UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2004
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ___________ to _____________
Commission File No. 000-30498
DDS TECHNOLOGIES USA, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 13-4253546
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 East Palmetto Park Road
Suite 510
Boca Raton, Florida 33432
(Address of Principal Executive Offices)
(561) 750-4450
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 10, 2004: 19,235,542 shares of common stock outstanding,
$0.0001 par value per share.
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
PAGE 1 CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30,
2004 (UNAUDITED) AND DECEMBER 31, 2003
PAGE 2 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 AND
FOR THE Period from July 17, 2002 (inception) through
SEPTEMBER 30, 2004 (UNAUDITED).
PAGES 3 - 5 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR
THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER
30, 2004 (UNAUDITED).
PAGE 6 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for THE NINE
MONTHS ended SEPTEMBER 30, 2004 AND 2003 AND FOR THE PERIOD
FROM July 17, 2002 (inception) through SEPTEMBER 30, 2004
(UNAUDITED).
PAGES 7 - 16 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003.
PAGES 17-18 MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PAGE 19 CONTROLS AND PROCEDURES
PAGE 20-22 PART II OTHER INFORMATION
PAGE 23 SIGNATURES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004 (UNAUDITED)
AND DECEMBER 31, 2003
ASSETS
Sept. 30, 2004 December 31,
(Unaudited) 2003
-------------- ------------
CURRENT ASSETS
Cash $ 1,358,735 $ 1,174,281
Prepaid expenses 50,000 318,871
------------ ------------
Total Current Assets 1,408,735 1,493,152
FIXED ASSETS, NET 704,609 24,277
PATENT (LICENSE IN 2003) 4,935,000 4,700,000
DEPOSIT ON PURCHASE OF MACHINERY 2,681,912 4,000,976
OTHER ASSETS 7,977 7,977
------------ ------------
TOTAL ASSETS $ 9,738,233 $ 10,226,382
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued professional fees $ 364,500 $ 311,048
Other accrued expenses 132,635 238,831
------------ ------------
Total Current Liabilities 497,135 549,879
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value, 1,000,000 shares authorized, no shares issued
and outstanding -- --
Common stock, $.0001 par value, 25,000,000 shares authorized, 19,235,542 and
18,715,103 shares issued and outstanding, respectively 1,923 1,871
Additional paid-in capital 18,171,587 16,347,363
Deferred consulting expense (109,319) (1,356,533)
Note receivable - related party -- (235,000)
Interest receivable - related party -- (3,074)
Deficit accumulated during development stage (8,823,093) (5,078,124)
------------ ------------
Total Stockholders' Equity 9,241,098 9,676,503
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,738,233 $ 10,226,382
============ ============
See accompanying notes to condensed consolidated financial statements.
1
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Period From
For the Three For the Three For the Nine For the Nine July 17, 2002
Months Ended Months Ended Months Ended Months Ended (Inception) Through
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004
-------------- -------------- -------------- -------------- -------------------
REVENUES $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
EXPENSES
Professional fees 622,490 888,568 2,578,326 2,130,102 6,576,806
General and administrative 265,846 109,604 700,106 264,681 1,349,584
Salaries and related taxes 159,400 66,370 470,319 136,802 703,559
Merger costs -- 200,000 200,000
------------ ------------ ------------ ------------ ------------
Total Expenses 1,047,736 1,064,542 3,748,751 2,731,585 8,829,949
INTEREST INCOME 1,337 922 3,782 2,152 6,856
------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,046,399) $ (1,063,620) $ (3,744,969) $ (2,729,433) $ (8,823,093)
============ ============ ============ ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.05) $ (0.06) $ (0.20) $ (0.16)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 19,235,542 18,392,410 18,961,531 16,793,985
============ ============ ============ ============
See accompanying notes to the condensed consolidated financial statements.
2
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2004
(UNAUDITED)
Note Interest
Additional Deferred Receivable Receivable Accum-
Common Stock Paid-In Subscriptions Consulting Related Related ulated
Shares Amount Capital Receivable Expense Party Party Deficit Total
---------- ------ ----------- ------------- ----------- ---------- --------- ------- -----------
Common stock issued for cash
at inception 10,944,055 $1,095 $ 957,310 $ -- $ -- -- -- -- $ 958,405
Common stock issued for
license valued at $1.00 per
share 3,500,000 350 3,499,650 -- -- -- -- -- 3,500,000
Common stock issued for cash
in December 2002 at $1.00 per
share 100,000 10 99,990 -- -- -- -- -- 100,000
Common stock issued for cash
in January 2003 at $1.00 per
share 200,000 20 199,980 -- -- -- -- -- 200,000
Common stock issued for
license in January 2003 at
$1.00 per share 500,000 50 499,950 -- -- -- -- -- 500,000
Note receivable - related
party in February 2003 -- -- -- -- -- (235,000) -- -- (235,000)
Interest receivable -
related party -- -- -- -- -- -- (3,074) -- (3,074)
Common stock issued for cash
in February, March and April
2003 at $1.00 per share 800,000 80 799,920 -- -- -- -- -- 800,000
Recapitalization for merger in
April 2003 429,000 43 (43) -- -- -- -- -- --
Common stock issued for cash
in May 2003 at $1.00 per
share 100,000 10 99,990 -- -- -- -- -- 100,000
Common stock subscribed at
$1.00 per share 1,500,000 150 1,499,850 (1,500,000) -- -- -- -- --
Collection of subscription
receivable in July 2003 -- -- -- 500,000 -- -- -- -- 500,000
Warrants issued for consulting
expense in April 2003 -- -- 1,274,848 -- (1,274,848) -- -- -- --
Common stock issued for cash
in July and August 2003 at
$3.50 per share, net 502,714 50 1,020,444 -- -- -- -- -- 1,020,494
See accompanying notes to the condensed consolidated financial statements.
