FORM 10-QSB/A
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
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
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2150 Highway 35, Sea Girt, New Jersey 08750
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (732) 359-0260
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 1, 2005
--------------------- --------------
$.001 par value 363,831,439 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 3
Item 1. Financial Statements 3
Consolidated Condensed Balance Sheet 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to the Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Control and Procedures 13
PART II - OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Digital Descriptor Systems, Inc. and Subsidiary
Condensed Consolidated Balance Sheet
March 31, 2005
(Unaudited)
As Restated
Assets
Current Assets
Cash and cash equivalents $ 823,485
Restricted cash 50,000
Accounts receivable, less allowance of $38,084 98,432
Inventory 365,963
Prepaid expenses 1,794
Deferred financing costs,net 889,544
------------
Total Current Assets 2,229,218
Property and equipment, net of
accumulated depreciation of $618,031 410,901
Intangible assets, net of
accumulated amortization of $25,310 202,178
Deposits 1,730
Goodwill 4,054,998
------------
Total Assets $ 6,899,025
============
Liabilities and Shareholders' Deficit
Current Liabilities
Accounts payable $ 202,193
Accrued expenses 305,634
Accrued interest 862,332
Due to officer and director 20,115
Deferred income 169,204
Convertible debentures, current 1,873,211
------------
Total Current Liabilities 3,432,689
Note payable 3,500,000
Convertible debentures 2,237,235
------------
Total Liabilities 9,169,924
------------
Shareholders' deficit
Preferred stock, $.01 par value
1,000,000 shares authorized, 0 issued and outstanding --
Common stock, par value $.01; authorized 9,999,000,000 shares;
319,466,359 issued and outstanding 292,512
Additional paid-in capital 19,400,888
Retained earnings (21,964,299)
------------
Total Shareholders' Deficit (2,270,899)
------------
Total Liabilities and Shareholders' Deficit $ 6,899,025
============
See notes to the condensed consolidated financial statements.
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Digital Descriptor Systems, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
As Restated
Three Months Ended March 31,
------------------------------
2005 2004
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Net Sales $ 148,875 $ 106,975
Cost of goods sold 44,702 4,948
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Gross profit 104,173 102,027
Operating expenses
General and administrative 259,701 113,129
Selling and marketing 25,332 18,807
Research and development 3,848 9,318
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Loss from operations (184,708) (39,227)
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Interest and amortization of financing costs 457,531 211,445
Provision for income taxes 780 1,664
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Net income (loss) (643,019) (252,336)
============= =============
Net income (loss) per common share:
Basic and diluted $ (0.00) $ (0.00)
============= =============
Weighted average number of common shares outstanding
Basic and diluted 251,049,692 143,980,401
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See notes to the condensed consolidated financial statements.
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Digital Descriptor Sysytems, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
As Restated
Three Months Ended March 31,
----------------------------
2005 2004
------------ ------------
Cash Flows from operating activities
Net income (loss) $ (643,019) $ (252,336)
Adjustments to reconcile net income (loss) to
Net cash used in operating activities
Amortization of deferred financing costs and debt discounts
related to the beneficial conversion feature of debentures 275,266 146,244
Changes in operating assets and liabilities
Accounts receivable (29,903) 63,185
Inventory (31,211) --
Prepaid expenses (1,794) 2,360
Accounts payable 64,611 8,469
Accrued expenses (4,140) (14,508)
Accrued interest 182,265 65,201
Deferred income (20,249) (43,280)
------------ ------------
Net cash used in operating activities (208,174) (24,665)
------------ ------------
Cash flows from investing activities
Puchase assets from CGM Security Solutions (1,500,000) --
------------ ------------
Net cash used by financing activities (1,500,000) --
------------ ------------
Cash flows from financing activities
Payment of financing costs (504,962) --
Proceeds from the issuance of convertible debentures -- 31,680
Due to officer and director 6,285 2,670
------------ ------------
Net cash (used) provided by financing activities (498,677) 34,350
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(Decrease) increase in cash and cash equivalents $ (2,206,851) $ 9,685
Cash and cash equivalents - beginning 3,080,336 51,288
------------ ------------
Cash and cash equivalents - ending $ 873,485 $ 60,973
============ ============
See notes to the condensed consolidated financial statements.
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Digital Descriptor Systems, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Item 310 of Regulation S-B. 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 normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31,
2004.
Principles of Consolidation. The consolidated financial statements include
the accounts of CGM Security Solutions, a wholly owned subsidiary. All
intercompany balances and transactions have been eliminated in
consolidation.
