SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
|X| Quarterly Report under Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 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
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(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
------------------------------------
(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 March 31, 1998 there were outstanding 9,324,601 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.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited and Restated)
Balance Sheets --
March 31, 1998, and June 30, 1997...............................3
Statements of Operations --
Three Months and Nine Months Ended March 31, 1998 and 1997......4
Statements of Cash Flows --
Nine Months Ended March 31, 1998 and 1997.......................5
Notes to Financial Statements (Restated).........................6-12
Item 2. Management's Discussion and Analysis (Restated).................13-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................................19
Item 2. Changes in Securities..............................................21
Item 3. Defaults Upon Senior Securities....................................22
Item 4. Submission of Matters to a Vote of Security Holders................23
Item 5. Other Information..................................................23
Item 6. Exhibits and Reports on Form 8-K...................................24
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
This amended filing contains restated financial information and related
disclosures for the three and nine months ended March 31, 1998 (See Note 1 to
Financial Statements). Quarterly financial statement information and related
disclosures included in this amended filing reflect, where appropriate, changes
as a result of the restatement. This information is consistent with the contents
of the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30,
1998 which, was filed with the SEC on December 17, 1998 (See "Note 15. Unaudited
Restated Quarterly Financial Information," in the 10-KSB).
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U.S. WIRELESS DATA, INC.
BALANCE SHEET
(Unaudited and Restated)
March 31, 1998 June 30, 1997
-------------- -------------
(As Restated)
-------------
<S> <C> <C>
ASSETS
Current Assets:
Cash ...................................................... $ 65,000 $ 6,000
Accounts receivable, net of allowance for ................. 80,000 131,000
doubtful accounts of $48,000 at March 31, 1998;
$16,000 at June 30, 1997
Inventory, net ............................................ 880,000 209,000
Other current assets ...................................... 571,000 103,000
------------ ------------
Total current assets ............................. 1,596,000 449,000
Processing units - deployed ....................................... 383,000 --
Property and equipment, net ....................................... 287,000 41,000
Other assets ...................................................... 68,000 11,000
------------ ------------
Total assets ...................................................... $ 2,334,000 $ 501,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable .......................................... $ 1,275,000 $ 354,000
Accrued liabilities ....................................... 4,181,000 126,000
Borrowings, current portion ............................... 828,000 738,000
------------ ------------
Total current liabilities ......................... 6,284,000 1,218,000
------------ ------------
Borrowings, long-term portion ..................................... 45,000 45,000
------------ ------------
Total Liabilities ................................................. 6,329,000 1,263,000
------------ ------------
Redeemable common stock and warrants .............................. 560,000 --
------------ ------------
Stockholders' Deficit:
Preferred Stock, 12,000,000 authorized, 3,060,000 Series A 3,060,000 --
Issued and outstanding
Common stock, no par value, 40,000,000 .................... 9,325,000 5,614,000
shares authorized; 9,324,601 and 5,613,952 shares
issued and outstanding at March 31, 1998
June 30, 1997, respectively
Additional paid-in capital ................................ 8,872,000 10,613,000
Accumulated deficit ....................................... (25,812,000) (16,961,000)
Notes Receivable from Shareholder ......................... -- (28,000)
------------ ------------
Total stockholders' deficit ....................... (4,555,000) (762,000)
------------ ------------
Total liabilities and stockholders' deficit ....................... $ 2,334,000 $ 501,000
============ ============
</TABLE>
Accompanying Notes are an integral part of the Financial Statements
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U.S. WIRELESS DATA, INC.
STATEMENTS OF OPERATIONS
(Unaudited and Restated)
Three Months Ended Nine Months Ended
3/31/98 3/31/97 3/31/98 3/31/97
------- ------- ------- -------
(As Restated) (As Restated)
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<S> <C> <C> <C> <C>
Revenue .................................... $ 252,000 $ 244,000 $ 638,000 $ 1,046,000
Cost of revenue ............................ 115,000 115,000 352,000 602,000
----------- ----------- ----------- -----------
Gross profit ............................... 137,000 129,000 286,000 444,000
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative .... 2,518,000 123,000 6,659,000 463,000
Research and development ............... 78,000 88,000 251,000 301,000
Litigation settlement .................. 1,353,000 -- 1,353,000 --
----------- ----------- ----------- -----------
Total operating expense ................ 3,949,000 211,000 8,263,000 764,000
----------- ----------- ----------- -----------
Loss from operations ....................... (3,812,000) (82,000) (7,977,000) (320,000)
Interest income
Interest expense ........................... (439,000) (8,000) (707,000) (24,000)
Other income ............................... (165,000) 7,000 (166,000) 31,000
----------- ----------- ----------- -----------
Net loss ................................... $(4,416,000) $ (83,000) $(8,850,000) $ (313,000)
=========== =========== =========== ===========
Basic and diluted net loss per share: ...... $ (.48) $ (.02) $ (1.01) $ (.07)
=========== =========== =========== ===========
Weighted average common shares outstanding - 9,281,000 4,984,000 8,753,000 4,815.000
basic and diluted =========== =========== =========== ===========
</TABLE>
Accompanying Notes are an integral part of the Financial Statements
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U.S. WIRELESS DATA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited and Restated)
Nine Months Ended
March 31,1998 March 31, 1997
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(As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ............................................. $(8,850,000) $ (313,000)
Depreciation and amortization ........................ 65,000 51,000
Non-cash consulting services and warrant extension ... 2,124,000 15,000
Non-cash compensation - stock option ................. 1,707,000 --
Non-cash interest expense - debentures ............... 637,000 --
Non-cash litigation expense .......................... 1,353,000 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable ........................ 46,000 18,000
Inventory .................................. (671,000) 168,000
Processing units - deployed ................ (383,000) --
Other current assets ....................... (152,000) 35,000
Increase (decrease) in:
Accounts payable ........................... 911,000 102,000
Accrued liabilities ........................ 52,000 (90,000)
Borrowings ................................. -- (23,000)
----------- -----------
Net cash used in operating activities ...... (3,161,000) (37,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, plant, and equipment ........... (291,000) 1,000
Increase in other assets ............................. (56,000) --
----------- -----------
Net cash used in investing activities ...... (347,000) 1,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ...................... 585,000 28,000
Proceeds from sale of options to purchase common stock 192,000 --
Note receivable ...................................... 28,000 (28,000)
Net Proceeds from issuance of debt ................... 2,762,000 --
----------- -----------
Net cash provided by financing activities ... 3,567,000 --
----------- -----------
INCREASE (DECREASE) IN CASH ............................... 59,000 (36,000)
CASH, Beginning of period ................................. 6,000 40,000
----------- -----------
CASH, End of period ....................................... $ 65,000 $ 4,000
=========== ===========
</TABLE>
Non-cash Financing and Investing:
1. Conversion of $50,000 Notes Payable to 75,000 shares of Common Stock
2. Conversion of $3,060,000 Convertible Debentures to 3,060,000 shares of
Preferred Stock
Accompanying Notes are an integral part of the Financial Statements
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U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited and Restated)
Note 1 -- RESTATEMENT
The accompanying restated balance sheet as of March 31, 1998 and the
accompanying restated statement of operations for the three months and
nine-months ended March 31, 1998 have been restated to reflect the proper
treatment of the Liviakis Financial Communications, Inc. financing and
consulting transactions (see Note 6 to Financial Statements), the granting
of a variable option (see Note 7 to Financial Statements) and the
settlement with certain noteholders regarding the tradability of shares to
be issued upon conversion of their notes (see Note 9 to Financial
Statements). The effect of these restatements is to increase selling,
general and administrative expenses and increase reported loss by
$1,114,000 and $2,985,000 for the three months and nine months ended March
31, 1998 ($0.12 and $0.34 for fully diluted earnings per share)
respectively, reduce total assets by $8,000, increase total liabilities by
$4,003,000, increase redeemable common stock and warrants by $560,000 and
increase stockholders' deficit by $4,571,000. These restatements do not
affect previously reported net cash flows.
