SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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, 2000.
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from to .
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Commission File No.: 0-22848
U.S. Wireless Data, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1178691
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(State of incorporation) (IRS Employer Identification No.)
805 Third Ave, 8th Floor
New York, NY 10022
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(Address of principal executive offices, including zip code)
(212) 750-7766
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(Registrant's Telephone Number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety days.
Yes [X] No [ ]
As of May 10, 2000 there were outstanding 32,328,020 shares of the Registrant's
Common Stock (no par value per share).
Transitional Small Business Disclosure Format
Yes [ ] No [X]
1
U.S. WIRELESS DATA, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
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Item 1. Financial Statements (Unaudited)
Balance Sheets -
March 31, 2000, and June 30, 1999 ........................... 3
Statements of Operations -
Three Months and Nine Months Ended March 31, 2000 and 1999 .. 4
Statements of Cash Flows -
Nine Months Ended March 31, 2000 and 1999 ................... 5
Notes to Financial Statements .................................. 6-15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 15-22
PART II OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 22
Item 2. Changes in Securities .......................................... 23
Item 3. Defaults on Senior Securities .................................. 24
Item 5. Other Information .............................................. 24
Item 6. Exhibits and Reports on Form 8-K .............................. 25
2
U.S. WIRELESS DATA, INC.
BALANCE SHEET
March 31, 2000 June 30, 1999
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ASSETS
Current Assets:
Cash and cash equivalents ................................................... $ 38,514,000 $ 425,000
Accounts receivable, net of allowance for doubtful accounts of
$51,000 at March 31, 2000; $43,000 at June 30, 1999 ...................... 157,000 178,000
Inventory, net .............................................................. 147,000 215,000
Other current assets ........................................................ 195,000 14,000
Escrow held for payment of professional fees ................................ -- 112,000
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Total current assets ..................................................... 39,013,000 944,000
Processing units - deployed ................................................... 45,000 408,000
Fixed assets, net ............................................................. 670,000 405,000
Other assets .................................................................. 53,000 14,000
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Total assets .................................................................. $ 39,781,000 $ 1,771,000
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................................ $ 1,547,000 $ 1,198,000
Accrued liabilities ......................................................... 388,000 413,000
Borrowings, current portion ................................................. 55,000 2,272,000
Other current liabilities ................................................... -- 450,000
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Total current liabilities ................................................. 1,990,000 4,333,000
Borrowings, long-term portion ................................................. -- 25,000
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Total liabilities ............................................................. 1,990,000 4,358,000
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Redeemable preferred stock:
Series B 6% cumulative convertible redeemable preferred stock,
no par value, $1.00 stated value, 1,954,705 and 5,000,000 shares
authorized, 227,352 and 1,954,705 shares issued and outstanding
at March 31, 2000 and June 30, 1999, respectively. Redeemable
at approximately $350,000 at March 31, 2000 ............................... 350,000 1,587,000
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Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, no par value, 15,000,000 shares authorized:
Series A, at $1.00 stated value, 0 and 4,000,000
shares authorized, and 0 and 752,000 issued and outstanding
at March 31, 2000 and June 30, 1999, respectively ..................... -- 752,000
Series C convertible, stated value $0.01 per share, liquidation
value $10.00 per share aggregating $50,616,000, 8,450,000 shares
authorized, 5,061,600 issued and outstanding at March 31, 2000 ........ 51,000
Common stock, at $1.00 stated value, 40,000,000 shares authorized;
32,328,020 and 17,816,075 shares issued and outstanding at
March 31, 2000 and June 30, 1999, respectively ......................... 32,328,000 17,816,000
Common stock to be distributed .............................................. -- 243,000
Additional paid-in capital .................................................. 89,535,000 12,082,000
Accumulated deficit ......................................................... (84,473,000) (35,067,000)
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Total stockholders' equity (deficit) ...................................... 37,441,000 (4,174,000)
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Total liabilities and stockholders' equity ................................ $ 39,781,000 $ 1,771,000
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Accompanying notes are an integral part of the financial statements
3
U.S. WIRELESS DATA, INC.
STATEMENTS OF OPERATIONS
For the three months ended For the nine months ended
March 31, March 31,
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2000 1999 2000 1999
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As Restated As Restated
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Net revenues:
Product sales ..................................... $ 111,000 $ 124,000 $ 271,000 $ 633,000
Services .......................................... 88,000 137,000 196,000 509,000
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199,000 261,000 467,000 1,142,000
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Cost of revenues:
Product sales ..................................... 214,000 89,000 349,000 499,000
Services .......................................... 52,000 151,000 196,000 482,000
Settlement with supplier .......................... -- -- -- (240,000)
------------ ------------ ------------ ------------
266,000 240,000 545,000 741,000
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Gross (loss) profit .................................... (67,000) 21,000 (78,000) 401,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative ................ 1,953,000 431,000 4,016,000 3,857,000
Research and development ........................... 391,000 105,000 859,000 363,000
------------ ------------ ------------ ------------
Total operating expenses ........................ 2,344,000 536,000 4,875,000 4,220,000
------------ ------------ ------------ ------------
Loss from operations ................................... (2,411,000) (515,000) (4,953,000) (3,819,000)
Interest expense ....................................... (462,000) (1,118,000) (1,394,000) (1,757,000)
Interest credit ........................................ 597,000 -- 597,000 --
Interest income ........................................ 65,000 -- 65,000 --
Other income ........................................... -- -- 128,000 8,000
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Net loss ............................................... (2,211,000) (1,633,000) (5,557,000) (5,568,000)
------------ ------------ ------------ ------------
Preferred stock dividends .............................. (42,864,000) (25,000) (43,849,000) (571,000)
------------ ------------ ------------ ------------
Net loss available to common stockholders .............. $(45,075,000) $ (1,658,000) $(49,406,000) $ (6,139,000)
============ ============ ============ ============
Basic and diluted net loss per share, (after
provision for preferred stock dividends) ............... $ (1.89) $ (0.12) $ (2.34) $ (0.46)
============ ============ ============ ============
Weighted average common shares
outstanding - basic/diluted ............................ 23,900,000 13,669,000 21,197,000 13,247,000
============ ============ ============ ============
Accompanying notes are an integral part of the financial statements
4
U.S. WIRELESS DATA, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
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2000 1999
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As Restated
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $ (5,557,000) $ (5,568,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................................... 127,000 175,000
Bad debt expense ................................................. 25,000 --
Write down of inventory .......................................... 112,000
Gain on sale of merchant portfolio ............................... (124,000)
Non-cash consulting services and other ........................... 511,000 1,499,000
Non-cash compensation expense-variable stock option .............. -- (1,302,000)
Non-cash interest expense ........................................ 451,000 966,000
Non-cash reduction of payment due supplier ....................... -- (240,000)
Loss on sale of fixed assets ..................................... 16,000 --
Changes in current assets and liabilities:
Accounts receivable ........................................... (4,000) (60,000)
Inventory ..................................................... (44,000) 457,000
Escrow for professional fees .................................. 112,000 --
Other current assets .......................................... (181,000) (29,000)
Accounts payable .............................................. 349,000 (261,000)
Accrued liabilities ........................................... 74,000 1,019,000
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Net cash used in operating activities ......................... (4,133,000) (3,344,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ......................................... (395,000) (46,000)
Proceeds from sale of merchant portfolio ......................... 450,000 --
Proceeds from sale of fixed assets ............................... 24,000 --
Processing units - deployed ...................................... -- (81,000)
(Increase) decrease in other assets .............................. (39,000) 9,000
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Net cash provided by (used in) investing activities ........... 40,000 (118,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................... 939,000 27,000
Principal payment on borrowings .................................. (1,827,000) (366,000)
Net proceeds from issuance of debt ............................... 1,585,000 2,310,000
Net proceeds from issuance of convertible debenture .............. -- 2,490,000
Proceeds from issuance of Series C preferred stock ............... 50,616,000 --
Payments of offering costs for Series C preferred stock .......... (6,102,000) --
Proceeds from exercises of options and warrants .................. 169,000 --
Redemption of Series A preferred stock ........................... -- (1,000,000)
Redemption of Series B preferred stock ........................... (2,198,000) --
Redemption of convertible debenture .............................. (1,000,000) --
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Net cash provided by financing activities ..................... 42,182,000 3,461,000
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Net increase (decrease) in cash and cash equivalents ..................... 38,089,000 (1,000)
Cash and cash equivalents, beginning of period ........................... 425,000 4,000
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Cash and cash equivalents, end of period ................................. $ 38,514,000 $ 3,000
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Accompanying notes are an integral part of the financial statements
5
U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - BASIS OF PRESENTATION
The accompanying financial statements included herein have been
prepared by U.S. Wireless Data, Inc. (the "Company" or "USWD"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The financial statements for the three and nine
month period ended March 31, 1999 have been restated from the originally
reported Form 10-QSB. A Form 8-K was filed on July 2, 1999, incorporating
this restatement. The financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule
310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The results of operations of any interim period are not necessarily
indicative of the results of operations to be expected for the fiscal
year. For further information, refer to the financial statements and
accompanying footnotes included in the Company's Form 10-KSB for the year
ended June 30, 1999.
