posted
The ask ended at .0003, for you stock gurus is that the equivelant of hearing faint thunder in the distance? Perhaps some dark clouds forming...drop the sails and don yer lifevest folks.
Posts: 602 | Registered: Aug 2005
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posted
I think it's going to be their best 10q ever. And it's audited. So, that's very good.
Here are some predicted positives to this stock:
No dilution Audited books Disclosure on the web site Accessible leadership team Great returns from the last acquisition 400-800% increases in revenue year over year New e-commerce web site High market demand for these products
Any downside? Please add thoughts.
-------------------- You can't afford to risk, what you can't afford to loose. Posts: 2422 | From: dc | Registered: Jun 2005
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It doesn;t matter is they are good or not... even 10 % increase from last quarter would be alot... remember its like 800 % + 500 % on top of 10 % is a frigging lot... if they keep increasing profit... in a year or so they could be profitable... IMHO
-------------------- All I say is IMHO.
I like these calm little moments before the storm... Reminds me of Bethoven Posts: 3255 | From: Orlando, FL | Registered: Mar 2006
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posted
Well the CMF is still climbing and the highest its ever been in a long time, I cannot believe the amount of accumulation on this stock. With another good 10q things are looking good.
posted
Form Formats Description Filing Date File/Film No NT 10-Q [html][text] 6 KB Notification of inability to timely file Form 10-Q or 10-QSB Acc-no: 0001144204-06-032776 (34 Act) 2006-08-14 000-26604 061027695
They haven't filed yet
-------------------- All I say is IMHO.
I like these calm little moments before the storm... Reminds me of Bethoven Posts: 3255 | From: Orlando, FL | Registered: Mar 2006
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posted
Personally I don't think increase will be big... I am not bashing. Reason I say this is because they have grown so much. I am not bashing... I own 30 million shares.. Im' just below JIF.
Also if you check the late filing:
(3) Is it anticipated that any significant change in results of operations from the corresponding period for the last fiscal year will be reflected by the earnings statements to be included in the subject report or portion thereof? [ ] Yes [X] No
If so, attach an explanation of the anticipated change, both narratively and quantitatively, and, if appropriate, state the reason why a reasonable estimate of the results cannot be made.
-------------------- All I say is IMHO.
I like these calm little moments before the storm... Reminds me of Bethoven Posts: 3255 | From: Orlando, FL | Registered: Mar 2006
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Digital Descriptor Systems, Inc. and Subsidiary Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2006 and 2005 (Restated) (Unaudited)
Digital Descriptor Systems, Inc. and Subsidiary Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2006 and 2005 (Restated) (Unaudited)
Condensed Consolidated Balance Sheet at June 30, 2006 Condensed Consolidated Statements of Operations for the Six and Three Months Ended June 30, 2006 and June 30, 2005 (restated) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and June 30, 2005 (restated)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Digital Descriptor Systems, Inc. and Subsidiary CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 2006 (UNAUDITED)
June 30 2006 ASSETS Current Assets Cash and cash equivalents $ 129,313 Restricted cash 0 Accounts receivable, less allowance of $34,550 667,730 Inventory 474,429 Prepaid expenses 6,325
Total Current Assets 1,277,797
Property and equipment, net of accumulated depreciation of $19,875 360,598
Other Assets Deposits 1,730 Goodwill 4,054,998 Intangible assets, net of accumulated amortization of $5,055 175,889 Deferred financing costs, net 194,591
Total Assets $ 6,065,603
LIABILITIES AND STOCKHOLDERS' (IMPAIRMENT)
Current Liabilities Accounts payable $ 285,997 Accrued expenses 317,299 Accrued interest 1,150,030 Deferred income 180,744 Convertible debentures current 3,505,716 Derivative liabilities 7,888,224
Shareholders' deficit Preferred stock, $.001 par value 1,000,000 shares authorized, -0- issued and outstanding -0- Common stock, par value $.001; authorized 9,999,000,000 shares; 9,243,406,000 issued and outstanding 9,243,406 Additional paid-in capital 9,406,917 Accumulated deficit (31,066,740 )
Total Shareholders' Impairment (12,416,417 )
Total Liabilities and Shareholders' Impairment $ 6,065,603
The accompanying notes are an integral part of these condensed consolidated financial statements.