Note 2 -- ACCOUNTING PRINCIPLES
The balance sheet as of March 31, 1998, as well as the statements of
operations for the three and nine months ended March 31, 1998 and March
31, 1997, and statement of cash flows for the nine months ended March 31,
1998 and March 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 March 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 be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for
fiscal year ended June 30, 1997. The results of operations for interim
periods presented are not necessarily indicative of the operating results
for the full year.
Note 3 -- FINANCIAL CONDITION AND LIQUIDITY (Restated)
The Company has incurred an accumulated deficit of approximately $25.8
million since inception, including a loss of $8.9 million during the first
nine months of fiscal year 1998. In order to attempt to continue as a
going concern, the Company has transitioned to a recurring revenue focus,
is working on programs to increase revenue levels and product margins, and
is negotiating new distribution agreements. In December 1997, the Company
closed a private placement offering of $3,060,000 of Convertible
Subordinated Debentures. After associated fees and repayment of bridge
loans incurred during the quarter ended December 31, 1997, the Company
retained approximately $2,200,000 to apply to immediate working capital
needs and the national launch of its proprietary wireless transaction
processing solution. The current sales volume is inadequate to fund the
infrastructure growth and business transition. As a result, the Company
anticipates the continued roll out of the GTE Wireless and Bell Atlantic
joint marketing and operating agreements and potential distribution
programs with other cellular carriers will require additional debt or
equity financing in the immediate future.
The accompanying 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.
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Note 4 -- 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 and nine month periods ended March 31, 1997 have been restated to
conform with SFAS No.128.
Note 5 -- FINANCINGS
As the Company entered the first quarter of fiscal 1998, it faced the need
for increased liquidity to meet its obligations and fund a significant
rollout of the CDPD TRANZ Enabler product. In August 1997, through an
introduction by the entrenet Group, LLC. ("entrenet"), the Company sold 3.5
million unregistered shares of common stock and 1.6 million warrants to
purchase common stock at an exercise price of $0.01 per share to two
officers of Liviakis Financial Communications, Inc. ("LFC") for $500,000 in
cash. The warrants are exercisable from January 15, 1998 through August 4,
2002. The securities sold to the two officers of LFC carry future
registration rights, including a one-time demand registration, with fees to
be paid by the Company (see also Note 6, below). In accordance with its
agreement with entrenet, the Company granted entrenet the right to receive
280,000 unregistered shares of the Company's Common Stock as an 8% finder's
fee for the direct source financing. The stock was issued to entrenet
following shareholder approval for an increase in authorized Common Stock,
which occurred on February 6, 1998. The agreement provides entrenet with
"piggyback registration rights."
On December 10, 1997 the Company closed a private placement offering of
$3,060,000 principal amount of 8% Adjustable Rate Convertible Subordinated
Debentures. After associated fees and repayment of bridge loans incurred
during the quarter, the Company retained approximately $2,200,000 to apply
to immediate working capital needs and the national launch of its
proprietary wireless transaction processing solution. 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 discount of fair
market value. The value of the in-the-money provision has been allocated to
stockholder's equity (deficit). The difference between the realized value
and face value of the debt was recognized as non-cash interest expense
between the date of issue and date of conversion into preferred stock,
which was effected as of February 9, 1998. Non-cash interest expense of
approximately $225,000 and $397,000 was recorded in the second and third
fiscal quarters, respectively. As the result of the approval by
shareholders on February 6, 1998, the Company authorized 4,000,000 shares
of no par value Series "A" Cumulative Convertible Redeemable Preferred
Stock (the "Preferred Stock"), with a stated value of $1.00 per share. On
that date, the debentures automatically converted into 3,060,000 shares of
Preferred Stock. The Preferred Stock gives the holder the right to convert
principal into shares of Common Stock in the future at 80% of market price,
but not lower than $4 per share for the first 270 days, and no higher than
$6 per share. The security carries an 8% dividend rate, which drops to a 4%
dividend rate once the underlying shares of Common Stock are registered
with the Securities and Exchange Commission. The Company is required to
register the shares of Common Stock underlying the securities sold in the
offering, plus the shares of Common Stock issuable as interest on the
Debentures and dividends on the Preferred Stock.
In order to satisfy a portion of its immediate short term capital
requirements the Company entered into an agreement on March 12, 1998, with
a stockholder to allow the Company to assign to third parties, options it
has held since 1995, on 367,684 shares of the Company's Common Stock owned
by that stockholder, which the Company has the right to purchase at $.25
per share. The Company anticipates that it will sell and assign these
options to accredited investors in blocks of no less than 50,000 shares
between the present time and October 5, 1998, the date on which its option
expires. The amount of cash that may be provided to the Company through
this source is not readily determinable, as it will vary depending on the
market price of the Company's Common Stock at the time the Company sells
each option. Through March 31, 1998, the Company assigned its Call Option
on 50,000 shares owned by stockholder's assignee, Tillicombe International,
LDC, to RBB Bank Aktiengesellschaft, the agent which owns 1,600,000 shares
of the Company's Series A Preferred Stock. During April 1998, additional
options for 150,000 shares were assigned. RBB Bank purchased the Call
Options in four increments of 50,000 share options each, and has
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paid the Company 85% of the average last sale price of the underlying
shares over the five days prior to the date of acquiring each Call Option,
less the Call Option exercise price of $.25 per share. In each transaction,
RBB Bank must pay the acquisition price for the Call Option to the Company,
as well as the exercise price to Tillicombe prior to taking delivery of the
shares.
Note 6 -- -RELATED PARTIES (Restated)
Transactions with Liviakis Financial Communications, Inc. ("LFC") and
Affiliates of LFC
In July of 1997, the Company entered into a Consulting Agreement with
Liviakis Financial Communications, Inc. ("LFC") pursuant to which LFC
provides the Company with financial and business consulting and public and
investor relations services. The Company was obligated to pay LFC
consulting fees of $10,000 in cash and 300,000 shares of its Common Stock
over the one-year term of the Consulting Agreement. Pursuant to the
Consulting Agreement, the Company must also pay LFC cash equal to 2.5% of
the gross proceeds received in any direct financing located for the Company
by LFC. In connection with the closing of the sale of $3,060,000 of 8%
Convertible Debentures, the Company paid LFC $76,500 in December 1997.
The Company also sold a total of 3,500,000 shares of Common Stock and
warrants to purchase up to an additional 1,600,000 shares of Common Stock
exercisable at $.01 per share to two LFC affiliates in August 1997 for
$500,000 in cash. Pursuant to this transaction, LFC and its affiliates
became significant shareholders of the Company. The Common Stock issued
(and issuable pursuant to the Consulting Agreement and upon exercise of the
warrants) to LFC and its affiliates carries certain registration rights.
The warrants provide that if for any reason the Company does not issue
shares upon exercise, the Company is required to repurchase the warrants
for the difference between the $.01 exercise price and the then-current
market price of the Common Stock. Pursuant to the agreements, the LFC
affiliates were granted the right to appoint certain officers and directors
of the Company.
