SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31, 1998.
------------------
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ______.
Commission File No.: 0-22848
U.S. Wireless Data, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1178691
- ------------------------ ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
2200 Powell Street, Suite 800
Emeryville, California 94608
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(Address of principal executive offices, including zip code)
(510) 596-2025
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(Registrant's Telephone Number, including area code)
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 ninety days.
Yes [X] No [ ]
As of December 31, 1998 there were outstanding 13,586,124 shares of the
Registrant's Common Stock (no par value per share).
Transitional Small Business Disclosure Format
Yes [ ] No [X]
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U.S. WIRELESS DATA, INC.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
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Item 1. Financial Statements (Unaudited)
Balance Sheets --
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December 31, 1998, and June 30, 1998...................................3
Statements of Operations --
Three Months and Six Months Ended December 31, 1998 and 1997...........4
Statements of Cash Flows --
Three Months Ended December 31, 1998 and 1997..........................5
Notes to Financial Statements.................................................6-9
Item 2. Management's Discussion and Analysis..........................................9-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................................17
Item 2. Changes in Securities.........................................................17
Item 3. Defaults Upon Senior Securities...............................................18
Item 6. Exhibits and Reports on Form 8-K..............................................18
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U.S. WIRELESS DATA, INC.
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BALANCE SHEET
(Unaudited)
December 31, 1998 June 30, 1998
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ASSETS
Current assets:
Cash ............................................................... $ 73,000 $ 4,000
Accounts receivable, net of allowance for doubtful ................. 197,000 55,000
accounts of $28,000 at December 31, 1998;
$22,000 at June 30, 1998
Inventory, net ..................................................... 260,000 480,000
Other current assets
443,000 187,000
------------ ------------
Total current assets .......................................... 973,000 726,000
Processing units - deployed ................................................ 520,000 517,000
Property and equipment, net ................................................ 255,000 253,000
Other assets .................................................. 317,000 69,000
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Total assets ............................................................... $ 2,065,000 $ 1,565,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 1,199,000 $ 1,506,000
Accrued liabilities ................................................ 1,053,000 1,735,000
Borrowings, current portion
2,221,000 452,000
------------ ------------
Total current liabilities ..................................... 4,473,000
3,693,000
Borrowings, long-term portion .............................................. 1,341,000 45,000
------------ ------------
Total liabilities ............................................. 5,814,000 3,738,000
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Redeemable common stock .................................................... 232,000 372,000
------------ ------------
Stockholders' deficit:
Preferred stock, 15,000,000 authorized, 1,341,667 and 3,060,000 ... 1,342,000 3,060,000
Series A issued and outstanding at September 30, 1998 and
June 30, 1998, respectively
Common stock, at stated value, 40,000,000 .......................... 13,586,000 12,195,000
shares authorized; 13,586,124 and 12,195,358 shares issued and
outstanding at September 30, 1998 and June 30, 1998, respectively
Additional paid-in capital ......................................... 12,997,000 10,222,000
Accumulated deficit ................................................ (31,906,000) (28,022,000)
------------ ------------
Total stockholders' deficit ........................................ (3,981,000) (2,545,000)
------------ ------------
Total liabilities and stockholders' deficit ........................ $ 2,065,000 $ 1,565,000
============ ============
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Accompanying notes are an integral part of the financial statements
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U.S. WIRELESS DATA, INC.
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STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended December 31, Six months ended December 31,
------------------------------- -----------------------------
1998 1997 1998 1997
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Net revenues:
Product sales ..................... $ 343,000 $ 95,000 $ 509,000 $ 351,000
Services .......................... 177,000 21,000 372,000 35,000
------------ ------------ ------------ ------------
520,000 116,000 881,000 386,000
------------ ------------ ------------ ------------
Cost of revenues:
Product sales ..................... 252,000 53,000 360,000 227,000
Services 172,000 8,000 331,000 10,000
------------ ------------ ------------ ------------
424,000 61,000 691,000 237,000
------------ ------------ ------------ ------------
Gross margin .......................... 96,000 55,000 190,000 149,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 1,382,000 2,853,000 3,068,000 4,141,000
Research and development 178,000 78,000 258,000 173,000
------------ ------------ ------------ ------------
Total operating expense ........ 1,560,000 2,931,000 3,326,000 4,314,000
------------ ------------ ------------ ------------
Loss from operations .................. (1,464,000) (2,876,000) (3,136,000) (4,165,000)
Interest income ....................... 3,000 -- 8,000 --
Interest expense ...................... (117,000) (244,000) (233,000) (268,000)
Other expense ......................... (351,000) (1,000) (161,000) (1,000)
------------ ------------ ------------ ------------
Net loss .............................. $ (1,929,000) $ (3,121,000) $ (3,522,000) $ (4,434,000)
============ ============ ============ ============
Basic and diluted loss per share: ..... $ (0.14) $ (0.34) $ (0.25) $ (0.30)
============ ============ ============ ============
Weighted average common shares ........ 13,582,000 9,209,000 13,038,000 8,490,000
outstanding - basic/diluted ============ ============ ============ ============
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Accompanying notes are an integral part of the financial statements
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U.S. WIRELESS DATA, INC.
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STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended December 31,
-------------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(3,522,000) $(4,434,000)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization .................... 145,000 11,000
Non-cash consulting services and warrant extension 1,339,000 1,454,000
Non-cash variable option-compensation expense .... (573,000) 1,188,000
Non-cash interest expense - debentures ........... 182,000 225,000
Non-cash other expense - warrants ................ 350,000 --
Debt forgiveness ................................. (192,000) --
Changes in current assets and liabilities:
Accounts receivable ........................... (142,000) (3,000)
Inventory ..................................... 170,000 (426,000)
Other current assets .......................... 16,000 (48,000)
Accounts payable .............................. (393,000) 396,000
Accrued liabilities ........................... (37,000) 24,000
----------- -----------
Net cash used in operating activities ......... (2,657,000) (1,613,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment ....... (45,000) (112,000)
Processing units - deployed ...................... (81,000) --
10,000 (85,000)
----------- -----------
Net cash used in investing activities ......... (116,000) (197,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock .................. 26,000 556,000
Issuance of note receivable ...................... 1,630,000 28,000
Principal payment on borrowings .................. (122,000) --
Net proceeds from issuance of debt ............... 2,308,000 2,743,000
Redemption of preferred stock .................... (1,000,000) --
----------- -----------
Net cash provided by financing activities ..... 2,842,000 3,327,000
----------- -----------
Net increase in cash ..................................... 69,000 1,517,000
Cash at beginning of period .............................. 4,000 6,000
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Cash at end of period .................................... $ 73,000 $ 1,523,000
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Accompanying notes are an integral part of the financial statements
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U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- ACCOUNTING PRINCIPLES
The balance sheet as of December 31, 1998, as well as the statements of
operations for the three months ended December 31, 1998 and December 31,
1997, and statement of cash flows for the three months ended December 31,
1998 and December 31, 1997 have been prepared by the Company without an
audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary to present fairly the financial
position, results of operations, and cash flows at December 31, 1998 and
for all periods presented, have been made.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these financial statements are read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the
fiscal year ended June 30, 1998. The results of operations for interim
periods presented are not necessarily indicative of the operating results
for the full year.
