to have tremendous potential value both economically and nutritionally. Management believes that the results obtained utilizing the technology are unattainable with any other currently available technology.

Initial work on the production version of the Company’s dry disaggregation machine by the Company’s consulting engineers has revealed that it does not fully disaggregate organic material to the extent that a prototype research machine does, and therefore requires additional development work. However, the production version does micronize very effectively to particle sizes of between 5 and 20 microns which provides application opportunities and commercial potential in a number of industries.

Results of Operations

From July 17, 2002 (inception) through March 31, 2005, the Company has incurred an accumulated deficit of $12,697,078. To date, the Company has yet to achieve revenues from operations. During the three months ended March 31, 2005 and 2004, the Company incurred operating expenses of $628,865 and $1,379,369, respectively. The decrease in operating expenses is primarily due to the reduction in the amortization of deferred consulting fees associated with warrants issued for services. The Company anticipates that losses from operations will continue for the remainder of the year primarily due to our relatively long sales cycle and the significant due diligence and testing conducted by our prospective customers. Testing includes the preparation of

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various sample products for processing using our proprietary technology process through our testing facility and submitting our analysis of results to third party labs for independent verification as well as reviewing the results with the prospective client. However, if the Company is not able to successfully implement our business model, the Company may not be able to achieve profitability.

The Company has marketed its technology to various large US and Latin American companies resulting in Memoranda of Understanding and has recently signed a five year licensing agreement with a Canadian firm for the purpose of processing and extracting sulfur and sulfur derivative materials in North America. However there can be no assurance that the Dry Disaggregation System technology will achieve market acceptance or that sufficient revenues will be generated to allow us to operate profitably.

Liquidity and Capital Resources

To date, we have funded our losses, license payments and patent acquisitions through the private sale of common and preferred stock and financing from accredited investors. On April 12, 2005 we completed a private placement for the sale of convertible preferred stock to accredited investors resulting in net proceeds of $1,957,500. Our cash balance at March 31, 2005 was $67,030.

The Company has a commitment to make a final payment for each remaining machine for which it will take delivery. While the final amount per machine is not determinable at this time, it is expected that the final payment, per machine, may range between $125,000 and $200,000. Currently there are three additional machines that are due to be delivered at a future time to be determined by the Company.

Without demonstrating commercial feasibility and/or securing customers we do not believe that we will be able to secure additional capital necessary to fund operations through private placements of our securities, or achieve sufficient revenues to operate at a cash flow breakeven.

ITEM 3. CONTROLS AND PROCEDURES

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-QSB, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective in timely providing them with material information required to be disclosed by us in our filings under the Exchange Act. There have been no significant changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls during our most recent fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a defendant in a lawsuit whereby the plaintiff contends that it is entitled to a commission for allegedly procuring financing for a transaction. The plaintiff seeks damages totaling $175,584 plus interest from December 31, 2002. In April 2004, the Company filed and Answer and Affirmative Defenses. The Company believes the suit is without merit and is vigorously defending its position. In the opinion of management, this suit will not have a material effect on the Company’s condensed consolidated financial position or results of operations.

The Company received a potential claim from two shareholders alleging that the Company failed to register their shares for re-sale in the Company’s last registration statement, filed on Form S-1 under the Securities Act of 1933, as amended on November 12, 2003 and an amendment thereto on December 13, 2003. In addition, these shareholders have alleged that they were induced erroneously into surrendering shares of DDS Holdings, Inc. in connection with the reorganization into Black Diamond Industries, Inc. Although the Company believes that it has defenses to these alleged actions, the Company is attempting to reach an amicable settlement for these claims. There can be no assurance that these disputes will be favorably resolved, if at all, or that these claims will not have a material adverse effect on the Company. The Company does not believe a provision is necessary at March 31, 2005 for this matter.

The Company is a defendant in a lawsuit whereby a stockholder and former president of the Company contends that he is entitled to receive consulting fees under a consulting agreement (See Note 3). The Company suspended payments and terminated the consulting agreement due to breach of the terms of the agreement. The Company has filed an Answer and Affirmative Defenses and a Counterclaim alleging breach of the consulting agreement and breach of fiduciary duty.

On August 1, 2003, the Company entered into a Pre-Formation Agreement with Xethanol Corporation (“Xethanol”), a company involved in the biomass waste-to-ethanol industry. In May 2004 the Company delivered one of its dry disaggregation machines to Xethanol’s plant in Iowa, for testing. The Company subsequently delivered to Xethanol a notice of termination with respect to the Pre-Formation Agreement and demanded a return of its machine. Xethanol refused to return the machine.

On October 22, 2004, the Company filed a Verified Complaint for injunctive relief in the United States District Court for the Northern District of Iowa against Xethanol, Xethanol-One, LLC (“X-One”), Permeate Refining, Inc. (“Permeate”), Charles d’Arnaud Taylor (Xethanol’s President), Jeffrey Langberg (an advisor to Taylor) and Robert Lehman (Permeate’s General Manager). The Verified Complaint seeks the entry of an order prohibiting the defendants – Xethanol, X-One, Permeate, Taylor, Langberg and Lehman – from: (A) preventing the Company from taking immediate possession of its disaggregation system, which was temporarily located on Permeate’s premises in Hopkinton, Iowa (the “DDS System”); (B) pirating or reverse engineering

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the technology contained in and exemplified by the DDS System; (C) disclosing or revealing to a third party the technology contained in and exemplified by the DDS System; (D) altering, modifying, wasting or damaging the DDS System; or (E) attempting to pledge, sell or dispose of the DDS System.

The Company intends to vigorously prosecute this lawsuit. The lawsuit alleges the Defendants’ continued detention of the DDS System is producing irreparable injury to the Company by depriving it of a unique product on which the Company may perform tests and adjustments, and which the Company could display to potential customers. Consistent with its intention to vigorously prosecute this lawsuit, Company has asked the district attorney in Delaware County, Iowa, to pursue criminal charges against any and all persons as to whom it may be appropriate.

Proceeding under the Pre-Formation Agreement, which the Company believes, is essentially an agreement to agree, Xethanol and an entity it created and controls – DDS-Xethanol, LLC (the “LLC”) – filed a petition for arbitration with the American Arbitration Association (the “AAA”) in late October 2004. The petition seeks money damages for breach of contract, tortuous interference with a contract, fraud, and declaratory judgment.

The Company believes that the petition for arbitration is groundless. On November 3, 2004, the Company filed a response opposing Xethanol’s arbitration petition. The Company’s response contains defenses and affirmative defenses, and sets out counterclaims for replevin, conversion and declaratory judgment. An arbitration hearing has been set to commence by the end of June, 2005 pending the completion of certain actions by both parties.

ITEM 2. CHANGES IN SECURITIES

No change in securities during the current quarter.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits, which are furnished with this Quarterly Report or incorporated herein by reference, are filed as part of this Quarterly Report.

Exhibit Number	Exhibit Description
31.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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(b) Reports on Form 8-K.

On March 2, 2005 we filed a Form 8-K reporting our entering into an exclusive license agreement

On March 31, 2005, we filed a Form 8-K reporting the signing of a new employment agreement with our CEO, Spencer L. Sterling.

On April 14, 2005, we filed a Form 8-K reporting the sale of Series A convertible preferred stock to accredited investors.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on the 12^th day of May 2005.

DDS TECHNOLOGIES USA, INC

/s/ Spencer L. Sterling

Spencer L. Sterling

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Joseph Fasciglione

Joseph Fasciglione

Chief Financial Officer

(Principal Accounting Officer)

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Exhibit Index

Exhibit Number	Exhibit Description
31.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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