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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 June 30, 1998
Commission file number: 33-21508
DATALINK SYSTEMS CORPORATION
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(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
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(Address of Principal Executive Offices including zip code)
(408)367-1700
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(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 2,028,955 shares of the Registrant's Common Stock outstanding as of
June 30, 1998.
Transitional Small Business Disclosure Format: Yes --- No -X-
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DATALINK SYSTEMS CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
a. Condensed Consolidated Balance Sheets
June 30, 1998 and March 31, 1998 3
b. Condensed Consolidated Statements of Operations
Three months ended June 30, 1998 and 1997 4
c. Condensed Consolidated Statements of Cash Flows
Three months ended June 30, 1998 and 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 12
EXHIBITS
INDEX TO EXHIBITS 13
EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF NET
LOSS PER SHARE 14
2
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DATALINK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 March 31
1998 1998
(unaudited) (audited)
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 6,091,165 $ 7,353,719
Accounts receivable 51,475 65,241
Other receivables 5,161 500
Prepaid expenses 55,852 42,537
------------ -----------
Total current assets $ 6,203,653 7,461,997
Fixed assets, net 754,334 629,696
Other assets 16,243 23,625
------------ -----------
Total assets $ 6,974,230 $ 8,115,318
============ ===========
LIABILITIES:
Current liabilities:
Accounts payable $ 374,378 $ 236,469
Accrued liabilities 183,269 300,450
Deferred revenue 372,142 269,538
Current portion of capital
lease obligation 14,060 13,699
Current portion on advance
on technology sales 453,777 460,501
------------ -----------
Total current liabilities 1,397,626 1,280,657
Advance on technology sales, net
of current portion 2,051,784 2,162,628
Obligations under capital lease,
net of current portion 58,987 62,640
------------ -----------
Total Liabilities $ 3,508,397 $ 3,505,925
SHAREHOLDERS' EQUITY
Preferred stock 2,740 2,740
Common stock 20,289 20,183
Additional paid-in capital 28,053,819 28,007,037
Foreign currency translation
Adjustment (61,797) (53,923)
Note receivable (1,588,804) (1,692,234)
Accumulated deficit (22,960,414) (21,674,410)
------------ -----------
Total shareholders' equity 3,465,833 4,609,393
------------ -----------
Total liabilities and shareholders'
equity $ 6,974,230 $ 8,115,318
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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DATALINK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
June 30,
1998 1997
---------- ----------
Revenue $ 587,535 $ 149,453
Cost of revenue 213,297 99,697
Research and development 217,923 147,411
Sales and marketing 980,398 386,948
General and administrative 675,665 478,527
Other income (note 3) 213,744 87,323
---------- ----------
Net loss $(1,286,004) $ (875,807)
Basic
Diluted $ (.63) $ (.45)
$ (.63) $ (.45)
Shares used in per share
calculations, basic and diluted 2,027,657 1,927,523
The accompanying notes are an integral part of these consolidated financial
statements.
4
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DATALINK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
June 30,
1998 1997
---------- ----------
Cash flows from operating
activities:
Net loss $(1,286,004) $ (875,807)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization 146,093 147,179
Amortization of technology
advance (117,568) (66,995)
Changes in assets and liabilities:
Accounts and other receivables 9,105 (17,902)
Prepaid and other assets (5,933) (1,133)
Accounts payable and accrued
Liabilities 20,728 122,525
Deferred Revenue 102,604 --
----------- ----------
Net cash used in operating
activities (1,130,975) (692,133)
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Cash flows from investing activities:
Acquisition of fixed assets (175,175) (61,090)
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Cash flows from financing activities:
Proceeds from sale of common stock 46,888 --
Payments on capital leases (3,292) --
Advances on technology fee -- 1,303,565
----------- ----------
Net cash provided by financ-
ing activities 43,596 1,303,565
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Net increase(decrease) in cash and
cash equivalents (1,262,554) 550,342
Cash and cash equivalents, beginning
of quarter 7,353,719 1,894,988
----------- ----------
Cash and cash equivalents, end of
quarter $ 6,091,165 $2,445,330
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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Statements of cash flows, continued
Three Months Ended
June 30,
1998 1997
---------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Foreign currency translation
adjustment (28,274)
Common stock issued in exchange for
notes receivable 200,000
6
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DATALINK SYSTEMS CORPORATION
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 providing wireless
communication technologies.
2. Summary of Significant Accounting Policies:
The significant accounting policies followed by the Company as well as other
information integral to these financial statements have been disclosed in the
notes to the financial statements included in the financial statements
included in form 10-KSB filed with the Securities and Exchange Commission at
the Company's fiscal year end, March 31, 1998. Readers of this form 10-QSB
are encouraged to refer to that form for additional details of the Company and
its accounting policies and required financial disclosures.