Note 2 -- FINANCIAL CONDITION AND LIQUIDITY
The Company continues to have difficulties due to its financial
condition and lack of liquidity. The Company has accumulated a deficit of
approximately $32 million since inception, including a loss of $1.9
million during the second quarter of fiscal year 1999, and has limited
financial reserves. At present, development of the Company's products and
services requires immediate and significant additional financing.
Due to the change in its distribution strategy to channel product sales
and service offerings through existing merchant acquirers, the Company has
been able to make significant reductions in its direct sales force and
reduce its cash requirements. However, execution of the Company's business
plan is dependent on a significant debt or equity-financing event in the
immediate future. The Company continues to work both directly and through
its consultants to secure such financing which is required to fund
operations while a significant recurring revenue stream is developed.
There can be no assurance that the Company will be successful with efforts
to raise additional capital. The inability of the Company to secure
additional financing in the near term could adversely impact the Company's
financial position, including its ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets and liabilities that might be necessary should the Company be
unable to continue as a going concern.
Note 3 -- NET LOSS PER SHARE
Earnings (loss) per common share (EPS) is computed using Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS
No. 128, establishes standards for the computation, presentation, and
disclosure of earnings per share. Basic and diluted net loss per common
share are computed by dividing the net loss by the weighted average number
of common shares outstanding at the end of the period. Diluted EPS
excludes exercisable stock options and warrants from the calculation since
their effect would be anti-dilutive. Such stock options and warrants could
potentially dilute earnings or losses per share in the future. EPS for the
three-month and six-month period ended December 30, 1997 have been
restated to conform with SFAS No.128. In the second quarter of fiscal
1999, the net loss available to common shareholders equals the net loss
less $27,000 of preferred stock dividends charged to retained earnings.
For the first six months of fiscal 1999, the net loss available to common
shareholders equals the net loss less $377,000 of preferred stock
dividends and redemption premium charged to retained earnings.
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Note 4 -- FINANCINGS
As the Company entered the first quarter of fiscal 1999, it continued
to face the need for increased liquidity to meet its obligations. In July
1998, the Company completed a private offering of $2,000,000 of 6%
convertible subordinated debentures due July 21, 2000 and 100,000 Common
Stock Purchase Warrants exercisable at $4.25 per share until July 21,
2001. The shares of Common Stock underlying the 6% Debentures and Warrants
carry registration rights. The net proceeds to the Company from the
offering were approximately $1.8 million. The Company used approximately
$252,000 of the proceeds from the offering to pay off a $250,000 short
term bridge loan from one of the investors, which was evidenced by a
promissory note executed July 1998, and the balance of the proceeds was
used for working capital. In consideration of the bridge loan, the
investor received a warrant to purchase 20,000 shares of Common Stock at
$4.375 per share, exercisable through September 9, 2001. The warrant
contains anti-dilution provisions and "piggyback" registration rights
applicable to the Common Stock issuable upon exercise of the warrant. A
holder of the Company's Series A Preferred Stock purchased $1,000,000 of
the Debentures.
In August 1998, the Company obtained effectiveness of a registration
statement on Form SB-2 (SEC File No. 333-52625) under which it registered
a total of 7,240,356 shares of Common Stock, for resale by certain
security holders of the Company (the "August SB-2"). After the August SB-2
was declared effective by the SEC, the National Association of Securities
Dealers, Inc. ("NASD") determined that it would undertake a detailed
review of the registration statement. Pending the completion of the NASD
review, the Company suspended the sale of shares under the registration
statement through NASD member firms. Approximately 250,000 of the
registered shares were sold under that registration statement before the
Company suspended sales under it. During the NASD's review, the Company
further determined that the Prospectus contained in the August SB-2 was no
longer current and that a "post-effective amendment" would be required to
be filed and declared effective by the SEC before additional sales can be
made under the August SB-2. A total of 1,030,310 shares of Common Stock
included in the August SB-2 were registered for sale on behalf of the
holders of the Company's Series A Preferred Stock. As of December 31,
1998, there remained 1,341,667 shares of Series A Preferred Stock
outstanding and approximately 307,000 shares of Common Stock which have
been issued upon conversion of, or as dividends on, the Series A Preferred
Stock which have not yet been sold under the SB-2. All shares of the
Common Stock issuable upon conversion of, or as dividends on, the Series A
Preferred stock became eligible for sale under SEC Rule 144 as of December
10, 1998.
On September 22, 1998, the Company entered into an agreement with
Liviakis Financial Communications, Inc., a significant shareholder of the
Company, for a $1,300,000 debt financing. The note payable was due
February 1, 1999, bears interest at 8% per year, and is secured by
substantially all available assets of the Company. The Company used
$1,000,000 of the proceeds to redeem $833,000 of the approximate $2.3
million balance of its Series A Convertible Preferred Stock. The Company
paid 120% of face value for the redemption. The security holders
participating in this redemption also agreed to a gated conversion
schedule over the following three months. The participating investors,
representing approximately 1,342,000 shares of the remaining Series A
Preferred, agreed to hold their Series A Preferred shares until at least
October 15, 1998 after which time one-third of the Series A Preferred
shares may be converted to common stock on each of October 15, November
15, and December 15 of 1999, respectively. As an incentive to these
investors, the Company agreed to issue Common Stock purchase warrants
exercisable to purchase that number of shares of Common Stock equal to
five percent of the number of shares of Series A Preferred Stock held by
the participating investor at the end of each period. As of December 31,
1998, the Company is obligated to issue warrants for 78,089 shares
exercisable at $2.40 per share through October 15, 2001, 67,084 shares
exercisable at $3.36 per share through November 15, 2001, and 67,084
shares exercisable through December 15, 2001. By October 31, 1998, the
Company was to file a registration statement for the shares underlying the
Warrants as well as additional shares issuable upon conversion of the
Series A Preferred Stock, beyond those included in the original SB-2
Registration Statement, due to a decline in the stock price subsequent to
effectiveness of the August SB-2. Penalties similar to those contained in
the original Designation of Series A Preferred Stock apply if the Company
is late in getting the shares registered. The Company intends to file a
registration statement as soon as practicable.
