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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, 2000
Commission file number: 1-15569
DATALINK.NET, INC.
----------------------------------------------------
(Exact name of small business issuer in its charter)
Nevada 36-3574355
------------------------------- -------------------------------
(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
---------------------------
(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 14,151,479 shares of the Registrant's Common Stock outstanding as of
June 30, 2000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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DATALINK.NET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
a. Condensed Consolidated Balance Sheets
June 30, 2000 and March 31, 2000 3
b. Condensed Consolidated Statements of Operations
and Comprehensive Loss for the three months ended
June 30, 2000 and 1999 4
c. Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 2000 and 1999 5
d. Notes to the Condensed Consolidated Financial
Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 13
ITEM 2. CHANGES IN SECURITIES. 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 13
ITEM 5. OTHER INFORMATION. 13
SIGNATURES 14
</TABLE>
EXHIBITS
INDEX TO EXHIBITS
EXHIBIT 27 FINANCIAL DATA SCHEDULE
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DATALINK.NET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 March 31
2000 2000
(unaudited)
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 14,396,297 $ 15,673,264
Trade receivables 37,558 36,717
Other receivables 10,271 4,962
Prepaid expenses 311,547 216,942
------------ ------------
Total current assets 14,755,673 15,931,885
Property and equipment, net 649,346 576,674
Other assets 101,952 88,847
------------ ------------
Total assets $ 15,506,971 $ 16,597,406
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 356,692 $ 539,791
Accrued expenses and other
current liabilities 264,910 214,342
Current portion of capital
lease obligation 15,332 15,332
Current portion of advances
on technology sales 389,852 398,930
Deferred revenue 167,846 202,069
------------ ------------
Total current liabilities 1,194,632 1,370,464
Capital lease obligation,
net of current portion 26,693 30,910
Advances on technology sales, net
of current portion 1,237,729 1,331,680
------------ ------------
Total Liabilities 2,459,054 2,733,054
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SHAREHOLDERS' EQUITY
Convertible preferred stock 469 769
Common stock 141,603 131,358
Additional paid-in capital 46,454,445 45,513,895
Accumulated other comprehensive loss (88,137) (81,400)
Notes receivable (1,288,681) (1,348,747)
Accumulated deficit (32,171,782) (30,351,523)
------------ ------------
Total shareholders' equity 13,047,917 13,864,352
------------ ------------
Total liabilities and
shareholders' equity $ 15,506,971 $ 16,597,406
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DATALINK.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue $ 281,221 $ 436,885
Cost of revenue 186,997 199,135
Research and development 304,802 142,349
Sales and marketing 1,023,351 356,445
General and administrative 939,943 523,685
Other income 353,613 171,997
------------ ------------
Net loss available to
common shareholders (1,820,259) (612,732)
Other comprehensive income
(loss) - Translation adjustment (6,737) 3,132
------------ ------------
Comprehensive Loss $ (1,826,996) $ (609,600)
============ ============
Net loss per share:
Basic $ (0.13) $ (0.12)
Diluted $ (0.13) $ (0.12)
Shares used in per share
calculation basic and diluted 13,739,736 5,017,448
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DATALINK.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,820,259) $ (612,732)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 64,895 63,596
Compensation expense related to stock
issued for services 29,099 --
Foreign currency translation adjustment (6,736) 3,132
Amortization of technology advances (103,029) (110,843)
Amortization of note receivable 60,066 17,762
Changes in assets and liabilities:
Accounts and other receivables (11,112) 13,547
Prepaid expenses and other assets (94,605) (5,234)
Accounts payable and accrued liabilities (104,302) (264,633)
Deferred revenue (34,223) (41,754)
------------ ------------
Net cash used in operating activities (2,020,206) (937,159)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (137,567) (18,871)
Other assets (8,145) (8,731)
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Net cash used in investing activities (145,712) (27,602)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock 893,168 17,143
Payments on capital lease (4,217) (3,702)
------------ ------------
Net cash provided by financing
activities 888,951 13,441
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Net decrease in cash and
cash equivalents (1,276,967) (951,320)
Cash and cash equivalents, beginning
of period 15,673,264 3,169,443
------------ ------------
Cash and cash equivalents, end of period $ 14,396,297 $ 2,218,123
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DATALINK.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $1,469 $2,253
====== ======
Cash paid for income taxes $ 605 $1,365
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SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Preferred stock converted to common
stock $ 600 $ 469
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
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DATALINK.NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Datalink.net, Inc., (the "Company") was formed under the laws of the State of
Nevada on June 18, 1996. On June 27, 1996, the Company went public through an
acquisition of a public corporation, Datalink Communications Corporation
("DCC"), which was previously Lord Abbott, Inc., a Colorado corporation formed
in 1986. Datalink.net is a wireless application service provider, marketing a
suite of products and services for both the B2B (business to business) and B2C
(business to consumer) markets. The B2B Group extends Internet franchises to the
wireless world through the Company's patented Xpresslink(TM) Application Server,
while the B2C Group provides customer tailored information to the wireless user,
through devices such as pagers, WAP phones and personal digital assistants, such
as the Palm V and VII.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. 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 three-month period ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 2001. All financial data and share data in this Form 10QSB give
retroactive effect to the 2 for 1 stock split which was effected on April 27,
2000. 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, 2000.