3. Other Income:
Other Income (expense) consists of the following items:
Three months ended June 30,
Description 1998 1997
----------- ---------- ----------
Owners fee sale $(392,500) $(392,500)
of technology
Interest on note from 392,500 392,500
sale of technology
Amortization of 117,568 67,005
technology advance
Interest income 104,571 25,664
Miscellaneous (8,395) (5,346)
--------- --------
Total Other income $ 213,744 $ 87,323
(expense) ========= ========
7
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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, among
others, the risks and uncertainties discussed below and in the Company's Form
10-KSB for the year ended March 31, 1998:
Results of operations:
Net sales increased from 149,453 in the quarter ending June 30, 1997 to
$587,535 in the quarter ending June 30, 1998. The increase in sales is due to
the development of a sales and marketing strategy, the release of new
products, and the development of an effective direct sales force. The
following table illustrates the comparative sales of products by product type
for each of the last two years.
Net sales for Net sales for
the quarter year the quarter year Increase
Product ended June 30, 1998 ended June 30, 1997 (decrease)
------- ------------------- ------------------- ----------
QuoteXpress $244,539 $149,453 $ 95,086
SplitXpress 323,682 0 323,682
CommodityXpress 17,150 0 17,150
Other 2,164 0 2,164
Totals $587,535 $149,453 $438,082
During the fiscal year between the quarter ended June 30, 1997 and June 30,
1998, the Company recruited executives to complete the sales and marketing
strategic plan. These individuals were able to identify key accounts and
markets. Together with the engineering and research and development staff,
these executives were able to develop a financial product. The executives
also have developed the direct sales force. Advertisements have been
developed for the appropriate media. The engineering department has completed
development of the SplitXpress, and CommodityXpress products, completed an
upgrade (in August 1997) of the QuoteXpress product, and has begun development
of a number of new products.
Cost of revenues and gross margin:
The cost of revenues has increased from the quarter ending June 30, 1997 to
the quarter ending June 30, 1998, and this is due to the increase in net
sales. Cost of revenues represents the costs necessary to provide the
services to customers, and as more services are provided to more customers,
the costs of providing those services rises. Examples of this type of costs
are the costs to obtain data feeds from the exchanges, costs to maintain the
Customer Service Department, and pager rental costs. The following table
shows the net sales, cost of revenues, and gross margin for the quarters ended
June 30, 1998 and 1997:
Increase Increase
Quarter ended Quarter ended (decrease) (decrease)
June 30, 1998 June 30, 1997 $ %
------------- ------------- ---------- ----------
Net sales $587,535 $149,453 $438,082 293.1%
Cost of revenues 213,297 99,697 113,600 113.9%
Gross margin $374,238 $ 49,756 $324,482 652.1%
8
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As can be noted from the table, the increase in sales has not caused a
proportional increase in the cost of revenues. This is due to the fact that
as the Company increases its sales, economies of scale are achieved, and the
Company operates more efficiently. In effect, each dollar of net sales costs
less to produce.
Operating expenses:
Operating expenses have increased from the prior year. Operating expenses are
separated into three categories: research and development, sales and
marketing, and general and administrative. The following table illustrates
the changes in these three categories of operating expenses.
Increase Increase
Quarter ended Quarter ended (decrease) (decrease)
Description June 30, 1998 June 30, 1997 $ %
----------- ------------- ------------- ---------- ----------
Research and $ 217,923 $ 147,411 $ 70,512 32.4%
development
Sales and 980,398 386,948 593,450 153.4%
marketing
General and 675,665 478,527 197,138 41.2%
administrative
Totals $1,873,986 $1,012,886 $861,100 85.0%
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 increased in the quarter
ended June 30, 1998 when compared to the quarter ended June 30, 1997. This
increase was due to the Company incurring costs for product development of new
products yet to be released in the coming months.
Sales and marketing expenses consist of costs incurred to market the Company's
products through media development, advertising in such media as television
and financial publications, attendance at trade shows, and the costs required
to develop an effective sales and 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. Sales and marketing costs have increased
when compared with the comparable quarter in the fiscal year. Prior to the
current fiscal year, the Company had only one product to market and it was
marketed through a direct sales force. Advertising was done in a limited
number of publications, and a minimal number of employees were maintained in
the marketing and sales departments. Since the quarter ending June 30, 1997,
and as is reflected in the quarter ending June 30, 1998, the Company hired
additional marketing and sales staff, did market research, developed new sales
and marketing materials for QuoteXpress, and created sales and marketing
materials for the new products, SplitXpress and CommodityXpress. Television
advertising was initiated and additional written publications were selected
for advertising.
