SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
|X| Quarterly Report under Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999.
---------------
|_| Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ______.
Commission File No.: 0-22848
U.S. Wireless Data, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1178691
-------- ----------
(State of incorporation) (IRS Employer Identification No.)
2200 Powell Street, Suite 800
Emeryville, California 94608
----------------------------
(Address of principal executive offices, including zip code)
(510) 596-2025
--------------
(Registrant's Telephone Number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety days.
Yes _X_ No ___
As of March 31, 1999 there were outstanding 17,330,783 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
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets --
March 31, 1999, and June 30, 1998..................................3
Statements of Operations --
Three Months and Nine Months Ended March 31, 1999 and 1998.........4
Statements of Cash Flows --
Nine Months Ended March 31, 1999 and 1998..........................5
Notes to Financial Statements.............................................6-10
Item 2. Management's Discussion and Analysis......................................11-19
PART II OTHER INFORMATION
Item 1. Legal Proceedings.........................................................19
Item 2. Changes in Securities.....................................................20
Item 3. Defaults Upon Senior Securities...........................................20
Item 6. Exhibits and Reports on Form 8-K..........................................21
2
U.S. WIRELESS DATA, INC.
BALANCE SHEET
(Unaudited)
March 31, 1999 June 30, 1998
-------------- -------------
ASSETS
Current assets:
Cash ................................................................... $ 3,000 $ 4,000
Accounts receivable, net of allowance for doubtful ..................... 115,000 55,000
accounts of $30,000 at March 31, 1999;
$22,000 at June 30, 1998
Inventory, net ......................................................... 231,000 480,000
Other current assets ................................................... 127,000 187,000
------------ ------------
Total current assets .............................................. 476,000 726,000
Processing units - deployed .................................................... 466,000 517,000
Property and equipment, net .................................................... 238,000 253,000
Other assets ................................................................... 338,000 69,000
------------ ------------
Total assets .......................................................... $ 1,518,000 $ 1,565,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 1,245,000 $ 1,506,000
Accrued liabilities ...................................................... 585,000 1,735,000
Borrowings, current portion .............................................. 366,000 452,000
------------ ------------
Total current liabilities .............................................. 2,196,000 3,693,000
Borrowings, long-term portion .................................................. 1,711,000 45,000
------------ ------------
Total liabilities .................................................. 3,907,000 3,738,000
------------ ------------
Redeemable common stock
232,000 372,000
------------ ------------
Stockholders' deficit:
Preferred stock, at $1 stated value,15,000,000 authorized, 789,000 3,060,000
789,325 and 3,060,000 Series A issued and outstanding at March 31, 1999
and June 30, 1998, respectively
Common stock, at $1 stated value, 40,000,000 ........................... 17,331,000 12,195,000
shares authorized; 17,330,783 and 12,195,358 shares
issued and outstanding at March 31, 1999 and
June 30, 1998, respectively
Additional paid-in capital ............................................. 12,511,000 10,222,000
Accumulated deficit .................................................... (33,252,000) (28,022,000)
------------ ------------
Total stockholders' deficit (2,621,000) (2,545,000)
------------ ------------
Total liabilities and stockholders' deficit ........................ $ 1,518,000 $ 1,565,000
============ ============
Accompanying notes are an integral part of the financial statements
3
U.S. WIRELESS DATA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net revenues:
Product sales ..................... $ 124,000 $ 153,000 $ 633,000 $ 504,000
Services ------------ ------------ ------------ ------------
137,000 99,000 509,000 134,000
------------ ------------ ------------ ------------
261,000 252,000 1,142,000 638,000
------------ ------------ ------------ ------------
Cost of revenues:
Product sales ..................... 89,000 91,000 449,000 318,000
------------ ------------ ------------ ------------
Services 151,000 24,000 482,000 34,000
------------ ------------ ------------ ------------
240,000 115,000 931,000 352,000
------------ ------------ ------------ ------------
Gross margin
21,000 137,000 211,000 286,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 789,000 2,518,000 3,857,000 6,659,000
Research and development 105,000 78,000 363,000 251,000
Litigation settlement
-- 1,353,000 -- 1,353,000
------------ ------------ ------------ ------------
Total operating expense 894,000 3,949,000 4,220,000 8,263,000
------------ ------------ ------------ ------------
Loss from operations .................. (873,000) (3,812,000) (4,009,000) (7,977,000)
Interest income ....................... -- -- 8,000 --
Interest expense ...................... (448,000) (439,000) (681,000) (707,000)
Other expense -- (165,000) (161,000) (166,000)
------------ ------------ ------------ ------------
Net loss .............................. $ (1,321,000) $ (4,416,000) $ (4,843,000) $ (8,850,000)
============ ============ ============ ============
Basic and diluted loss per share: ..... $ (0.09) $ (0.48) $ (0.39) $ (1.01)
============ ============ ============ ============
Weighted average common shares ........ 14,093,000 9,281,000 13,386,000 8,753,000
outstanding - basic/diluted ============ ============ ============ ============
Accompanying notes are an integral part of the financial statements
4
U.S. WIRELESS DATA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended March 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $(4,843,000) $(8,850,000)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization ........................ 203,000 65,000
Non-cash consulting services and warrant extension ... 1,933,000 2,124,000
Non-cash variable option-compensation expense ........ (1,252,000) 1,707,000
Non-cash interest expense - debentures ............... 589,000 637,000
Non-cash litigation expense .......................... -- 1,353,000
Non-cash other expense - warrants .................... 378,000 --
Debt forgiveness ..................................... (192,000) --
Changes in current assets and liabilities:
Accounts receivable ............................... (60,000) 46,000
Inventory ......................................... 213,000 (671,000)
Other current assets .............................. 27,000 (152,000)
Accounts payable .................................. (270,000) 911,000
Accrued liabilities ............................... (63,000) 52,000
----------- -----------
Net cash used in operating activities ............. (3,337,000) (2,778,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment ........... (46,000) (291,000)
Processing units - deployed .......................... (82,000) (383,000)
Decrease (Increase) in other assets .................. 10,000 (56,000)
----------- -----------
Net cash used in investing activities ............. (118,000) (730,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ...................... 26,000 585,000
Proceeds from sale of options to purchase common stock 1,000 192,000
Issuance of notes payable ............................ 2,744,000 28,000
Principal payment on borrowings ...................... (122,000) --
Net proceeds from issuance of debt ................... 1,805,000 2,762,000
Redemption of preferred stock ........................ (1,000,000) --
----------- -----------
Net cash provided by financing activities ......... 3,454,000 3,567,000
----------- -----------
Net increase in cash ......................................... (1,000) 59,000
Cash at beginning of period .................................. 4,000 6,000
----------- -----------
Cash at end of period ........................................ $ 3,000 $ 65,000
=========== ===========
Supplemental Disclosure of non-cash financing and investing:
1. Conversion of $2,567,000 notes payable and interest to 2,934,00
Accompanying notes are an integral part of the financial statements
5
U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- ACCOUNTING PRINCIPLES
The balance sheet as of March 31, 1999, as well as the statements of
operations for the three and nine month period ended March 31, 1999 and
March 31, 1998, and statement of cash flows for the nine month periods
ended March 31, 1999 and March 31, 1998 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, 1999 and for all periods presented, have been made.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these financial statements are read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the
fiscal year ended June 30, 1998. The results of operations for interim
periods presented are not necessarily indicative of the operating results
for the year.
Note 2 -- FINANCIAL CONDITION AND LIQUIDITY
The Company continues to have difficulties due to its financial
condition and lack of liquidity. The Company has accumulated a deficit of
approximately $33 million since inception, including a loss of $1.3
million during the third quarter of fiscal year 1999, and has limited
financial resources. In May 1999, the Company completed the first phase of
a $1.5 to $5.0 million private placement pursuant to Regulation D of the
Securities Act of 1933. The financing was facilitated by an institutional
investor, through which the Company raised gross proceeds of $1,500,000.
At present, development of the Company's products and services requires
significant additional financing.
Due to the change in its distribution strategy to channel product sales
and service offerings through existing merchant acquirers, the Company has
been able to make significant reductions in its direct sales force and
reduce its cash requirements. However, execution of the Company's business
plan is dependent on a significant debt or equity-financing event in the
immediate future. The Company continues to work both directly and through
its consultants to secure such financing which is required to fund
operations while a significant recurring revenue stream is developed.
