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 endedDecember 31, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 0-22848
U.S. Wireless Data, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware
(State of incorporation)
84-1178691
(IRS Employer Identification No.)
750 Lexington Avenue, 20th Floor
New York, NY 10022
(Address of principal executive offices, including zip code)
(212) 750-7766
(Registrant's Telephone Number, including area code)
Check whether the issuer (1) has 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 February 12, 2002, there were outstanding 12,256,544 shares of the Registrant’s Common Stock ($0.01 par value per share).
Transitional Small Business Disclosure Format. Yes [ ] No [X]
U.S. WIRELESS DATA, INC.
TABLE OF CONTENTS
Part I — FINANCIAL INFORMATION Page
ITEM 1. Financial Statements Consolidated Balance Sheets as of December 31, 2001 and June 30, 2001................................ 3 Consolidated Statements of Operations for the three and six months ended December 31, 2001 and 2000................................... 4 Consolidated Statements of Stockholders' Equity for the six months ended December 31, 2001..................................... 5 Consolidated Statements of Cash Flows for the six months ended December 31, 2001 and 2000......................................... 6 Pro forma Condensed Statement of Operations for the three and six moths ended December 31, 2000.............................. 7-8 Notes to Consolidated Financial Statements............................. 9-17 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors................... 17-36
Part II — OTHER INFORMATION
ITEM 1. Legal proceedings...................................................... 36 ITEM 2. Changes in securities and use of proceeds.............................. 36 ITEM 3. Defaults upon senior securities........................................ 36 ITEM 4. Submission of matters to a vote of security holders.................... 36 ITEM 5. Other information...................................................... 36 ITEM 6. Exhibits and Reports on Form 8-K ...................................... 36
Part I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
U.S. WIRELESS DATA, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31 June 30, 2001 2001 ----------- -------- ASSETS (Unaudited) Current assets: Cash and cash equivalents ..................................... $ 9,070,000 18,205,000 Accounts receivable, net of allowance for doubtful accounts of $112,000 and $55,000 at December 31 and June 30, 2001, respectively ............. 1,687,000 1,515,000 Inventory, net ................................................ 4,390,000 3,923,000 Notes receivable .............................................. 88,000 87,000 Other current assets .......................................... 560,000 472,000 ------------- ------------- Total current assets .............................. 15,795,000 24,202,000 Property and equipment, net ........................................ 2,538,000 2,818,000 Segregated cash .................................................... 712,000 769,000 Intangible assets, net ............................................. 14,536,000 15,739,000 Other assets ....................................................... 99,000 93,000 ------------- ------------- Total assets ...................................... $ 33,680,000 $ 43,621,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .............................................. $ 2,711,000 2,258,000 Accrued restructuring expense ................................. 1,079,000 2,400,000 Accrued liabilities ........................................... 1,661,000 1,538,000 Other current liabilities ..................................... 66,000 261,000 Obligation under capital lease, current portion ............... 1,074,000 793,000 Purchase price payable, current portion ....................... 455,000 2,557,000 ------------- ------------- Total current liabilities ......................... 7,046,000 9,807,000 Deferred rent expense .............................................. 174,000 275,000 Accrued restructuring expense, less current portion ................ 1,215,000 -- Other liabilities, less current portion ............................ 79,000 109,000 Obligation under capital lease, less current portion ............... 409,000 1,074,000 Purchase price payable, long term portion .......................... -- 455,000 ------------- ------------- Total liabilities ................................. 8,923,000 11,720,000 ------------- ------------- Commitments and contingencies Stockholders' equity: Preferred stock, 25,000,000 shares authorized Series C convertible, at $.01 par value, liquidation value $10.00 per share, aggregating $49,224,000 and $55,145,000 at December 31 and June 30, 2001, respectively; 8,450,000 shares authorized, 4,922,410 and 5,514,475 issued and outstanding at December 31 and June 30, 2001, respectively.. 49,000 55,000 Common stock, 200,000,000 shares authorized at $.01 par value; 12,934,355 and 11,478,419 shares issued and outstanding at December 31 and June 30, 2001, respectively ................. 129,000 115,000 Additional paid-in capital ...................................... 142,863,000 142,873,000 Unearned compensation ........................................... (1,892,000) (2,639,000) Accumulated deficit ............................................. (116,392,000) (108,503,000) ------------- ------------- Total stockholders' equity ........................ 24,757,000 31,901,000 ------------- ------------- Total liabilities and stockholders' equity ......................... $ 33,680,000 $ 43,621,000 ============= =============
Accompanying notes are an integral part of the financial statements
The above statement gives retroactive effect to a 1 for 4 reverse stock split that was effectuated on October 18, 2000.
U.S. WIRELESS DATA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the six months ended December 31, December 31, -------------------------- ------------------------ 2001 2000 2001 2000 Net revenues ---- ---- ---- ---- Service revenue Activation fees ......................... $ 72,000 $ 49,000 $ 142,000 $ 63,000 Monthly fees ............................ 386,000 134,000 740,000 221,000 Transaction fees ........................ 1,535,000 137,000 2,858,000 176,000 Other fees .............................. 124,000 -- 298,000 -- ------------ ------------ ------------ ------------ Total service fees ................. 2,117,000 320,000 4,038,000 460,000 Product sales ........................... 129,000 13,000 459,000 24,000 ------------ ------------ ------------ ------------ Total revenue ...................... 2,246,000 333,000 4,497,000 484,000 ------------ ------------ ------------ ------------ Cost of revenues Services ................................ 1,350,000 240,000 2,666,000 338,000 Product sales ........................... 109,000 9,000 337,000 17,000 Inventory reserve ....................... -- (70,000) -- (70,000) ------------ ------------ ------------ ------------ Total cost of revenue .............. 1,459,000 179,000 3,003,000 285,000 ------------ ------------ ------------ ------------ Gross profit ................................. 787,000 154,000 1,494,000 199,000 ------------ ------------ ------------ ------------ Operating expenses Selling, general and administrative (exclusive of non-cash compensation) .... 2,449,000 3,014,000 5,473,000 5,771,000 Non-cash compensation ........................ 375,000 370,000 747,000 740,000 ------------ ------------ ------------ ------------ Total selling, general and administrative .................. 2,824,000 3,384,000 6,220,000 6,511,000 Depreciation and amortization ................ 860,000 364,000 1,735,000 453,000 Research and development ..................... 390,000 564,000 888,000 958,000 Restructuring expense ........................ -- -- 625,000 -- ------------ ------------ ------------ ------------ Total operating expense ............ 4,074,000 4,312,000 9,468,000 7,922,000 Loss from operations ......................... (3,287,000) (4,158,000) (7,974,000) (7,723,000) Interest income .............................. 70,000 551,000 233,000 1,178,000 Interest expense ............................. (82,000) -- (174,000) -- Other income ................................. -- 60,000 64,000 70,000 Taxes ........................................ (33,000) -- (38,000) -- ------------ ------------ ------------ ------------ Net loss ..................................... (3,332,000) (3,547,000) (7,889,000) (6,475,000) ------------ ------------ ------------ ------------ Net loss available to common stockholders .... $ (3,332,000) $ (3,547,000) $ (7,889,000) $ (6,475,000) ============ ============ ============ ============ Basic and diluted net loss per share ....... . $ (0.27) $ (0.36) $ (0.67) $ (0.71) ============ ============ ============ ============ Weighted average common shares outstanding, basic and diluted .......... 12,545,000 9,947,000 11,737,000 9,147,000 ============ ============ ============ ============
Accompanying notes are an integral part of the financial statements
The above statement gives retroactive effect to a 1 for 4 reverse stock split that was effectuated on October 18, 2000.
U.S. WIRELESS DATA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001
(Unaudited)
Series C Preferred Common Stock ---------------------- ---------------------- Shares Amount Shares Amount ----- ------ ------ ------ Balance at July 1, 2000 ....... 5,586,600 $ 56,000 8,098,637 $ 8,099,000 Exercise of stock warrants .... -- -- 1,572,000 16,000 Non cash compensation ......... -- -- -- -- Issuance of common stock and contingent consideration to CellGate .................. -- -- 563,000 6,000 Issuance of common stock and contingent consideration to NXT shareholders' ......... -- -- 1,125,000 11,000 Conversion of Preferred C stock (72,125) (1,000) 119,782 1,000 Adjustment to reflect par and stated value change .......... -- -- -- (8,018,000) Net Loss ...................... -- -- -- -- ---------- ---------- ---------- ---------- Balance at June 30, 2001 ...... 5,514,475 $ 55,000 11,478,419 $ 115,000 Non cash compensation ......... -- -- -- -- Conversion of Preferred C Stock (592,065) (6,000) 987,186 9,000 Issuance of contingent consideration to Cellgate ... -- -- 468,750 5,000 Net Loss ...................... -- -- -- -- ---------- ---------- ---------- ---------- Balance at December 31, 2001 .. 4,922,410 $ 49,000 12,934,355 $ 129,000 ========== =========- ========== ========== Additional Total Paid in Unearned Accumulated Stockholders' Capital Compensation Deficit Equity ----------- ------------ ----------- ------------ Balance at July 1, 2000 ....... $ 124,902,000 $ (4,119,000) $ (89,246,000) $ 39,692,000 Exercise of stock warrants .... 47,000 -- -- 63,000 Non cash compensation ......... -- 1,480,000 -- 1,480,000 Issuance of common stock and contingent consideration to CellGate .................. 3,605,000 -- -- 3,611,000 Issuance of common stock and contingent consideration to NXT shareholders' ......... 6,301,000 -- -- 6,312,000 Conversion of Preferred C stock -- -- -- -- Adjustment to reflect par and stated value change .......... 8,018,000 -- -- -- Net Loss ...................... -- -- (19,257,000) (19,257,000) ----------- ----------- ----------- ----------- Balance at June 30, 2001 ...... $ 142,873,000 $ (2,639,000) $(108,503,000) $ 31,901,000 Non cash compensation ......... -- 747,000 -- 747,000 Conversion of Preferred C Stock (4,000) -- -- (1,000) Issuance of contingent consideration to Cellgate ... (6,000) -- -- (1,000) Net Loss ...................... -- -- (7,889,000) (7,889,000) ----------- ----------- ----------- ----------- Balance at December 31, 2001 .. $ 142,863,000 $ (1,892,000) $(116,392,000) $ 24,757,000 =========== =========== =========== ===========
Accompanying notes are an integral part of the financial statements
The above statement gives retroactive effect to a 1 for 4 reverse stock split that was effectuated on October 18, 2000.