The year ended June 30, 1999 condensed balance sheet data was
derived from audited financial statements but does not include all
disclosures required by Generally Accepted Accounting Principles.
Note 2 - THE COMPANY
The Company was incorporated in the State of Colorado on July 30,
1991. The Company relocated its principal executive office from
California to New York City in February 2000. The Company is in the
business of providing products and services to enable the use of wireless
technology for electronic payment and other transactions. The Company's
Wireless Express Payment ServiceSM ("WEPS") gateway serves as a link
joining all parties involved in a wireless point-of-sale ("POS")
transaction. This enables businesses requiring mobility and/or faster
transaction speed to accept non-cash payments utilizing wireless
technology. By providing a seamless interface between a merchant's POS
terminal(s), wireless carriers and front-end processors, credit, debit
and other card transactions can be processed as fast as cash, without the
cost and inconvenience of being tethered to a telephone line. In
addition, WEPS' Internet-based tools offer on-line terminal activation
and online/real-time transaction monitoring, reporting and remote
terminal diagnostics.
Note 3 - BRIDGE FINANCING AND PRIVATE PLACEMENT
Bridge Financing
On December 23, 1999, the Company entered into an agreement with
Commonwealth Associates, L.P. ("Commonwealth") in connection with the
private placement (the "Private Placement") of the Company's Series C
Convertible Preferred Stock (the "Series C Preferred Stock"). The
securities issued in the Private Placement and in the bridge financing
described below have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and may not be offered or sold
in the United States absent registration or an applicable exemption from
registration requirements.
In connection with the engagement of Commonwealth, the Company
entered into an agreement with ComVest Capital Management, LLC
("ComVest"), an affiliate of Commonwealth, pursuant to which ComVest
initially lent the Company $1,000,000 and Dean M. Leavitt, the Company's
Chairman and Chief Executive Officer lent the Company $100,000 (the
"Bridge Financing"). ComVest and Mr. Leavitt subsequently lent the
Company an additional $250,000 and $25,000, respectively. The loans were
collateralized by substantially all of the Company's assets pursuant to
general security agreements and bore interest at a rate of 8% per annum.
6
The notes were due on the earlier of (x) the date a change of control (as
defined in the note) occurs, (y) the date the Company concludes a debt or
equity financing in which the Company receives at least $5,000,000 of
gross proceeds, or (z) December 30, 2000. The notes included certain
negative covenants, including prohibitions on the payment of certain
dividends, redemptions and asset sales and limitations on the incurrence
of indebtedness, liens and the issuance, prior to March 31, 2000, of
securities not specifically exempted. The lenders had the option to
convert the outstanding principal amount of the notes into securities
issued in connection with any private placement transaction on the same
terms as investors in such placement. In addition, the Company agreed to
appoint a designee of the bank affiliate lender to the Board and to have
an observer present at all meetings of the Board. In addition to the
Bridge Financing, the Company also borrowed $125,000 from ComVest and
$75,000 from Mr. Leavitt (the "Additional Notes"). The Additional Notes
were due on demand interest free. The Company repaid the full outstanding
amount of the Bridge Financing and Additional Notes on March 18, 2000,
from the Private Placement described below. The rights under the Bridge
Financing expired on March 18, 2000, when the loans were repaid.
In connection with the Bridge Financing, the Company also issued
ComVest and Mr. Leavitt warrants to purchase 13,636,363 shares and
1,363,637 shares, respectively, of Common Stock at an exercise price of
$.01 per share. These warrants are fully exercisable at any time, subject
to certain conditions, including the availability of a sufficient number
of shares of Common Stock for issuance upon exercise thereof. On March
10, 2000, Commonwealth and Mr. Leavitt exercised their warrants with
respect to 7,920,000 shares and 792,000 shares, respectively. The
remaining warrants expire on December 30, 2006. ComVest and Mr. Leavitt
have certain demand and "piggyback" registration rights, commencing in
June 2000, as to the shares of Common Stock underlying the warrants.
Currently, the Company does not have enough authorized Common Stock
for the remaining warrants to be fully exercised. As a result, the
Company entered into Economic Participation Agreements with the bridge
lenders which are intended to provide the bridge lenders with the
economic equivalent of ownership of the shares of Common Stock underlying
the warrants in the event that the Company is unable to amend its
Articles of Incorporation to increase the number of authorized shares of
Common Stock. The Economic Participation Agreements terminate at such
time as a sufficient number of shares of Common Stock are authorized and
reserved for issuance upon the exercise of the warrants, unless the
Company failed to amend its Articles of Incorporation by April 28, 2000,
in which case the bridge lenders are entitled to liquidated damages which
are calculated in accordance with the agreement. The Economic
Participation Agreements were subsequently amended to extend the period
in which the Company must amend its Articles of Incorporation to July 11,
2000. If the agreements are not automatically terminated as contemplated
by the agreements within 195 days of the date of the agreements, then the
Company shall pay to the bridge lenders on such 195th day a nonconversion
fee of $550,000 and, in addition, until such time as the agreements are
terminated as provided for, the bridge lenders may elect to receive in
cash in consideration of canceling the agreements the greater of (A) $2.5
million or (B) the product of (1) the number of shares as adjusted per
the agreement and (2) the remainder of (x) the closing asking price of
the common stock on the last trading date prior to the exercise by the
bridge lenders of their liquidation right and (y) $0.01.
The Company established the value of the Bridge Warrants based upon
an assessment of the market rate of interest for debt securities with
similar attributes but without the stock purchase warrants feature. In
December 1999, the Company recorded a discount on the notes from the
Bridge Financing via a charge of $34,000 against the face value of the
notes for a proportionate amount of the warrant valuation. For the
quarter ended March 31, 2000, the Company recorded an additional charge
of $417,000 against the face value of the notes for the balance of the
warrant valuation. The Company accreted the carrying value of the notes
to their full face value by the time of repayment on March 17, 2000.
Private Placement
Commonwealth acted as placement agent in the Private Placement
pursuant to which, as of March 31, 2000, 506.16 Units have been sold at
$100,000 per Unit for aggregate proceeds of $50,616,000. Each Unit
consists of 10,000 shares of the Company's Series C Preferred Stock
7
(which is initially convertible into 66,667 shares of Common Stock) and
warrants to purchase Common Stock equal to 25% of the number of shares
into which the Series C Preferred Stock is convertible. Under the terms
of the Private Placement, an additional 143.84 Units for aggregate
proceeds of $14,384,000 may be sold.
The Series C Preferred Stock has a liquidation preference of $10 per
share, plus accrued and unpaid dividends. The holders of Series C
Preferred Stock are entitled to vote their shares of Series C Preferred
Stock on an as converted basis with the holders of Common Stock as a
single class on all matters submitted to a vote of the shareholders,
except as otherwise required by applicable law and except that the
holders of Series C Preferred Stock voting separately as a class have the
right to elect two directors to the Board of Directors.
Each share of Series C Preferred Stock is convertible at any time,
subject to the approval by the shareholders of an amendment to the
Company's Articles of Incorporation to increase the number of authorized
shares of Common Stock, at the option of the holder, into a number of
shares of Common Stock determined by dividing the liquidation value by
the conversion price, initially $1.50 per share, which is subject to
adjustment for stock splits, recapitalizations and other similar events.
If the Company issues shares of Common Stock at a price per share less
than the then current conversion price, then, subject to certain
exceptions, the conversion price will be automatically reduced to such
lower price and the number of shares issuable upon conversion of the
Series C Preferred Stock shall be increased proportionately. The Series C
Preferred Stock automatically converts into Common Stock (a) if, at any
time commencing three months after June 17, 2000, the average closing bid
price of the Company's Common Stock exceeds 300% of the conversion price
for 20 consecutive trading days or (b) upon a public offering of the
Company's securities that raises gross proceeds in excess of $30,000,000,
provided the shareholders have approved an increase in authorized capital
to allow for the conversion of the Series C Preferred Stock.
The warrants issued in connection with the Private Placement (the
"Unit Warrants") are exercisable for a period of seven years for an
aggregate number of shares of Common Stock equal to 25% of the number of
shares into which the Series C Preferred Stock are convertible, at an
exercise price equal to the then applicable conversion price. The initial
exercise price is $1.50 per share, subject to adjustment under the same
circumstances as the conversion price of the Series C Preferred Stock.
