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 March 31, 2003
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
Digital Descriptor Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2770048
- ------------------------------- -----------------------
(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
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 May 15, 2003
--------------------- ----------------
$.001 par value 101,129,163 Shares
Transitional Small Business Disclosure Format Yes No X
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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 March 31, 2003 (Unaudited) and December 31, 2002
Statements of Operations for the three months ended March 31, 2003 and
2002 (Unaudited)
Statements of Cash Flows for the three months ended March 31, 2003 and
2002 (Unaudited)
Notes to Financial Statements - March 31, 2003 (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Control 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 to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS
March 31 December 31
2003 2002
----- ----
(Unaudited)
ASSETS
Current assets:
Cash $ 49,338 $ 15,439
Restricted cash 656 680
Accounts receivable, less allowance for uncollectible
accounts of $96,885 (unaudited) and $117,560 in
2003 and 2002, respectively 135,502 28,491
Inventory 18,595 8,550
Prepaid expenses 151,330 153,047
Debt discount and deferred financing costs 130,148 95,625
---------- ----------
Total current assets 485,569 301,832
Furniture and Equipment, net 8,561 12,158
Deposits and other assets 24,394 24,395
---------- ----------
Total assets $ 518,524 $ 338,385
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 304,955 $ 391,067
Accrued expenses 126,815 118,493
Accrued interest 185,476 145,333
Accrued payroll taxes -- 84,848
Deferred income 603,260 545,724
Current portion of equipment loan 7,289 7,289
Convertible debentures 1,476,131 1,103,732
---------- ----------
Total current liabilities 2,703,928 2,396,486
Equipment Loan, Net of Current Portion 10,950 12,766
---------- ----------
Total liabilities $2,714,878 $2,409,252
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DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS (continued)
March 31 December 31
2003 2002
----- ----
(Unaudited)
Shareholders' deficiency:
Preferred Stock, $.01 par value, authorized shares -
1,000,000; issued and outstanding - none -- --
Common Stock, $.001 par value, authorized shares -
150,000,000; issued and outstanding shares - 78,208,529
and 61,351,387 at March 31, 2003 and December 31, 2002,
respectively 78,208 61,351
Additional paid-in capital 16,896,529 16,909,886
Accumulated deficit (19,171,091) (19,042,104)
------------ ------------
Total shareholder's deficiency (2,196,354) (2,070,867)
------------ ------------
Total liabilities and shareholders' deficiency $ 518,524 $ 338,385
============ ============
The accompanying notes are an integral part of these financial statements.
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DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31 March 31
2003 2002
---- ----
Revenues:
Software $ 52,225 $ 39,592
Hardware 47,401 13,104
Maintenance 96,181 157,174
Other 14,891 14,292
------------ ------------
210,698 224,162
Costs and expenses:
Cost of revenues 23,226 68,325
General and administrative 164,472 271,300
Sales and marketing 58,947 23,846
Research and development 21,329 76,793
Depreciation and amortization 3,597 9,910
Interest and amortization of
deferred debt costs 83,260 259,765
Other (income) expense, net (15,146) (20,943)
------------ ------------
339,685 688,995
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Net loss $ (128,987) $ (464,833)
============ ============
Net loss per common share $ (0.01) $ (0.01)
============ ============
(basic and diluted)
Weighted average number of common shares outstanding:
Basic and diluted 73,268,847 60,114,624
============ ============
The accompanying notes are an integral part of these financial statements
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DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31 March 31
2003 2002
---- ----
Cash flows from operating activities:
Net loss ($128,986) ($464,831)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,597 9,909
Provision for doubtful note receivable - former officer -- (19,647)
Compensation expense in connection with issuance
of Common Stock -- --
Common stock issued for services -- 14,400
Amortization of deferred financing costs and debt discounts
related to the issuance of warrants and the beneficial
conversion feature of convertible debentures 43,070 232,013
Changes in operating assets and liabilities:
Accounts receivable (107,011) 74,473
Inventory (10,044) (2,495)
Prepaid expenses, deposits and other assets 1,717 (117,728)
Accounts payable (86,113) (116,603)
Accrued expenses (35,483) (23,372)
Deferred income 57,539 43,685
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Net cash used in operating activities (261,714) (370,196)
---------
Cash flows from investing activities:
Increase in restricted cash 23
(33,186)
(Increase) Decrease in note receivable-former officer -- 19,647
--------- ---------
Net cash used in investing activities 23
(13,539)
Cash flows from financing activities:
Proceeds from issuance of convertible debentures, net
of issuance costs of $77,724 in 2003 and $0 in 2002 297,406 --
Deferred financing costs -- --
Repayment of equipment loan (1,816) (1,796)
--------- ---------
Net cash provided by (used in) financing activities 295,590 (1,796)
