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 June 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 August 8, 2000, the Registrant had 3,938,113 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>
<S> <C> <C>
June 30, December 31,
ASSETS 2000 1999
(unaudited) ----
-----------
CURRENT ASSETS
Cash $ 148,708 $ 84,493
Accounts Receivable 43,299 -
Inventory 22,840 14,765
Other 5,004 4,753
----- -----
TOTAL CURRENT ASSETS 219,851 104,011
------- -------
PROPERTY AND EQUIPMENT 62,919 48,584
------ ------
OTHER ASSETS
Patents and trademarks 396,112 387,821
License fee escrow 49,996 49,996
------ ------
446,108 437,817
------- -------
$ 728,878 $ 590,412
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable to vendor $ 10,000 $ 10,000
Accounts payable 74,710 56,326
Accrued expenses 17,684 29,688
------ ------
TOTAL CURRENT LIABILITIES 102,394 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 -
3,928,113 and 3,620,113 shares) 39,281 36,201
Additional paid-in capital 654,369 80,449
Warrants 4,877 4,877
Accumulated deficit (972,043) (377,129)
-------- --------
26,484 (105,602)
------ --------
$ 728,878 $ 590,412
======= =========
</TABLE>
See notes to condensed financial statements.
<PAGE>
Digital Privacy, Inc.
Condensed Statements of Operations
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES $ 60,473 $ 211 $75,088 $ 211
COST OF GOODS SOLD 947 86 1,358 86
--- -- ----- --
GROSS PROFIT 59,526 125 73,730 125
OPERATING EXPENSES 350,803 265,246 638,065 662,916
------- ------- ------- -------
OPERATING LOSS (291,277) (265,121) (564,335) (662,791)
INTEREST EXPENSE 15,537 5,893 30,579 8,352
------ ----- ------ -----
NET LOSS (306,814) (271,014) (594,914) (671,143)
PREFERRED STOCK DIVIDEND ACCRUED 6,000 - 10,691 -
----- ----- ------ -----
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (312,814) $ (271,014) $ (605,605) $ (671,143)
================ ================ ============ ============
NET LOSS PER SHARE OF COMMON STOCK-
BASIC AND DILUTED $ (0.08) $ (0.16)
================ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,918,992 3,816,783
================ ============
</TABLE>
See notes to condensed financial statements.
<PAGE>
Digital Privacy, Inc.
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<S> <C> <C>
Six months ended June 30,
----------------------------
2000 1999
---- ----
OPERATING ACTIVITIES
Net loss $(594,914) $ (671,143)
Adjustments to reconcile net loss
to net cash provided (used) by operating
activities:
Depreciation 14,174 14,570
Loss on disposal of property and equipment - 9,292
Amortization and impairment of deferred
finance costs - 262,058
Changes in operating assets and liabilities:
Accounts receivable (43,299) -
Inventory (8,075) 83
Other current assets (251) 17,146
Accounts payable and accrued liabilities 6,380 393,502
----- -------
Net cash provided (used) by operating activities (625,985) 25,508
-------- ------
INVESTING ACTIVITIES
Purchases of property and equipment (28,509) -
Patent and trademark costs (8,291) (10,475)
------ -------
Net cash used by investing activities (36,800) (10,475)
------- -------
FINANCING ACTIVITIES
Issuance of stock 727,000 -
------- -------
NET INCREASE IN CASH 64,215 15,033
CASH
Beginning of period 84,493 4,233
------ -----
End of period $ 148,708 $ 19,266
========== =======
</TABLE>
See notes to condensed financial statements.
<PAGE>
DIGITAL PRIVACY, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 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 six months ended June 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 six month
period ended June 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 six months ended June 30, 2000, the Company issued 15,000 shares
of Series A preferred stock for $150,000 and issued in a private placement
308,000 shares of common stock for $577,000.
<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.
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 $10,000 from the sale of 5,000
shares common stock at a price of $2.00 per share in a private placement and
$1,000 from the exercise of employee stock options. Subsequent to the close of
the quarter, in July, we raised an additional $50,000. As of August 7, 2000, we
had approximately $100,000 in cash which we believe will be sufficient until
October 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, 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.
Second Quarter Activities
<PAGE>
We continued to actively market our computer security
products. Our family of PrivacyWeb(TM) products providing secure websites have
been developed and are currently undergoing final stage Beta testing. We expect
to begin actively marketing them commercially during the third quarter. 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 $306,814 from
operations and had revenues of $60,473. We expect to have some meaningful
revenues during the fourth quarter and possibly towards the end of the third
quarter.
The Company is concentrating its efforts on the security
aspects of its products. As a result, shortly after the quarter ended its Vice
President of Sales resigned. The Company has 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.
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 10,000 restricted shares of common
stock at a price of $2.00 per share to one investor. The shares were sold
pursuant to the exemption from registration contained in Regulation D, Rule 506.
We also issued 20,000 shares to a former employee 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: August 14, 2000
DIGITAL PRIVACY, INC.
By: /s/Howard Miller
Howard Miller
Chief Executive Officer
