<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
Commission file number: 33-21508
DATALINK SYSTEMS CORPORATION
----------------------------------------------------
(Exact name of small business issuer in its charter)
Nevada 35-3574355
- ------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
1735 Technology Drive, Suite 790, San Jose, CA 95110
-----------------------------------------------------------
(Address of Principal Executive Offices including zip code)
(408) 367-1700
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ X ] No [ ]
There were 19,182,925 shares of the Registrant's Common Stock outstanding as
of September 30, 1997.
Transitional Small Business Disclosure Format: Yes --- No -X-
<PAGE>
DATALINK SYSTEMS CORPORATION
(a development stage company)
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
a. Condensed Consolidated Balance Sheets
September 30, 1997 and March 31, 1997 3
b. Condensed Consolidated Statements of Operations
for three months ended September 30, 1997 and 1996,
and the six months ended September 30, 1997 and 1996
and the period from June 15, 1993 (date of inception)
to September 30, 1997 4
c. Condensed Consolidated Statements of Cash Flows
six months ended September 30, 1997 and 1996 and
the period from June 15, 1993 (date of inception)
to September 30, 1997 5-6
d. Notes to the Condensed Consolidated Financial
Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 12
ITEM 2. CHANGES IN SECURITIES. 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 12
ITEM 5. OTHER INFORMATION. 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
EXHIBITS
INDEX TO EXHIBITS 13
EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF NET
LOSS PER SHARE
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<PAGE>
DATALINK SYSTEMS CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 March 31
1997 1997
(unaudited) (audited)
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 1,491,129 $1,916,509
Accounts receivable 85,231 49,685
Other receivables 12,233 4,733
Prepaid expenses 28,035 5,432
----------- ----------
Total current assets $ 1,616,628 1,976,359
Fixed assets, net 398,395 321,368
Other assets 30,633 14,741
----------- ----------
Total assets $ 2,045,656 $2,312,468
LIABILITIES:
Current liabilities:
Bank Overdraft $ 21,521
Accounts payable $ 147,356 131,188
Accrued liabilities 348,453 93,024
Current portion on advance
on technology sales 468,707 263,292
Deferred revenue 113,749 0
----------- ----------
Total current liabilities 1,078,265 509,025
Advance on technology sale, net
of current portion 2,395,430 1,531,154
----------- ----------
Total Liabilities $ 3,473,695 $2,040,179
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock
Common stock 19,183 19,183
Additional paid-in capital 8,335,777 8,335,777
Foreign currency translation
adjustment (39,096) (57,655)
Note receivable (850,002) (1,089,410)
Deficit accumulated during the
development stage (8,893,901) (6,935,606)
----------- ----------
Total shareholders' equity (1,428,039) 272,289
----------- ----------
Total liabilities and shareholders'
equity $ 2,045,656 $2,312,468
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
DATALINK SYSTEMS CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Period from
June 15, 1993
(date of in-
Three Months Ended Six Months Ended ception) to
September 30, September 30, September 30,
1997 1996 1997 1996 1997
----------- ---------- ---------- ----------- -----------
Net sales $ 222,812 $ 37,612 $ 372,265 $ 60,520 $ 569,156
Cost of sales 105,770 21,875 205,467 39,199 364,525
----------- ---------- ---------- ----------- -----------
Gross profit 117,042 15,737 166,798 21,321 204,631
----------- ---------- ---------- ----------- -----------
Operating
expenses:
Research and
development 171,261 179,403 318,672 258,303 1,237,084
Sales and
marketing 428,692 137,306 815,640 197,880 2,093,792
General and
administrative 804,614 389,046 1,283,142 1,500,449 6,416,448
Owners fees,
sales of
technology 392,500 -- 785,000 -- 1,058,750
----------- ---------- ---------- ------------ -----------