As noted above, the Company also has a pending commitment to file a
registration statement, which was due October 7, 1998, covering the shares
of Common Stock issuable upon conversion of the 6% Debentures. In the
event the registration is not effective with the SEC within 120 calendar
days of the Initial Issuance Date (which was July 21, 1998), the Company
is required to pay a cash penalty of two percent (2%) of the face amount
of the 6% Debentures and thereafter an amount equal to three percent (3%)
of the face amount for every thirty calendar days (or any fraction
thereof) until the registration is effective. If the Company has not
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obtained effectiveness of a registration statement by January 18, 1999,
the holders have the right to require the Company to redeem the 6%
Debentures at 120% of face value plus accrued and unpaid interest and
penalties to the date of redemption. The Company intends to file a
registration statement covering the Common Stock issuable upon conversion
of the 6% Debentures as soon as practicable, and will include in that
registration statement a sufficient number of shares to cover the
additional warrants issued since January 1998 and 290,000 shares issued to
Liviakis Financial Communications, Inc., an affiliate of the Company,
which have registration rights. See Note 5, below.
On October 1, 1998, the Company and Cardservice International (CSI)
entered into a non-binding Letter of Intent to form a non-exclusive
strategic partnership. CSI may also make an equity investment of
$1,000,000 in the Company through a direct purchase of restricted shares
of common stock. In a related transaction, an officer and shareholder of
CSI, may make a separate investment of $1,000,000 in the Company through
direct purchase of restricted shares. The Company intends to coordinate
the timing and terms of these investments with a future private offering
of equity.
On October 28, 1998, the Company borrowed $500,000 from the CEO and 50%
owner of Cardservice International, Inc. The note bears interest at 8% per
annum and is payable in full on the earlier of the receipt by the Company
of proceeds from the sale of the Company's Common Stock to this individual
or March 1, 1999. In consideration for the loan, the Company also agreed
to issue a Common Stock Purchase Warrant exercisable to purchase 25,000
shares of Common Stock at $3.038 per share through October 27, 2001.
During the second fiscal quarter of 1999, the Company received two
bridge loans from Liviakis Financial Communications, Inc. (LFC) totaling
$300,000 in the form of 8% Notes Payable due April 1, 1999. In January and
February, the Company received $350,000 of additional bridge loans in the
form of 8% Notes Payable, due April 1, 1999.
Note 5 -- LIVIAKIS FINANCIAL COMMUNICATIONS INC. ("LFC") - CONSULTING
On June 30, 1998, the Company and LFC agreed to extend their consulting
relationship through the entry of a new consulting agreement covering the
period from August 1, 1998 through March 15, 1999 (the "New LFC
Agreement"). The terms of the New LFC Agreement are substantially the same
as the original LFC Agreement of June 1997. For services to be rendered
under the New LFC Agreement, LFC received 290,000 shares of Common Stock,
issued as a signing bonus upon execution of the New LFC Agreement. The
consulting agreement was valued as $1,078,438 of prepaid consulting
services based on the share price on the date of the agreement less a 15%
discount, attributable to the fact that the shares were restricted and
subject to a "lock-up" provision as described below. The consulting
services will be expensed over the term of the agreement. The Common Stock
issued to LFC under the New LFC Agreement carries certain registration
rights. In conjunction with the entry of the New LFC Agreement, LFC agreed
to a further lock-up of all shares owned by LFC and its affiliates,
pursuant to which they agreed not to sell such shares before February 1,
1999, even though certain of those shares were included in the Company's
Registration Statement on From SB-2, which became effective August 7,
1998. LFC and the principals of LFC subsequently agreed to extend their
"lock-up" of Company shares , through the end of calendar year 1999.
Note 6 - LITIGATION
Settlement of Claims of Certain Noteholders
In April 1998, the Company entered into an agreement with certain
Noteholders under which the Company issued shares of Common Stock in
settlement of the dispute. Terms of the settlement entitled the
Noteholders to certain guarantee or put provisions related to the shares.
The guarantee provision of the settlement agreement allows the former
Noteholders to recover the difference between the guarantee price (which
is $3.00 per share as to the shares that are still entitled to the
guarantee) and the gross amount the Noteholder receives upon a sale of the
shares. The guarantee is operative at any time during the one year period
commencing on the date the shares became saleable under SEC Rule 144. The
Company is obligated to pay the amount due within thirty days of receiving
a demand, accompanied by documentation confirming the sale. Under the
"put" provision of the settlement agreement, the former Noteholders will
have a five day period commencing on the date one year from the date the
shares become saleable under SEC Rule 144 during which the former
Noteholders may "put" any shares remaining unsold by them at the time back
to the Company. Upon exercise of the put, the Company must either (1)
purchase the shares for the put price of $3.00 per share, or (2) require
the shareholder to sell the
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shares into the market, with the Company making up the difference between
the put price and the gross amount received by the shareholder upon such
sale, within 15 days after receipt of written notice and documentation
confirming the sale. The shares originally issued upon conversion of the
notes and the additional shares resulting from the settlement are reflected
as Redeemable Common Stock on the balance sheet. The originally issued
shares are reflected at their conversion value adjusted for the value
attributable to the guarantee and "put" provisions. In the event redemption
of such shares becomes probable and the actual redemption amount is in
excess of the carrying amount, such excess amount will be recorded as
litigation settlement expense. The additional shares are reflected at their
redemption value. As of December 31, 1998, approximately 128,000 shares
subject to the guarantee and "put" provision, with a carrying value of
$232,000, remained outstanding and have a maximum redemption value of
approximately $384,000 prior to any reduction for amounts the holder may
receive upon the sale of such shares.
Note 7 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting changes in the values of these
derivatives will be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they
qualify for hedge accounting. The key criterion for hedge accounting is
that the derivative must be highly effective in achieving offsetting
changes in fair value or cash flows of the hedged items during the term of
the hedge. The Company plans to adopt FAS 133 in the first quarter of
fiscal 2000 and has not yet determined the effect, if any, of adopting the
new standard.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company may, in discussions of its future plans, objectives and
expected performance in periodic reports filed by the Company with the
Securities and Exchange Commission (or documents incorporated by reference
therein) and in written and oral presentations made by the Company,
include projections or other forward-looking statements within the meaning
of Section 27A of the Securities Exchange Act of 1933 or Section 21E of
the Securities Act of 1934, as amended. Such projections and
forward-looking statements are based on assumptions, which the Company
believes are reasonable but are, by their nature, inherently uncertain. In
all cases, results could differ materially from those projected. Some of
the important factors that could cause actual results to differ from any
such projections or other forward-looking statements are detailed below,
and in other reports filed by the Company under the Securities Exchange
Act of 1934, including the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998 and the Report on Form 8-K filed on August
11, 1998, Reporting an Event of August 3, 1998. The Form 8-K incorporates
the Company's Registration Statement on Form SB-2 (SEC File No.
333-52625).
History of Losses and Potential Fluctuations in Operating Results:
Throughout the Company's history including the first half of the fiscal
year ending June 30, 1999, the Company has continued to experience
significant operating losses. The Company has sold securities or borrowed
funds to cover these losses. In addition, because the Company generally
ships its products on the basis of credit card processing applications or
purchase orders, increments to recurring revenue and other component sales
in any quarter are highly dependent on orders shipped in that quarter and,
accordingly, may fluctuate materially from quarter to quarter. The
Company's operating expense levels are based on the Company's internal
forecasts for future demand and not on firm customer orders. Failure by
the Company to achieve these internal forecasts could result in expense
levels that are inconsistent with actual revenues. The Company's results
may also be affected by fluctuating demand for the Company's products and
by increases in the costs of components acquired from the Company's
vendors.
