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: March 31, 2004
[ ] 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 (I.R.S. Employer
incorporation or 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 32,664,776
--------------------------------------------------------------------------------
Class Number of shares outstanding at May 19, 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 March 31, 2004
and June 30, 2003.................................................. 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2004 and 2003......................... 2
Condensed Consolidated Statements of Operations for the
nine months ended March 31, 2004 and 2003.......................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 2004 and 2003.......................... 4
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 17
Item 3. Controls and Procedures............................................ 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 21
Item 2. Changes in Securities and Use of Proceeds...................... 21
Item 3. Defaults Upon Senior Securities................................ 21
Item 4. Submission of Matters to a Vote of Security Holders............ 21
Item 5. Other Information.............................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
SIGNATURES ................................................................ 22
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
ITEM 1 FINANCIAL STATEMENTS
DATAWORLD SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, June 30,
2004 2003*
(Unaudited)
------------ ----------
ASSETS
CURRENT ASSETS:
Cash $ 11,192 $ 11,888
Accounts receivable, net of allowance 236,072 173,309
Other current assets 5,061 --
------------ ------------
TOTAL CURRENT ASSETS 252,325 185,197
PROPERTY, PLANT, AND EQUIPMENT, NET 16,258 --
SECURITY DEPOSITS 12,119 --
------------ ------------
TOTAL ASSETS $ 280,702 $ 185,197
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Payable to asset-based lender $ 1,766,055 $ 1,838,655
Accounts payable 3,020,648 3,200,009
Accrued expenses and other 1,201,792 1,137,009
Billings in excess of costs and
estimated earnings 25,087 --
Current portion of notes payable 15,500 15,500
Bankruptcy distributions payable 286,809 270,332
Secured subordinated debentures 91,553 90,473
------------ ------------
TOTAL CURRENT LIABILITIES 6,407,444 6,551,978
Notes payable-related parties 647,575 536,000
Accrued dividends on preferred stock 31,095 393,436
Subscriptions received 135,000 35,000
------------ ------------
TOTAL LIABILITIES 7,221,114 7,516,414
------------ ------------
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 March 31,
2004 and June 30, 2003, respectively 1,559,000 1,595,000
Common stock, $.001 par value; 40,000,000
Shares authorized, 39,780,429 and 34,240,313
issued and outstanding at March 31, 2004 and
June 30, 2003, respectively 39,780 34,240
Additional paid-in capital 6,822,259 3,144,931
Accumulated deficit (15,361,451) (12,105,388)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (6,940,412) (7,331,217)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 280,702 $ 185,197
============ ============
*Condensed from audited financial statements
See accompanying notes to condensed consolidated financial statements.
Page 1
DATAWORLD SOLUTIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
2004 2003
------------ ------------
Net sales $ 304,536 $ 286,834
Cost of goods sold 237,554 82,561
------------ ------------
Gross profit 66,982 204,273
------------ ------------
Expenses:
Selling, general and administrative expenses 677,104 218,327
Interest expense 109,834 95,259
------------ ------------
Total expenses 786,938 313,586
------------ ------------
(719,956) (109,313)
------------ ------------
Other income:
Commission income 6,019 31,977
Gain on settlement of debt 230,235 --
------------ ------------
Total other income 236,254 31,977
------------ ------------
Net loss $ (483,702) $ (77,336)
Accrued dividends on preferred stock 31,095 31,900
------------ ------------
Net loss attributable to common shareholders $ (514,797) $ (109,236)
============ ============
Basic and diluted loss per share $ (0.01) $ (0.00)
============ ============
Weighted average common shares outstanding -
basic and diluted 39,461,659 34,240,313
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 2
DATAWORLD SOLUTIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31,
2004 2003
------------ ------------
Net sales $ 542,538 $ 689,921
Cost of goods sold 383,797 305,163
------------ ------------
Gross profit 158,741 384,758
------------ ------------
Expenses:
Selling, general and administrative expenses 3,383,375 563,655
Interest expense 356,729 324,764
------------ ------------
Total expenses 3,740,104 888,419
------------ ------------
(3,581,363) (503,661)
------------ ------------
Other income:
Commission income 93,206 94,255
Gain on settlement of debt 326,473 --
------------ ------------
Total other income 419,679 94,255
------------ ------------
Net loss $ (3,161,684) $ (409,406)
Accrued dividends on preferred stock 94,379 112,232
------------ ------------
Net loss attributable to common shareholders $ (3,256,063) $ (521,638)
============ ============
Basic and diluted loss per share $ (0.09) $ (0.02)
============ ============