U.S. WIRELESS DATA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended December 31, ------------------------------------ 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................................. $ (7,889,000) $ (6,475,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................... 1,735,000 453,000 Bad debt expense ............................................ 70,000 -- Deferred rent ............................................... (101,000) 108,000 Non-cash consulting services and other ...................... 747,000 740,000 Loss on asset disposal ...................................... -- 5,000 Gain on sale of fixed assets ................................ -- (1,000) Changes in current assets and liabilities: Accounts receivable ................................... (242,000) (741,000) Inventory ............................................. (467,000) (1,029,000) Other current assets .................................. (89,000) (181,000) Other assets .......................................... (6,000) 60,000 Accounts payable ...................................... 453,000 (288,000) Accrued liabilities ................................... 123,000 737,000 Accrued restructuring expense ......................... (106,000) -- Other current liabilities ............................. (195,000) 398,000 Other liabilities, less current portion ............... (30,000) 108,000 ------------ ------------ Net cash used in operating activities ........... (5,997,000) (6,106,000) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .......................... (200,000) (1,493,000) Segregated cash ............................................. 57,000 (123,000) Net payment for purchase acquisition, net of cash acquired .. (2,610,000) (1,164,000) Proceeds from sales of equipment ............................ -- 2,000 Notes receivable ............................................ (1,000) (4,000) ------------ ------------ Net cash used in investing activities ........... (2,754,000) (2,782,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of warrants and options .............. -- 61,000 Payment of notes payable .................................... -- (690,000) Payments on obligations under capital lease ................. (384,000) -- ------------ ------------ Net cash used in financing activities ........... (384,000) (629,000) ------------ ------------ Net decrease in cash ................................................. (9,135,000) (9,517,000) Cash and cash equivalents, beginning of period ....................... 18,205,000 39,231,000 ------------ ------------ Cash and cash equivalents, end of period ............................. $ 9,070,000 $ 29,714,000 ============ ============
Accompanying notes are an integral part of the financial statements
The above statement gives retroactive effect to a 1 for 4 reverse stock split that was effectuated on October 18, 2000.
Unaudited Pro Forma Information related to acquisitions
The following unaudited pro forma information shows the results of the Company for the three and six months ended December 31, 2000, as if the acquisitions of NXT Corporation and Cellgate Technology, LLC occurred on July 1, 2000. The pro forma results of operations are unaudited, have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combinations been in effect on the date indicated or which may occur in the future.
U.S. WIRELESS DATA, INC.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 2000 (a)
(Unaudited) (Unaudited) (Unaudited) Cellgate NXT Combined U.S. Wireless Cellgate NXT Pro Forma Pro Forma Pro Forma Data, Inc. Technologies LLC Corporation Adjustments Adjustments Results ------------- ---------------- ----------- ----------- ----------- --------- Net revenues .................................. $ 333,000 $ 20,000 $ 1,339,000 -- -- $ 1,692,000 Cost of revenues .............................. 179,000 10,000 945,000 -- -- 1,134,000 ------------ ------------ ------------ ------------ ------------ ------------ Gross profit .................................. 154,000 10,000 394,000 -- -- 558,000 ------------ ------------ ------------ ------------ ------------ ------------ Operating expenses Selling, general and administrative ........... 3,378,000 30,000 1,063,000 177,000 (b) 22,000 (b) 4,670,000 Research and development ...................... 564,000 -- -- -- -- 564,000 Non cash compensation ......................... 370,000 -- -- -- -- 370,000 ------------ ------------ ------------ ------------ ------------ ------------ Total operating expenses ...................... 4,312,000 30,000 1,063,000 177,000 22,000 5,604,000 ------------ ------------ ------------ ------------ ------------ ------------ Loss from operations .......................... (4,158,000) (20,000) (669,000) (177,000) (22,000) (5,046,000) Interest income ............................... 551,000 -- -- -- -- 551,000 Interest expense .............................. -- -- (69,000) -- -- (69,000) Other income .................................. 60,000 -- -- -- -- 60,000 ------------ ------------ ------------ ------------ ------------ ------------ (3,547,000) (20,000) (738,000) (177,000) (22,000) (4,504,000) ------------ ------------ ------------ ------------ ------------ ------------ Net loss available to common stockholders ................................ $ (3,547,000) $ ( 20,000) $ (738,000) $ (177,000) $ (22,000) $ (4,504,000) ============ ============ ============ ============ ============ ============ Basic and diluted net loss per share (after deduction of preferred stock dividends) Net loss available to common stockholders .. $ (0.36) -- -- -- -- $ (0.45) ============ ============ ============ ============ ============ ============ Weighted average common shares outstanding basic and diluted .............. 9,947,000 -- -- -- -- 9,947,000(c) ============ ============ ============ ============ ============ ============
See notes to unaudited Pro forma Condensed Consolidated financial statements
U.S. WIRELESS DATA, INC.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended December 31, 2000
(Unaudited) (Unaudited) (Unaudited) Cellgate NXT Combined U.S. Wireless Cellgate NXT Pro Forma Pro Forma Pro Forma Data, Inc. Technologies LLC Corporation Adjustments Adjustments Results ------------- ---------------- ----------- ----------- ----------- --------- Net revenues .................................. $ 484,000 $ 44,000 $ 2,722,000 -- -- $ 3,250,000 Cost of revenues .............................. 285,000 245,000 1,994,000 -- -- 2,524,000 ------------ ------------ ------------ ------------ ------------ ------------ Gross profit (loss) ........................... 199,000 (201,000) 728,000 -- -- 726,000 ------------ ------------ ------------ ------------ ------------ ------------ Operating expenses Selling, general and administrative ........... 6,224,000 732,000 2,294,000 177,000(b) 22,000(b) 9,449,000 Research and development ...................... 958,000 -- -- -- -- 958,000 Non cash compensation expense ................. 740,000 -- -- -- -- 740,000 ------------ ------------ ------------ ------------ ------------ ------------ Total operating expense ....................... 7,922,000 732,000 2,294,000 177,000 22,000 11,147,000 ------------ ------------ ------------ ------------ ------------ ------------ Loss from operations .......................... (7,723,000) (933,000) (1,566,000) (177,000) (22,000) (10,421,000) Interest income ............................... 1,178,000 2,000 -- -- -- 1,180,000 Interest expense .............................. -- -- (139,000) -- -- (139,000) Other income .................................. 70,000 -- -- -- -- 70,000 ------------ ------------ ------------ ------------ ------------ ------------ (6,475,000) (931,000) (1,705,000) (177,000) (22,000) (9,310,000) ------------ ------------ ------------ ------------ ------------ ------------ Net loss available to common stockholders .......................... $ (6,475,000) $ (931,000) $ (1,705,000) $ (177,000) $ (22,000) $ (9,310,000) ============ ============ ============ ============ ============ ============ Basic and diluted net loss per share Net loss available to common stockholders .......................... $ (0.71) -- -- -- -- $ (1.02) ============ ============ ============ ============ ============ ============ Weighted average common shares Outstanding basic and diluted ............ 9,147,000 -- -- -- -- 9,147,000 (c) ============ ============ ============ ============ ============ ============
See notes to unaudited Pro forma Condensed Consolidated financial statements
U.S. Wireless Data, Inc.
Notes to the Unaudited Pro Forma Condensed
Consolidated Financial Statements
a) | U.S. Wireless Data, Inc. (“USWD”) acquired NXT Corporation (“NXT”) on December 22, 2000, and the assets and assumed certain liabilities of Cellgate Technologies LLC (Cellgate) on November 16, 2000. For the purposes of the Unaudited Pro Forma Condensed Consolidated Statement of Operations, information for NXT and Cellgate has been included from July 1, 2000 through their respective acquisition dates. |
b) | Represents the applicable amortization expense for intangible assets derived from the NXT transaction. The intangible assets are being amortized on a straight line basis and have been estimated by management to have a useful life of four (4) to ten (10) years. |
Represents the applicable amortization expense for intangible assets derived from the Cellgate transaction and consists of work force acquired, intellectual property and goodwill, which are amortized on a straight line basis over four (4) years, seven (7) years and ten (10) years, respectively. |
c) | Represents the weighted average number of common stock outstanding for the period and 1,125,000 shares of USWD’s common stock issued as a result of the merger. This does not include 2,242,000 shares of common stock contingently issuable two years from the date of closing depending on the average share price of USWD common stock. |
Represents U.S. Wireless’ weighted average number of shares of common stock outstanding for the period and 562,500 shares issued as a result of the merger. This does not include 468,750 shares of common stock issued on November 16, 2001 pursuant to the acquisition agreement. |
U.S. WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - THE COMPANY
U.S. Wireless Data, Inc. (“USWD” or the “Company”) was incorporated in the state of Colorado on July 30, 1991 and was reincorporated in the state of Delaware on October 6, 2000. U.S. Wireless Data, Inc. is a premier provider of transaction delivery and gateway services to the payments processing industry. The Company provides credit card processors, merchant acquirers, banks, and their respective sales organizations with turnkey wireless and other IP-based transaction management services. The Company also provides those entities with proprietary wireless enabling products designed to displace conventional telephone lines. These products may be utilized by conventional card accepting retailers as well as emerging card accepting market segments such as quick service restaurants (fast foods), taxis and limousines, in-home service provider contractors, delivery services, vending machines, sporting events, and outdoor markets. Our products may also be used in conjunction with dial-up ATMs and PC-based electronic cash registers and other types of integrated point-of-sale systems.
On October 6, 2000, authorized capital was increased to 225,000,000 shares, 200,000,000 of which were $.01 par value common stock and 25,000,000 of which were $.01 par value preferred stock.