There can be no assurance that the Company will be successful with efforts
to raise additional capital. The inability of the Company to secure
additional financing in the near term could adversely impact the Company's
financial position, including its ability to continue as a going concern.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets and
liabilities that might be necessary should the Company be unable to
continue as a going concern.
Note 3 -- NET LOSS PER SHARE
Earnings (loss) per common share (EPS) is computed using Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS
No. 128 establishes standards for the computation, presentation, and
disclosure of earnings per share. Basic and diluted net loss per common
share is computed by dividing the net loss by the weighted average number
of common shares outstanding at the end of the period. Diluted EPS
excludes exercisable stock options and warrants from the calculation since
their effect would be anti-dilutive. Such stock options and warrants could
potentially dilute earnings or decrease losses per share in the future.
EPS for the three-month and nine-month periods ended March 31, 1998 have
been restated to conform to SFAS No.128. In the third quarter of fiscal
1999, the net loss available to common shareholders equals the net loss
less $25,000 of preferred stock dividends charged to retained earnings.
For the first nine months of fiscal 1999, the net loss available to common
shareholders equals the net loss plus $387,000 of preferred stock
dividends and redemption premium charged to accumulated deficit.
6
Note 4 -- FINANCINGS
As the Company entered the first quarter of fiscal 1999, it continued
to face the need for increased liquidity to meet its obligations. In July
1998, the Company completed a private offering of $2,000,000 of 6%
convertible subordinated debentures due July 21, 2000 and 100,000 Common
Stock Purchase Warrants exercisable at $4.25 per share until July 21,
2001. The shares of Common Stock underlying the 6% Debentures and Warrants
carry registration rights. The net proceeds to the Company from the
offering were approximately $1.8 million. The Company used approximately
$250,000 of the proceeds from the offering to pay off a $250,000 short
term bridge loan from one of the investors, which was evidenced by a
promissory note executed July 1998, and the balance of the proceeds was
used for working capital. In consideration of the bridge loan, the
investor received a warrant to purchase 20,000 shares of Common Stock at
$4.375 per share, exercisable through September 9, 2001. The warrant
contains anti-dilution provisions and "piggyback" registration rights
applicable to the Common Stock issuable upon exercise of the warrant.
Holders of the Company's Series A Preferred Stock purchased $1,000,000 of
the Debentures.
In August 1998, the Company obtained effectiveness of a registration
statement on Form SB-2 (SEC File No. 333-52625) under which it registered
a total of 7,240,356 shares of Common Stock, for resale by certain
security holders of the Company (the "August SB-2"). After the August SB-2
was declared effective by the SEC, the National Association of Securities
Dealers, Inc. ("NASD") determined that it would undertake a detailed
review of the registration statement. Pending the completion of the NASD
review, the Company suspended the sale of shares under the registration
statement through NASD member firms. Approximately 250,000 of the
registered shares were sold under that registration statement before the
Company suspended sales under it. During the NASD's review, the Company
further determined that the Prospectus contained in the August SB-2 was no
longer current and that a "post-effective amendment" would be required to
be filed and declared effective by the SEC before additional sales could
be made under the August SB-2. A total of 1,030,310 shares of Common Stock
included in the August SB-2 were registered for sale on behalf of the
holders of the Company's Series A Preferred Stock. As of March 31, 1999,
there remained 789,000 shares of Series A Preferred Stock outstanding. All
shares of the Common Stock issuable upon conversion of, or as dividends
on, the Series A Preferred stock became eligible for sale under SEC Rule
144 as of December 10, 1998.
On September 22, 1998, the Company entered into an agreement with
Liviakis Financial Communications, Inc., a significant shareholder of the
Company, for a $1,300,000 debt financing. The note payable was due April
1, 1999, bears interest at 8% per year, and is secured by substantially
all available assets of the Company. The Company used $1,000,000 of the
proceeds to redeem $833,000 of the approximate $2.3 million balance of its
Series A Convertible Preferred Stock. The Company paid 120% of face value
for the redemption. The participating investors, representing
approximately 1,342,000 shares of the remaining Series A Preferred, agreed
to hold their Series A Preferred shares until at least October 15, 1998
after which time one-third of the Series A Preferred shares could be
converted to common stock on each of October 15, November 15, and December
15 of 1998, respectively. As an incentive to these investors, the Company
agreed to issue Common Stock purchase warrants exercisable to purchase
that number of shares of Common Stock equal to five percent of the number
of shares of Series A Preferred Stock held by the participating investor
at the end of each period. On December 31, 1998, the Company was obligated
to issue warrants for 78,089 shares exercisable at $2.40 per share through
October 15, 2001, 67,084 shares exercisable at $3.36 per share through
November 15, 2001, and 67,084 shares exercisable through December 15,
2001. The Company also agreed to increase the dividend rate from 4% to 8%
on the balance of the unconverted Series A Preferred Stock. By October 31,
1998, the Company was to file a registration statement for the shares
underlying the Warrants as well as additional shares issuable upon
conversion of the Series A Preferred Stock, beyond those included in the
original SB-2 Registration Statement, due to a decline in the stock price
subsequent to effectiveness of the August SB-2. The Company has not met
this obligation, but intends to include the shares underlying the warrants
in the upcoming registration statement for the Series B Preferred Stock.
During the quarter ended March 31, 1999, the Company issued common stock
purchase warrants to JW Genesis as consideration for services rendered in
conjunction with the redemption of Series A Preferred Stock. A total of
15,000 warrants were issued at $2.70 per share and are exercisable through
September 13, 2001. The shares of Common Stock underlying the warrants
have "piggy-back" registration rights,
7
On October 28, 1998, the Company borrowed $500,000 and issued an 8%
Note Payable due March 1, 1999, from the CEO and 50% owner of Cardservice
International, Inc. In consideration for the loan, the Company agreed to
issue a Common Stock Purchase Warrant exercisable to purchase 25,000
shares of Common Stock at $3.038 per share through October 27, 2001.
During the second fiscal quarter of 1999, the Company received two
bridge loans from Liviakis Financial Communications, Inc. (LFC) totaling
$300,000 in the form of 8% Notes Payable due April 1, 1999. In January and
February, the Company received $390,000 of additional bridge loans from
LFC in the form of 8% Notes Payable, due April 1, 1999.
On March 19, 1999, the Company and holders of the 8% Notes, LFC and the
CSI affiliate, agreed to convert $2,490,000 of principal plus accrued
interest to Common Stock at the rate of $.875 per share. This rate was
established at a 20% discount from the closing price of the Common Stock
as of March 18, 1999. The Company issued 2,933,671 shares under these
agreements. These shares are restricted securities and will become
eligible for sale under SEC Rule 144 one year after the original issuance
dates of the promissory notes.
As noted above, the Company had a pending commitment to file a
registration statement, which was due October 7, 1998, covering the shares
of Common Stock issuable upon conversion of the 6% Convertible Debentures
and related warrants. A registration was not effective with the SEC within
the required 120 calendar days of the Initial Issuance Date (which was
July 21, 1998), and the Company became obligated to pay a cash penalty of
two percent (2%) of the face amount of the 6% Debentures and thereafter an
amount equal to three percent (3%) of the face amount for every thirty
calendar days (or any fraction thereof) until the registration is
effective. At March 31, 1999, the Company had not filed or obtained
effectiveness of a registration statement, thereby giving the holders the
right to require the Company to redeem the 6% Debentures at 120% of face
value plus accrued and unpaid interest and penalties to the date of
redemption. The Company has recorded $280,000 in penalties as of March 31,
1999 for this obligation. On May 7, 1999, the Company and the 6% Debenture
holders agreed to convert all the accrued interest and penalties into
shares of the Series B Preferred Stock. In addition, they waived their
default rights under the original schedule described above and adopted the
default schedule for the Series B Preferred Stock (See "Subsequent
Events").
On March 12, 1999, the Company completed a note and common stock
purchase agreement with RBB Bank Aktiengesellschaft, which is the agent
for the holders of certain shares of the Company's Series A Preferred
Stock, and $1,000,000 of 6% Debentures. As part of this agreement, 50,000
shares of common stock and a $250,000 promissory note bearing interest at
10% due June 12, 1999 were issued. In connection with the issuance of the
Note, the Company also granted RBB Bank a right of first refusal to fund
any such additional bridge financing needed by the Company. This right
must be exercised within one day of RBB Bank being notified of the terms
of any such additional bridge financing. The shares issued as part of this
agreement are restricted securities and the Company will include the
shares in the Registration Statement to be filed for the 6% Convertible
Debentures and other share issuances. The loan was intended as a
short-term bridge loan and was originally required to be repaid from the
proceeds of any aggregate equity placements made by the Company which
amount to at least $1,000,000. This provision was subsequently eliminated
in an amendment to the agreement dated April 22,1999. Liviakis Financial
Communications, Inc, agreed to guarantee the note (See "Subsequent
Events").