Digital Descriptor Systems, Inc. and Subsidiary CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2006 AND 2005 (RESTATED) (UNAUDITED)
Three Months Three Months Six Months Six Months Ended Ended Ended Ended 30-Jun-06 30-Jun-05 30-Jun-06 30-Jun-05 (Restated) (Restated) INCOME Net Sales $ 1,233,729 $ 875,513 $ 2,104,693 $ 1,024,388 Cost of Revenue 334,538 447,460 627,880 492,161 Gross Profit 899,191 428,053 1,476,813 532,227
OPERATING EXPENSES General and administrative 677,406 555,080 1,367,629 775,453 Sales and marketing 60,585 79,070 Research 26,512 51,606 Total Operating Expenses 677,406 642,177 1,367,629 906,129 LOSS BEFORE OTHER INCOME (EXPENSE) 221,785 (214,124 ) 109,184 (373,902 )
OTHER (EXPENSE) Interest (1,202,312 ) (298,726 ) (1,934,505 ) (599,298 ) Amortization of deferred financing cost (32,621 ) (37,225 ) (69,846 ) (77,365 ) Amortization of debt discount (323,029 ) (602,975 ) (646,058 ) (1,043,730 ) Change in fair market value of derivative liability (668,136 ) (655,070 ) (1,329,156 ) (1,285,771 ) Depreciation and Amortization (18,699 ) (41,606 ) (24,930 ) Other income and expenses (1,050 ) (9,947 ) Total Other (Expense) (2,245,847 ) (1,593,996 ) (4,031,118 ) (3,031,094 ) NET (LOSS) APPLICABLE TO COMMON SHARES (2,024,062 ) (1,808,120 ) (3,921,934 ) (3,404,996 ) NET (LOSS) PER BASIC AND DILUTED SHARES (2,024,062 ) (1,808,120 ) (3,921,934 ) (3,404,996 )
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (0.00 ) (0.00 ) (0.00 ) (0.01 )
Weighted average shares of common stock Outstanding, basic and diluted 7,814,385,941 371,637,947 5,881,322,478 311,343,819
The accompanying notes are an integral part of these condensed consolidated financial statements.
Digital Descriptor Systems, Inc. and Subsidiary CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (RESTATED) (UNAUDITED)
Six Months Ended June 30, 2006 2005 (Restated) Net (loss) $ (2,024,062 ) $ (1,808,120 ) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 41,606 24,930 Common stock issues for settlement of vendor payables 0 30,000 Amortization of deferred financing cost (32,621 ) (37,225 ) Amortization of debt discount 323,029 602,975 Amortization of benefical interest 798,271 (42,443 ) Change in fair market value of derivatives 668,136 655,070 Bad debt expense 7,500 0
Changes in operating assets and liabilities: (Increase) in inventory 48,370 95,944 (Increase) Accounts receivable (131,772 ) (192,674 ) (Increase) Prepaid expense, deposits and other assets 0 (15,579 ) Accounts payable 784 59,647 (Decrease) Increase Accured expenses 701 (1,176 ) Accured interest 343,345 214,545 (Decrease) Deferred Income 8,224 (30,809 )
Net cash provided by (used in) operating activities $ 51,511 $ (444,915 )
CASH FLOWS FROM FINANCING ACTIVITIES Payment of financing costs 0 (502,041 ) Due to officer and director 0 (13,830 ) Net cash provided by (used in) financing activities 0 (515,871 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 28,604 $ (2,511,278 )
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 100,709 3,080,336 CASH AND CASH EQUIVALENTS - END OF PERIOD $ 129,313 $ 569,058
The accompanying notes are an integral part of these condensed consolidated financial statements.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
Note 1 - Description of 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 test 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 generates the majority of the Company's revenues. Substantially all of the Company's revenues are derived from governmental agencies in the United States. CGM is a manufacturer and distributor of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products.
Note 2 - Summary of Significant Accounting Policies
Significant accounting policies followed by the Company in the preparation of the accompanying condensed consolidated financial statements are summarized below:
Use of Estimates The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition The Company derives revenue from the sale of hardware, software, post customer support, and other related services. Post customer support includes telephone support, bug fixes, and rights to upgrades. Other related services include basic training.
The Company recognizes revenue upon delivery of the product to the end-user, when the fee is determinable and collectibility is probable. Revenue allocable to post customer support is recognized on a straight-line basis over the period which the service is to be provided. Revenue collected for future services is recorded as deferred income and totaled $ 180,744 and $ 158,644, respectively, for the six months ended June 30, 2006 and 2005. Revenue allocable to other services is recognized as the services are provided.
Software Development Costs All costs incurred in the research and development of new software products and costs incurred prior to the establishment of a technologically feasible product are expensed as incurred. Research and development of software costs were $ 53,654 and $51,606, respectively, for the six months ended June 30, 2006 and 2005.
Cash and Cash Equivalents For the purpose of the statement of cash flows, cash and cash equivalents include time deposits, certificates of deposits, restricted cash, and all highly liquid debt instruments with original maturities or three months or less.
Accounts Receivable Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. No interest is charged on any past due accounts. Accounts receivable are stated at the amount billed to the customer. Accounts receivable was $ 667,730 and $261,206, respectively, for the six months ended June 30, 2006 and 2005.
The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management's best estimate of the amount that will not be collected. Management reviews all accounts receivable balances that exceed 90 days from invoice date and based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The allowance for doubtful accounts was $68,084 and 34,550, respectively, for the six months ended June 30, 2006 and 2005.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
Income Taxes The Company provides for income taxes under the liability method. Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Such differences result from differences in the timing of recognition by the Company of net operating loss carry forwards, certain expenses, and differences in the depreciable lives and depreciation methods for certain assets.