Note 2 - BASIS OF PRESENTATION
The Consolidated Balance Sheets as of December 31, 2001 and June 30, 2001, the Consolidated Statements of Operations for the three and six months ended December 31, 2001 and 2000, and the Consolidated Statements of Cash Flows for the six months ended December 31, 2001 and 2000 have been prepared by the Company, without an audit. In the opinion of management, all adjustments have been made, which include normal recurring adjustments necessary to present fairly the consolidated financial statements. Operating results for the three and six months ended December 31, 2001 are not necessarily indicative of the operating results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report for the year ended June 30, 2001 on Form 10-KSB.
The common stock and per share prices in the consolidated financial statements and related notes have been retroactively adjusted to give effect to the 1 for 4 reverse stock split that was effectuated on October 18, 2000.
Certain amounts in the financial statements have been reclassified from prior period presentations. The Company is currently evaluating the accounting relating to the Convertible Preferred Stock offering completed in May 2000. There may be a reclassification between accumulated deficit and additional paid in capital. There would be no net impact on shareholders’ equity or the results of operations for any period filed.
Note 3 – BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary NXT Corporation (“NXT”). All intercompany accounts and transactions have been eliminated in consolidation.
Note 4 – RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 44 (FIN 44), Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for the following issues: (1) the definition of employee for purposes of applying Opinion 25, (2) the criteria for determining whether a plan qualifies as a noncompensatory plan, (3) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (4) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000. The Company elected to early adopt FIN 44 in March 2000.
In July 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”. SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill and reassessment of the useful lives of existing recognized intangibles. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company has not determined the impact, if any, that this statement will have on its financial statements.
In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” which requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its present value and the related capitalized charge is depreciated over the useful life of the asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact of SFAS 143 on the financial statements of the Company.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144, supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact of the new accounting standard on existing long-lived assets and plans to adopt the new accounting standard in its financial statements for the fiscal year ending June 2003.
Note 5 – ACQUISITIONS
Cellgate Technologies LLC
On November 16, 2000, the Company acquired the assets and assumed certain liabilities of Cellgate Technologies LLC (“Cellgate”), a Delaware limited liability company in a cash and stock transaction. The acquisition was accounted for under the purchase method of accounting and accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair values. The purchase price included $1,250,000 cash and 562,500 shares of the Company’s Common Stock, valued at the closing at an aggregate of $1,969,000 and additional consideration.
In addition, the agreement provided for the following: if the average Closing Price (as defined in the Asset Purchase Agreement dated October 30, 2000) of the Company’s Common Stock for the twenty (20) consecutive trading days ending with the trading day immediately preceding the one-year anniversary of the closing date is less than $16.00 per share (as adjusted for any stock splits, stock dividends or similar events), such additional consideration shall be an amount equal to: (i) the number of the shares which have not previously been sold or transferred, subject to certain exceptions, multiplied by (ii) the amount, if any, not to exceed $10.00, by which such average Closing Price is less than $16.00. No less than 50% of such amount shall be paid in cash, and the balance shall be paid, at the Company’s option, in cash or shares of Common Stock having a value, based on such average Closing Price provided that such average Closing Price for such purposes shall not be less than $6.00 per share prior to the anniversary of the closing. As a result, on November 16, 2001 and December 10, 2001, the Company issued 468,750 shares of the Company’s Common Stock and paid $2,812,500 in cash. The operating results of Cellgate have been included in the consolidated financial statements of the Company since the acquisition date. The Company incurred approximately $475,000 of expenses related to this transaction, which includes accounting fees, attorney’s fees, investment banking fees and other costs.
The purchase price was calculated as follows:
Cash paid $ 1,250,000 U.S. Wireless Data, Inc. Common Stock issued at closing valued at $3.50 per share 1,969,000 Maximum cash that may be paid in one (1) year discounted by 10% to present value 2,557,000 Maximum shares of U.S. Wireless Data, Inc. Common Stock that may be issued in one year valued at $3.50 per share 1,642,000 Closing costs 475,000 Fair value of assumed liabilities as of November 16, 2000 (a) 3,353,000 ---------- Total purchase price 11,246,000 Less fair value of tangible assets acquired (a) (2,707,000) ---------- Total amount of acquired intangible assets and goodwill $ 8,539,000 ==========
(a) The fair value of assets acquired and assumed liabilities were increased by $2,505,000 and $2,223,000, respectively, to reflect recognition of inventory and an obligation under capital leases.
The purchase price was allocated, based on an independent third party valuation, as follows:
Allocated Useful Value Life --------- ------ Intellectual Property: AT&T Wireless IP technology $ 2,600,000 7 CBF 2000 design and Tellus agreement 1,700,000 7 Cellgate gateway application 200,000 7 Cellgate enterprise system 200,000 7 ATM wireless solution 1,300,000 7 Acquired workforce 250,000 4 Fair value of tangible assets acquired 2,707,000 4 Goodwill 2,289,000 10 ---------- Total allocation of purchase price $11,246,000 ==========
The valuation methodology for intangible assets and intellectual property were based on the income and cost approach.
NXT Corporation
On December 22, 2000, the Company acquired NXT Corporation (“NXT”) in a stock for stock transaction, accounted for under the purchase method of accounting. The assets acquired and the liabilities assumed have been recorded at their estimated fair values as of the date of the acquisition. The shareholders of NXT, including holders of certain phantom stock rights in NXT have exchanged their shares of Common Stock of NXT and such rights, for an aggregate of 1,125,000 shares of USWD’s Common Stock valued at an aggregate of approximately $2,109,000. In addition, under certain circumstances, depending on the price of the Company’s Common Stock, a maximum in cash, discounted by 10% to the present value, of $455,000 from $500,000 and approximately 2,242,000 shares of the Company’s Common Stock, valued at $4,203,000 may be issued two (2) years from closing based on the following: if the Daily Average Price (as defined in the Asset Purchase Agreement dated December 13, 2000) of USWD Common Stock for the twenty (20) consecutive trading days ending with the trading day immediately preceding December 21, 2002 is less than $18.40 per share (as adjusted for any stock splits, stock dividends or similar events). Such additional consideration shall be an amount equal to: (i) the number of the original 1,125,000 shares which have not previously been sold or transferred, subject to certain exceptions, multiplied by (ii) the amount, if any, not to exceed $12.40, by which such Daily Average Price is less than $18.40. Such additional consideration shall be paid to the NXT shareholders in cash, to the extent of 10% of the amount of the additional consideration to be paid by USWD, provided that the aggregate amount of cash paid will not exceed $455,000. Any balance of consideration due shall be paid in shares of USWD Common Stock having value equal to the Daily Average Price, provided however, that for such purposes, in no event shall the value ascribed to USWD Common Stock be lower than $6.00 per share.
In addition to the 1,125,000 shares of Common Stock, the Company also assumed options for approximately 76,000 shares of its Common Stock, which were fully vested on change of control, at exercise prices ranging from $7.50 to $33.07 per share. The holders of such options may also be entitled, upon exercise of their options, to additional consideration depending on the Daily Average Price of USWD common stock for the twenty (20) consecutive trading days immediately preceding December 21, 2002. The value was considered to be nominal, therefore, not recorded.
In connection with the merger, Paymentech, Inc. (“Paymentech”) and Merchant-Link, LLC, NXT’s two largest customers, agreed, subject to certain exceptions, to maintain certain revenue levels of business with NXT over the next twelve (12) months and twenty-four (24) months, respectively. Failure of either of these parties to maintain such levels of business for any reason could materially impair the value of the NXT acquisition. Paymentech, Inc. was a stockholder of NXT and Merchant-Link, LLC is a wholly owned subsidiary of Paymentech, Inc.
In connection with the merger, American Express Travel Related Services Company, Inc. (“AMEX”), a stockholder of and service provider to NXT, agreed to provide certain services at more favorable rates and the Company agreed that AMEX shall be entitled to designate a person to serve as a member of its board of directors for a period of two (2) years following the closing. The Company also paid an aggregate amount of approximately $1,700,000 to AMEX and Paymentech to retire certain indebtedness payable by NXT to AMEX and Paymentech other than current trade payables. In addition, AMEX has provided the Company with $300,000 in business development funding. The Company incurred approximately, $1,055,000 of expenses related to this transaction, which includes accounting fees, attorney’s fees, investment banking fees and other costs. The operating results of NXT have been included in the consolidated financial statements of the Company since the acquisition date.
The purchase price was calculated as follows:
Shares of U.S. Wireless Data, Inc. Common Stock issued at closing, valued at $1.875 per share $ 2,109,000 Maximum cash that may be paid in two years discounted by 10% to present value 455,000 Maximum shares U.S. Wireless Data, Inc. Common Stock that may be issued in two years valued at $1.875 per share 4,203,000 Closing costs 1,055,000 Assumed liabilities as of December 22, 2000 3,260,000 ---------- Total purchase price 11,082,000 Less the fair value of tangible assets acquired (2,976,000) ---------- Total amount of acquired intangible assets and goodwill $ 8,106,000 ==========
The purchase price was allocated, based on an independent third party valuation, as follows:
Allocated Useful Value Life --------- ------ Intellectual Property: IP transaction switch $ 2,400,000 6 Customer relationships 1,700,000 4 Proprietary software 864,000 5 Tools & value added components 190,000 6 Acquired workforce 1,300,000 5 Fair value of tangible assets acquired 2,976,000 5 Goodwill 1,652,000 10 ---------- Total allocation of purchase price $ 11,082,000 ==========
The valuation methodology for intangible assets and intellectual property were based on the income and cost approach. The purchase price for both acquisitions was recorded under EITF 97-15, “Accounting for Contingency Arrangements Based on Security Prices in a Purchase Business Combination,” under which additional contingent consideration will not affect the purchase price.
Note 6 - INVENTORY
December 310, June 30, 2001 2001 ---- ---- Inventory consists of: Raw material $ 112,000 $ 239,000 Work in process 26,000 26,000 Finished goods 4,269,000 3,675,000 Lower of cost or market reserve (17,000) (17,000) ---------- ---------- $ 4,390,000 $ 3,923,000 ========== ==========
The Company has established a reserve to reflect the lower of cost or market value of the inventory as of December 31, 2001 and June 30, 2001.
