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 June 30, 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)
2150 Highway 35, Suite 250, Sea Girt, NJ 08750
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (732) 359-0260
446 Lincoln Highway, Fairless Hills, Pa 19030
(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 February 4, 2004
- --------------------- ------------------
$.001 par value 145,958,423 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 June 30, 2003 (Unaudited) and December 31, 2002
Statements of Operations for the three months ended June 30, 2003
and 2002 (Unaudited)
Statements of Operations for the six months ended June 30, 2003 and
2002 (Unaudited)
Statements of Cash Flows for the six months ended June 30, 2003 and
2002 (Unaudited)
Notes to Financial Statements - June 30, 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
<Table>
<Caption>
June 30 December 31
2003 2002
---------- ----------
(Unaudited)
Assets
Current assets:
Cash $ 15,896 $ 15,439
Restricted cash 641 680
Accounts receivable, less allowance for uncollectible
accounts of $20,140 (unaudited) and $117,560 in
2003 and 2002, respectively 122,802 28,491
Inventory 21,499 8,550
Prepaid expenses 62,070 153,047
Debt discount and deferred financing costs 345,451 95,625
---------- ----------
Total current assets 568,359 301,832
Furniture and Equipment, net 349 12,158
Deposits and other assets -- 24,395
---------- ----------
Total assets $ 568,708 $ 338,385
========== ==========
Liabilities and Shareholders' Deficiency
Current liabilities:
Accounts payable $ 300,320 $ 391,067
Accrued expenses 234,421 118,493
Accrued interest 229,829 145,333
Accrued payroll and related withholdings -- 84,848
Due to officers and directors 39,634 --
Deferred income 419,462 545,724
Current portion of equipment loan 4,130 7,289
Convertible debentures 1,596,837 1,103,732
---------- ----------
Total current liabilities
2,824,633 2,396,486
Equipment Loan, Net of Current Portion -- 12,766
---------- ----------
Total liabilities $2,824,633 $2,409,252
---------- ----------
</Table>
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DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS (continued)
<Table>
<Caption>
June 30 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 - 111,137,789
and 61,351,387 at June 30, 2003 and December 31, 2002,
respectively 111,137 61,351
Additional paid-in capital 17,282,227 16,909,886
Accumulated deficit (19,649,289) (19,042,104)
------------ ------------
Total shareholder's deficiency (2,255,925) (2,070,867)
------------ ------------
Total liabilities and shareholders' deficiency $ 568,708 $ 338,385
============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
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DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30 June 30, June 30
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Software $ 94,448 $ 13,349 $ 146,673 $ 52,941
Hardware 7,776 14,858 55,177
27,962
Maintenance 108,961 157,416 205,142 314,590
Other 49,153 4,373 64,044 18,665
------------ ------------ ------------ ------------
260,338 189,996 471,036 414,158
Costs and expenses:
Cost of revenues 95,882 13,688 119,108 82,013
General and administrative 344,208 239,265 508,679 510,565
Sales and marketing 60,230 33,392 119,177 57,238
Research and development 12,309 74,582 33,638 151,375
Depreciation and amortization 2,150 8,305 5,747 18,214
Interest and amortization of
deferred debt costs 270,484 255,805 345,451 515,569
Other (income) expense, net (46,726) (3,352) (61,872)
------------ ------------ ------------ ------------
(24,296)
738,537 621,685 1,078,221 1,310,678
------------ ------------ ------------ ------------
Net loss $ (478,199) $ (431,689) $ (607,185) $ (896,520)
============ ============ ============ ============
Net loss per common share $ (0.01) $ (0.01) $ (0.01) $ (0.02)
============ ============ ============ ============
(basic and diluted)
Weighted average number of common shares outstanding:
Basic and diluted 96,530,244 56,724,007 81,311,081 53,844,741
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these financial statements
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DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
Six Months Ended
June 30 June 30
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss ($607,185) ($896,520)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,747 18,215
Provision for doubtful note receivable - former officer -- --
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 269,174 456,513
Gain on disposal of fixed assets (6,833) --
Changes in operating assets and liabilities:
Accounts receivable (94,311) 97,462
Inventory (12,950) (17,161)
Prepaid expenses, deposits and other assets 115,372 (79,086)
Advances - Employees -- (110,066)
Accounts payable (11,479) (81,029)
Accrued expenses 203,613 92
Due to officers and directors (39,634) --
Accrued payroll and related withholdings (84,848) 173,929
Deferred income (126,262) (35,946)
--------- ---------
Net cash used in operating activities (389,596) (459,197)
Cash flows from investing activities:
Decrease in restricted cash 39 4,925
--------- ---------
Net cash provided by investing activities 39 4,925
Cash flows from financing activities:
Proceeds from issuance of convertible debentures, net
of issuance costs of $106,958 in 2003 and $0 in 2002 393,042 64,750
Repayment of equipment loan (3,028) (3,597)
--------- ---------
