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 September 30, 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.)
1433 Utica Avenue South, Suite 290, Minneapolis, MN 55416
(Address of Principal Executive Offices)
(763) 544-2200
(Issuer's Telephone Number)
4820 Minnetonka Blvd., Suite 410, St. Louis Park, MN 55416
(Former Address)
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a planned confirmed by a court.
Yes [X] No [ ]
As of November 10, 2000, the Registrant had 3,971,113 shares of its Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
Item 1. Financial Information
Digital Privacy, Inc.
Condensed Balance Sheets
September 30, December 31,
ASSETS 2000 1999
------------ ------------
(unaudited)
CURRENT ASSETS
Cash $ 41,352 $ 84,493
Accounts Receivable 40,491 -
Inventory 51,940 14,765
Other 5,254 4,753
----- -----
TOTAL CURRENT ASSETS 139,037 104,011
PROPERTY AND EQUIPMENT 61,413 48,584
OTHER ASSETS
Patents and trademarks 399,727 387,821
License fee escrow 49,981 49,996
------------ ------------
449,708 437,817
------------ ------------
$ 650,158 $ 590,412
============ ============
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable to vendor $ 10,000 $ 10,000
Accounts payable 110,172 56,326
Accrued expenses 53,337 29,688
------ ------
TOTAL CURRENT LIABILITIES 173,509 96,014
NOTES PAYABLE OTHER 50,000 -
NOTES PAYABLE TO DIRECTOR 600,000 600,000
------------ ------------
650,000 600,000
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 -
3,971,113 and 3,620,113 shares) 39,711 36,201
Additional paid-in capital 720,439 80,449
Warrants 4,905 4,877
Accumulated deficit (1,238,406) (377,129)
------------ ------------
(173,351) (105,602)
------------ ------------
$ 650,158 $ 590,412
============ ============
============ ============
See notes to condensed financial statements.
<PAGE>
Digital Privacy, Inc.
Condensed Statements of Operations
(unaudited)
<TABLE>
<S> <C> <C>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
REVENUES $ 22,588 $ 717 $ 97,676 $928
COST OF GOODS SOLD 1,146 198 2,504 284
----- --- ----- ---
GROSS PROFIT 21,442 519 95,172 644
OPERATING EXPENSES 272,429 176,084 910,494 839,000
------- ------- ------- -------
OPERATING LOSS (250,987) (175,565) (815,322) (838,356)
INTEREST EXPENSE (15,376) (7,475) (45,955) (15,827)
------- ------ ------- -------
LOSS BEFORE REORGANIZATION ITEMS AND
EXTRAORDINARY GAIN (266,363) (183,040) (861,277) (854,183)
REORGANIZATION ITEMS - 661,238 - 661,238
------- ------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (266,363) 478,198 (861,277) (192,945)
EXTRAORDINARY GAIN - 1,838,259 - 1,838,259
------- --------- ------- ---------
NET INCOME (LOSS) (266,363) 2,316,457 (861,277) 1,645,314
PREFERRED STOCK DIVIDEND ACCRUED 6,005 - 16,696 -
----- --------- ------ ---------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS $ (272,368) $ 2,316,457 $ (877,973) $ 1,645,314
============= ============ ============ =============
NET INCOME (LOSS) PER SHARE OF COMMON STOCK-
BASIC AND DILUTED $ (0.07) $ (0.23)
============= ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,958,363 3,864,321
============= ============
</TABLE>
See notes to condensed financial statements.
<PAGE>
Digital Privacy, Inc.
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<S> <C> <C>
Nine months ended September 30,
2000 1999
---- ----
OPERATING ACTIVITIES
Net income (loss) $ (861,277) $ 1,645,314
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Extraordinary gain on discharge of prepetition liabilities - (1,838,259)
Depreciation 21,835 21,604
Amortization of debt issuance costs - 326,371
Loss on disposal of property and equipment - 9,292
Changes in operating assets and liabilities:
Accounts receivable (40,491) -
Inventory (37,175) (3,864)
Other assets (486) 34,031
Accounts payable and accrued liabilities 87,523 (360,794)
------ --------
Net cash used by operating activities (830,071) (166,305)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (34,664) -
Patent and trademark costs (11,906) (12,558)
------- -------
Net cash used by investing activities (46,570) (12,558)
------- -------
FINANCING ACTIVITIES
Proceeds from notes payable 50,000 175,000
Proceeds from issuance of stock and option exercises 783,500 -
-------
Net cash provided by financing activities 833,500 175,000
------- -------
NET DECREASE IN CASH (43,141) (3,863)
CASH
Beginning of period 84,493 4,233
------ -----
End of period $ 41,352 $ 370
====== =====
</TABLE>
See notes to condensed financial statements.
<PAGE>
DIGITAL PRIVACY, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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 nine months ended September 30, 2000, and as discussed
in the following notes.
2. Earnings (Loss) Per Share:
Earnings (loss) per share was not calculated for the three and nine month
period ended September 30, 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 nine months ended September 30, 2000, the Company issued 15,000
shares of Series A preferred stock for $150,000, issued 351,000 shares of
common stock for $633,500 and issued 5,000 shares of common stock and
warrants in satisfaction of $10,028 of accounts payable.
<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.
We recognized only very nominal revenues in 1998. Revenues were
<PAGE>
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 $56,000 from the sale of 28,000
shares common stock at a price of $2.00 per share in a private placement and
$500 from the exercise of employee stock options. Subsequent to the close of the
quarter we raised an additional $75,000. As of November 3, 2000, we had
approximately $51,000 in cash which we believe will be sufficient until December
2000. We are currently commencing a new round of private financing which we hope
will raise $500,000 through the sale of convertible debentures. 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, we will have
to seek alternative sources of funding. While we are currently looking to raise
a lesser amount of funds for short term working capital, 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 private offerings 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.
Third Quarter Activities
We continued to actively market our computer security products.
During the quarter, our family of Privacy products consisting of PrivacyWeb(TM),
Privacy.AccessTM and Privacy.FileTM completed final stage Beta testing and we
began actively marketing them. The development efforts relating to our
e-commerce security products are currently on hold as we are meeting with
potential joint venture partners to produce a multi-purpose SmartCard(TM).
We incurred a loss during the quarter of $266,363 from operations
and had revenues of $22,588. We expect to have some meaningful revenues during
the fourth quarter.
<PAGE>
The Company is concentrating its efforts on the security aspects
of its products. As a result, in the beginning of the quarter its Vice President
of Sales resigned. The Company filled the opening by hiring as consultants two
salesmen that are specialists in security technology products. We are hopeful
that these efforts will be successful in increasing sales. 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. In this regard we also established and filled the position of
Vice President-Government Relations and Business Development.
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.
We sold an aggregate of 28,000 restricted shares of common
stock at a price of $2.00 per share to two investors. The shares were sold
pursuant to the exemption from registration contained in Regulation D, Rule 506.
We also issued 10,000 shares to a former director upon the
exercise of stock options.
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) None.
<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: November 14, 2000
DIGITAL PRIVACY, INC.
By: /s/Howard Miller
-----------------------------
Howard Miller
Chief Executive Officer
