UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 1-9263
DATAWORLD SOLUTIONS, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 11-2816128
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
275K Marcus Blvd.
Hauppauge, NY 11788
------------------------
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (631) 951-4000
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes ___ No _X_
The number of shares outstanding of each of the issuer's classes of common
stock, as of the last practicable date:
Common stock, $.001 par value 32,465,450
--------------------------------------------------------------------------------
Class Number of shares outstanding at May 6, 2004
Transitional Small Business Disclosure Format: Yes ___ No _X_
DATAWORLD SOLUTIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2003
and June 30, 2003............................................. 1
Condensed Consolidated Statements of Operations for the
three months ended December 31, 2003 and 2002................. 2
Condensed Consolidated Statements of Operations for the
six months ended December 31, 2003 and 2002.................. 3
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 2003 and 2002.................. 4
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 15
Item 3. Controls and Procedures........................................... 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................ 19
Item 2. Changes in Securities and Use of Proceeds.................... 19
Item 3. Defaults Upon Senior Securities.............................. 19
Item 4. Submission of Matters to a Vote of Security Holders.......... 19
Item 5. Other Information............................................ 19
Item 6. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES ............................................................... 20
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
ITEM 1 FINANCIAL STATEMENTS
DATAWORLD SOLUTIONS, INC.
Condensed Consolidated Balance Sheet
December 31, 2003
December 31, 2003 June 30, 2003*
(Unaudited)
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash $ 7,690 $ 11,888
Accounts receivable, net of allowance 62,481 173,309
Other current assets 3,000 -
-------------- --------------
TOTAL CURRENT ASSETS 73,171 185,197
-------------- --------------
TOTAL ASSETS $ 73,171 $ 185,197
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Payable to asset-based lender $ 1,729,648 $ 1,838,655
Accounts payable 3,244,325 3,200,009
Accrued expenses and other 1,129,254 1,137,009
Current portion of notes payable 15,500 15,500
Bankruptcy distributions payable 281,499 270,332
Secured subordinated debentures, net 91,193 90,473
-------------- --------------
TOTAL CURRENT LIABILITIES 6,491,419 6,551,978
Notes payable-related parties 420,000 536,000
Accrued dividends on preferred stock - 393,436
Subscriptions received 35,000 35,000
-------------- --------------
TOTAL LIABILITIES 6,946,419 7,516,414
-------------- --------------
1
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
8% Series B Convertible Preferred Stock,
$.01 par value, stated value $1,000 per
share; Redeemable at $1,250 per
share; authorized, 3,000 shares;
1,559 and 1,595 shares issued and
outstanding at December 31, 2003 and
June 30, 2003, respectively 1,559,000 1,595,000
Common stock, $.001 par value; 40,000,000
Shares authorized, 38,420,429 and 34,240,313
issued and outstanding at December 31, 2003
and June 30, 2003, respectively 38,420 34,240
Additional paid-in capital 6,375,986 3,144,931
Accumulated deficit (14,846,654) (12,105,388)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIT (6,873,248) (7,331,217)
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 73,171 $ 185,197
============== ==============
*Condensed from audited financial statements
See accompanying notes to condensed consolidated financial statements.
DATAWORLD SOLUTIONS, INC.
Unaudited Condensed Consolidated Statements of Operations
Three Months ended December 31,
2003 2002
-------------- --------------
Net sales $ 92,519 $ 224,105
Cost of goods sold 61,529 117,703
-------------- --------------
Gross profit 30,990 106,402
-------------- --------------
Expenses:
Selling, general and administrative expenses 2,578,627 158,127
Interest expense 111,983 110,036
-------------- --------------
Total expenses 2,690,610 268,163
-------------- --------------
(2,659,620) (161,761)
-------------- --------------
2
Other income:
Commission income 32,026 62,278
Gain on settlement of debt 96,238 -
-------------- --------------
Total other income 128,264 62,278
-------------- --------------
Net loss $ (2,531,356) $ (99,483)
Accrued dividends on preferred stock 31,180 38,682
-------------- --------------
Net loss attributable to common shareholders $ (2,562,536) $ (138,165)
============== ==============
Basic and diluted loss per share $ (0.07) $ (0.00)
============== ==============
Weighted average common shares outstanding -
basic and diluted 34,754,646 33,927,487
============== ==============
See accompanying notes to condensed consolidated financial statements.
DATAWORLD SOLUTIONS, INC.