Accounting for Stock Options Financial Accounting Standards Board issued Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" which provides companies with a choice to follow the provisions of SFAS 123 in determination of stock-based compensation expense or to continue with the provisions of Accounting Principles Board Opinion No. 25 (APB 25). The Company has elected to follow the provisions of APB 25. Under APB 25, if the exercise price of the Company stock options equals or exceeds the market price of the underlying Common Stock on the date of grant, no compensation expense is recognized. The effect of applying SFAS 123 to the Company's stock-based awards results in net loss and net loss per common share that are disclosed on a pro forma basis in Note 7 .
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. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for the periods presented.
Concentration of Credit Risk Financial instruments which potentially subject the company to a concentration of credit risk principally consist of cash and accounts receivable. Concentration of credit risk, with respect to accounts receivable, is limited due to the Company's credit evaluation process. The Company does not require collateral from its customers. The Company sells its principal products to end users and distributors principally in the United States.
Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and convertible debentures approximates their fair value based on the liquidity of these financial instruments and based on their short-term nature.
Reclassification Certain amounts at June 30, 2005 have been reclassified to conform to the presentation of the June 30, 2006 amounts.
Note 3 - Impact of Recent Accounting Pronouncements
In December of 2004 the FASB issued a revision to Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for good or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees as provided in Statement 123 as originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with selling, Goods or Services." This Statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans. The revisions of this statement did not have a material impact upon the Company's condensed consolidated financial statements.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
The Company reviews the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value. Goodwill represents the excess of the cost of the Company’s acquired subsidiaries or assets over the fair value of their net assets at the date of acquisition. Under Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill is no longer subject to amortization over its estimated useful life; rather, goodwill is subject to at least an annual assessment for impairment applying a fair-value based test.
Note 4 - Convertible Debentures
Based on the guidance in SFAS133 and EITF00-19, the Company concluded that the conversion features of it convertible debentures were required to be accounted for as derivatives. The imbedded derivative feature was bi-furcated and the fair market value was determined using a convertible bond valuation model. The derivative instruments are recorded at fair market value with changes in value recognized during the period of change. For further discussion, see footnote #11 regarding restatement.
During May 2001, the Company issued three convertible notes for an aggregate amount of $20,000. The debentures are collateralized by substantially all of the company's assets. The debentures accrue interest at the rate of 10% per annum.
The holders have the right to convert the principal amount plus accrued interest into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be an amount equal to 50% of the mean average price of the common stock for the ten trading days prior to notice of conversion.
We recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 4,992 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
During September 2001, the Company issued two convertible debentures for an aggregate amount of $400,000. The debentures are collateralized by substantially all of the company's assets. These debentures are in default as they were due on September 30, 2002. The debentures accrue interest at the rate of 12% per annum. A late fee equal to 15% of the accrued and unpaid interest is also assessed during the default period. Interest on the debentures was not paid quarterly and accordingly accrued interest and late fees payable related to the notes totaling $187,600 is included in the accompanying condensed consolidated financial statements.
The holders have the right to convert the principal amount plus accrued interest into shares of the Company's common stock at anytime after issuance. The conversion price in effect on any Conversion Date shall be the lesser of $.08 per share or 50% of the average of the lowest three inter-day sales prices during the ten trading days immediately preceding the applicable Conversion Date.
The Company also issued common stock purchase warrants for the right to purchase 800,000 shares of common stock of the Company at an exercise price per share equal to the lesser of $.36 or the average of the lowest three closing sales prices for the common stock during the twenty Trading Days immediately prior to exercise. The estimated fair value of the warrants of $48,000 was allocated to paid-in capital. This resulting debt discount plus $90,000 of financing charges were amortized on a straight-line basis over the term of the debentures, and were fully amortized at December 31, 2002.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 59,407 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
During 2004, $10,500 of the debenture was converted into 35,000,000 shares of common stock and during 2003; $3,164 of the debenture was converted into 15,818,010 shares of common stock.
In December, 2001 the Company issued three convertible debentures for an aggregate amount of $500,000. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due December 31, 2002. Interest accrues at the rate of 12% per annum through maturity, and increased to 15% per annum during the default period. Quarterly interest payments were not made, and accordingly accrued interest payable related to the notes totaling $210,000 is included in the accompanying condensed consolidated financial statements.
The holders have the right to convert the principal amount plus accrued interest into shares of the Company's common stock at any time. The conversion price in effect on any Conversion Date shall be the lesser of $.043 per share or 50% of the average of the lowest three inter-day sales prices during the twenty Trading Days immediately preceding the applicable Conversion Date.