In March 1999, the Company entered into a consulting agreement with EBI
Securities Corporation for purposes of assisting the Company as a
corporate finance consultant in obtaining additional capital and liquidity
for its stock. The intent of the agreement is to position the Company for
future financing, including but not limited to a secondary public
offering. The agreement has an initial term of six months with an
available extension of 3 months. For its services, the Company has agreed
to issue warrants to purchase 100,000 shares of its Common Stock
exercisable at $1.00 per share expiring three years from March 15, 1999.
The Company amortized a prepaid expense of $60,000 during the current
quarter for these warrants. The Warrants contain standard anti-dilution
provisions, provide EBI Securities with a cashless exercise provision, and
"piggy-back" registration rights. The Company also agreed to pay a monthly
consulting fee of $5,000. Additionally, the agreement provides for a fee
to be paid for services rendered in conjunction with any merger or
acquisition or significant investment by the Company with fees ranging
from 1% to 5% based on the value of the transaction.
8
Note 5 -- LIVIAKIS FINANCIAL COMMUNICATIONS INC. ("LFC") - CONSULTING
On June 30, 1998, the Company and LFC agreed to extend their consulting
relationship through the entry of a new consulting agreement covering the
period from August 1, 1998 through March 15, 1999 (the "New LFC
Agreement"). The terms of the New LFC Agreement are substantially the same
as the original LFC Agreement of June 1997. For services to be rendered
under the New LFC Agreement, LFC received 290,000 shares of Common Stock,
issued as a signing bonus upon execution of the New LFC Agreement. The
consulting agreement was valued as $1,078,438 of prepaid consulting
services based on the share price on the date of the agreement less a 15%
discount, attributable to the fact that the shares were restricted and
subject to a "lock-up" provision as described below. The consulting
services have been expensed over the term of the agreement. The Common
Stock issued to LFC under the New LFC Agreement carries certain
registration rights. In conjunction with the entry of the New LFC
Agreement, LFC agreed to a further lock-up of all shares owned by LFC and
its affiliates, pursuant to which they agreed not to sell such shares
before February 1, 1999. LFC and the principals of LFC subsequently agreed
to extend their "lock-up" of Company shares through the end of calendar
year 1999.
Note 6 - LITIGATION
Settlement of Claims of Certain Noteholders
In April 1998, the Company entered into an agreement with certain
Noteholders under which the Company issued shares of Common Stock in
settlement of the dispute. Terms of the settlement entitled the
Noteholders to certain guarantee or put provisions related to the shares.
The guarantee provision of the settlement agreement allows the former
Noteholders to recover the difference between the guarantee price (which
is $3.00 per share for the shares that are still entitled to the
guarantee) and the gross amount the Noteholder receives upon a sale of the
shares. The guarantee is operative at any time during the one year period
commencing on the date the shares became saleable under SEC Rule 144. The
Company is obligated to pay the amount due within thirty days of receiving
a demand, accompanied by documentation confirming the sale. Under the
"put" provision of the settlement agreement, the former Noteholders will
have a five day period commencing on the date one year from the date the
shares become saleable under SEC Rule 144 during which the former
Noteholders may "put" any shares remaining unsold by them at the time back
to the Company. Upon exercise of the put, the Company must either (1)
purchase the shares for the put price of $3.00 per share, or (2) require
the shareholder to sell the shares into the market, with the Company
making up the difference between the put price and the gross amount
received by the shareholder upon such sale, within 15 days after receipt
of written notice and documentation confirming the sale. The shares
originally issued upon conversion of the notes and the additional shares
resulting from the settlement are reflected as Redeemable Common Stock on
the balance sheet. The originally issued shares are reflected at their
conversion value adjusted for the value attributable to the guarantee and
"put" provisions. In the event redemption of such shares becomes probable
and the actual redemption amount is in excess of the carrying amount, such
excess amount will be recorded as litigation settlement expense. The
additional shares are reflected at their redemption value. As of March 31,
1999, there were up to approximately 128,000 shares subject to the
guarantee and "put" provision, with a carrying value of $232,000, and a
maximum redemption value of approximately $384,000 prior to any reduction
for amounts the holder may receive upon the sale of such shares. On April
29, 1999, certain Noteholders holding approximately 83,500 shares, agreed
to waive their guarantee and "put" rights in return for the isssuance of
200,000 restricted shares of the Company's common stock (See "Subsequent
Events").
Note 7 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting changes in the values of these
derivatives will be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they
qualify for hedge accounting. The key criterion for hedge accounting is
that the derivative must be highly effective in achieving offsetting
changes in fair value or cash flows of the hedged items during the term of
the hedge. The Company plans to adopt FAS 133 in the first quarter of
fiscal 2000 and has not yet determined the effect, if any, of adopting the
new standard.
Note 8 -- SUBSEQUENT EVENTS
On April 29, 1999, the Company agreed with certain Noteholders to waive
their "put" rights in return for issuance of 200,000 restricted shares of
USWD's Common Stock on a pro-rata basis for their 83,500 shares of the
original distribution covered in the Settlement Agreement. Issuance of the
shares is subject to a final agreement and verification by the Company of
eligibility of the 83,500 shares for the put/guarantee rights (See "Note
6-Litigation").
9
On May 6, 1999, the Company completed the minimum amount of a $1.5 to
$5.0 million private placement pursuant to Regulation D of the Securities
Act of 1933. The financing was facilitated by an institutional investor,
through which the Company raised gross proceeds of $1,500,000. The Company
issued 6% Cumulative Convertible Redeemable Preferred Stock (Series B) for
$1.00 per share. The instrument gives the holder the right to convert the
Preferred Stock into shares of the Company's Common Stock in the future at
80% of then current market price. Concurrent with this transaction, the
holders of the Company's 6% Convertible Debentures agreed to convert all
accrued interest and penalties into shares of the Series B Preferred
Stock. The Series B Preferred Stock and Common Stock to be issued upon
conversion have not been registered under the Act and may not be offered
or sold in the United States absent registration or an applicable
exemption from registration requirements.
The Company immediately used $401,000 of the proceeds to pay principal
and interest on a $400,000 bridge note entered into subsequent to the end
of third quarter 1999. In addition, proceeds will be used to pay finders
fees of $180,000 plus estimated offering expenses of $41,000 (including
approximately $26,000 for the investor's legal fees). The Company is
obligated to utilize an additional $413,000 of the proceeds to pay past
and future legal and accounting fees, while the estimated balance of
$465,000 is to be used as working capital.
As described under Note 4 - Financings, the Company was obligated to
file a registration statement by October 7, 1998 covering the shares of
Common Stock issuable upon conversion of the 6% Debentures. Since the
Company did not meet the registration requirements, certain penalties
accrued through April 18, 1999. The Company issued 454,705 shares of
Series B Preferred Stock at $1.00 per share to compensate the 6% Debenture
holders for the penalties and interest owed on the 6% Debentures through
June 1999. As part of this agreement, the Debenture holders agreed to
adopt the default schedule set for the Series B Preferred Stock and to
waive their rights under certain prior defaults.
The Company also entered into an agreement (the "Registration
Rights Agreement") with the purchasers of the Series B Preferred to file a
registration statement with the SEC covering the Common Stock underlying
the Series B Preferred and the Warrants within 30 days of the Closing Date
to be effective within 90 days of the Closing Date. If the Company fails
to meet this requirement, monthly penalties accrue at the rate of 2 to 3
percent of the purchase price, and in certain circumstances can equal up
to 6% per month. In addition, if the Series B Registration Statement has
not been filed within 60 days of the Closing Date or has not been declared
effective within 150 days of the Closing Date, the holders of the Series B
Preferred may require the Company to redeem the Series B Preferred for
$1.25 per share, plus all accumulated dividends. The filing of this
registration statement will activate certain prior registration rights
granted by the Company to holders of certain of its securities.
The Company also issued a Common Stock Purchase Warrant exercisable to
purchase 300,000 shares of common Stock at $1.50 per share for five years
from April 30,1999 (the "Series B Warrants") to the cash purchaser of the
Series B Preferred.