Net cash provided by financing activities 390,014 61,153
--------- ---------
Net increase in cash 457 (393,119)
Cash at beginning of period 15,439 435,661
--------- ---------
Cash at end of period $ 15,896 $ 42,542
========= =========
</Table>
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DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
<Table>
<Caption>
June 30 June 30
2003 2002
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 86 $ 1,937
======== ========
Income taxes $ -- $ --
======== ========
Supplemental disclosure of non-cash investing and financial activities:
Conversion of debentures into common stock $ 6,895 $ 51,640
======== ========
Debt discount relating to the issuance of warrants and the $393,042 $ --
beneficial conversion factors of the convertible debt ======== ========
Conversion of liquidated damages into common stock $ 3,191 $ --
======== ========
</Table>
Theequipment loan payable was reduced by $12,896 in May 2003 when
the Company returned two vehicles
The accompanying notes are an integral part of these financial statements
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DIGITAL DESCRIPTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 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 June 30, 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 six months
ended June 30, 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 six month periods ended June 30, 2003 and 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003. Our independent auditors have added an explanatory paragraph
to their audit opinions issued in connection with the fiscal years 2002 and 2001
financial statements, which states that our ability to continue as a going
concern depends upon our ability to resolve liquidity problems, principally by
obtaining capital, commencing sales and generating sufficient revenues to become
profitable. Our ability to obtain additional funding will determine our ability
to continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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
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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.
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.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity". This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, Elements of Financial Statements. The remaining provision of this
statement are consistent with the Board's proposal to revise that definition to
encompass certain obligations that a reporting entity can or must settle by
issuing its own equity shares, depending on the nature of this relationship
established between the holder and the issuer. This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. Since the Company has already classified it's Series A Cumulative
Convertible Preferred Stock outside its stockholders' deficiency section, the
Company does not believe that the adoption of SFAS 150 will have a material
impact upon the Company's financial statements.
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4. CONVERTIBLE DEBENTURES
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) $.005 and (2) 40% 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 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) $.005 and (2) 40% 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.
On April 2, 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 March 31, 2004. Interest payable on the Debentures shall be
paid quarterly commencing May 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) $.005 and (2) 40% 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 April 2003, $1,600 of the convertible debentures issued in December 2001 was
converted into 8,000,000 shares of common stock.
In May 2003, $1,600 of the convertible debentures issued in December 2001 was
converted into 8,000,000 shares of common stock.
During June 2003, $1,093 of the convertible debentures issued in December 2001
were converted into 5,468,010 shares of common stock.
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5. EQUITY TRANSACTIONS
The Company defaulted on its debt and pursuant to the agreement dated December
2001, a portion of the damages were paid in company stock as follows:
In April 2003, $1,200 in liquidated damages relating to notes issued in December
2001 were converted into an additional 6,000,000 shares of common stock.
In May 2003, $890 in liquidated damages relating to notes issued in December
2001 were converted into an additional 4,450,000 shares of common stock.
During June 2003, 1,011,250 shares of common stock were issued for $202 in
liquidated damages relating to notes issued in December 2001.
6. RELATED PARTY TRANSACTIONS
A director of the Company provided consulting services during 2003. For the six
months ended June 30, 2003, the services amounted to $16,800. As of June 30,
2003, the Company owes the director $33,000 with no repayment terms.
The Company also owes the former chief executive officer of the Company $6,634
at June 30, 2003 for back payroll and sundry expenses with no repayment terms.
7. SUBSEQUENT EVENTS
On September 30, 2003, a judgment was entered against the Company by Primezone,
Inc in the amount of $3,134.50. The Company satisfied the judgment on October 9,
2003.
On October 16, 2003, a judgment was entered against the Company by its landlord,
BT Lincoln L.P. for breach of lease in the amount of $184,706.76. The company
intends to negotiate a settlement.