Requirement for Additional Capital: At present, the development of the
Company's infrastructure, product development initiatives, and transition
to the new distribution program requires additional financing. Proceeds
from recently completed private placement offerings have provided the
Company with the ability to launch joint marketing and distribution
programs with the wireless carriers, however, execution of the Company's
business
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plan is dependent on a more significant debt or equity financing event.
Recently, operating expenses have been satisfied by borrowing from a
significant shareholder and by making selective payments on certain
accounts payable. The Company continues to work both directly and through
its consultants to secure additional debt or equity financing which is
required to fund operations while a significant recurring revenue stream is
built. While management is confident it can accomplish this objective,
there is no guarantee that this additional funding will occur in the
required time frame. The failure of the Company to obtain additional
financing could have a material adverse impact on the Company, including
its ability to continue as a going concern.
Distribution Program: The Company has recently executed a Letter of
Intent with Cardservice International which outlines CSI's intent to
produce its LinkPoint(TM) processing terminals using the Company's
proprietary Wireless Express Payment ServiceSM (WEPSSM). Lipman USA Inc.
has also announced the availability of its NURIT 2090 terminal using
WEPSSM. The Company anticipates that CSI and Lipman will promote these
products within their own markets using their respective distribution
channels. CSI is also expected to promote the wireless products to other
ventures of First Data Merchant Services. The Company also has joint
marketing and distribution agreements in place with GTE Wireless, Bell
Atlantic Mobile, and Ameritech. These and anticipated additional
distribution programs are expected to have a positive impact on the
Company's future revenue stream. In addition, the Company anticipates it
will execute a definitive agreement with CSI and sign distribution
agreements with other significant partners, the failure to successfully
complete the agreements and successfully execute the specified programs
through any of these distributors could have a material adverse effect on
the Company.
The Company's Dependence on a Single Type of Product and Technological
Change: All of the Company's revenue is derived from sales of its credit
card transaction services and CDPD enabling products. Demand for these
products could be affected by numerous factors outside the Company's
control, including, among others, market acceptance by prospective
customers, or the introduction of new or superior competing technologies.
The Company's success will depend in part on its ability to respond
quickly to technological changes through the development and improvement
of its products.
Competition by Existing Competitors and Potential New Entrants into the
Market: The Company has identified several potential competitors
attempting to develop CDPD based terminals and solutions. In addition,
companies with substantially greater financial, technical, marketing,
manufacturing and human resources, as well as name recognition than the
Company may also enter the market.
CDPD Resale Agreements Containing Minimum Purchase Obligations: The
Company has to date entered into four CDPD service resale agreements, one
of which contains minimum obligations which can be characterized as "take
or pay" provisions. The agreement with AT&T Wireless contains such
provisions. The Company is obligated to pay for the minimum amount of
service stated in the agreement even if it fails to place enough service
with merchants to meet the minimums. The failure of the Company to meet
these service minimums could have an adverse financial impact upon the
Company.
Status of Federal Corporate Tax Filings: The Company has not completed
federal income tax filings for fiscal years 1996 and 1997. While it is
unlikely that the Company will owe any taxes due to the sustained losses
during the periods, the Company may be subject to penalties for the
delinquency. The Company intends to take the steps required to complete
the tax filings as soon as practicable.
Dilutive and Other Possible Adverse Effects of Outstanding Options,
Warrants and Other Rights to Acquire Common Stock: The Company has a
substantial number of outstanding rights to acquire Common Stock in the
form of the Series A Preferred Stock, the 6% Convertible Subordinated
Debentures, various warrants, and contract rights. A substantial number of
these rights, plus additional rights in the form of options that have been
or may be granted to the Company's officers, directors, employees or
consultants under the Company's 1992 Stock Option Plan or otherwise, are
exercisable at prices which are less than the present market price for the
Common Stock. Under the terms of such rights, the holders thereof are
given an opportunity to profit from a rise in the market price of the
Common Stock with a resulting dilution in the interests of other
shareholders. The terms on which the Company may obtain additional
financing may be adversely affected by the existence of such rights. For
example, the holders of these rights could exercise them at a time when
the Company was attempting to obtain additional capital through a new
offering of securities on terms more favorable than those provided by the
rights.
10
<PAGE>
Current Status of Registration Statements: The Company was obligated to
file a registration statement with the Securities and Exchange Commission
by October 7, 1998, covering the shares of Common Stock issuable upon
conversion of the 6% Debentures which the Company sold in July 1998. In
September 1998, the Company redeemed a total of 833,000 shares of its
Series A Preferred Stock. In conjunction with that redemption, the Company
also agreed to issue warrants exercisable to purchase a total of 212,257
shares of Common Stock to the holders of the remaining shares of Series A
Preferred Stock. The redemption agreement includes provisions that
obligated the Company to file a registration statement by October 31,
1998, covering any additional shares issuable upon conversion of the
Series A Preferred Stock. A registration statement to cover these shares
has not been filed as of the date of filing of this Report. See
"Securities Issuances to Fund Operations" and "Private Offering of 6%
Convertible Subordinated Debentures due July 21, 2000" sections of Results
of Operations.
RESULTS OF OPERATIONS
---------------------
U.S. Wireless Data, Inc. (the "Company" or "USWD") was incorporated in
the State of Colorado on July 30, 1991. The Company is in the business
of providing products and services to enable the use of wireless
technology for electronic payment and other transactions.
Over the past two and a half years, USWD has focused its product
development effort on incorporating Cellular Digital Packet Data (CDPD)
technology into its product line. Because of the high speed nature of CDPD
technology, and the ability to bypass the public switched telephone
network, the Company's new line of CDPD-based terminals has significant
performance and communication cost advantages when compared with the
traditional dial-up terminals currently being sold in the U.S. market
today.
In fiscal year 1998, to broaden distribution of the TRANZ Enabler CDPD
based product, the Company entered into agreements with large
telecommunications carriers for direct distribution of products and
services to merchants. The Company signed joint marketing and operating
agreements with Bell Atlantic Mobile, Ameritech Mobile Communications,
Inc., and GTE Wireless. The agreements contain certain significant
operational and financial performance criteria that the company is
required to meet. Commencing in the second quarter of fiscal 1998 and
continuing into the first quarter of fiscal 1999, USWD made significant
investments to support a nationwide deployment of TRANZ Enablers to
merchants through GTE's and other telecommunications carriers' national
sales forces. Under these deployment programs, the carrier's sales
representative introduces USWD's credit card processing solution and TRANZ
Enabler to the end user merchant. Upon execution of a credit card
processing agreement, a TRANZ Enabler unit(s) was provided to the merchant
by USWD. The Company retains a portion of the monthly credit card fees
based on the dollar volume and number of transactions processed through
the TRANZ Enabler.