Note 7 - ACCRUED LIABILITIES
December 31, June 30, 2001 2001 ----------- ------- Accrued liabilities consists of: Accrued compensation $ 1,098,000 $ 1,102,000 Accrued professional fees 57,000 149,000 Accrued telecommunication expenses 85,000 -- Accrued tax expense 49,000 -- Other 372,000 287,000 ---------- ---------- Total accrued liabilities $ 1,661,000 $ 1,538,000 ========== ==========
Note 8 – ACCRUED RESTRUCTURING EXPENSE
USWD recorded pretax charges totaling $2.4 million in the fourth quarter of fiscal year ended June 30, 2001, related to the consolidation of the Company’s technical and network operations for disposal of assets not used in the primary operations facility and the estimated impact of vacating the unused facilities, net of potential subleases.
As part of the Company’s consolidation of its technical and network operations and the closure of our Bethesda, Maryland facility, a restructuring charge of $0.6 million was recorded in the first quarter of fiscal year 2002. The charge is related to the cost of involuntary severance and related benefits for technical, operations, engineering and administrative employees located in our Bethesda, Maryland and Palmer Lake, Colorado facilities.
Provided below is an analysis of the changes in the restructuring accrual;
Accrued restructuring expense:
Balance at June 30, 2001 $ 2,400,000 Charges against accrual (Bethesda rent payments, severance and benefit payments) (731,000) Additions to accrual (severance and benefits accrual) 625,000 ---------- Balance at December 31, 2001 2,294,000 Less current portion 1,079,000 ---------- Balance at December 31, 2001 Excluding current portion $ 1,215,000 ==========
Note 9 - NET LOSS PER SHARE
Earnings (loss) per common share (EPS) is computed using Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share”. SFAS No. 128 establishes standards for the computation, presentation, and disclosure of earnings per share. Basic per share amounts are computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted per share amounts incorporate the incremental shares issuable upon the assumed exercise of the Company’s stock options and warrants and assumed conversion of convertible securities. Throughout fiscal year 2001 and during the three and six months ended December 31, 2001, such incremental amounts have been excluded from the calculation since their effect would be anti-dilutive. Such stock options, warrants and conversions could potentially dilute earnings per share in the future.
The following table reconciles the number of basic weighted average shares of common stock outstanding to the maximum diluted shares of common stock for the six months ended December 31, 2001 and 2000.
U.S. WIRELESS DATA INC.
CONSOLIDATED COMMON STOCK EQUIVALENTS
(Unaudited)
As of December 31, 2001 2000 ---- ---- Weighted average common shares outstanding: ...... 12,545,000 9,147,000 ---------- ---------- Private Placement @ $55.866 million Max offering ..................... 8,204,000 9,311,000 ---------- ---------- Warrants Investor warnts. 25% CS Shs ... 2,328,000 2,328,000 Agent warrants 25% Units ......... 2,328,000 2,328,000 Agent warnts. 25% CS Shs ...... 582,000 582,000 PJSC warrants 20% Comw Pref ...... 466,000 466,000 PJSC warnts. 25% CS Shs ....... 116,000 116,000 Warrants, various outstanding .................... 326,000 419,000 Warrants, executive .............................. 1,343,000 2,915,000 ---------- ---------- 7,489,000 9,154,000 ---------- ---------- Employee options Outstanding, 1992 Option Plan .... 288,000 400,000 Outstanding, 2000 Option Plan .... 2,857,000 1,197,000 Outstanding, Non-Plan ............ 338,000 505,000 ---------- ---------- 3,483,000 2,102,000 ---------- ---------- ---------- ---------- Common stock to be distributed ................... 2,242,000 2,710,000 ---------- ---------- Total Shares issued or issuable .. 33,963,000 32,424,000 ========== ==========
Note 10 – STOCKHOLDERS’ EQUITY
On November 16, 2001, 468,750 shares were issued to Cellgate Technologies LLC in accordance with the acquisition agreement (see Note 5 for further information).
During the six months ended December 31, 2001, 592,065 shares of Series C preferred stock were converted into 987,186 shares of common stock, in accordance with the Series C preferred stock documents.
During the six months ended December 31, 2001, 512,750 stock options were issued to employees with exercise prices equal to the fair market value of the Company’s common stock at the date of grant.
For the six months ended December 31, 2001, $747,000 was charged to compensation expense relating to options issued to four Board Members granted on March 29, 2000.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
We may, in discussions of our future plans, objectives and expected performance in periodic reports filed by us with the Securities and Exchange Commission (or documents incorporated by reference therein) and in written and oral presentations made by us, 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 we believe 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 discussed below, and in other reports filed by us under the Securities Exchange Act of 1934.
OVERVIEW
U.S. Wireless Data, Inc. (“USWD” or the “Company”) is the premier provider of transaction delivery and gateway services to the payments processing industry. We provide credit card processors, merchant acquirers, banks, ATM deployment companies, and their respective sales organizations with turnkey wireless and other IP-based transaction management services. We also provide those entities with proprietary wireless enabling products designed to displace conventional telephone lines and to allow for card acceptance where such acceptance has heretofore been too expensive or technologically unfeasible. These products and services may be utilized by conventional card accepting retailers as well as emerging card accepting market segments such as quick service restaurants (fast foods), taxis and limousines, in-home service providers contractors, delivery services, vending machines, sporting events, and outdoor markets. Our products may also be used in conjunction with dial-up automatic teller machines (“ATMs”) and PC-based electronic cash registers and other types of integrated point-of-sale systems.
USWD’s proprietary technology provides a seamless interface between a merchant’s point of sale and their credit card processor using a sophisticated and proprietary network infrastructure, proprietary equipment, and unique message translation software applications.
We have developed a scalable and flexible technology platform that enables us to deliver a broad, integrated suite of services to merchants, merchant acquirers, credit card processors, ATM distributors and others. Generally, our services utilize common core technology platforms within the same operational infrastructure. We design our services to be highly flexible and customizable, enabling our customers to select from among our broad range of wireless and wireline products and services. We believe that one of our principal strengths is our internally developed proprietary technology, which enables us to add new distribution partners by employing a scalable architecture adapted specifically to our Internet protocol-based infrastructure services. We help our wireline and wireless customers build and maintain their brands by delivering services with the look, feel and navigation features specific to their delivery platform and format, including the growing number of emerging wireless devices. In addition, USWD supports a variety of protocols that may be proprietary to different wireless and wireline devices, enabling the end user to access the same services across a variety of devices. Our more than 196 clients process the vast majority of all point-of-sale (“POS”) transaction activity in the United States and include: Bank of America, BuyPass, Cardservice International, CardSystems, Concord EFS, First Data Merchant Services, First Horizon, Global Payments, Lynk Systems, MSI, National Processing Company, Paymentech, Vital, and many others.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
KEY METRICS
We utilize several basic performance metrics to measure the progress of our operations. Some of the metrics we rely upon include: (1) the number of resellers through which we sell our various products and services; (2) the number of active sites processing transactions through one or more of our hosts, including those that transmit via wireless, satellite, dial-up and leased-line technology; (3) the number of transactions processed through one or more of our hosts; (4) the number of units of USWD equipment sold; and (5) EBITDA- Earnings before interest, taxes, depreciation, amortization and other non-cash items.
RESELLERS
As of December 31, 2001, we had over 196 resellers under contract to sell our products and services as compared to 75 contracts that were in place at December 31, 2000. As of December 31, 2001, more than 100 of these 196 resellers were actively engaged in the sale of one or more of our products or services.
ACTIVE SITES
Synapse Services
Active wireless sites have grown to over 10,000 at December 31, 2001, an increase of 5,200 or over 109% compared to the same six month period last year. Since June 30, 2001, we have added over 4,900 new terminals or an increase of 72%. As of December 31, 2001 we had over 7,700 merchants using Synapse.
NXT Gateway Services
Total active sites on the NXT gateway as of December 31, 2001 were over 45,000 compared to 41,600 active sites as of December 31, 2000, representing an increase of over 3,400, or 8%. Since June 30, 2001, 1,100 total new active sites have been acquired.
TRANSACTIONS
Synapse Services
Wireless transactions processed for the three and six months ended December 31, 2001, were 1,075,000 and 2,072,000, respectively, an increase of over 580,000 or 118% and 1,260,000 or 155% from the same periods last fiscal year. This was due to an increase in active wireless sites and transactions per terminal.
NXT Gateway Services
Our NXT Gateway Service Host utilizes traditional narrowband/dedicated networks (ie: dial lines and leased-line circuits) to deliver transactions between merchants and processors. Total transactions for the three and six months ended December 31, 2001 were 137 million and 275 million, respectively, compared to 115 million and 231 million for the same periods in fiscal year 2001, an increase of over 22 million, or 19 %, and 44 million transactions, or 19%, respectively.
EQUIPMENT SALES
Unit sales for the three and six months ended December 31, 2001 were 373 and 1,474, respectively, as processors and merchant acquirers continue to market the Synapse Adapters for resale to retail merchants, and the Synapse Enabler, for conversion of taxi meters, vending machines and other integrated devices to accept credit cards wirelessly.
REVENUE
We derive revenue primarily from two sources: service fees and equipment sales. Service fees consist of: (a) one-time, non-refundable service activation fees; (b) wireless and landline fees for transactions delivered on wireless, broadband and narrowband networks through one or more of our hosts; (c) monthly fees for providing online, real time reports; (d) monthly minimum subscription fees; and (e) software development fees. Service fees are generated from both our Synapse Service and NXT Gateway Services platforms. Most U.S. Wireless Data services are designed to be device-independent and serve multiple platforms that enable our clients to support a variety of protocols, hence, a variety of products and services. Equipment sales are derived from the sale of our proprietary Synapse Adapter and Synapse Enabler line displacement wireless conversion devices.