In October 2003, management changes were as follow: Mr. Michael Pellegrino
resigned effective October 6, 2003 as President and CEO of DDSI. Mr. Anthony
Shupin accepted the position of CEO and President of the Corporation. The Board
of Director's unanimously elected Mr. Pellegrino as Chairman of the Board. Mr.
Shupin remains a Director of the Company.
On October 1, 2003, DDSI issued three convertible debentures for an aggregate
amount of $300,000, with simple interest accruing at the annual rate of 12%. The
debentures are due October 1, 2004. Interest payable on the Debentures shall be
paid quarterly commencing December 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) $.005 and (2) 40% of the average of the lowest three
inter-day sales prices of the common stock during the twenty Trading Days
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immediately preceding the applicable Conversion Date. The debenture holders also
received warrants to purchase 2,100,000 shares at an exercise price of $0.005
per share anytime before September 30, 2008.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of certain significant
factors that will have affected our financial condition and results of
operations. Certain statements under this section may constitute
"forward-looking statements". The following discussion should be read in
conjunction with our financial statements and notes thereto included in this
report.
Critical Accounting Policies
No material changes have occurred in the disclosure with respect to our critical
accounting policies set forth in our Annual Report Form 10-KSB for the fiscal
year ended December 31, 2002.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity". This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, Elements of Financial Statements. The remaining provision of this
statement are consistent with the Board's proposal to revise that definition to
encompass certain obligations that a reporting entity can or must settle by
issuing its own equity shares, depending on the nature of this relationship
established between the holder and the issuer. This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company does not believe that the adoption of SFAS 150 will have a
material impact upon the Company's financial statements.
General
Financial Condition
We had net losses of $478,199 and $431,689 during the three months ended June
30, 2003 and 2002, respectively. As of June 30, 2003, we had a cash balance in
the amount of $15,896 and current liabilities of $2,824,633 including
obligations of $39,634 and $1,596,837 to officers and convertible debenture
holders, respectively. We do not have sufficient cash or other assets to meet
our current liabilities. In order to meet those obligations, we will need to
raise cash from the sale of securities or from borrowings. Our independent
auditors have added an explanatory paragraph to their audit opinions issued in
connection with the fiscal years 2003 and 2002 financial statements, which
states that our ability to continue as a going concern depends upon our ability
to resolve liquidity problems, principally by obtaining capital, commencing
sales and generating sufficient revenues to become profitable. Our ability to
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obtain additional funding will determine our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Short-Term Objectives
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 products to its
installed base in the criminal justice market. The Company's objective is to
expand with these, and additional products and services, into much larger
commercial and federal markets.
Long-Term Objectives
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.
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 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.
o Expand the Compu-Capture product acceptance as an employee
identification/badging system in response to market demand
o Focus on recruiting and supporting Value Added Resellers targeting
DDSI's primary market.
o Pursuing strategic relationships enabling the Company to develop and
support products and services related to our primary markets.
Results of Operations
Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30 2002
Revenues for the six months ended June 30, 2003 of $471,036 increased $56,878 or
13% from the six months ended June 30, 2002. The Company generates its revenues
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through software licenses, hardware, post customer support arrangements and
other services. The overall increase in the Company's revenue is attributed to
the completion of two SI-3000 projects. Software, hardware and installation
combined sales increased $166,326 or 167% while maintenance revenues decreased
$109,448 or 35% from the six months ended June 30, 2002. Cost of revenues
increased $37,095 or 45% due to the completion of the SI-3000 projects and
increased to 25% of total revenues from 20% in the same period a year earlier.
Costs and expenses decreased $232,457 or 18% during the six months ended June
30, 2003 versus the six months ended June 30, 2002. Cost of revenue increased
$37,095, interest and amortization of deferred debt cost decreased by ($161,825)
due to the decrease in the costs related to debentures, depreciation expense
decreased ($12,467), general and administrative expenses decreased ($1,886),
sales and marketing increased $61,939 and research and development decreased
($117,737) and other income increased $37,576 for the six months ended June 30,
2003. The overall decrease is primarily due to the cost containment efforts of
the Company.
General and Administrative expenses for the six month period ending June 30,
2003 was $508,679 versus $510,565 for the same period prior year for an decrease
of $1,886. This decrease was due to a combination of the judgment against the
company for $160,313 (net of rent deposit) for breaking its lease and an
increase in filing fees of $19,948 to a decrease in salaries and related payroll
expenses of ($135,742), consulting fees of ($14,400) for services paid in stock,
legal fees of ($16,016), travel expense of ($7,410), telephone expense of
($6,626) and miscellaneous items for ($1,953).