The Company also issued common stock purchase warrants for the right to purchase 1,500,000 shares of common stock of the Company at an exercise price per share equal to the lesser of $.02 or the average of the lowest three inter-day sales prices during the twenty Trading Days immediately prior to exercise. The estimated fair value of the warrants of $90,000 was allocated to paid-in capital. This resulting debt discount plus $77,500 of financing charges were amortized on a straight-line basis over the term of the debentures, and were fully amortized at December 31, 2002.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 388,800 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In June 2002, a 12% convertible promissory note for $75,000 was issued to two investors. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due in August 2003. The debentures accrue interest at the rate of 12% per annum. A late fee equal to 15% of the accrued and unpaid interest is also assessed during the default period. Quarterly interest on the debentures was not paid and accordingly accrued interest and late fees payable related to the notes totaling $29,071 is included in the accompanying condensed consolidated financial statements.
The holders have the right to convert the principal amount plus unpaid accrued interest into shares of the Company's common stock at any time through repayment. The conversion price is equal to fifty percent of the average of the lowest three (i) inter-day trading prices, or (ii) if the common stock is traded on the OTC Bulletin Board or Pink Sheets, the prices asked by any person or entity acting as a market maker in the common stock during the twenty trading days immediately preceding the relevant date upon which a conversion is effected.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 59,430 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In September 2002, the Company issued secured convertible debentures in the aggregate principal amount of $100,000. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due on September 30, 2003. The debentures accrue interest at the rate of 12% per annum. A late fee equal to 15% of the accrued and unpaid interest is also assessed during the default period. Quarterly interest on the debentures was not paid, and accordingly accrued interest and late fees payable related to the notes totaling $30,000 are included in the accompanying condensed consolidated financial statements.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
The holders have the right to convert the principal amount and interest due under the debentures into shares of common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $0.005 or (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 Company also issued common stock purchase warrants for the right to purchase 300,000 shares of common stock of the Company at an exercise price per share equal to $.01. The estimated fair value of the warrants was zero. Debt issuance costs of $27,500 were also amortized on a straight-line basis over the term of the debentures and were fully amortized at December 31, 2003.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 79,190 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In January, 2003 the Company issued three convertible debentures for an aggregate amount of $250,000, with simple interest accruing at the annual rate of 10%. The debentures are collateralized by substantially all of the company's assets. These debentures are in default as they were due January 10, 2004. Quarterly interest was not paid and accordingly, accrued interest of $61,415 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $0.005 or (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 Company also issued common stock purchase warrants for the right to purchase 750,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Financing costs incurred of $56,750 were fully amortized at December 31, 2003.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 92,225 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In February, 2003, the Company issued three convertible debentures for an aggregate amount of $125,000, with simple interest accruing at the annual rate of 10%. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due February 27, 2004. Quarterly interest due was not paid and accordingly accrued interest of $28,125 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $0.005 or (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 Company also issued common stock purchase warrants for the right to purchase 375,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Debt issuance costs of $10,843 were also amortized on a straight-line basis over the term of the debentures. Amortization expense during 2004 was $24,307 and the costs were fully amortized as of December31, 2004.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 47,850 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In April, 2003, The Company issued three convertible debentures for an aggregate amount of $125,000, with simple interest accruing at the annual rate of 10%. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due March 31, 2004. Quarterly interest was not paid and accordingly accrued interest of $15,834 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $0.005 or (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 Company also issued common stock purchase warrants for the right to purchase 375,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Debt issuance costs of $20,844 were also amortized on a straight-line basis over the term of the debentures. Amortization expense during 2004 was $38,591 and the costs were fully amortized as of December31, 2004.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 68,250 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In October, 2003, the Company issued two convertible debentures for an aggregate amount of $165,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due October 1, 2004. Quarterly interest was not paid and accordingly accrued interest of $25,988 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $.005 or (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 debenture holders also received warrants to purchase 1,505,000 shares at an exercise price of $0.01 per share. The estimated fair value of the warrants was zero. Amortization expense during 2004 was $147,469 and the costs were fully amortized as of December31, 2004.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 326,733 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
In November, 2003, the Company issued two convertible debentures for an aggregate amount of $45,000, with simple interest accruing at the annual rate of 10%. The debentures are in default as they were due November 27, 2004. Quarterly interest was not paid and accordingly accrued interest of $9,453 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $.005 or (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 Company also issued common stock purchase warrants for the right to purchase 315,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Amortization expense during 2004 was $47,469 and the costs were fully amortized as of December 31, 2004.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 72,572 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In December, 2003, the Company issued three convertible debentures for an aggregate amount of $45,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. These debentures are in default as they were due by December 3, 2004. Quarterly interest was not paid and accordingly accrued interest of $5,694 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $.005 or (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 Company also issued common stock purchase warrants for the right to purchase 750,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. . Amortization expense during 2004 was $42,349 and the costs were fully amortized as of December 31, 2004.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 72,527 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In February, 2004, the Company issued two convertible debentures for an aggregate amount of $45,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. These debentures are due in February, 2005. Quarterly interest was not paid and accordingly accrued interest of $4,906 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any conversion date shall be the lesser of (1) $.005 or (2) 67% 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 addition the debenture holders also received warrants to purchase 315,000 shares at an exercise price of $0.005 per share anytime before February 28, 2009. The estimated fair value of the warrants was $504, which was also recorded as a debt discount. The total debt discount is being amortized on a straight line basis which approximates the effective interest method, over the life of the note. $20,317 of this amount was charged to interest expense during 2004. Additional costs of $12,819 incurred with the issuance of the convertible debentures were recorded as deferred financing cost and are being amortized on a straight-line basis, which approximates the effective interest method, over the term of the debentures. Unamortized costs as of December 31, 2004 amounted to $1,068.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $172,265 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In May, 2004, the Company issued four convertible debentures for an aggregate amount of $250,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. These debentures are due in May 2005. Quarterly interest was not paid and accordingly accrued interest of $19,555 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any conversion date shall be the lesser of (1) $.005 or (2) 67% 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 addition the debenture holders also received warrants to purchase 750,000 shares at an exercise price of $0.005 per share anytime before May 31, 2009. The estimated fair value of the warrants was $5,175, which was also recorded as a debt discount. The total debt discount is being amortized on a straight line basis which approximates the effective interest method, over the life of the note. $35,911 of this amount was charged to interest expense during 2004.
