SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB Quarterly Report under Section 13 or Section 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 1997 -------------- Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to ___________________. Commission File No.: 0-22848 U.S. Wireless Data, Inc. (Exact name of registrant as specified in its charter) Colorado 84-1178691 -------- ---------- (State of incorporation) (IRS Employer Identification No.) 4851 Independence Street, Suite 189 Wheat Ridge, Colorado 80033 --------------------------- (Address of principal executive offices, including zip code) (303) 431-6858 -------------- (Registrant's Telephone Number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes _X_ No ___ As of March 31, 1997 there were outstanding 4,409,033 shares of the Registrant's Common Stock (no 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 (Unaudited) Balance Sheet -- March 31, 1997 .................................... 3 Statements of Operations -- Three Months and Nine Months Ended March 31, 1997 and 1996 ...................................... 4 Statements of Cash Flows -- Nine Months Ended March 31, 1997 and 1996 ............ 5 Notes to Financial Statements ........................... 6-7 Item 2. Management's Discussion and Analysis ................. 8-12 PART II OTHER INFORMATION Item 1. Material Developments in Connection with Legal Proceedings ................................. 11 Item 3. Defaults Upon Senior Securities ...................... 11 Item 5. Other Information ................................... 12 Item 6. Exhibits and Reports on Form 8-K ..................... 12 U.S. WIRELESS DATA, INC. BALANCE SHEET (Unaudited) March 31, 1997 ---- ASSETS Current Assets: Cash ................................................ $ 3,726 Accounts receivable, net of allowance for ........... 158,917 doubtful accounts of $11,109 Sales-type lease receivables ........................ 13,477 Inventory, net ...................................... 326,885 Other current assets ................................ 60 -------- Total current assets ....................... 503,065 Property and equipment, net ................................. 46,375 Notes receivable ............................................ 27,950 Other assets ................................................ 10,295 ------ Total assets ................................................ $ 587,685 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable .................................... $ 344,458 Accrued liabilities ................................. 127,299 Notes payable ....................................... 397,466 ------- Total current liabilities ................... 869,223 ------- Stockholders' Equity: Common stock, no par value, 12,000,000 .............. 4,901,084 shares authorized, 4,983,852 shares issued and outstanding Additional paid-in capital .......................... 11,227,111 Accumulated deficit ................................. (16,409,733) ----------- Total stockholders' equity .................. (281,538) Total liabilities and stockholders' equity .................. $ 587,685 ============ See Accompanying Notes U.S. WIRELESS DATA, INC. STATEMENTS OF OPERATIONS (Unaudited) Three Months Nine Months Ended Ended 3/31/97 3/31/96 3/31/97 3/31/96 ------- ------- ------- ------- Revenue ....................... $ 243,446 $ 410,964 $ 1,046,359 $ 1,085,183 Cost of goods sold ............ 114,780 343,548 602,078 954,301 ------- ------- ------- ------- Gross margin .................. 128,666 67,416 444,281 130,882 Operating Expenses Selling, general and administrative ................ 122,691 266,509 463,009 984,715 Research and development 87,914 112,288 301,315 362,943 ------ ------- ------- ------- 210,605 378,797 764,324 1,347,658 ------- ------- ------- --------- (Loss) from operations ........ (81,939) (311,381) (320,043) (1,216,776) Other income/(expense) ........ (1,112) (10,348) 6,776 (28,635) ------ ------- ----- ------- (Loss) from continuing operations .................... $ (83,051) $ (321,729) $ (313,267) $(1,245,411) =========== =========== =========== =========== (Loss) from discontinued operation ..................... -- -- -- (309,206) -------- Net (loss) .................... $ (83,051) $ (321,729) $ (313,267) $(1,554,617) =========== =========== =========== =========== Net (loss) per share: From continuing ...... $ (.02) $ (.07) $ (.07) $ (.28) From discontinued operation ..................... -- -- -- (.07) ----------- ----------- ----------- ----------- Net (loss) per share . $ (.02) $ (.07) $ (.07) $ (.35) =========== =========== =========== =========== Weighted average common shares outstanding ................... 4,983,852 4,401,664 4,814,900 4,394,469 See Accompanying Notes U.S. WIRELESS DATA, INC. STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended 3/31/97 3/31/96 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................. $ (313,267) $(1,245,411) Depreciation and amortization ............. 