<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 December 31, 1996
Commission file number: 0-21069
DATALINK SYSTEMS CORPORATION
--------------------------------------------------
(Exact name of small business issuer in its charter)
Nevada 35-3574355
- ------------------------------ ----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
2105 Hamilton Avenue, Suite 240, San Jose, California 95125
-----------------------------------------------------------
(Address of Principal Executive Offices including zip code)
(408) 558-0800
-------------------------
(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 19,060,925 shares of the Registrant's Common Stock outstanding as
of December 31, 1996.
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
December 31, 1996 and March 31, 1996 3
b. Condensed Consolidated Statements of Operations
Three months ended December 31, 1996 and 1995 and
Nine months ended December 31, 1996 and 1995 and
the period from August 15, 1986 (date of inception)
to December 31, 1996 4
c. Condensed Consolidated Statements of Cash Flows
Nine months ended December 31, 1996 and 1995 and
the period from August 15, 1986 (date of inception)
to December 31, 1996 5
d. Notes to the Condensed Consolidated Financial
Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 9
ITEM 2. CHANGES IN SECURITIES. 9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 9
ITEM 5. OTHER INFORMATION. 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 10
EXHIBITS
INDEX TO EXHIBITS 11
EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF
NET LOSS PER SHARE
-2-
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DATALINK SYSTEMS CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1996 1996
(Unaudited) (Unaudited)
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents $2,535,757 $353,274
Accounts Receivable 106,844 17,157
Prepaid expenses 9,634 5,491
---------- ----------
Total current assets 2,652,235 375,922
Equipment, net 307,317 82,578
Other assets, net 121,332 -
---------- -----------
Total assets 3,080,884 458,500
---------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY:
Current liabilities:
Accounts payable $ 81,107 $ 51,698
Payable to related parties 18,000
---------- -----------
Total current liabilties 81,107 69,698
SHAREHOLDERS' EQUITY
Common stock and other equity 3,853,196 1,384,718
Accumulated deficit (853,419) (995,916)
---------- -----------
Total shareholders' equity 2,999,777 388,802
---------- -----------
Total liabilities and shareholders $3,080,884 $ 458,500
equity ---------- -----------
See accompanying notes.
-3-
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DATALINK SYSTEMS CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended inception)
December 31, December 31, to Dec. 31,
1996 1995 1996 1995 1996
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 28,403 $ 3,331 $ 88,166 $ 3,887 $ 184,224
--------- ---------- ---------- ---------- -----------
Costs and operating expenses:
Cost of sales 54,783 6,532 88,880 8,937 137,446
Research and development 197,763 31,728 501,290 127,525 969,852
Sales and marketing 215,176 69,532 522,066 101,246 703,638
General and administrative 427,339 65,762 1,156,175 89,238 1,582,139
--------- ---------- ---------- ---------- -----------
Total operating expenses (895,061) (173,559) (2,268,411) (327,036) (3,393,075)
--------- ---------- ---------- ---------- -----------
Loss from operations (866,858) (170,228) (2,180,245) (323,059) (3,208,857)
--------- ---------- ---------- ---------- -----------
Other income
Interest 29,436 - 57,318 - 86,186
Government grants 9,124 61,320 13,140 7,300 16,962
Income from sale of
technology - - 2,186,934 - 2,186,934
Canadian investment
tax credit - - 65,350 - 65,350
--------- ---------- ---------- ---------- -----------
Net income (loss) ($828,098) ($108,908) $ 142,497 ($250,059) ($853,419)
--------- ---------- ---------- ---------- -----------
Net loss per share (0.04) (0.0007) .01 (0.0015) (0.70)
Net loss per share
(fully diluted) (0.04) (0.0007) .01 (0.0015) (0.70)
---------- ----------- ---------- ----------- -----------
Shares used in per share
calculations 18,639,795 162,117,662 12,711,752 162,117,662 1,211,534
Fully diluted shares used in 19,134,360 162,117,662 12,761,928 162,117,662 1,215,174
per share calculations
</TABLE>
See accompanying notes.
-4-
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DATALINK SYSTEMS CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
Nine months ended Period from August 15,
December 31, 1986 (date of inception)
1996 1995 to December 31, 1996
---------- --------- -----------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ 142,497 $(250,059) $(853,419)
Adjustment to reconcile net income (loss)
to net cash used in operating activities:
Depreciation/Amortization 22,042 2,073 38,990
Changes in assets and liabilities:
Accounts receivable (89,688) - (106,845)
Prepaid expenses (4,143) - (9,634)
Other (121,332) - (121,332)
Accounts payable 29,409 7,719 81,107
---------- --------- -----------
Net cash used in operating
activities (21,215) (240,267) (971,133)
---------- --------- -----------
Cash used in investing activities:
Acquisition of equipment (246,780) 0 (346,306)
---------- --------- -----------
Cash flows from financing activities:
Repayment of advances from Affiliates (18,000) (17,868) -
Proceeds from sale of common stock 2,468,478 266,242 3,853,196
----------- --------- -----------
Net cash provided by financ-
ing activities 2,450,478 248,374 2,535,757
----------- --------- -----------
Net increase in cash and cash
equivalents 2,182,483 8,107 2,535,757
Cash and cash equivalents, beginning
of period 353,274 8,967 -
----------- --------- -----------
Cash and cash equivalents, end of
period $ 2,535,757 $ 17,074 $ 2,535,757
</TABLE>
See accompanying notes.