Note 2. Supplemental Cash Flows Disclosures
There were no cash payments for interest during the first quarter of 2005
or 2004.
Cash payments for income taxes were $780 and $1,664 in the first quarter
of 2005 and 2004 respectively.
During the first quarter of 2005, $13,420 of the convertible debentures
issued in September 2001, were converted into 72,375,000 shares of common
stock.
During the first quarter of 2005, 36,375,000 shares of common stock were
issued for liquidated damages relating to the notes issued December 2001.
The Compnay issued a Note Payable for $3,500,00 for the acquisition of
certain CGM Security Solution assets aquired by our wholly owned
subsidairy.
During the first quarter of 2004, $42,000 of outstanding compensation
expense related to an officer and director was converyted into the
Company's common stock.
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Digital Descriptor Systems, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
Note 3. Related Party Transactions
The Company owes the former chief executive officer, who is presently a
director, and Senior Vice President & CFO, $20,115 at March 31, 2005, for
back payroll and sundry expenses with no repayment terms. For the
three-month period ended March 31, 2005, the director provided consulting
services amounting to $8,000.
Issuance of 15,000,000 shares of common stock was executed January 7,
2004, to satisfy partial payment relating to the outstanding debt for
services and accrued payroll provided and owed to the above mentioned
director for prior year's services and expenses.
Note 4. Subsequent Events
During April 2005, $3,000 of the convertible debentures issued in
September 2001, were converted into 15,000,000 shares of common stock.
During April 2005, $3,700 of the convertible debentures issued in
September 2001, were converted into 14,682,540 shares of common stock. And
14,682,540 shares were issued for liquidated damages relating to the notes
issued December 2001.
Note 5. Goodwill and Acqusition of CGM
On March 1, 2005, our wholly owned subsidiary acquired substantially all
of the assets of CGM Security Solutions, Inc. ("CGM") for $1,500,000 in
cash and a $3,500,00 promissory note at 2.86% interest, subject to
adjustment. CGM is a manufacturer and distributor of barrier security
seals, security tapes and related packaging security systems for
palletized cargo, physical security systems for tractors, trailers and
containers.
The company has not had the fair market value of the acquired assets
appraised as of the date of this filing. Therfore, the assets acquired
from CGM were recorded by the Company at CGM's book value (until the fair
market value appraisal is completed).
The Company recorded the excess of the cost of the CGM assets acquired
over their book values as goodwill in the amount of $4,054,998. In
accordance with SFAS No.142, no amortization was recorded for goodwill as
it is deemed to have an infinite life. The goodwill, subject to adjustment
as described in the preceeding paragraph, will be assessed annually for
impairment.
Note 6. Restatement
We have restated the financial statements for the three months ended March
31, 2005 as a result of changes made to the amortization period for the
intrinsic value of the beneficial convertion feature of notes payable.
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The intrinsic value of the benefical conversion feature of the notes was
previously recorded as interest expense during 2004. The amount previously
expensed has been reclassified to debt disounts and is being amoritized
over the life of the notes.
The impact of this adjustment on the financial statements as originally
reported is summarized below:
March 31, 2005
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As reported As restated
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Deferred financing cost 897,122 889,544
Total assets 6,906,603 6,899,025
Total liabilities 10,682,655 5,737,235
Accumulated deficit (23,469,452) (21,964,299)
Interest and amortization of debt costs 221,521 457,531
Net loss (407,009) (643,019)
Net loss per share (0) (0)
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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 AND ESTIMATES
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, 2004.
Results of Operations
Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31,
2004
Revenues for the three months ended March 31, 2005, of $148,875 increased
$41,900 or 39% from the three months ended March 31, 2004. The Company generates
its revenues through software licenses, hardware, post customer support
arrangements security tape and other security related items and other services.
The increase in the Company's revenue is attributed to the acquisition of CGM,
on March 1, 2005. DDSI is still experiencing a decrease in software maintenance
contract dollar amount, a loss in client base, and the lack of new product
offerings to their clients. Cost of goods sold increased by $39,754 due to the
higher cost of sales in CGM Sub.
General and Administrative expenses for the three month period ending March 31,
2005, was $259,701 versus $113,129 for the same period prior year for a increase
of $146,571 or 130%. This increase was mainly attributable to the acquisition of
CGM which added costs of $102,314, an increase in salaries, and an increase in
accounting and legal costs.