Additional costs of $55,244 incurred with the issuance of the convertible debentures were recorded as deferred financing cost and are being amortized on a straight-line basis, which approximates the effective interest method, over the term of the debentures. Unamortized costs as of December 31, 2004 amounted to $36,829.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $327,750 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In November, 2004, the Company issued four convertible debentures for an aggregate amount of $3,500,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. These debentures are due in November, 2005. Quarterly interest was not paid and accordingly accrued interest of $36,151 is included in the condensed consolidated financial statements.
The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any conversion date shall be the lesser of (1) $.0005 or (2) 67% 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 addition the debenture holders also received warrants to purchase 10,500,000 shares at an exercise price of $0.005 per share anytime before November 30, 2009. The estimated fair value of the warrants was $5,250, which was also recorded as a debt discount. The total debt discount is being amortized on a straight line basis which approximates the effective interest method; over the life of the note $71,828 of this amount was charged to interest expense during 2004.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
Additional costs of $391,569 with the issuance of the convertible debentures were recorded as deferred financing cost and are being amortized on a straight-line basis which approximates the effective interest method, over the term of the debentures. Unamortized costs as of December 31, 2004 amounted to $376,509.
In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 2,519,300 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.
In 2005 the Company converted $643,340 of accrued interest into convertible debentures; $97,402 was recorded as debt discount. In March 2005, $513,431 was repaid on convertible debentures.
Note 5 - Deferred Financing Costs
Deferred financing costs represent cost incurred in connection with the issuance of the convertible debentures. Deferred financing costs are being amortized over the life of the convertible debentures on the straight-line basis, which approximates the effective interest method. The net financing costs were $194,591 and $338,888 for the six months ended June 30, 2006 and 2005, respectively.
Note 6 - Commitments and Contingencies
Operating Lease The Company rents office facilities under a rental agreement that is automatically renewable every four months. The most recent renewal period will expire on August 31, 2006.
CGM leases two facilities, one in Somerset NJ and the other in Staten Island New York under non-cancelable lease agreements that end in December 2007 and December 2008, respectively.
Employment Agreements
Anthony R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was re-appointed as Chairman, President and Chief Executive Officer effective February, 2005. On February 25, 2005, DDSI entered into a five-year employment agreement with Mr. Shupin, which entitled him to a base salary of $215,000 per year, which may at the Board of Directors discretion adjust his base salary (but not below $215,000 per year). Mr. Shupin is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Shupin will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Plan, Mr. Shupin will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of DDSI. The Company may grant Mr. Shupin, following the first anniversary of the date hereof and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Shupin will be entitled to 25 vacations days per year at such times as may be mutually agreed with the Board of Directors. DDSI will provide Mr. Shupin a monthly car allowance of Six Hundred Dollars ($600.00) along with related car expenses.
Michael J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino was appointed as Senior Vice President and Chief Financial Officer effective February 25, 2005. On February 25, 2005, DDSI entered into a five-year employment agreement with Mr. Pellegrino, which entitled him to a base salary of $175,000 per year which may at the Board of Directors discretion adjust his base salary (but not below $175,000 per year). Mr. Pellegrino is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Incentive Plan, Mr. Pellegrino will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of DDSI. DDSI may also grant to the Employee, following the first anniversary of the date of the Agreement and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Pellegrino will be entitled to 25 vacation days per year at such times as may be mutually agreed with the Board of Directors. DDSI shall also furnish Mr. Pellegrino with monthly car allowance of Six Hundred Dollars ($600.00) and related car expenses.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
DDSI has an employment agreement with Erik Hoffer, pursuant to which Mr. Hoffer will be employed as Executive Vice President of the Company for an initial term of three years, which may be extended, and President of CGM Sub for an initial term of one year, which may be renewed for successive one-year terms. Pursuant to the Employment Agreement, Mr. Hoffer will receive a base salary of $200,000, a bonus of 5% of the gross margin sales increase over the prior year's gross margin sales of CGM products and customary benefits and reimbursements.