Total Revenues
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total revenue $ 2,246,000 $ 333,000 574% $ 4,497,000 $ 484,000 829%
Total revenues were $2,246,000 and $4,497,000 for the three and six months ended December 31, 2001 as compared to $333,000 and $484,000 for the same periods in the last fiscal year. This improvement from the prior year represents over a five fold increase for the quarter and over an eight fold increase for the six month period. The increases were attributable to the inclusion of the revenue associated with the acquisitions of Cellgate Technologies LLC and NXT Corporation and our continued successful efforts in marketing our flagship suite of Synapse products and services. Most revenue categories, including recurring services, transaction fees and equipment revenues, increased from the prior year, all of which are discussed in more detail below.
SERVICE REVENUES
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Service revenue Activation fees $ 72,000 $ 49,000 47% $ 142,000 $ 63,000 125% Monthly fees 386,000 134,000 188% 740,000 221,000 235% Transaction fees 1,535,000 137,000 1020% 2,858,000 176,000 1524% Other fees 124,000 -- NA 298,000 -- NA --------- ------- ---- --------- ------- ---- Total service revenue $2,117,000 $ 320,000 562% $4,038,000 $ 460,000 778%
Activation Revenue
Activation revenue which is generated through our proprietary Synapse Gateway, for the three months ended December 31, 2001 was $72,000, a $23,000 or a 47% increase as compared to the three months ended December 31, 2000. Activation revenue for the six months ended December 31, 2001 was $142,000, a $79,000 or a 125% increase as compared to the six months ended December 31, 2000. These increases are a direct result of significant increases in merchant activations for our Synapse wireless and landline conversion services.
Recurring Monthly Revenue
Recurring monthly service revenue, which is generated from the Synapse Gateway, was $386,000 for the three months ended December 31, 2001, a $252,000 or a 188% increase as compared to the three months ended December 31, 2000. Recurring service revenue for the six months ended December 31, 2001 was $740,000, a $519,000 or a 235% increase as compared to the six months ended December 31, 2000. The increases for both the three and six months are attributed to the significant growth in total activations and a decline in over all deactivations.
Transaction Revenue
Transaction revenue is generated by both Synapse and our NXT Gateway Services, which was acquired as part of our acquisition of NXT Corporation. Total transaction revenue for the three months ended December 31, 2001 was $1,535,000 compared to $137,000 for the same period last year, an over ten fold increase. Including revenue generated by NXT prior to the acquisition revenue for the same period last year was $1,179,000, an increase of $356,000 or 30%. Total transaction revenue for the six months ended December 31, 2001 was $2,858,000, compared to $176,000 during the same period last year, an over fifteen fold increase. Including revenue generated by NXT prior to the acquisition, revenue for the same period last year was $2,797,000, an increase of $61,000 or 2%. The increase for both Synapse and NXT Gateways is attributed to a higher number of transactions per active site, increased revenue per transaction that is charged to the customer and the addition of a significant number of new customer sites.
Equipment Revenue
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Equipment revenue $ 129,000 $ 13,000 892% $ 459,000 $ 24,000 1813%
Equipment revenue is derived from the sale of our proprietary wireless conversion devices, the Synapse Adapter and the Synapse Enabler. Equipment revenue increased for the three months ended December 31, 2001 to $129,000 compared to the same period last year of $13,000. Equipment revenue increased for the six months ended December 31, 2001 to $459,000 from $24,000 during the same period last year. The increases were attributed to penetrating new markets that utilize the Synapse Adapter and Enabler for vending, multilane restaurants, ATM’s, existing POS and transportation solutions, which are discussed below.
As previously announced, we have entered into a strategic partnership with Pepsi-Cola North America (“Pepsi”) to provide our proprietary wireless vending solution. This solution will enable Pepsi vending machines to accept credit cards, transmit the credit card information wirelessly and to provide detailed inventory and mechanical information to the Pepsi bottlers on a real time basis. The system is currently being operated on a test basis with approximately 200 machines in Memphis.
Also during the second quarter, we began deployment of our Synapse Adapters to convert dial point of sale terminals to wireless for a major worldwide quick service restaurant. Our Synapse Adapter solution provides queue sensitive merchants the ability to process credit and debit card purchases faster than a traditional dial terminal.
GROSS PROFIT
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Gross profit Service $ 767,000 $ 80,000 859% $ 1,372,000 $ 122,000 1025% Equipment 20,000 4,000 400% 122,000 7,000 1643% Inventory reserve -- 70,000 -100% -- 70,000 -100% -------- -------- ---- --------- -------- ---- Gross profit 787,000 154,000 411% 1,494,000 199,000 651% -------- -------- ---- --------- -------- ---- Total gross margin excluding inventory reserve credit $ 787,000 $ 84,000 837% $ 1,494,000 $ 129,000 1058%
Gross profit consists of revenues net of direct costs of sales. Costs of sales consist primarily of the cost for the initial setup and ongoing communications costs associated with terminals connected through Synapse, costs related to sales of the Synapse Adapter and Enablers, and cost of wireless and non-wireless carriers. Total gross profit for the three months ended December 31, 2001 was $787,000, compared to $154,000 for the same period in fiscal year 2001, which was over a four fold increase. Total gross profit for the six months ended December 31, 2001 was $1,494,000, compared to $199,000 for the same period in fiscal year 2001, an over six fold increase.
Service gross profit for the three months ended December 31, 2001 was $767,000, compared to $80,000 for the same period in fiscal year 2001, which was over an eight fold increase. Service gross profit for the six months ended December 31, 2001 was $1,372,000, compared to a gross profit of $122,000 for the same period in fiscal year 2001.
Equipment gross profit for the three months ended December 31, 2001 was $20,000, compared $4,000 for the same period in fiscal year 2001. Equipment gross profit for the six months ended December 31, 2001 was $122,000, compared to $7,000 for the same period in fiscal year 2001.
The improvement in gross profit for the three and six months ended December 31, 2001 as compared to the same periods in fiscal year 2001, was primarily the result of: (1) inclusion of the gross profit associated with the acquisitions of Cellgate and NXT; (2) an increase in higher margin Synapse service revenues during the first six months of fiscal year 2002; and (3) an increase in equipment sales during the first six months of fiscal year 2002.
GROSS MARGIN
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Gross margin Service 36% 25% 45% 34% 27% 28% Equipment 16% 31% -50% 27% 29% -9% ---- ---- ---- ---- ---- ---- Total gross margin 35% 46% -24% 33% 41% -19% ---- ---- ---- ---- ---- ---- Total gross margin excluding inventory reserve credit 35% 25% 39% 33% 27% 25%
Total gross margin (gross profit as a percentage of net revenues) for the three months and six months ended December 31, 2001 decreased from the same periods of fiscal year 2001 due to a non-operating inventory reserve adjustment increasing the gross margin for fiscal year 2001. Excluding the inventory reserve adjustment, total gross margin for the three months ended December 31, 2001 increased by 39% from 25% of sales to 35% of sales compared to the same period last year. Excluding the inventory reserve adjustment, total gross margin for the six months ended December 31, 2001 increased by 25% from 27% of sales to 33% of sales. Service gross margin increased for the three months and six months ended December 31, 2001 by 45% and 28%, respectively, from the same periods in fiscal year 2001. This margin increase is primarily due to a greater percentage of Synapse service revenue than from the previous fiscal year.
Equipment gross margin was 16% for the three months ended December 31, 2001 compared to 31% for the same period last fiscal year. The decrease is primarily attributed to the higher mix of the vending enablers which have a lower margin than our standard equipment selling prices. The margins on the vending enabler will increase as additional units are deployed due to cost reductions from our manufacturer based on volume discounts.
OPERATING EXPENSES
Total operating expenses
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total operating expense $ 4,074,000 $ 4,312,000 -6% $ 9,468,000 $ 7,922,000 -20%
Total operating expenses for the three months ended December 31, 2001 decreased by $238,000 or 6% compared to the same period last fiscal year. This decrease was due to the realization of the cost savings from the initial stages of our acquisition consolidation plan initiated at the end of fiscal year 2001. Operating expenses for the six months ended December 31, 2001 increased by $1,546,000 or 20% compared to the same period last fiscal year. The increase was due to higher amortization of goodwill from the acquisition of Cellgate and NXT of approximately $1,260,000 and a one time restructuring charge of $625,000 related to the consolidation of our facilities for severance and related benefits. Excluding these items, operating expenses were lower by approximately $260,000.
Research and Development Expenses
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Research and development $ 390,000 $ 564,000 -31% $ 888,000 $ 958,000 -7%
Research and development expenses consist primarily of engineering personnel costs for research, design and development of the proprietary technology we use to integrate and develop our products and services. Research and development expenses decreased $174,000, or 31%, to $390,000 for the three months ended December 31, 2001, from $564,000 for the comparable period in fiscal year 2001. For the six months ended December 31, 2001, research and development expenses decreased $70,000 or 7%, to $888,000 from $958,000 for the six months ended December 31, 2000. The decreases are primarily the result of reduction of employees related to our facilities consolidation.
During the fourth quarter of fiscal year 2001, we changed the methodology for recording research and development expenses. The costs were originally reported in selling, general and administrative expense, but have been reclassified and are now recorded as research and development expenses.
Selling, General and Administrative Expenses
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Selling, general and administrative $ 2,449,000 $3,014,000 -19% $ 5,473,000 $5,771,000 -5% Non-cash compensation 375,000 370,000 1% 747,000 740,000 1% --------- --------- --- ---------- --------- --- Total S,G&A $ 2,824,000 $3,384,000 -17% $ 6,220,000 $6,511,000 -4%
Selling, general and administrative expenses consist primarily of salaries and benefits for sales, general and administrative personnel, advertising and promotion expenses, professional service fees, occupancy and general office expenses, travel expenses, other general corporate purposes and non-cash compensation. Sales, general and administrative expenses excluding non-cash compensation, research and development, depreciation and amortization and restructuring costs were $2.5 million for the three months ended December 31, 2001 compared to $3.0 million for the three months ended December 31, 2000, a 19% decrease. Sales, general and administrative expenses excluding non-cash compensation, research and development, depreciation and amortization and restructuring costs were $5.5 million for the six months ended December 31, 2001 compared to $5.8 million for the six months ended December 31, 2000, a 5% decrease. The decreases are primarily attributed to the successful implementation of our integration and consolidation plan for our recent acquisitions. This plan has reduced overall operating expenses by approximately $0.8 million per month or $9.6 million on an annual basis, representing approximately 42% of our ongoing annual operating expenses. These expense reductions are related to personnel, professional fees, consulting services, facility expenses, travel expenses, public relations expenses and advertising and promotion expenses.