Unaudited Condensed Consolidated Statements of Operations
Six Months ended December 31,
2003 2002
-------------- --------------
Net sales $ 238,002 $ 403,087
Cost of goods sold 146,243 222,602
-------------- --------------
Gross profit 91,759 180,485
-------------- --------------
Expenses:
Selling, general and administrative expenses 2,706,271 345,328
Interest expense 246,895 229,505
-------------- --------------
Total expenses 2,953,166 574,833
-------------- --------------
(2,861,407) (394,348)
-------------- --------------
3
Other income:
Commission income 87,187 62,278
Gain on settlement of debt 96,238 -
-------------- --------------
Total other income 183,425 62,278
-------------- --------------
Net loss $ (2,677,982) $ (332,070)
Accrued dividends on preferred stock 63,284 80,332
-------------- --------------
Net loss attributable to common shareholders $ (2,741,266) $ (412,402)
============== ==============
Basic and diluted loss per share $ (0.08) $ (0.01)
============== ==============
Weighted average common shares outstanding -
basic and diluted 36,037,833 33,851,400
============== ==============
See accompanying notes to condensed consolidated financial statements.
DATAWORLD SOLUTIONS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31,
2003 2002
-------------- --------------
Cash flows from operating activities:
Net loss $ (2,677,982) $ (332,070)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation - 1,000
Loss on seizure of assets - 5,460
Amortization of bond discount 720 720
Gain on settlement of debt (96,238) -
Interest component of beneficial conversion
feature of convertible loans 58,000 -
Common stock issued for consulting services 338,000 -
Stock options granted for consulting
services 1,965,165 -
4
Changes in current assets and liabilities:
Accounts receivable 110,828 3,433
Other current assets (3,000) -
Accounts payable and accrued liabilities 154,149 213,667
Accrued interest on bankruptcy liability 11,167 1,749
-------------- --------------
Cash used by operating activities (139,191) (106,041)
-------------- --------------
Cash flows from financing activities:
Principal repayments on loans (6,000) -
Borrowings from asset-based lender and
loan agreements 303,565 491,964
Repayment of amounts due asset-based lender (312,572) (390,795)
Common stock sales 150,000 -
-------------- --------------
Cash provided by financing activities 134,993 101,169
-------------- --------------
Increase (decrease) in cash (4,198) (4,872)
Cash, beginning of period 11,888 4,872
-------------- --------------
Cash, end of period $ 7,690 $ 0
============== ==============
Supplemental disclosure of cash flow
information:
Cash paid for income taxes $ 0 $ 0
============== ==============
Cash paid for interest $ 0 $ 0
============== ==============
Non-Cash Investing and Financing Activities:
Conversion of notes payable and accrued
interest and dividends to common stock $ 677,555 $ -
============== ==============
Conversion of accrued liability to common
stock $ 97,248 $ -
============== ==============
Conversion of preferred stock and accrued
dividends to common stock $ 45,505 $ -
============== ==============
Dividends accrued on preferred stock $ 63,284 $ 80,332
============== ==============
See accompanying notes to condensed consolidated financial statements.
5
DATAWORLD SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Summary of Significant Accounting Policies
(A) - Unaudited Interim Financial Information
The unaudited consolidated interim financial statements, and accompanying notes
included herein, have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and reflect all
adjustments which are of a normal recurring nature and which, in the opinion of
management, are necessary for the fair statement of the results of the three and
six months ended December 31, 2003 and 2002. Certain information and footnote
disclosures have been condensed or omitted pursuant to such rules and
regulations. The results for the current interim period are not necessarily
indicative of the results for the full year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto in the Company's latest annual report filed
with the SEC on Form 10-KSB for the year ended June 30, 2003.
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated. The preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies as of the date of the consolidated
financial statements and the reported amount of revenues and expenses during the
period. Actual results could differ from those estimates.
(B) - Nature of Business
The Company distributes electronic wire, cable and related products used
primarily for data communication and distribution. The principal market for the
Company's products is the United States with a concentration in the New York
metropolitan area.
In October, 2003, the Company established a new division, DWS Defense Systems,
to address the demand for security and safety products, internationally and
domestically.
(C) - Net Income (Loss) Per Basic and Diluted Common Share
Net income (loss) per basic and diluted common share is computed on the basis of
the weighted average number of basic and diluted common shares outstanding
during the period. Only the weighted average number of shares of common stock
outstanding was used to compute basic and diluted loss per common share for the
three months and six months ended December 31, 2003 and 2002. Options and
warrants to purchase 3,000,000 and 160,000 shares of common stock, respectively,
have been excluded from the calculation of diluted loss per share, as their
effect would have been anti-dilutive.
6
(D) - Income Taxes
The Company records its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of deferred tax
assets and liabilities for the future tax consequences of temporary differences
between the financial statement and tax basis carrying amounts of assets and
liabilities. There were no differing methods of reporting income for tax
purposes as compared to financial reporting purposes.