The Unit Warrants are callable for a nominal price at the Company's
option on 30 days' notice to the holders of the Unit Warrants if (a) the
average closing bid price of the Company's Common Stock for 20
consecutive trading days exceeds 300% of the exercise price, as adjusted,
(b) the Company's Common Stock is trading on a national securities
exchange or Nasdaq SmallCap or National Market Systems, and (c) a
registration statement covering the shares issuable upon exercise of the
Unit Warrants has been declared effective and the shares issuable upon
exercise of the Unit Warrants are not otherwise subject to any lock-up
restrictions.
The terms of the Series C Preferred Stock and the Unit Warrants may
be amended, modified or waived by an agreement among the Company,
Commonwealth and a committee to be designated by Commonwealth whose
members hold in the aggregate not less than 20% of the outstanding Series
C Preferred Stock and not less than 20% of the outstanding Unit Warrants.
The Company has agreed to file a registration statement with respect
to the shares of Common Stock issuable upon conversion of the Series C
Preferred Stock and exercise of the Unit Warrants under the Securities
Act within nine months of the closing of the Private Placement. The
investors also have certain "piggyback" registration rights with respect
to the shares of Common Stock issuable upon conversion of the Series C
Preferred Stock and the exercise of the Unit Warrants.
Each investor who purchased Units in the Private Placement agreed not
to sell, transfer or otherwise dispose of any of the securities sold in
the Private Placement for a period of one year following the closing of
the transaction. Thereafter, investors may not sell, transfer or dispose
of more than 25% of such securities during each of the following four
90-day periods. The lock-up period may be extended by Commonwealth for up
to an additional six months from the closing of any public offering that
is consummated prior to the end of the initial lock-up period, in which
8
event there shall be no further lock-up at the end of such period. The
Company's officers, directors and certain other existing shareholders
agreed to substantially the same lock-up provisions as to shares owned or
acquired by them.
Several of the Company's officers and directors purchased Units in
the Private Placement. Dean M. Leavitt, the Company's Chief Executive
Officer and Chairman purchased 2.5 Units, Charles I. Leone, the Company's
Chief Financial Officer, Chief Operating Officer and Secretary purchased
1 Unit and Robert E. Robichaud, the Company's former Chief Financial and
Accounting Officer, Treasurer and Secretary purchased .75 of a Unit.
Edwin Cooperman, a member of the Board, purchased 1 Unit and each of
Michael S. Falk and Amy Newmark, both also members of the Board,
purchased 2.5 Units. Barry Kaplan, also a member of the Board, purchased
25 Units. Mr. Kaplan also received from Commonwealth at no charge a
warrant to purchase 1.5 Units exercisable at $100,000 per Unit (from the
warrants Commonwealth received as compensation in the Private Placement).
As part of its compensation, Commonwealth received warrants to
purchase 126.5 Units, exercisable at $100,000 per Unit, a commission
equal to $3,543,000, which is 7% of the gross proceeds raised in the
Private Placement, and a structuring fee equal to $1,518,000, which is 3%
of the gross proceeds raised in the Private Placement. Pursuant to a
prior agreement with Peter J. Solomon Securities Company Limited ("PJSC")
relating to financing transactions entered into by the Company, the
Company issued to PJSC a warrant to purchase 25.3 Units at $100,000 per
Unit and a fee equal to $400,000. The warrants are exercisable commencing
on the date of issuance and for seven years thereafter. The Company
valued the unit warrants at $5.57 million.
Commonwealth has the right under an Agency Agreement to designate
two directors to the Board and the following individuals gave proxies to
Commonwealth to vote for the election of such designees: Messrs. Leavitt
and Leone, John H. Perveiler, the Company's Vice President/National Sales
Manager, Marc R. Shultz, the Company's Vice President of Business
Development, and Barry Kaplan, Alvin Rice and Chester Winter, each
members of the Board. On March 29, 2000, four new directors joined the
Board, including Michael S. Falk, the Chairman of Commonwealth, and Amy
L. Newmark, both of whom were designated by Commonwealth.
As a condition to the completion of the Private Placement, the
Company agreed that the exercise price of a warrant owned by Dean M.
Leavitt, the Company's Chairman and Chief Executive Officer, to purchase
2,687,500 shares of Common Stock should be reduced from $3.00 per share
to the market price of the Common Stock on January 4, 2000. No amount has
been charged to operations for compensation in connection with the
repricing because the exercise price equaled the market price on the date
of repricing. In March 2000, the FASB issued Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation". The
interpretation is not effective until July 1, 2000. Had the
interpretation been in effect on the date of the repricing, the warrant
would have been considered a variable warrant. On March 31, 2000, the
variable warrant would have resulted in $9.75 million in compensation
expense, which would have increased the current quarter's net loss and
net loss per share to $54.9 million and $2.30 per share, respectively. On
July 1, 2000, in accordance with Interpretation No. 44, the warrant will
be recorded as a variable warrant.
As a result of the Bridge Financing and Private Placement,
Commonwealth may be deemed to control the Company.
Note 4 - FINANCIAL CONDITION AND LIQUIDITY
The Company has incurred recurring losses from operations and has an
accumulated deficit of approximately $42 million. During the
implementation of its new business plan as described in Item 2 -
Management Discussion and Analysis, the Company expects expenses to
continue to exceed revenues during the initial phases of the business
plan.
9
The Company's cash position of $38.5 million provides the Company, in
management's opinion, with the financial resources to pursue it's
business plan and fund monthly deficits. As of May 10, the Company is
debt free and has no current financing needs.
Note 5 - NET LOSS PER SHARE
Earnings (loss) per common share (EPS) is computed using Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS
No. 128 establishes standards for the computation, presentation, and
disclosure of earnings per share. Basic per share amounts are computed by
dividing the net loss available to common stockholders by the weighted
average number of common shares outstanding during the year. Diluted per
share amounts incorporate the incremental shares issuable upon the
assumed exercise of the Company's stock options and warrants and assumed
conversion of convertible securities. During fiscal 1999 and 2000 such
incremental amounts have been excluded from the calculation since their
effect would be anti-dilutive. Such stock options, warrants and
conversions could potentially dilute earnings per share in the future.
Note 6 - FINANCINGS, BORROWINGS AND STOCKHOLDERS' EQUITY
For the nine months ended March 31, 2000, the Company raised
$930,000 in a private offering of common stock and common stock purchase
warrants. The Company issued approximately 1,500,000 shares of common
stock and warrants to purchase approximately 301,000 shares of common
stock. The warrants are exercisable at $1.50 per share through July 6,
2004. An additional 727,273 shares of common stock were issued on the
conversion of $450,000 notes payable. In addition, as a result of the
private offering, Bridge Financing and Private Placement described above,
anti-dilution provisions of certain outstanding warrants were triggered
and the Company is required to adjust the exercise prices and the number
of shares of common stock issuable upon the exercise of such warrants.
During the none months ended March 31, 2000, approximately 752,000
shares of Series A Preferred Stock and accrued dividends of approximately
$23,000 were converted into approximately 1,177,000 shares of common
stock at various price levels.
In the fourth quarter of fiscal 1999, USWD entered into an agreement
with the purchasers of the Series B Preferred Stock and holders of the 6%
Debentures to file a registration statement with the SEC covering the
common stock underlying the Series B Preferred Stock, a common stock
purchase warrant issued at the same time as the Series B Preferred Stock,
the 6% Debentures, and the common stock purchase warrants issued to the
6% Debenture holders in July, 1998, within 30 days of May 11, 1999, to be
effective within 90 days of May 11, 1999. Failure to file the
registration statement by June 10, 1999 and/or obtain effectiveness of it
by August 9, 1999, resulted in the accrual of penalties against the
Company. The Company did not file the required registration statement
until June 30, 1999, and the registration statement has never been
declared effective. The Series B Preferred Stock and 6% Debentures
ultimately became subject to redemption at the option of the holders for
failure to obtain effectiveness of the registration statement. The
Company became subject to a late filing penalty of $74,000 and accrued
"late effectiveness" penalties of $188,000, $225,000 and $0 for the
quarters ended September 30, 1999, December 31, 1999 and March 31, 2000,
respectively. Upon redemption of these securities, approximately $372,000
of the penalties were waived by the holders and recorded as an interest
credit in the current fiscal quarter. Offering costs, and valuation of
related warrants and incentive shares were recorded against the aggregate
preference value of the preferred stock and will be accreted up to the
full redemption value by the date of mandatory redemption. Accretion and
accrued dividends for the first, second and third fiscal quarters was
$807,000, $126,000 and $49,000, respectively. As described below in this
Footnote and in Footnote 14 (Subsequent Events), the Company redeemed or
converted all outstanding shares of Series B Preferred Stock and 6%
Debentures on or before May 3, 2000. The previously accrued dividends
include $87,000 which was waived in conjunction with the Series B
Preferred Stock redemptions. This waived amount reduced preferred stock
dividends and accumulated deficit in the current fiscal quarter.