3
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2004
(UNAUDITED)
Note Interest
Additional Deferred Receivable Receivable Accum-
Common Stock Paid-In Subscriptions Consulting Related Related ulated
Shares Amount Capital Receivable Expense Party Party Deficit Total
---------- ------ ----------- ------------- ----------- ---------- --------- ------- -----------
Warrants issued with the sale
of common stock in July and
August 2003 -- -- 563,056 -- -- -- -- -- 563,056
Common stock issued for
services in August and
September 2003 175,000 17 1,298,233 -- (1,298,250) -- -- -- --
Common stock issued for
settlement 60,000 6 464,994 -- -- -- -- -- 465,000
Cancellation of subscription
receivable (1,000,000) (100) (999,900) 1,000,000 -- -- -- -- --
Common stock issued for cash
in October 2003 at $6.00 per
share, net 904,334 90 2,896,206 -- -- -- -- -- 2,896,296
Warrants issued with the sale
of common stock in
October 2003 -- -- 1,962,114 -- -- -- -- -- 1,962,114
Warrants issued for consulting
expense in December 2003 -- -- 29,761 -- (29,761) -- -- -- --
Options issued for consulting
services in August and
November 2003 -- -- 181,010 -- (181,010) -- -- -- --
Amortization of deferred
consulting expenses in 2003 -- -- -- -- 1,427,336 -- -- -- 1,427,336
See accompanying notes to the condensed consolidated financial statements.
4
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2004
(UNAUDITED)
Note Interest
Additional Deferred Receivable Receivable Accum-
Common Stock Paid-In Subscriptions Consulting Related Related ulated
Shares Amount Capital Receivable Expense Party Party Deficit Total
---------- ------ ----------- ------------- ----------- ---------- --------- ------- -----------
Common stock issued for
services in February
2004 at $5.88 per share 20,000 2 117,498 -- (117,500) -- -- -- --
Warrants issued for
consulting expense in
February 2004 -- -- 42,454 -- (42,454) -- -- -- --
Warrants issued for
consulting expense in
April 2004 -- -- 170,052 -- (170,052) -- -- -- --
Common stock issued for
services in May 2004 at
$2.55 per share 10,000 1 25,499 -- (25,500) -- -- -- --
Warrants issued for
consulting expense in
May 2004 -- -- 12,165 -- (12,165) -- -- -- --
Common stock issued for cash
in May 2004 at $3.30 per
share, net 490,439 49 741,680 -- -- -- -- -- 741,729
Warrants issued with the
sale of common stock
in May 2004 -- -- 714,876 -- -- -- -- -- 714,876
Amortization of deferred
consulting expenses -- -- -- 1,614,885 -- -- -- 1,614,885
Interest receivable related
party in 2004 -- -- -- -- -- -- (1,844) -- (1,844)
Forgiveness of Note and
interest receivable
July 2004 235,000 4,918 239,918
Net loss:
July 17, 2002 (inception)
through December 31, 2002 -- -- -- -- -- -- -- (407,803) (407,803)
Year ended December 31, 2003 -- -- -- -- -- -- -- (4,670,321) (4,670,321)
Nine Months ended
September 30, 2004 -- -- -- -- -- -- -- (3,744,969) (3,744,969)
---------- ----- ---------- --------- -------- -- ------ ---------- ----------
BALANCE, SEPTEMBER 30, 2004 19,235,542 1,923 18,171,587 -- (109,319) -- -- (8,823,093) 9,241,098
========== ===== ========== ========= ======== == ====== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
5
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
For the Nine For the Nine For the Period From
Months Ended Months Ended July 17, 2002
September September (Inception) Through
30, 2004 30, 2003 September 30, 2004
------------ ------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,744,969) $(2,729,433) $ (8,823,093)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 4,303 2,360 8,319
Amortization of deferred consulting expense 1,614,885 657,526 3,042,221
Common stock issued for services -- -- 465,000
Other non-cash expenses -- 4,112 --
Changes in operating assets and liabilities:
Prepaid expenses and other assets 268,871 (1,847) (57,977)
Accrued expenses (50,839) 623,238 499,040
----------- ----------- ------------
Net Cash Used In Operating Activities (1,907,749) (1,444,044) (4,866,490)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits on purchase of machinery and partial
refund 667,092 (955,890) (3,333,884)
Purchases of fixed assets (31,496) (4,761) (59,789)
Acquisition of license/patent -- (200,000) (700,000)
Note receivable and accrued interest -related
party -- (235,000) (238,074)
----------- ----------- ------------
Net Cash Provided by (Used In) Investing Activities 635,596 (1,395,651) (4,331,747)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock and warrants 1,456,607 3,183,550 10,556,972
----------- ----------- ------------
Net Cash Provided By Financing Activities 1,456,607 3,183,550 10,556,972
----------- ----------- ------------
NET INCREASE IN CASH 184,454 343,855 1,358,735
CASH - BEGINNING OF PERIOD 1,174,281 125,105 --
----------- ----------- ------------
CASH - END OF PERIOD $ 1,358,735 $ 468,960 $ 1,358,735
=========== =========== ============
Deposits on purchase of machinery applied to fixed
asset purchases $ 651,972 $ -- $ 651,972
=========== =========== ============
Common stock issued for license valued at $1.00 per
share $ -- $ 500,000 $ 4,000,000
=========== =========== ============
Warrants issued for deferred consulting services $ -- $ 1,274,848 $ 1,509,519
=========== =========== ============
Common stock issued for deferred consulting expenses $ -- $ 1,298,250 $ 1,451,250
=========== =========== ============
Options issued for deferred consulting services $ -- $ 64,636 $ 99,636
=========== =========== ============
Common stock subscribed at $1.00 per share $ -- $ 1,500,000 1,500,000
=========== =========== ============
Common stock issued to consultant to settle
contract dispute $ -- $ -- $ 60,000
=========== =========== ============
Forgiveness of note receivable and accrued
interest for patent $ 236,724 $ -- $ 236,724
=========== =========== ============
Reclass of note receivable to patent acquisition $ 235,000 $ -- $ 235,000
=========== =========== ============
See accompanying notes to the condensed consolidated financial statements.
