FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30,2002
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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 0-21384
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Digital Descriptor Systems, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-2770048
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
446 Lincoln Highway, Fairless Hills, PA 19030
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (267) 580-1075
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(former, name, address and former fiscal year, if changed since last report)
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
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State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock November 15, 2002
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$.001 par value 61,351,387 shares
Transitional Small Business Disclosure Format Yes No X
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-1-
FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
DIGITAL DESCRIPTOR SYSTEMS, INC.
Index
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 2002 (unaudited) and December
31, 2001
Statements of Operations for the three and nine months ended
September 30, 2002 and 2001 (Unaudited)
Statements of Cash Flows for the nine months ended September
30, 2002 and 2001 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Controls and Procedures
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities:
Item 4. Submission of Matters of a Vote to Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
-2-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS
September 30 December 31
2002 2001
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(Unaudited)
ASSETS
Current assets:
Cash $ 102,865 $ 435,662
Restricted cash 1,051 5,969
Investments - -
Accounts receivable, less allowance for uncollectible
account of $54,092 (unaudited) and $87,930 in
2002 and 2001, respectively 7,820 107,948
Inventory 13,998 5,665
Prepaid expenses 160,676 267,534
Advance - employees 200,716 -
Debt discount and deferred financing costs 160,562 807,014
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Total current assets 647,688 1,629,792
Note receivable - Former officer, less allowance
for uncollectible notes of $163,092 and $177,400
in 2002 and 2001, respectively - -
Furniture and equipment, net 15,772 37,090
Deposits and other assets 24,395 24,395
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Total assets $ 687,855 $1,691,277
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 369,054 $ 418,764
Accrued expenses 212,692 175,742
Accrued payroll and related withholdings 289,247 -
Deferred income 497,943 854,618
Current portion of equipment loan 7,260 7,211
Convertible debentures 1,106,731 965,000
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Total current liabilities 2,482,927 2,421,335
Equipment Loan, net of current portion 14,615 20,066
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Total liabilities $2,497,542 $2,441,401
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-3-
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS (continued)
September 30 December 31
2002 2001
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(Unaudited)
Shareholders' equity (deficiency):
Preferred Stock, $.01 par value, authorized shares - 1,000,000; issued and
outstanding - none
Common Stock, $.001 par value, authorized shares - 58,156 48,045
150,000,000; issued and outstanding shares - 58,156,490 (unaudited) and
48,045,610 at September 30, 2002 and December 31, 2001, respectively
Additional paid-in capital 16,782,748 16,726,819
Accumulated deficit (18,650,591) (17,524,988)
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Total shareholder's equity (deficiency) (1,809,687) (750,124)
=========== ===========
Total liabilities and shareholders' equity (deficiency) $ 687,855 $ 1,691,277
=========== ===========
The accompanying notes are an integral part of these financial statements.
-4-
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Software $ 386,448 $ 249,755 $ 439,390 $ 591,066
Hardware 36,022 19,751 63,984 68,325
Maintenance 139,877 127,756 454,469 396,674
Consulting - 20,968 - 55,468
Other 11,545 9,313 30,208 41,268
----------- ----------- ----------- -----------
Total Revenues 573,892 427,543 988,051 1,152,801
Costs and expenses:
Cost of revenues 294,847 164,722 376,860 434,510
General and administrative 212,808 403,357 723,373 1,320,601
Sales and marketing 18,268 56,044 75,505 362,605
Research and development 16,716 144,724 168,091 284,818
Depreciation and amortization 3,103 68,119 21,318 189,055
Interest and amortization of
deferred debt costs 257,240 195,613 772,809 484,281
Other (income) expense, net (7) (5,898) (24,302) (20,288)
----------- ----------- ----------- -----------
Total Costs and expenses 802,975 1,026,681 2,113,654 3,055,582
----------- ----------- ----------- -----------
Net loss $ (229,083) $ (599,138) $(1,125,603) $(1,902,781)
=========== =========== =========== ===========
Net loss per common share
(basic and diluted) $ (0.00) $ (0.03) $ (0.02) $ (0.09)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding
(basic and diluted) 58,156,490 22,776,744 55,297,784 21,708,767
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
-5-
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
2002 2001
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Cash flows from operating activities:
Net loss $(1,125,603) $(1,902,781)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 21,318 189,055
Compensation expense in connection with issuance 14,400 266,781
of common stock
Amortization of debt discount 684,201 440,444
Accrued interest converted into Common Stock - 5,077
Changes in operating assets and liabilities:
Accounts receivable 100,128 (29,439)
