SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
Commission file number 0-21934
DIGITAL PRIVACY, INC.
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
52-1680936
(IRS Employer Identification No.)
4820 Minnetonka Blvd., Suite 410, St. Louis Park, MN 55416
(Address of principal executive offices)(Zip Code)
(612) 285-1163
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 12, 2000, the Registrant had 3,908,113 shares of its Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Digital Privacy, Inc.
Condensed Balance Sheets
<TABLE>
March 31, December 31,
ASSETS 2000 1999
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 485,823 $ 84,493
Accounts Receivable 14,429 -
Inventory 14,879 14,765
Other 2,782 4,753
---------------- --------------
TOTAL CURRENT ASSETS 517,913 104,011
---------------- --------------
PROPERTY AND EQUIPMENT 57,347 48,584
---------------- --------------
OTHER ASSETS
Patents and trademarks 392,146 387,821
License fee escrow 49,996 49,996
---------------- --------------
442,142 437,817
---------------- --------------
$ 1,017,402 $ 590,412
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable to vendor $ 10,000 $ 10,000
Accounts payable 35,613 56,326
Accrued expenses 49,491 29,688
----------------- ---------------
TOTAL CURRENT LIABILITIES 95,104 96,014
----------------- ---------------
NOTES PAYABLE TO DIRECTOR 600,000 600,000
----------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock:
Series A, 8% cumulative convertible - $.01
par value, $10 stated and liquidation value
(authorized - 40,000 shares; issued and
outstanding - 30,000 and 15,000 shares) 300,000 150,000
Undesignated - $.01 par value (authorized -
4,960,000 shares; no shares issued and
outstanding) - -
Common stock - $.01 par value (authorized -
95,000,000 shares; issued and outstanding -
3,903,113 and 3,620,113 shares) 39,031 36,201
Additional paid-in capital 643,619 80,449
Warrants 4,877 4,877
Accumulated deficit (665,229) (377,129)
---------------- --------------
322,298 (105,602)
---------------- --------------
$ 1,017,402 $ 590,412
================ ==============
See notes to condensed financial statements.
</TABLE>
<PAGE>
Digital Privacy, Inc.
Condensed Statements of Operations
(unaudited)
Three Months
Ended March 31,
2000 1999
REVENUES $ 14,615 $ -
COST OF GOODS SOLD 411 -
------------ --------------
GROSS PROFIT 14,204 -
OPERATING EXPENSES 287,262 397,670
------------ --------------
OPERATING LOSS (273,058) (397,670)
INTEREST EXPENSE 15,042 2,459
------------ --------------
NET LOSS (288,100) (400,129)
PREFERRED STOCK DIVIDEND ACCRUED 4,691 -
------------ --------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (292,791) $ (400,129)
================== ==================
NET LOSS PER SHARE OF COMMON STOCK-
BASIC AND DILUTED $ (0.08)
==================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,714,575
==================
See notes to condensed financial statements.
<PAGE>
Digital Privacy, Inc.
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<S> <C> <C>
Three Months
Ended March 31,
2000 1999
OPERATING ACTIVITIES
Net loss $ (288,100) $ (400,129)
Adjustments to reconcile net loss
to net cash provided (used) by operating
activities:
Depreciation 7,087 7,536
Loss on sale or disposal of property and
equipment - 9,292
Amortization and impairment of deferred
finance costs - 207,169
Changes in operating assets and liabilities:
Accounts receivable (14,429) -
Inventory (114) -
Other current assets 1,974 (4,889)
Accounts payable and accrued liabilities (910) 212,474
------------ ----------
Net cash provided (used) by operating activities (294,492) 31,453
------------ ----------
INVESTING ACTIVITIES
Purchases of property and equipment (15,850) -
Patent and trademark costs (4,328) -
------------ ---------
Net cash used by investing activities (20,178) -
------------ ---------
FINANCING ACTIVITIES
Issuance of stock 716,000 -
------------ --------
NET INCREASE IN CASH 401,330 31,453
CASH
Beginning of period 84,493 4,233
----------- --------
End of period $ 485,823 $ 35,686
================== ==================
See notes to condensed financial statements.