6
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1 BACKGROUND AND BASIS OF PRESENTATION
DDS Technologies USA, Inc. and subsidiary (the "Company") is a development
stage company with no revenues since its inception on July 17, 2002. The
Company has obtained the patent rights on a world wide basis for a dry
disaggregation and micronization system, which is a system that converts
certain waste into value added products for further processing or resale.
Since its inception, the Company has been dependent upon the receipt of
capital investment to fund its continuing activities. In addition to the
normal risks associated with a new business venture, there can be no
assurance that the Company's product development will be successfully
completed or that it will be a commercial success. The Company's ability
to execute its business plan will depend on its ability to obtain
additional financing and achieve a profitable level of operations. There
can be no assurance that sufficient financing will be obtained. Nor can
the Company give any assurance that it will generate substantial revenues
or that its business operations will prove to be profitable.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of DDS Technologies USA, Inc. and its wholly owned subsidiary.
All material intercompany accounts and transactions have been eliminated.
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash, note receivable and accrued liabilities approximate their fair value
at September 30, 2004 and December 31, 2003, because of their relatively
short-term nature.
(C) PATENT
The patent is recorded at its acquisition cost. The acquisition cost
represents the cost of the license transferred to the patent of $4,700,000
and the forgiveness of the note receivable with the former patent owners
of $235,000. Also see Note 10. The patent has a 20-year life, which
expires in May 2022, and will be amortized over the expiration term when
the Company commences operations which generate revenues.
7
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(D) USE OF ESTIMATES
The preparation of the condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(E) LOSS PER COMMON SHARE
Net loss per common share (basic and diluted) is based on the net loss
divided by the weighted average number of common shares outstanding during
each period. Common stock equivalents were not included in the calculation
of diluted loss per share as their effect would be anti-dilutive.
(F) CONCENTRATIONS
The Company maintains the majority of its cash balances in a financial
institution located in Boca Raton, Florida. The balance in the institution
is insured by the Federal Deposit Insurance Corporation up to $100,000. At
September 30, 2004, the Company's uninsured cash amounted to $1,292,503.
(G) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of September 30, 2004
and for the three and nine months ended September 30, 2004 and 2003, and
for the period from July 17, 2002 (inception) through September 30, 2004,
are unaudited. In the opinion of management, such condensed consolidated
financial statements include all adjustments (consisting of normal
recurring accruals) necessary for the fair presentation of the
consolidated financial position and the consolidated results of
operations. The consolidated results of operations for the periods
presented are not necessarily indicative of the results to be expected for
the full year. The condensed consolidated balance sheet information as of
December 31, 2003 was derived from the audited consolidated financial
statements included in the Company's Annual Report Form 10-KSB. The
interim condensed consolidated financial statements should be read in
conjunction with that report.
8
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(H) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the U.S. Securities and Exchange Commission's Office of the
Chief Accountant and the Division of Corporate Finance released Staff
Accounting Bulletin ("SAB") No. 105, "Loan Commitments Accounted for as
Derivative Instruments". This bulletin contains specific guidance on the
inputs to a valuation-recognition model to measure loan commitments
accounted for at fair value, and requires that fair-value measurement
include only differences between the guaranteed interest rate in the loan
commitment and market interest rate, excluding any expected future cash
flows related to the customer relationship or loan servicing. In addition,
SAB No. 105 requires the disclosure of the accounting policy for loan
commitments, including methods and assumptions used to estimate the fair
value of loan commitments, and any associated hedging strategies. SAB No.
105 is effective for derivative instruments entered into subsequent to
March 31, 2004 and should also be applied to existing instruments as
appropriate.
The Company does not anticipate that this pronouncement will have a
material impact on the consolidated financial statements.
(I) RECLASSIFICATIONS
Certain amounts from prior periods have been reclassified to conform to
the current year period presentation.
NOTE 3 RELATED PARTY TRANSACTIONS
For the three months ended September 30, 2004 and 2003, and for the period
from July 17, 2002 (inception) through September 30, 2004, the Company
incurred consulting expenses of $42,000, $133,000 and $878,500,
respectively, from stockholders of the Company.
For the nine months ended September 30, 2004 and 2003, the Company
incurred consulting expenses from stockholders of the Company of $274,500
and $379,000, respectively.
In connection with the consulting services aforementioned, in April 2004,
the Company entered into a consulting agreement with a stockholder and
former president of the Company. Pursuant to the terms of this agreement,
the Company would pay him a monthly fee of $15,000 for a period of three
years. In July 2004, the Company terminated this agreement and it is now
the subject of litigation. See Note 9 (B).