Total opera-
ting expenses 1,797,067 705,755 3,202,454 1,956,632 10,806,074
----------- ---------- ---------- ------------ -----------
Loss from
operations (1,680,025) (690,018)(3,035,656) (1,935,311)(10,601,443)
Other income
(expense):
Interest 472,891 -- 891,054 -- 1,304,323
Amortization
of technol-
ogy advance 166,869 -- 233,874 -- 370,075
Miscellaneous (42,222) 13,847 (47,567) (47,326) 33,145
----------- ---------- ----------- ----------- ------------
Net loss $(1,082,488)$ (676,171)$(1,958,295) $(1,982,637)$(8,893,901)
Net loss
per share $ (0.06)$ (0.04)$ (0.10) $ (0.12)$ (0.63)
Shares used
in per share
calculations 19,238,360 16,738,740 19,256,695 16,299,313 14,103,229
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
DATALINK SYSTEMS CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Period from
June 15, 1993
(date of
Six Months Ended inception) to
September 30, September 30,
1997 1996 1997
Cash flows from operating ----------- ----------- -----------
activities:
Net loss $(1,958,295) $(1,982,637) $(8,893,901)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 46,495 16,097 115,233
Foreign currency translation
adjustment 18,559 54,703 (39,096)
Amortization of technology
advances (233,874) -- (364,485)
Amortization of note receivable 239,408 217,882 718,748
Common stock issued for services -- 1,019,815 3,188,857
Changes in assets and liabilities:
Accounts and other receivables (43,046) (912,936) (97,464)
Prepaid and other assets (22,603) (280,381) (42,776)
Accounts payable and accrued
liabilities 250,076 (104,739) 609,558
Deferred revenue 113,749
----------- ---------- ----------
Net cash used in operating
activities (1,589,531) (1,972,196) (4,805,326)
----------- ---------- ----------
Cash flows from investing activities:
Acquisition of fixed assets (123,522) (126,982) (513,628)
Deposits (15,892) - (15,892)
----------- ---------- ----------
(139,414) (126,982) (529,520)
Cash flows from financing activities:
Issuance of convertible debentures -- 2,000,000 2,000,000
Proceeds from sale of common stock -- 297,000 1,607,353
Repurchases of common stock (10,000) (10,000)
Advances on technology fee 1,303,565 1,925,057 3,228,622
----------- ---------- ----------
Net cash provided by
financing activities 1,303,565 4,212,057 6,825,975
----------- ---------- ----------
Net increase(decrease) in cash
and cash equivalents (425,380) 2,112,879 1,491,129
Cash and cash equivalents,
beginning of period 1,916,509 357,556 --
----------- ---------- ----------
Cash and cash equivalents,
end of period $ 1,491,129 $2,470,435 $1,491,129
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
Statements of cash flows, continued
Period from
June 15, 1993
Six Months Ended (date of inception)
September 30, to September 30,
1997 1996 1997
---------- -------- -----------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in exchange
for services performed -- 889,715 1,755,214
Issuance of stock options in exchange
for services performed -- -- 152,892
Issuance of common stock in exchange
for employee compensation -- -- 110,751
Common stock exchanged for debentures
exercised -- -- 1,270,000
Issuance of common stock in exchange
for stock subscriptions -- 271,049 271,049
Foreign currency translation
adjustment 18,559 54,703 29,381
Common stock issued in exchange for
notes receivable -- 1,568,750 1,568,750
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<PAGE>
DATALINK SYSTEMS CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Formation and Business of The Company:
Datalink Systems Corporation (formerly Lord Abbott, Inc., a publicly traded
shell corporation) (the Company), is engaged in research and development and
marketing of wireless communication technologies. The Company s primary
activities to date have been acquiring and developing certain wireless
technologies, marketing, recruiting personnel and obtaining capital.
The Company is a development stage organization and accordingly its principal
functions have been completion of research and development activities, and
establishment of market presence.