In the first quarter of fiscal year 2000, holders of the 6%
Debentures converted $200,000 of the debt into approximately 313,000
shares of common stock per the specified conversion formula.
10
In the first quarter of fiscal year 2000, a Colorado based management
recruiting firm successfully completed a search for a key product
development engineer. The Company agreed to pay half the $17,000 fee in
the form of 13,600 shares of common stock, which was issued on February
23, 2000.
On January 20, 2000, the Company issued a 22,500 share common stock
purchase warrant to RBB Bank as an inducement to redeem shares of Series
B Preferred Stock and 6% Debentures held by RBB Bank, exercisable at
$1.50 per share. The warrant vests immediately, was issued with an
exercise price equal to the market price of the underlying stock on the
date of grant, and expires on July 6, 2004. The Company valued the
warrant at $32,000, which was charged as a deemed dividend to accumulated
deficit.
On February 11, 2000, holders of the 6% Debentures converted
$800,000 of the debt into approximately 405,000 shares of common stock
per the specified conversion formula. Upon conversion of the 6%
Debentures, approximately $225,000 of interest previously accrued was
waived by the holders and recorded as an interest credit in the current
fiscal quarter.
On March 15, 2000, the Company retained Lippert/Heilshorn and
Associates, Inc. to provide investor relations services. In addition to
monthly fees and expenses, the Company agreed to issue Lippert/Heilshorn
a 15,000 share common stock purchase warrant each year for the next 3
years. The warrants vest one year after date of grant, are issued with an
exercise price equal to the market price of the underlying stock on the
date of grant, and expire 5 years from the vesting date. The first year
grant was issued on March 28, 2000, exercisable at $5.344 per share,
which the Company valued at $52,000. The Company charged the valuation as
investor relations expense.
On March 17, 2000, the Company redeemed 227,353 shares of Series B
Preferred Stock and $1,000,000 of 6% Debentures from RBB Bank for a price
equal to 125% of the liquidation value or principal amount, as
applicable, of the Series B Preferred Stock and 6% Debentures and repaid
a loan in the amount of $250,000. In connection with the redemption, RBB
Bank also waived certain accrued penalties and dividends.
On March 28, 2000, the Company issued a 50,000 share common stock
purchase warrant to Cornell Consulting International, Inc. for executive
search services, exercisable at $5.344 per share. The warrant vests
immediately, was issued with an exercise price equal to the market price
of the underlying stock on the date of grant, and expires March 27, 2005.
The Company valued the warrant at $95,000 (based on the market value of
the services received less cash paid), which was charged as executive
search expenses.
On March 31, 2000, the Company redeemed 1,500,000 shares of the
Company's Series B Preferred Stock from Bold Street, LLC, for a price
equal to 125% of the liquidation value of the Series B Preferred Stock,
plus accrued dividends. As an inducement for the redemptions, the Company
also issued a common stock purchase warrant, expiring April 30, 2004, to
purchase 150,000 shares of Common Stock, exercisable at $2.28 per share.
In connection with such redemption, Bold Street waived certain accrued
penalties. Bold Street received certain "piggyback" registration rights
as to the shares of Common Stock underlying the warrant. The Company
valued the warrant at $536,000, which was charged as a deemed dividend to
accumulated deficit.
For the third fiscal quarter ended March 31, 2000: (i) 109,600 common
stock shares were issued on exercise of employee options for aggregate
proceeds of $81,452, (ii) 8,712,000 common stock shares were issued on
exercise of the Bridge Warrants for aggregate proceeds of $87,120, and
(iii) 218,235 common stock shares were issued on cashless exercises of
warrants aggregating 394,632 shares.
11
Note 7 - SALE OF CREDIT CARD PORTFOLIO
On July 7, 1999, USWD sold a portion of its merchant credit card
portfolio to PMT Services Inc., a wholly owned subsidiary of Nova
Corporation. The transaction resulted in a cash payment to USWD of
$450,000. The sale included approximately 450 installed USWD owned TRANZ
Enabler point-of-sale devices deployed with a portion of the respective
merchants. A gain of $124,000 was recorded on the sale as other income.
Note 8 - RELATED PARTY TRANSACTIONS
On July 1, 1999, USWD entered into an agreement with Liviakis
Financial Communications, Inc. (LFC), to provide the Company with public
relations and investor relations services through March 15, 2000. The
Company issued 690,000 restricted shares of common stock to LFC for its
services under this agreement. LFC is entitled to receive a 2.5% cash
finder's fee for financing located by LFC and a 2% finder's fee based on
the "total consideration provided" through any acquisition located by
LFC. The Company recorded a charge to consulting expense of $352,000 for
the valuation of the shares. LFC agreed not to sell any USWD common stock
during the term of the consulting services agreement.
In December 1999, the Company issued 443,077 restricted shares of
common stock to John M. Liviakis, the principal owner of LFC, and a
significant Company shareholder, to replace shares transferred to a
finder in conjunction with the May 1999 Series B Preferred Stock
financing.
In order to induce Commonwealth to consummate the Private Placement,
Mr. Liviakis and LFC agreed that for a period beginning on March 15, 2000
and ending on the first anniversary of the final closing of the Private
Placement (the "Lock-up Period"), they will not sell, transfer or
otherwise dispose of any securities of the Company that were owned by
either of them as of March 14, 2000 or acquired during the Lock-up
Period, except for an aggregate of 1,139,000 shares which may be
transferred or sold under certain conditions.
On March 29, 2000, the Company issued each of the four new members of
the Board a nonqualified stock option for 250,000 shares of the Company's
common stock. The options are exercisable at $1.50 per share, vest one
third per yearly anniversary date following grant date and expire on the
earlier of ten years from the grant date or one year after cessation of
the Optionee's relationship with the Company. Since the exercise price
for the options was less than the market price of the common stock
($6.00) on the date of issue, the Company valued the options under APB 25
at an aggregate of $4.5 million. The value will be charged to
compensation expense over the vesting period of the options. For the
quarter ended March 31, 2000, the Company charged $12,000 to compensation
expense.
See additional disclosures of related party transactions in Note 3 -
Bridge Financing and Private Placement and in Note 14 - Subsequent
Events.
Note 9 - BENEFICIAL CONVERSION FEATURE - SERIES C PREFERRED STOCK
The value of the "in the money" conversion feature for the Series C
Preferred Stock from the closings of the Private Placement approximated
$42.4 million. The value was charged to increase accumulated deficit as
deemed dividends during the quarter ended March 31, 2000.
12
Note 10 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of non-cash financing and investing activities:
1. Conversion of $450,000 notes payable to 727,273 shares of common
stock.
2. Conversion of $1,000,000 6% convertible debenture into 718,018
shares of common stock.
3. Accretion on mandatory redeemable preferred stock of $982,000,
including accrued dividends of $84,000.
4. Conversion of 751,610 shares of Series A preferred stock and accrued
dividends to 1,134,113 shares of common stock.
5. Issuance of 690,000 and 443,077 shares of common stock to Liviakis
Financial Communications.
6. Recording of "in the money conversion feature" on Series C preferred
stock for $42.4 million.
7. Issuance of 243,000 shares of common stock classified as "to be
distributed" on June 30, 1999.
Note 11 - INVENTORY
March 31, 2000 June 30, 1999
-------------- -------------
Inventory consists of:
Raw material $ 139,000 $ 144,000
Work-in-process 133,000 --
Finished goods 230,000 331,000
Lower of cost or market reserve (355,000) (260,000)
--------- ---------
$ 147,000 $ 215,000
========= =========
The Company has established a reserve to reflect the estimated net
realizable value of the inventory as of March 31, 2000 and June 30, 1999.
Note 12 - COMMITMENTS AND CONTINGENCIES
The Company leases office facilities in Colorado and New York
expiring January 16, 2003 and September 29, 2001, respectively. Future
minimum annual lease commitments for the years subsequent to March 31,
2000 are $300,000, $190,000 and 64,000.
The Company has employment agreements with two of its executive
officers. The agreements are for initial terms of two years, with
automatic one-year extensions after the initial term. Effective May 4,
2000, the employment agreements commit the Company to annual salary
compensation of $425,000 and annual discretionary bonuses.
See additional disclosure regarding the Economic Participation
Agreements in Note 3 - Bridge Financing and Private Placement and Leases
in Note 14 - Subsequent Events.