Weighted average common shares outstanding -
basic and diluted 37,179,108 33,992,704
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3
DATAWORLD SOLUTIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(3,161,684) $ (409,406)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation 343 1,000
Loss on seizure of assets -- 5,460
Amortization of note and bond discounts 1,530 1,080
Gain on settlement of debt (326,473) --
Interest component of beneficial conversion
feature of convertible loans 66,333 --
Common stock issued for consulting services 418,000 --
Stock options granted for consulting services 1,965,165 --
Common stock issued for officer compensation 236,500 --
Changes in current assets and liabilities:
Accounts receivable (62,763) (78,172)
Other current assets (5,061) --
Accrued interest on payable to
asset-based lender 36,407 --
Accounts payable and accrued liabilities 396,257 273,150
Accrued interest on bankruptcy liability 16,477 7,060
----------- -----------
Cash used by operating activities (418,969) (199,828)
----------- -----------
Cash flows from investing activities:
Fixed asset acquisitions (16,601) --
Other assets (12,119) --
----------- -----------
Cash used in investing activities (28,720) --
----------- -----------
Cash flows from financing activities:
Proceeds from notes and loans 215,000 --
Principal repayments on loans (9,000) (1,500)
Borrowings from asset-based lender 203,565 796,605
Repayment of amounts due asset-based lender (312,572) (600,149)
Proceeds from stock subscriptions 100,000 --
Common stock sales 250,000 --
----------- -----------
Cash provided by financing activities 446,993 194,956
----------- -----------
Increase (decrease) in cash (696) (4,872)
Cash, beginning of period 11,888 4,872
----------- -----------
Cash, end of period $ 11,192 $ 0
=========== ===========
Page 4
DATAWORLD SOLUTIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
2004 2003
----------- -----------
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 $ --
=========== ===========
Accrued liabilities settled by cash payment
from shareholder $ 281,985 $ --
=========== ===========
Conversion of accrued liabilities to common stock $ 183,423 $ --
=========== ===========
Dividends accrued on preferred stock $ 94,379 $ 112,332
=========== ===========
Conversion of preferred stock and accrued
dividends to common stock $ 45,505 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 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 DataWorld Solutions, Inc., (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 nine months ended March 31, 2004 and
2003. 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.
Page 6
(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 subsidary, DWS Defense Systems,
to address the demand for security and safety products, internationally and
domestically.
(C) - Revenue Recognition
The Company records sales on its long-term contracts on a
percentage-of-completion basis, based upon current estimates of costs to
complete such contracts. Contract costs include all direct materials, labor and
subcontractor costs. General and administrative expenses are accounted for as
period charges and, therefore, are not included in the calculation of the
estimates to complete. Anticipated losses are provided for in their entirety
without reference to the percentage-of-completion. Costs and estimated earnings
in excess of billings represent unbilled charges on long-term contracts
consisting of amounts recognized but not billed. Billings in excess of costs and
estimated earnings represent billed charges on long-term contracts consisting of
amounts not recognized but billed.
Revenue from short-term contracts is recognized when the product is shipped
and/or the service is rendered.
(D) - 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 nine months ended March 31, 2004 and 2003. 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.
(E) - Income Taxes
The Company records its income taxes in accordance with Statement of Financial
Accounting Standards 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.
Page 7
(F) - Property and Equipment
Property and equipment at March 31, 2004, are stated at cost less accumulated
depreciation and amortization computed on a straight-line basis over the
estimated useful lives of the respective assets, which range from three to five
years. Leasehold improvements are amortized over the useful life of the
improvement, or the lease term, whichever is less. Expenditures for maintenance,
repairs and betterments, which do not materially extend the useful lives of the
assets, are charged to operations as incurred. The cost and related accumulated
depreciation of assets retired or sold are removed from the respective accounts
and any gain or loss is recognized in operations.
(G) - 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
nine month period ended March 31, 2004 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
(H)- 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
Page 8
receivable, accounts payable, notes payable, long-term debt and subordinated
debentures approximate carrying value for assets and is undeterminable for
liabilities.
(I) - 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 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.