--------- ---------
Net increase (decrease) in cash 33,899 (385,531)
Cash at beginning of period 15,439 435,662
--------- ---------
Cash at end of period $ 49,338 $ 50,131
========= =========
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DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31 March 31
2003 2002
---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 46 $ 1,691
======= =======
Income taxes $- --
======= =======
Supplemental disclosure of non-cash investing and financial activities:
Conversion of debentures $ 2.600 $32,371
======= =======
The accompanying notes are an integral part of these financial statements
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DIGITAL DESCRIPTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
March 31, 2003
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 March 31, 2003 and 2002. 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 months
ended March 31, 2003 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 month period ended March 31, 2003 and 2002 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2003.
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
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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.
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. Since DDSI was
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. We
re-evaluated this product and determined that to see the project to completion
would cost an additional $400,000 to $600,000 dollars plus an additional 12 to
18 month timeframe, with no guarantee of FBI certification. As such, we decided
not to pursue this project any further and focus on developing the existing
products.
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 mature on March 4, 2003; 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
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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.
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 1,012,494 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
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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 this 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.
During February through June 2002, $33,269 of the convertible debentures issued
in March 2001 was converted into 7,547,052 shares of common stock. Additionally,
accrued interest relating to these notes was converted into an additional
703,828 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.
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.
During October 2002, $3,000 of the convertible debentures issued in December
2001 were converted into 1,639,344 shares of common stock. Additionally,
liquidated damages relating to these notes were converted into an additional
1,555,553 shares of common stock.
On January 10, 2003, DDSI issued three convertible debentures for an aggregate
amount of $250,000, with simple interest accruing at the annual rate of 10%.
These debentures are due January 10, 2004. Interest payable on the Debentures
shall be paid quarterly commencing March 31, 2003. 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) $.01 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.
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During February 2003, $1,000 of the convertible debentures issued in December
2001 was converted into 2,857,142 shares of common stock.
On February 27, 2003, DDSI issued three convertible debentures for an aggregate
amount of $125,000, with simple interest accruing at the annual rate of 10%. The
debentures are due February 27, 2004. Interest payable on the Debentures shall
be paid quarterly commencing March 31, 2003. 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) $.01 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.
In March 2003, $1,600 of the convertible debentures issued in December 2001 was
converted into 8,000,000 shares of common stock. Additionally, accrued interest
relating to the note dated May 2001 was converted into an additional 1,820,634
shares of common stock.
On March 31, 2003, DDSI issued three convertible debentures for an aggregate
amount of $125,000, with simple interest accruing at the annual rate of 12%. The
debentures are due March 31, 2004. Interest payable on the Debentures shall be
paid quarterly commencing June 30, 2003. 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) $.01 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
None
6. SUBSEQUENT EVENTS
During April through May 12, 2003, liquidated damages relating to the
convertible debentures issued in December 2001 were converted into 9,000,000
shares of common stock. $2,400 of the convertible debenture issued in March 2001
were converted into 12,000,000 shares of Common Stock.
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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 the Company is to continue to expand the sale and
acceptance of its core solutions by offering new and synergistic biometric
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.
DDSI believes that it will not reach profitability until the year 2004. 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. The Company 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.
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 o FMS SDK (software developers
kit)..
o Increase revenues through the introduction of Compu-Capture to
schools, 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.