Since the LFC related financing transaction and the LFC Consulting
Agreement were entered into by the Company at approximately the same time,
the Company has treated these transactions as one transaction for
accounting purposes. Based on the fair market value of the Common Stock as
determined by an independent valuation, the initial 3,500,000 shares of
Common Stock and warrants for 1,600,000 shares of Common Stock issued in
the transactions, net of cash proceeds received, were valued at
approximately $1,285,000 and recorded as prepaid consulting services. The
consulting services are amortized on a straight-line basis over the term of
the Consulting Agreement commencing with the July 25, 1997 effective date
of the agreement. The warrants are classified as redeemable securities as a
result of the repurchase provisions described above. The 300,000 shares
which are issuable over the term of the contract are being valued as such
shares vest, and resulted in an additional $164,000 and $847,000 in
consulting expenses during the three-months and nine-months ended March 31,
1998, respectively.
Between October 14 and November 30, 1997, the Company received several
bridge loans from LFC in the total amount of $475,000. The Company was
obligated to pay LFC interest on the amount borrowed at the rate of 9% per
annum. The Company paid LFC the amount due on these loans, with interest at
the stated rate, from the proceeds of the sale of the 8% Convertible
Debentures sold on December 10, 1997.
Transactions with entrenet Group, LLC
In June 1997, the Company entered into a consulting agreement with entrenet
Group, LLC ("entrenet"), for purposes of assisting the Company in strategic
planning, the creation of a detailed business and marketing plan and in
locating financing sources. For its services, the Company issued a $150,000
convertible promissory note to entrenet, with interest payable at 10% per
annum, due in full on or before June 2, 1998. In addition, the Company was
obligated to pay entrenet a finder's fee of 8% for any direct financing it
located for the Company, payable in Company securities identical to those
issued in the subject financing. . entrenet located the $500,000 LFC
financing. The Company and entrenet were in discussions over the
interpretation of the provisions specifying the consideration payable to
entrenet as its finder's fee for locating LFC. The matter was resolved in
November 1997, whereby the Company agreed to issue entrenet a total of
300,000 shares of its Common Stock for the promissory note and 280,000
shares of Common Stock as payment of
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the finder's fee. Those shares were issued in April 1998 and included in
the Registration Statement, which became effective August 7, 1998.
As of March 12, 1998, the Company entered into an agreement with entrenet
to provide business and financial consulting services to the Company and to
assist the Company in locating additional financing. The term of the
agreement is for six months from March 12, 1998 and renews for additional
six-month terms unless at least 60 days notice is given to terminate the
agreement prior to the end of a term. For its advisory services under the
agreement, entrenet earned a fee of $60,000. In addition, entrenet received
a Common Stock Purchase Warrant to purchase 10,435 shares at $5.75 per
share, exercisable until March 11, 2003. The shares issuable pursuant to
the warrant carry certain piggyback registration rights. Upon the
consummation of any financing transaction entered into by the Company
during the term of the agreement (with the exception of financings from
certain identified, excluded sources) or for two years after termination
with respect to any financing obtained from a source introduced to the
Company by entrenet, entrenet is entitled to receive cash compensation as
follows: for debt financings, 2% of the total amount of the financing,
payable in cash or in the form of a 10% note due in one year; for equity
financings, 7% of the total gross financing proceeds (payable in cash),
unless there is a licensed investment banker entitled to receive
compensation as a result of the transaction, in which case the amount
payable to entrenet is reduced to 2 1/2% of the gross proceeds (payable in
cash), plus a five year Common Stock purchase warrant which entitles
entrenet to purchase that number of shares of Common Stock equal in value
(as determined by a defined fair market price) to the full amount of
compensation payable to entrenet in cash, at a per share exercise price
equal to the then current market value of the Common Stock (as defined);
for mergers and acquisitions, 5% of the total consideration paid or
received in the transaction (payable in cash), unless there is a licensed
investment banker entitled to receive compensation as a result of the
transaction, in which case the amount payable to entrenet is reduced to 3%
(payable in cash) of such consideration, plus a five year Common Stock
purchase warrant which entitles entrenet to purchase that number of shares
of Common Stock equal in value (as determined by a defined fair market
price) to the full amount of compensation payable to entrenet in cash, at a
per share exercise price equal to the then current market value of the
Common Stock (as defined). If entrenet assists the Company in locating an
executive-level candidate who is hired by the Company, entrenet is entitled
to receive a fee equal to 30% (payable in cash) of the candidate's total
first year compensation.
Note 7 - VARIABLE OPTION
In August 1997, the Company granted an option to purchase 600,000 shares of
common stock to its Chief Executive Officer , and in November 1997, agreed
to pay the officer any additional income taxes which the officer may incur
as a result of the option being a non-qualified stock option as compared to
an incentive stock option. Due to this agreement, the stock options, which
the Company had previously accounted for based on the fair value as of the
grant date, are being accounted for as variable options resulting in an
additional $519,000 and $1,707,000 of non-cash compensation expense in the
three-months and nine-months ended March 31, 1998, respectively. The
Company's previously reported balance sheet and statement of operations are
being restated to reflect this additional expense.
Note 8 - ACCOUNTING FOR PROCESSING UNITS DEPLOYED
Merchants that subscribe to the Company's credit card processing service
usually receive a TRANZ Enabler unit that provides the wireless
communications and processing functionality. As these units are deployed at
a customer location, the asset value is transferred from inventory to
"Processing units - deployed" and depreciated via a charge to Cost of Sales
over a 48 month life. The Company retains title to the TRANZ Enabler units
and earns usage income on the units while they are deployed at the customer
location.
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Note 9 -- LITIGATION
Securities Class Actions Settlements
In September 1996, the Company agreed to terms in settlement of securities
fraud litigation, pending since 1994, which was brought in connection with
the Company's initial public offering in December 1993. The parties'
agreement (the "Settlement Agreement") was filed in the United States
District Court for the District of Colorado on January 15, 1997. By its
order approving the settlement, the court certified a plaintiffs'
settlement class and provided the mechanism for payment of claims. The
Company contributed $10,000 to the total settlement fund of $2,150,000. The
remaining portion of the settlement was contributed by certain underwriters
of the Company's initial public offering and its former securities counsel.
No objections to the Settlement Agreement were made. No potential class
member opted-out of the settlement and all are bound by the release granted
the Company. All claims against the Company in those consolidated cases
were dismissed by final federal court order on September 4, 1997. No appeal
was filed. Similar state court claims were dismissed by Colorado district
court order dated October 9, 1997, and no appeals have been filed in that
case.
To resolve cross-claims asserted by the underwriters in the litigation, the
Company agreed to issue a total of 600,000 shares of Common Stock valued at
approximately $94,000 upon the effective date of the Settlement Agreement,
which was April 26, 1997. The shares issued under this settlement become
saleable under SEC Rule 144 commencing on April 26, 1998. The Company has
agreed to register such shares upon demand of holders of not less than 25%
of the shares. Further, on September 17, 1997, the Company agreed to entry
of a consent judgment against it and in favor the sole shareholder of an
underwriter, in the amount of $60,000 payable over a three year period.
Settlement with Consultant
In July 1997, the Company executed a two-year agreement effective as of
April 1, 1997 for consulting services. In addition to monthly cash
compensation, the consultant received a $50,000 two-year convertible note
with 10% interest per annum. The note was convertible into Common Stock at
$.40 per share, for a total of 125,000 shares issuable upon conversion of
the principal amount of the note. A dispute arose between the consultant
and the Company and the consulting agreement was terminated by the Company
as of the end of August 1997. The Company settled the dispute in January
1998, which resulted in a $60,000 payment (including amounts previously
paid to the consultant prior to termination) for all services rendered. As
part of the settlement, an adjustment to the conversion terms of the
promissory note was made reflecting that all principal and accrued interest
on the note could be converted to 75,000 shares of the Company's Common on
or before April 1, 1998. The note was converted and the shares were issued
as "restricted securities" as defined under Rule 144 under the Securities
Act of 1933, as of January 26, 1998. The shares became saleable under Rule
144 commencing on April 1, 1998.