Sales and Marketing expenses increased $61,939 for the six months period ended
June 30, 2003 from $57,238 (2002) to $119,177 (2003) or a 108% increase. This
increase was mainly attributable to an increase in professional consulting of
$42,350, an increase in salaries, commissions, benefits and payroll taxes in the
aggregate of $35,190, a decrease in trade show expenses of ($3,168), travel of
($4,461), advertising of ($6,176) and miscellaneous items for ($1,796).
Research and development for the six months ended June 30, 2003 was $33,638
compared to $151,375 for the same period prior year for a decrease of $117,737
that was due in part to a decrease in research and development consulting costs
of ($113,272) and support line of ($1,880). Also contributing to the overall
decrease was the decline in salaries, benefits and payroll taxes in the
aggregate of ($2,585). 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.
The net loss for the Company decreased 32% for the six months ending June 30,
2003 to $607,185 from $896,520 for the six months ending June 30, 2002. This was
principally due to the decrease in expenses and debentures incurred during the
period.
Three Months June 30, 2003 Compared to the Three Months Ended June 30, 2002
Revenues for the three months ended June 30, 2003 of $260,338 versus three
months ended June 30, 2002 of $189,996 increased $70,342 or 37%. The completion
of two SI-3000 projects attributed to the overall increase in revenue. Software
and installation revenues increased $118,797. With the completion of the SI-3000
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projects, the cost of revenues also increases. Costs of revenue for the three
months ended June 30, 2003 of $95,882 versus the three months ended June 30,
2002 of $13,688 increased $82,194. Maintenance revenues decreased $48,455 or 31%
during the three months ended June 30, 2003 from the three months ended June 30,
2002. This is attributable to the decrease in software maintenance contract
dollar amount in 2003.
Costs of revenue and expenses increased 116,852 or 19% during the three months
ended June 30, 2003 versus the three months ended June 30, 2002. As discussed
above, cost of revenue increased $82,194 due to the completion of 2 SI-3000
projects. General and administrative expenses increased $104,943 or 44% to
$344,208 for the three months ended June 30, 2003 from $239,265 for the three
months ended June 30, 2002. The judgment against the company by its landlord for
breaking its lease of $160,313 was offset by the reduction in salaries and other
payroll related expenses, travel expense, telephone expense and rent expense.
Research and development have also contributed to the overall decrease in
reducing consulting costs of ($62,273). Sales and Marketing increased $26,838 or
80% during the three months ended June 30, 2003 from the three months ended June
30, 2002. The addition of professional consulting and increased salary and other
related payroll costs account for the increase for the three months ended June
30, 2003 versus the three months ended June 30, 2002. Depreciation expense
decreased ($6,155) due to the lack of asset purchases in 2003. Also attributed
to the decrease are the expenses related to the debentures incurred for the
three months ended June 30, 2003 and 2002. Debenture expenses for the three
months ended June 30, 2003 of $270,484 versus three months ended June 30, 2002
of $255,805 increased $14,679. Other income increased $43,374 due to refunds
from overpayment from prior years.
The net loss for the Company increased $46,510 or 11% for the three months ended
June 30, 2003 to ($478,199) from ($431,689) for the three months ended June 30,
2002. This was principally due to the increase in sales and marketing costs
during the period.
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<Page>
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.
The Company has total liabilities and contractual obligations of $2,824,634 as
of June 30, 2003. These contractual obligations, along with the dates on which
such payments are due, are described below:
<Table>
<Caption>
Payments Due by Period
------------------------------------------------------
Contractual Obligations Total One Year or Less More than One Year
---------- ---------- ----------
Due to Related Parties $ 39,634 $ 39,634 $ 0
Notes Payable - Related Parties 0 0 0
Convertible Debentures 1,596,837 1,596,837 0
Accounts Payable and Accrued
Expenses 1,188,163 1,188,163 0
---------- ---------- ----------
Total Contractual Obligations $2,824,634 $2,824,634 $ 0
========== ========== ==========
</Table>
Below is a discussion of our sources and uses of funds for the three months
ended June 30, 2003 and 2002.
Net Cash Used In Operating Activities
Net cash used in operating activities for the six months ended June 30, 2003 and
2002 was ($389,596) and ($459,197), respectively. The decrease in cash used from
operating activities in the six months ended June 30, 2003 versus 2002 of
$69,601 was principally due to the decrease in net loss for the six months.