Note 13 - LITIGATION
In April 1998, USWD entered into an agreement with certain former
noteholders of its Demand Notes under which USWD issued 525,800 shares of
common stock in settlement of the dispute regarding conversion terms of
their notes. Terms of the settlement entitled the noteholders to certain
guarantee and/or "put" provisions related to the shares issued in
conversion of the notes. The shares originally issued upon conversion of
the notes and the additional shares resulting from the settlement were
reflected as redeemable common stock on the balance sheet. The guarantee
expired as to all shares on June 19, 1999. The "put" expired as to all
shares on June 24, 1999. As of June 30, 1999, the "put" provisions
related to the shares had expired or been relinquished in return for the
Company's agreement to issue up to 200,000 shares of common stock to
13
certain holders who had exercised their "put" rights. In the fourth
fiscal quarter of 1999, $49,000 was accrued to reflect the settlement.
The agreement has been executed and 200,000 shares of common stock were
issued on February 22, 2000.
Note 14 - SUBSEQUENT EVENTS
The Board of Directors approved an amendment to the Company's
Articles of Incorporation to increase authorized capital from 55,000,000
shares to 225,000,000 shares. Of that number, 200,000,000 shares would be
designated as no par value Common Stock and 25,000,000 shares would be
designated as preferred stock, with the rights, designations and
preferences of any series of preferred stock to be fixed and determined
by the Board of Directors at the time of issuance, without further action
by shareholders. The amendment to the Articles of Incorporation is to be
submitted to the Company's shareholders as soon as practicable.
The Board of Directors approved a new stock option plan, subject to
approval by the Company's shareholders at the next shareholder meeting.
Once approved by shareholders (and assuming an increase in authorized
common stock is also approved by shareholders) the option plan would
reserve 15,000,000 shares of Common Stock for issuance pursuant to
options that may be granted under the plan. To date, Dean Leavitt, the
Company's Chief Executive Officer, has been granted 2,500,000 options,
and other employees have been granted 678,000 options, to be issued with
the exercise price to be set as of the date of shareholder approval of
the plan. The plan is to be submitted to the Company's shareholders as
soon as practicable.
On April 28, 2000, the Company repaid $55,000 of principal plus
accrued interest to date on all outstanding notes classified under
current liabilities in the Balance Sheet at March 31, 2000.
On May 3, 2000, pursuant to purchase agreements reached with the
holders, the Company redeemed the remaining 227,352 outstanding shares of
Series B Preferred Stock for an aggregate price of $350,000 and, as an
inducement for the redemptions, common stock purchase warrants to
purchase an aggregate of 25,000 shares of the Company's Common Stock at
an exercise price of $1.50 per share. The warrants are exercisable
through April 30, 2004, and the Company valued the warrants at $60,000 on
the date of grant, which will be charged as a deemed dividend to
accumulated deficit.
The Company intends to enter into a new lease for office space in New
York City for a term of ten years. Assuming the Company signs the new
lease in mid May 2000, minimum annual lease commitments for the five
years subsequent to March 31, 2000 are $456,300, $608,400, $608,400,
$608,400, $608,400 and thereafter in the aggregate are $3,334,500. At the
same time, the Company is also negotiating with its current landlord and
a prospective tenant for the termination of its existing New York City
lease. Assuming the Company is released from it's existing New York City
lease effective July 1, 2000 with no loss or penalty, the Company would
be relieved of future minimum lease commitments of $164,000 and $110,000
for the years ending March 31, 2001 and 2002, respectively.
14
On May 4, 2000, the Board approved an increase in Mr. Leavitt's
annual salary to $250,000. The Board also approved a bonus of $200,000 to
Mr. Leavitt for the year ending May 3, 2000, the first anniversary of Mr.
Leavitt's position as Chairman and Chief Executive Officer. Compensation
expense in the third fiscal quarter was charged $182,000 for the
proration of the bonus.
May 4, 2000, the Company issued a 25,000 share common stock purchase
warrant to Cornell Consulting International, Inc. for executive search
services, exercisable at $3.1875 per share. The warrant vests
immediately, is exercisable at a price equal to the market price of the
underlying stock on the date of grant, and expires 5 years from the date
of grant. The Company valued the warrant at $25,000 (based on the market
value of the services received less cash paid), which will be charged to
operations as executive search expenses in the fourth fiscal quarter.
ITEM 2 - 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 Act of 1933 or Section 21E
of the Securities Exchange Act of 1934, as amended. Such projections and
forward-looking statements are based on assumptions, which the Company
believes are reasonable but are, by their nature, inherently uncertain.
In all cases, results could differ materially from those projected. Some
of the important factors that could cause actual results to differ from
any such projections or forward-looking statements include, but are not
limited to: the Company's requirement for additional capital; failure of
the Company to raise additional capital critical to continue ongoing
operations; the failure to execute definitive agreements with potential
strategic alliance partners; technological change; system capacity
constraints or system failures; the ability of the Company to develop new
distribution channels; or the intensification of competition. Additional
factors may be described in other reports filed by the Company under the
Securities Exchange Act of 1934. A detailed statement of risks and
uncertainties relating to forward-looking statements is set forth in the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30,
1999 filed on October 14, 1999, under the caption "Risk Factors" in Item
6 of that Report, and is hereby incorporated by reference.
OVERVIEW
The Company was incorporated in the State of Colorado in July 1991
for the purposes of designing, manufacturing and marketing wireless and
portable credit card and check authorization terminals for use in the
transaction processing business. The Company completed an initial public
offering in December 1993. The Company relocated its principal executive
office to New York City from California in February 2000. In late March
2000, the Company raised $50.6 million in gross proceeds from the Private
Placement.
15
The Company has now repositioned itself as a facilitator of wireless
transaction and data services. It is a device- neutral, wireless
carrier-neutral, merchant acquirer and front-end processor neutral
enabler of wireless transaction processing services through the creation
of its Wireless Express Payment ServiceSM or WEPSSM ("WEPS"). WEPS
provides a gateway between all of the parties within a wireless
point-of-sale ("POS") transaction. By providing a seamless interface
between a merchant's POS terminals, wireless carriers and transaction
processors, credit, debit and other card transactions can be processed
almost as fast as cash, without the cost and inconvenience of being
tethered to a telephone line. In addition, WEPS' Internet-based tools
offer online, real-time transaction monitoring and reporting, remote
diagnostics and automated terminal activation.
USWD provides merchant acquirers, Independent Sales Organizations
("ISOs") and payment processors with a wireless transaction management
service that can be utilized at both conventional and emerging merchant
segments, permits the retrieval of on-line/real-time transactional
reports and diagnostics via the Internet and simplifies the customer
service and application development effort.
Revision of Business Plan
In fiscal year 1998, USWD entered into agreements with large
telecommunications carriers for direct distribution of USWD's products
and services to merchants. USWD 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 (a device developed by USWD that provides the ability for a
traditional dial-up terminal to communicate wirelessly) 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 at USWD's cost. Under this program, USWD retained 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 USWD's agreements with
telecommunications carriers did not develop as rapidly as anticipated and
did not reach anticipated (and necessary) levels to pay for the
infrastructure to support the programs. Costs to USWD of implementing the
joint marketing and distribution agreements with GTE Wireless, Bell
Atlantic Mobile and Ameritech exceeded revenue generated by the programs
throughout the entire program. USWD has phased-out this program.
USWD's continued focus on direct sales to the merchant community had
inadvertently positioned it in direct competition with the industry's
largest acquirers, a competitive stance that resulted in disappointing
sales. As the Company entered fiscal 1999, it was clear that the Company
did not have the requisite expertise as a merchant acquirer and that it
should not be in direct competition with firms that were its prospective
customers. USWD hired Roger Pierce, former President of First Data
Corporation and Chief Operating Officer of Visa International, as Chief
Executive Officer in August 1998. It was during this period that the
Company began the development of WEPS. Mr. Pierce retired in March 1999.
16
In May 1999, Dean M. Leavitt, former President and Chief Executive
Officer of U.S. Data Capture, a credit card processing company serving a
broad spectrum of conventional card acceptors and emerging markets, was
hired as Chairman and Chief Executive Officer of USWD. Mr. Leavitt has
refined the Company's mission to become a device neutral, wireless
carrier-neutral and merchant acquirer-neutral provider of wireless
processing services. The Company also developed a complimentary suite of
Internet browser-based tools to simplify the activation, troubleshooting
and deployment of wireless terminal devices. As part of USWD's new
strategy, the Company has focused its resources on the continued
development of the WEPS platform and its suite of services and has phased
out the sale of products and services directly to merchants, thereby
positioning itself as a neutral enabler to the acquirer marketplace. The
Company now has significant efforts underway to broaden the use of WEPS
through the expansion of its sales channels via contracts with merchant
acquirers, ISO's and payment processors. The Company is also in the
process of expanding its WEPS offerings by certifying additional
WEPS-enabled POS devices and implementing connectivity to additional
processors.