Settlement of Claims of Certain Noteholders
From April through June 1997, the Company issued a total of $185,000 of
Demand Notes payable in full on or before April 11, 1998 (the "Demand
Notes"). The principal and accrued interest on the Demand Notes became
convertible into shares of the Company's Common Stock as of November 1,
1997 at prices of $.35 per share (as to $75,000 of the Demand Notes) and
$.50 per share (as to $110,000 of the Demand Notes). Commencing on November
3, 1997, the Company began receiving conversion demands from the
Noteholders and as of November 14, 1997, holders of $135,000 of the Demand
Notes had demanded conversion of their Demand Notes into "free trading"
Common Stock. The Noteholders claimed that their right to free-trading
stock arose out of certain oral representations made at the time of
issuance of the Demand Notes, the fact that no "restricted securities"
legends were imprinted on the documents evidencing the Demand Notes and no
other written advice as to the "restricted" nature of the shares underlying
the Demand Notes was given to them at the time. The complaining Noteholders
were asserting damages based on a market price for the Company's Common
Stock in the $8.00 per share range as of the November 1, 1997 time period.
The holder of the remaining $50,000 Demand Note (which was convertible at
$.50 per share) did not assert any claims against the Company in connection
with his purchase of the Demand Note.
Rather than incur the expense and risks of litigation, the Company settled
the complaining Noteholders' claims by issuing 1.4 times the number of
shares originally issuable as principal and interest on the Demand Notes
purchased by the complaining Noteholders (plus an additional 11,000 shares
to one Noteholder who
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purchased $50,000 of the Demand Notes), and providing the Noteholders with
certain guarantees as to the amount for which the shares can be resold and
a "put" which allows the Noteholders to require the Company to repurchase
any restricted shares remaining unsold at the end of the one year period
after the shares become saleable under SEC Rule 144, as described in detail
below. The shares issued upon conversion of the Demand Notes are
"restricted securities" as defined under SEC Rule 144, but will become
saleable pursuant to Rule 144 one year from the date the converted Demand
Note was purchased by the Noteholder. A total of 525,800 shares have been
issued to the complaining Noteholders upon conversion of their Demand Notes
which will be subject to the guarantee and put agreements. The holder of
the other $50,000 Demand Note has been given the enhanced conversion rate
(of 1.4 times the number of shares originally issuable) and received
154,000 shares upon conversion of his Demand Note; the shares are not
entitled to the guarantee or put.
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 360,800 of the shares and $4.29 per share as to the
remaining 165,000 shares issuable upon conversion of the Demand Notes) 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 become 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 (or the first business day thereafter if such
day is a day on which the stock markets are closed) during which the former
Noteholders may "put" any restricted 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 for
360,800 of the shares and $4.29 per share for 165,000 of the shares) 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.
As a result of the above settlement, the Company recorded approximately
$1,353,000 as litigation settlement expense in the third quarter of fiscal
1998. The shares originally issuable upon conversion of the notes and the
additional shares resulting from the settlement are subject to the
guarantee and "put" provisions and are reflected as Redeemable Common
Stock. The originally issuable 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.
On July 2, 1997, the Company also issued a promissory note in the amount of
$17,000 to one of the investors who purchased the Demand Notes. This note
was due and payable in full as of July 30, 1997 and bore interest at a
default rate of 18% per annum if not paid when due. In return for the
investor's agreement not to require the Company to pay the note when it
came due, the investor claims that a representative of the Company promised
that the Company would treat the note the same as the other Demand Notes
and convert it to Common Stock on the same terms. In conjunction with the
Demand Note settlement with this investor, the Company agreed to convert
all amounts owing as principal and interest by it under this note to a
total of 18,507 shares of Common Stock. The shares issued upon conversion
of this note are not entitled to the guarantee or put described above.
Dispute with Supplier
In April of 1995, the Company entered into an agreement with a supplier to
supply modems for CDPD products. In October 1996, the supplier asserted a
claim for payment of product sold under that agreement in the amount of
approximately $60,000. The Company asserted the supplier delivered
defective product, which caused damages to the Company in excess of the
amount being claimed. The Company agreed to settle the dispute by paying
$50,000 over the sixty-day period commencing June 30, 1998.
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Note 10 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997, establishes standards for reporting and displaying
comprehensive income and its components with the same prominence as other
financial statements. All prior periods must be restated to conform to the
provisions of SFAS No. 130. The Company will adopt SFAS No. 130 during the
first quarter of fiscal 1999, but does not expect the new accounting
standard to have a material impact on the Company's reported financial
results.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131, which is effective
for fiscal years beginning after December 15, 1997, establishes new
disclosure requirements for operating segments, including products,
services, geographic areas, and major customers. The Company will adopt
SFAS No. 131 for the 1999 fiscal year. The Company does not expect the new
accounting standard to have a material impact on the Company's reported
financial results.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Restated)
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 Act of 1933 or Section 21E of the Securities
Exchange 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, 1997 and the current Report on Form 8-K filed on May 20,
1998, Reporting an Event of May 14, 1998. The Form 8-K incorporates the
Company's Registration Statement on Form SB-2 (SEC File No. 333-52625).
Amounts in this discussion and analysis have been restated as disclosed in
Notes 1, 3, 6, 7 and 9 of the Notes to the Financial Statements.
History of Losses and Potential Fluctuations in Operating Results: Through
the end of the third quarter of fiscal year ending June 30, 1998, the
Company had experienced significant operating 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 and expansion of the sales and marketing
organization requires additional financing. Proceeds from the recently
completed private placement offering have provided the Company with the
ability to launch the GTE joint marketing and distribution program,
however, execution of the Company's business plan is dependent on a more
significant debt or equity financing event. 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 rollout of the GTE and Bell Atlantic distribution
programs is expected to have a material impact on the Company's future
revenue stream. While the Company anticipates it will execute distribution
agreements with other significant partners, the loss of, diminution of
purchases from the Company through, or failure to place sufficient numbers
of merchant accounts through, any of these distributors could have a
material adverse effect on the Company.
Need for Third-Party Inventory Financing: The Company has recently entered
into an agreement with GTE Leasing Corporation to pay for the manufacture
of TRANZ Enabler units to be deployed under the GTE Wireless marketing
agreement. The agreement grants GTE Leasing a security interest in the
units as well as certain rights to cash flow from the processing revenue
payable to the Company under its agreement with NOVA. It is expected that
repayment of the financing will be made from the recurring revenue
generated by units placed under the GTE Wireless marketing agreement.
Several technical and legal requirements remain to be finalized before the
Company will be able to draw upon this financing source. Although this
financing provides the Company with needed support for units placed through
the GTE Wireless marketing agreement,
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third party financing of all TRANZ Enabler units placed by the Company
through any source is a required element of the Company's business model.
The Company must therefore seek similar financing arrangements for units
distributed through other marketing channels, including the Bell Atlantic
Mobile marketing agreement. The inability to fund inventory needs from
outside sources could have a material adverse impact on the Company, its
liquidity and results of operations.
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 three CDPD service resale agreements, two of which
contain minimum obligations which can be characterized as "take or pay"
provisions. The agreements with GTE Wireless and AT&T Wireless Data, Inc.
contain such provisions. The Company is obligated to pay for the minimum
amount of service stated in the agreements 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.
RESULTS OF OPERATIONS
---------------------
U.S. Wireless Data, Inc., a Colorado corporation, (the "Company" or
"USWD"), was organized on July 30, 1991 for the purpose of designing,
manufacturing and marketing a line of wireless and portable credit card and
check authorization terminals. 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
have significant performance and communication cost advantages when
compared with the traditional dial-up terminals currently being sold in the
U.S. market today. In mid fiscal year 1997, the Company made a fundamental
decision to change the manner in which it generates revenue. If
successfully implemented, this will transform the Company from being a "box
maker" in which it earned one time wholesale margins from the sale of its
products to earning recurring revenue by providing wireless credit card and
debit card processing services to retail merchants.