NOTE 2: GOING CONCERN
-------------
The Company has current assets of $252,325 (including $11,192 in cash) compared
with current liabilities of $6,407,444, resulting in a working capital deficit
of $6,155,119 as of March 31, 2004. In addition, the Company incurred a net loss
of $3,161,684 for the nine months ended March 31, 2004 and has incurred
significant net losses in each of the three preceding fiscal years
Page 9
and has a stockholder's equity deficit of $6,940,412 at March 31, 2004. 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 by trade creditors, 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. The Company is in the process of applying 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 March 31, 2004, consists of the
following:
TW Cable, LLC $247,900
Edward Goodstein 159,600
Augustine Capital Mgmt 115,450
Shareholder loan 115,125
J&B Associates 25,000
--------
663,075
(Less) current maturities (15,500)
--------
$647,575
========
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 15, 2004, the
Page 10
outstanding balance was $115,125. The amounts advanced included $85,000 paid
directly to a subcontractor on behalf the Company and $30,125 paid in settlement
of outstanding judgments of $196,985, which resulted in the Company recognizing
a gain of $166,860.
For the nine months ended March 31, 2004, the Company's borrowings from
Augustine Capital Management ("Augustine") required the recognition of
approximately $66,000 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. In March 2004, the Company borrowed
$25,000 under the terms of this convertible note facility, bringing the
cumulative borrowings thereunder to $199,000, of which $174,000 had been
converted to common stock as of December 31, 2003. (See Note 6B). Any future
borrowings under this agreement will result in the recognition of additional
interest expense related to this beneficial conversion feature.
In March 2004, the Company entered into a new convertible note agreement with
Augustine. Under the agreement, the Company received proceeds of $90,000 on a 6%
discounted note of $100,800 which also accrues additional interest at 8%,
payable quarterly. The agreement provides for the conversion of outstanding
principal and interest into shares of common stock based on the average closing
price of the stock for the ten trading days immediately preceding the conversion
notice.
NOTE 4: OTHER RELATED PARTY TRANSACTIONS
--------------------------------
As of March 31, 2004, approximately $237,000 of accrued compensation due the
Company's President and Chief Executive Officer was included in accrued expenses
on the Condensed Consolidated Balance Sheet. (See also Note 6B).
NOTE 5: INCOME TAXES
------------
No income taxes were provided since the Company incurred losses from its
operations. As of March 31, 2004, the Company has net operating loss
carry-forwards totaling approximately $19,800,000, 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 shares 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.
Page 11
In February 2004, the Company settled an $86,175 liability with the issuance of
60,000 shares of common stock. The shares were valued at $22,800, or $0.63 per
share, the weighted average closing market price for the two days before and
after the date of the settlement. As a result of this transaction, the Company
recorded a gain of $63,375.
(B) Other capital stock transactions
In August 2003, as per the terms of the 8% Convertible Preferred Stock
agreement, Augustine converted three shares of preferred stock with a stated
value of $3,000 plus accrued dividends of $775 into 1,078,571 shares of Common
Stock based on a conversion price of $0.0035 per share.
Additionally, in September 2003, Augustine, converted 33 shares of preferred
stock with a stated value of $33,000 plus accrued dividends of $8,730, into
1,594,780 shares of Common Stock based on a conversion price of $0.026 per
share.
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.
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
In January 2004, the Company issued 200,000 shares of common stock pursuant to a
consulting agreement, to a relative of the Company's Chief Executive Officer.
The shares were 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.
In January 2004, a stockholder/consultant subscribed for 400,000 shares of
common stock for $100,000, or $0.25 per share, pursuant to a stock purchase
agreement.
In February 2004, the Company issued 500,000 shares of common stock to the
Company's Chief Operating and Financial Officer upon his acceptance of the
position. The shares were valued at $236,500, or $0.47 per share, the weighted
average closing market price for the two days before and after the date of his
acceptance.
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
Page 12
share. Additionally, one of the individuals received an additional 100,000
shares of stock valued at $20,000, based on the share price implicit in the
transaction, for his assistance in placing the shares with the other investors,
which has been charged directly to equity as a cost of raising capital.
Following is a schedule of changes in shareholders' deficit for the nine months
ended March 31, 2004:
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 66,333 66,333
Common stock sales 900,000 900 249,100 250,000
Common stock issued to
Company officer 500,000 500 236,000 236,500
Common stock issued in
exchange for consulting
services 700,000 700 417,300 418,000
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 accrued
liabilities to common stock 120,000 120 58,680 58,800
Stock options granted for
consulting services 1,965,165 1,965,165
Accrued dividends on 8%
preferred stock (94,379) (94,379)
Net loss for nine months
ended March 31, 2004 -- -- -- -- (3,161,684) (3,161,684)
---------- ---------- --------- ---------- ------------ ------------
Balance March 31, 2004 $1,559,000 39,780,429 $39,780 $6,822,259 $(15,361,451) $ (6,940,412)
=========== =========== ========= ========== ============ ============
Page 13
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 March 31, 2004, the Company had outstanding
judgments amounting to $1,275,830. This balance is included in accounts payable
in the accompanying condensed consolidated financial statements.