WEPS
The Company's business plan is now focused on establishing WEPS as
the global standard for wireless POS transaction processing. WEPS
provides for a seamless interface between wireless POS terminals and
front-end processors (companies with established connections to the
credit and debit card issuers). The speed and mobility offered by WEPS
has the potential to open up vast new markets that have historically not
accepted card payments. Central to the Company's strategy is its position
as a "neutral" provider of wireless transaction services to the industry,
specifically neutral with respect to terminal manufacturers, wireless
carriers and card processors.
The transaction processing industry in the United States is large and
growing. In 1998, Americans used their credit and debit cards nearly 14
billion times, generating over $1 trillion in purchases. However, there
are two weaknesses in the electronic transaction processing industry -
slow transaction speed and lack of mobility. Until the mid-1980's, all
credit card processing was essentially paper-based. As improvements in
electronic terminal technologies evolved landline transmission became the
prevailing means for processing credit card transactions. Electronic
Draft Capture ("EDC"), the electronic authorization and settlement of
credit card transactions has since become the standard for processing POS
transactions. Merchant acquirers, transaction processors and credit card
issuers all require merchants to utilize EDC to conduct secure credit and
debit card transactions. However, this tethered methodology excludes
significant under-served markets that require mobility and/or speed, such
as quick service restaurants, transportation services, delivery-based
businesses, stadium concessions and others.
As the electronic transaction processing industry has evolved,
providers have devoted substantial resources to developing proprietary
solutions to gain competitive advantages, including the development of
wireless POS systems. However, with the increasing variety of terminal
manufacturers, wireless carriers and front-end processors needing to
communicate, and with each having proprietary systems and communication
protocols, the cost and complexity of connectivity has become a barrier
to deployment of wireless POS systems.
WEPS is designed to provide a solution to this connectivity problem.
WEPS provides a scalable, client-server architecture that serves as a
neutral gateway between all parties in a wireless POS transaction. This
architecture enables any WEPS-compliant POS terminals to communicate over
most major U.S. wireless carriers to any transaction processors that have
established WEPS connectivity.
17
Typically, terminal manufacturers program a specific terminal to
communicate with a specific processor. With WEPS, terminal manufacturers
can now develop a single application to communicate to WEPS. The WEPS
server then performs the formatting necessary to communicate the
transaction to any front-end processor which has agreed to accept WEPS
facilitated transactions and with which WEPS connectivity has been
established. This process saves the terminal manufacturers significant
development expenses, reduces the time to bring new terminals to market,
and enables the development of "thin-client" terminals whose
characteristics are largely determined by the server. Transaction
processors benefit from WEPS by not having to negotiate with each
wireless carrier to build and support connections to each. Instead, they
simply connect to the WEPS server as a single point of contact. As new
terminals and transaction types become available, each transaction
processor will be able to use their existing WEPS connection to gain
wireless access with minimal development expense or effort on their end.
As WEPS enables new markets to accept wireless payment processing,
wireless carriers benefit from an increase in traffic and simplified
connectivity to the processors. By providing a single point of contact,
WEPS significantly minimizes the time and development cost for terminal
manufacturers and transaction processors.
USWD is targeting large merchant acquirers, front-end processors and
ISO's for the WEPS service. The initial response for WEPS from the
targeted prospects has been positive. The Company has entered into more
than fifty WEPS agreements with various targeted prospects, including
Card Service International (CSI), Paymentech Network Services, and
Certified Merchant Services (CMS), and anticipates adding additional
agreements in the near future. The WEPS agreement allows the client to
offer WEPS as a wireless transaction processing solution to a merchant.
The WEPS agreement defines the services and billing terms between the
Company and client if and when the merchant acquirer utilizes WEPS. A
WEPS agreement is not a firm commitment by the client to purchase any
goods or service from USWD.
The benefits of WEPS to a merchant include:
o Mobility - with today's wireless terminals and the WEPS service,
a terminal no longer needs to be stationary. Eliminating the need
for a phone line opens up an array of new markets.
o Speed - transaction speed of approximately 3-5 seconds in most
cases vs. 15-20 seconds for a traditional landline transaction.
o Installation speed and reduced costs - elimination of phone lines
enhance the installation process and reduce the costs associated
with phone lines.
o On-line, real-time Internet reporting - WEPS online merchant site
offers merchants a look at their transactions as they occur as
well as detailed statistics and reports.
WEPS enables a business that requires mobility and/or transaction
speed to accept POS transactions. WEPS target markets include:
o Fast-food restaurants.
o Delivery services.
o Transportation services such as taxicabs, limos and buses.
o Stadiums, arenas and amusement parks.
o Public parking lots such as at airports.
o Movie theatres.
o Golf tournaments and racetracks.
18
WEPS Internet-based tools provide the merchant, merchant acquirer and
front-end processor with a new level of control and management over their
wireless POS systems:
o Internet-based on-line activation, deactivation, and terminal
diagnostic tools - WEPS automates the terminal activation and
deactivation process, significantly decreasing the installation
time for new terminals. USWD can perform real-time, remote
diagnostic services for immediate problem solving.
o Internet-based on-line access to real-time transaction reports -
WEPS provides real-time transaction reporting, which allows for
previously unavailable levels of tracking and accountability.
USWD continues to establish connectivity between the wireless
networks, WEPS server and various front-end processors. Commercial
transactions running through the WEPS platform began in the second
quarter of fiscal 2000. The Company is also working with several POS
terminal manufacturers and front-end processors as part of the ongoing
process of adding additional devices to the WEPS menu of offerings.
The Company is exploring opportunities for the WEPS platform to
transport data to provide solutions for various non-payment applications
or applications with a combination of payment and non-payment data. Over
the long term, the Company intends to further its service offerings by:
o Expanding into selected international markets.
o Enabling wireless processing of ATM transactions.
o Transporting non-payment oriented transactions such as health
care related transactions, vending machine inventory reports, EBT
transactions and telemetric data.
o Becoming a vehicle for the transport of frequency and loyalty
program information.
o Recognizing and storing signatures in the WEPS network, and
accommodating nonconventional payment and debit transactions.
Year 2000 Issues
While the Company believes the greatest risks associated with the
Year 2000 issue have passed, the Company cannot be certain that Year 2000
issues with respect to the electronic payments infrastructure utilized by
credit card processors, banks and financial institutions within the
United States and on which USWD is reliant will not emerge over the
coming months. USWD could be adversely, materially affected, both
operationally and financially, to the extent third parties with whom it
interfaces, either directly or indirectly, have not properly addressed
their Year 2000 issues. The Company does not have an available
contingency plan that would alleviate a disruption of service in the
electronic transaction sector.
RESULTS OF OPERATION - FISCAL 2000 COMPARED TO FISCAL 1999
Revenue
Revenue from services of $88,000 for the third quarter of fiscal
2000 decreased 36% from revenue of $137,000 generated during the third
quarter of fiscal 1999 as the Company continued the implementation of its
new business model. As noted in the overview section above, the Company
is now marketing WEPS to merchant acquirers, ISO's and front-end
processors. The Company currently has over 50 "Clients" (merchant
acquirers, payment processors or independent service organizations) under
contract for WEPS. Billing for the new WEPS service accounted for $72,000
of the services revenue during the third quarter of fiscal 2000. This
19
represents an increase of 57% from the second quarter of fiscal 2000, and
should continue increasing as the number of active terminals increase
from the growth in Clients and merchants. The Company is also working to
increase the number of WEPS certified devices and obtaining
communications connectivity and integration to additional front-end
processors. In addition, the Company sold one of its two existing
merchant credit card portfolios at the beginning of July 1999 (see Other
Income, below). The lost revenue from this portfolio accounted for a
decrease of approximately $108,000 in services revenue between the
current quarter and the same quarter of the prior year. Revenues from
product sales decreased to $111,000 in the current quarter from $124,000
in the prior period as the Company completes the transition from one-time
product sales to a recurring revenue model based on WEPS service. For the
nine months ended March 31, 2000, total revenues decreased to $467,000
from $1,142,000 in the prior year, again due to transition from the old
to the new business model.