3. OTHER INCOME
Other income consists of the following items:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
Description 2000 1999
----------------------------------- --------- ---------
<S> <C> <C>
Owners fee sales of technology $(392,500) $(392,500)
Interest on notes from sales of
technology 392,500 392,500
Amortization of technology advances 103,031 110,844
Interest income 250,309 59,675
Miscellaneous 273 1,478
--------- ---------
Total other income $ 353,613 $ 171,997
========= =========
</TABLE>
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4. CALCULATIONS OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Weighted average common shares
outstanding for the period 13,739,736 5,017,448
Shares used in per share
calculations 13,739,736 5,017,448
Net loss available to common
shareholders $ (1,820,259) $ (612,732)
Net loss per share $ (0.13) $ (0.12)
</TABLE>
Basic and diluted calculations are substantially the same.
Common stock equivalents resulting from convertible preferred shares, warrants
and stock options amounted to 4,939,611 and 9,203,344 as of June 30, 2000 and
1999, respectively. These common stock equivalents are excluded from the
weighted average common shares outstanding for the periods because their
inclusion would be anti-dilutive.
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, 2000:
OVERVIEW
In FY 2000, the Company announced a strategic repositioning as a Wireless
Application Service Provider (w-ASP), which involved major infrastructure
changes. The financial trends begun in FY 2000 have continued through the first
quarter of FY 2001. The Company has used the proceeds of its private placement
to expand its engineering capability and research and development efforts, as
well as to increase its sales and marketing presence in the wireless market. The
Company is completing this repositioning with its focus on the Business to
Business (B2B) marketplace and end-to-end mobile data solutions utilizing unique
and patented Wireless Information Technology. This strategy has necessitated a
drastic reduction in the direct marketing, media
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supported programs previously dedicated to promoting the Company's Business to
Consumer (B2C) products. The Company's B2B strategy has moved forward
significantly with the formation of a new business unit, Net2Wireless.com which
is concentrating on providing consulting and engineering services and turnkey
applications for wireless enablement of corporate Intranet, Internet and
e-commerce transactions.
The highlights of the first quarter of FY 2001:
1. Datalink.net continues the repositioning to a w-ASP, specializing in wireless
enterprise solutions.
2. Contract signed with Chase Manhattan Bank for licensing of a professional
financial product, the Global Market Pro.
3. Signed contracts to provide wireless enablement of and gateway licensing to
additional B2B enterprises: Wall Street Strategies, Unimobile, WizShop, and Bull
Market Report.
4. Signed letters of intent to acquire two wireless software companies: Cross
Communications, Inc., which was subsequently closed in July, and Simkin, Inc., a
medical software and wireless company.
5. Recruited new senior executives in positions of Chief Operating Officer,
Executive Vice-President for mergers and acquisitions and Vice-President of
Strategic Sales.
6. Strengthening of engineering, sales and marketing staffs with the addition of
over 20 professionals.
7. Initiated extensive participation in and/or sponsorship of the Wireless Data
Forum, the WAP Forum, and other wireless trade organizations. Anthony LaPine,
Chairman and CEO of Datalink.net was appointed Co-Chair of the WAP
Interoperability Group.
Although the Company's strategic repositioning is in place, any resultant
financial benefit is anticipated to impact future quarters of FY 2001 and
beyond, as the contracts and business initiatives begun in FY 2000 and
continuing in the first quarter of FY 2001 ultimately generate revenues.