Inventory (8,333) (25,391)
Prepaid expenses, deposits and other assets 106,858 (319,797)
Advances - employees (200,716) -
Accounts payable (49,710) 175,877
Accrued expenses 55,323 (19,906)
Accrued payroll and related withholdings 289,247 -
Deferred income (356,675) 548,349
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Net cash used in operating activities (469,562) (671,731)
Cash flows from investing activities:
Purchase of furniture and equipment - (3,766)
Increase in officer note receivable - (8,906)
Decrease in restricted cash 4,918 10,452
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Net cash provided by (used in) investing activities 4,918 (2,220)
Cash flows from financing activities:
Proceeds from issuance of convertible debentures 175,000 755,000
Debt issuance costs (37,750) (121,000)
Repayment of equipment loan (5,402) (5,354)
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Net cash provided by financing activities 131,848 628,646
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Net (decrease) increase in cash (332,796) (45,305)
Cash at beginning of period 435,661 202,877
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Cash at end of period $ 102,865 $ 157,572
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,694 $ 5,036
=========== ===========
Income Tax $ - $ -
=========== ===========
Supplemental disclosure of non-cash investing and Financial activities:
Conversion of debentures and
accrued interest into common stock $ 51,640 $ 155,077
=========== ===========
The accompanying notes are an integral part of these financial statements
-6-
DIGITAL DESCRIPTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 2002
1. BUSINESS
Digital Descriptor Systems, Inc. incorporated in Delaware in 1994, develops,
assembles and markets computer installations consisting of hardware and
software, which capture video and scanned images, link the digitized images to
text and store the images and text on a computer database and transmit this
information to remote locations. The principal product of the Company is the
Compu-Capture Law Enforcement Program, which is marketed to law enforcement
agencies and jail facilities and generated the majority of the Company's
revenues during the quarters ended September 2002 and 2001. Substantially all of
the Company's revenues are derived principally from U.S. government agencies.
2. BASIS OF PRESENTATION
The financial statements and disclosures included herein for the three and nine
months ended September 30, 2002 and 2001 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of adjustments of a
normal and recurring nature) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2002 and 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2002.
3. ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company derives revenue from the sale of hardware, software, post customer
support (PCS), and other related services. PCS includes telephone support, bug
fixes, and rights to upgrades on a when-and-if-available basis. Other related
services include basic consulting and training. Included with the hardware is
software that is not considered to be incidental. Revenue from transactions with
customers where the software component is not considered to be incidental is
allocated between the hardware and software components based on the relative
fair value of the respective components.
The Company also derives revenue from the sale of software without a related
hardware component. Revenue allocable to software components is further
allocated to the individual deliverable elements of the software portion of the
arrangement such as PCS and other services. In arrangements that include rights
to PCS for the software and/or other services, the software component
arrangement fee is allocated among each deliverable based on the relative fair
value of each of the deliverables determined using vendor-specific objective
evidence, which has been established by the separate sales of these
deliverables.
The Company recognizes the revenue allocable to hardware and software licenses
upon delivery of the product to the end-user, unless the fee is not fixed or
determinable or collectibility is not probable. If collectibility is not
considered probable, revenue is recognized when the fee is collected. Revenue
allocable to PCS is recognized on a straight-line basis over the period the PCS
is provided. Revenue allocable to other services is recognized as the services
are provided.
-7-
Software Development Costs
The Company capitalizes software development costs after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. Technological
feasibility of the Company's software development costs is determined when the
planning, designing, coding, and testing activities are completed, and the
Company has established that the product can be produced to meet its design
specifications. All costs incurred in the research and development of new
software products and costs incurred prior to the establishment of technological
feasibility are expensed as incurred. During 1999, $413,604 was capitalized as
software development costs in connection with the Company's new product entitled
Compu-Scan, a computerized inkless fingerprint device. The Company awarded a
contract to Titan Systems Corporation's DBA division for technical assistance in
achieving final compliance with the FBI certification process. During December
2001, DDSI revised its anticipated certification date for its Compu-Scan product
indefinitely after its submission was not accepted by the FBI. Additionally,
there are no assurances that the FBI will ever certify the technology. As such,
and since DDSI is unable to forecast any revenues from the product, DDSI wrote
off the investment in Software Development of $413,604 in the fourth quarter of
2001.