Depreciation and Amortization
For the three months ended For the six months ended December 31, December 31, ---------------------------- -------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Depreciation $ 232,000 $ 188,000 23% $ 479,000 $ 277,000 73% Amortization 628,000 176,000 257% 1,256,000 176,000 614% -------- -------- --- --------- -------- --- Total $ 860,000 $ 364,000 136% $ 1,735,000 $ 453,000 283%
Amortization of intangibles includes amortization of goodwill, core technology, trademarks, customer lists, contract rights, patents and assembled workforce. Amortizations of intangibles were $0.6 million and $1.3 million for the three and six months ended, December 31, 2001, respectively compared with $0.2 million for the three and six months ended December 31, 2000. The increases are a result of amortization of intangibles recorded from the acquisitions of Cellgate and NXT. Intangibles for acquisitions are being amortized over four to ten years. In the event that we complete additional acquisitions, which we expect to do, expenses relating to the amortization of intangibles could increase in the future.
RESTRUCTURING CHARGE
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Restructuring expense -- -- $ 625,000 -- NA
During the first quarter of fiscal year 2002, we recorded a restructuring charge related to the consolidation and relocation of our Bethesda, Maryland network operations center with our research and development and operations center, located in Palmer Lake, Colorado. In conjunction with the latest integration activities, the Company recorded pretax charges totaling $625,000 or $0.05 per share, in the first quarter of fiscal year ending June 30, 2002, related to severance payments to employees and benefits.
INTEREST AND OTHER
For the three months ended For the six months ended December 31, December 31, --------------------------- ------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Interest income $ 70,000 $ 551,000 -87% $ 233,000 $1,178,000 -80% Interest expense (82,000) -- NA (174,000) -- NA Other income -- 60,000 -100% 64,000 70,000 -9% Taxes (33,000) -- NA (38,000) -- NA --------- -------- ---- -------- --------- ---- Total interest, net & other $ (45,000) $ 611,000 -107% $ 85,000 $1,248,000 -93%
Interest income for the three months ended December 31, 2001 was $70,000, compared to $551,000 for the same period in fiscal 2001. Interest income for the six months ended December 31, 2001 was $233,000, compared to $1,178,000 for the same period in fiscal 2001. Interest income decreased due to the utilization of cash to fund our growth expectations and the recent declining trend in interest rates.
Interest expense for the three and six month period ended December 31, 2001 was $82,000 and $174,000, respectively, related to the financing under a capital lease for Synapse Adapters assumed with the acquisition of Cellgate. There was no interest expense for the three and six months ended December 31, 2000. Other income, which consists primarily of rental income for a sublet facility, for the three months ended December 31, 2001 there was none, as compared to $60,000 for the three months ended December 31, 2001. Other income for the six months ended December 31, 2001 was $64,000 compared to $70,000 for the same period in fiscal year 2001.
Tax expense for the three and six months ended December 31, 2001 was $33,000 and $38,000, respectively. There was no tax expense for the three and six months ended December 31, 2000.
NET LOSSES
For the three months ended For the six months ended December 31, December 31, ---------------------------- -------------------------- % % 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Net loss $ (3,332,000) $ (3,547,000) -6% $ (7,889,000) $ (6,475,000) 22% ----------- ----------- ----------- ----------- Basic and diluted net loss per share $ (0.27) $ (0.36) -25% $ (0.67) $ (0.71) -5% ----------- ----------- ----------- ----------- Weighted average common shares outstanding basic and diluted 12,545,000 9,947,000 11,737,000 9,147,000
For the three months ended December 31, 2001, net loss totaled $3.3 million or $0.27 per share, as compared to a net loss of $3.5 million or $0.36, for the three months ended December 31, 2000. For the six months ended December 31, 2001, net loss totaled $7.9 million or $0.67 per share, as compared to a net loss of $6.5 million or $0.71, for the six months ended December 31, 2000.
Reconciliation of net loss to adjusted EBITDA:
The Company uses a modified version of EBITDA (“Adjusted EBITDA”), which is net loss excluding interest, net and other, taxes, depreciation and amortization, restructuring expense and non cash compensation. Adjusted EBITDA loss for the three months ended December 31, 2001 was $2.1 million or $0.16 per share as compared to the same period last year of $3.4 million or $0.34 per share. This improvement in adjusted EBITDA loss of $1.3 million or approximately 38% is primarily attributed substantially higher revenues and reduction of operating expenses as discussed in prior sections.
For the three months ended For the six months ended December 31, December 31, -------------------------- ------------------------ 2001 2000 2001 2000 ---- ---- -- ---- Net loss $(3,332,000) $(3,547,000) $(7,889,000) $(6,475,000) Depreciation and amortization 860,000 364,000 1,735,000 453,000 Non-cash compensation 375,000 370,000 747,000 740,000 Restructuring expense -- -- 625,000 -- Interest, net and other 45,000 (611,000) (85,000) (1,248,000) ----------- ----------- ----------- ----------- Adjusted EBITDA loss $(2,052,000) $(3,424,000) $(4,867,000) $(6,530,000) ----------- ----------- ----------- ----------- Adjusted EBITDA loss per share $ (0.16) $ (0.34) $ (0.41) $ (0.71) =========== =========== =========== ===========
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
At December 31, 2001 our principal source of liquidity was $9.7 million in cash, cash equivalents and segregated cash. We have incurred losses since our inception and as of December 31, 2001, we had an accumulated deficit of approximately $116.4 million.
Net cash used in operating activities was $6.0 million for the six months ended December 31, 2001. This primarily consisted of net operating losses, increases in inventory and accounts payable, offset by non-cash charges for depreciation, amortization and consulting services. Net cash used in operating activities was $6.1 million for the six months ended December 31, 2000. This primarily consisted of net operating losses, increases in inventory and accounts payable, offset by non-cash charges for depreciation, amortization and consulting services.
Net cash used in investing activities was $2.8 million for the six months ended December 31, 2001. This amount consists primarily of $2.8 million which was paid to Cellgate Technologies LLC under the purchase agreement (see Note 5 of the Notes to Consolidated Financial Statements for additional information), and $0.2 million for purchases of capital equipment. Net cash used in investing activities for the six months ended December 31, 2000 was $2.8 million, consisting primarily of purchases of equipment and acquisition costs.
Net cash used in financing activities was $0.4 million for the six months ended December 31, 2001, which was related to payments for obligations under capital leases. Net cash provided by financing activities for the six months ended December 31, 2000 was $0.6 million, which was related to a payment of a note payable, offset by cash received from the exercise of warrants.
As of June 30, 2001, our monthly consolidated net losses before depreciation, amortization, interest and taxes (“EBITDA”) was averaging approximately $1.4 million. EBITDA has improved to an average net loss of $0.7 million per month for the second quarter of fiscal year 2002 as we realized the benefits from the reductions in operating expense and increased sales. In addition, we believe EBITDA will continue to improve as revenue increases in excess of its current levels and we continue to minimize our costs in future quarters.
We believe that existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months, assuming current growth rates of revenues. However, the underlying assumed levels of revenues and expenses may not prove to be accurate. We may seek additional funding through public or private financings or other arrangements prior to such time. Adequate funds may not be available when needed or may not be available on favorable terms. If we raise additional funds by issuing equity securities, dilution to existing stockholders will result. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures.
We believe that our future success will depend largely on our ability to continue to offer wireless and other gateway solutions that are attractive to our existing and potential future clients. Therefore, we plan to:
° | continue to develop and upgrade our products, services, connectivity and message translation technology; |
° | expand our wireless and other gateway service offerings and cross-sell such services to our existing clients; |
° | seek out co-marketing alliances and other partnering opportunities with card associations, carriers, device manufacturers and card processors in an effort to “seed” new and emerging markets; |
° | increase capital equipment expenditures to meet service level agreement requirements and build-out our evolving infrastructure; |
° | expand our mobile and fixed wireless installations by up-selling and cross-selling to our existing merchant aggregator partners and grow our network of merchants; |
° | expand our NXT Gateway Service capabilities to meet the growing message translation needs of both our wireless and land-line clients; and |
° | seek out merger and acquisition opportunities that will either enhance our technology and/or generate additive revenue that will be accretive to our earnings. We expect to incur operating losses on a quarterly basis in the future. In light of the rapidly evolving nature of our business, we believe that period-to-period comparisons of our revenues and operating results are not necessarily meaningful, and you should not rely upon them as indications of future performance. Although we have experienced sequential quarterly growth in revenues over the past quarters, we do not believe that our growth rates are necessarily indicative of future growth. |
Seasonal Variation of Business
We anticipate that the recurring revenue generated under Synapse and NXT Gateway Services agreements with merchants, merchant acquirers and credit card processors will be relatively immune to seasonal variations, although we expect that transaction related revenue will reflect seasonal variations paralleling consumer spending patterns, generally increasing somewhat during the holiday season. The placement of devices can be expected to be slow during that season as well, due to the reluctance of merchants to change processors during premier shopping seasons and the general industry freeze on new systems implementations during that season.
RISK FACTORS
Investing in our stock is highly speculative and risky. You should be able to bear a complete loss of your investment. Before making an investment decision, you should carefully consider the following risk factors. In any event or circumstance described in the following risk factors actually occurs, it could materially adversely affect our business, operating results and financial condition. The risks and uncertainties described below are not the only ones, which we face. There may be additional risks and uncertainties not presently known to us or those we currently believe are immaterial which could also have a negative impact on our business, operating results and financial condition.
We have never been profitable, and there is no assurance that we will generate significant revenues or profits in the future.