A key element of USWD's strategic direction is to establish close alliances
with large communications carriers through joint distribution programs. In
August 1997, USWD and GTE Wireless announced a joint marketing and
operating agreement to distribute USWD's proprietary TRANZ Enabler credit
card processing system using GTE's CDPD network. The agreement contains
certain operational and financial performance criteria which must be met by
the Company. During the second fiscal quarter, USWD made significant
investments to execute a nationwide deployment, which will extend TRANZ
Enabler sales to merchants through GTE's national sales force. The Company
added significant sales and support personnel and infrastructure to provide
local support for the GTE sales representatives. The initial placements of
the TRANZ Enabler units did not develop as rapidly as anticipated; however,
recent actions by GTE are expected to favorably impact the program. The
Company expects that the transition from a "voice" to "data" sales
orientation for the GTE sales personnel will be aided by several new
operational initiatives implemented in February 1998 by GTE Wireless, and
that this will have a positive impact on product placement and revenue to
the Company. By leveraging the sales organizations of the major CDPD
providers, the Company has the potential to quickly reach a large number of
merchants. The Company has CDPD air time agreements
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in place with AT&T and Bell Atlantic and has selectively added sales
personnel in these markets to begin deployment of TRANZ Enabler units. See
discussion of agreement with Bell Atlantic Mobile, below.
In July 1997, the Company retained Liviakis Financial Communications, Inc.
(LFC) to advise and assist the Company in matters concerning investor
relations, corporate finance and strategic management planning.
Remuneration to LFC under the Consulting Agreement, which has a term of one
year, includes $10,000 in cash over a one year period and 300,000 shares of
unregistered stock with 150,000 shares of the stock issuable at November
15, 1997 and 150,000 additional shares issuable over a 10-month period
thereafter. The Company completed a private placement of restricted
securities pursuant to Regulation D of the Securities Act of 1933 with two
officers of Liviakis. The Company raised $500,000 in cash for 3.5 million
shares of common stock and 1.6 million warrants to purchase common stock
for $.01 per share, exercisable from January 15, 1998 through August 4,
2002. In May 1998, 1.2 million of the warrants were exercised by one
warrant holder. The securities carry future registration rights, including
a one-time demand registration, with fees to be paid by the Company. See
"Note 6 - Related Parties" in Notes to Financial Statements for a
description of the accounting treatment for these transactions.
Between October and December 1997, the Company received bridge loans from
Liviakis Financial Communications, Inc. for $475,000 pending completion of
the private placement offering. Following the funding in mid-December, the
notes were immediately repaid by the Company along with interest of nine
percent per annum.
On December 10, 1997 the Company closed a private placement offering of
$3,060,000 principal amount of 8% Adjustable Rate Convertible Subordinated
Debentures. After associated fees and repayment of bridge loans incurred
during the quarter, the Company retained approximately $2,200,000 to apply
to immediate working capital needs and the national launch of its
proprietary wireless transaction processing solution. See Note 5 -
Financing in Notes to Financial Statements.
During the second quarter, the Company completed the relocation of its
customer support, administrative and accounting functions to the
Emeryville, California headquarters. The lease on the Wheatridge, Colorado
office has terminated. Engineering functions will remain at the Company's
Palmer Lake, Colorado facility.
Through the second quarter of fiscal 1998, the Company conducted its own
equipment deployment and servicing functions. In late January 1998, USWD
entered into an agreement with TASQ Technology, Inc. of Rocklin, CA, to
provide these services. TASQ will deploy, track and maintain all TRANZ
Enablers placed with merchants acquired by the Company. In addition, TASQ
will provide these same functions for peripheral equipment sold by the
Company. The Company believes that this relationship will ultimately result
in savings to the Company over what it would cost to provide these services
internally.
In March 1998 the Company signed a joint sales and marketing agreement with
Bell Atlantic Mobile. Bell Atlantic Mobile is the largest wireless service
provider on the East Coast and the second largest in the United States. The
agreement is similar in structure to the GTE Wireless agreement described
above, and the Company anticipates adding additional personnel to support
that agreement. By leveraging the sales organizations of the major CDPD
providers, the Company has the potential to quickly reach a large number of
merchants. It is expected that the costs to the Company of implementing
both this and the GTE joint marketing and distribution agreement will
exceed short-term revenue generated by the programs.
The Company also signed a merchant acquiring agreement with National Bank
of Commerce "NBC", in March 1998. NBC is the lead banking affiliate of
National Commerce Bancorporation. USWD expects the agreement to broaden its
ability to provide credit card processing services for merchants in the
retail, restaurant, and hotel/lodging industries.
During the second quarter, the Company granted an option to purchase
600,000 shares of common stock and subsequently agreed to pay to the
employee any additional income taxes which the employee may incur as a
result of the option being a non-qualified stock option as compared to an
incentive stock option. Due to this agreement, the company incurred an
additional $519,000 and $1,706,000 of non-cash compensation expense in the
three-months and nine-months ended March 31, 1998, respectively. See "Note
7 - Variable Option" in Notes to Financial Statements for a description of
the accounting treatment for these transactions.
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As of March 12, 1998, the Company entered into an agreement with entrenet
Group, LLC ("entrenet") to provide business and financial consulting
services to the Company and to assist the Company in locating additional
financing. The term of the agreement is for six months from March 12, 1998
and renews for additional six month terms unless at least 60 days notice is
given to terminate the agreement prior to the end of a term. For its
advisory services under the agreement, entrenet will receive a fee of
$60,000, payable in the form of a promissory note bearing 10% interest, due
on or before the earlier of March 11, 1999, or the receipt by the Company
of aggregate gross proceeds from financings of $2,000,000. In addition,
entrenet received a Common Stock Purchase Warrant to purchase 10,435 shares
at $5.75 per share, exercisable until March 11, 2003. Upon the consummation
of any financing transaction entered into by the Company during the term of
the agreement (with the exception of financings from certain identified,
excluded sources) or for two years after termination with respect to any
financing obtained from a source introduced to the Company by entrenet, or
if entrenet assists the Company in locating an executive-level candidate
who is hired by the Company, entrenet is entitled to compensation under the
agreement.
The Company has not completed a comprehensive 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 engineering staff has made a preliminary
assessment of USWD products and is not aware of any material complications.
In the first quarter of fiscal 1999, the Company expects to confirm the
impact, if any, on products it distributes, and complete an assessment of
external factors including key vendors and licensed software for internal
business applications.
Net Sales
Revenue of $252,000 for the third quarter of fiscal 1998 was up slightly
from revenue of $244,000 generated during the third fiscal quarter of
fiscal 1997 as the Company continued the shift from a per-unit sales
approach to a recurring revenue model. The Company was also able to resume
shipment of POS-50 units following a product shortage in the second
quarter. For the nine-month period, revenue of $638,000 decreased 39% from
the prior period amount of $1,046,000 due to the strategy shift described
above. Product placements of the TRANZ Enabler to merchants through the new
distribution program have not developed as rapidly as anticipated,
consequently revenue has been minimal, while at the same time; significant
expenses have been incurred. The Company hopes that the transition from a
"voice" to "data" sales orientation for the GTE sales personnel will be
aided by several new operational initiatives implemented in February 1998
by GTE Wireless. The Company also expects a positive impact on product
placement and revenue from the recently signed Bell Atlantic joint sales
and marketing agreement. However, for both programs, expenses are likely to
exceed revenues, at least over the near term.