Note 7 - Stock Option and Other Plans
The Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant to which the Company reserved 5,000,000 shares of common stock. The options granted have a term of ten years and are issued at or above the fair market value of the underlying shares on the grant date. The Company also maintains the 1996 Director Option Plan (the Director Plan) pursuant to which the Company reserved 200,000 shares of common stock. Options granted under the Director Plan are issued at or above the fair market value of the underlying shares on the grant date. A portion of the first option vests at the six-month anniversary of the date of the grant and continues over a four-year period. Subsequent options vest on the first anniversary of the grant date. The options expire ten years from the date of the grant or 90 days after termination of employment, whichever comes first.
The following is a summary of option activity under all plans:
1994 Plan 1996 Director Plan Nonqualified Total Number of Options Weighted Average Exercise Price
Outstanding at June 30, 2005 33,000 -- -- 33,000 $ .10-$.365
Outstanding at June 30, 2006 33,000 33,000 $ .10-.365
Net loss and net loss per common share determined as if the Company accounted for stock options granted under the fair value method of SFAS 123 would result in the same amounts reported.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
Note 8 - Contingency
There were two holders of convertible notes dated December 31, 2001 who could potentially seek similar damages from the Company. Should they seek these damages, the Company could incur additional expense of $71,668. Management feels however, that the likelihood that the other holders will seek the damages is remote, and therefore, no provision for this expense has been made in the accompanying condensed consolidated financial statements.
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.
Note 9 - Related Parties
A Director of the Company provided consulting services during 2006 and 2005 that amounted to $0 and $4,000 respectively. As of June 30, 2006, the Company owes this Director $0.
Note 10 - Purchase of CGM Applied Security Technology, Inc.
On March 1, 2005, the Company acquired substantially all of the assets of CGM Security Solutions, Inc., a Florida corporation ("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 the Company and CGM dated as of February 25, 2005. In connection with the acquisition, the Company and CGM each entered into an employment agreement with Erik Hoffer (the "Employment Agreement"). CGM is a manufacturer and distributor of barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers.
The principal amount of the Note is subject to adjustment based upon the average of (i) the gross revenues of CGM for the fiscal year ending December 31, 2007 and (ii) an independent valuation of CGM Sub based upon the consolidated audited condensed consolidated financial statements of the Company and CGM Sub for the fiscal years ending 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) 40% 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.
Note 11 - Restatement
We have restated the condensed consolidated financial statements for the six months ended June 30, 2005. Based upon the guidance in SFAS133 and EITF00-19, the Company concluded that the conversion features of it convertible debentures were required to be accounted for as derivatives. The imbedded derivative feature was bi-furcated and the fair market value was determined using a convertible bond valuation model. The derivative instruments are recorded at fair market value with changes in value recognized during the period of change.
The impact on the condensed consolidated financial statements is summarized below.
Digital Descriptor Systems, Inc. and Subsidiary Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005 (Restated)
June 30, 2005 As Reported As Restated Debt discount and deferred financing costs, net $ 2,186,504 338,888 Total Assets 7,976,131 6,128,515 Accumulated deficit (22,615,854 ) (30,134,466 )
Total Liabilities and Shareholders Deficit 7,976,131 6,128,515
Interest and amortization of deferred debt costs 894,963 599,298 Total Other Expenses 919,893 3,031,094 Net Loss (1,294,575 ) (3,404,896 )
Net loss per Share (.00 ) (.01 )
Note 12 - Going Concern
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has sustained operating losses and has accumulated large deficits for the six months ended June 30, 2006 and 2005. These factors raise substantial doubt about its ability to continue as a going concern.
Management has formulated and is in the process of implementing its business plan intended to develop steady revenues and income, as well as reducing expenses in the areas of operations. This plan includes the following management objectives:
· Soliciting new customers in the U.S. · Expanding sales in the international market · Expanding sales through E-commerce · Adding new distributor both in the U.S and internationally · The introduction of new products into the market · Seeking out possible merger candidates
Presently, the Company cannot ascertain the eventual success of management’s plan with any degree of certainty. The accompanying consolidated financial statements do not include any adjustments that might result from the eventual outcome of the risks and uncertainties described above.
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 condensed consolidated financial statements and notes thereto included in this report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
Revenues for the three months ended June 30, 2006 were $1,233,729 compared to $875,513 for the three months ended June 30, 2005 (restated), an increase of $358,216 or 409%. DDSI generates its revenues through software licenses, hardware, post customer support arrangements and other services. The increase in DDSI's revenue is attributed to the purchase of CGM Applied Security Technology, Inc in March, 2005.