</TABLE>
<PAGE>
DIGITAL PRIVACY, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(unaudited)
1. Basis Of Presentation:
The interim financial statements are unaudited, but in the opinion of
management reflect all adjustments necessary for a fair presentation of
results of such periods. All such adjustments are of a normal recurring
nature. The results of operations for any interim period are not
necessarily indicative of results for a full fiscal year.
The condensed balance sheet as of December 31, 1999, is derived from the
audited financial statements but does not include all disclosures required
by generally accepted accounting principals. The notes accompanying the
financial statements in the Company's Annual Report on form 10-KSB for the
year ended December 31, 1999, include accounting policies and additional
information pertinent to an understanding of both the December 31, 1999,
condensed balance sheet and the interim financial statements. The
information has not changed substantially except as a result of normal
transactions in the three months ended March 31, 2000, and as discussed in
the following notes.
2. Earnings (Loss) Per Share:
Earnings (loss) per share was not calculated for the three month period
ended March 31, 1999, as it is not meaningful due to the Company's adoption
of fresh start reporting upon its emergence from Chapter 11 bankruptcy on
September 9, 1999.
3. Stock Transactions:
During the three months ended March 31, 2000, the Company issued 15,000
shares of Series A preferred stock for $150,000 and issued in a private
placement 283,000 shares of common stock for $566,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion should be read in conjunction with
the financial statements and related notes which are included under Item 1.
Statements made below which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, our
ability to complete development and then market our products, competitive
factors and other risk factors as stated in other of our public filings with the
Securities and Exchange Commission.
Overview
We were initially formed in December 1990 and filed for
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on January 6, 1999. Our
Reorganization Plan was confirmed by the U.S. Bankruptcy Court for the District
of Minnesota on September 8, 1999.
We began commercial activity in the first quarter of 2000 and
are now in a position to offer a diverse range of products designed around the
concept of providing useful products and services in an attractive, convenient
format to people in their everyday environments.
From December 7, 1990 through December 1998, we raised
approximately $5,000,000 through equity and debt financings from private
investors. As a development stage enterprise, we incurred losses in excess of $8
million.
Our ability to continue in business is dependent on our
ability to raise additional capital and, ultimately, to generate sufficient cash
flow from operations to support our cost structure. The following are primary
obstacles which we feel contributed to our inability to generate cash flow
sufficient to meet scheduled payments and sustain further operations and forced
us into bankruptcy:
1. We experienced significant delays, some unforseeable and
uncontrollable, in the design and development of our products;
2. We experienced delays in bringing our products to market because of the
slow adaptation and development of the smart card and security market
place in the United States, and the lack of established distribution
channels;
3. Our inability to deliver to the government market our hardware based
product and the significant time delay in developing new software
products; and
4. We expended a considerable amount of time and resources in preparing
for further financing and growth. It was necessary to engage an
independent auditor to review and audit historical financials and
operational procedures and to retain consultants to provide marketing
research and prepare a comprehensive business plan. We also retained
the services of corporate counsel to prepare private placement
memorandum, review our past sales of securities for compliance with
applicable securities laws and applicable contractual shareholder
obligations, assist in reducing potential liability resulting from past
transactions, and advise on the revaluation and related issues involved
in recapitalization efforts.
<PAGE>
We recognized only very nominal revenues in 1998. Revenues
were generated primarily on integration services and the sale of our developer's
tool kit product. 1998 was the first year we realized sales.
Inadequate cash flow and lack of capital resources continued
to be the most serious concerns facing our management coming into 1999. At
December 31, 1998, we had a significant negative net worth. Having taken steps
to cut expenses and extend the payment schedule on long-term payables, we then
developed a proposal for a restructuring of our debts that would involve the
conversion of secured and certain unsecured debt into common stock. Ultimately,
we concluded that a non-bankruptcy restructuring was unlikely to be completed in
a timely manner. We therefore decided to file a Chapter 11 bankruptcy as the
best method for restructuring our obligations.
Following the bankruptcy proceedings we added to our
management structure and board of directors. Current management is familiar with
our history and recognizes the problems that plagued us prior to the bankruptcy.
Accordingly, we are now focused on two aspects: (i) raising sufficient financing
to support us until positive cash flow from sales are generated and (ii)
generating sales.