Market Penetration through Telecommunications Carriers and Revisions to
Business Plan
--------------------------------------------------------------------------
Placements of TRANZ Enabler units pursuant to the Company's agreements
with telecommunications carriers did not develop as rapidly as anticipated
and have not reached anticipated (and necessary) levels to pay for the
infrastructure to support the programs. Costs to the Company of
implementing the joint marketing and distribution agreements with GTE
Wireless, Bell Atlantic Mobile and Ameritech have exceeded revenue
generated by the programs since they began. The GTE Agreement also
required the Company to generate minimum CDPD service billings to GTE
Wireless from merchants signed up for GTE Wireless's CDPD service through
the Company. GTE Wireless agreed to adjust the commencement date for these
obligations so that the start date for the first quarter was February 1,
1998. Actual placements did not allow the Company to meet the renegotiated
minimum purchase obligations. To remedy this minimum purchase requirement,
the Company and GTE amended the agreement on September 9, 1998 which
removed any minimum purchase requirement and established new IP address
pricing for merchants placed under the agreement.
Because revenue has not developed as hoped, and expenditures have been
outstripping the Company's ability to support its business plan,
management began to reexamine the Company' s business plan in the fourth
quarter of fiscal 1998 and came to the conclusion that the Company could
not continue to function at its current expenditure levels.
During the first quarter of fiscal 1999, Roger Peirce, previous Vice
President of Operations for Visa and most recently the President of First
Data Merchant Services joined the USWD Board of Directors. While
acclimating to USWD's business plan and strategy, Mr. Peirce was asked by
the Board of Directors to take a more active role in
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<PAGE>
the Company. On August 21, 1998 Mr. Peirce became the Chief Executive
Officer of the Company. Mr. Peirce is also a nonvoting member of the Board
of Directors of Cardservice International. Inc. ("CSI"), a related party.
Mr. Peirce replaced Evon A. Kelly as the Company's CEO and Rod Stambaugh
as Chairman. Mr. Kelly resigned as an officer and director of the Company,
but remains as an employee of the Company under a one-year employment
agreement. Mr. Stambaugh remains as President and a director of the
Company.
Mr. Peirce identified several areas in the Company's distribution and
operational strategy that required redirection. Beginning the last week of
August 1998, several changes in the Company's strategy were implemented.
The fundamental change in the strategy involves positioning the Company as
an enabler of wireless products and services to the marketplace and not as
a competitor to the current incumbents. This repositioning of the Company
in the marketplace encompasses the discontinuation of soliciting and
owning merchant contracts for providing bankcard-processing services. The
Company's approach to the market in fiscal 1998 effectively positioned
itself as a direct competitor to the major merchant acquirers. The
Company's new strategy involves an end-to-end systems approach to enabling
the marketplace. The Company is enabling the marketplace with a new
service offering - Wireless Express Payment ServiceSM (WEPSSM). WEPSSM
includes an expanding set of wireless terminal devices that incorporate
the Company's proprietary CDPD modem, a web-based IP address provisioning
and terminal activation process that includes real time remote diagnostic
capabilities, the CDPD network service, and server technology that
delivers wireless transactions to the current front end of card
processors. The Company is targeting the top 30 merchant acquirers and
card processors for this service. The initial response for WEPSSM from the
targeted prospects has been positive.
In furtherance of this new strategy, on October 1, 1998, the Company
and CSI entered into a non-binding Letter of Intent to form a
non-exclusive strategic partnership to jointly exploit payment system
opportunities using wireless technologies. Upon entry of a final
agreement, CSI will produce its LinkPoint(TM) processing terminals using
the Company's proprietary Wireless Express Payment ServiceSM. CSI will
promote these products within its own markets using its approximately
2,200-person sales force. In addition, CSI is to promote the wireless
products to other ventures of First Data Merchant Services, the
fifty-percent owner of CSI. Pursuant to the non-binding Letter of Intent,
CSI also agreed to consider making an equity investment of $1,000,000 in
the Company through a direct purchase of restricted shares of common stock
and Chuck Burtzloff, the chief executive officer and 50 percent owner of
CSI, has agreed to consider making a separate investment of $1,000,000 in
the Company through direct purchase of restricted shares. The Company
intends to coordinate the timing and terms of these investments with a
future private offering of equity.
Securities Issuances to Fund Operations
---------------------------------------
To fund its operating requirements, the Company has had to rely
primarily on the issuance of debt or equity securities over a significant
part of the last two fiscal years. In August 1998, the Company obtained
effectiveness of a registration statement on Form SB-2 (SEC File No.
333-52625) under which it registered a total of 7,240,356 shares of Common
Stock, for resale by certain security holders of the Company (the "August
SB-2"). The August SB-2 was filed to honor the registration rights of the
holders of the Company's Series A Preferred Stock and one previously
issued 50,000 share Warrant. After the August SB-2 was declared effective
by the SEC, the National Association of Securities Dealers, Inc. ("NASD")
determined that it would undertake a detailed review of the registration
statement. Pending the completion of the NASD review, the Company
suspended the sale of shares under the registration statement through NASD
member firms. Approximately 244,000 of the registered shares were sold
under the registration statement before the Company suspended sales under
it. During the NASD's review, the Company further determined that the
Prospectus contained in the August SB-2 was no longer current and that a
"post-effective amendment" would be required to be filed and declared
effective by the SEC before additional sales can be made under the August
SB-2. A total of 1,030,310 shares of Common Stock included in the August
SB-2 were registered for sale on behalf of the holders of the Company's
Series A Preferred Stock. As of December 31, 1998, there remained
1,341,667 shares of Series A Preferred Stock outstanding and approximately
307,000 shares of Common Stock issued upon conversion of, or as dividends
on, the Series A Preferred Stock which have not yet been sold under the
SB-2. All shares of the Common Stock issuable upon conversion of, or as
dividends on, the Series A Preferred stock became eligible for sale under
SEC Rule 144 as of December 10, 1998.
In September 1998, the Company negotiated a partial redemption of the
outstanding Series A Preferred Stock with several of the security holders.