Advances/Accrued Payroll
The Company has made advances to its employees which total $200,716 at September
30, 2002. Advances have ceased as of September 30, 2002. In addition the Company
has accrued payroll and related withholdings of $289,247 for the nine months
ended September 30, 2002.
Net Loss Per Common Share
Basic loss per share is calculated by dividing the net loss by the weighted
average common shares outstanding for the period. Diluted loss per share is
calculated by dividing the net loss by the weighted average common shares
outstanding of the period plus the dilutive effect of common stock equivalents.
No exercise of common stock equivalents were assumed during any period because
the assumed exercise of these securities would be antidilutive.
4. CONVERTIBLE DEBENTURES
During March 2001, the Company issued $200,000 of convertible debentures to two
investors. These debentures matured on March 4, 2002; however, the parties have
entered into an agreement to extend the maturity date for another year, and
accrue interest at 12% per annum. The holder has the right to convert the
debentures to common shares at any time through maturity at the conversion price
as described in the note agreement. The debenture holders received warrants to
purchase 200,000 common shares at an exercise price the lesser of: $0.036 per
share or the average of the lowest three trading prices during the 20 days
preceding the exercise date. Such warrants expire March 4, 2004. The debentures
are collateralized by substantially all of the Company's assets.
During April 2001, the Company issued two convertible notes for $100,000 and
$15,000, and one convertible note in May 2001 for $40,000 respectively, with
interest at 10% per annum. Interest on these Notes shall be payable quarterly
commencing June 30, 2001. The holder has the right to convert the debentures and
interest accrued into shares of the Company's Common Stock at a conversion price
per share that shall be an amount equal to 50% of the mean average price of the
Common Stock for the ten (10) trading days prior to notice of conversion per
share. The intrinsic value of the beneficial conversion features relating to the
convertible notes issued in 2001 of $155,000 has been allocated to paid in
capital. This resulting debt discount will be amortized over the term of the
debentures
During September 2001, the Company issued $400,000 of convertible debentures to
the same investors under the same terms as the debentures issued in March 2001.
However, there were no warrants attached to these debentures. The intrinsic
value of the beneficial conversion feature relating to these debentures of
$350,000 has been allocated to paid in capital. This resulting debt discount
will be amortized over the life of the debentures.
-8-
During September 2001, $35,000 of the convertible debentures issued in December
2000 were converted into Common Stock. The debentures were converted in
accordance with the terms of the agreements. Subsequent to September 30, 2001,
an additional $35,000 of the convertible debentures issued in December 2000 were
converted into 1,232,396 shares of Common Stock. The investors also converted
interest accrued into 1,012,494 shares of Common Stock.
During September 2001, the holder of the $100,000 note issued in April 2001
converted the note into 1,428,571 shares of free trading Common Stock and
1,252,069 shares of restricted stock. The conversion price was valued at $.03895
per share in accordance with the agreement terms.
During September 2001, the $15,000 note issued in April 2001 was also converted
into 214,286 shares of free trading Common Stock and 246,471 shares of
restricted stock. The conversion price for this transaction was valued at $.034
per share in accordance with the agreement terms
During October through December 2001, the remaining $165,000 of the convertible
debentures issued in December 2000, as well as $160,000 of the convertible
debentures issued in March 2001 were converted into 10,551,280 shares of Common
Stock. Additionally, accrued interest relating to these notes was converted into
an additional 1,012,49 shares of Common Stock. The underlying shares were
registered August 29, 2001 file number 33359888.
On December 31, 2001, DDSI issued three convertible debentures for an aggregate
amount of $500,000, with simple interest accruing at the annual rate of 12%. A
$125,000 note was issued to New Millennium Capital Partners II, LLC, a $125,000
note to AJW Partners, LLC and a $250,000 note to Bristol Investment Fund, Ltd.