Liquidity
During the quarter we raised $150,000 from the sale of
convertible preferred stock and $566,000 from a private placement of common
stock. As of May 10, 2000, we had approximately $275,000 in cash which we
believe will be sufficient until September 2000. We currently project requiring
approximately an additional $1,500,000 to allow us to grow the business. In the
event we are unsuccessful in raising such funds in this offering, we will have
to seek alternative sources of funding. We currently have no plans how to raise
such additional funds.
There can be no assurance that we will be able to raise any
additional proceeds from our current private offering of our securities or
otherwise obtain the substantial additional capital necessary to permit us to
attract and retain a sufficient number of subscribers or that any assumptions
relating to our business plan will prove to be accurate. While we hope to raise
additional financing, we have no current arrangements with respect to, or
sources of, additional financing and there can be no assurance that any such
financing, particularly the significant amounts of financing that would be
required, will be available to us on commercially reasonable terms, or at all.
Any inability to obtain additional financing could have a material adverse
effect, including possibly requiring us to significantly curtail or cease
operations.
First Quarter Activities
Effective March 1, 2000 we hired a Vice President of Sales to
develop a marketing plan and sales department to increase sales. We are hopeful
that these efforts will be successful. In the event we can increase sales, this
will relieve the burden of financing and allow other members of management to
devote their efforts to growing the business through internal growth.
<PAGE>
We completed development of our computer security products and
they are being actively marketed. Our family of PrivacyWeb(TM) products
providing secure websites have been developed and are currently undergoing Beta
testing. We expect to begin marketing them commercially during the first
quarter. We are working to complete development of our e-commerce security
products.
We incurred a loss during the quarter of $288,100 from
operations in the first quarter and had revenues of $14,615. We expect to have
some meaningful revenues during the third quarter and possibly towards the end
of the second quarter.
Once we attain a level of liquidity, we will also look to grow
our business through acquisitions. We currently have no acquisition plans and do
not believe that any such type of transaction is likely in the near future.
Year 2000 Disclosure
We are Year 2000 compliant and we do not anticipate any
internal problems. In the event any internal problems should arise, we have many
expert computer technicians on our payroll and we believe that we will be able
to satisfactorily address any such problems. However, we are dependent on the
integrity of the Internet being maintained to increase its use as a commercial
marketplace, thereby increasing demand for our products. Given the currently
available information it does not appear to be likely that the Internet will
suffer major failure and, accordingly, we do not believe that our potential for
profitability or operations will be materially affected by the Year 2000
problem.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
During the quarter we sold an aggregate of 15,000 restricted shares of
Preferred Stock to six current shareholders for $150,000, completing the second
half of the December 30, 1999 sale. The shares were sold pursuant to the
exemptions from registration contained in Regulation S and Regulation D, Rule
506.
We also sold an aggregate of 283,000 restricted shares of common stock
at a price of $2.00 per share to 21 investors. The shares were sold pursuant to
the exemption from registration contained in Regulation D, Rule 506.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) A financial data schedule is filed herewith as an exhibit.
(b) During this quarter a Current Report on Form 8-K was filed to
report the merger with Digital Privacy, Inc., a Minnesota
corporation, and the simultaneous name change, as well as the
Company's new management team and business activities. The
Report also disclosed a change in accountants following the
merger and the financial statements (including pro forma)
required to report the merger.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned thereto duly
authorized.
Date: May 12, 2000
DIGITAL PRIVACY, INC.
By: /s/ Howard Miller
Howard Miller
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000892038
<NAME> DIGITAL PRIVACY, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 485,823
<SECURITIES> 0
<RECEIVABLES> 14,429
<ALLOWANCES> 0
<INVENTORY> 14,879
<CURRENT-ASSETS> 517,913
<PP&E> 57,347
<DEPRECIATION> 7,087
<TOTAL-ASSETS> 1,017,402
<CURRENT-LIABILITIES> 95,104
<BONDS> 0
0
300,000
<COMMON> 39,031
<OTHER-SE> (16,733)
<TOTAL-LIABILITY-AND-EQUITY> 1,017,402
<SALES> 14,615
<TOTAL-REVENUES> 14,615
<CGS> 411
<TOTAL-COSTS> 411
<OTHER-EXPENSES> 287,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,042
<INCOME-PRETAX> (288,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288,100)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