9
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
In connection with the consulting services aforementioned, in March 2004,
the Company entered into a revised consulting agreement with one of its
stockholders whereby the Company pays a monthly fee of $15,000 per month
for a period of seven years. This replaced a previous consulting
agreement, dated October 1, 2002, that required the Company to pay the
consultant $30,000 per month for a period of five years.
NOTE 4 MACHINERY
In May 2004, the Company installed its first commercial dry disaggregation
machine in a production plant of an Iowa ethanol producer which the
Company entered into a pre-formation agreement with in August 2003. In
connection with the installation, the Company reclassified $651,972 from
deposit on purchase of machinery to fixed assets, in addition to
capitalizing $31,496 of shipping costs. The machine is currently the
subject of litigation. See Note 9 (B).
NOTE 5 STOCK OPTIONS
The Company has established a Stock Option Plan (the "Plan") to attract,
retain and motivate key employees, to provide an incentive for them to
achieve long-range performance goals and to enable them to participate in
the long-term growth of the Company. Options granted under the Plan may
include non-qualified stock options as well as incentive stock options
intended to qualify under Section 422A of the Internal Revenue Code. The
aggregate number of shares that may be issued under the Plan or exercise
of options must not exceed three million shares. Each stock option
agreement specifies when all or any installment of the option becomes
exercisable.
In May and October 2003, the Company granted stock options to two
executive employees. The Company applies Accounting Principles Board
("APB") Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for options granted to employees. Under APB
Opinion 25, if the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of
grant, no compensation cost is recognized. The options granted in May 2003
have an exercise price equal to the market price of the Company's stock on
the date of grant, expire in 10 years from the date of grant and provide
for the immediate vesting of 100,000 shares with an additional 50,000
shares vesting monthly until March 15, 2004. For the options granted in
October 2003, the exercise price of each option granted equaled the market
price of the Company's stock on the date of grant and the options vest
three years from the date of grant.
In October 2003, the Company granted stock options to the members of its
Board of Directors. Each member was issued a stock option to purchase
50,000 shares at an exercise price of $8.00 per share exercisable one year
from grant date and expiring in October 2014.
10
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
In March 2004, the Company also granted stock options to the members of
its Board of Directors. Each member was issued a stock option to purchase
50,000 shares at an exercise price of $3.96 per share exercisable one year
from grant date and expiring in March 2015.
In May 2004, the Company granted a one time stock option to the outside
members of its Board of Directors. Each member was issued a stock option
to purchase 100,000 shares at an exercise price of $3.40 per share
exercisable one year from grant date and expiring in May 2015.
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, requires the Company
to provide pro forma information regarding net loss and loss per share for
each period presented as if compensation cost for the Company's stock
options had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option pricing
model with the following assumptions used for the grants in May 2003; no
dividend yield for all years; expected volatility of 74%; risk-free
interest rate of 3%, and an expected life of 10 years.
Under the accounting provisions of SFAS No. 123, as amended by SFAS No.
148, the Company's net loss and net loss per common share would have been
as follows:
For the Nine Months Ended
September 30, 2004
------------------------
Net loss As Reported $ (3,744,969)
Pro Forma $ (4,113,606)
Net loss per common As Reported $ (0.20)
share - basic and diluted Pro Forma $ (0.22)
A summary of the status of the Company's option plans as of and for the
nine months ended September 30, 2004 is as follows:
Weighted Average
Shares Exercise Price
---------- --------
Outstanding at December 31, 2003 1,350,000 $ 6.37
Granted 550,000 $ 3.65
Forfeited (200,000) $ 6.99
---------- --------
Outstanding at September 30, 2004 1,700,000 $ 5.42
========== ========
Options exercisable at September 30, 2004 600,000
==========
11
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
Weighted average fair value of options
granted to employees during the period
from July 17, 2002 (inception) through
September 30, 2004 $ 3.59
======
The following table summarizes information about the stock options
outstanding at September 30, 2004:
Options Outstanding Options Exercisable
------------------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price Sept. 30, 2004 Life Price Sept. 30, 2004 Price
---------------- ----------------- ------------ --------- ---------------- ------------
$ 3.40 300,000 10.75 $ 3.40 -- $ 3.40
$ 3.96 200,000 10.50 $ 3.96 -- $ 3.96
$ 5.00 600,000 8.63 $ 5.00 600,000 $ 5.00
$ 7.00 400,000 3.18 $ 7.00 -- $ 7.00
$ 8.00 200,000 9.18 $ 8.00 -- $ 8.00
NOTE 6 SALES OF COMMON STOCK
In May 2004, the Company entered into stock purchase agreements with
several accredited investors for the sale of common stock. The Company
sold 490,439 shares and warrants for $1,618,450 ($1,456,556 net of
commissions). The agreements provide for the purchase of shares at $3.30
per share plus warrants for an equal number of shares purchased. The
warrants are exercisable at any time for a period of three years at an
exercise price of $3.75 per share. The 490,439 warrants were valued using
the Black-Scholes pricing model and resulted in a fair value of $714,876.
The net proceeds of $1,456,556 were allocated between the fair value of
the warrants issued with the common stock ($714,876) and the common stock
($741,680).
NOTE 7 INVESTMENT BANKING AGREEMENT
On April 23, 2003, the Company entered into a one-year agreement with a
consulting company for investment banking and other related services.
Pursuant to this agreement, the Company issued to the consulting company a
stock purchase warrant exercisable for a period of five years to acquire
500,000 shares of the Company's common stock at an exercise price of $6.50
per share. The warrant was valued using the Black-Scholes pricing model
and resulted in a fair value of $1,274,848. The amount was being amortized
over the life of the agreement resulting in consulting expense of $106,237
and $424,949 for the three and nine months ended September 30, 2004,
respectively, and $1,274,848 for the period from July 17, 2002 (inception)
through September 30, 2004. There is no remaining unamortized balance as
of September 30, 2004.