(E) - Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to Statements of
Financial Accounting Standards Nos. 123 and 148. This pronouncement allows
companies to either expense the estimated fair value of all stock options or,
with respect to options granted to employees and directors, to continue to
follow the intrinsic value method previously set forth in Accounting Principles
Board Opinion No. 25, but disclose the pro forma effects on net income (loss)
had the fair value of those options been expensed. The Company has elected to
continue to apply the intrinsic value method in accounting for stock options
granted to employees and directors. The fair value method is used in accounting
for stock options granted to others.
In October and November, 2003, the Company issued 3,000,000 options to purchase
shares of common stock at various exercise prices ranging from $0.50 to $5.00
per share, to individuals serving on the Advisory Board of DWS Defense Systems,
Inc., a wholly owned subsidiary of the Company. The fair value of these options
on their grant dates using the Black-Scholes pricing model was approximately
$1,950,000, and the Company incurred a non-cash charge for this amount for the
three and six month periods ended December 31, 2003 as a result of the issuance
of these options. This amount is included in selling, general and administrative
expenses on the Condensed Consolidated Statement of Operations.
The determination of the fair value of these options was based on the following
elements:
Stock price volatility: 151%-187%
Annual interest rate: 0.95%
Dividends paid on common stock: $0.00
Estimated useful life of options: 5-10 years
(F)- Fair Value of Financial Instruments
The Company has estimated the fair value for financial instruments using
available market information and other valuation methodologies in accordance
with Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." Management of the Company believes that the fair value
of financial instruments, consisting of cash, accounts receivable, accounts
payable, notes payable, long-term debt and subordinated debentures approximate
carrying value for assets and is undeterminable for liabilities.
7
(G) - Recent Accounting Pronouncements
FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities," was issued in January 2003, and a revised interpretation of FIN 46
(FIN 46-R) was issued in December 2003. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 were effective immediately
for all arrangements entered into after January 31, 2003, and application of FIN
46 was required through the end of the Company's second quarter of fiscal 2004.
The Company is required to adopt the provisions of FIN 46-R for those
arrangements in the third quarter of fiscal 2004. For arrangements entered into
prior to February 1, 2003, the Company is required to adopt the provisions of
FIN 46-R in the fourth quarter of fiscal 2004. The Company does not believe it
has investments in variable interest entities and, as a result, the adoption of
FIN 46-R will not impact its consolidated financial statements.
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," (SFAS 150).
Under SFAS 150, certain financial instruments, which under previous guidance
were accounted for as equity, should be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003. The Company does not
anticipate an impact on its financial position by adoption of SFAS 150.
In April 2003, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies
the accounting for derivative instruments, including derivative instruments
imbedded in other contracts, and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Company does
not anticipate an impact on its financial position by adoption of SFAS 149.
In December 2002, the FASB issued Statement of Financial Accounting Standard
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS
148). SFAS 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement of Financial Accounting Standard 123, "Accounting for Stock-Based
Compensation" (SFAS 123), to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
8
Note 2: Going Concern
The Company has current assets of $73,171 (including $7,690 in cash) compared
with current liabilities of $6,491,419, resulting in a working capital deficit
of $6,418,248 as of December 31, 2003. In addition, the Company incurred a net
loss of $2,677,982 for the six months ended December 31, 2003 and has incurred
significant net losses in each of the three preceding fiscal years and has a
stockholder's equity deficit of $6,873,248 at December 31, 2003. Such deficits
and recurring losses raise questions about the Company's ability to continue as
a going concern.
Additionally, the Company's continuation is also threatened by the existence of
numerous judgments on trade payables, defaults on various secured indebtedness
and delinquencies on certain tax obligations. These conditions could result in
the seizure of Company assets and/or its being forced into bankruptcy. (See Note
7).
The Company is currently implementing a business plan that it believes will
increase revenue and generate profits. The plan involves a series of
initiatives. The Company is seeking to restructure its liabilities by
negotiating with secured and unsecured creditors and vendors to settle or
restructure the outstanding debt, or exchange debt for equity. The Company is
also actively engaged in raising capital through private investors. If
successful, this will provide additional working capital and allow the Company
to pursue more profitable projects and lines of business. The Company is working
to complete all outstanding SEC filings and remain current on a going-forward
basis. This will allow it to apply for re-listing on the OTC Bulletin Board,
thereby increasing shareholder liquidity and gaining easier access to capital
through equity transactions. In October, 2003 the Company formed a new
subsidiary, DWS Defense Systems ("DWS"), to address the demand for security and
safety products in the domestic and international business community. The
Company believes that this new venture will complement and enhance its current
product offerings and greatly expand its customer base. Additionally, the
Company has formed an advisory board to assist DWS in the development and
execution of its business plan. The board consists of several recognized
business and industry leaders. These individuals will provide guidance and
experience, access to prospective customers, and build industry awareness for
DWS's products and services. The Company may also pursue strategic acquisitions
that provide it with growth and vertical integration within this new area. There
is no assurance that the Company will be successful in accomplishing its
objectives. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Note 3: Notes payable-related parties
Notes payable-related parties, as of December 31, 2003, consists of
the following:
TW Cable, LLC $ 249,900
Edward Goodstein 160,600
J&B Associates 25,000
----------
435,500
(Less) current maturities (15,500)
----------
$ 420,000
==========
9
For the six months ended December 31, 2003, the Company's borrowings from
Augustine Capital Management ("Augustine") required the recognition of $58,000
of additional interest expense related to the lender's right to convert the
outstanding balance of their note payable into shares of common stock at a 25%
discount from market. Any future borrowings under this agreement will result in
the recognition of additional interest expense related to this beneficial
conversion feature. As of December 31, 2003, Augustine had converted all of its
outstanding loans. (See Note 6).