Gross Profit
The Company recorded a gross loss of $67,000 in the third fiscal
quarter of 2000 compared to a gross profit of $21,000 in the third
quarter of fiscal 1999. The third quarter negative product margin versus
28% for the same quarter of the previous year reflects markdowns on
product sales and a $112,000 write down in the value of inventory. The
prior year nine-month product cost included a $240,000 one- time gain
resulting from the successful restructuring of a note payable to a former
terminal equipment supplier. The services costs include the initial setup
and ongoing communications costs associated with the terminals connected
through WEPS or terminals deployed via the previous credit-card
portfolios. The services margin was $36,000 for the current quarter
versus a loss of $14,000 for the same quarter of the prior year. The
spread in services revenue and cost structure are impacted by the
initialization of new terminals, the quantity of active terminals,
transaction volume and the associated rates the Company bills its Clients
for such services versus its charges from the various carrier networks.
Prior period service costs were distorted by excess wireless addresses
associated with the previous credit-card portfolios or other inventorying
of addresses.
Operating Expenses
Selling, general and administrative expense was $1,953,000 in the
current quarter, versus $431,000 in the third quarter of fiscal 1999. For
the current nine-month period, selling, general and administrative
expense was $4,016,000 versus $3,857,000 in the prior year.
Selling, general and administrative expense for the same quarter of
the prior year was reduced due to a $658,000 non-cash credit to reflect a
change in the carrying value of a variable stock option due to the change
in the Company's stock during the quarter. Increases in other expenses
for the current quarter versus the same quarter of the previous fiscal
year include increased activity for marketing, including promotions and
travel, recruiting, and other general and administrative expenses. Also
adding to the increase were non-cash charges for warrant grants valued at
$52,000 for investor relations and $95,000 for executive recruiting. The
Company also accrued $182,000 in the current quarter for the proration of
Mr. Leavitt's bonus.
20
Selling, general and administrative expenses increased $159,000 to
$4,016,000 for the nine months ended March 31, 2000, versus the same
period of the prior year. The underlying makeup of the expenses are
changing as the Company transitions to its new business plan.
Research and development expenses increased to $391,000 in the third
fiscal quarter of 2000 from $105,000 in the same quarter of the prior
year. This increase was due primarily to an increase in the number of
employees and full time consultants focused on the implementation of
WEPS. For the nine-month period ending this fiscal year versus the prior,
research and development increased $496,000 to $859,000, also due
primarily to increased staffing.
Interest, Other Income and Preferred Stock Dividends
Interest income amounted to $65,000 for the current fiscal quarter
versus negligible amounts for prior periods. Prior to March 2000, the
Company had substantial liquidity problems. The Company's receipt of the
net cash from the Private Placement in late March 2000 provided the
Company with a large cash balance from which it earned interest income in
March, and from which it will earn interest or other investment income in
future periods.
Interest expense of $462,000 in the quarter ended March 31, 2000,
includes $451,000 of non-cash interest expense related to the Bridge
Warrants. Interest expense of $1,118,000 for the same quarter of the
previous year includes $950,000 of interest and late registration
penalties on the 6% Debentures. Interest expense for the first nine
months of this fiscal year decreased to $1,394,000 from $1,757,000 for
the same period of the previous fiscal year.
The Interest credit of $597,000 in the quarter ended March 31, 2000,
related primarily to the reversal of accrued interest and penalties on
the 6% Debentures and Series B Preferred Stock. The interest and
penalties were waived as part of the redemption agreements reached with
the holders.
Other income of $128,000 for the nine-month period ended March 31,
2000 included a $124,000 gain on the July 1999 sale of a portion of
USWD's merchant credit card portfolio to PMT Services Inc., a wholly
owned subsidiary of Nova Corporation. The transaction resulted in a cash
payment to USWD of $450,000. The sale included approximately 450
installed USWD owned TRANZ Enabler point-of-sale devices deployed with a
portion of the respective merchants.
The $42,864,000 preferred stock dividend for the third fiscal
quarter of 2000 includes $42,364,000 charged for the value of the "in the
money" conversion feature for the Series C Preferred Stock from the
closings of the Private Placement and $592,000 for warrants issued and
cash paid to induce the redemption of the Series B Preferred Stock.
Preferred stock dividends of $43,849,000 for the nine month period ended
March 31, 2000, include, in addition to the amounts above, $874,000 to
accrete the value of the Series B preferred stock up to its redemption
value by the date at which mandatory redemption is available to the
holders. The preferred stock dividend of $571,000 for the nine months
ended March 31, 1999, includes $465,000 of warrants and cash paid in the
inducement of the redemption of the Series A Preferred Stock and $106,000
of dividends accrued for the Series A Preferred Stock.
21
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
In late March 2000, the Company closed on $50.616 million in gross
proceeds from the Private Placement. Net proceeds to the Company amounted
to $44.6 million, after payment of commissions, fees and expenses of $6
million.
As of May 10, 2000, the Company has redeemed all outstanding Series
A Preferred Stock, Series B Preferred Stock, 6% Debentures and repaid the
notes from the Bridge Financing and other notes, and has no current
financing needs.
The Company's success in raising funds from the Private Placement
frees management from the daily struggles of operating with little to no
liquidity and long-term solution to its cash needs. During the
implementation of its new business plan that the Company expects to
aggressively pursue, the Company expects expenses to continue to exceed
revenues during the initial phases of the plan. Interest income provided
from the available cash balance will help to reduce monthly deficits. The
Company's cash position of $38.5 million as of March 31, 2000, provides,
in management's opinion, the financial resources to pursue it's business
plan and fund monthly deficits. In addition, the Company's currently
anticipated capital equipment expenditures for its technology
infrastructure are not extensive.
Prior to March 2000, USWD faced significant challenges due to its
then current financial condition and lack of liquidity. The Company has
incurred recurring losses from operations and has an accumulated deficit
of approximately $84.6 million at March 31, 2000.
PART II OTHER INFORMATION
ITEM 1 - LITIGATION
Settlement of Claims of Certain Noteholders
In April 1998, USWD entered into an agreement with certain former
noteholders of its Demand Notes under which USWD issued 525,800 shares of
common stock in settlement of the dispute regarding conversion terms of
their notes. Terms of the settlement entitled the noteholders to certain
guarantee and/or "put" provisions related to the shares issued in
conversion of the notes. The shares originally issued upon conversion of
the notes and the additional shares resulting from the settlement were
reflected as redeemable common stock on the balance sheet. The guarantee
expired as to all shares on June 19, 1999. The "put" expired as to all
shares on June 24, 1999. As of June 30, 1999, the "put" provisions
related to the shares had expired or been relinquished in return for the
Company's agreement to issue up to 200,000 shares of common stock to
certain holders who had exercised their "put" rights. In the fourth
fiscal quarter of 1999, $49,000 was accrued to reflect the settlement.
The agreement has been executed and 200,000 shares of common stock were
issued on February 22, 2000.
22
ITEM 2 - CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
During the fiscal quarter ended March 31, 2000, the Company sold or
issued the following equity securities without registering the securities
under the Securities Act of 1933, as amended (the "Act").
On January 20, 2000, the Company issued a 22,500 share common stock
purchase warrant to RBB Bank.
On February 11, 2000, holders of the 6% Debentures converted $800,000
of the debt into 404,599 shares of common stock per the specified
conversion formula.
On March 15, 2000, the Company retained Lippert/Heilshorn and
Associates, Inc. to provide investor relations services. In addition to
monthly fees and expenses, the Company agreed to issue Lippert/Heilshorn
a 15,000 share common stock purchase warrant each year for the next 3
years. The warrants vest one year after date of grant, are issued with an
exercise price equal to the market price of the underlying stock on the
date of grant, and expire 5 years from the vesting date. The first year
grant was issued on March 28, 2000, with an exercise price of $5.344 per
share.
On March 28, 2000, the Company issued a 50,000 share common stock
purchase warrant to Cornell Consulting International, Inc. for executive
search services. The warrant vests immediately and is exercisable at
$5.344 per share.
On March 31, 2000, the Company redeemed 1,500,000 shares of the
Company's Series B Convertible Preferred Stock from Bold Street, LLC. The
Company also issued a common stock purchase warrant, expiring April 30,
2004, to purchase 150,000 shares of Common Stock exercisable at $2.28 per
share. Bold Street received certain "piggyback" registration rights as to
the shares of Common Stock underlying the warrant.
For the third fiscal quarter ended March 31, 2000: (i) 109,600 common
stock shares were issued on exercise of employee options, (ii) 8,712,000
common stock shares were issued on exercise of the Bridge Warrants, and
(iii) 218,235 common stock shares were issued on cashless exercises of
warrants aggregating 394,632 shares.