12
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 8 CONSULTING AND MARKETING AGREEMENTS
On August 14, 2003, the Company entered into a one-year agreement with a
marketing company. As part of the agreement, the marketing company
provides business advisory and various other investment and marketing
services. For these services, the Company pays $5,000 monthly. In
addition, the Company is required to issue 10,000 shares of restricted
common stock per quarter. The first 10,000 shares were issued upon signing
the agreement and 10,000 shares were issued in December 31, 2003, February
2004 and in May 2004. Based on the closing market price of the Company's
common stock on the contractual dates of the agreement, $12,750 and
$90,000 were expensed to consulting fees for the three and nine months
ended September 30, 2004, respectively and $195,500 for the period from
July 17, 2002 (inception) through September 30, 2004. The Company further
agreed to issue 35,000 stock options per quarter with a strike price of
$8.00 per share, expiring 3 years from the date of grant. The Company
issued all 105,000 stock options under the agreement in 2003. The Company
estimated the fair value of the stock options at the grant dates by using
the Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield for all years; expected volatility of 83%;
risk-free interest rate of 3% and an expected life of 3 years, resulting
in a fair value of $235,629. The amount is being amortized over the life
of the agreement resulting in consulting expense of $6,082 and $112,806
for the three and nine months ended in September 30, 2004, respectively
and $235,629 the period from July 17, 2002 (inception) through September
30, 2004. There is no remaining unamortized balance as of September 30,
2004.
On September 12, 2003 the Company entered into a one-year agreement with a
financial consulting firm. The consulting firm provides analytical review
of the Company's financial information and assists the Company as its
financial advisor and investment banker. As compensation for these
services, in 2003, the Company issued 100,000 restricted shares of common
stock to the financial consulting firm. The Company recognized $161,250
and $580,500 in consulting fee expense for the three and nine months ended
September 30, 2004, respectively and $774,000 for the period from July 17,
2002 (inception) through September 30, 2004. There is no remaining
unamortized balance as of September 30, 2004.
On September 19, 2003 the Company entered into a one-year agreement with
an individual. The individual provides a list of names of potential
investors and other services to the Company. As compensation for these
services, in 2003 the Company issued 50,000 shares of restricted common
stock. The Company recognized $82,291 and $279,791 in consulting fee
expense for the three and nine months ended September 30, 2004,
respectively and $395,000 for the period from July 17, 2002 (inception)
through September 30, 2004. There is no remaining unamortized balance as
of September 30, 2004.
13
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
On December 8, 2003 the Company entered into an eight-month agreement with
a marketing company. The marketing company provides business advisory and
various other investment and marketing services to the Company. For these
services, the Company pays $5,000 per month. In addition, the Company
issued the marketing company warrants for the purchase of 10,000 shares of
common stock at an exercise price of $9.00 per share. The warrants expire
on December 7, 2005. The warrants were valued using the Black-Scholes
pricing model and resulted in a fair value of $29,761. The amount is
amortized over the life of the agreement resulting in consulting expense
of $3,721 and $26,041 for the three and nine months ended September 30,
2004, respectively, and $29,761 for the period from July 17,
2002(inception) through September 30, 2004. There is no remaining
unamortized balance as of September 30, 2004.
On April 26, 2004, the Company entered into a 14 month agreement with a
marketing company. The marketing company provides business advisory and
various other investment and marketing services to the Company. The
Company paid the marketing company $25,000 upon signing the agreement and
pays a monthly fee of $5000. In addition, the Company issued warrants for
the purchase of 400,000 shares of common stock at exercise prices of $3.75
and $4.25 per share. The warrants are exercisable until April 26, 2007.
The warrants were valued using the Black-Scholes pricing model and
resulted in a fair value of $170,052. The amount is amortized over the
life of the agreement resulting in consulting expense of $36,440 and
$60,734 for the three and nine months ended September 30, 2004. The
remaining unamortized balance of $109,319 is presented in the condensed
consolidated balance sheet as deferred consulting expense.
NOTE 9 COMMITMENT AND CONTINGENCIES
(A) CONTINGENCIES
The Company granted registration rights to certain investors in the July
2, 2003 private placement of securities. Under those rights, if the
Company did not file a registration statement within 45 days of closing,
the Company owes the investors an aggregate of approximately $13,000 per
month in penalties. The Company began incurring those penalties on August
16, 2003. The registration statement was filed on November 12, 2003. The
Company has accrued $37,611 of penalties which are included in accrued
expenses at September 30, 2004.
(B) LITIGATION
The Company is a defendant in a lawsuit whereby the plaintiff contends
that it is entitled to a commission for allegedly procuring financing for
a transaction. The Company filed Answer and Affirmative Defenses. The
plaintiff seeks damages totaling $175,584, plus interest from December 31,
2002. The Company believes the suit is without merit and is vigorously
14
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
defending its position. In the opinion of management, this suit will not
have a material effect on the Company's condensed consolidated financial
position or results of operations.
The Company received a potential claim from two shareholders alleging that
the Company failed to register their shares for re-sale in the Company's
last registration statement, filed on Form S-1 under the Securities Act of
1933, as amended on November 12, 2003 and an amendment thereto on December
13, 2003. In addition, these shareholders have alleged that they were
induced erroneously into surrendering shares of DDS Holdings, Inc. in
connection with the reorganization into Black Diamond Industries, Inc.