As noted in Note 4, RBB Bank Aktiengesellschaft, which is the agent for
the holders of certain shares of the Company's Series A Preferred Stock,
$1,000,000 of 6% Debentures and a promissory note in the principal amount
of $250,000, agreed to waive the right to immediate repayment of the
$250,000 note (which was originally payable upon completion of the next
funding received by the Company of at least $1,000,000). RBB Bank agreed
to forebear initiating an action against the Company to collect the amount
due until the earlier of receipt by the Company of funding in the
aggregate of at least $2,500,000, or December 1, 1999.
Mr. John Liviakis, a significant shareholder of the Company, also
agreed to transfer a total of 443,077 shares of Company Common Stock owned
by him to the finder who located the cash purchaser of the Series B
Preferred Stock. The shares will be transferred as "restricted securities"
as defined in Rule 144 under the Securities Act of 1933 and will not have
any registration rights.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company may, in discussions of its future plans, objectives and
expected performance in periodic reports filed by the Company with the
Securities and Exchange Commission (or documents incorporated by reference
therein) and in written and oral presentations made by the Company,
include projections or other forward-looking statements within the meaning
of Section 27A of the Securities Exchange Act of 1933 or Section 21E of
the Securities Act of 1934, as amended. Such projections and
forward-looking statements are based on assumptions, which the Company
believes are reasonable but are, by their nature, inherently uncertain. In
all cases, results could differ materially from those projected. Some of
the important factors that could cause actual results to differ from any
such projections or other forward-looking statements are detailed below,
and in other reports filed by the Company under the Securities Exchange
Act of 1934, including the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998.
History of Losses and Potential Fluctuations in Operating Results:
Throughout the Company's history including the first nine months of the
fiscal year ending June 30, 1999, the Company has continued to experience
significant operating losses. The Company has sold securities or borrowed
funds to cover these losses. In addition, because the Company generally
ships its products on the basis of credit card processing applications or
purchase orders, increments to recurring revenue and other component sales
in any quarter are highly dependent on orders shipped in that quarter and,
accordingly, may fluctuate materially from quarter to quarter. The
Company's operating expense levels are based on the Company's internal
forecasts for future demand and not on firm customer orders. Failure by
the Company to achieve these internal forecasts could result in expense
levels that are inconsistent with actual revenues. The Company's results
may also be affected by fluctuating demand for the Company's products and
by increases in the costs of components acquired from the Company's
vendors.
Requirement for Additional Capital: At present, the development of the
Company's infrastructure, product development initiatives, and transition
to the new distribution program requires additional financing. Proceeds
from recently completed financings have provided the Company with the
ability to launch joint marketing and distribution programs with credit
card acquirers, however, execution of the Company's business plan is
dependent on a more significant debt or equity financing event. Recently,
operating expenses have been satisfied by several bridge financings, a
private equity offering, and making selective payments on certain accounts
payable. The Company continues to work both directly and through its
consultants to secure additional debt or equity financing which is
required to fund operations while a significant recurring revenue stream
is built. While management is confident it can accomplish this objective,
there is no guarantee that this additional funding will occur in the
required time frame. The failure of the Company to obtain additional
financing could have a material adverse impact on the Company, including
its ability to continue as a going concern.
Distribution Program: The Company has recently executed a Letter of
Intent with Cardservice International which outlines CSI's intent to
produce its LinkPoint(TM) processing terminals using the Company's
proprietary Wireless Express Payment ServiceSM (WEPSSM). Lipman USA Inc.
has also announced the availability of its NURIT 2090 terminal using
WEPSSM. The Company anticipates that CSI and Lipman will promote these
products within their own markets using their respective distribution
channels. The Company also has joint marketing and distribution agreements
in place with GTE Wireless, Bell Atlantic Mobile, and Ameritech. These and
anticipated additional distribution programs are expected to have a
positive impact on the Company's future revenue stream. In addition, the
Company anticipates it will execute a definitive agreement with CSI and
sign distribution agreements with other significant partners. The failure
to successfully complete the agreements and successfully execute the
specified programs through any of these distributors could have a material
adverse effect on the Company.
The Company's Dependence on a Single Type of Product and Technological
Change: All of the Company's revenue is derived from sales of its credit
card transaction services and CDPD enabling products. Demand for these
products could be affected by numerous factors outside the Company's
control, including, among others, market acceptance by prospective
customers, or the introduction of new or superior competing technologies.
The Company's success will depend in part on its ability to respond
quickly to technological changes through the development and improvement
of its products.
Competition by Existing Competitors and Potential New Entrants into the
Market: The Company has identified several potential competitors
attempting to develop CDPD based terminals and solutions. In addition,
companies with substantially greater financial, technical, marketing,
manufacturing and human resources, as well as name recognition than the
Company may also enter the market.
11
CDPD Resale Agreements Containing Minimum Purchase Obligations: The
Company has to date entered into four CDPD service resale agreements, one
of which contains minimum obligations which can be characterized as "take
or pay" provisions. The agreement with AT&T Wireless contains such
provisions. The Company is obligated to pay for the minimum amount of
service stated in the agreement even if it fails to place enough service
with merchants to meet the minimums. The failure of the Company to meet
these service minimums could have an adverse financial impact upon the
Company.
Status of Federal Corporate Tax Filings: The Company has not completed
federal income tax filings for fiscal years 1996, 1997, and 1998. While it
is unlikely that the Company will owe any taxes due to the sustained
losses during the periods, the Company may be subject to penalties for the
delinquency. The Company intends to take the steps required to complete
the tax filings as soon as practicable.
Dilutive and Other Possible Adverse Effects of Outstanding Options,
Warrants and Other Rights to Acquire Common Stock: The Company has a
substantial number of outstanding rights to acquire Common Stock in the
form of the Series A and Series B Preferred Stock, 6% Convertible
Subordinated Debentures, various warrants, and contract rights. A
substantial number of these rights are exercisable at prices which are
less than the present market price for the Common Stock. Under the terms
of such rights, the holders thereof are given an opportunity to profit
from a rise in the market price of the Common Stock with a resulting
dilution in the interests of other shareholders. The terms on which the
Company may obtain additional financing may be adversely affected by the
existence of such rights. For example, the holders of these rights could
exercise them at a time when the Company was attempting to obtain
additional capital through a new offering of securities on terms more
favorable than those provided by the rights.
Current Status of Registration Statements: The Company was obligated to
file a registration statement with the Securities and Exchange Commission
by October 7, 1998, covering the shares of Common Stock issuable upon
conversion of the 6% Debentures which the Company sold in July 1998. In
September 1998, the Company redeemed a total of 833,000 shares of its
Series A Preferred Stock. In conjunction with that redemption, the Company
also agreed to issue warrants exercisable to purchase a total of 212,257
shares of Common Stock to the holders of the remaining shares of Series A
Preferred Stock. The redemption agreement includes provisions that
obligated the Company to file a registration statement by October 31,
1998, covering the shares underlying these warrants plus any additional
shares issuable upon conversion of the Series A Preferred Stock. A
registration statement to cover these shares has not been filed as of the
date of filing of this Report. The Company is preparing to file a
registration statement covering the Common Stock issuable upon conversion
of the 6% Debentures and Series B Preferred Stock described below and will
include the shares of Common Stock underlying the warrants, Series A
Preferred Stock and other securities having piggyback registration rights
in this registration (See "Securities Issuances to Fund Operations" in
Results of Operations, below).
RESULTS OF OPERATIONS
Company Background
U.S. Wireless Data, Inc. (the "Company" or "USWD") was incorporated in
the State of Colorado on July 30, 1991. The Company is in the business
of providing products and services to enable the use of wireless
technology for electronic payment and other transactions.
Over the past three years, USWD has focused its product development
effort on incorporating Cellular Digital Packet Data (CDPD) technology
into its product line. Because of the high speed nature of CDPD
technology, and the ability to bypass the public switched telephone
network, the Company's new line of CDPD-based terminals has significant
performance and communication cost advantages when compared with the
traditional dial-up terminals currently being sold in the U.S. market
today.