Gross Margin
Gross margins in the third fiscal quarter of 1998 were $137,000 compared to
$129,000 for the same period in fiscal 1997. As a percent of revenue, gross
margins increased to 54% for the three-months ended March 31, 1998 over 53%
for the same period in 1997. For the nine-month periods, gross margins
decreased from $444,000 in fiscal 1997 to $286,000 in the current period on
the corresponding revenue decline. For the current nine-month period, gross
margin as a percent of revenue was up 2.3% from the prior period due to the
mix of product sales in the first half of the current year.
Operating Expenses
Selling, general and administrative expense increased from $123,000 in the
third fiscal quarter of 1997 to $2,518,000 in the third fiscal quarter of
1998. For the nine-month periods, selling, general and administrative
expense increased from $463,000 in the prior year to $6,659,000 in the
current year. The current quarter contains several significant non-cash
charges. These include a $514,000 charge related to the revalued LFC
consulting agreement, and compensation expense related to the granting of a
variable option of $519,000 (see Note 7 to the financial statements).
Non-cash consulting fees related to business development of approximately
$1,968,000 are reflected in the fiscal 1998 nine month results, and include
the termination of the original entrenet and Woolley consulting agreements
entered into during fiscal year 1997, and
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amortization of the Liviakis Financial Communications consulting services
(see Note 6 to the financial statements). Non-cash compensation expense
related to the granting of a variable option in the second quarter was
approximately $1,707,000 for the nine-month period (see Note 7 to the
financial statements). The nine-month period was also impacted by the
$156,000 charge related to the warrant extension.
The balance of the selling, general and administrative expense increased by
approximately $1,362,000 and $2,522,000 for the three month and nine month
periods, respectively. A significant portion of the increase in both the
three and nine month periods resulted from the aggressive addition of sales
and support personnel and infrastructure to provide local support for the
GTE nationwide deployment. Headcount increased from approximately 18 at the
end of September 1997, to approximately 50 employees as of December 31,
1997 and approximately 60 at the end of March 1998. Expenditures include
increased compensation expense for new sales and sales management
personnel, selective additions to the management team, increased travel and
communication expense related to the new marketing program, and expense
related to the resolution of several outstanding legal issues. The Company
continues to hire sales and support personnel to support the new marketing
programs. At least in the near term, operating expense will continue to
increase ahead of revenue.
Research and development expenses decreased from $88,000 in the third
fiscal quarter of 1997 to $78,000 in the first third quarter of 1998. This
decrease was due to lower engineering material purchases. The nine-month
period expense decreased from $301,000 in fiscal 1997 to $251,000 in fiscal
1998 due to one vacancy in the department during a portion of the first
half of fiscal 1998 and due to lower occupancy costs.
The third quarter results include a $1,353,000 charge for the valuation of
common shares issued to a group of certain noteholders, in settlement of a
dispute regarding rights related to the conversion of the notes into shares
of Common Stock. Refer to Settlement of Claims of Certain Noteholders in
Note 7 to the financial statements for a complete description of the
settlement.
Interest and Other Expense
Interest expense includes a $397,000 and $622,000 non-cash charge to
interest expense in the three and nine month periods of fiscal 1998,
respectively, related to the 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 discount off of fair market
value. The value of the in-the-money provision has been allocated to
stockholder equity. The difference between the realized value and face
value of the debt was recognized as non-cash interest expense between the
date of issue and date of conversion into preferred stock which was
effected on February 9, 1998. Other expense of $165,000 includes a $156,000
charge in the three and nine-month periods related to the extension of a
common stock warrant exercise period which was expiring.
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 $25.8 million since
inception to December 31, 1997. The Company's CDPD based products, the GTE
and Bell Atlantic joint marketing and distribution agreements, pending
distribution agreements (if realized) and the transition to a recurring
revenue focus present an opportunity for significant revenue growth,
eventual profitability, and the generation of positive cash flow from
operations. At present, however, development of the Company's
infrastructure and expansion of the sales and marketing organization
requires immediate, additional financing. Proceeds from the private
placement offering which was completed in December 1997, have been used
primarily to complete the launch of the joint marketing program with GTE
Wireless, build the related corporate infrastructure and make selective
inventory purchases.
Based on current staffing levels, the Company's expenditures are running at
a monthly rate of approximately $450,000. In order to meet its obligations
under its agreement with Bell Atlantic Mobile, the Company will require
additional sales personnel for significant product to be placed under that
agreement. This will further increase the Company's expenditures over
present levels. As a result, execution of the Company's business plan is
dependent on a significant debt or equity financing event. The Company
continues to work both directly and through its consultants to secure
additional debt or equity financing which is required to fund
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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 be accomplished or that it will
occur in the required time frame. 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.
In an attempt to finance a portion of its inventory requirements, the
Company engaged in discussions with GTE Leasing Corporation for some time
regarding a program to fund the manufacture of TRANZ Enabler units which
are deployed and to be deployed through the joint USWD and GTE Wireless
marketing agreement. As described below in this discussion under
"Subsequent Events," the Company entered into this inventory financing
agreement with GTE Leasing Corporation as of April 2, 1998 and is presently
completing certain technical and legal requirements to finalize the
agreement and begin to draw funding thereunder. Third-party financing of
TRANZ Enabler units is a required element of the Company's business model
and it is likely that the Company will have to seek similar financing
arrangements for units distributed through other marketing channels. The
inability to fund inventory needs from outside sources could have a
material adverse impact on the Company.
In order to satisfy a portion of its immediate short term capital
requirements the Company has entered into an agreement with a shareholder
to allow the Company to assign to third parties, options it has held since
1995, on 367,684 shares of the Company's Common Stock owned by that
shareholder, which the Company has the right to purchase at $.25 per share.
The Company anticipates that it will sell and assign these options to
accredited investors in blocks of no less than 50,000 shares between the
present time and October 5, 1998, the date on which its option expires. The
amount of cash that may be provided to the Company through this source is
not readily determinable, as it will vary depending on the market price of
the Company's Common Stock at the time the Company sells each option.
Inventory increased from $209,000 as June 30, 1997 to $880,000 at March 31,
1998. Approximately $359,000 of this increase was for TRANZ Enabler
inventory, with the remaining portion being for components needed to
initiate new builds of POS-50(R) and POS-500 units. This inventory was
purchased directly by the Company. The Company's business plan calls for
all TRANZ Enablers to be financed through third party financing sources.
While the Company has entered into the agreement with GTE Leasing
(described below) to fund product placed through the GTE Wireless
agreement, it must obtain inventory financing from external sources for
other placements, and at present the Company has not yet obtained such
financing. As described in Note 6 to the financial statements, merchants
that subscribe to the Company's credit card processing service usually
receive a TRANZ Enabler unit which provides the wireless communications and
processing functionality. As these units are deployed at a customer
location, the asset value is transferred from inventory to "Processing
units - deployed" and depreciated via a charge to Cost of Sales over a 48
month life. The net value of this equipment was $383,100 as of March 31,
1998.
As the result of the approval by shareholders on February 6, 1998, the
Company authorized 4,000,000 shares of no par value Series "A" Cumulative
Convertible Redeemable Preferred Stock (the "Preferred Stock"), with a
stated value of $1.00 per share. On that date, the $3,060,000 of
Convertible Debentures issued in December 1997, automatically converted
into 3,060,000 shares of Preferred Stock. The Preferred Stock gives the
holder the right to convert principal into shares of Common Stock in the
future at 80% of market price, but not lower than $4 per share for the
first 270 days, and no higher than $6 per share. The security carries an 8%
dividend rate, which drops to a 4% dividend rate once the underlying shares
of Common Stock are registered with the Securities and Exchange Commission.