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 March 31, 2004, 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.
Page 14
As of March 2002, the Company failed to remit federal payroll taxes that it had
collected. As of March 31, 2004, approximately $57,000 was due, inclusive of
estimated penalties and interest. The Company recently entered into a formal
payment agreement in settlement of this obligation. This agreement calls for the
Company to make equal monthly installment payments of $3,000 until the
obligation is paid in full.
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 grant component calls for the consultant to receive 400,000 shares of the
Company's Common Stock upon signing of the agreement.
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 efforts.
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.
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
Page 15
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.
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.
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.
NOTE 9: SUBSEQUENT EVENTS
-----------------
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.
In April 2004, the Company settled a $10,303 liability for 39,326 shares of
common stock valued at $0.262 per share, the weighted average closing price of
the stock for the two days immediately preceding the agreement.
Page 16
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 the Company's results of operations for the three and nine
months ended March 31, 2004, as compared to the same periods in 2003. 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 the Company's future
business plans and strategies, statements about its 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004, VS. THREE MONTHS ENDED MARCH 31, 2003
Sales revenue increased approximately 6.2 percent, to $304,536 for the three
months ended March 31, 2004, from $286,834 for the comparative period in the
prior year primarily due to the DWS Defense subsidiary completing its first
project, offset by decreases attributable to reduced demand for the Company's
data products as well as a reduction in sales staff.
Costs of revenue increased approximately 187.7 percent, to $237,554 for the
three months ended March 31, 2004, from $82,561 for the three months ended March
31, 2003. Cost of sales for the comparable period in 2003 were significantly
below normal levels due to the Company utilizing inventory with a market value
of approximately $100,000, which, due to prior write-offs, had been carried on
its books at a nominal value, therefore substantially reducing cost of sales for
the period.
Gross profit decreased approximately 67.2 percent, to $66,982 for the three
months ended March 31, 2004, from $204,273 for the three months ended March 31,
2003. Gross profit margin decreased to 22.0% for the three months ended March
31, 2004, compared to 71.2% for the three months ended March 31, 2003. The
decrease was due to the utilization of previously written-off
Page 17
inventory discussed above, and a higher percentage of sales of lower margin
products such as patchcords and other commodity-type products, as well as the
lower margin associated with the construction and installation business.
Selling, general and administrative expenses increased approximately 210
percent, to $677,104 for the three months ended March 31, 2004, from $218,327
for the three months ended March 31, 2003. The increase is primarily related to
stock-based compensation charges for officer's compensation and consulting fees,
as disclosed in Note 6 and Note 8 to the Condensed Consolidated Financial
Statements, as well as increased professional fees related to the Company's
efforts to become current with its public reporting requirements.
Interest expense increased 15.3 percent, to $109,834 for the three months ended
March 31, 2004, from $95,259 for the three months ended March 31, 2003. This was
primarily related to interest expense incurred as a result of the beneficial
conversion feature of a note payable.
(Note: Each of the two preceding expense totals for the 2003 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 2003 period.)
The Company incurred a net loss of $483,702 for the three months ended March 31,
2004, as compared to a net loss of $77,336 for the three months ended March 31,
2003, an increase of 525 percent, primarily due to the aforementioned non-cash
charge and increased professional fees as well as a lower gross profit margin.
The net loss applicable to common shareholders for the three months ended March
31, 2004 and 2003 was $514,797 and $109,236, respectively. This was due to
dividends accrued on convertible preferred stock of $31,095 and $31,900 for the
three months ended March 31, 2004 and 2003, respectively.
NINE MONTHS ENDED MARCH 31, 2004, VS. NINE MONTHS ENDED MARCH 31, 2003
Sales revenue decreased approximately 21.4 percent, to $542,538 for the nine
months ended March 31, 2004, from $689,921 for the comparative period in the
prior year primarily due to decreases attributable to reduced demand for the
Company's data products as well as a reduction in sales staff, offset by the DWS
Defense subsidiary completing its first project in the third quarter of fiscal
2004.
Costs of revenue increased approximately 25.8 percent, to $383,797 for the nine
months ended March 31, 2004, from $305,163 for the nine months ended March 31,
2003. Cost of sales for the comparable period in 2003 were significantly below
normal levels due to the Company utilizing inventory in the third fiscal quarter
with a market value of approximately $100,000, which, due to prior write-downs,
had been carried on its books at a nominal value, therefore substantially
reducing cost of sales for the period.