12
In fiscal year 1998, to broaden distribution of the TRANZ Enabler CDPD
based product, the Company entered into agreements with large
telecommunications carriers for direct distribution of products and
services to merchants. The Company signed joint marketing and operating
agreements with Bell Atlantic Mobile, Ameritech Mobile Communications,
Inc., and GTE Wireless. Commencing in the second quarter of fiscal 1998
and continuing into the first quarter of fiscal 1999, USWD made
significant investments to support a nationwide deployment of TRANZ
Enablers to merchants through GTE's and other telecommunications carriers'
national sales forces. Under these deployment programs, the carrier's
sales representative introduced USWD's credit card processing solution and
TRANZ Enabler to the end user merchant. Upon execution of a credit card
processing agreement, a TRANZ Enabler unit(s) was provided to the merchant
by USWD. Under this program, the Company would retain a portion of the
monthly credit card fees based on the dollar volume and number of
transactions processed through the TRANZ Enabler.
Placements of TRANZ Enabler units pursuant to the Company's agreements
with telecommunications carriers did not develop as rapidly as anticipated
and have not reached anticipated (and necessary) levels to pay for the
infrastructure to support the programs. Costs to the Company of
implementing the joint marketing and distribution agreements with GTE
Wireless, Bell Atlantic Mobile and Ameritech have exceeded revenue
generated by the programs since they began. The GTE Agreement also
required the Company to generate minimum CDPD service billings to GTE
Wireless from merchants signed up for GTE Wireless's CDPD service through
the Company. Actual placements did not allow the Company to meet the
renegotiated minimum purchase obligations. To remedy this minimum purchase
requirement, the Company and GTE amended the agreement on September 9,
1998 which removed any minimum purchase requirement and established new IP
address pricing for merchants placed under the agreement.
Revision to Business Plan
-------------------------
Because revenue did not develop as planned under the carrier
distribution program, and expenditures relating thereto outstripped the
Company's ability to support its business plan, management began to
reexamine the Company' s business plan in the fourth quarter of fiscal
1998 and came to the conclusion that the Company could not continue to
function at its current expenditure levels.
During the first quarter of fiscal 1999, Roger Peirce, previous
Vice President of Operations for Visa and most recently the President of
First Data Merchant Services joined the USWD Board of Directors. While
acclimating to USWD's business plan and strategy, Mr. Peirce was asked by
the Board of Directors to take a more active role in the Company.On August
21, 1998 Mr. Peirce became the Chief Executive Officer of the Company. Mr.
Peirce was also a nonvoting member of the Board of Directors of Cardservice
International. Inc. ("CSI"), a related party. Mr. Peirce replaced Evon A.
Kelly as the Company's CEO and Rod Stambaugh as Chairman. Mr. Kelly
resigned as an officer and director of the Company, but remains as an
employee of the Company under a one-year employment agreement.
Beginning in late August 1998, several changes in the Company's
distribution and operational strategy were implemented. The fundamental
change in the strategy involves positioning the Company as an enabler of
wireless products and services to the marketplace and not as a competitor
to the current incumbents. This repositioning of the Company in the
marketplace encompasses the discontinuation of soliciting and owning
merchant contracts for providing bankcard-processing services. The
Company's approach to the market in fiscal 1998 effectively positioned
itself as a direct competitor to the major merchant acquirers. The
Company's new strategy involves an end-to-end systems approach to enabling
the marketplace. The Company is enabling the marketplace with a new
service offering - Wireless Express Payment ServiceSM (WEPSSM). WEPSSM
includes an expanding set of internet based software offerings and
wireless terminal devices that incorporate the Company's proprietary CDPD
modem, a web-based IP address provisioning and terminal activation process
that includes real time remote diagnostic capabilities, the CDPD network
service, and server technology that delivers wireless transactions to the
current front end of card processors. The Company is targeting large
merchant acquirers and card processors for this service. The initial
response for WEPSSM from the targeted prospects has been positive.
In furtherance of this new strategy, on October 1, 1998, the Company
and CSI entered into a non-binding Letter of Intent to form a
non-exclusive strategic partnership to jointly exploit payment system
opportunities using wireless technologies. Upon entry of a final
agreement, CSI will produce and promote its LinkPoint(TM) processing
terminals using the Company's proprietary USWD 500 CDPD modem and USWD's
Wireless Express Payment ServiceSM. CSI will promote these products within
its own markets using its approximately 2,200-person sales force.
13
Lipman USA, Inc., the third largest supplier of point of sale terminals
is also in the process of integrating the USWD 500 CDPD modem into its
Nurit 2090 POS/EDC terminal. The terminal is expected to be available for
distribution to the market in the Company's fourth quarter of fiscal 1999
and will utilize WEPSSM to manage the transaction from point of sale to
the payment processor.
Management Changes
------------------
In early May 1999, Dean M. Leavitt was appointed CEO and Chairman of
the Company. He succeeds Roger Peirce, who resigned as CEO and Chairman
for personal reasons in March 1999. Mr. Leavitt is the founder and former
president of US Data Capture, Inc., a merchant service provider in the
credit card processing industry. Also in May 1999, Messrs. Caesar Berger
and Richard Barton resigned as directors of the Company.
Securities Issuances to Fund Operations
---------------------------------------
To fund its operating requirements, the Company has had to rely
primarily on the issuance of debt or equity securities over the last two
fiscal years.
In August 1998, the Company obtained effectiveness of a registration
statement on Form SB-2 (SEC File No. 333-52625) under which it registered
a total of 7,240,356 shares of Common Stock for resale by certain security
holders of the Company (the "August SB-2"). The August SB-2 was filed to
honor the registration rights of the holders of the Company's Series A
Preferred Stock and one previously issued 50,000 share Warrant. After the
August SB-2 was declared effective by the SEC, the National Association of
Securities Dealers, Inc. ("NASD") determined that it would undertake a
detailed review of the registration statement. Pending the completion of
the NASD review, the Company suspended the sale of shares under the
registration statement through NASD member firms. Approximately 244,000 of
the registered shares were sold under the registration statement before
the Company suspended sales under it. During the NASD's review, the
Company further determined that the Prospectus contained in the August
SB-2 was no longer current and that a "post-effective amendment" would be
required to be filed and declared effective by the SEC before additional
sales could be made under the August SB-2. A post-effective amendment has
not been filed to date. A total of 1,030,310 shares of Common Stock
included in the August SB-2 were registered for sale on behalf of the
holders of the Company's Series A Preferred Stock. As of March 31, 1999,
there remained 789,000 shares of Series A Preferred Stock outstanding. All
shares of the Common Stock issuable upon conversion of, or as dividends
on, the Series A Preferred stock became eligible for sale under SEC Rule
144 as of December 10, 1998.
In September 1998, the Company negotiated a partial redemption of the
outstanding Series A Preferred Stock with several of the security holders.
The Company borrowed $1,300,000 from Liviakis Financial Communications,
Inc. ("LFC") and used $1 million of that money to redeem $833,000 face
value of the Series A Preferred Stock, paying 120% of face value for the
redemption. The note payable was due April 1, 1999 and bore interest at 8%
per year. On March 19, 1999, LFC agreed to convert this note to equity
(See "Other Recent Borrowings and Financing Activities"). The security
holders participating in the Series A redemption also agreed to a gated
conversion schedule over the following three months. The participating
investors, representing approximately 1,342,000 shares of the remaining
Series A Preferred agreed to hold their Series A Preferred shares until at
least October 15, 1998. Following October 15, 1998, one-third of the
Series A Preferred shares became convertible to common stock on each of
October 15, November 15, and December 15 of 1998, respectively. As an
incentive to these investors, the Company issued Common Stock purchase
warrants exercisable to purchase that number of shares of Common Stock
equal to five percent of the number of shares of Series A Preferred Stock
held by the participating investor at the end of each period. The warrants
are exercisable for three year terms, at a per share price equal to 110%
of the average of the closing bid price over the five days prior to the
effective date of each warrant. The Company also agreed to increase the
dividend rate from 4% to 8% on the balance of the unconverted Series A
Preferred Stock and to register with the SEC for public resale a
sufficient number of shares of Common Stock to cover all conversions of
the Series A Preferred stock plus the shares of Common Stock underlying
the warrants. The registration statement was to be filed by October 31,
1998, and "penalties similar to the current deal" apply if the Company is
tardy in getting the registration statement effective. As of the date of
this report, the Company has not met this obligation, but intends to
include the shares underlying the warrants in the upcoming registration
statement for the Series B Preferred Stock. During the quarter ended March
31, 1999, the Company agreed to issue Common Stock purchase warrants to JW
Genesis as consideration for services rendered in conjunction with the
redemption of Series A Preferred Stock. The warrant is exercisable to
purchase 15,000 shares of Common Stock at $2.70 per share through
September 13, 2001.