The new B2B sales and product strategy creates an optimistic future for
Datalink.net, but in the interim, has not been in place long enough with
sufficient resources to develop meaningful revenues. This, combined with the
reduced direct sales of products in the consumer sector (B2C) has contributed to
an overall decline in revenues from the prior period.
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 2000 amounted to $281,221, as
compared to $436,885 in the same period of 1999.
The revenue decrease resulted principally from the Company's strategic
repositioning as a wireless application service provider, as further described
above in the "Overview".
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COST OF REVENUES AND GROSS MARGIN
Cost of revenues has decreased from $199,135 in the June 30, 1999 quarter to
$186,997 in the June 30, 2000 quarter, due to the decrease in net revenues. Cost
of revenues represents the direct costs necessary to provide the services to
customers. This cost of revenues is not directly proportional to revenues, and
when revenues decrease as they have in the current quarter, the cost of revenues
does not decrease in the same percentage and has in fact decreased less because
of minimum base charges for data feeds. Cost of revenues principally includes
costs to obtain data feeds from various exchanges, costs for pager rental or
depreciation and pager airtime for those customers without their own pagers, and
certain telephone, computer and other direct operational costs.
OPERATING EXPENSES
Operating expenses increased during the three months ended June 30, 2000 from
the like period of 1999. The Company categorizes operating expenses into three
major categories: research and development, sales and marketing and general and
administrative. The tables below summarize the increases in these three
categories of operating expenses:
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------
Description 2000 1999
--------------- ---------- ----------
<S> <C> <C>
Research and
Development $ 304,802 $ 142,349
Sales and
Marketing 1,023,351 356,445
General and
Administrative 939,943 523,685
---------- ----------
Totals $2,268,096 $1,022,479
========== ==========
</TABLE>
Research and development expenses are expenses incurred in developing new
products and product enhancements for current products. These expenditures are
charged to expense as incurred. The increase in these costs is due principally
to additional engineering personnel and from the development of new products,
such as Global Market Pro.
Sales and marketing expenses consist of costs incurred to develop and implement
marketing and sales programs for the Company's product line. These include costs
required to staff and execute a sales and marketing strategy, participation in
trade shows, media development and advertising, and web site development and
maintenance. These costs also include the expenses of sales personnel and a
customer support call center. These costs have increased substantially in the
quarter ended June 30, 2000 from the quarter ended June 30, 1999, due
principally to the addition of new salesmen and new marketing personnel, in
addition to increased participation in wireless data forums and trade shows. New
marketing programs have also been developed and are in the process of being
implemented for new wireless products such as the Global Market Pro.
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General and administrative expenses include accounting, legal and consulting.
This category also includes the costs associated with being a publicly traded
company, rent, depreciation of furniture and fixtures and other fixed assets,
administrative personnel, and other overhead related costs. These costs
increased in the current quarter due to increases in administrative personnel as
well as an expansion in office space in San Jose and Vancouver. Further,
non-cash charges of $29,099 incurred in the June 30, 2000 quarter versus none in
the June 30, 1999 quarter were included in general and administrative expense.
These charges are compensation related expenses for financial and marketing
consulting services paid for with stock, options or warrants. The expense is
valued at the fair market value of the stock issued, or in the instance of
common stock purchase warrants, in accordance with Black-Scholes pricing
guidelines.
NON-OPERATING REVENUES AND EXPENSES
Non-operating revenues and expenses are primarily made up of interest income
from invested cash, amortization of deferred revenue from technology sales
advances received in previous periods, and the owner's fees and offsetting
interest income recognized, related to the technology sales. The following
tables reflect the changes in other income (expense):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------
Description 2000 1999
----------------- --------- ---------
<S> <C> <C>
Owners fee sales
of technology $(392,500) $(392,500)
Interest on notes
from sales of
technology 392,500 392,500
Amortization of
technology
advances 103,031 110,844
Interest income 250,309 59,675
Miscellaneous 273 1,478
--------- ---------
Totals $ 353,613 $ 171,997
========= =========
</TABLE>
The resultant non-operating income increased during the three months ended June
30, 2000 from the three months ended June 30, 1999 due principally to the
increase in interest income from the cash available for investment from the
proceeds raised in the February 2000 private placement.
The net loss available to common shareholders increased from $612,732 during the
three months ended June 30, 1999 to $1,820,259 for the three months ended June
30, 2000, due to the factors previously described.