-5-
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DATALINK SYSTEMS CORPORATION
(a development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared by the
Company without audit in accordance with generally accepted accounting
principles for interim financial information and pursuant to rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair representation have been included. The
results of operations for the interim periods presented are not necessarily
indicative of the results expected for any other interim period or for the
full year. These financials statements should be read in conjunction with the
Company's consolidated financial statements and notes contained in the
Company's annual report on form 10-KSB for the fiscal year March 31, 1996 and
on form 8-K filed during the period from April 1, 1996 through September 30,
1996.
2. ACQUISITION:
On June 27, 1996, Datalink Systems Corporation (formerly Lord Abbott, Inc.)
(the Company) completed the acquisition of 100% of the outstanding common
stock of Datalink Communications Corporation (DCC) (formerly Datalink Systems
Corporation or DSC) in exchange for shares of the Company's common stock. The
Company issued a total of 16,465,316 shares of its common stock to the
shareholders of DCC.
In anticipation of the above acquisition, on June 18, 1996, the Company
changed its domicile from Colorado to Nevada, changed its name from Lord
Abbott, Inc. to Datalink Systems Corporation, and effected a 1-for-300 reverse
stock split.
Pursuant to the agreement, at closing, the Company issued to Westridge Capital
Limited (Westridge), as a finder's fee, a debenture in the principal amount of
$130,000 which was convertible into 1,300,000 shares of the Company's common
stock.
3. CONVERTIBLE DEBENTURES AND WARRANTS:
On July 1, 1996, the Company issued an unaffiliated investor a non interest
bearing convertible debenture in the amount of $2,000,000. The debenture was
convertible at any time prior to its maturity date of July 1, 1998 for
1,000,000 shares of the Company's common stock. During the quarter ending
December 31, 1996, the debenture was converted to 1,000,00 shares of common
stock. In conjunction with the above issuance, the Company issued to the same
investor a warrant to purchase an additional 1,000,000 shares of common stock
at $2.50 per share any time prior to July 15, 1998.
Westridge also exercised its debenture during the quarter ending December 31,
1996, and all 1,300,000 shares were issued.
The common stock issued to both the investor and Westridge was issued pursuant
to the exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act") provided by Regulation S; the Company was a
"Reporting Issuer" under the provisions of the Securities Exchange Act of
1933, as amended, as such term is defined in Rule 902 under Regulation S, at
the time of the sale of common stock; the Company was current in its reporting
obligations under the Exchange Act at the date of sale; and the sales were
made in "offshore transactions" as such term is defined in Rule 902.
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4. NET LOSS PER SHARE
Net income (loss) per share is computed by dividing net income (loss) the
weighted average number of common and common equivalent, when dilutive, shares
of common stock outstanding during each period. All calculations reflect the
effects of the reverse split (300 to 1) of the merger of Lord Abbott, the
original public shell, and the resulting issued and outstanding common stock
of the Company.
The Company is a development stage company. The condensed consolidated
statement of operations includes revenue and expenditures from August 15,
1986, the date of inception, through December 31, 1996, the interim quarterly
reporting period. The outstanding debentures are deemed likely for conversion
and all per share calculations reflect this assumption.
5. FIXED ASSETS:
December 31, March 31,
1996 1996
---------- ----------
Computer equipment $252,211 $60,422
Computer software 29,370 372
Furniture & fixtures 55,531 36,363
Leasehold improvements 8,876 2,369
Other equipment 319 -
---------- ----------
Accumulated depreciation (38,990) (16,948)
---------- ----------
Net fixed assets $307,317 $82,578
6. INCOME FROM SALE OF TECHNOLOGY:
Income From Sale of Technology represents amounts received pursuant to the
sale of intellectual property technology and is as follows:
December 31, March 31,
1996 1996
------------ --------
Sale of technology, net of transaction
costs of $246,000 $1,940,934 -
------------ --------
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
financial statements and notes thereto. Except for the historical information
contained herein, the matters discussed in this document are forward-looking
statements that involve certain risks and uncertainties, including, without
limitation those described in the Company's annual report on Form 10KSB or
Form 8K which have been filed with the Securities and Exchange Commission.
Actual results may differ materially.