These debentures are due December 31, 2002. Interest payable on the Debentures
shall be paid quarterly commencing March 31, 2002. The holders shall have the
right to convert the principal amount and interest due under the debentures into
shares of DDSI's Common Stock. The conversion price in effect on any Conversion
Date shall be the lesser of (1) $.043 and (2) 50% of the average of the lowest
three inter-day sales prices of the Common Stock during the twenty Trading Days
immediately preceding the applicable Conversion Date. The shares that will be
issued upon conversion of these debentures are being registered for resale
purposes by a recent registration statement. DDSI also issued common stock
purchase warrants for the right to purchase 1,500,000 shares of Common Stock of
DDSI at an exercise price per share equal to the lesser of (i) $.02 and (ii) the
average of the lowest three inter-day sales prices during the twenty (20)
Trading Days immediately prior to exercise.
During January through March 2002, $14,000 of the convertible debentures issued
in March 2001 were converted into 2,456,140 shares of Common Stock.
Additionally, accrued interest of $18,371 relating to these notes was converted
into an additional 2,203,828 shares of Common Stock.
In April 2002, the Company entered into an agreement to extend the maturity date
of the convertible debenture issued in March 2001 in the amount of $200,000 with
a maturity date of March 4, 2002 for an additional year.
During April through June 2002, $19,269 of the convertible debentures issued in
March 2001 were converted into 5,090,912 shares of Common Stock.
In June 2002, a 12% convertible promissory note for $75,000 was issued to two
investors. The conversion price is (i) 50% of the average of the lowest three
inter-day sales prices, or (ii) if the common stock is then traded on the OTC
Bulletin Board or Pink Sheets, the prices asked by any person or entity acting
as a market maker in the common stock during the twenty trading days immediately
preceding the relevant date upon which a conversion is effected.
-9-
On September 30, 2002, DDSI issued two convertible debentures for an aggregate
amount of $100,000, with simple interest accruing at the annual rate of 12%.
These debentures are due September 30, 2003. Interest payable on the Debentures
shall be paid quarterly commencing December 31, 2002. The holders shall have the
right to convert the principal amount and interest due under the debentures into
shares of DDSI's common stock. The conversion price in effect on any Conversion
Date shall be the lesser of (1) $.005 and (2) 50% of the average of the lowest
three inter-day sales prices of the Common Stock during the twenty Trading Days
immediately preceding the applicable Conversion Date.
5. EQUITY TRANSACTIONS
See Note 4.
6. SUBSEQUENT EVENTS
Mr. Randolph Hall, Vice President of Sales and an Officer of the Company
resigned from Digital Descriptor Systems, Inc. effective October 18, 2002.
On October 28, 2002, $5,333 of convertible debentures issued in December 2001,
were converted into 3,194,897 shares of common stock.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Plan of Operations
The short-term objectives of DDSI are the following:
1. The short-term objective of DDSI is to continue to expand the sale and
acceptance of its core solutions by offering new and synergistic
biometric (i.e. FMS) security products to its installed base in the
criminal justice market. The Company's objective is to expand with
these, and additional products, into much larger commercial and federal
markets.
DDSI's long-term objectives are as follows:
1. To seek additional products to sell into its basic business
market--Criminal Justice -- so that DDSI can generate sales adequate
enough to allow for profits. New products include FMS (Fingerprint
Matching System), and Identify on Demand.
2. Continue pursuing the FBI certification of the Compu-Scan 3000
fingerprint capturing device. This would include redesigning the slap
unit of the Compu-Scan to capture a palm print as well as a
fingerprint. In addition consideration will be given to the creation of
a contactless single digit reader that would not require FBI
certification. There is no guarantee that the company will be able to
raise sufficient funding to complete this project or that it will ever
be able to meet FBI certification
DDSI believes that it will not reach profitability until the year 2003. Over the
next twelve months, management is of the opinion that sufficient working capital
will be obtained from operations and external financing to meet the Company's
liabilities and commitments as they become payable. DDSI has in the past
successfully relied on private placements of common stock securities, bank debt,
loans from private investors and the exercise of common stock warrants in order
to sustain operations. If DDSI is unable to obtain additional funding in the
future, it may be forced to curtail or terminate operations.
DDSI is doing the following in its effort to reach profitability:
o Cut costs in areas that add the least value to DDSI.
o Derive funds through investigating business alliances with other
companies who may wish to license the Compu-Scan device or the FMS
SDK (software developers kit).
o Increase revenues through the introduction of Compu-Capture,
specifically towards kindergarten through twelfth grades, for the
creation of ID cards.
o Increase revenues through the introduction of a scaled down
version of our Compu-Capture product.