Sales and Marketing expenses increased $6,526 for the three months period ended
March 31, 2005 to $25,332 from $18,807 for the same period in 2004, which
represents a 37% increase. This increase was mainly attributable to costs
associated with CGM Sub.
Research and development for the three months ended March 31, 2005, was $3,848
compared to $9,318 for the same period prior year for a decrease of $5,470. The
decrease was due to the decline in development expenses as the Company looks for
other ways to expand its revenue bases.
The net loss for the Company increased 155% for the three months ending March
31, 2005, to $643,019 from $252,336 for the three months ending March 31, 2004.
This was principally due to the increase in expenses, mainly from CGM.
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Plan of Operations
Acquisition of CGM
On March 1, 2005, DDSI and CGM Sub acquired substantially all of the assets of
CGM, for (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the "Note") in
the principal amount of $3,500,000, subject to adjustment (the "Acquisition").
The assets of CGM were acquired pursuant to an Asset Purchase Agreement among
DDSI, CGM Sub and CGM dated as of February 25, 2005.
The principal amount of the Note is subject to adjustment based upon the average
of (i) the gross revenues of CGM Sub for the fiscal year ending December 31,
2007 and (ii) an independent valuation of CGM Sub based upon the consolidated
audited financial statements of the Company and CGM Sub for the fiscal years
ended December 31, 2006 and 2007. In addition, the Company has granted CGM a
secondary security interest in substantially all of its assets and intellectual
property.
In connection with the Acquisition, the Company entered into a letter agreement
with certain of its investors (the "Investors") which extended the maturity date
of debt instruments issued on November 30, 2004 until March 1, 2008, and amended
the conversion price of the debt that is held by the Investors to the lower of
(i) $0.0005 or (ii) 60% of the average of the three lowest intraday trading
prices for the Company's common stock during the 20 trading days before, but not
including, the conversion date. In addition, the exercise price of the warrants
held by the Investors was amended to $.001 per share.
The short-term objective of DDSI is the following:
o To continue to expand the sale and acceptance of its core solutions
by offering new and synergistic biometric (a measurable, physical
characteristic or personal behavioral trait used to recognize the
identity, or verify the claimed identity, of an individual) (i.e.
FMS) security products to its installed base in the criminal justice
market. DDSI's objective is to expand with these, and additional
products, into much larger commercial and federal markets.
Additionally, DDSI plans to execute an acquisition strategy based upon the
availability of financing.
We also plan to add additional product lines as a Value Added Reseller.
Technologies related to DDSI's core business can bring additional cash flow with
relatively small internal development capital outlay.
DDSI's long-term objective is as follows:
o 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 biometric devices such as
FMS (Fingerprint Matching System) and our integrated digital image
and fingerprint package, Identify on Demand.
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DDSI believes that it will not reach profitability until the year 2006. Over the
next twelve months, management is of the opinion that sufficient working capital
will be obtained from operations and external financing to meet DDSI's
liabilities and commitments as they become payable. DDSI has in the past
successfully relied on private placements of common stock securities, bank debt,
loans from private investors and the exercise of common stock warrants in order
to sustain operations. If DDSI is unable to obtain additional funding in the
future, it may be forced to curtail or terminate operations.
DDSI is doing the following in its effort to reach profitability:
o Cutting costs in areas that add the least value to DDSI.
o Deriving funds through investigating business alliances with other
companies who may wish to license the FMS SDK (software developer's
kit).
o Increasing revenues through the introduction of Compu-Capture(R),
specifically towards kindergarten through twelfth grades, for the
creation of ID cards.
o Increasing revenues through the introduction of a scaled down
version of our Compu-Capture(R) product.
o Increasing revenues through the addition of innovative technologies
as a Value Added Seller.
o Acquiring and effectively adding management support to profitable
companies complementary to its broadened target markets.
Liquidity and Capital Resources
We had net losses of $643,019 and $252,336 during the three months ended March
31, 2005 and 2004, respectively. As of March 31, 2005, we had a cash balance in
the amount of $873,485 and current liabilities of $3,432,689, which includes
$20,115 due to officers and directors. The total amount of notes payable and
debentures is $7,610,446. We may not have sufficient cash or other assets to
meet our current liabilities. In order to meet these obligations, we may need to
raise cash from the sale of securities or from borrowings.
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.
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The Company has contractual obligations of $9,000,720 as of March 31, 2005.