Note 4: Other related - party transactions
As of December 31, 2003, approximately $230,000 of accrued compensation due the
Company's President and Chief Executive Officer was included in accrued expenses
in the Condensed Consolidated Balance Sheet. (See also Note 9B).
Note 5: Income taxes
No income taxes were provided since the Company incurred losses from its
operations. As of December 31, 2003, the Company has net operating loss
carry-forwards totaling approximately $19,300,000, expiring at various dates
through fiscal 2023.
Note 6: Capital Stock Transactions
(A) Gain on settlement of debt
In November 2003, a former employee entered into an agreement to convert the
outstanding balance of $44,790 of principal and interest on a note payable into
14,000 share of common stock, valued at $9,800 or $0.70 a share. As a result of
this transaction, the Company recorded a gain of $34,990.
In December 2003, the Company settled a $97,248 liability with the issuance of
60,000 shares of common stock valued at $36,000 or $0.60 a share. As a result of
this transaction, the Company recorded a gain of $61,248.
(B) Other capital stock transactions
In October 2003, the Company awarded 400,000 shares of common stock to an
individual in consideration of his acceptance to serve on the Advisory Board of
the Company's subsidiary, DWS Defense Systems, Inc.
In November 2003, the Company awarded 100,000 shares of common stock to an
individual in consideration of his acceptance to serve on the Advisory Board of
the Company's subsidiary, DWS Defense Systems, Inc.
In November 2003, two existing stockholders entered into agreements with the
Company to purchase a total of 300,000 shares of common stock for $150,000, or
$0.50 per share.
10
In December 2003, Augustine converted the outstanding balance of $185,550 of
principal and interest on a note payable, together with $447,215 of outstanding
dividends on their 8% Series B Convertible Preferred Stock, into 632,765 shares
of common stock based on a conversion price of $1.00 per share.
Following is a schedule of changes in shareholders' deficit for the six months
ended December 31, 2003:
8% Retained
Preferred Common Additional Earnings Stock-
Stock Common Stock Paid in (accumulated holder's
Amount Shares Amount Capital deficit) Deficit
----------- ----------- -------- ----------- ------------- ------------
Balance July 1, 2003 $1,595,000 34,240,313 $34,240 $3,144,931 $(12,105,388) ($7,331,217)
Conversion of preferred
stock to common stock (36,000) 2,673,351 2,674 42,831 9,505
Value of beneficial
conversion feature
of convertible loans 58,000 58,000
Common stock sales 300,000 300 149,700 150,000
Common stock issued in
exchange for
consulting services 500,000 500 337,500 338,000
Conversion of note
payable and accrued
dividends to common
stock 632,765 632 632,133 632,765
Conversion of note
payable and accrued
interest to common
stock 14,000 14 9,786 9,800
Conversion of debt
payable
to common stock 60,000 60 35,940 36,000
Stock options granted
for consulting
services 1,965,165 1,965,165
Accrued dividends on 8%
preferred stock (63,284) (63,284)
Net loss for six months
ended December 31,
2003 - - - - (2,677,982) (2,677,982)
----------- ----------- -------- ----------- ------------- ------------
Balance December 31,
2003 $1,559,000 38,420,429 $38,420 $6,375,986 $(14,846,654) $(6,873,248)
=========== =========== ======== =========== ============= ============
Note 7: Commitments and contingencies
(A) Litigation matters
The Company is a party to legal matters arising in the general course of
business. During fiscal 2001 and subsequently, the Company decided not to
dispute litigation with suppliers and other creditors for collection of amounts
owed to them. As a result, as of December 31, 2003, the Company had outstanding
judgments amounting to $1,250,865. This balance is included in accounts payable
in the accompanying consolidated financial statements.