14
Private Offering of 6% Convertible Subordinated Debentures due July 21,
2000.
--------------------------------------------------------------------------
On July 27 1998, the Company completed a private offering of $2,000,000
principal amount of 6% Convertible Subordinated Debentures due July 21,
2000 (the "6% Debentures") and Common Stock Purchase Warrants Exercisable
to Purchase 100,000 shares of Common Stock exercisable at $4.25 per share
until July 21, 2001 (the "Warrants"). The net proceeds to the Company from
the offering were approximately $1,810,000, after paying finder's fees of
$190,000, but before paying additional expenses of the offering, which
were approximately $20,000. The Company used $250,000 of the proceeds from
the offering to pay off a $250,000 short term bridge loan from one of the
participating investors, which was evidenced by a promissory note dated
June 26, 1998, and used the balance of the proceeds as working capital and
to repay existing obligations. Holders of 1,600,000 shares of the
Company's Series A Cumulative Convertible Redeemable Preferred Stock
purchased $1,000,000 of the 6% Debentures. JW Genesis Securities, Inc. of
Boca Raton, Florida, acted as the primary finder in the transaction and
the Company paid JW Genesis a finder's fee equal to seven percent (7%) of
the amount raised from the sale of the 6% Debentures, which amounted to
$140,000. In addition, JW Genesis received a three-year, 60,000 share
Common Stock purchase warrant exercisable at $4.50 per share. The shares
underlying the Warrant are entitled to piggyback registration rights, with
the registration expenses to be paid by the Company. The Company also paid
a $50,000 finder's fee to Liviakis Financial Communications, Inc. ("LFC"),
which was 2.5% of the amount raised on the sale of the 6% Debentures,
under the consulting relationship between the Company and LFC. Messrs.
John M. Liviakis and Robert B. Prag, who are affiliates of LFC, are
significant shareholders of the Company.
The 6% Debentures are convertible into shares of Common Stock at the
option of the holders at the lesser of: 80% of the average closing bid
price of the Common Stock over the five trading days prior to conversion;
or $4.25 per share (the "Fixed Conversion Price"). Fifty percent of the 6%
Debentures held by any holder become convertible on the earlier of
effective registration of the underlying shares with the SEC or 120 days
after the Initial Issuance Date. The remaining 50% of the 6% Debentures
become convertible 150 days after the Initial Issuance Date. Subject to
certain adjustments described below, the 6% Debentures could not be
converted below a "floor" price, which is $2.125 per share. The floor was
eliminated 180 days after the Initial Issuance Date.
Once the underlying Common Stock has been registered with the SEC for
at least 90 days and the Common Stock has traded at or above $8.50 for at
least 20 consecutive trading days (based on the average closing bid price
over such period), the Company can require conversion of the 6%
Debentures, subject to certain restrictions if the stock is suspended from
trading or the registration of the underlying Common Stock is suspended.
Any 6% Debentures that have not been converted to Common Stock as of
the maturity date, or upon a merger, consolidation or other sale of the
Company or its assets in which the Company is not the surviving entity,
are to either be converted into Common Stock at the conversion price then
in effect or, at the option of the holders, must be redeemed by the
Company.
The Company committed to file a registration statement covering the
shares of Common Stock underlying the 6% Debentures by October 7, 1998. No
registration statement has yet been filed. Since the registration was not
effective with the SEC within 120 calendar days of the Initial Issuance
Date, the Company became obligated to pay a cash penalty of two percent
(2%) of the face amount of the 6% Debentures and thereafter an amount
equal to three percent (3%) of the face amount for every thirty calendar
days (or any fraction thereof) until the registration is effective.
Because the Company failed to obtain effectiveness of a registration
statement by January 18, 1999, the holders had the right to require the
Company to redeem the 6% Debentures at 120% of face value plus accrued and
unpaid interest and penalties to the date of redemption. The Company has
recorded as interest expense $280,000 in penalties as of March 31, 1999
for this obligation. The Company issued 454,705 shares of Series B
Preferred Stock to compensate the 6% Debenture holders for the penalties
as well as the interest owed through June 1999 at the rate of $1.00 per
share. In addition, the holders waived their default rights under the
original schedule described above and adopted the default schedule for the
Series B Preferred Stock. The Company is preparing to file a registration
statement covering the Common Stock issuable upon conversion of the 6%
Debentures and Series B Preferred Stock described below.
Private Offering of 6% Cumulative Convertible Redeemable Preferred Stock
(Series B)
--------------------------------------------------------------------------
On May 6, 1999, the Company completed the minimum amount phase of a
$1.5 to $5.0 million private placement pursuant to Regulation D of the
Securities Act of 1933. The financing was facilitated by an institutional
investor, through which the Company raised gross proceeds of $1,500,000.
The Company issued 6% Cumulative Convertible Redeemable Preferred Stock
(Series B) for $1.00 per share. The instrument gives the holder the right
15
to convert the Preferred Stock into shares of the Company's Common Stock in
the future at 80% of then current market price. Concurrent with this
transaction, the holders of the Company's 6% Convertible Debentures agreed
to convert all accrued interest and penalties into shares of the Series B
Preferred Stock. The Series B Preferred Stock and Common Stock to be issued
upon conversion have not been registered under the Act and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
The Company immediately used $400,000 of the proceeds to pay principal
and interest on a $400,000 bridge note entered into subsequent to the end
of third quarter 1999. In addition, proceeds will be used to pay finders
fees of $180,000 plus estimated offering expenses of $41,000 (including
approximately $26,000 for the investor's legal fees). The Company is
obligated to utilize an additional $413,000 of the proceeds to pay past and
future legal and accounting fees, while the estimated balance of $465,000
is to be used as working capital.
The Company also entered into an agreement (the "Registration Rights
Agreement") with the purchasers of the Series B Preferred to file a
registration statement with the SEC covering the Common Stock underlying
the Series B Preferred and the Warrants within 30 days of the Closing Date
to be effective within 90 days of the Closing Date. If the Company fails to
meet this requirement, monthly penalties accrue at the rate of 2 to 3
percent of the purchase price. In addition, if the Series B Registration
Statement has not been filed within 60 days of the Closing Date or has not
been declared effective within 150 days of the Closing Date, the holders of
the Series B Preferred may require the Company to redeem the Series B
Preferred for $1.25 per share, plus all accrued dividends. This will
activate certain prior registration rights granted by the Company to
holders of certain of its securities. The Company estimates that in
addition to the shares it will be required to register to cover conversions
of the Series B Preferred, it will include up to approximately 7,000,000
additional shares of Common Stock on the Series B Registration Statement to
honor such registration rights (including 150% of the shares needed to
cover conversions of the 6% Debentures).
The Company also issued a Common Stock Purchase Warrant exercisable to
purchase 300,000 shares of common Stock at $1.50 per share for five years
from April 30,1999 (the "Series B Warrants") to the cash purchaser of the
Series B Preferred. Holders of the 6% Debentures did not receive Series B
Warrants.
Mr. John Liviakis, a significant shareholder of the Company, also
agreed to transfer a total of 443,077 shares of Company Common Stock owned
by him to the finder who located the cash purchaser of the Series B
Preferred Stock. The shares will be transferred as "restricted securities"
as defined in Rule 144 under the Securities Act of 1933 and will not have
any registration rights.
Other Recent Borrowings and Financing Activities
------------------------------------------------
On October 28, 1998, the Company borrowed $500,000 from the CEO and 50%
owner of Cardservice International, Inc. The note bore interest at 8% per
annum and was payable in full on the earlier of the receipt by the Company
of proceeds from the sale of the Company's Common Stock to this individual
or March 1, 1999. In consideration for the loan, the Company also agreed
to issue a Common Stock Purchase Warrant exercisable to purchase 25,000
shares of Common Stock at $3.038 per share through October 27, 2001.
During the second fiscal quarter of 1999, the Company received two
additional bridge loans from Liviakis Financial Communications, Inc. (LFC)
totaling $300,000 in the form of 8% Notes Payable due April 1, 1999. In
January and February, the Company received an additional $390,000 of
bridge loans in the form of 8% Notes Payable, due April 1, 1999.
On March 19, 1999, the Company and holders of the 8% Notes agreed to
convert all $2,490,000 of principal plus accrued interest to Common Stock
at the rate of $.875 per share. This rate was established at a 20%
discount from the closing price of the Common Stock as of March 18, 1999.