Cost of revenue for the three months ended June 30, 2006 was $334,538 compared to $447,460 for the three months ended June 30, 2005 (restated), a (decrease) of ($112,922) or (25%). The decrease was attributable more efficient purchasing procedures of raw material and more efficient production procedures put into place. Cost of revenue sold as a percentage of revenue for the three months ended June 30, 2006 was 27% of total revenues.
Operating expenses for the three months ended June 30, 2006 were $677,406 compared to $642,177 for the three months ended June 30, 2005 (restated), an increase of $35,229 or 5%. This increase was mainly attributable management’s controls over spending.
General and Administrative expenses for the three months ended June 30, 2006 were $555,264 compared $555,080 for the three months ended June 30, 2005 (restated) for an increase of $184. This increase was mainly attributable management’s controls over spending.
Sales and Marketing expenses for the three months ended June 30, 2006 were $95,011 compared $60,585 for the three months ended June 30, 2005 (restated) for an increase of $34,426 or 57%. This increase was mainly attributable to the company increasing its advertising budget due to the purchase of CGM Applied Security Technologies, Inc.
Research and development expenses for the three months ended June 30, 2006 were $27,131 compared to $26,512 for the three months ended June 30, 2005 (restated) for an increase of $619 or 2%.
The net (loss) for DDSI increased ($215,942) or 12% for the three months ended June 30, 2006 to $(2,024,062) from $(1,808,120) for the three months ended June 30, 2005 (restated). This was primarily due to the change in accounting procedures in which convertible debentures are treated as derivative according to the guidance of SFAS133 and EITF00-19.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
Revenues for the six months ended June 30, 2006 of $2,104,693 compared to $1,024,388 for the six months ended June 30, 2005 (restated), an increase of $1,080,305 or 106%. DDSI generates its revenues through software licenses, hardware, post customer support arrangements and other services. The increase in DDSI's revenue is attributed to the purchase of CGM Applied Security Technology, Inc in March, 2005.
Cost of revenue for the six months ended June 30, 2006 was $627,880 compared to $492,161 for the six months ended June 30, 2005 (restated), an increase of $135,719 or 28%. The increase was attributable to the purchase of CGM Applied Security Technology, Inc in March 2005. Cost of revenue sold as a percentage of revenue for the six months ended June 30, 2006 was 34% of total revenues.
Operating expenses for the six months ended June 30, 2006 was $1,367,628 compared to $906,129 for the six months ended June 30, 2005 (restated), an increase of $461,499 or 51%. This increase was mainly attributable to the purchase of CGM Applied Security Technology, Inc in March 2005.
General and Administrative expenses for the six months ended June 30, 2006 were $1,095,926 compared $775,453 for the six months ended June 30, 2005 (restated) for an increase of $320,473 or 41%. This increase was mainly attributable to the purchase of CGM Applied Security Technology, Inc in March 2005.
Sales and Marketing expenses for the six months ended June 30, 2006 were $218,048 compared $79,070 for the six months ended June 30, 2005 (restated) for an increase of $138,978 or 176%. This increase was mainly attributable to the company increasing its advertising budget due to the purchase of CGM Applied Security Technologies, Inc.
Research and development expenses for the six months ended June 30, 2006 were $53,654 compared to $51,606 for the six months ended June 30, 2005 (restated) for an increase of $2,048 or 4%. This increase was due in part to upgrades necessary to keep current.
The net (loss) for DDSI increased ($516,937) or 15% for the six months ended June 30, 2006 to $(3,921,933) from $(3,404,996) for the six months ended June 30, 2005 (restated). This was primarily due to the change in accounting procedures in which convertible debentures are treated as derivative according to the guidance of SFAS133 and EITF00-..
Net cash provided by (used in) operating activities for the six months ended June 30, 2006 and the six months ended June 30, 2005 (restated) was $51,511 and ($444,915), respectively. The increase in cash provided by (used in) operating activities for the six months ended June 30, 2006 of $496,426. This increase was due in part to less expenditures for infrastructure necessary after the purchase of CGM Applied Security Technology, Inc. in March 2005.
Net cash (used in) investing activities was ($22,907) and ($1,550,492) for the six months ended June 30, 2006 and June 30, 2005 (restated), respectively. This increase was due in part to less expenditures for infrastructure necessary after the purchase of CGM Applied Security Technology, Inc. in March 2005.
Net cash provided by (used in) financing activities was $(0) and $($515,871) for the six months ended June 30, 2006 and the six months ended June 30, 2005, respectively. This increase was due to repayment of officers for monies owed.
LIQUIDITY AND CAPITAL RESOURCES
DDSI's revenues have been insufficient to cover the cost of revenues and operating expenses. Therefore, DDSI has been dependent on private placements of its common stock and issuance of convertible notes in order to sustain operations. In addition, there can be no assurances that the proceeds from private or other capital will continue to be available, or that revenues will increase to meet DDSI's cash needs, or that a sufficient amount of DDSI'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 DDSI.