50,586 39,183 Stock issued for services ................. 15,446 3,880 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable ............. 18,210 309,798 Inventory ....................... 168,300 734,421 Other assets .................... 34,627 24,281 Increase (decrease) in: Accounts payable ................ 102,071 50,178 Accrued liabilities ............. (90,297) (61,238) Notes payable ................... (22,800) -- ------- --------- Net cash used in operating activities .................... (37,124) (144,908) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and furniture ....... 500 59,201 --- ------ Net cash used in investing activities .................... 500 59,201 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of warrant ......... 27,950 -- Notes receivable .......................... (27,950) -- ------- ------- Net cash provided by financing activities ...................... 0 -- INCREASE (DECREASE) IN CASH .................... (36,624) (85,707) CASH, Beginning of period ...................... 40,350 128,381 ------ ------- CASH, End of period ............................ $ 3,726 $ 42,674 =========== =========== See Accompanying Notes U.S. WIRELESS DATA, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1 -- ACCOUNTING PRINCIPLES The balance sheet as of March 31, 1997, as well as the statements of operations for the three and nine months ended March 31, 1997 and March 31, 1996, and statement of cash flows for the nine months ended March 31, 1997 and March 31, 1996, have been prepared by the Company without an audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at March 31, 1997 and for all periods presented have been made. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-KSB for fiscal year end June 30, 1996. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full year. Note 2 -- FINANCIAL CONDITION AND LIQUIDITY While the Company is optimistic with its medium and long term opportunities, it is concerned with its immediate financial condition and liquidity. The Company has accumulated a deficit of approximately $16 million since inception and has incurred additional losses subsequent to the year ended June 30, 1996. The Company needs to: sustain or increase revenue levels, maintain product margins; secure additional product software and hardware development contracts; successfully deploy its own direct sales organization for its new CDPD products; generate positive cash flow from operations; and/or secure additional debt or equity financing. Note 2 -- INVENTORIES Inventories for the period presented are stated at the lower of cost or market and consist primarily of finished goods. Note 3 -- REVENUE RECOGNITION Direct sales are recognized upon shipment of products to customers. Sales to reseller organizations are recognized upon the Company's receipt of payment from the reseller. Note 4 -- NET LOSS PER SHARE Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding at the end of the period. Exercisable stock options and warrants are not included in the calculation since their effect would be anti-dilutive. Note 5 -- DIRECT DATA, INC. ACQUISITION/DISSOLUTION In September 1994, the Company completed the acquisition of Direct Data, Inc. ("Direct Data"). The Company paid approximately $2 million in cash and issued 700,000 shares (valued at $2.56 per share) of its common stock in exchange for all outstanding shares of Direct Data. The transaction was accounted for using the purchase method of accounting and the Company recorded goodwill of approximately $6 million. During the fourth quarter of fiscal 1995, the Company determined that the goodwill related to the acquisition of Direct Data was fully impaired, and therefore, wrote-off the entire balance resulting in a charge included in the Statement of Operations for fiscal year 1995. In September 1995, Direct Data received notice that its bank note creditor would not extend the loan payment terms and demanded payment on a $1.3 million bank note. An officer and director of Direct Data and former director of the Company (the "Officer") had personally guaranteed the note. In early October 1995, the Officer repaid the note and, pursuant to the Officer's guaranty arrangement with the bank, became the holder of a security interest in all of Direct Data's assets. Subsequently, on October 5, 1995, the Officer and the Company consummated an agreement whereby in exchange for the Company's approval of the surrender of all of Direct Data's assets ($1,032,719 at June 30, 1995 and approximately $780,000 at October 5, 1995), the Officer released the Company from its $1.3 million obligation (to assume the Officer's obligation under the guaranty) and agreed that the Company would have the option to purchase 397,684 shares of the Company's common stock owned by the Officer, for a period of three years, at a price