Shares totaling 2,933,671 were issued as part of this agreement. These
shares are restricted securities and will become eligible for sale under
SEC Rule 144 one year after the original issuance dates of the promissory
notes.
On March 12, 1999, the Company entered into a note and common stock
purchase agreement with RBB Bank Aktiengesellschaft, which is the agent
for the holders of certain shares of the Company's Series A Preferred
Stock, and $1,000,000 of 6% Debentures. As part of this agreement, 50,000
shares of common stock and a $250,000 promissory note bearing interest at
10% due June 12, 1999 were issued. In connection with the issuance of the
Note, the Company also granted RBB Bank a right of first refusal to fund
any such additional bridge financing needed by the Company. This right
must be exercised within one day of RBB Bank being notified of the terms
16
of any such additional bridge financing. The shares issued as part of this
agreement are restricted securities and the Company will include the
shares in the Registration Statement to be filed for the 6% Convertible
Debentures and other share issuances. The loan was intended as a
short-term bridge loan and was originally required to be repaid from the
proceeds of any aggregate equity placements done by the Company which
amount to at least $1,000,000 in equity financing. In April 1999, RBB Bank
agreed to waive the right to immediate repayment of the $250,000. RBB Bank
agreed to forebear initiating an action against the Company to collect the
amount due until the earlier of receipt by the Company of funding in the
aggregate of at least $2,500,000, or December 1, 1999. Liviakis Financial
Communications, Inc, agreed to guarantee the note.
In March 1999, the Company entered into a consulting agreement with EBI
Securities Corporation for purposes of assisting the Company as a
corporate finance consultant in obtaining additional capital and liquidity
for its stock. The intent of the agreement is to position the Company for
future financing, including but not limited to a secondary public
offering. The agreement has an initial term of six months with an
available extension of 3 months. For its services, the Company issued
warrants to purchase 100,000 shares of its Common Stock exercisable at
$1.00 per share expiring three years from March 15, 1999. The Company
recorded a prepaid expense of $60,000 during the current quarter for these
warrants. The Warrants contain standard anti-dilution provisions and
provide EBI Securities with a cashless exercise provision and "piggy-back"
registration rights. The Company also agreed to pay a monthly consulting
fee of $5,000. Additionally, the agreement provides for a fee to be paid
for services rendered in conjunction with any merger or acquisition or
significant investment by the Company with fees ranging from 1% to 5%
based on the value of the transaction.
Year 2000 Issues
----------------
The Company has completed a review of the impact of the Year 2000 issue
on the Company's business. This issue concerns the potential problems and
liabilities faced by all users and persons dependent on computers that
might result from software or system failure or malfunctions if the
systems fail to properly recognize the date change between 1999 and 2000.
The Company's internal business systems have been evaluated, and with the
exception of the accounting system, are Year 2000 compatible. The Company
intends to replace the accounting software during fiscal year 1999. The
cost of conversion is not expected to be material. The engineering staff
has made an assessment of USWD products and is not aware of any
complications regarding the products the Company delivers to the end
users. The specific entities providing credit card processing services to
the Company have active Y2K projects underway. On a broader basis, the
Company is reliant on the electronic payments infrastructure utilized by
credit card processors, banks and financial institutions within the United
States, and could be subject to unresolved issues which impact this
infrastructure. The Company could be adversely, materially affected, both
operationally and financially, to the extent third parties with which it
interfaces, either directly or indirectly, has not properly addressed
their Year 2000 issues.
Fiscal 1999 Compared to Fiscal 1998
Net Revenue
-----------
Revenue of $261,000 for the third quarter of fiscal 1999 increased
slightly from revenue of $251,000 generated during the third quarter of
fiscal 1998 as the Company continued the shift to its new business model.
For the nine-month period, total revenue increased 79% to $1,142,000 from
the prior year's $637,000. In the third quarter, product sales of POS-500,
WEPSSM Enabler, POS-50 and other equipment sales decreased approximately
$28,000 while service revenue, which includes application fees,
transaction processing, and repair revenue increased by approximately
$38,000. Product sales slowed from the previous quarter as resellers
worked down their inventory levels. Services revenue of $137,000 decreased
somewhat from the immediate preceding quarter as the Company discontinued
sales under its former credit card processing offering and is just
starting the placement of units under the new WEPSSM program. In the
latter part of the first quarter of fiscal 1999, the Company embarked on a
significant shift in its product and distribution strategy. This involves
the integration of the Company's WEPSSM modem and server technology into
the product offerings of other terminal manufacturers and development of
distribution agreements with the major merchant card acquirers and card
processors. The transition to the new business model has been delayed
17
somewhat due to the Company's constrained financial resources. The Company
anticipates that the transition will take several months as new products,
services and distribution capabilities are introduced to the market.
Gross Profit
------------
Gross profit of $21,000 in the third quarter of fiscal 1999 decreased
from the prior year level of $136,000. Gross margin decreased as a percent
of revenue to 8% in the current quarter from 54% in the prior quarter.
This was attributable to a decrease in product margins as product prices
were adjusted to wholesale versus retail structure, and negative margins
in the services segment. The services cost structure in the third quarter
reflects the components of the previous business model which includes
ongoing TRANZ Enabler amortization for processing units deployed. Efforts
are also underway to eliminate underutilized CDPD addresses from the CDPD
carrying cost. Billing for the new WEPSTM service has started and is
expected to improve the margin relationships as it becomes a more
predominate component of the services offering in the future. For the
nine-month period, gross profit decreased by $74,000 on a significant
increase in revenue during the nine-month period. The decrease in gross
profit for the nine-month period was attributable to the third quarter
variance described above.
Operating Expenses
------------------
Selling, general and administrative expense decreased from $2,518,000
in the third quarter of fiscal 1998 to $788,000 in the third quarter of
fiscal 1999. The large decrease in expense was primarily attributable to a
quarterly adjustment for a variable stock option resulting in a $658,000
non-cash credit to reflect the change in the carrying value of the option
due to the change in the Company's stock price during the quarter versus a
charge in the prior year third quarter of $519,000. Non-cash consulting
expense $594,000 in the third quarter of fiscal 1999 included a decrease
from the prior quarter of $214,000 related to investor relations and
business consulting. In response to the new business model, the Company's
personnel was reduced from 53 as of the end of September 1998 to 27 at the
end of March 1999, thereby reducing salary related expense by
approximately $120,000 per month. Several key consultants were added to
the management staff and compensated with stock options instead of cash.
The option valuation resulted in a $138,000 non-cash consulting charge to
general and administrative expense in the quarter. Expense for the
nine-month period decreased by $2,803,000 to $3,856,000, predominately due
to the accounting for the variable stock option and decreased compensation
expense noted above.
Research and development expenses increased by $27,000 from the prior
fiscal year's quarter to $105,000 in the third fiscal quarter of 1999.
This increase was primarily related to an increasing in staffing. For the
nine-month period, research and development expense increased by $112,000
to $363,000 in the current fiscal year, with a decrease in materials
expense partially offsetting the increased staff expense.
The prior year third quarter results include a $1,353,000 charge to
Litigation Settlement for the valuation of common shares issued to a group
of Certain Noteholders, in settlement of a dispute regarding rights
related to the conversion of the notes into shares of Common Stock.
Interest Expense and Other Income
---------------------------------
Interest expense of $448,000 in the current quarter includes accrued
interest on the 6% Convertible Debentures and various notes payable, and
$280,000 of late registration penalties related to the 6% Convertible
Debentures. Accrued interest and penalties on the Debentures were
converted into shares of Series B Preferred Stock in the fourth quarter of
the fiscal year. The prior year interest expense includes a $397,000 and
$622,000 non-cash charge to interest expense in the three and nine month
periods of fiscal 1998, respectively, related to an "in-the -money"
convertible option associated with the December 1997 private placement.
For the nine-month period, interest expense decreased slightly from
$707,000 to $681,000 in the current fiscal year.
For the nine-month period of fiscal 1999, other expense of $162,000
includes $351,000 resulting from the valuation of warrants issued to
several holders of the Series A Preferred Stock in return for an agreement
to restrict conversion of shares into Common Stock during the quarter.
This was partially offset by a $189,000 credit resulting from the
restructuring of a note payable to a former terminal equipment supplier.