Results of Operations
Nine Months September 30, 2002 Compared to the Nine Months Ended September
30, 2001
Revenues for the nine months ended September 30, 2002 of $988,051 decreased
$164,750 or 14% from the nine months ended September 30, 2001. DDSI generates
its revenues through software licenses, hardware, post customer support
arrangements and other services. The decrease in DDSI's revenue is attributed to
discontinued sales of the SI-3000 product line at the end of the first quarter
in 2001. SI-3000 products' largest revenue impact was in software sales. These
revenues are included in deferred revenue until the job has been completed and
"signed-off" by the client. Once that job is completed, revenue is then
recognized on the income statement. During the first nine months of 2002, DDSI
recognized revenue of $211,500 from software sales and software maintenance
agreements from previous installations of SI-3000. Maintenance revenues
increased $57,795 or 14% from the nine months ended September 30, 2001 primarily
due to an increase in DDSI's customer's service and additional stations being
purchased by customers which include software maintenance agreements.
-11-
Cost of goods for the period ended September 30, 2002 was $376,860 a decrease of
$57,650 or 13% from the same period, prior year. The decrease was attributable
to the decrease in SI-3000 projects. Cost of goods sold as a percentage of
revenue for the period ended September 30, 2002 was 38% of total revenues,
versus 38% in the same period a year earlier.
Costs and expenses decreased $938,604 or 34% during the nine months ended
September 30, 2002 versus the nine months ended September 30, 2001. The decrease
is due primarily to the cost containment efforts of the Company. This decrease
was offset by an increase in interest and amortization of deferred debt cost of
$772,809 in connection with the convertible debentures issued in 2001. All other
expenses of the Company experienced decreases for the nine months ended
September 30, 2002 versus the nine months ended September 30, 2001.
General and Administrative expenses for the nine month period ending September
30, 2002 was $723,373 versus $1,320,601 for the same period prior year for a
decrease of $597,228 or 45%. This decrease was mainly attributable to a decrease
in salaries and related payroll expenses of $170,606, a prior year charge in
miscellaneous of $266,780 for services paid in stock, a decrease in accounting
fees of $68,812, a decrease in insurance costs of $22,344, and miscellaneous
items for $55,000.
Sales and Marketing expenses decreased $287,100 for the nine-month period ended
September 30, 2002 from $362,605 (2001) to $75,505 (2002) or a 79% decrease.
This decrease was mainly attributable to a decrease in salaries, commissions,
benefits and payroll taxes in the aggregate of $167,034, travel expenses of
$47,361, a decrease in public relations / advertising costs of $18,380, a
reduction in trade show expenses of $4,303, a decrease in hiring expenses of
$36,300, a cost cut in computer expenses of $5,529 and miscellaneous items for
$8,152.
Research and development for the nine months ended September 30, 2002 was
$168,091 compared to $284,818 for the same period prior year for a decrease of
$116,727, which was due in part to a decrease in research and development
consulting costs of $15,099. Also contributing to the overall decrease was the
decline in salaries, benefits and payroll taxes in the aggregate of $69,433,
travel expenses by $27,630 and miscellaneous items of $4,100.
The net loss for the Company decreased 41% for the nine months ending September
30, 2002 to ($1,128,926) from ($1,902,781) for the nine months ending September
30, 2001. This was principally due to the decrease in expenses during the
period.
Net cash used in operating activities for the nine months ended September 30,
2002 and 2001 was ($469,562) and ($671,731), respectively. The decrease in cash
used from operating activities in the nine months ended September 30, 2002
versus 2001 of $202,169 was principally due to the decrease in net loss for the
nine months.
Net cash provided by (used in) investing activities nine months ended September
30, 2002 and 2001 was $4,918 and $(2,220) respectively, reflecting a change of
$7,138. This change is due to lack of purchases of furniture and equipment for
the nine months ended September 30, 2002 as compared to the same period prior
year.
Net cash provided by financing activities was $131,848 and $628,646 for the nine
months ended September 30, 2002 and 2001, respectively, reflecting a decrease of
496,798. This decrease was principally due to decrease in proceeds from issuance
of convertible debenture.
-12-
Three Months September 30, 2002 Compared to the Three Months Ended September
30, 2001
Revenues for the three months ended September 30, 2002 of $573,892 versus three
months ended September 30, 2001 of $427,543 increased $146,349 or 34%. As
indicated above, the Company generates its revenues through software licenses,
hardware, post customer support arrangements and other services. The increase in
the Company's revenue is attributed to the completion of a SI-3000 project.
