pkera : DDS Technology
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of results of operations and financial condition is based upon and should be read in conjunction with our consolidated financial statements, including the notes thereto, contained on pages F-1 through F-31.
The Company is currently a development stage company with no revenues to date. We hold a patent for a dry disaggregation technology, which dry separates agricultural products and sorts them according to various properties. The technology may have applications across numerous industries. The Company intends to fully commercialize its technology. The technology is expected to produce, as a final product, either highly micronized particles, based on customers requirements or various fractions of separated materials.
We commenced business in July 2002 when our founders formed DDS Holdings, Inc. to acquire rights to, and commercialize, a patented dry disaggregation system technology in North, South and Central America, the Caribbean (excluding Cuba) and Africa. The founders and initial investors subsequently acquired control of Black Diamond Industries, Inc., a Florida corporation, in a reverse merger on November 14, 2002. Black Diamond Industries, Inc. was a public company that conducted no business other than to seek a suitable acquisition partner. Thereafter (in December 2002), Black Diamond Industries, Inc. reincorporated in Delaware and changed its name to DDS Technologies USA, Inc. ("DDS Delaware"). On April 4, 2003, the holders of approximately 88% of the outstanding shares of DDS Delaware exchanged their shares for shares representing approximately 97% of the shares of Fishtheworld Holdings, Inc., a Florida corporation. Thereafter (in May 2003), Fishtheworld Holdings, Inc. effected a reincorporation merger in the State of Nevada and changed the name of the corporation to DDS Technologies USA, Inc. ("DDS Nevada"). Fishtheworld Holdings, Inc. was a public company that conducted no business other than to seek a suitable acquisition partner. On October 17, 2005, we merged DDS Delaware into us and DDS Holdings became a direct wholly-owned subsidiary of ours. The Company has never been subject to any bankruptcy, receivership or similar proceedings.
Generally accepted accounting principles in the United States of America require that a company whose stockholders retain a majority interest in a business combination be treated as the acquirer for accounting purposes. Since Black Diamond and Fishtheworld were public shells and DDS Holdings, Inc. is a development stage company with no revenues, the transactions were treated as recapitalizations of the Company.
The Company has entered into a contract with a Canadian company to supply them with dry disaggregation machine(s) and has granted it an exclusive license for the processing and extraction of sulfur and sulfur derivative materials in North America. The Company is also conducting tests on products in conjunction with a number of major companies in the food ingredient, flavoring and spice industries as well as health food and pharmaceutical
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products. The Company has also entered into an exclusive licensing agreement with Xethanol Corporation, a leading bio-mass to ethanol producer and technology developer. Under this agreement Xethanol will apply the DDS Technology to its own manufacturing operations and market the DDS Technology in conjunction with its own licensed technology to other small and medium sized ethanol producers throughout the United States.
Plan of Operations
The operation and development of our business will not require additional capital during 2006 to, among other things, fund our operations, acquire machines to employ in joint ventures, conduct research and development, and finance future acquisitions and investments. In April 2006, the Company received $1,430,000 from the exercise of short term warrants issued in connection with the Series A Convertible preferred stock in April 2005.
For the year ended December 31, 2005, the Company's plan of operations focused on three primary objectives:
1. raising capital through private offerings;
2. working with the Company's consultants to develop and enhance the Company's technology; and
3. finding customers to purchase or lease from us machinery which employs the dry disaggregation technology or enter into joint venture or strategic partner arrangements with us based on their use of our machinery.
During 2006, the Company intends to continue efforts to improve and enhance its technology through ongoing research and development. The Company also intends to continue to develop potential customers, testing of customer's products and prepare for the commencement of commercial operations. The Company plans on purchasing machines throughout the year based on customer demands. Management plans on paying for the machines by receiving deposits from our customers for each machine ordered, subsequent progress payments, royalty payments received and capital raised through the sale of securities as described above.
Off-Balance Sheet Arrangements
Critical Accounting Policies
The Securities and Exchange Commission issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" suggesting that companies provide additional disclosure and commentary on their most critical accounting policies. In Financial Reporting Release No. 60, the Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the following significant policies as critical to the understanding of our consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting periods. Areas where significant estimation judgments are made and where actual results could differ materially from these estimates are:
A. The carrying amount of our patent.
B. The assumptions used in calculating the fair value of our stock options and warrants issued using the Black-Scholes pricing model.