Although the Company believes that it has defenses to these alleged
actions, the Company is attempting to reach an amicable settlement for
these claims. There can be no assurance that these disputes will be
favorably resolved, if at all, or that these claims will not have a
material adverse effect on the Company. The Company does not believe a
provision is necessary at September 30, 2004 for this matter.
The Company is a defendant in a lawsuit whereby a stockholder and former
president of the Company contends that it is entitled to receive
consulting fees under a consulting agreement (See Note 3). The Company
suspended payments and terminated the consulting agreement due to non
compliance by the plaintiff with the terms of the agreement. The Company
has filed a counterclaim against the plaintiff for breach of fiduciary
duty.
On August 1, 2003, the Company entered into a nonbinding Pre-Formation
Agreement with Xethanol Corporation ("Xethanol"), a company involved in
the biomass waste-to-ethanol industry. In May 2004 the Company delivered
one of its dry disaggregation machines to Xethanol's plant in Iowa, for
testing. The Company subsequently delivered to Xethanol a notice of
termination with respect to the nonbinding Pre-Formation Agreement and
demanded a return of its machine. Xethanol refused to return the machine.
On October 22, 2004, the Company filed a Verified Complaint for injunctive
relief. Amongst various requests, the Complaint requested the return of
the machine to the Company. Xethanol filed a petition for arbitration with
the American Arbitration Association (the "AAA") in late October 2004. The
petition seeks money damages for breach of contract, tortuous interference
with a contract, fraud, and declaratory judgment. The Company believes
that the petition for arbitration is groundless. On November 3, 2004, the
Company filed a response opposing Xethanol's arbitration petition.
(C) COMMITMENTS
The Company has a commitment to make a final payment for each remaining
machine for which it will take delivery. While the final amount per
machine is not determinable at this time, it is expected that the final
payment, per machine, may range between $125,000 and $200,000. Currently
there are three additional machines that are due to be delivered at a
future time to be determined by the Company.
15
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 10 PATENT FOR DRY DISAGGREGATION TECHNOLOGY
The Company previously entered into a Memorandum of Understanding, dated
July 31, 2004, with Umberto Manola ("Manola"), Haras Engineering Corp.
("HEC"), High Speed Fragmentation B.V. ("HSF"), and Intel Trust S.A.
("Intel") and an Amended and Restated Memorandum of Understanding, dated
as of July 31, 2004 with HEC, HSF, Intel, Giancarlo Lo Fiego ("Lo Fiego")
and Adriano Zapparoli ("Zapparoli").
Pursuant to terms of the Memorandum of Understanding, dated July 31, 2004,
the Company, whose original license to the dry disaggregation technology
was previously restricted to North, South and Central America, the
Caribbean (excluding Cuba) and Africa, has acquired the patents for the
dry disaggregation technology. Following the assignment to the Company of
the patents, the Company filed the assignments with the United States
Patent and trademark Office. The Company also plans to file the
assignments in the corresponding offices in the foreign jurisdictions
where the patents have been applied for or obtained.
Pursuant to the original licensing agreement dated August 2002, and
amendment dated January 2003, the Company paid a total of $4,700,000 in
cash and stock for the licensing rights to the technology. As part of the
Memorandum of Understanding dated July 31, 2004, the Company forgave a
note receivable from the licensor in the amount of $235,000 and applied it
towards the acquisition cost of the patent. Additionally, as part of the
above mentioned MOU, the Company received a refund of approximately
$741,000 of payments it had made towards the deposits for the purchase of
five machines embodied with the DDS technology.
NOTE 11 SUBSEQUENT EVENTS
A second machine has been delivered to the Company in October 2004 and has
been located in Marietta, Georgia. This machine is being analyzed and
evaluated by a consulting firm in order to determine its functionality and
to determine improvements and enhancements to the technology. The machine
is also being used as a testing machine in order to process sample
materials for various customers.
Initial work on the production version of the Company's dry disaggregation
machine by the Company's consulting engineers has revealed that it does
not fully disaggregate organic material to the same extent as the
prototype research machine. Additional testing and design refinements are
being made on the dry disaggregation/fractionizing applications by our
consulting engineers.
16
DDS TECHNOLOGIES USA, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BACKGROUND
DDS Technologies USA, Inc. (formerly FishtheWorld Holdings, Inc.) and subsidiary
(the "Company") is a development stage company with no revenues since its
inception on July 17, 2002. The Company had been engaged in the process of
obtaining the license rights and exclusive marketing rights for a dry
disaggregation system for North America, Central America, the Caribbean
(excluding Cuba), South America and Africa (also see below).
On November 14, 2002, Black Diamond Industries, Inc., a public Florida
corporation conducting no business other than to seek a suitable acquisition
partner, acquired all of the outstanding shares of common stock of DDS Holdings,
Inc., a Nevada company pursuant to a securities exchange agreement dated October
27, 2002. Under the terms of the securities exchange agreement, the stockholders
of DDS Holdings, Inc. agreed to transfer all of the issued and outstanding
shares of common stock of DDS Holdings, Inc. in exchange for an aggregate of
12,915,525 shares of common stock, or approximately 93%, of Black Diamond
Industries. Immediately prior to, and in conjunction with the transaction, the
sole director and officer and majority shareholder of Black Diamond Industries
returned 13,564,350 shares of common stock to treasury.