Gross profit decreased approximately 58.7 percent, to $158,741 for the nine
months ended March 31, 2004, from $384,758 for the nine months ended March 31,
2003. Gross profit margin decreased to 29.3% for the nine months ended March 31,
2004, compared to 55.8% for the nine months ended March 31, 2003, due to the
utilization of previously written-off inventory discussed above, and a higher
percentage of sales of lower margin products such as patchcords
Page 18
and other commodity-type products, as well as the lower margin associated with
the construction and installation business.
Selling, general and administrative expenses increased approximately 500
percent, to $3,383,375 for the nine months ended March 31, 2004, from $563,655
for the nine months ended March 31, 2003. The increase is related to non-cash
charges for consulting expenses and officer's compensation related to the
granting of common stock and options to certain individuals, as disclosed in
Note 1E, Note 6 and Note 8 to the Condensed Consolidated Financial Statements.
(Note: Each of the two preceding expense totals for the 2003 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 2003 period.)
Interest expense increased 9.8 percent, to $356,729 for the nine months ended
March 31, 2004, from $324,764 for the nine months ended March 31, 2003. This was
primarily related to interest expense incurred as a result of the beneficial
conversion feature of a note payable.
The Company incurred a net loss of $3,161,684 for the nine months ended March
31, 2004 as compared to a net loss of $409,406 for the nine months ended March
31, 2003, an increase of 672 percent, primarily due to the aforementioned
non-cash charges.
The net loss applicable to common shareholders for the nine months ended March
31, 2004 and 2003 was $3,256,063 and $521,638, respectively. This was due to
dividends accrued on convertible preferred stock of $94,379 and $112,232 for the
nine months ended March 31, 2004 and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has current assets of $252,325 (including $11,192 in cash) compared
with current liabilities of $6,407,444, resulting in a working capital deficit
of $6,155,119 as of March 31, 2004. In addition, the Company incurred a net loss
of $3,161,684 for the nine months ended March 31, 2004 and has incurred
significant net losses in each of the three preceding fiscal years and has a
stockholder's equity deficit of $6,940,412 at March 31, 2004. 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 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 in the
process of applying for re-listing on the OTC Bulletin Board, thereby increasing
shareholder liquidity and gaining easier access to capital through equity
transactions.
Page 19
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 $696, from $11,888 to
$11,192 as of March 31, 2004. The decrease was the result of a combination of
cash used for the repayment of loans totaling $321,572, investing activities
totaling $28,720, and negative cash flows from operations totaling $418,969,
offset by cash proceeds from shareholder loans and advances from the Company's
asset-based lender totaling $418,565, and proceeds from commons stock sales
totaling $350,000. Operating activities exclusive of changes in current assets
and liabilities required $800,286, offset by an increase in receivables and
other current assets of $67,824, and an increase in accounts payable and accrued
liabilities of $449,141.
The Company's capital resources include private stock sales and loans and
advances from principal shareholders. During the nine month period ended March
31, 2004, the Company borrowed $289,000 under the terms of its convertible loan
agreements with Augustine, of which $174,000 had been converted into shares of
common stock as of December 31, 2003. Subsequently, the Company has borrowed an
additional $50,000 under the terms of these agreements, bringing the total
indebtedness to $165,000. The agreements provide for additional borrowings of
$251,000, all of which may be converted to common stock. Additionally, during
the three month period ended March 31, 2004, the Company borrowed approximately
$115,000 from an existing shareholder.
ITEM 3. CONTROLS AND PROCEDURES
Daniel McPhee, Chief Executive Officer and Philip J. Rauch, Chief Financial
Officer of DataWorld Solutions, Inc. have established and are 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 them as soon as it is known by others
within the Company.
The Company's Chief Executive Officer and Chief Financial Officer conduct an
update and a review and evaluation of the effectiveness of the Company's
disclosure controls and procedures
Page 20
and have concluded, based on their evaluation within 90 days of the filing of
this Report, that the Company's disclosure controls and procedures are effective
for gathering, analyzing and disclosing the information it 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 March 31, 2004.
ITEM 2 - CHANGES IN SECURITIES:
As a result of several transactions, the Company issued 1,360,000 shares of
common stock during the three month period ended March 31, 2004, as disclosed in
Note 6 to the Condensed Consolidated Financial Statements.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
As of March 31, 2004, 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.
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.
Page 21
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 19, 2004 By: /s/ Daniel McPhee
-------------------- -------------------
Daniel McPhee
President and Chief Executive Officer
Date: May 19, 2004 By: /s/ Philip J. Rauch
-------------------- ---------------------
Philip J. Rauch,
Chief Financial Officer
Page 22