of $.25 per share. Additionally, the Officer granted the Company the right to vote these shares during the three year option period. The transfer of assets to the Officer was consummated on October 5, 1995. Immediately prior to the transfer, from September 29, 1995 to October 3, 1995, all remaining Direct Data employees were terminated. As a result of the asset transfer and the Officer's earlier re-payment of the bank debt, Direct Data had no assets, no secured debt, approximately $1.6 million in unsecured trade debt (not including the $1.9 million intercompany loan from the Company) and ceased operations. Direct Data notified its creditors that it would be unable to pay its remaining debts, and pursuant to the Colorado Business Corporation Act, Direct Data was dissolved effective October 19, 1995. Management believes that Direct Data represented a separate and material line of business from the Company. The pretax loss on disposal has been accounted for as a loss from a discontinued operation and prior years financial statements have been reclassified to reflect the disposition. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- The Company was incorporated on July 30, 1991, and was in the development stage until the quarter ended September 30, 1994. Since inception, the Company has raised equity capital through the sale of its securities, completed development of its initial product, negotiated agreements with suppliers of components, developed a marketing strategy, and initiated sales of the POS-50r portable credit card and check verification terminal. During fiscal 1995, the Company continued to promote its product through the cellular reseller channel and, in the second half of fiscal 1995, enhanced its marketing strategy by focusing sales efforts on Independent Sales Organization (ISO) channels and began development on its new CDPD product line. In fiscal 1996, the Company continued its efforts on the POS-50r and in the second half of the year introduced two new CDPD-based products. Substantially all the revenue of the Company for fiscal year 1996 was derived from the sale of inventories for which the Company had previously paid. Beginning September 1996, the Company received its first shipment of an enhanced version of the POS-50r manufactured by Uniform Industrial Corporation. Although product margins are higher, the Company must succeed on the gross margin which will result in a smaller per-unit working capital infusion. With lower net cash inflow, coupled with the Company's current financial condition and sales volumes, the Company may be unable to continue as a going concern if additional revenue is not realized from the sale of its new CDPD products. In 1993, the Company established a contractual relationship with Solectron Corporation in Milpitas, California for subcontract manufacturing of the POS-50r. The Company ordered and received approximately 2,900 POS-50r terminals through June 1995. The Company built a large inventory of finished goods to facilitate promptly filling orders from customers. Because of higher-than- desirable inventory levels and poor sales results, the Company stopped production by Solectron in April 1994. Discussions with Solectron during the Company's third fiscal quarter of 1995 led to a conclusion that $1.4 million of raw materials inventory held by Solectron should be recorded as a liability on the Company's financial statements. During fiscal 1996, the Company negotiated an arrangement whereby Solectron sold all of the raw materials inventory and concurrently signed a mutual release with the Company. As a result, the Company recognized a $1,099,412 gain on the restructuring of its debt to Solectron. The Company then entered into an agreement with Uniform Industrial Corporation for the future manufacture and sale of an additional 2,000 POS-50r units. During fiscal 1995, the Company acquired all of the outstanding shares of Direct Data, a distributor of POS-related products. During fiscal year 1996, the Direct Data assets were surrendered to Direct Data's secured creditor in lieu of the creditor's foreclosure on a past due $1.3 million obligation. Direct Data was left with no assets, ceased operations, and was dissolved on October 19, 1995. As a result of the surrender of Direct Data's assets in settlement of the $1.3 million obligation and the dissolution of Direct Data in fiscal 1996, the Company recognized a gain on restructuring of payables and debt of $2,332,411. On October 23, 1996, the Company closed its Boulder office and consolidated operations in Colorado Springs, Colorado. A small customer service and POS-50 deployment office was opened in Wheat Ridge, Colorado. As part of the restructuring plan, Michael J. Brisnehan, its president and chief executive officer resigned. Rod L. Stambaugh, chairman and former vice president of marketing and business development was appointed president and chief