The Company believes the following is among the most critical accounting policies that impact our consolidated financial statements. The Company suggests that our significant accounting policies, as described in our consolidated financial statements in the Summary of Significant Accounting Policies and Organization, be read in conjunction with this Management's Discussion and Analysis of Financial Condition or Plan of Operations:
A. The Company evaluates impairment of our long-lived assets by applying the provisions of SFAS No. 144. In applying those provisions, the Company has recognized an impairment charge of $2,602,775 on our long-lived assets in 2004.
B. The Company accounts for its embedded derivatives by applying the provisions of SFAS 133. In applying those provisions, the Company recognized a gain from the fair value adjustment to the embedded derivatives of $633,159 for the year ended December 31, 2005.
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Results of Operations
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
From July 17, 2002 (inception) through December 31, 2005, the Company has incurred an accumulated deficit of $17,577,269. To date, the Company has yet to achieve revenues. During the year ended December 31, 2005 the Company incurred a net loss of $4,643,829 in comparison to a net loss of $6,990,752 for the prior year ended December 31, 2004. There are several key reasons for the decrease in the net loss. In 2004 the Company recorded a machinery and deposits impairment charge of $2,602,775. In 2005 the Company recorded an inventory parts write-down of $430,190. Professional fees decreased in 2005 by approximately $1.5 million primarily due to nonrecurring amortization charges for services received in exchange for stock and warrants. Salaries and related taxes and benefits decreased by approximately $128,000 due to reduction in staff. General and administrative costs decreased primarily due to reduction in D&O insurance premiums. The Company anticipates that losses from operations will continue for the remainder of the year 2006 primarily due to the relatively long sales cycle and significant due diligence and testing on the part of the customers. Testing includes the preparation of various sample products through our testing facility, submitting the samples to third party labs for independent analyses and then reviewing the results with the prospective client. However, if the Company is not able to successfully implement our business model, the Company may not be able to achieve profitability.
The Company has marketed its technology to various large North and South American companies. In February 2005, the Company signed a five year licensing agreement with a Canadian firm for the purpose of processing and extracting sulfur and sulfur derivative materials in North America. However, there can be no assurance that the Dry Disaggregation System technology will achieve market acceptance or that sufficient revenues will be generated to allow us to operate profitably. Pursuant to the agreement, the Company has shipped the first machine. If, during the evaluation phase, the machine operates within certain parameters, the Company will be paid a negotiated purchase price for each machine plus royalties.
Liquidity and Capital Resources
To date, we have funded our losses, license payments and patent acquisitions through the private sale of common and preferred stock and financing from accredited investors. Since its inception, the Company has raised net proceeds of $15,645,220 from the sale of 4,562,487 shares of our common stock and from the sale of Series A Preferred Stock, Series B Preferred Stock and the exercise of short term warrants.
On April 12, 2005 we completed a private placement for the sale of convertible Series A preferred stock to accredited investors resulting in net proceeds of $1,957,500. In connection with the Series A preferred stock private placement, the Company is required to make a 6% annual dividend payment, payable quarterly in arrears in cash, or in common stock if certain "Equity Conditions", as defined, are met. Having met these "Equity Conditions", in September 2005, December 2005 and March 2006, the Company issued shares of common stock in partial settlement of dividends payable.
Our cash balance at December 31, 2005 was $1,365,798.
On January 4, 2006, we completed a private placement for the sale of Series B Convertible Preferred Stock to accredited investors resulting in net proceeds of $1,483,250. In connection with the Series B preferred stock private placement, the Company is required to make a 7% annual dividend payment, payable quarterly in arrears in cash, or in common stock if certain "Equity Conditions", as defined, are met. Having met these "Equity Conditions", in March 2006, the Company issued shares of common stock in partial settlement of dividends payable.
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With the proceeds of the Series B Preferred Stock offering, we believed that we would be able to fund our operations until the end of the second quarter of 2006. In April 2006, the Company received $1,430,000 from the exercise of short term warrants issued in connection with the Series A Convertible preferred stock in April 2005.
Without demonstrating commercial feasibility and/or securing customers, we do not believe that we will be able to secure additional capital necessary to fund operations through private placements of our securities, or achieve sufficient revenues to operate at a cash flow breakeven.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment". SFAS No. 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123 (R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123 (R) is effective as of the first interim or annual reporting period that begins after June 15, 2005 for non-small business issuers and after December 15, 2005 for small business issuers. Accordingly, the Company will adopt SFAS No. 123 (R) in its quarter ending March 31, 2006.
The Company believes that the implementation of this new pronouncement will result in a charge to expense of $1,992,085 in 2006.