11
In September 2000, the Company began to negotiate a potential merger with
American Access Technologies ("AAT"), which resulted in a merger agreement being
signed in April 2001. In June 2001, the Company was notified by AAT that they
were unilaterally terminating the agreement claiming that the Company had
suffered material and adverse changes and that such change entitled AAT to
terminate the agreement. AAT then filed suit against the Company seeking
reimbursement of various incurred costs. The Company has filed a counter suit
against AAT alleging wrongful termination. The matter is currently set for trial
in June 2004. The ultimate outcome of this matter is not expected to have a
material adverse effect on the Company's results of operations or financial
position.
(B) Default on debt obligations
All of the Company's assets have been pledged as collateral under the term of
its financing agreement with Rosenthal & Rosenthal, Inc (hereinafter "R&R"). The
Company has been in default on this agreement since fiscal 2001. R&R stopped
advancing on collateral in October 2003. As a consequence of the default, R&R
has the right to seize the Company's assets. The Company has negotiated a
settlement of this obligation which is currently being reduced to writing and
which if completed, will settle all claims and eliminate R&R's ability to seize
the Company's assets. Should negotiations not be successful, the Company could
be forced to cease operations.
The Company is currently in default on payments owed on its bankruptcy
distributions payable. This could result in the Company's creditors requesting
that the Company's Chapter 11 bankruptcy proceedings be re-opened.
Additionally, the Company has not made payments on its Secured Subordinated
Debentures since January, 2001, and may be declared in default. This obligation
is secured by all of the Company's assets, but is subordinate to all current and
future loan facilities.
(C) Sales and payroll tax delinquencies
As of August 2001, the Company failed to remit sales taxes that it collected
from customers in four states. As of December 31, 2003, approximately $378,000
was due these states (inclusive of estimated penalties and interest). The
Company is presently negotiating a settlement of its approximately $317,000
liability with the State of New York. Should negotiations not be successful, the
Company could be forced by the State of New York to cease operations.
As of March 2002, the Company failed to remit federal payroll taxes that it had
collected. As of December 31, 2003, approximately $60,000 was due, inclusive of
estimated penalties and interest.
12
Note 8: Consulting Agreements
(A) Consulting and commission agreement
In October 2003, the Company entered into an agreement with a consultant/advisor
in consideration of his acceptance to serve on the Advisory Board of the
Company's subsidiary, DWS Defense Systems, Inc. The agreement calls for the
consultant to devote such time and attention to his duties, as he deems
appropriate in order to expand the Company's business. The agreement has four
components: a commission component, a loan component, a grant component and a
stock option component.
The commission component calls for the consultant/advisor to receive 2% of gross
receipts from all contracts or other sales of the Company or affiliates that
result from his originations.
The grant component calls for the consultant to receive 400,000 shares of the
Company's Common Stock upon signing of the agreement.
The stock option component calls for the consultant/advisor to be awarded
1,200,000 options that are exercisable immediately and expire October 29, 2013.
The options have exercise prices as follows: $.50 per share for the first
200,000 shares, $1.00 per share for the next 200,000 shares, $2.00 per share for
the next 200,000 shares, $3.00 per share for the next 200,000 shares, $4.00 per
share for the next 200,000 shares and $5.00 per share for the last 200,000
shares.
The loan component calls for the Company to loan the consultant $150,000 without
interest which is required to be repaid with profits earned by the consultant
out of the sale of shares acquired by him pursuant to the stock grant or stock
options provided for in this agreement, by 2013.
Pursuant to this agreement the Company is obligated to issue 400,000 shares of
common stock.
In addition, as a result of the aforementioned consulting agreement being
executed, the Company paid a finder's fee of $50,000, and issued warrants to
purchase 900,000 shares of common stock at prices ranging from $0.50 to $5.00
per share; such warrants to expire in five years.
(B) Other consulting agreements
In November 2003, the Company entered into an agreement with a consultant in
consideration of his acceptance to serve as Chairman of the Advisory Board of
the Company's subsidiary, DWS Defense Systems, Inc. The agreement calls for the
consultant to devote such time and attention to his duties, as he deems
appropriate in order to expand the Company's business. In consideration, the
Company awarded 300,000 options to purchase common stock that are exercisable
immediately and expire in November 2008. The options have exercise prices as
follows: $.75 per share for the first 50,000 shares, $1.00 per share for the
next 100,000 shares, $1.50 per share for the next 50,000 shares, $2.00 per share
for the next 50,000 shares, and $2.50 per share for the last 50,000 shares.