The Company borrowed $1,300,000 from Liviakis Financial Communications,
Inc. and used $1 million of that money to redeem $833,000 face value of
the Series A Preferred Stock. The Company paid 120% of face value for the
redemption. The note payable is due April 1, 1999 and bears interest at 8%
per year. The security holders participating in this redemption also
agreed to a gated
12
<PAGE>
conversion schedule over the following three months. The participating
investors, representing approximately 1,342,000 shares of the remaining
Series A Preferred agreed to hold their Series A Preferred shares until at
least October 15, 1998. Following October 15, 1998, one-third of the Series
A Preferred shares may be converted to common stock on each of October 15,
November 15, and December 15 of 1998, respectively. As an incentive to
these investors, the Company has agreed to issue Common Stock purchase
warrants exercisable to purchase that number of shares of Common Stock
equal to five percent of the number of shares of Series A Preferred Stock
held by the participating investor at the end of each period. The warrants
are to be exercisable for three year terms, at a per share price equal to
110% of the average of the closing bid price over the five days prior to
the effective date of each warrant. The Company also agreed to increase the
dividend rate from 4% to 8% on the balance of the unconverted Series A
Preferred Stock balance and to register with the SEC for public resale a
sufficient number of shares of Common Stock to cover all conversions of the
Series A Preferred stock plus the shares of Common Stock underlying the
warrants. The registration statement was to be filed by October 31, 1998,
and "penalties similar to the current deal" apply if the Company is tardy
in getting the registration statement effective. As of the date of this
report, the Company has not yet filed this registration statement.
Private Offering of 6% Convertible Subordinated Debentures due July 21,
2000.
---------------------------------------------------------------------------
On July 27 1998, the Company completed a private offering of $2,000,000
principal amount of 6% Convertible Subordinated Debentures due July 21,
2000 (the "6% Debentures") and Common Stock Purchase Warrants Exercisable
to Purchase 100,000 shares of Common Stock exercisable at $4.25 per share
until July 21, 2001 (the "Warrants"). The net proceeds to the Company from
the offering were approximately $1,810,000, after paying finder's fees of
$190,000, but before paying additional expenses of the offering, which the
Company estimates will be approximately $20,000. The Company used $251,537
of the proceeds from the offering to pay off a $250,000 short term bridge
loan from one of the participating investors, which was evidenced by a
promissory note dated June 26, 1998, and used the balance of the proceeds
as working capital and to repay existing obligations. The purchaser of
1,600,000 shares of the Company's Series A Cumulative Convertible
Redeemable Preferred Stock purchased $1,000,000 of the 6% Debentures. JW
Genesis Securities, Inc. of Boca Raton, Florida, acted as the primary
finder in the transaction and the Company paid JW Genesis a finder's fee
equal to seven percent (7%) of the amount raised from the sale of the 6%
Debentures, which amounted to $140,000. In addition, JW Genesis received a
three-year, 60,000 share Common Stock purchase warrant exercisable at $4.50
per share. The shares underlying the Warrant are entitled to piggyback
registration rights, with the registration expenses to be paid by the
Company. The Company also paid a $50,000 finder's fee to Liviakis Financial
Communications, Inc. ("LFC"), which was 2.5% of the amount raised on the
sale of the 6% Debentures, under the consulting relationship between the
Company and LFC. Messrs. John M. Liviakis and Robert B. Prag, who are
affiliates of LFC, are significant shareholders of the Company.
The 6% Debentures are convertible into shares of Common Stock at the
option of the holders at the lesser of: 80% of the average closing bid
price of the Common Stock over the five trading days prior to conversion;
or $4.25 per share (the "Fixed Conversion Price"). Fifty percent of the 6%
Debentures held by any holder become convertible on the earlier of
effective registration of the underlying shares with the SEC or 120 days
after the Initial Issuance Date. The remaining 50% of the 6% Debentures
become convertible 150 days after the Initial Issuance Date. Subject to
certain adjustments described below, the 6% Debentures cannot be converted
below a "floor" price, which is $2.125 per share. The floor was eliminated
180 days after the Initial Issuance Date.
Once the underlying Common Stock has been registered with the SEC for
at least 90 days and the Common Stock has traded at or above $8.50 for at
least 20 consecutive trading days (based on the average closing bid price
over such period), the Company can require conversion of the 6%
Debentures, subject to certain restrictions if the stock is suspended from
trading or the registration of the underlying Common Stock is suspended.
Any 6% Debentures that have not been converted to Common Stock as of
the maturity date, or upon a merger, consolidation or other sale of the
Company or its assets in which the Company is not the surviving entity,
are to either be converted into Common Stock at the conversion price then
in effect or, at the option of the holders, must be redeemed by the
Company.
The Company committed to file a registration statement covering the
shares of Common Stock underlying the 6% Debentures by October 7, 1998
(which it did not do). Since the registration was not effective with the
SEC within 120 calendar days of the Initial Issuance Date, the Company
became obligated to pay a cash penalty of two percent (2%) of the face
amount of the 6% Debentures and thereafter an amount equal to three
percent (3%) of the face amount for every thirty calendar days (or any
fraction thereof) until the registration is effective.
13
<PAGE>
Because the Company failed to obtain effectiveness of a registration
statement by January 18, 1999, the holders have the right to require the
Company to redeem the 6% Debentures at 120% of face value plus accrued and
unpaid interest and penalties to the date of redemption. The Company
intends to file a registration statement covering the Common Stock issuable
upon conversion of the 6% Debentures as soon as practicable, and will
include in that registration statement a sufficient number of shares to
cover the additional warrants issued since January 1998 and the 290,000
shares issued to an affiliate of the Company which have registration
rights. The Company may also include additional shares of Common Stock to
cover the conversion of shares of Series A Preferred Stock for which a
sufficient number of shares were not included in the August SB-2 owing to a
decline in the Market Price for the Common Stock subsequent to the time the
August SB-2 was filed, although as noted above, all shares of Common Stock
issuable on conversion of , or as dividends on, the Series A Preferred
Stock became eligible for sale under SEC Rule 144 as of December 10, 1998.
The ability to sell the shares under SEC Rule 144 may abrogate the need to
include those shares in a future registration statement.. The Company is in
discussion with various holders of the Series A Preferred Stock and the 6%
Debentures regarding a possible restructuring or redemption of these
securities.
Recent Borrowings
-----------------
On October 28, 1998, the Company borrowed $500,000 from the CEO and 50%
owner of Cardservice International, Inc. The note bears interest at 8% per
annum and is payable in full on the earlier of the receipt by the Company
of proceeds from the sale of the Company's Common Stock to this individual
or March 1, 1999. In consideration for the loan, the Company also agreed
to issue a Common Stock Purchase Warrant exercisable to purchase 25,000
shares of Common Stock at $3.038 per share through October 27, 2001.
During the second fiscal quarter of 1999, the Company received two
bridge loans from Liviakis Financial Communications, Inc. (LFC) totaling
$300,000 in the form of 8% Notes Payable due April 1, 1999. In January and
February, the Company received an additional $350,000 of bridge loans in
the form of 8% Notes Payable, due April 1, 1999.
Current Financing Initiatives
-----------------------------
The Company has several initiatives that it is currently pursuing to
raise additional capital. On September 30, 1998, the Company entered into
a non-binding Letter of Intent with Cardservice International, Inc. to
form a non-exclusive strategic partnership involving joint- product and
distribution initiatives. The Letter of Intent also includes a provision
pursuant to which a $2,000,000 direct equity investment in USWD by CSI and
its chief executive officer may be made if the terms of a definitive
agreement can be reached. The parties are working on the completion of
definitive agreements.