18
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
----------------------------------------------------
The Company continues to have significant problems due to its financial
condition and lack of liquidity. While management is optimistic with its
medium and long term opportunities, the Company is constrained by its
immediate financial condition and requirement for increased liquidity. The
Company has accumulated a deficit of approximately $33 million since
inception to March 31, 1999, with a working capital deficit of
approximately $1,720,000 at March 31, 1999, versus a deficit of $2,967,000
at year-end June 30, 1998. The Company was successful in restructuring
several note payable obligations to equity and has converted accrued
interest and late registration penalties on the 6% Convertible Debentures
to shares of Series B Preferred Stock. The Company is continuing to work
with key vendors on payables. The Company has completed the minimum amount
of an equity private placement and intends to raise additional funds via
the issuance of additional shares of Series B Preferred Stock. The Company
believes that it will be able to restructure commitments as necessary
while it completes an anticipated financing event designed to satisfy its
obligations and fund the business plan, although no assurance can be given
that this will be the case.
The increase in other assets from June 30, 1998 to March 31, 1999 is
attributable to unamortized debt issuance expense related to the 6%
Convertible Debenture issued in July 1998. The increase in long term
borrowings is also related to the 6% Convertible Debenture.
With the implementation of the new distribution strategy initiated in
the latter part of the first quarter of fiscal 1999 (see "Revisions to
Business Plan"), the Company has taken steps to reduce spending. With the
new focus on distribution through large merchant acquirers, the Company
has reduced personnel from 60 at June 30, 1998, to 27 as of March 31,
1998, with most of the reduction occurring in the direct sales force.
Based on current staffing levels, the Company's cash expenditures are
running at a monthly rate of approximately $225,000 versus $450,000 per
month during the fourth quarter of fiscal 1998. However, execution of the
Company's current business plan is dependent on a significant debt or
equity financing event in the immediate future. The Company continues to
work both directly and through its consultants to secure additional debt
or equity financing which is required to fund operations while a
significant recurring revenue stream is built. While management is
confident it can accomplish this objective, the inability of the Company
to secure additional financing in the near term could adversely impact the
Company's financial position, including its ability to continue as a going
concern.
PART II
ITEM 1 - Legal Proceedings
Settlement of Claims of Certain Noteholders
In April 1998, the Company entered into an agreement with certain
Noteholders under which the Company issued shares of Common Stock in
settlement of the dispute. Terms of the settlement entitled the
Noteholders to certain guarantee or put provisions related to the shares.
The guarantee provision of the settlement agreement allows the former
Noteholders to recover the difference between the guarantee price (which
is $3.00 per share as to the shares that are still entitled to the
guarantee) and the gross amount the Noteholder receives upon a sale of the
shares. The guarantee is operative at any time during the one year period
commencing on the date the shares became saleable under SEC Rule 144. The
Company is obligated to pay the amount due within thirty days of receiving
a demand, accompanied by documentation confirming the sale. Under the
"put" provision of the settlement agreement, the former Noteholders will
have a five day period commencing on the date one year from the date the
shares become saleable under SEC Rule 144 during which the former
Noteholders may "put" any shares remaining unsold by them at the time back
to the Company. Upon exercise of the put, the Company must either (1)
purchase the shares for the put price of $3.00 per share, or (2) require
the shareholder to sell the shares into the market, with the Company
making up the difference between the put price and the gross amount
received by the shareholder upon such sale, within 15 days after receipt
of written notice and documentation confirming the sale. The shares
originally issued upon conversion of the notes and the additional shares
resulting from the settlement are reflected as Redeemable Common Stock on
the balance sheet. The originally issued shares are reflected at their
conversion value adjusted for the value attributable to the guarantee and
"put" provisions. In the event redemption of such shares becomes probable
and the actual redemption amount is in excess of the carrying amount, such
excess amount will be recorded as litigation settlement expense. The
additional shares are reflected at their redemption value. As of March 31,
1999, there are up to approximately 128,000 shares subject to the
guarantee and "put" provision, with a carrying value of $232,000,
outstanding, which have a maximum redemption value of approximately
$384,000 prior to any reduction for amounts the holder may receive upon
the sale of such shares. On April 29, 1999, certain Noteholders having
approximately 83,500 shares, agreed to waive their guarantee and "put"
rights in return for the isssuance of 200,000 restricted shares of the
Company's Common Stock.
19
ITEM 2 - CHANGES IN SECURITIES
Recent Issuances of Unregistered Securities:
During the fiscal quarter ended March 31, 1999, the Company sold or
issued the following securities without registering the securities under
the Securities Act of 1933, as amended (the "Act").
March 1, 1999: 15,000 Common Stock purchase warrants issued to a
consultant exercisable at $2.70 per share through September 13, 2001.
March 12, 1999: 50,000 shares of Common Stock issued to RBB Bank
Aktiengesellschaft as partial consideration for a bridge loan.
March 15, 1999: 100,000 Common Stock purchase warrants issued to a
finance consultant exercisable at $1.00 per share through September 13,
2002.
March 19, 1999: 2,933,671 Common Shares issued upon conversion of 8%
Promissory Notes.
The Company relied upon the registration exemption contained in Section
4(2) of the Securities Act of 1933 for these transactions. None of the
transactions involved a public offering. Representations were received
from the purchasers of the securities to the effect that the purchasers
were taking for investment purposes only and not with a view to
distribution; "restricted securities" legends were or will be imprinted
on all certificates; and stop-transfer instructions will be lodged with
the Company's transfer agent as to all shares of common stock issued upon
exercise of the Warrants.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
6% Convertible Subordinated Debentures Due July 21, 2000
Pursuant to the Debenture Agreement relating to the Company's 6%
Convertible Subordinated Debentures due July 21, 2000, the Company
committed to file a registration statement with the Securities and
Exchange Commission by October 7, 1998, covering the shares of Common
Stock issuable upon conversion of the 6% Debentures which the Company sold
in July 1998. That registration statement has not been filed as of the
date of filing of this Report. The security required effective
registration of the underlying shares within 120 days of July 21, 1998,
with the following cash penalties for failure to obtain effectiveness by
that time: 2% of the face amount of the Debentures at 120 days; and 3% of
the face amount of the Debentures for each additional 30 day period (or
any part of any 30-day period) during which the registration statement
remains ineffective. The holders also have the right to require the
Company to redeem the Debentures for 120% of face value plus accrued
interest if the shares were not registered by January 18, 1999. The
Company had not made the penalty or interest payments totaling $363,000 as
of March 31, 1999. The holders also have the right to accelerate the
payment of all amounts due and owing under the Debentures if an "Event of
Default" (as defined in the Debenture Agreement) is not cured within 45
days of its occurrence. Failure to pay the penalties and/or interest
within the periods required by the Debenture Agreement may constitute
"Events of Default." On May 7, 1999, the Company and the 6% Debenture
holders agreed to convert all the accrued interest and penalties into
shares of the Series B Preferred Stock. In addition, they waived their
default rights under the original schedule described above and adopted the
default schedule for the Series B Preferred Stock.
20
Series A Preferred Stock
In September 1998, the Company redeemed a total of 833,000 shares of
its Series A Preferred Stock. In conjunction with that redemption, the
Company also agreed to issue warrants exercisable to purchase a total of
212,257 shares of Common Stock to the holders of the remaining shares of
Series A Preferred Stock. The redemption agreement includes provisions
that obligated the Company to file a registration statement by October 31,
1998, covering any additional shares issuable upon conversion of the
Series A Preferred Stock (beyond those included in the original SB-2
Registration Statement that was declared effective as of August 7, 1998,
which, because of a declining stock price, included an insufficient number
of shares to cover conversion of all of the outstanding shares of Series A
Preferred Stock), plus the shares issuable upon exercise of the warrants.
The Company has not filed this registration statement as of the date of
filing of this Report, and penalties similar to those contained in the
original Designation of Series A Preferred Stock apply if the Company is
"late" in getting the shares registered
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required by Item 601 of Regulation S-B
4.1 Note and Common Stock Purchase Agreement with RBB Bank,
dated March 12, 1999
10.1 Promissory Note Conversion and Common Stock Purchase
Agreement with Burtzloff Family Trust, dated March 19, 1999
10.2 Common Stock Purchase Agreement Pursuant to Note Payable
Conversion to Equity with Liviakis Financial Communications,
Inc., dated March 19, 1999
27 Financial Data Schedule
b) Reports on Form 8-K - none filed during this period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. WIRELESS DATA, INC.
Registrant
Date: May 17, 1999 By: \s\Dean M. Leavitt
------------------------------
May 17, 1999 By: \s\ Robert E. Robichaud
------------------------------
Chief Financial Officer