13
In November 2003, the Company entered into an agreement with a consultant in
consideration of his acceptance to serve on the Advisory Board of the Company's
subsidiary, DWS Defense Systems, Inc. The agreement calls for the consultant to
devote such time and attention to his duties, as he deems appropriate in order
to expand the Company's business. In consideration, the Company awarded 100,000
shares of common stock, and 300,000 options to purchase common stock that are
exercisable immediately and expire in November 2008. The options have exercise
prices as follows: $.75 per share for the first 50,000 shares, $1.00 per share
for the next 100,000 shares, $2.00 per share for the next 50,000 shares, $3.00
per share for the next 50,000 shares, and $5.00 per share for the last 50,000
shares. Pursuant to this agreement the 100,000 shares were issued in November
2003 and were valued at $74,000, or $0.74 per share, the weighted average
closing market price for the two days before and after the date of the
agreement.
In November 2003, the Company entered into an agreement with a consultant in
consideration of his acceptance to serve on the Advisory Board of the Company's
subsidiary DWS, Defense Systems, Inc. The agreement calls for the consultant to
devote such time and attention to his duties, as he deems appropriate in order
to expand the Company's business. In consideration, the Company awarded 300,000
options to purchase common stock that are exercisable immediately and expire in
November 2008. The options have exercise prices as follows: $.75 per share for
the first 50,000 shares, $1.00 per share for the next 100,000 shares, $2.00 per
share for the next 50,000 shares, $3.00 per share for the next 50,000 shares,
and $5.00 per share for the last 50,000 shares.
Note 9: Subsequent events
(A) Stockholder loan
In January 2004, the Company entered into an agreement with a stockholder
whereby the stockholder agreed to advance up to $200,000 to the Company on a
short-term basis for purposes of settling outstanding judgments and financing
ongoing projects. As of May 1, 2004, the outstanding balance was approximately
$115,000. As this debt is non-interest bearing, the Company will impute
interest.
(B) Consulting agreement
In January 2004, the Company entered into a consulting agreement with a relative
of the Company's President and Chief Executive Officer. The agreement calls for
the consultant to provide business planning and consulting services. In
consideration, the Company awarded him 200,000 shares of Common Stock valued at
$80,000, or $0.40 per share, the weighted average closing market price for the
two days before and after the date of the agreement.
(C) Stock issuances
In January 2004, a stockholder/consultant purchased 400,000 shares of common
stock for $100,000, or $0.25 per share.
14
In February 2004, the Company issued 500,000 shares of common stock to the
Company's Chief Operating Officer upon his acceptance of the position.
(D) Stock issuance under subscription agreement
In February 2004, the Company issued 500,000 shares of common stock to four
unaffiliated individuals, pursuant to four subscription agreements for total
proceeds of $100,000 or $0.20 per share.
(E) Contribution of treasury shares
In April 2004, the Company's President and Chief Executive Officer contributed
six million shares of common stock that he had previously held to the Company's
treasury.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis covers material changes in the financial
condition of Data World Solutions, Inc., (the "Company") since June 30, 2003 and
material changes in our results of operations for the three and six months ended
December 31, 2003, as compared to the same periods in 2002. This discussion and
analysis should be read in conjunction with "Management's Discussion and
Analysis" included in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 2003, including audited financial statements contained therein,
as filed with the Securities and Exchange Commission.
Special note regarding forward-looking statements
This report contains forward-looking statements within the meaning of federal
securities laws. These statements plan for or anticipate the future.
Forward-looking statements include statements about our future business plans
and strategies, statements about our need for working capital, future revenues,
results of operations and most other statements that are not historical in
nature. In this Report, forward-looking statements are generally identified by
the words "intend", "plan", "believe", "expect", "estimate", and the like.
Investors are cautioned not to put undue reliance on forward-looking statements.
Except as otherwise required by applicable securities statutes or regulations,
the Company disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise. Because forward-looking statements involve future risks and
uncertainties, these are factors that could cause actual results to differ
materially from those expressed or implied.
15
Results of Operations
Three Months Ended December 31, 2003, vs. Three Months Ended December 31, 2002
Sales revenue decreased approximately 58.7 percent, to $92,519 for the
three months ended December 31, 2003, from $224,105 for the comparative period
in the prior year primarily due to decreased demand for the Company's data
products and a reduction in sales staff.
Costs of revenue decreased approximately 47.7 percent, to $61,529 for the three
months ended December 30, 2003, from $117,703 for the three months ended
December 31, 2002 primarily due to the decrease in product sales.
Gross profit decreased approximately 70.9 percent, to $30,990 for the three
months ended December 31, 2003, from $106,402 for the three months ended
December 31, 2002, primarily due to the decrease in product sales. Gross profit
margin decreased to 33.5% for the three months ended December 31, 2003, compared
to 47.5% for the three months ended December 31, 2002, due to a higher
percentage of sales of lower margin products such as patchcords and other
commodity-type products.