2. Summary of Significant Accounting Policies
Comparative consolidated financial statement information for the period ended
September 30, 1996 has been restated for certain errors and omissions as a
result of the annual financial statement process as of March 31, 1997 on Form
10-KSB.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the six-month
period ended September 30, 1997, are not necessarily indicative of the results
that may be expected for the year ended March 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended March 31, 1997.
3. New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
Number 128 (SFAS 128) "Earnings Per Share," which the Company is required to
adopt for its fiscal year ending March 31, 1998. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. Application of SFAS 128 is expected to have no impact on
primary earnings per share for the period ended September 30, 1997. A
calculation of diluted earnings per share will also be required; however, this
is not expected to differ materially from the Company's reported primary
earnings per share.
4. Subsequent Events
The Company has entered into an agreement with an investment banking firm to
sell units of the Company's preferred stock in a Private Placement. The sale
of stock was completed subsequent to the quarter ending September 30, 1997.
68.5 units were sold at a cost of $150,000 per unit. Each unit consisted of
40,000 shares of preferred stock, par value $.001, convertible into 400,000
shares of common stock. Also included with each unit was a detachable common
stock purchase warrant to purchase
-7-
<PAGE>
200,000 shares of the Company's common stock at a purchase price of $.50 per
share. The Company received approximately $8.0 million in cash, net of
expenses, and $1.05 million in a note receivable from an officer of the
Company. Expenses and commissions related to the private placement totalled
approximately $1.3 million. In conjunction with the private placement, three
additional Board members were appointed to the Board of Directors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains predictions, estimates and other forward-
looking statements that involve a number of risks and uncertainties. While
this outlook represents the Company's current judgment in the future direction
of the business, such risks and uncertainties could cause actual results to
differ materially from any future performance suggested herein. Risk factors
related to the Company have been discussed in the Form 10-KSB for the year
ended March 31, 1997. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Quarter Ended Percent Six Months Ended Percent
9/30/96 9/30/97 Change 9/30/96 9/30/97 Change
-------- -------- ------- ---------- ---------- -------
Net Sales $ 37,612 $222,812 492% $ 60,520 $ 372,265 515%
Gross Profit $ 15,737 $117,042 644% $ 21,321 $ 166,798 682%
Percentage of
net sales 42% 53% 35% 45%
Research &
Development $179,403 $171,261 -5% $ 258,303 $ 318,672 23%
Percentage of
net sales 477% 77% 427% 86%
Sales &
Marketing $137,306 $428,692 212% $ 197,880 $ 815,640 312%
Percentage of
net sales 365% 192% 327% 219%
General &
Administrative $389,046 $804,614 107% $1,500,449 $1,283,142 -14%
Percentage of
net sales 1,034% 361% 2,479% 345%
TOTAL REVENUES AND GROSS PROFIT:
As can be seen from the above table, total revenues for the second quarter of
fiscal year 1998 as well as for the first six months of the fiscal year
increased when compared to both the second quarter of fiscal year 1997 and the
first six months of fiscal year 1997. This increase was due to the Company
commencing sales of its QuoteXpress and SplitXpress products. The QuoteXpress
product sales were in the early stages in first quarter of fiscal year 1997,
and have increased markedly since that time. The SplitXpress product sales
began in August 1997 and represented approximately $23,000 of the sales for
the latest quarter. The remaining sales represented sales of QuoteXpress
products.
Gross profit for both the second quarter of fiscal year 1998 as well as for
the first six months of the fiscal year increased when compared to both the
second
-8-
<PAGE>
quarter of fiscal year 1997 and the first six months of fiscal year 1997.
This increase was due to increasing sales volumes as discussed above. Gross
profit percentages for both the second quarter of fiscal year 1998 as well as
for the first six months of the fiscal year increased when compared to both
the second quarter of fiscal year 1997 and the first six months of fiscal year
1997. This increase was due to increasing efficiencies as the Company has
increased sales. Overhead and indirect cost of providing services have
steadily decreased as a percent of sales as those costs are distributed over a
larger subscriber base.