These contractual obligations, along with the dates on which such payments are
due are described below:
Contractual Obligations Total One Year or Less More Than One Year
- ----------------------- ------------ ---------------- ------------------
Due to Related Parties $ 20,115 $ 20,115 $ 0
Accounts Payable and Accrued Expenses 507,827 507,827 0
Accrued interest on loans 862,332 862,332 0
Note payable 3,500,000 0 3,500,000
Convertible Debentures 4,110,446 1,873,211 2,237,235
Total Contractual Obligations $ 9,000,720 $ 3,263,485 $ 5,737,235
Below is a discussion of our sources and uses of funds for the three months
ended March 31, 2005 and 2004.
Net Cash from Operating Activities
Net cash used in operating activities for the three months ended March 31, 2005
and 2004 was $208,174 and $24,665, respectively. The increase in cash used from
operating activities in the three months ended March 31, 2005 versus 2004 of
$183,509 was principally due to the increase in net operating costs associated
with CGM for the three months.
Net Cash from Investing Activities
Net cash used by investing activities for the three months ended March 31, 2005
was $1,500,000, which reflects the cash paoid for the acquisition of CGM's
assets.
Net Cash from Financing Activities
Net cash provided by financing activities was $3,481,510 and $221,447 for the
three months ended March 31, 2005 and 2004, respectively, reflecting a decrease
of $3,260,063. This is mainly reflected in the note payable to CGM and Erik
Hoffer for the purchase of CGM.
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Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as of March 31, 2005 or as of
the date of this report.
Item 3. Control and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of March 31, 2005, 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 were not 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 in that we were required to make certain
revisions to our financial statements. 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,
reglardless 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 those 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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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities:
The Company is in default of $1,744,238 of outstanding debentures. Although the
debenture holders have not pursued their rights under such debentures, there can
be no assurances that such rights will not be exercised.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
4.1 Security Agreement dated February 25, 2005 by and between CGM Applied
Security Technologies, Inc. and CGM Security Solutions, Inc. (incorporated
herein by reference to the Current Report on Form 8-K, dated March 3,
2005)
4.2 Intellectual Property Security Agreement dated February 25, 2005 by and
between CGM Applied Security Technologies, Inc and CGM Security Solutions,
Inc. (incorporated herein by reference to the Current Report on Form 8-K,
dated March 3, 2005)
4.3 Letter Agreement, by and among the Company, AJW Partners, LLC, New
Millennium Capital Partners II, LLC, AJW Offshore, Ltd. and AJW Qualified
Partners, LLC, dated January 31, 2005 (incorporated herein by reference to
the Current Report on Form 8-K, dated March 3, 2005)
4.4 2.86% Secured Convertible promissory Note in the name of CGM Security
Solutions, Inc. dated February 25, 2005 (incorporated herein by reference
to the Current Report on Form 8-K, dated March 3, 2005)
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10.1 Asset Purchase Agreement dated February 25, 2005 by and among the Company,
CGM Applied Security Technologies, Inc. and CGM Applied Security
Solutions. (incorporated herein by reference to the Current Report on Form
8-K, dated March 3, 2005)
10.2 Employment Agreement, dated February 25, 2005, by and among the Company,
CGM Applied Security Technologies, Inc. and CGM Security Solutions, Inc.
and Eric Hoffer (incorporated herein by reference to the Current Report on
Form 8-K, dated March 3, 2005)
10.3 Employment Agreement dated February 25, 2005 by and among the Company and
Anthony Shupin (incorporated herein by reference to the Current Report on
Form 8-K, dated April 15, 2005)
10.4 Employment Agreement dated February 25, 2005 by and among the Company and
Michael J. Pellegrino (incorporated herein by reference to the Current
Report on Form 8-K, dated April 15, 2005)
31.1 Certification by Chief Executive Officer pursuant to Sarbanes-Oxley
Section 302
31.2 Certification by Chief Financial Officer pursuant to Sarbanes-Oxley
Section 302
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C., Section
1350
32.2 Certification by Chief Financial Officer pursuant to Sarbanes-Oxley
Section 1350
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIGITAL DESCRIPTOR SYSTEMS, INC.
--------------------------------
(Registrant)
Date: December 29, 2005 By: /s/ ANTHONY SHUPIN
---------------------------------------
Anthony Shupin
(President, Chief Executive Officer)
(Chairman)
Date: December 29, 2005 By: /s/ MICHAEL J. PELLEGRINO
---------------------------------------
Michael J. Pellegrino
Senior Vice President & CFO
(Director)
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