General and administrative expenses increased approximately 1,531 percent, to
$2,578,627 for the three months ended December 31, 2003, from $158,127 for the
three months ended December 31, 2002. The increase is related to a non-cash
charge to consulting expenses related to the granting of common stock and
options to certain individuals, as disclosed in Note 1E and Note 8 to the
Condensed Consolidated Financial Statements.
Interest expense increased 1.8 percent, to $111,983 for the three months ended
December 31, 2003, from $110,036 for the three months ended December 31, 2002.
This was primarily related to interest expense incurred as a result of the
beneficial conversion feature of a note payable, offset by a $1.2 million
reduction in notes payable between December 31, 2003 and 2002, respectively.
(Note: Each of the two preceding expense totals for the 2002 period have been
reclassified from the amounts disclosed in the Management Discussion and
Analysis of the interim periods included in the Company's cumulative Form 10-KSB
for the annual period ended June 30, 2003. Such reclassifications do not affect
the net results of operations for the 2002 period.)
The Company incurred a net loss of $2,531,356 for the three months ended
December 31, 2003, as compared to a net loss of $99,483 for the three months
ended December 31, 2002, an increase of 2,445 percent, primarily due to the
aforementioned non-cash charge.
The net loss applicable to common shareholders for the three months ended
December 31, 2003 and 2002 was $2,562,536 and $138,165, respectively. This was
due to dividends accrued on convertible preferred stock of $31,180 and $38,682
for the three months ended December 31, 2003 and 2002, respectively.
16
Six Months Ended December 31, 2003, vs. Six Months Ended December 31, 2002
Sales revenue decreased approximately 41.0 percent, to $238,002 for the six
months ended December 31, 2003, from $403,087 for the comparative period in the
prior year primarily due to decreased demand for the Company's data products and
a reduction in sales staff.
Costs of revenue decreased approximately 34.3 percent, to $146,243 for the six
months ended December 31, 2003, from $222,602 for the six months ended December
31, 2002 primarily due to the decrease in product sales.
Gross profit decreased approximately 49.2 percent, to $91,759 for the six months
ended December 31, 2003, from $180,485 for the six months ended December 31,
2003, primarily due to the decrease in product sales. Gross profit margin
decreased to 38.6% for the six months ended December 31, 2003, compared to 44.8%
for the six months ended December 31, 2002, due to a higher percentage of sales
of lower margin products such as patchcords and other commodity-type products.
General and administrative expenses increased approximately 684 percent, to
$2,706,271 for the six months ended December 31, 2003, from $345,328 for the six
months ended December 31, 2002. The increase is related to a non-cash charge to
consulting expenses related to the granting of common stock and options to
certain individuals, as disclosed in Note 1E and Note 8 to the Condensed
Consolidated Financial Statements.
Interest expense increased 7.6 percent, to $246,895 for the six months ended
December 31, 2003, from $229,505 for the six months ended December 31, 2002.
This was primarily related to interest expense incurred as a result of the
beneficial conversion feature of a note payable, offset by a $1.2 million
reduction in notes payable between December 31, 2003 and 2002, respectively.
(Note: Each of the two preceding expense totals for the 2002 period have been
reclassified from the amounts disclosed in the Management Discussion and
Analysis of the interim periods included in the Company's cumulative Form 10-KSB
for the annual period ended June 30, 2003. Such reclassifications do not affect
the net results of operations for the 2002 period.)
The Company incurred a net loss of $2,677,982 for the six months ended December
31, 2003, as compared to a net loss of $332,070 for the six months ended
December 31, 2002, an increase of 707 percent, primarily due to the
aforementioned non-cash charge.
The net loss applicable to common shareholders for the six months ended December
31, 2003 and 2002 was $2,741,266 and $412,402, respectively. This was due to
dividends accrued on convertible preferred stock of $63,284 and $80,332 for the
six months ended December 31, 2003 and 2002, respectively.
Liquidity and Capital Resources
The Company has current assets of $73,171 (including $7,690 in cash) compared
with current liabilities of $6,491,419, resulting in a working capital deficit
of $6,418,248 as of December 31, 2003. In addition, the Company incurred a net
loss of $2,677,982 for the six months ended December 31, 2003 and has incurred
significant net losses in each of the three preceding fiscal years and has a
stockholder's equity deficit of $6,873,248 at December 31, 2003. Such deficits
and recurring losses raise questions about the Company's ability to continue as
a going concern.
17
Additionally, the Company's continuation is also threatened by the existence of
numerous judgments on trade payables, defaults on various secured indebtedness
and delinquencies on certain tax obligations. These conditions could result in
the seizure of Company assets and/or its being forced into bankruptcy. (See Note
7 to the Condensed Consolidated Financial Statements).