The Company is required to register the shares of Common Stock underlying
the securities sold in the offering, plus the shares of Common Stock
issuable as interest on the Debentures and dividends on the Preferred
Stock.
Subsequent Events
Agreement with GTE Leasing Corporation
On April 2, 1998 the Company entered into a Loan and Security Agreement
with GTE Leasing Corporation to fund the manufacture of TRANZ Enabler units
by Wellex which are or will be deployed through the GTE Wireless joint
marketing agreement. The agreement with GTE Leasing is in the form of a
revolving credit facility in the maximum amount of $1,200,000. GTE Leasing
will pay the Company a fixed amount for each TRANZ Enabler unit
manufactured by Wellex for placement under the GTE Wireless joint marketing
agreement. At approximately $400 per unit, the Company has the ability to
finance up to 3,000 TRANZ
18
<PAGE>
Enabler units at any one time under this agreement. The Company expects
that repayment of the amounts financed under the credit facility will be
made from the recurring revenue generated by the units placed under the GTE
Wireless joint marketing agreement. However, the Company is primarily
obligated to repay all amounts owing under the credit facility,
irrespective of whether processing revenues are sufficient to pay such
amounts. To secure payment under the agreement the Company has granted GTE
Leasing a security interest in the units and the processing revenues from
those units. The Company also entered into a Notice, Consent and Agreement
between itself, NOVA Information Systems, Inc. ("NOVA") and GTE Leasing
which acknowledges the obligation of NOVA to pay GTE Leasing directly from
amounts owed to the Company by NOVA for amounts owing by the Company to GTE
Leasing under the credit facility. The agreement with GTE Leasing is
terminable on certain defined events of default, including the failure to
pay any installment within ten days of its due date and for other events of
default which remain unremedied for ten days after notice is given to the
Company by GTE Leasing. The Company is presently finalizing several
technical and legal requirements that must be completed before it can begin
to draw funds under this agreement.
Part II
ITEM 1 -- LEGAL PROCEEDINGS
Securities Class Actions Settlements
In September of 1996, the Company agreed to terms to settle securities
fraud litigation, pending since 1994, which was brought in connection with
the Company's initial public offering in December 1993. The parties'
agreement (the "Settlement Agreement") was filed in the United States
District Court for the District of Colorado on January 15, 1997 in
consolidated Case No. 94-Z-2258, Appel, et al. v. Caldwell, et al. By its
order approving the settlement, the court certified a plaintiffs'
settlement class and provided the mechanism for payment of claims. The
Company contributed $10,000 to the total settlement fund of $2,150,000. The
remaining portion of the settlement was contributed by certain underwriters
of the Company's initial public offering and its former securities counsel.
No objections to the Settlement Agreement were made. No potential class
member opted-out of the settlement and all are bound by the release granted
the Company. All claims against the Company in those consolidated cases
were dismissed by final federal court order on September 4, 1997. No appeal
was filed. Similar state court claims were dismissed by Colorado district
court order dated October 9, 1997, and no appeals have been filed in that
case.
To resolve cross-claims asserted by the underwriters in the litigation, the
Company agreed to issue to RAS Securities Corporation, H.J. Meyers & Co,
Inc., Sands & Co. Ltd. and R.J. Steichen & Co. a total of 600,000 shares of
Common Stock upon the effective date of the Settlement Agreement, which was
April 25, 1997. The shares issued under this settlement become saleable
under SEC Rule 144 commencing on April 26, 1998. The Company has agreed to
register such shares upon demand of holders of not less than 25% of the
shares, not sooner than April 26, 1998. Further, on September 17, 1997 the
Company agreed to entry of a consent judgment against it and in favor of
Don Walford, the sole shareholder of underwriter Walford Securities, Inc.,
in the amount of $60,000, payable over a three-year period. The total
charge recognized during fiscal 1997 consists of the following: $93,600 for
the value of the common shares issued based upon the fair market value of
the Company's Common Stock on the date the commitment of such shares was
made; $10,000 for actual cash to be paid by the Company pursuant to the
settlement with stockholders; and $60,000 for the note payable executed
with Don Walford as discussed above.
19
<PAGE>
Settlement with Consultant
In July of 1997, the Company executed a two-year agreement effective as of
April 1, 1997 for consulting services previously provided and to be
provided by Mr. Gary Woolley. In addition to monthly cash compensation, Mr.
Woolley received a $50,000 two-year convertible note with 10% interest per
annum. The note was convertible into Common Stock at $.40 per share, for a
total of 125,000 shares issuable upon conversion of the principal amount of
the note. A dispute arose between Mr. Woolley and the Company and the
consulting agreement was terminated by the Company as of the end of August
1997. Mr. Woolley and the Company settled their dispute in January 1998,
which resulted in a payment by the Company to Mr. Woolley of a total of
$60,000 (including amounts previously paid to Mr. Woolley as a consulting
fee prior to termination) for all services rendered by Mr. Woolley to the
Company. As part of the settlement, an adjustment to the conversion terms
of the promissory note was made reflecting that all principal and accrued
interest on the note could be converted to 75,000 shares of the Company's
Common Stock by election of Mr. Woolley made on or before April 1, 1998.
The shares are to be issued as "restricted securities" as defined under
Rule 144 under the Securities Act of 1933. Mr. Woolley elected to convert
the note to shares of Common Stock as of January 26, 1998. The shares
became saleable under Rule 144 commencing on April 1, 1998.
Settlement of Claims of Certain Noteholders
From April through June 1997 the Company issued a total of $185,000 of
Demand Notes payable in full on or before April 11, 1998 (the "Demand
Notes"). The principal and accrued interest on the Demand Notes became
convertible into shares of the Company's Common Stock as of November 1,
1997 at prices of $.35 per share (as to $75,000 of the Demand Notes) and
$.50 per share (as to $110,000 of the Demand Notes). Commencing on November
3, 1997, the Company began receiving conversion demands from the
Noteholders and as of November 14, 1997, holders of $135,000 of the Demand
Notes had demanded conversion of their Demand Notes into Common Stock and
were insisting that the Company issue "free-trading" shares to them. The
Noteholders claimed that their right to free-trading stock arose out of
certain oral representations made at the time of issuance of the Demand
Notes, the fact that no "restricted securities" legends were imprinted on
the documents evidencing the Demand Notes and no other written advice as to
the "restricted" nature of the shares underlying the Demand Notes was given
to them at the time. The complaining Noteholders were asserting damages
based on a market price for the Company's Common Stock in the $8.00 per
share range as of the November 1, 1997 time period. The holder of the
remaining $50,000 Demand Note (which is convertible at $.50 per share) has
not asserted any claims against the Company in connection with his purchase
of the Demand Note.
During March 1998, the Company reached a settlement with the complaining
Noteholders' by agreeing to issue 1.4 times the number of shares originally
issuable as principal and interest on the Demand Notes purchased by the
complaining Noteholders (plus an additional 11,000 shares to one Noteholder
who purchased $50,000 of the Demand Notes). As a result of the settlement,
the issuance of "premium" shares was recorded in Operating Expense as a
litigation settlement of approximately $1,353,000 in March 1998. The
agreement also provides the Noteholders with certain guarantees as to the
amount for which the shares can be resold and a "put" which allows the
Noteholders to require the Company to repurchase any restricted shares
remaining unsold at the end of the one year period after the shares become
saleable under SEC Rule 144. The shares issuable upon conversion of the
Demand Notes will be "restricted securities" as defined under SEC Rule 144,
but will become saleable pursuant to Rule 144 one year from the date the
converted Demand Note was purchased by the Noteholder. A total of 525,800
shares have been or will be issued to the complaining Noteholders upon
conversion of their notes which will be subject to the guarantee and put
agreements. The holder of the other $50,000 Demand Note will be given the
enhanced conversion rate (of 1.4 times the number of shares originally
issuable) and will receive 154,000 shares upon conversion of his Demand
Note but will not be given the guarantee or put.