Maintenance revenues increased $12,121 or 9% from the three months ended
September 30, 2001 primarily due to an increase in the Company's customers
entering into such arrangements and the revenue sharing agreement with Itx on
maintenance of the SI-3000 product. Other revenues consist of sales of supplies
that the Company makes available to its customers, such as wristbands, ID cards
and print packs. More customers ordered such items in the three months ended
September 30, 2002 versus 2001. Cost of goods increased $130,125 or 79% due to
the completion of the SI-3000 project; whereas there was less SI-3000 activity
during the same period in 2001. Cost of goods consisted of 51% of total revenues
for 2002; whereas cost of goods in 2001 consisted of 39% of the revenues.
Costs and expenses decreased $256,334 or 41% during the three months ended
September 30, 2002 versus the three months ended September 30, 2001. The
decrease is due to reduction of general and administrative related expenses such
as stock for services ($80,250), salaries ($40,844), insurance costs ($9,989). A
decrease of ($37,776) in the sales and marketing departments was a result of
lower costs. The research and development department also contributed to the
overall decrease in reducing consulting costs of ($86,426).
The net loss for the Company decreased 61% for the three months ending September
30, 2002 to ($232,406) from ($599,138) for the three months ending September 30,
2001. This was principally due to the decrease in cost of goods and overall
operating costs during the period.
Liquidity and Capital Resources
The Company's revenues have been insufficient to cover the cost of revenues and
operating expenses. Therefore, the Company has been dependent on private
placements of its common stock and issuance of convertible notes in order to
sustain operations. In addition, there can be no assurances that the proceeds
from private or other capital will continue to be available, or that revenues
will increase to meet the Company's cash needs, or that a sufficient amount of
the Company's common stock or other securities can or will be sold or that any
common stock purchase options/warrants will be exercised to fund the operating
needs of the Company.
Over the next twelve months, management is of the opinion that sufficient
working capital will be obtained from operations and external financing to meet
the Company's liabilities and commitments as they become payable. DDSI has in
the past relied on private placements of common stock securities, and loans from
private investors to sustain operations. However, if DDSI is unable to obtain
additional funding in the future, it may be forced to curtail or terminate
operations.
DDSI is doing the following in its effort to reach profitability and positive
cash flow:
o Cut costs in areas that add the least value to DDSI.
o Derive funds through investigating business alliances with other companies
who may wish to license the Compu-Scan device or the FMS SDK (software
developers kit).
o Increase revenues through the introduction of Compu-Capture in the education
industry, specifically towards kindergarten through twelfth grades, for the
creation of ID cards.
o Increase revenues through the introduction of a scaled down version of our
Compu-Capture product.
Item 3. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief
executive officer and chief financial officer, conducted an evaluation of our
"disclosure controls and procedures" (as defined in Securities Exchange Act of
1934 (the "Exchange Act") Rules 13a-14(c)) within 90 days of the filing date of
this Quarterly Report on Form 10-QSB (the "Evaluation Date"). Based on their
evaluation, our chief executive officer and chief financial officer have
concluded that as of the Evaluation Date, our disclosure controls and procedures
are effective to ensure that all material information required to file in this
Quarterly Report on Form 10-QSB has been made known to them in a timely fashion.
Changes in Internal Controls
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date set forth above.
-13-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Robert Martin - Shareholder Threatened Lawsuit
On January 19, 2002, DDSI's Board of Directors received a letter threatening
legal action from Mr. Robert P. Martin who purchased shares pursuant to a
private placement offering in October 2001. The letter alleged false and
misleading representations made to Mr. Robert Martin by Mr. Garrett Cohn and Mr.
Scott Gallagher (About Face Communications) involving convertible debenture
funding.
The shareholder has threatened a direct and derivative action suggesting the
convertible debt was not legally authorized.
Upon receipt of the threatened complaint, DDSI's Board of Directors had a
discussion with Mr. Martin where DDSI represented that it was in compliance with
the Company Bylaws, state and federal securities laws and that the current Board
of Directors were unaware of any fraudulent representations.