In December 2002, Black Diamond Industries changed its name to DDS Technologies
USA, Inc. and reincorporated in the state of Delaware. Under a share exchange
agreement dated April 4, 2003, FishtheWorld Holdings, Inc., a public Florida
corporation conducting no business other than to seek a suitable acquisition
partner, acquired 88.5% of DDS Technologies USA, Inc. in exchange for 15,367,255
shares of common stock, or approximately 97% of the then issued and outstanding
shares, of FishtheWorld Holdings. Immediately prior to the share exchange, the
majority shareholder of FishtheWorld Holdings returned 8,571,000 shares to
treasury and resigned as the sole director and officer. The members of the Board
of Directors of DDS Technologies USA, Inc. became members of the Board of
Directors of FishtheWorld. In May 2003, FishtheWorld Holdings changed its name
to DDS Technologies, USA, Inc. and reincorporated in the State of Nevada.
Generally accepted accounting principles in the United States of America require
that a company whose stockholders retain a majority interest in a business
combination be treated as the acquirer for accounting purposes. Since Black
Diamond Industries and FishtheWorld Holdings were public shells and DDS
Holdings, Inc. is a development stage company with no revenues, the transactions
were treated as recapitalizations of DDS Technologies USA, Inc.
DDS Technologies USA, Inc. was formed in July 2002 for the purpose of
commercializing certain technology which had been licensed from DDS Technologies
Ltd., a United Kingdom company and a principal stockholder of DDS Technologies
USA, Inc. The license had provided for the exclusive North, South, Central
American and Caribbean (excluding Cuba) rights to the pending patent, #
02425336.1, which was filed with the European Patent Office on May 28, 2002.
17
Subsequently, the Company entered into a Memorandum of Understanding, dated July
31, 2004, with Umberto Manola ("Manola"), Haras Engineering Corp. ("HEC"), High
Speed Fragmentation B.V. ("HSF"), and Intel Trust S.A. ("Intel") and an Amended
and Restated Memorandum of Understanding, dated as of July 31, 2004 with HEC,
HSF, Intel, Giancarlo Lo Fiego ("Lo Fiego") and Adriano Zapparoli ("Zapparoli").
Pursuant to terms of the Memorandum of Understanding, the Company, whose
original license to the dry disaggregation technology was previously restricted
to North, South and Central America, the Caribbean (excluding Cuba) and Africa,
has acquired sole ownership of the patents for the dry disaggregation
technology. Following the assignment to the Company of the patents, the Company
filed the assignments with the United States Patent and Trademark Office. The
Company also plans to file the assignments in the corresponding offices in the
foreign jurisdictions where the patents have been applied for or obtained. The
patent relates to the Longitudinal Micrometric Separator For Classifying Solid
Particulate Materials. The license agreement also covers other related
technologies of DDS Technologies Ltd. Management believes that this
Disaggregation Dry System (DDS) technology system is a unique process, in which
fragments of organic and inorganic matter are "crushed to collision" enduring
violent accelerations and decelerations causing the disaggregation of the
structure. This technology and its end results are believed by the various
companies that we have contacted to have tremendous potential value both
economically and nutritionally. Management believes that the results obtained
utilizing the technology is unattainable with any other currently available
technology.
Initial work on the production version of the Company's dry disaggregation
machine by the Company's consulting engineers has revealed that it does not
fully disaggregate organic material to the extent that a prototype research
machine does, and therefore requires additional development work. However, the
production version does micronize very effectively to particle sizes of between
1 and 5 microns which provides application opportunities and commercial
potential in a number of industries.
RESULTS OF OPERATIONS
From July 17, 2002 (inception) through September 30, 2004, we have incurred an
accumulated deficit of $8,823,093. To date, we have yet to achieve revenues from
operations. During the nine months ended September 30, 2004 and 2003, we
incurred operating expenses of $1,047,736 and $1,064,542, respectively. We
anticipate that losses from operations will continue for the remainder of the
year primarily due to our relatively long sales cycle and the significant due
diligence and testing conducted by our prospective customers. Testing includes
the preparation of various sample products for processing using our proprietary
technology process through our testing facility and submitting our analysis of
results to third party labs for independent verification as well as reviewing
the results with the prospective customer.
We have marketed our technology to various large US and Latin American companies
resulting in some Memoranda of Understanding. However, the technology may not
achieve market acceptance and we may not generate sufficient revenues to allow
us to operate profitably.
18
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded our losses and license acquisitions through the private
sale of common stock and financing from accredited investors. During the quarter
ended June 30, 2004, we completed a private placement of shares of our common
stock to accredited investors resulting in net proceeds of $1,456,605. Our cash
balance at September 30, 2004 was $1,358,733. The Company has a commitment to
make a final payment for each remaining machine for which it will take delivery.
While the final amount per machine is not determinable at this time, it is
expected that the final payment, per machine, may range between $125,000 and
$200,000. Currently there are three additional machines that are due to be
delivered at a future time to be determined by the Company.
Without demonstrating commercial feasibility and/or securing customers we do not
believe that we will be able to secure additional capital necessary to fund
operations through private placements of our common stock, or achieve sufficient
revenues to operate at a cash flow breakeven. As a result, our cash balance,
based on our current rate of expenditures is sufficient only to fund our
operating expense into the first quarter of 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the U.S. Securities and Exchange Commission's Office of the Chief
Accountant and the Division of Corporate Finance released Staff Accounting
Bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments". This bulletin contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB No. 105 requires the disclosure of the
accounting policy for loan commitments, including methods and assumptions used
to estimate the fair value of loan commitments, and any associated hedging
strategies. SAB No. 105 is effective for derivative instruments entered into
subsequent to March 31, 2004 and should also be applied to existing instruments
as appropriate.