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LIQUIDITY AND CAPITAL RESOURCES
Sources and uses of cash during the periods are summarized below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------
Product 2000 1999 Change
------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Cash (used) in operating
activities $(2,020,206) $ (937,159) $(1,083,047)
Cash (used) in investing
activities (145,712) (27,602) (118,110)
Cash provided by
financing activities 888,951 13,441 875,510
----------- ----------- -----------
Net decrease in cash
and cash equivalents $(1,276,967) $ (951,320) $ (325,647)
=========== =========== ===========
</TABLE>
As of June 30, 2000, the Company had cash and cash equivalents amounting to
$14,396,297, a decrease of $1,276,967 from the balance at March 31, 2000.
Working capital decreased to $13,561,041 as compared to $14,561,421 at March 31,
2000. In the quarter ended June 30, 2000, the 165,346 remaining $2.50 common
stock purchase warrants were exercised, resulting in additional cash received of
$413,365. The decreases in cash and working capital resulted from working
capital utilized in operations and offset somewhat by the exercise of stock
options and warrants. The Company has not yet generated sufficient revenues to
cover the costs of continued product development and support, sales and
marketing efforts and general and administrative expenses. There are no material
commitments for capital expenditures at June 30, 2000.
Management believes that it has adequate working capital for the next 12 months.
YEAR 2000 COMPLIANCE
The Company did not directly experience any problems related to Year 2000 (Y2K).
Although the Company had been assured by all related third parties that each was
Y2K compliant, one was not. Specifically, the Company's credit card verifier
experienced a software problem which caused certain of Datalink.net's customers
to be billed multiple times for the same services. This problem has since been
rectified.
The Company is aware of the issues associated with the functioning of the
programming code in computer systems.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Other than routine litigation incidental to its business, the Company is a party
in two pending legal proceedings. One suit was filed on March 23, 2000 in the
Superior Court of California, County of Santa Clara by Theresa Dorr, a former
company employee, who claims that the Company wrongfully terminated her
employment, discriminated/harassed her based on her sex, and breached her
alleged implied employment contract and covenant of good faith/fair dealing.
Plaintiff is seeking damages in an unspecified amount for lost earnings,
emotional distress, punitive damages and recovery of attorney's fees and costs.
The Company denies all allegations, believes the suit is entirely without merit
and intends to contest the suit vigorously.
The second suit was filed on July 11, 2000 in the United States District Court,
for the District of Minnesota, by Datalink Corporation, seeking redress for
alleged: (i) trademark infringement, (ii) unfair competition, (iii) service mark
infringement, (iv) unfair competition, and (v) deceptive trade practices.
Plaintiff is seeking (a) an Order of the Court enjoining and restraining the
Company from using the name "Datalink.net" or "Datalink"; (b) an Order
compelling Defendant to disgorge all profits in an unspecified amount which the
Company has earned as a result of its use of the name "Datalink.net"; (c)
compensatory damages in an unspecified amount caused by Defendant's alleged
infringing activities; and (d) treble damages, costs, and reasonable attorney's
fees, in an unspecified amount. The Company denies all allegations, believes the
suit is entirely without merit and intends to contest the suit vigorously.
ITEM 2. CHANGES IN SECURITIES.
The Company issued securities which were not registered under the Securities Act
of 1933, as amended, as follows:
During the Quarter ended June 30, 2000, the Company issued a total of 10,064
shares of its common stock to suppliers of services to the Company and converted
300,000 shares of Series B Convertible Preferred Stock to 600,000 shares of
Common Stock, for a total of 610,064 shares of common stock. Also, the Company
issued 10,000 shares of its common stock to the holders of warrants exercisable
at $1.59 in exchange for cash, issued 205,958 shares of common stock to the
holders of $1.875 warrants in exchange for cash, for total proceeds to the
company of $402,071.25.
With respect to these transactions, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended. The investors were given complete
information concerning the Company. The appropriate restrictive legend was
placed on the certificates and stop transfer instructions were issued to the
transfer agent.
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) Exhibits
Exhibit 27 - Financial Data Schedule
B) Reports on Form 8-K: None.
<PAGE> 14
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, 2000 By:/s/ Anthony N. LaPine
Anthony N. LaPine, President and
Chief Executive Officer (Principal
Executive Officer)
By:/s/ William Mahan
William Mahan, Chief Financial
Officer (Principal Financial Officer)
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
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EXHIBIT METHOD OF FILING
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27. Financial Data Schedule Filed herewith electronically
</TABLE>