executive officer. In February, 1997, the Company launched the first phase of its national proprietary direct sales organization for its two new CDPD products. The Company plans to expand its proprietary sales organization to deploy its products and transaction processing services to traditional retail merchants within all CDPD coverage areas. Net Sales Net sales of $243,446 for the third fiscal quarter of 1997 decreased from $410,964 for the third fiscal quarter of 1996. This decrease is attributable to: a) reduced revenue from its POS-50r product because of lower average selling price on approximately the same number of units sold, and; b) sale of 32 fewer CDPD products than in the fiscal quarter ended March 31, 1996. Gross Margin Gross margins in the third fiscal quarter of 1997 were $128,666 compared to $67,416 for the same period in fiscal 1996. The increase was due primarily to more favorable margins on the POS-50r product as a result of: a) re-valuation of finished goods inventory at 1996 fiscal year end, and; b) negotiation of a new manufacturing agreement at substantially reduced product cost. Operating Expenses Selling, general and administrative expenses decreased from $266,509 in the third fiscal quarter of 1996 to $122,691 in the third fiscal quarter of 1997. This decrease was due to continued reduction in staffing levels and other cost reductions which have been implemented from time to time since the last half of fiscal 1996. Research and development expenses decreased from $112,288 in the third fiscal quarter of 1996 to $87,914 in the third fiscal quarter of 1997. This decrease was due to reductions in spending levels as required to meet existing business conditions. Other Income/(Expense) Other income/(expense) increased from $(10,348) in the third fiscal quarter of 1996 to $(1,112) in the third fiscal quarter of 1997. This increase was due primarily to a $5,000 loss on sale of assets which had occurred in the third fiscal quarter of 1996. Financial Condition, Capital Resources and Liquidity The Company continues to have significant concerns regarding its financial condition and liquidity. Since May 1995, when the Company was notified that the transaction to sell its Direct Data subsidiary had been terminated, the Company has continued to reduce its expenses through cost controls and workforce reduction. It also has been successful in securing additional orders from its largest customer, CSI, and has sold off its finished goods inventory, for which it had previously paid. As a result, the Company has been able to maintain operations, although it has been unable to significantly reduce its obligation to its largest creditor. The Company now manufactures an enhanced version of the POS-50r under a new manufacturing agreement with Uniform Industrial Corporation, that allows higher product margins with little or no cash required until the finished product is sold. While this will significantly assist the Company's cash flow, it can no longer rely on the full sales price of the product to meet its working capital requirements. Instead, it must succeed on the gross margin of its product sales. This will require that the Company achieve an increased order rate on its POS-50r and new CDPD products. In December, the Company secured two software development contracts and is negotiating for additional hardware and software development contracts which, if entered into, would provide additional working capital to the Company and a new product it can offer through its own sales organization. As part of an aggressive sales restructuring plan, the Company is building its own national proprietary sales organization to sell its new CDPD products to traditional retail merchants in all CDPD coverage areas. The successful deployment of this sales organization and positive sales results will provide additional working capital. While the Company believes that its relationship with CSI continues to be strong, the Company is dependent upon it sales to CSI, and the loss of, or a significant decrease in those sales would have a material adverse effect on the Company's cash position and threaten its ability to sustain operations. As a result of these developments, including the failure to sell Direct Data, and its subsequent liquidation, and in order to continue as a going concern, the Company will need to increase its revenue levels, maintain product margins, successfully execute a direct sales and marketing program with its new CDPD products, secure additional hardware and software development contracts, generate positive cash flow from operations and/or secure additional debt or equity financing. Part II The information required for Part II, Items 2 and 5 are not applicable. ITEM 1 -- MATERIAL DEVELOPMENTS IN CONNECTION WITH LEGAL PROCEEDINGS In early September 1994, two shareholders filed a Colorado state court class action lawsuit in Denver District Court