We have never been profitable and have incurred substantial losses since our inception. We had an accumulated deficit of approximately $108.5 million and $116.4 million at June 30 and December 31, 2001, respectively, and had a loss of $19.2 million for the year ended June 30, 2001 and a loss of $7.9 million for the six months ended December 31, 2001. Our Synapse system is relatively new and there is no history upon which to base a judgment of its prospects. There is no assurance we will generate significant revenues from Synapse or otherwise or that we will ever become profitable. There can be no assurance that Synapse will gain market acceptance.
The success of our business plan is uncertain.
The success of our business plan, which is to concentrate on trying to develop a recurring revenue stream from customers’ use of our neutral gateway, is dependent on our platforms being utilized by merchant acquirers, processors and independent sales organizations in sufficient quantities to generate profits. To date, the revenues generated from our products and services have been nominal. The failure to successfully implement our business plan would have a material adverse effect on our business, operating results and financial condition.
Approximately 67% of our revenue for fiscal year 2001 was generated from four customers and, accordingly, the loss of such customers could adversely affect our revenues.
As of December 31, 2001, Cardservice International, Inc., Merchant Link, Inc., Paymentech and First Horizon accounted for approximately 67% of our revenue. Although we are seeking to broaden our client base, no assurance can be made that our efforts will be successful or that these current clients will not account for a large concentration of our revenues. If any one customer accounts for a significant portion of our revenues, the loss of such customer could adversely affect our business, operating results and financial condition.
There is no assurance that the market will accept our systems.
We plan to generate our revenue from sales of services relating to wireless credit card and other transactions. The market for providing this service is in the early stages of development and it is difficult to predict the rate at which this market will grow, if at all. Future competitors are likely to introduce services that compete with the services offered by us. Demand for these services could be affected by numerous factors outside of our control, including, among others, market acceptance by prospective customers, the introduction of new or superior competing technologies or services that are available on more favorable pricing terms than those being offered by us, and the general condition of the economy. Any market acceptance for our services may not develop in a timely manner or may not be sustainable. Our success will likely depend on our ability to sell our services to merchant acquirers and independent sales organizations, as well as an increase in the availability of terminals that interface with our platforms. New or increased competition may result in market saturation, more competitive pricing, or lower margins. Our business, operating results and financial condition would be materially and adversely affected if the market for our services fails to grow, grows more slowly than anticipated, or becomes more competitive or if targeted customers do not accept our products and services even if a substantial market develops.
Component shortages could curtail production.
From time to time, supply for key components in products lags behind worldwide demand. In the event that supply of a key material component is delayed or curtailed, our ability to ship the related product in desired quantities and in a timely manner could be adversely affected. Our attempts to mitigate the risks of component shortages by working closely with key suppliers on product plans, coordinated product introductions, purchases on the spot market and selected strategic purchases.
We may not be able to protect our proprietary technology, which could enable others to more easily compete with us.
Our performance and ability to compete are dependent to a significant degree on our proprietary technology. We rely on our patents, copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. Our inability to protect our proprietary rights adequately would have a material adverse effect on our business.
We have been granted two design patents, have filed an application to patent the Synapse process and expect to file additional patents as we determine appropriate. There can be no assurance that a patent will be issued from the patent application filed by us or that patents will be issued from any patent applications filed by our licensors or us in the future or that the scope of any claims granted in any patent will provide meaningful proprietary protection or a competitive advantage to us. There can be no assurance that the validity or enforceability of patents issued or licensed to us will not be challenged by others or, if challenged, will be upheld by a court. In addition, there can be no assurance that competitors will not be able to circumvent any patents issued or licensed to us. We have been granted the service mark “U.S. Wireless Data” and have filed for the service mark “Synapse”, “Wireless Made Easy”, “Wireless Express Payment Service”, “WEPS”, “Powered by WEPS”, “e-Processing” “e-Processing for the new millennium” in the United States. There can be no assurance that we will be able to secure significant protection for these marks.
We generally have entered into agreements containing confidentiality and non-disclosure provisions with our employees and consultants and limit access to and distribution of our documentation and other proprietary information. There can be no assurance that the steps taken by us will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable.
Notwithstanding the precautions we have taken, it might be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently. Policing unauthorized use of our technology is difficult. The laws of other countries may afford us little or no effective protection of our intellectual property. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services are made available. In the future, we may also need to file lawsuits to enforce our intellectual property rights, protect our trade secrets, and determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business operating results and financial condition.
Third parties may sue us for infringement of their intellectual property rights. We may incur costs of defense and royalties or lose the right to use technology important to providing our services.
The telecommunications, hardware and software industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement or other violations of intellectual property rights. As the number of participants in our market increases, the possibility of an intellectual property claim against us could increase. Any intellectual property claims, with or without merit, could be time-consuming and expensive to litigate or settle, could require us to enter into costly royalty arrangements, could divert management attention from administering our business and could preclude us from conducting our business.
Our acquisition of NXT Corporation could require additional consideration payments.
Although we completed the acquisition of substantially all of the assets of NXT Corporation in December 2000, we may be required to pay additional consideration to NXT Corporation. Under certain circumstances, we may be required to pay additional cash consideration to NXT Corporation based upon the closing price of the common stock at certain dates (see Note 5 –Acquisitions).
We could lose our rights to our exclusive, except as to AT&T Wireless and its affiliates, license with AT&T Wireless.
USWD’s rights to a technology that make the conversion from landline to wireless transactions possible for traditional dial-up point of sale terminals and other dial-up devices are dependent upon an exclusive, except as to AT&T Wireless and its affiliates, license agreement with AT&T Wireless. Under certain circumstances the license agreement may be terminated and USWD would no longer have access to this technology. Additionally, there can be no guarantees that AT&T Wireless or its affiliates will not enter into competition with USWD for the application of this technology, and should such competition arise, it could have an adverse effect on our operating results and financial condition.
Unanticipated delays in product schedules could affect product demand.
The process of developing new high-technology products and services is complex and often uncertain. Successful product transitions and deployment of new products requires accurate predictions of the product development schedule as well as volumes, product mix, customer demand and configuration. We may also anticipate demand and perceived market acceptance that differs from the product’s realizable customer demand and revenue stream. Further, in the face of intense competition in the industry, any delay in a new product rollout could decrease any advantage we may have to be the first to market. A failure on the part of us to carry out a product rollout in the time frame anticipated and in the quantities appropriately matching current customer demand could directly affect the future demand for the product and the profitability of our operations.
Our services rely on an emerging infrastructure that could encounter capacity constraints or system failures, which could adversely affect our reputation and market acceptance of our product.
We utilize a variety of technologies, infrastructures and products in providing our products and services, including wireless networks, dedicated lines, web servers, Internet information servers, local area networks, data storage devices and proprietary applications. If these systems experience difficulties, capacity constraints or service interruptions, it could have a detrimental impact on our business, operating results and financial condition.
The satisfactory performance, reliability and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and maintain adequate customer service levels.
Any system interruptions or quality defects would reduce the quantity and/or quality of services rendered and the attractiveness of our product offerings and would have a material adverse effect on our reputation, business, operating results and financial condition.
We are dependent on outside parties for our communications infrastructure.
Our ability to retain and attract merchant acquiring banks, independent sales organizations and card processors to our products and services is dependent upon, among other things, the performance of cellular, digital wireless and landline communication networks and credit card processing networks used by us. Any system or network failure that causes interruption or slower response time of our services could result in reduced usage and could reduce the attractiveness of our offerings to consumers.
The recent growth in cellular and digital wireless traffic has caused periods of decreased performance requiring wireless providers to upgrade and expand their infrastructures.
If wireless usage continues to increase rapidly, the wireless infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. Consequently, the emergence and growth of the market for our services is dependent on future improvements to the entire wireless network.
We will have to keep pace with new products and rapid technological change in order to remain competitive in the marketplace.
If we are able to penetrate the market with our products and services, our future success will depend upon our ability to keep pace with technological developments and respond to evolving merchant demands. Failure to anticipate or respond adequately to technological developments or significant delays in product development could damage our potential position in the marketplace and could result in less revenue or an inability to generate profits. With our current financial and technical resources, we may not be able to develop or market new services or enhancements to our existing service offerings. It is possible that we could experience significant delays in these endeavors. Any failure to successfully develop and market services and service enhancements could have a material adverse effect on our business, operating results and financial condition.
We face potential competition and pricing pressures from larger, well financed and recognized companies and we may not be able to compete successfully if such potential competitors enter the market.
The market for our products and services is highly competitive, including pressure to maintain competitive pricing structures for credit card processing services. We have identified potential competitors that may be logical candidates to develop similar products and services, although at the present time, we are aware of no other applications currently available that are designed specifically for wireless transaction processing utilizing Internet-based tools. However, barriers to entry in our business are relatively insubstantial and companies with substantially greater financial, technical, marketing, manufacturing and human resources, as well as those with far greater name recognition than us, may attempt to enter the market. We believe that our ability to compete depends on brand recognition, price, distribution channels and quality of service. There can be no assurance that we will be able to compete successfully in the market.
We depend on recruiting and retaining key management and technical personnel and we may not be able to develop new services or support existing services if we cannot hire or retain qualified employees.
Our success depends to a large degree upon the skills of our senior management team and current key employees. We depend particularly upon Dean M. Leavitt, our Chief Executive Officer. We have an employment agreement with Mr. Leavitt and with certain of our other employees. We do not maintain key person life insurance for any of our officers or key employees other than Mr. Leavitt. We do not generally require our executives or our employees to enter non-competition agreements with us, and those executives or employees could leave us to form or join a competitor. The loss of any of our key executives, the use of proprietary or trade secret data by former employees who compete with us, or the failure to attract, integrate, motivate, and retain additional key employees could have a material adverse effect on our business, operating results and financial condition. Because of the technical nature of our services and the dynamic market in which we compete, our performance depends on attracting and retaining key employees. Competition for qualified personnel in the wireless data and software industries is intense and finding qualified personnel with experience in both industries is even more difficult. We believe there are only a limited number of individuals with the requisite skills in the field of wireless data communication, and it is becoming increasingly difficult to hire and retain these persons.
We might not be able to manage our growth.