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 360,800 of the shares and $4.29 per share as to the
remaining 165,000 shares issuable upon conversion of the Demand Notes) 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 become saleable under SEC
20
<PAGE>
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 (or the first
business day thereafter if such day is a day on which the stock markets are
closed) during which the former Noteholders may "put" any restricted shares
remaining unsold by them at the time back to the Company. Upon exercise of
the put, the Company which must either (1) purchase the shares for the put
price (which is $3.00 per share for 360,800 of the shares and $4.29 per
share for 165,000 of the shares) 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.
On July 2, 1997, the Company also issued a promissory note in the amount of
$16,825 to one of the investors who purchased the Demand Notes. This note
was due and payable in full as of July 30, 1997 and bore interest at a
default rate of 18% per annum if not paid when due. In return for the
investor's agreement not to require the Company to pay the note when it
came due, the investor claims that a representative of the Company promised
that the Company would treat the note the same as the other Demand Notes
and convert it to Common Stock on the same terms. In conjunction with the
Demand Note settlement with this investor, the Company agreed to convert
all amounts owing as principal and interest by it under this note to a
total of 18,507 shares of Common Stock. The shares issuable upon conversion
of this note are not entitled to the guarantee or put described above which
applies to the shares issuable upon conversion of the Demand Note purchased
by this investor.
Dispute with Supplier
In April of 1995, the Company entered into an agreement with Novatel
Communications Ltd. (now called Novatel, Inc.) to supply it with modems for
its CDPD products. Novatel. Inc. has asserted a claim against the Company
for payment for product it tendered to the Company under that agreement.
The claim was asserted in October 1996 for $59,632. Although the Company
has accrued a liability in the amount of this claim, it asserts that
Novatel delivered defective product, which has caused damages to the
Company in excess of the amount being claimed by Novatel. The Company is
therefore disputing the claim. The Company and Novatel have agreed to
arbitrate the dispute under an arbitration provision of the agreement which
requires arbitration before a private arbitration agency located in
Vancouver, British Columbia. The Company believes it has a substantial
basis for its refusal to pay the claim, but no assurance can be given that
it will prevail in arbitration.
ITEM 2 - CHANGES IN SECURITIES
Recent Issuances of Unregistered Securities:
January 26, 1998: conversion of a $50,000 promissory note issued to
consultant was converted to 75,000 shares of common stock pursuant to
agreement between the Company and a former consultant (see Item 1 - Legal
Proceedings Settlement with Consultant, above);
February 9, 1998: conversion of $3,060,000 face value of 8% Convertible
Debentures into 3,060,000 shares of Series A Preferred Stock;
March 12, 1998: issuance of a $60,000 10% unsecured promissory note and
10,435 shares Common Stock Purchase Warrant exercisable until March 11,
2003 at 5.75 per share to a consultant of the Company for services to be
rendered over the six month period commencing March 12, 1998;
March 24 - March 30, 1998: sale of call options acquired by the Company in
October 1995, to purchase a total of 50,000 shares of Common Stock owned by
an unaffiliated third party, sold by the Company to an unaffiliated third
party for total consideration of $216,700 in cash, less a one time
inducement fee to the original stockholder of $25,000.
21
<PAGE>
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 stock
certificates; and stop-transfer instructions were lodged with the Company's
transfer agent as to all shares of common stock issued in the transactions.
Changes in Securities:
Prior to going public, the Company issued two 50,000 share warrants to
purchase a total of 100,000 shares of Common Stock to a former Director.
The Directors' Warrants were originally exercisable through April 12, 1998
at $4.00 per share; however, the Company has agreed to extend the
expiration date of the Directors' Warrants until the earlier of six months
from the effective date of a registration statement including the shares
underlying the 50,000 share warrant which has registration rights, or April
12, 1999.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
The Company is indebted to Omron Systems, Inc. under a Secured
Installment Note dated March 27, 1995, for the principal amount of
$387,866 and interest thereon. The terms of such note required the
Company to make payments of principal and interest each month from April
1995 through December 1995, at which time the note became due in full.
The Company made one principal payment, and monthly interest payments
through October 1996, in accordance with the terms of the note, but has
made no other payments under this note and for that reason is in default.
The Company continues to discuss options with Omron regarding the
possible restructuring or mutually agreeable settlement of this note.
22
<PAGE>
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
<TABLE>
<CAPTION>
Annual Shareholder Meeting, February 6, 1998:
Proposals For Against Abstain Not Voted Total Voted
--------- --- ------- ------- --------- -----------
<S> <C> <C> <C>
1. Elect five directors to the Company's Board of
Directors
Evon A. Kelly 8,177,029 -- 11,467 -- 8,188,496
Rod L. Stambaugh 8,177,029 -- 11,467 -- 8,188,496
Richard S. Barton 8,177,029 -- 11,467 -- 8,188,496
Caesar Berger 8,177,029 -- 11,467 -- 8,188,496
Chester N. Winter 8,177,029 -- 11,467 -- 8,188,496
2. Amendments to Company's Articles of Incorporation 8,081,829 90,504 16,163 -- 8,188,496
to increase the number of shares of no par value
Common Stock to 40,000,000
3. Amendments to Company's Articles of Incorporation 5,216,071 91,287 20,554 2,860,584 5,327,912
to authorize up to 15,000,000 shares of preferred stock,
up to 4,000,000 designated as Series A Cumulative
Convertible Redeemable Preferred Stock
4. Amendments to Company's Amended 1992 Stock Option 5,178,657 126,187 22,168 2,861,484 5,327,012
Plan to increase the number of shares available for
issuance upon exercise to 2,680,000 shares
5. Ratify selection of Price Waterhouse LLP as 8,170,676 8,470 9,350 -- 8,188,496
Company's Independent Accountants
</TABLE>
ITEM 5 -- OTHER INFORMATION
On May 14, 1998, The Company filed a Registration Statement on Form
SB-2 with the United States Securities and Exchange Commission (SEC
File No. 333-52625) to register a total of 7,324,106 shares of Common
Stock ( the "Shares"). The Shares are being registered and will be
offered for sale by certain holders of the Company's securities (the
"Selling Security Holders"). None of the Shares are being sold by the
Company and the Company will not receive any proceeds from sales of the
Shares. All expenses of this registration (excluding selling expenses
incurred by the Selling Security Holders) are being paid by the
Company.
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
No reports on Form 8-K were filed by the Company during
the quarter ended March 31, 1998.
23
<PAGE>
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 25, 1999 By: \s\ Roger L. Peirce
----------------- --------------------------
Chief Executive Officer
February 25, 1999 By: \s\ Robert E. Robichaud
----------------- --------------------------
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 65,000
<SECURITIES> 0
<RECEIVABLES> 128,000
<ALLOWANCES> (48,000)
<INVENTORY> 880,000
<CURRENT-ASSETS> 1,596,000
<PP&E> 1,094,000
<DEPRECIATION> 424,000
<TOTAL-ASSETS> 2,334,000
<CURRENT-LIABILITIES> 6,284,000
<BONDS> 0
0
3,060,000
<COMMON> 9,325,000
<OTHER-SE> (16,940,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,334,000
<SALES> 0
<TOTAL-REVENUES> 252,000
<CGS> 115,000
<TOTAL-COSTS> 4,064,000
<OTHER-EXPENSES> (164,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 439,000
<INCOME-PRETAX> (4,416,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,416,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,416,000)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