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Results of Operations
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002
Revenues for the three months ended March 31, 2003 of $210,698 decreased $13,464
or 6% from the three months ended March 31, 2002. The Company generates its
revenues through software licenses, hardware, post customer support arrangements
and other services. The slight overall decrease in the Company's revenue is
attributed to a decrease in software maintenance contract dollar amount.
Software, hardware and installation combined sales increased $47,529 or 71%
while maintenance revenues decreased $60,993 or 39% from the three months ended
March 31, 2002. Cost of goods decreased $45,099 or 66% due to the decrease in
SI-3000 projects and was reduced to 11% of total revenues from 30% in the same
period a year earlier. The gross profit percentage per sale increased by 17%
compared to the same period a year earlier.
Costs and expenses decreased $349,310 or 51% during the three months ended March
31, 2003 versus the three months ended March 31, 2002. The decrease is due
primarily to the cost containment efforts of the Company. Interest and
amortization of deferred debt cost decreased by $176,505 for the three months
ended March 31, 2003 and 2002. The expense for the sales and marketing
department increased $35,101 or 147% due to the addition of a sales consultant
to fill the void of the reduced sales staff for the three months ended March 31,
2003 and 2002. Expenses for research and development decreased $55,464 or 138%
for the three months ended March 31, 2003 and 2002. In keeping with the goal to
streamline costs yet achieve a working product the Company is re-evaluating its'
current development strategy and resources resulting in a cutback of expenses.
General and Administrative expenses for the three month period ending March 31,
2003 was $164,448 versus $271,300 for the same period prior year for a decrease
of $106,852 or 39%. This decrease was mainly attributable to a decrease in
salaries and related payroll expenses of $47,109, consulting fees of $14,400 for
services paid in stock, legal fees of $15,468, accounting fees of $15,943,
vehicle expense of $1,965, rent of $5,730, telephone expense of $4,566 and
miscellaneous items for $1,671.
Sales and Marketing expenses increased $35,101 for the three months period ended
March 31, 2003 from $23,846 (2002) to $58,947 (2003) or a 147% increase. This
increase was mainly attributable to an increase in professional consulting of
$21,700, an increase in salaries, commissions, benefits and payroll taxes in the
aggregate of $15,645, a decrease in trade show expenses of $4,240 and an
increase in miscellaneous items for $2,000.
Research and development for the three months ended March 31, 2003 was $21,329
compared to $76,793 for the same period prior year for a decrease of $55,464
that was due in part to a decrease in research and development consulting costs
of $51,305. Also contributing to the overall decrease was the decline in
salaries, benefits and payroll taxes in the aggregate of $4,159.
The net loss for the Company decreased 72% for the three months ending March 31,
2003 to $128,963 from $464,833 for the three months ending March 31, 2002. This
was principally due to the decrease in expenses and debentures incurred during
the period.
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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 placements 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.
Net cash used in operating activities for the three months ended March 31, 2003
and 2002 was ($261,714) and ($370,196), respectively. The decrease in cash used
from operating activities in the three months ended March 31, 2003 versus 2002
of $108,482 was principally due to the decrease in net loss for the three
months.
Net cash provided by (used in) investing activities three months ended March 31,
2003 and 2002 was $23 and ($13,539) respectively, reflecting a change of
$13,562. This change is due to a reduction of restricted cash and lack of a note
receivable - former officer three months ended March 31, 2003 as compared to the
same period prior year.
Net cash provided by financing activities was $295,590 and ($1,796) for the
three months ended March 31, 2003 and 2002, respectively, reflecting an increase
of $298,386. This increase in financing activity is due to the issuance of the
convertible debentures.
ITEM 3. CONTROL AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to March 31, 2003, the Company carried out an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation
was done under the supervision and with the participation of the Company's
President and Chief Financial Officer. Based upon that evaluation, they
concluded that the Company's disclosure controls and procedures are effective in
gathering, analyzing and disclosing information needed to satisfy the Company's
disclosure obligations under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in its
factors that could significantly affect those controls since the most recent
evaluation of such controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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 in the amount of $18,371 relating to these notes
was converted into an additional 2,203,828 shares of Common Stock.