Net Cash Provided By (Used In) Investing Activities
Net cash provided by investing activities six months ended June 30, 2003 and
2002 was ($39) and $4,925 respectively, reflecting a change of $4,886. This
change is due to a reduction of restricted cash ended June 30, 2003 as compared
to the same period prior year.
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<Page>
Net Cash Provided By Financing Activities
Net cash provided by financing activities was $390,014 and $61,153 for the six
months ended June 30, 2003 and 2002, respectively, reflecting an increase of
$328,861. This increase is primarily due to the issuance of convertible
debentures in the amount of $500,000 net of issuance costs of $106,958.
Item 3. Control and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of June 30, 2003, we carried out an evaluation, under the supervision
and with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them
to material information required to be included in our periodic reports
that are filed with the Securities and Exchange Commission. It should be
noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote. In
addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that
could significantly affect those controls subsequent to the date of their
last valuation.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls during the
quarter covered by this Report or from the end of the reporting period to
the date of this Form 10-QSB.
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<Page>
PART II. OTHER INFORMATION
The statements in this quarterly report, Form 10-QSB, that are not historical
constitute "forward-looking statements". Such forward-looking statements involve
risks and uncertainties that may cause the actual results, performance or
achievements of the Company and its subsidiary to be materially different from
any future results, performances or achievements, express or implied by such
forward-looking statements. These forward-looking statements are identified by
their use of such terms and phrases as "expects", "intends", "goals",
"estimates", "projects", "plans", "anticipates", "should", "future", "believes",
and "scheduled".
Item 1. Legal Proceedings
None during the period ending June 30, 2003.
On September 30, 2003, a judgment was entered against the Company by Primezone,
Inc in the amount of $3,134.50. The Company satisfied the judgment on October 9,
2003.
On October 16, 2003, in the Court of Common Please of Bucks County Pennsylvania,
a judgment was entered against the Company by its landlord, BT Lincoln L.P. for
breach of lease in the amount of $184,706.76. The company intends to negotiate a
settlement.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
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) $.005 and (2) 40% 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 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) $.005 and (2) 40% 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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<Page>
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.
In April 2003, $1,600 of the convertible debentures issued in December 2001 was
converted into 8,000,000 shares of common stock. Additionally, liquidated
damages relating to these notes were converted into an additional 6,000,000
shares of common stock.
In April 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 March 31, 2004. Interest payable on the Debentures shall be
paid quarterly commencing May 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) $.005 and (2) 40% 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 May 2003, $1,600 of the convertible debentures issued in December 2001 was
converted into 8,000,000 shares of common stock. Additionally, liquidated
damages relating to these notes were converted into an additional 4,450,000
shares of common stock.
During June 2003, $1,093 of the convertible debentures issued in December 2001
were converted into 5,468,010 shares of common stock, while 1,011,250 shares of
common stock were converted for liquidated dames relating to these notes.
On October 1, 2003, we entered into a Securities Purchase Agreement, with three
accredited investors, that provides for the issuance of convertible notes
payable up to an aggregate face value of $300,000 and warrants to acquire up to
an aggregate 2,100,000 shares of our common stock. The agreement provides for
the funding of the notes in three tranches, of which the first, amounting to
$165,000 with 1,155,000 warrants were issued on October 1, 2003. On the final
business day of each of the three (3) months beginning in October 2003 and
ending in December 2003, the Company will issue and sell to the investors an
aggregate of $45,000 principal amount of convertible notes and warrants to
purchase an aggregate of 315,000 shares.
The convertible notes are due one year from the date of issuance. Interest
payable on the convertible notes shall be paid quarterly commencing December 30,
2003. The holders shall have the right to convert the principal amount and
interest due under the convertible notes 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) 40% 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 warrants have an exercise price of $0.005 and
expire on September 30, 2008.
Item 3. Defaults Upon Senior Securities:
None.
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<Page>
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits.
31.1 Certification by Chief Executive Officer and Chief Financial Officer
pursuant to Sarbanes-Oxley Section 302:
32.1 Certification by Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S. C. Section 1350:
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<Page>
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: February 11, 2004 By: /s/ ANTHONY SHUPIN
-------------------------------------
Anthony Shupin
(President, Chief Executive Officer,
Acting Chief Financial Officer
and Director)
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