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 relied on private placements of common stock securities, and loans from private investors to sustain operations. However, if DDSI is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations. At June 30, 2006, DDSI had assets of $6,065,603 compared to $6,128,515 on June 30, 2005 a decrease of ($62,912) and shareholder (deficit) of $(12,416,417) on June 30, 2006 compared to shareholder (deficit) of $(10,399,406) on June 30, 2005, an increase of ($1,897,871). This increase in shareholder (deficit) for the six months ended June 30, 2006 resulted from the net loss for the six months ended June 30, 2006.
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 condensed consolidated financial statements of the Company and CGM Sub for the fiscal years ending 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:
The Company plans to spend the majority of it's time and efforts on increasing the revenue and marketplace of its wholly owned subsidiary, CGM Applied Security Technologies, as it feels that there is a much greater potential for growth of the product line of CGM. In order to accomplish this, the Company has hired additional sales people and is increasing its marketing budget in order to expand the awareness of CGM's product line. In addition, the Company has begun a complete revamping of the company's infrastructure in order to make it better able to respond to the need of its customers and to give management the reporting it needs on a timely basis.
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:
To enhance its sales of the product line acquired with the acquisition of CGM both domestically and internationally, though the addition of sales representative and distributors
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.
DDSI believes that it will not reach profitability in the foreseeable future due to its debt service. 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 The Company is putting a great deal of effort to increase the sales of the CGM subsidiary. The Company believes at this time that the most significant growth in revenue will come from CGM and its product lines.
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 ($3,921,933) and ($3,404,996) during the six months ended June 30, 2006 and 2005, respectively. As of June 30, 2006, we had a cash balance in the amount of $129,313 and current liabilities of $13,328,010. The total amount of notes payable and debentures is $8,659,726. 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.
The Company has contractual obligations of $10,413,052 as of June 30, 2006. These contractual obligations, along with the dates on which such payments are due are described below:
Contractual Obligations Total One Year of Less More Than One Year Due to Related Parties $ 0 $ 0 $ 0 Accounts Payable and Accrued Expenses 603,296 603,296 0 Accrued interest on loans 1,150,030 1,150,030 0 Note payable 3,500,000 0 3,500,000 Convertible Debentures 5,159,726 3,505,716 1,654,010 Total Contractual Obligations $ 10,413,052 $ 5,259,042 $ 5,154,010
The Company is currently in default on several of the convertible debentures that are included in current liabilities. Below is a discussion of our sources and (uses) of funds for the six months ended June 30, 2006 and 2005 (restated), respectively.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as of June 30, 2006 or as of the date of this report.
Item 3. Control and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of June 30, 2006, 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 effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There was no change in our internal controls over financial reporting that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting during the quarter covered by this Report.
The Company is in default of $1,733,478 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) 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
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: August , 2006 By: /s/ ANTHONY SHUPIN
-------------------------------------------------------------------------------- Anthony Shupin (President, Chief Executive Officer) (Chairman)
Revenues for the three months ended June 30, 2006 were $1,233,729 compared to $875,513 for the three months ended June 30, 2005 (restated), an increase of $358,216 or 409%. DDSI generates its revenues through software licenses, hardware, post customer support arrangements and other services. The increase in DDSI's revenue is attributed to the purchase of CGM Applied Security Technology, Inc in March, 2005.
Cost of revenue for the three months ended June 30, 2006 was $334,538 compared to $447,460 for the three months ended June 30, 2005 (restated), a (decrease) of ($112,922) or (25%). The decrease was attributable more efficient purchasing procedures of raw material and more efficient production procedures put into place. Cost of revenue sold as a percentage of revenue for the three months ended June 30, 2006 was 27% of total revenues.
Operating expenses for the three months ended June 30, 2006 were $677,406 compared to $642,177 for the three months ended June 30, 2005 (restated), an increase of $35,229 or 5%. This increase was mainly attributable management’s controls over spending.
-------------------- You can't afford to risk, what you can't afford to loose. Posts: 2422 | From: dc | Registered: Jun 2005
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quote:Revenues for the three months ended June 30, 2006 were $1,233,729 compared to $875,513 for the three months ended June 30, 2005 (restated), an increase of $358,216 or 409%.
Continued growth....409% is outstanding if you ask me! Let's see a nice PR to the investment community about it now.
Posts: 960 | Registered: Sep 2005
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posted
All I have to say is there will be a PR with the percentage of revenue increase. They always do. That is a fact per prior history of PR. Once they PR it I think volume will increase.
I dont care about anything else just the fact that they keep increasing their revenues. THAT IS GOOD !
Per past history also, if it runs it will be like 5 days after not immediately.
-------------------- All I say is IMHO.
I like these calm little moments before the storm... Reminds me of Bethoven Posts: 3255 | From: Orlando, FL | Registered: Mar 2006
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