The Company is also exploring similar initiatives with several other
potential strategic partners as well as continuing efforts to raise
capital from other debt or equity sources.
Year 2000 Issues
----------------
The Company has completed a review of the impact of the Year 2000 issue
on the Company's business. This issue concerns the potential problems and
liabilities faced by all users and persons dependent on computers that
might result from software or system failure or malfunctions if the
systems fail to properly recognize the date change between 1999 and 2000.
The Company's internal business systems have been evaluated, and with the
exception of the accounting system, are Year 2000 compatible. The Company
intends to replace the accounting software during fiscal year 1999. The
cost of conversion is not expected to be material. The engineering staff
has made an assessment of USWD products and is not aware of any
complications regarding the products the Company delivers to the end
users. The specific entities providing credit card processing services to
the Company have active Y2K projects underway. On a broader basis, the
Company is reliant on the electronic payments infrastructure utilized by
credit card processors, banks and financial institutions within the United
States, and could be subject to unresolved issues which impact this
infrastructure. The Company could be adversely, materially affected, both
operationally and financially, to the extent third parties with which it
interfaces, either directly or indirectly, has not properly addressed
their Year 2000 issues.
14
<PAGE>
Fiscal 1999 Compared to Fiscal 1998
Net Revenue
-----------
Revenue of $520,000 for the second quarter of fiscal 1999 increased
significantly from revenue of $116,000 generated during the second quarter
of fiscal 1998 as the Company continued the shift to its new business
model. For the six month period, total revenue more than doubled to
$881,000 from the prior year's $386,000. In the second quarter, product
sales of POS-500, WEPSSM Enabler, POS-500 and other equipment sales
increased by approximately $248,000 while service revenue, which includes
application fees, transaction processing, and repair revenue increased by
approximately $156,000. Services revenue of $177,000 decreased somewhat
from the immediate preceding quarter as the Company discontinued sales
under its former credit card processing offering and is just starting the
placement of units under the new WEPSSM program. In the latter part of the
first quarter of fiscal 1999, the Company embarked on a significant shift
in its product and distribution strategy. This involves the integration of
the Company's WEPSSM modem and server technology into the product
offerings of other terminal manufacturers and development of distribution
agreements with the major merchant card acquirers and card processors. The
Company anticipates that this transition will take several months as new
products, services and distribution capabilities are introduced to the
market.
Gross Profit
------------
Gross profit of $96,000 in the second quarter of fiscal 1999 increased
from the prior year level of $55,000, although the profit margin decreased
as a percent of revenue to 18% in the current quarter from 47% in the
prior quarter. This was attributable to a decrease in product margins as
product prices were adjusted to wholesale versus retail structure. The
margin on the services revenue component was negligible do to the sales
shift noted above. The services cost structure in the second quarter
reflects the components of the previous business model which includes
ongoing TRANZ Enabler amortization for processing units deployed. Efforts
are also underway to eliminate underutilized CDPD addresses from the CDPD
carrying cost. The new WEPSTM service is expected to improve the margin
relationships as it becomes a more predominate component of the services
offering in the future. Gross profit increased by $41,000 on a significant
increase in revenue during the six-month period. The decrease in gross
profit percent for the six-month period was attributable to the second
quarter variance described above.
Operating Expenses
------------------
Selling, general and administrative expense decreased from $2,853,000
in the second quarter of fiscal 1998 to $1,382,000 in the second quarter
of fiscal 1999. The large decrease in expense was primarily attributable
to a quarterly adjustment for a variable stock option resulting in a
$380,000 non-cash credit to reflect the change in the carrying value of
the option due to the change in the Company's stock price during the
quarter versus a charge in the prior year second quarter of $1,187,000.
Non-cash consulting expense of $510,000 decreased by $106,000 in the
current quarter. In response to the new business model, the Company's
personnel was reduced from 53 in September 98 to 35 at the end of December
98. This will reduce future salary related expense by approximately
$100,000 per month. Several key consultants were added to the management
staff and compensated with stock options versus cash. The option valuation
resulted in a $228,000 non-cash charge to general and administrative
expense in the quarter. Expense for the six-month period decreased by
$1,073,000 to $3,068,000, predominately due to the accounting for the
variable stock option noted above.
Research and development expenses increased by $100,000 from the prior
fiscal year's quarter to $178,000 in the second fiscal quarter of 1999.
This increase was primarily related to the non-cash stock option valuation
associated with a staff consultant. For the six-month period, research and
development expense increased by $85,000 to $258,000 in the current fiscal
year, with a decrease in materials expense partially offsetting the
increased staff expense.
Interest Expense and Other Income
---------------------------------
Interest expense of $117,000 in the current quarter includes accrued
interest on the 6% Convertible Debentures and various notes payable, and a
$52,000 valuation on warrants issued in conjunction with a $500,000 bridge
loan. The prior year interest expense includes a $225,000 non-cash charge
to interest expense in the second quarter related to the December 97
private placement. The convertible features of the debenture include an
"in-the-money" convertible option that allows the holder to obtain shares
of common stock at a
15
<PAGE>
discount off of fair market value. For the six-month period, interest
expense decreased from $268,000 to $233,000 in the current fiscal year.
Other expense of $351,000 in the second quarter resulted from the
valuation of warrants issued to several holders of the Series A Preferred
Stock in return for an agreement to restrict conversion of shares into
common stock during the quarter. The current six-month period included a
$190,000 credit resulting from the restructuring of a note payable to a
former terminal equipment supplier.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
----------------------------------------------------
The Company continues to have significant problems due to its financial
condition and lack of liquidity. While management is optimistic with its
medium and long term opportunities, the Company is constrained by its
immediate financial condition and requirement for increased liquidity. The
Company has accumulated a deficit of approximately $32 million since
inception to December 31, 1998, with a working capital deficit of
approximately $3,500,000 at December 30, 1998, versus a deficit of
$2,967,000 at year-end June 30, 1998. The Company has several immediate
financial obligations in the form of notes payable secured by
substantially all available assets of the Company, commitments on the 6%
Convertible Debentures, and several key vendor payables. The Company
believes that it will be able to restructure these commitments as
necessary while it completes an anticipated financing event designed to
satisfy its obligations and fund the business plan, although no assurance
can be given that this will be the case.
The increase in other current assets from June 30, 1998 to December 31,
1998 primarily represents the balance of pre-paid consulting services
related to the New LFC Agreement which continue to be charged to
operations over the remaining term of the agreement. The increase in other
assets over the same period is attributable to unamortized debt issuance
expense related to the July 1998 6% Convertible Debenture. The increase in
current borrowings at December 31, 1998 versus June 30, 1998 reflect the
additional bridge loans assumed by the Company, while the increase in long
term borrowings is related to the July 1998 6% Convertible Debenture.