OPERATING EXPENSES:
Research and development expenses are expenses incurred to develop new
products and to develop product enhancements for current products. These
expenses are incurred in the Company's engineering offices located in
Vancouver B.C. Research and development expenses were comparable for the
second quarter fiscal year 1998 when compared with the second quarter fiscal
year 1997, and increased for the six month period ended September 30, 1997
when compared with the six month period ended September 30, 1996. The increase
was due to the Company incurring costs for product enhancements for the
MailXpress product as well as for QuoteXpress product. Additionally, MessageX
reached completion during the second quarter of fiscal year 1998. During the
same period of fiscal year 1997 the Company was still in the early development
stages for MessageX and MailXpress. The Company also has a number of products
in the early stages of development during quarter ended September 30, 1997
which were not in development in the comparable period in the prior fiscal
year.
Sales and marketing expenses consist of costs incurred to market the Company's
products through advertising, attendance at trade shows, and to develop an
effective marketing strategy. Also included in this category are costs for
the maintenance of both an inside sales staff, and an outside key account
sales force. These costs have increased when compared with comparable periods
in the prior fiscal year. This is due to the development of a marketing
strategy, increased advertising costs necessary to obtain customers, and an
increase in the sales staff. The Company anticipates further increases in
this category due to ongoing marketing efforts, anticipated increases in the
sales staff, as well as for the development of additional advertising
campaigns necessitated by the completion of products currently in research and
development which will reach marketability in the coming months.
General and administrative expenses are classified as costs incurred by the
infrastructure of the organization. These consist of accounting costs, legal
costs, rent, depreciation of Company fixed assets, utilities and allocation of
other overhead related costs. Also included in this category are salaries of
all administrative personnel, and the recruitment costs necessary to obtain
those individuals. Costs associated with this category have decreased for the
six month period ended September 30, 1997 when compared to the comparable six
month period in the previous year. When the quarter ended September 30, 1997
is compared to the quarter ended September 30, 1996, the expenses have
increased between periods. This change is due to the fact that the Company
incurred considerable costs when the administrative function was being
established in the first quarter of fiscal year 1997. These costs were of a
one-time nature and as a result the costs decreased when compared to the
current six month period. Costs of the second quarter 1997 have increased
when compared to the second quarter 1996 due to increases in personnel, legal
and accounting costs associated with a private placement which was in process
during the quarter and other overhead costs such as insurance and rent.
-9-
<PAGE>
Quarter Ended Percent Six Months Ended Percent
9/30/96 9/30/97 Change 9/30/96 9/30/97 Change
--------- ----------- ------- ----------- ----------- -------
Loss from
Operations $(690,018) $(1,680,025) 143% $(1,935,311) $(3,035,656) 57%
Percentage
of net sales -1,835% -754% 3,198% 815%
LOSS FROM OPERATIONS:
The losses incurred from operations have increased for both the six month
period ended September 30, 1997 and for the quarter ended September 30, 1997
when compared to the appropriate periods in the previous fiscal year. This is
due to the reasons discussed and elaborated upon above.
Quarter Ended Percent Six Months Ended Percent
9/30/96 9/30/97 Change 9/30/96 9/30/97 Change
------- -------- ------ --------- ---------- ------
Other Income
(Expense) $13,847 $597,538 4,215% $(47,326) $1,077,361 2,377%
OTHER INCOME AND EXPENSE:
Other income and expense category consists of non-operational revenues and
expenses. Examples of this category are interest revenue, interest expense,
gains on sales of fixed assets, and miscellaneous items. The non-operational
revenues have increased due to the recognition of income earned on sales of
technology and interest earned on notes receivable with stockholders. The
sale of technology occurred subsequent to second quarter end September 30,
1996. Interest earned on note receivable from stockholder was earned for only
a portion of the six month period ended September 30, 1996 and for the
complete six month period ended September 30, 1997.