During January 2002, the Company granted 360,000 shares of restricted Common
Stock for consulting services performed. The Company recorded a charge for the
issuance of such shares in the amount of $7,200 based on the fair market value
of the Company stock on the date of the stock grant.
During February through June 2002, $33,269 of the convertible debentures issued
in March 2001 was converted into 7,547,052 shares of common stock. Additionally,
accrued interest relating to these notes was converted into an additional
703,828 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.
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.
During October 2002, $3,000 of the convertible debentures issued in December
2001 were converted into 1,639,344 shares of common stock. Additionally,
liquidated damages relating to these notes were converted into an additional
1,555,553 shares of common stock.
On January 10, 2003, DDSI issued three convertible debentures for an aggregate
amount of $250,000, with simple interest accruing at the annual rate of 10%.
These debentures are due January 10, 2004. Interest payable on the Debentures
shall be paid quarterly commencing March 31, 2003. 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) $.01 and (2) 50% of
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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.
During February 2003, $1,000 of the convertible debentures issued in December
2001 was converted into 2,857,142 shares of common stock.
On February 27, 2003, DDSI issued three convertible debentures for an aggregate
amount of $125,000, with simple interest accruing at the annual rate of 10%. The
debentures are due February 27, 2004. Interest payable on the Debentures shall
be paid quarterly commencing March 31, 2003. 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) $.01 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.
On March 31, 2003, DDSI issued three convertible debentures for an aggregate
amount of $125,000, with simple interest accruing at the annual rate of 12%. The
debentures are due March 31, 2004. Interest payable on the Debentures shall be
paid quarterly commencing June 30, 2003. 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) $.01 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.
In March 2003, $1,600 of the convertible debentures issued in December 2001 was
converted into 8,000,000 shares of common stock. Additionally, accrued interest
relating to the note dated May 2001 was converted into an additional 1,820,634
shares of common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
DDSI filed an Amended Definitive Proxy with the SEC on February 14, 2003,
requesting the following:
o the election of four directors;
o the increase in the number of authorized shares of our Common Stock
from 150,000,000 to 750,000,000;
o to approve up to a 1 to 20 reverse stock split of all of Digital
Descriptor System Inc.'s authorized Common Stock;
o the ratification of the appointment of WithumSmith+Brown as our
independent accountants for the current fiscal year; and
At the annual shareholders meeting held on March 13, 2003 the shareholders
approved the election of the four directors and the appointment of WithumSmith &
Brown, but did not approve the amendment to DDSI's Restated Certificate of
Incorporation to increase the number of authorized shares or the stock
combination (reverse split).
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
Exhibit 99.1
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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.
DIGITAL DESCRIPTOR SYSTEMS, INC.
(Registrant)
Date: May 20, 2003 By: /s/ ANTHONY SHUPIN
----------------------------------
Anthony Shupin
(Director - Chairman)
Date: May 20, 2003 By: /s/ MICHAEL J. PELLEGRINO
----------------------------------
Michael J. Pellegrino
(President, Chief Executive
Officer and Director)
Date: May 20, 2003 By: /s/ VINCENT MORENO
----------------------------------
Vincent Moreno.
(Director)
Date: May 20, 2003 By: /s/ ROBERT GOWELL.
----------------------------------
Robert Gowell
(Director)
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CEO CERTIFICATION
I, Michael J. Pellegrino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Digital
Descriptor Systems, Inc.,
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
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internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 20, 2003
/s/ Michael J. Pellegrino
--------------------------------------------
Michael J. Pellegrino
Chief Executive Officer
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CFO CERTIFICATION
I, Michael J. Pellegrino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Digital
Descriptor Systems, Inc.,
2. Based on my knowledge, this Quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
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internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 20, 2003
/s/ Michael J. Pellegrino
--------------------------------------------
Michael J. Pellegrino
Chief Financial Officer
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Digital Descriptor Systems, Inc. (the
"Company") on Form 10-QSB for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Michael J. Pellegrino, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Michael Pellegrino
-----------------------------
Michael J. Pellegrino
Chief Executive Officer
May 20, 2003
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