With the implementation of the new distribution strategy adopted in the
latter part of the first quarter of fiscal 1999 (see Market Penetration
through Telecommunication Carriers and Revisions to Business Plan"), the
Company has taken steps to reduce spending. With the new focus on
distribution through large merchant acquirers, the Company has reduced
personnel from 60 at June 30, 1998, to 35 as of December 31, 1998, with
most of the reduction occurring in the direct sales force. With the
appointment of Roger Peirce as CEO, the Company has been able to avail
itself of the services of several key senior level personnel, engaged
under consulting contracts with remuneration in the form of options rather
than cash. Based on current staffing levels, the Company's expenditures
are running at a monthly rate of approximately $325,000 versus $450,000
per month during the fourth quarter of fiscal 1998. However, execution of
the Company's current business plan is dependent on a significant debt or
equity financing event in the immediate future. The Company continues to
work both directly and through its consultants to secure additional debt
or equity financing which is required to fund operations while a
significant recurring revenue stream is built. While management is
confident it can accomplish this objective, the inability of the Company
to secure additional financing in the near term could adversely impact the
Company's financial position, including its ability to continue as a going
concern.
16
<PAGE>
PART II
ITEM 1 - LITIGATION
Settlement of Claims of Certain Noteholders
In April 1998, the Company entered into a settlement agreement with
certain Noteholders. Terms of the settlement entitled the Noteholders to a
guarantee or put provision. The guarantee provision of the settlement
agreement allows the former Noteholders to recover the difference between
the guarantee price (which is $3.00 per share) and the gross amount the
Noteholder receives upon a sale of the shares. The guarantee is operative
at any time during the one year period commencing on the date the shares
became saleable under SEC Rule 144. The Company is obligated to pay the
amount due within thirty days of receiving a demand, accompanied by
documentation confirming the sale. Under the "put" provision of the
settlement agreement, the former Noteholders will have a five day period
commencing on the date one year from the date the shares become saleable
under SEC Rule 144 during which the former Noteholders may "put" any
shares remaining unsold by them at the time back to the Company. Upon
exercise of the put, the Company must either (1) purchase the shares for
the put price which is $3.00 per share, or (2) require the shareholder to
sell the shares into the market, with the Company making up the difference
between the put price and the gross amount received by the shareholder
upon such sale, within 15 days after receipt of written notice and
documentation confirming the sale. The shares originally issued upon
conversion of the notes and the additional shares resulting from the
settlement are reflected as Redeemable Common Stock. The originally issued
shares are reflected at their conversion value adjusted for the value
attributable to the guarantee and "put" provisions. In the event
redemption of such shares becomes probable and the actual redemption
amount is in excess of the carrying amount, such excess amount will be
recorded as litigation settlement expense. The additional shares are
reflected at their redemption value. As of September 30, 1998,
approximately 128,000 shares subject to the guarantee and "put" provision,
with a carrying value of $232,000 remained outstanding and have a maximum
redemption value of approximately $384,000 prior to any reduction for
amounts the holder may receive upon the sale of such shares.
ITEM 2 - CHANGES IN SECURITIES
Recent Issuances of Unregistered Securities:
During the fiscal quarter ended December 30, 1998, the Company sold or
issued the following securities without registering the securities under
the Securities Act of 1933, as amended (the "Act").
October 15, 1998: 78,098 Common Stock purchase warrants issued to four
holders of the Series A Preferred Stock, exercisable at $2.40 through
October 15, 2001;
November 15, 1998: 67,084 Common Stock purchase warrants issued to four
holders of the Series A Preferred Stock, exercisable at $3.36 through
November 15, 2001;
December 15, 1998: 67,084 Common Stock purchase warrants issued to four
holders of the Series A Preferred Stock, exercisable at $3.69 through
December 15, 2001.
The Company relied upon the registration exemption contained in Section
4(2) of the Securities Act of 1933 for these transactions. None of the
transactions involved a public offering. Representations were received
from the purchasers of the securities to the effect that the purchasers
were taking for investment purposes only and not with a view to
distribution; "restricted securities" legends were or will be imprinted
on all certificates; and stop-transfer instructions will be lodged with
the Company's transfer agent as to all shares of common stock issued upon
exercise of the Warrants.
17
<PAGE>
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
6% Convertible Subordinated Debentures Due July 21, 2000
Pursuant to the Debenture Agreement relating to the Company's 6%
Convertible Subordinated Debentures due July 21, 2000, the Company
committed to file a registration statement with the Securities and
Exchange Commission by October 7, 1998, covering the shares of Common
Stock issuable upon conversion of the 6% Debentures which the Company sold
in July 1998. That registration statement has not been filed as of the
date of filing of this Report. The security required effective
registration of the underlying shares within 120 days of July 21, 1998,
with the following cash penalties for failure to obtain effectiveness by
that time: 2% of the face amount of the Debentures at 120 days; and 3% of
the face amount of the Debentures for each additional 30 day period (or
any part of any 30-day period) during which the registration statement
remains ineffective. The holders also have the right to require the
Company to redeem the Debentures for 120% of face value plus accrued
interest if the shares were not registered by January 17, 1999. The
initial interest payment through December 31, 1998, of approximately
$55,000, was due and payable by January 15, 1999. The Company has not made
the penalty or interest payments as of the date of filing this Report, and
does not presently have the resources to do so. The holders also have the
right to accelerate the payment of all amounts due and owing under the
Debentures if an "Event of Default" (as defined in the Debenture
Agreement) is not cured within 45 days of its occurrence. Failure to pay
the penalties and/or interest within the periods required by the Debenture
Agreement may constitute "Events of Default."
Series A Preferred Stock
In September 1998, the Company redeemed a total of 833,000 shares of
its Series A Preferred Stock. In conjunction with that redemption, the
Company also agreed to issue warrants exercisable to purchase a total of
212,257 shares of Common Stock to the holders of the remaining shares of
Series A Preferred Stock. The redemption agreement includes provisions
that obligated the Company to file a registration statement by October 31,
1998, covering any additional shares issuable upon conversion of the
Series A Preferred Stock (beyond those included in the original SB-2
Registration Statement that was declared effective as of August 7, 1998,
which, because of a declining stock price, included an insufficient number
of shares to cover conversion of all of the outstanding shares of Series A
Preferred Stock), plus the shares issuable upon exercise of the warrants.
The Company has not filed this registration statement as of the date of
filing of this Report, and penalties similar to those contained in the
original Designation of Series A Preferred Stock apply if the Company is
"late" in getting the shares registered.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required by Item 601 of Regulation S-B
27 Financial Data Schedule
b) Reports on Form 8-K - none filed during this reporting period
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. WIRELESS DATA, INC.
Registrant
Date: February 15, 1999 By: \s\ Roger Peirce
--------------------------- ---------------------------
Chief Executive Officer
February 15, 1999 By: \s\ Robert E. Robichaud
--------------------------- ---------------------------
Chief Financial Officer
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