The Company is currently implementing a business plan that it believes will
increase revenue and generate profits. The plan involves a series of
initiatives. The Company is seeking to restructure its liabilities by
negotiating with secured and unsecured creditors and vendors to settle or
restructure the outstanding debt, or exchange debt for equity. The Company is
also actively engaged in raising capital through private investors. If
successful, this will provide additional working capital and allow the Company
to pursue more profitable projects and lines of business. The Company is working
to complete all outstanding SEC filings and remain current on a going-forward
basis. This will allow it to apply for re-listing on the OTC Bulletin Board,
thereby increasing shareholder liquidity and gaining easier access to capital
through equity transactions. In October, 2003 the Company formed a new
subsidiary, DWS Defense Systems ("DWS"), to address the demand for security and
safety products in the domestic and international business community. The
Company believes that this new venture will complement and enhance its current
product offerings and greatly expand its customer base. Additionally, the
Company has formed an advisory board to assist DWS in the development and
execution of its business plan. The board consists of several recognized
business and industry leaders. These individuals will provide guidance and
experience, access to prospective customers, and build industry awareness for
DWS's products and services. The Company may also pursue strategic acquisitions
that provide it with growth and vertical integration within this new area. There
is no assurance that the Company will be successful in accomplishing its
objectives. If the Company is not successful in these initiatives, it may be
forced to severely curtail operations or seek protection under the bankruptcy
laws.
The Company's cash balance at June 30, 2003 decreased $4,198, from $11,888 to
$7,690 as of December 31, 2003. The decrease was the result of a combination of
cash used for the repayment of loans totaling $318,572, and negative cash flows
from operations totaling $139,191, offset by cash proceeds from shareholder
loans and advances from the Company's asset-based lender totaling $303,565, and
proceeds from commons stock sales totaling $150,000. Operating activities
exclusive of changes in current assets and liabilities required $412,335, offset
by a decrease in receivables of $107,828, and an increase in accounts payable
and accrued liabilities of $165,316.
The Company's capital resources include private stock sales and loans and
advances from principal shareholders. During the six month period ended December
31, 2003, the Company borrowed an additional $99,000 under the terms of its
convertible loan agreement with Augustine, bringing the total indebtedness to
$174,000, all of which was subsequently converted into shares of common stock.
The agreement provides for maximum loans of $500,000, all of which may be
converted to common stock.
In November 2003, the Company raised additional capital through the sale of
common stock to private investors totaling $150,000. In January 2004, the
Company raised additional capital through the sale of common stock to another
private investor totaling $100,000. In February 2004, the Company raised
additional capital through the sale of common stock to a group of unaffiliated
private investors totaling $100,000.
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ITEM 3. CONTROLS AND PROCEDURES
Daniel McPhee, Chief Executive and Financial Officer of Data World Solutions,
Inc. has established and is currently maintaining disclosure controls and
procedures for the Company. The disclosure controls and procedures have been
designed to ensure that material information relating to the Company is made
known to him as soon as it is known by others within the Company.
The Company's Chief Executive and Financial Officer conducts an update and a
review and evaluation of the effectiveness of the Company's disclosure controls
and procedures and has concluded, based on his evaluation within 90 days of the
filing of this Report, that such disclosure controls and procedures are
effective for gathering, analyzing and disclosing the information the Company is
required to disclose in its reports filed under the Securities Exchange Act of
1934. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.
PART II. OTHER INFORMATION
Item 1 - Legal Precedings:
There were no new legal proceeding or significant developments in existing
proceedings that occurred during the three months ended December 31, 2003.
Item 2 - Changes in Securities:
As a result of several transactions, the Company issued 1,506,765 shares of
common stock during the three month period ended December 31, 2003, as disclosed
in Note 6 to the Condensed Consolidated Financial Statements.
Item 3 - Defaults Upon Senior Securities:
As of December 31, 2003, the Company is in default on the following obligations,
as disclosed in Note 7B to the Condensed Consolidated Financial Statements: The
R&R Financing Agreement, the Secured Subordinated Debentures, and the Class 7
Bankruptcy Distributions. Additionally, as disclosed in Notes 7A and 7C, the
Company has approximately $1.3 million in judgments entered against it for
unpaid trade payables and is delinquent on payment of certain sales and payroll
tax obligations.
Item 4 - Submission of Matters to a Vote of Security Holders:
None.
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Item 5 - Other information:
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
31 Section 302 Certification
32 Section 906 Certification
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATAWORLD SOLUTIONS, INC.
Date: May 6, 2004 By: /s/ Daniel McPhee
---------------------------------------
Daniel McPhee Chief Executive
Officer and Chief Financial Officer
20