We anticipate a period of significant growth in connection with our entry into the market for wireless payment transaction delivery. The resulting strain on our managerial, operational, financial, and other resources could be significant. Success in managing this expansion and growth will depend, in part, upon the ability of senior management to manage our growth effectively. Any failure to manage our proposed growth and expansion could have a material adverse effect on our business, operating results and financial condition.
In addition to managing our company-wide growth, we must continue to develop and expand our systems and operations to accommodate expected growth in the use of our products and services. Due to the limited deployment of our some of our services to date, the ability of our systems and operations to connect and manage a substantially larger number of customers while maintaining superior performance is unknown. Any failure on our part to develop and maintain our wireless transaction service as we experience rapid growth could significantly reduce demand for our services and materially adversely affect our revenue.
Our use of wireless, wireline and Internet technologies could pose security issues regarding data transmission and reporting.
Utilization of our products and services involves the transmission of payment transactions via a wireless or wired networks and our servers from the merchant’s device to the payment processor and back. All data is transmitted in an encrypted format through secure channels. The reporting and utility functions accessible via the Internet are designed with a variety of security precautions, and the end-user’s card number is not contained in the database accessible via the Internet. However, a significant barrier to the growth of wireless data services or transactions on the Internet or by other electronic means has been the need for secure transmission of confidential information. Our systems could be disrupted by unauthorized access, computer viruses and other accidental or intentional actions. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. If a third party were able to misappropriate our users’ personal or proprietary information or credit card information, we could be subject to claims, litigation or other potential liabilities that could materially adversely impact our revenue and may result in the loss of customers.
We may be subject to liability for transmitting information, and our insurance coverage may be inadequate to protect us from this liability.
We may be subject to claims relating to information transmitted over systems we develop or operate. These claims could take the form of lawsuits for defamation, negligence, copyright or trademark infringement or other actions based on the nature and content of the materials. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed.
Because our business is not currently diversified, if our wireless or wireline payment transaction delivery processing business does not succeed, our business may fail.
We are currently in the payment transaction services industry, and accordingly, there is no diverse portfolio of products on which to rely if our systems fail. If our systems fail, we would fail unless we develop new products and a new business plan.
Our business is dependent on our relationship with wireless and wireline carriers.
A significant aspect of our strategy is to be able to market our products and services as working with all major wireless protocols. Our business depends, in part, on our ability to purchase sufficient capacity from the wireless and wireline carriers and the security and reliability of their systems. If our current arrangements with wireless and wireline carriers are terminated, if we are unable to enter into arrangements with any new carriers or if the terms of our arrangements are altered or prices are increased, it may have a material adverse effect on our business.
The benefits derived from any acquisition or strategic alliance may be less than the price we pay and may result in excessive expenses if we do not successfully integrate them. The costs and management resources we expend in connection with such integrations may exceed our expectations.
Acquisitions and strategic alliances may have a significant impact on our business, financial condition and results of operations. The value of acquisitions may be less than the amount we pay for them if there is:
° | A decline of their position in the respective markets; or |
° | A decline in general of the markets they serve. |
The expenses associated with these transactions may be greater and their revenue may be smaller than expected if:
° | We fail to assimilate any acquired assets with our pre-existing business; |
° | We lose key employees of these companies or ours as a result of acquisitions; |
° | Our management’s attention is diverted by other business concerns; or |
° | We assume unanticipated liabilities related to any acquired assets. |
In addition, the companies we may acquire may be subject to the other business risks we describe in this section, which may adversely impact such business. Further, we cannot guarantee that we will realize the benefits or strategic objectives we are seeking to obtain if we make any acquisitions.
We may be adversely impacted by government regulation of the wireless infrastructure and the Internet.
We are not currently subject to direct regulation by the Federal Communications Commission or any other governmental agency, other than regulations applicable to business in general. However, in the future, we may become subject to regulation by the FCC or another regulatory agency. In addition, the wireless carriers who supply us airtime are subject to regulation by the FCC and regulations that affect them could increase our costs or reduce our ability to continue selling and supporting our services.
The laws governing Internet transactions remain largely unsettled. The adoption or modification of laws or regulations relating to the Internet could adversely affect our business, operating results, and financial condition by increasing our costs and administrative expenses. It may take years to determine whether and how existing laws such as those governing intellectual property; privacy, libel, consumer protection, and taxation apply to the Internet. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. We must comply with new regulations in the United States, as well as any other regulations adopted by other countries where we may do business. The growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, as well as new laws governing the taxation of Internet commerce. Compliance with any newly adopted laws may prove difficult for us and may harm our business, operating results, and financial condition.
We have a 41% stockholder who is able to exercise substantial influence over us.
We are effectively controlled by ComVest, which beneficially owns, as of June 30, 2001 and December 31, 2001, approximately 41% of our common stock. Such ownership interest gives ComVest substantial influence over the outcome of all matters submitted to our stockholders, including the election of directors.
The market for our stock could suffer because there may be too many available shares.
We have approximately 11,478,419 and 12,935,355 total shares of common stock outstanding as of June 30 and December 31, 2001, respectively, of which approximately 7,140,917 and 9,317,777 shares are in the public float respectively. We have a substantial number of additional shares of common stock that are either presently outstanding or issuable upon conversion or exercise of other securities that were issued as “restricted securities” and are either presently saleable under SEC Rule 144 or which will become eligible for sale under SEC Rule 144 over the next several months. In addition, before the end of calendar 2000 we were obligated to register the sale of a total of 21,121,577 shares of common stock underlying Series C Preferred Stock, options and warrants, a portion of which have subsequently been sold. In December 2000, we filed a registration statement to register such shares. Subsequent to filing, the registration statement was withdrawn and we anticipate filing a new registration statement for the resale of approximately 17,900,000 shares by the end of calendar year 2002. Although the sale of certain of these shares is subject to lock-ups, large numbers of securities may be sold pursuant to these registrations and adversely affect the market for our common stock.
Anti-takeover provisions.
Our Articles of Incorporation authorize the issuance of up to 25,000,000 shares of preferred stock. Our Board is empowered, without stockholder approval, to issue a new series of preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or other rights of the holders of common stock. Such authority, together with certain provisions of Delaware law and of our Articles of Incorporation and bylaws, may have the effect of delaying, deterring or preventing a change in control of us, may discourage bids for the common stock at a premium over the market price and may adversely affect the market price, and the voting and other rights of the holders, of the common stock. Although we have no present intention to issue any additional shares of our preferred stock or common stock, there can be no assurance that we will not do so in the future. Under the Delaware Business Corporation Act, the Board of Directors of a Delaware corporation may issue rights, options, warrants or other convertible securities (hereinafter “rights”) entitling the holders of the rights to purchase, receive or acquire shares or fractions of shares of the corporation or assets or debts or other obligations of the corporation, upon such terms as are determined by the Board. The Board is free, subject to its fiduciary duties to stockholders, to structure the issuance or exercise of the rights in a manner which may exclude “significant stockholders,” as defined, from being entitled to receive such rights or to exercise such rights or in a way which may effectively prevent a takeover of the corporation by persons deemed hostile to management. Nothing presently contained in our Articles of Incorporation prohibits the Board from using these types of rights in this manner.
We have never paid cash or common stock dividends and are unlikely to do so for the foreseeable future.
We have never paid cash or other dividends on our common stock. It is our intention to retain any earnings to finance the operation and expansion of our business, and therefore, we do not expect to pay any cash dividends in the foreseeable future.
Volatility of common stock.
The common stock is traded on the OTCBB under the symbol “USWE.” The trading volume of the common stock historically has been limited and sporadic, and the stock prices have been volatile. For example, during the fiscal year ended June 30, 2001, the common stock has traded at prices ranging from $1.01 to $9.75 and $0.50 to $4.85 during the six months ended December 31, 2001. As a result of the limited and sporadic trading activity, the quoted price for the common stock on the OTCBB is not necessarily a reliable indicator of its fair market value.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. However, we may from time to time become a party to legal proceedings arising in the ordinary course of our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2001 Annual Meeting of Shareholders was held at the New York Marriott East Side Hotel, Vanderbilt Room, 525 Lexington Avenue, New York, New York 10017 at 2:00 p.m., Eastern time, on November 1, 2001.
The following matters were voted upon at the Annual Meeting of Shareholders, at which there was a quorum:
1) Election of a Board of Directors for One Year Terms:
The following individuals were elected by vote of a majority of the Common Shareholders present or represented by proxy to a one-year term on the Board of Directors:
Votes For Votes Withheld
Dean M. Leavitt 7,052,507 7,775
Alvin C. Rice 7,052,507 7,775
Chester N. Winter 7,052,507 7,775
Michael S. Falk 7,052,507 7,775
Amy L. Newmark 7,052,507 7,775
The following individuals were elected by vote of a majority the Series C Preferred Shareholders present or represented by proxy to a one-year term on the Board of Directors:
Votes For Votes Withheld
Edwin M. Cooperman 4,408,172 8,333
Barry A. Kaplan 4,408,172 8,333
2) Ratification of Deloitte & Touche LLP as Independent Auditors and Public Accountants:
Common Stockholders:
Votes For Votes Against Votes Abstaining
6,864,724 194,783 775
Series C Preferred Stockholders:
Votes For Votes Against Votes Abstaining
4,408,172 0 8,333
By a vote of the majority of the Common and Series C Preferred Shareholders together present or represented by proxy, Deloitte & Touche LLP was ratified as Independent Accountants to the Company.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 | Form of Employment Agreement between the Company and Heidi R. Goff dated October 10, 2001. |
b) Reports on Form 8-K
On October 22, 2001, the Company filed a report on Form 8K/A, Amendment No. 1 reporting the change of the Company’s certifying accountants. |
On October 15, 2001, the Company filed a report on Form 8-K reporting the change of the Company’s certifying accountants. |
On October 3, 2001, the Company filed a report on Form 8-K reporting the date of the 2001 Annual Shareholder’s meeting. |
SIGNATURES
In accordance with Section 13 or 15 of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
U.S. WIRELESS DATA, INC.
Dated November 14, 2002 By:/s/ Dean M. Leavitt
Dean M. Leavitt
Chief Executive Officer
Dated November 14, 2002 /s/Rick J. DeVincenzo
Rick J. DeVincenzo
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)