Therefore, DDSI disputes the allegations made in the complaint for the following
reasons, 1) the Company is unaware of any false and misleading misrepresentation
made by Mr. Garrett Cohn, 2) the threatened complaints received contained
insufficient information to make a determination of any wrong doing and 3) the
convertible debt was legally authorized by DDSI Board of Directors. Concerning
the legality of the convertible debt, there were three members on the Board of
Directors at the time this issue was voted on. Two board members were present
and voted on behalf of accepting the convertible debenture. In addition,
corporate counsel was contacted prior to the vote and after review of the
corporate bylaws indicated that pursuant to DDSI bylaws there was a quorum
present, therefore the business transacted by the Board would be legal and
binding. Thus, DDSI would vigorously defend itself against the allegations if
such actions were pursued. Currently there has been no action filed.
AccuSoft - Action to Terminate Product Licenses
On July 16, 2001, AccuSoft Corporation filed a complaint against DDSI in the
United States District Court for the Central District of Massachusetts, Civil
Action No. 0140132-NMG. AccuSoft sought the following relief:
A. The termination of the following license agreements: ImageGear
6.0, 95 and 98.
B. A preliminary injunction enjoining DDSI from using the above
licenses in the sales of their products.
Since the initial filing of the action by AccuSoft Corporation, DDSI has stopped
using AccuSoft's ImageGear 6.0, 95 and 98 software and have replaced AccuSoft's
controls. The parties reached an agreement on October 28, 2002, whereas DDSI has
agreed to pay AccuSoft $7,500.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During January through March 2002, $14,000 of the convertible debentures issued
in March 2001 were converted into 2,456,140 shares of Common Stock.
Additionally, accrued interest of $18,371 relating to these notes was converted
into an additional 2,203,828 shares of Common Stock.
-14-
In April 2002, the Company entered into an agreement to extend the maturity date
of the convertible debenture issued in March 2001 in the amount of $200,000 with
a maturity date of March 4, 2002 for an additional year.
During April through June 2002, $19,269 of the convertible debentures issued in
March 2001 were converted into 5,090,912 shares of Common Stock.
The outstanding shares of 61,351,387 as of November 15, 2002 excludes the
authorized and unissued Common Redeemable Class A and Class B Warrants numbering
one million four hundred eighty-three thousand and seven hundred fifty
(1,483,750) of each class. Each Class A Warrant entitled the holder to purchase
one share of Common Stock for a period of four years commencing August 15, 1996,
subject to earlier redemption, and would have been exercisable at a price of
$1.00 a unit. Each Class B Warrant entitled the holder to purchase one share of
Common Stock for a period of four years commencing August 15, 1996, subject to
earlier redemption, and would have been exercisable at a price of $1.50 a unit.
During July 2000, both the Class A Warrants and the Class B Warrants expiration
dates were extended to August 15, 2002. No further action was taken and both the
Class A Warrants and the Class B Warrants expired on August 15, 2002
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS
The Company filed a Preliminary Proxy with the SEC on September 11, 2002, and an
amended Proxy on October 31, 2002, requesting the following pending SEC review:
o The election of four directors.
o To approve and adopt an amendment to the Company's Restated
Certificate of Incorporation to increase the authorized number of
shares of Common Stock from 150,000,000 to 750,000,000.
o To approve an amendment to the Certificate of Incorporation in
order to provide for a stock combination (reverse split) of the
Common Stock in an exchange ratio to be approved by the Board,
from one newly issued share for each ten outstanding shares of
Common Stock to one newly issued share for each twenty outstanding
shares of Common Stock
o To approve the appointment of WithumSmith+Brown as auditors for
Digital Descriptor Systems, Inc.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Reports on Form 8-K:
July 29, 2002 Item 6
Resignation of Garrett U. Cohn for personal reasons.
-15-
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.
DIGITAL DESCRIPTOR SYSTEMS, INC.
--------------------------------
(Registrant)
Date: November 19, 2002 By: /s/ MICHAEL J. PELLEGRINO
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Michael J. Pellegrino
(President, Chief Operating Officer & Chief
Financial Officer)
Date: November 19, 2002 By: /s/ ROBERT GOWELL
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Robert Gowell
(Chief Executive Officer and Chairman of
the Board of Directors)
Date: November 19, 2002 By: /s/VINCENT MORENO
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Vincent Moreno.
Date: November 19, 2002 By: /s/ANTHONY SHUPIN
-------------------------------------------
Anthony Shupin