against the Company, three of its directors, and others (Jacques A. Machol III, et al, v. U.S. Wireless Data, Inc., et al.). The lawsuit alleges various fraudulent acts, omissions and misrepresentations by the defendants in connection with the initial public offering of and subsequent trading in the Company's stock. A second shareholder class action complaint against the Company, three of its directors, and others was filed by one shareholder in late September 1994 in U.S. District Court, Denver, Colorado (Jeffry Appel on behalf of himself and all others similarly situated, v. Maurice Caldwell Jr., Rod L. Stambaugh, Leonard Trout, Donald L. Walford, Frank LaHue, U.S. Wireless Data, Inc., among others). The complaint also arises out of the Company's public offering and makes allegations similar to those made in the first complaint. The Denver District Court lawsuit has been stayed by court order so as to avoid duplication with the U.S. District Court lawsuit. In February 1995, another class action complaint was filed in U.S. District Court, Denver, Colorado by the same plaintiff who had previously filed the Colorado State class action in early September 1994 (Jacques A. Machol III and Prism Partners I on behalf of themselves and all others similarly situated, v. U.S. Wireless Data, Inc., Maurice R. Caldwell Jr., Rod L. Stambaugh, Leonard Trout, Donald L. Walford, Frank LaHue, among others). The Defendants and allegations are the same as in the original and subsequent lawsuits. Currently, the court is deciding whether to consolidate the two federal cases. The Company believes these lawsuits are without merit and denies that it engaged in any fraudulent acts or omissions, or otherwise violated Federal or Colorado law. In each case, the Company intends to contest the litigation on its merits, as well as the suitability of the plaintiff shareholders to act for the alleged class. Nonetheless, because litigation of this type involves inherent risks, it is not possible for the Company at this time to make an assessment of potential exposure, nor to predict with precision what the ultimate outcome will be. On January 7, 1997, counsel for the plaintiffs advised the court that plaintiffs and major defendants have reached a settlement in principle, and therefore requested that the trial date of March 24. 1997 be vacated and held in abeyance pending the filing of settlement papers. As of the date of this filing, final settlement documents have not been filed with the court. In April, 1997, plaintiffs and defendants executed a settlement agreement and final documents have been filed with the court. The case is now entering a notification period in which members of the class will be notified of the settlement terms. At the end of the notification period, and if no significant objections are filed, the case will be resolved and filed with the court. ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES The Company is indebted to Omron Systems, Inc. under a Secured Installment Note dated March 27, 1995, for the principal amount of $472,800 and interest thereon. The terms of such note required the Company to make payments of principal and interest each month from April 1995 through December 1995, at which time the note became due. The Company made one principal payment, and monthly interest payments through October, 1996, in accordance with the terms of the note, but has made no other principal payments under this note and for that reason is in default. In December, the Company was contacted by Omron regarding the transfer of 40 terminals, resulting in a $9,600 reduction in the installment note. The Company completed this transfer on January 3, 1997. The total amount due under such note is $389,066. The Company continues to discuss options with Omron regarding the possible restructuring or mutually agreeable settlement of this note. ITEM 5 -- OTHER INFORMATION In February, as part of the sales restructuring plan, the Company launched the first phase of its own proprietary national sales organization in which the new CDPD products will be sold directly to existing merchants that currently have a Verifone TRANZ 330 or TRANZ 380 dial-up type terminal. The new CDPD product simply enables the merchants existing dial up terminal to authorize credit and debit card transactions via the CDPD network resulting in 3-5 second response time, lower discount rates and the potential elimination of a phone line and the costs associated with it. The Company plans to expand its national proprietary sales force to all retail markets that have CDPD coverage. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits required by Item 601 of Regulation S-B 27 Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. U.S. WIRELESS DATA, INC. Registrant Date: May 15, 1997 By: \s\ Rod L. Stambaugh ---------------- ------------------------------------------- President and Chief Executive Officer