As to each of the foregoing transactions, the Company relied upon the
registration exemption contained in Section 4(2) of the Act. The
transactions did not involve a public offering of securities; the Company
received investment representations from each purchaser to the effect
that such purchaser was taking for investment only and not with a view to
distribution of the securities; the Company had reason to believe that
each purchaser had such knowledge and experience, either alone or through
a purchaser representative not affiliated with the Company, that such
purchaser was capable of evaluating the merits and risks of an investment
in the Company; each purchaser, either in his or her capacity as an
investor or an employee or consultant to the Company, had access to
adequate information concerning the Company and its business; all
certificates representing the securities were appropriately imprinted
23
with customary "restricted securities" legends, and instructions were
lodged with the Company's transfer agent with respect to all shares of
common stock issued in the transactions as "restricted securities."
ITEM 3 - DEFAULT ON SENIOR SECURITIES
In the fourth quarter of fiscal 1999, USWD entered into an agreement
with the purchasers of its Series B Preferred Stock and holders of its 6%
Debentures to file a registration statement with the SEC covering the
common stock underlying the Series B Preferred Stock, a common stock
purchase warrant issued at the same time as the Series B Preferred Stock,
the 6% Debentures, and the common stock purchase warrants issued to the
6% Debenture holders in July 1998, within 30 days of May 6, 1999, to be
effective within 90 days of May 6, 1999. This date was subsequently
extended to May 11, 1999. USWD filed the required registration statement
on June 30, 1999. The Company thereby became subject to a late filing
penalty of $74,000 (following waiver of the "late filing" penalty by the
holder of 1,500,000 shares of Series B Preferred Stock). The registration
statement did not become effective by August 10, 1999. The Company
therefore become subject to an initial "late effectiveness" penalty of 3%
of the total original purchase price of $1,800,000 of 6% Debentures and
1,954,705 shares of Series B Preferred Stock, which were outstanding as
of August 10, 1999. Additional late effectiveness penalties accrue
monthly (or for any portion of any month) that the registration statement
is not effective, in amounts equal to 2% of the original purchase price
of the outstanding Series B Preferred Stock and 3% of the face amount of
the outstanding 6% Debentures. As of December 31, 1999, $413,000 of
penalties was accrued as a charge to interest expense. The registration
statement has not become effective as of the date of filing this report.
As of October 10, 1999, the Series B Registration Statement had not
been declared effective. The holders of the Series B Preferred Stock had
the right to require USWD to redeem the shares of Series B Preferred
Stock for $1.25 per share plus accrued penalties and dividends
(approximately $2,700,000 as of December 31, 1999), and holders of the 6%
Debentures to redeem the $1,800,000 face amount at 120% of the face value
(increased to 125% based on pending redemption proposal) plus accrued
penalties and interest (approximately 2,520,000 as of December 31, 1999).
As of March 31, 2000, the Company had redeemed 1,727,353 shares of
Series B Preferred Stock at prices equal to 125% of the liquidation value
of the Series B Preferred Stock and warrants to purchase and aggregate of
150,000 shares of Common Stock at $1.50 per share, and repurchased
$200,000 of the 6% Debentures. The remaining $800,000 of 6% Debentures
and accrued interest were converted into 404,745 shares of Common Stock
at $2.05 per share. The Company redeemed the remaining 227,353 shares of
Series B Preferred Stock on May 3, 2000, for an aggregate of $350,000 and
warrants to purchase an aggregate of 25,000 shares of Common Stock at an
exercise price of $1.50 per share. In connection with these redemptions,
the holders of the securities waived any rights they may have had arising
out of any of the above described defaults.
ITEM 5 - OTHER INFORMATION
On January 4, 2000, the Board of Directors approved an amendment to
the Company's Articles of Incorporation to increase authorized capital
from 55,000,000 shares to 225,000,000 shares. Of that number, 200,000,000
shares would be designated as no par value Common Stock and 25,000,000
shares would be designated as preferred stock, with the rights,
designations and preferences of any series of preferred stock to be fixed
and determined by the Board of Directors at the time of issuance, without
further action by shareholders. The amendment to the Articles of
Incorporation is to be submitted to the Company's shareholders as soon as
practicable.
24
On January 4, 2000, the Board of Directors approved a new stock
option plan, subject to approval by the Company's shareholders at the
next shareholder meeting. Once approved by shareholders (and assuming an
increase in authorized common stock is also approved by shareholders) the
option plan would reserve 15,000,000 shares of Common Stock for issuance
pursuant to options that may be granted under the plan. To date, Dean
Leavitt, the Company's Chief Executive Officer, was granted 2,500,000
options, and other employees were granted 678,000 options, to be issued
with the exercise price to be set as of the date of shareholder approval
of the plan. The plan is to be submitted to the Company's shareholders as
soon as practicable.
On May 3, 2000, pursuant to Purchase Agreements reached with the
holders, the Company redeemed the remaining 227,352 outstanding shares of
Series B Preferred Stock.
The Company intends to enter into a new lease for office space in New
York City for a term of ten years. At the same time, the Company is also
negotiating with its current landlord and a prospective tenant for the
termination of its existing New York City lease.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required by Item 601 of Regulation S-B
4.1 Form of Nonqualified Stock Option Certificate issued to Edwin M.
Cooperman dated March 29, 2000 *
4.2 Form of Nonqualified Stock Option Certificate issued to Michael S.
Falk dated March 29, 2000 *
4.3 Form of Nonqualified Stock Option Certificate issued to Barry A.
Kaplan dated March 29, 2000 *
4.4 Form of Nonqualified Stock Option Certificate issued to Amy L. Newmark
dated March 29, 2000 *
4.5 Nonqualified Stock Option Certificate issued to Charles I. Leone dated
February 15, 2000 *
4.6 Form of Common Stock Purchase Warrant (originally issued to Dean M.
Leavitt as of May 3, 1999), as re-executed as of January 4, 2000 to
reflect repricing authorized as of such date *
4.7 Form of Common Stock Purchase Warrant for 22,500 shares issued to RBB
Bank dated January 20, 2000.
4.8 Form of Common Stock Purchase Warrant for 15,000 shares issued to
Lippert/Heilshorn & Associates, Inc. dated March 28, 2000
4.9 Form of Common Stock Purchase Warrant for 50,000 shares issued to
Cornell Consulting International, Inc. dated March 28, 2000
4.10 Form of Common Stock Purchase Warrant for 25,000 shares issued to
Cornell Consulting International, Inc. dated May 4, 2000
4.11 Lock-up Agreement between the Company and John M. Liviakis and
Liviakis Financial Communications, Inc. dated March 15, 2000**
25
10.1 Form of Redemption Agreement between the Company and Bold Street, LLC
dated January 31, 2000**
10.2 Form of Repurchase Agreement between the Company and RBB Bank
Aktiengesellschaft dated January 18, 2000**
10.3 Form of Purchase Agreement between the Company and The Cuttyhunk Fund
dated May 3, 2000
10.4 Form of Purchase Agreement between the Company and Tonga Partners LP
dated May 3, 2000
10.5 Form of Employment Agreement between USWD and Charles I. Leone dated
February 11, 2000 *
27 Financial Data Schedule
- -----------------
* Management compensatory agreement.
** To be filed by amendment.
b) Reports on Form 8-K
On January 12, 2000, the Company filed a report on Form 8-K reporting
an event of December 23, 1999. The report contained disclosures under
Item 5 - Other Events, relating to various agreements entered into in
connection with a proposed equity private placement and a bridge
financing.
On March 24, 2000, the Company filed a report on Form 8-K reporting
an event of March 17, 2000. The report contained disclosures under Item 5
- Other Events, relating to the issuance of a press release on March 20,
2000 announcing a closing of a private placement raising $37.8 million of
gross proceeds. The Report also disclosed the relocation of the Company's
principal executive offices from California to New York.
On March 30, 2000, the Company filed a report on Form 8-K reporting
an event of March 28, 2000. The report contained disclosures under Item 5
- Other Events, relating to the issuance of a press release on March 29,
2000 announcing a closing of a private placement raising an additional
$12.8 million of gross proceeds. The press release also announced the
appointment of four new Directors to the Board of Directors, raising the
number of Board Members to seven.
On April 12, 2000, the Company filed a report on Form 8-K reporting
an event of March 28, 2000. The report contained disclosures under Item 1
- Change of Control and Item 5 - Other Events, relating to a series of
transactions entered into in connection with the equity private
placement.
On April 18, 2000, the Company filed a report on Form 8-K/A, amending
the Form 8-K filing of April 12, 2000, to include various Exhibits.
On April 24, 2000, the Company filed a report on Form 8-K/A-2,
further amending the Form 8-K filing of April 12, 2000, to include an
additional Exhibit.
26
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, 2000 By: \s\ Dean M. Leavitt
---------------------------
Chief Executive Officer
May 15, 2000 By: \s\ Charles I. Leone
---------------------------
Chief Financial Officer
and Chief Operating Officer
27