9
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General and administrative expenses are classified as costs incurred in the
development and operation of the infrastructure of the organization. These
consist of accounting costs, legal costs, rent, depreciation of Company fixed
assets, utilities, and 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 increased during the quarter ended June 30, 1998 when compared
to the quarter ended June 30, 1997. The Company has grown considerably in
the last year, and has moved to a larger facility, hired additional staff, and
increased expenditures for utilities and other costs related to increases in
space and personnel.
Non-operating revenues and expenses:
Non-operating revenues and expenses consist of interest income, amortization
of technology advance deferred revenue, and owners fees and associated
interest income related to the sale of technology. The following table
illustrates the changes in the other income (expense) account.
Increase Increase
Quarter ended Quarter ended (decrease) (decrease)
Description June 30, 1998 June 30, 1997 $ %
----------- ------------- ------------- ---------- ----------
Owners fee sale $ (392,500) $ (392,500) $ 0 0
of technology
Interest income 392,500 392,500 0 0
sales of
technology
Amortization of 117,568 67,005 50,563 75.5%
technology advance
Interest income 104,571 25,664 78,907 307.5%
Miscellaneous (8,395) (5,346) (3,049) 144.8%
---------- ---------- ---------
Totals $ 213,744 $ 87,323 $ 126,421
========== ========== =========
As can be seen from the table above, most other income (expense) items have
remained relatively constant. A sale of technology was completed late in the
first quarter of fiscal 1997, and as a result when comparing the amortization
of the advance between quarters, the 1997 numbers reflect a partial quarter,
whereas the 1998 numbers reflect a full quarter. Interest income has
increased due to interest earned on cash deposited from the private placement,
which was completed in November 1997, as well as interest earned on the note
receivable from the officer of the Company.
Liquidity and Capital Resources:
The Company completed a private placement during the quarter ending December
31, 1997. As a result of the private placement, the Company netted
approximately $8,000,000. The Company also completed, during the quarter
ending June 30, 1997, the sale of the QuoteXpress product, a provision of
which was an up-front payment of approximately $1,300,000. The sources and
uses of cash during the quarters ended June 30, 1998 and 1997 are as follows:
10
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Year Ended June 30,
1998 1997 Change
------------ ---------- -----------
Cash used in operating $(1,130,975) $ (692,133) $ (438,842)
activities
Cash used in investing (175,175) (61,090) (114,085)
activities
Cash provided by financing 43,596 1,303,565 1,259,969
activities ----------- ---------- ----------
Net increase(decrease) in cash $(1,262,554) $ 550,342 $(1,812,896)
=========== ========== ===========
As of June 30, 1998 the Company had cash and cash equivalents in the amount of
$6,091,165. Working capital has decreased from $6,181,340 as of March 31,
1998 to $4,806,027 as of June 30, 1998. The Company has a letter of credit
with a bank in the amount of $200,000 and has obtained a credit line in the
amount of $1,000,000. Management believes that it has sufficient working
capital for at least 12 months.
11
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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)
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: August 14, 1998 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)
12
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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
13
DATALINK SYSTEMS CORPORATION
COMPUTATION OF NET LOSS PER SHARE
(unaudited)
Three Months Ended
June 30,
Primary: 1998 1997
- -------- --------- ---------
Weighted average common shares out-
standing for the period 2,027,657 1,927,523
Shares used in per share calculations 2,027,657 1,927,523
Net loss $(1,286,004) $ (875,807)
Net loss per share, basic and diluted $ (.63) $ (.45)
Calculated in accordance with the guidelines of Item 601 of Regulation S-B.
Primary and fully diluted calculations are substantially the same.
14
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<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-QSB for the year to date, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,091,165
<SECURITIES> 0
<RECEIVABLES> 65,236
<ALLOWANCES> (8,600)
<INVENTORY> 0
<CURRENT-ASSETS> 6,203,653
<PP&E> 975,535
<DEPRECIATION> 221,201
<TOTAL-ASSETS> 6,974,230
<CURRENT-LIABILITIES> 1,397,626
<BONDS> 0
<COMMON> 20,289
0
2,740
<OTHER-SE> 3,442,804
<TOTAL-LIABILITY-AND-EQUITY> 6,974,230
<SALES> 587,535
<TOTAL-REVENUES> 587,535
<CGS> 213,297
<TOTAL-COSTS> 2,087,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,286,004)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,286,004)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