The Company does not anticipate that this pronouncement will have a material
impact on the consolidated financial statements.
ITEM 3. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this quarterly
report on Form 10-QSB, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective in timely providing them with material
information required to be disclosed by us in our filings under the Exchange
Act. There have been no significant changes in our internal controls or in other
factors that have materially affected, or are reasonably likely to materially
affect, our internal controls during our most recent fiscal quarter, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit whereby the plaintiff contends that it
is entitled to a commission for allegedly procuring financing for a transaction.
The plaintiff seeks damages totaling $175,584 plus interest from December 31,
2002. In April 2004, the Company filed and Answer and Affirmative Defenses. The
Company believes the suit is without merit and is vigorously defending its
position. In the opinion of management, this suit will not have a material
effect on the Company's condensed consolidated financial position or results of
operations.
The Company received a potential claim from two shareholders alleging that the
Company failed to register their shares for re-sale in the Company's last
registration statement, filed on Form S-1 under the Securities Act of 1933, as
amended on November 12, 2003 and an amendment thereto on December 13, 2003. In
addition, these shareholders have alleged that they were induced erroneously
into surrendering shares of DDS Holdings, Inc. in connection with the
reorganization into Black Diamond Industries, Inc. Although the Company believes
that it has defenses to these alleged actions, the Company is attempting to
reach an amicable settlement for these claims. There can be no assurance that
these disputes will be favorably resolved, if at all, or that these claims will
not have a material adverse effect on the Company. The Company does not believe
a provision is necessary at September 30, 2004 for this matter.
The Company is a defendant in a lawsuit whereby a stockholder and former
president of the Company contends that it is entitled to receive consulting fees
under a consulting agreement (See Note 3). The Company suspended payments and
terminated the consulting agreement due to breach of the terms of the agreement.
The Company has filed and Answer and Affirmative Defenses and a Counterclaim
alleging breach of the consulting agreement and breach of fiduciary duty.
On August 1, 2003, the Company entered into a Pre-Formation Agreement with
Xethanol Corporation ("Xethanol"), a company involved in the biomass
waste-to-ethanol industry. In May 2004 the Company delivered one of its dry
disaggregation machines to Xethanol's plant in Iowa, for testing. The Company
subsequently delivered to Xethanol a notice of termination with respect to the
Pre-Formation Agreement and demanded a return of its machine. Xethanol refused
to return the machine.
On October 22, 2004, the Company filed a Verified Complaint for injunctive
relief in the United States District Court for the Northern District of Iowa
against Xethanol, Xethanol-One, LLC ("X-One"), Permeate Refining, Inc.
("Permeate"), Charles d'Arnaud Taylor (Xethanol's President), Jeffrey Langberg
(an advisor to Taylor) and Robert Lehman (Permeate's General Manager). The
Verified Complaint seeks the entry of an order prohibiting the defendants -
Xethanol, X-One, Permeate, Taylor, Langberg and Lehman - from: (A) preventing
the Company from taking immediate possession of its disaggregation system, which
was temporarily located on Permeate's premises in Hopkinton, Iowa (the "DDS
System"); (B) pirating or reverse engineering the technology contained in and
exemplified by the DDS System; (C) disclosing or revealing to a third party the
technology contained in and exemplified by the DDS System; (D) altering,
modifying, wasting or damaging the DDS System; or (E) attempting to pledge, sell
or dispose of the DDS System.
This lawsuit is at an early stage, in that the time within which the defendants
may respond to it has not
20
expired. The Company intends to vigorously prosecute this lawsuit. The lawsuit
alleges the Defendants' continued detention of the DDS System is producing
irreparable injury to the Company by depriving it of a unique product on which
the Company may perform tests and adjustments, and which the Company could
display to potential customers. Consistent with its intention to vigorously
prosecute this lawsuit, Company has asked the district attorney in Delaware
County, Iowa, to pursue criminal charges against any and all persons as to whom
it may be appropriate.
Proceeding under the Pre-Formation Agreement, which the Company believes, is
essentially an agreement to agree, Xethanol and an entity it created and
controls - DDS-Xethanol, LLC (the "LLC") - filed a petition for arbitration with
the American Arbitration Association (the "AAA") in late October 2004. The
petition seeks money damages for breach of contract, tortuous interference with
a contract, fraud, and declaratory judgment.
The Company believes that the petition for arbitration is groundless. On
November 3, 2004, the Company filed a response opposing Xethanol's arbitration
petition. The Company's response contains defenses and affirmative defenses, and
sets out counterclaims for replevin, conversion and declaratory judgment.
The AAA arbitration proceeding is also at an early stage. The parties have not
conducted any discovery, and the arbitration panel has not been selected.
ITEM 2. CHANGES IN SECURITIES
No change in securities during the current quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits, which are furnished with this Quarterly Report or
incorporated herein by reference, are filed as part of this Quarterly Report.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
31.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K.
21
On August 4, 2004 and August 19, 2004 we filed a Form 8-K reporting our entering
into the Memorandum of Understanding and the Amended and Restated Memorandum of
Understanding.
On November 8, 2004, we filed a Form 8-K reporting the certain settlements
regarding our technology, the appointment of Charles F. Kuoni III as a director
of the Company and recent developments with respect to our dispute with
Xethanol.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 16th day of
November 2004.
DDS TECHNOLOGIES USA, INC
/s/ Spencer L. Sterling
-----------------------
Spencer L. Sterling
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Joseph Fasciglione
----------------------
Joseph Fasciglione
Chief Financial Officer
(Principal Accounting Officer)