FINANCIAL CONDITION:
Six months ended
September 30, Percent
1997 1996 Change
----------- ----------- -------
Net cash used in operating activities $(1,589,531) $(1,972,196) -24%
Net cash used in investing activities (139,414) (126,982) 10%
Net cash provided by financing activities 1,303,565 4,212,057 -69%
Working capital has decreased from $1,467,334 at March 31, 1997 to $538,363 at
September 30, 1997. The decrease was primarily attributable to the $1,958,295
net loss for the six month period. This was offset in part by the $1,303,565
which the Company received as an advance on the sale of the QuoteXpress
technology. The net loss was due to expenses incurred in developing products,
establishing and maintaining an administrative and finance function and
developing and implementing marketing and sales plans.
Cash used in investing activities increased as fixed assets were purchased by
the Company for the research and development department, and for
administrative functions.
-10-
<PAGE>
Cash provided by financing activities decreased for the six months ended
September 30, 1997 when compared to the six months ended September 30, 1996.
This is due to the Company not selling common stock or debentures in the six
months ended September 30, 1997; however, the Company did receive the
$1,303,565 from the sale of a technology referred to above.
On November 5, 1997 the Company completed a private placement, selling
approximately 2.7 million shares of preferred stock for which approximately
$6.9 million in cash net of expenses was received. The cash received will be
used to implement the marketing plan as well as for ongoing research and
development efforts.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
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) The following exhibits have been filed with this report:
Exhibit 11.1 - Statement Regarding Computation of Net Loss
Per Share (p.11)
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated
September 10, 1997 which reported on Item 5.
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.
DATALINK SYSTEMS CORPORATION
Date: November 14, 1997 By: /s/ Anthony N. LaPine
Anthony N. LaPine, President and
Chief Executive Officer (Principal
Executive Officer)
By: /s/ Thomas C. Bland
Thomas C. Bland, Chief Financial
Officer (Principal Financial Officer)
INDEX TO EXHIBITS
EXHIBIT METHOD OF FILING
- ------- -------------------------
11.1 Statement Regarding Computation of
Net Loss Per Share Filed herewith electronically
27. Financial Data Schedule Filed herewith electronically
-11-
DATALINK SYSTEMS CORPORATION
COMPUTATION OF NET LOSS PER SHARE
(unaudited)
Cumulative
period from
June 15, 1993
Three Months Ended Six Months Ended (date of in-
September 30, September 30, ception) to
1997 1996 1997 1996 June 30, 1997
---------- ---------- ----------- ----------- -------------
Weighted average
common shares
outstanding for
the period 19,238,360 16,738,740 19,256,695 16,299,313 14,103,229
Shares used in
per share
calculations 19,238,360 16,738,740 19,256,695 16,299,313 14,103,229
Net loss $(1,082,488) $ (676,171) $(1,958,295) $(1,982,637) $(8,893,901)
Net loss
per share $ (0.06) $ (0.04) $ (0.10) $ (.0.12) $ (0.63)
Calculated in accordance with the guidelines of Item 601 of Regulation S-B.
Primary and fully diluted calculations are substantially the same.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages 3 and 4 of the
Company's Form 10-Q for the year to date, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,491,129
<SECURITIES> 0
<RECEIVABLES> 102,443
<ALLOWANCES> (4,979)
<INVENTORY> 0
<CURRENT-ASSETS> 1,616,628
<PP&E> 513,628
<DEPRECIATION> (115,233)
<TOTAL-ASSETS> 2,045,656
<CURRENT-LIABILITIES> 1,078,265
<BONDS> 0
<COMMON> 19,183
0
0
<OTHER-SE> (1,447,222)
<TOTAL-LIABILITY-AND-EQUITY> 2,045,656
<SALES> 372,265
<TOTAL-REVENUES> 372,265
<CGS> (205,467)
<TOTAL-COSTS> (3,202,454)
<OTHER-EXPENSES> (1,077,361)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,958,295)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,958,295)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> 0
</TABLE>