NET SALES
Net sales for the third fiscal quarter of 1996 increased over the third fiscal
quarter of 1995 by $25,072 and by $84,279 for the first three quarters of
fiscal 1996 as compared to the first three quarers of fiscal 1995 due to the
Company realizing revenue from sales of services to customers. Sales were
almost exclusively Quotexpress customers in Canada. No significant sales are
expected until the first calendar quarter of 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses increased in absolute dollars, primarily due
to patent and trademark expenses and product development. The Company expects
to continue investing significantly in research and product development;
however, dollars and percentages may vary from period to period. Expenditures
for the third quarter of 1996 rose by $166,035 compared to the third quarter
of 1995 and rose by $373,765 for the first three quarters of 1996 compared to
the first three quarters of 1995.
SELLING AND MARKETING
Selling and marketing expenses increased in absolute dollars due to increased
spending on advertising, marketing consulting, and marketing literature.
Expenditures for the third quarter of 1996 rose by 209% compared to the third
quarter of 1995 and rose by 416% for the first three quarters of 1996 compared
to the first three quarters of 1995. The Company expects to continue to invest
significantly in the area of selling and marketing expenditures as it
implements its promotional strategy for its products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter increased compared to the
third quarter of 1996 largely due to increased costs in the development of
U.S. operations and key personnel travel between the US (San Jose) and the
Canadian (Vancouver) locations. Expenditures for the third quarter of 1996
rose by 550% compared to the third quarter of 1995 and rose by 1,196% for the
first three quarters of 1996 compared to the first three quarters of 1995.
OTHER INCOME (EXPENSE)
Other income includes an investment tax credit given by the Canadian
government for scientifically related research and development costs, the
recognition revenue from the sale of technology (See Note 6), and money market
interest income from cash management.
-8-
<PAGE>
ADDITIONAL COMMENTS
In addition, a wide variety of factors influence the Company's quarterly and
annual operating results, any of which could materially affect revenues and
profitability. These include, among others, business factors such as
increases in competition and related pricing pressure, changes in distribution
channels, variations in product mix, and potential problems and delays in new
product development and introduction; as well as, national economic and other
factors, such as interest rates.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 31, 1996 cash used in operating activities
was only $21,215 due principally to the sale of intellectual property
technology to a Canadian investment company for $2,186,934. Details related
to the sale of technology are contained in the Company's October 10, 1996 form
8K filing with the SEC, as well as in Note 6.
Total net cash provided by financing activities for the nine months ended
December 31, 1996 was $2.45 million which was offset by cash used in
operations of approximately $21,000 and cash used in the acquisition of
equipment of $247,000. The cash and cash equivalents balance at the end of
the nine months ended December 31, 1996 increased by a net of $2.2 million
compared to an increase in cash and cash equivalents of approximately $8,000
for the nine month period ended December 31, 1995.
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) Exhibit 27 Financial Data Schedule Filed herewith
electronically
(b) Reports on Form 8-K. None.
-9-
<PAGE>
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: February 19, 1997 By/s/ Anthony N. LaPine
Anthony N. LaPine, President and
Chief Executive Officer (Principal
Executive and Financial Officer)
-10-
<PAGE>
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
<PAGE>
EXHIBIT 11.1
DATALINK SYSTEMS CORPORATION
COMPUTATION OF NET LOSS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
August 15,
1986 (date of
Three months ended Nine months ended inception)
December 31, December 31, December 31,
1996 1995 1996 1995 1996
----------------------- ----------------------- ----------
<S> <C> <C> <C> <C> <C>
PRIMARY:
Weighted average common
shares outstanding for
the period 18,639,795 162,117,662 12,711,752 162,117,662 1,211,534
---------- ----------- ---------- ----------- ----------
Shares used in per share
calculation 18,639,795 162,117,662 12,711,752 162,117,662 1,211,534
Net loss ($828,008) ($108,908) $142,497 ($250,059) ($853,419)
Net Loss per share ($0.04) 0 $0.01 ($0.0015) ($0.70)
FULLY DILUTED:
Weighted average common
shares outstanding for
the period 19,134,360 162,117,662 12,761,928 162,117,662 1,215,174
---------- ----------- ---------- ----------- ----------
Shares used in per share
calculation 19,134,360 162,117,662 12,761,928 162,117,662 1,215,174
Net Loss ($828,008) ($108,908) $142,497 ($250,059) ($853,419)
Net Loss per share ($0.04) 0 $0.01 ($0.0015) ($0.70)
Calculated in accordance with the guidelines of Item 601 of Regulation S-B.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheets and condensed consolidated statements of
operations found on pages 3-5 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,535,757
<SECURITIES> 0
<RECEIVABLES> 106,844
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,652,235
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,080,884
<CURRENT-LIABILITIES> 81,107
<BONDS> 0
<COMMON> 3,853,196
0
0
<OTHER-SE> (853,419)
<TOTAL-LIABILITY-AND-EQUITY> 3,080,884
<SALES> 88,166
<TOTAL-REVENUES> 2,410,908
<CGS> 88,880
<TOTAL-COSTS> 88,880
<OTHER-EXPENSES> 2,179,531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 142,497
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,497
<EPS-PRIMARY> (.0112)
<EPS-DILUTED> (.0112)
</TABLE>
