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 September 30, 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 October 31, 1999 there were outstanding 20,245,566 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
Item 1. Financial Statements
Balance Sheets --
September 30, 1999, and June 30, 1999.......................3
Statements of Operations --
Three Months Ended September 30, 1999 and 1998..............4
Statements of Cash Flows --
Three Months Ended September 30, 1999 and 1998..............5
Notes to Financial Statements .....................................6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................9-13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 13
Item 2. Changes in Securities.............................................. 14
Item 3. Defaults Upon Senior Securities.................................... 14
Item 5. Other Information.................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................... 15
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
U.S. WIRELESS DATA, INC.
BALANCE SHEET
(Unaudited)
September 30, 1999 June 30, 1999
ASSETS ------------------ -------------
Current Assets:
Cash ................................................................... $ 148,000 $ 425,000
Accounts receivable, net of allowance for doubtful accounts of
$30,000 at September 30, 1999; $43,000 at June 30, 1999 ............ 83,000 178,000
Inventory, net ......................................................... 175,000 215,000
Other current assets ................................................... 30,000 14,000
Escrow held for payment of professional fees ........................... 45,000 112,000
------------ ------------
Total current assets ............................................... 481,000 944,000
Processing units - deployed ................................................. 53,000 408,000
Property and equipment, net ................................................. 397,000 405,000
Other assets ................................................................ 39,000 14,000
------------ ------------
Total assets ................................................................ $ 970,000 $ 1,771,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ....................................................... $ 979,000 $ 1,198,000
Accrued liabilities .................................................... 572,000 413,000
Borrowings, current portion ............................................ 2,046,000 2,272,000
Other current liabilities .............................................. 275,000 450,000
------------ ------------
Total current liabilities .......................................... 3,872,000 4,333,000
Borrowings, long-term portion ............................................... 25,000 25,000
------------ ------------
Total liabilities ........................................................... 3,897,000 4,358,000
------------ ------------
Redeemable preferred stock:
Series B 6% cumulative convertible redeemable preferred stock,
$1.00 par value, 5,000,000 shares authorized, 1,954,705
shares issued and outstanding. Redeemable at approximately
$2,500,000 at September 30, 1999 .................................. 2,394,000 1,587,000
------------ ------------
Stockholders' deficit:
Preferred stock, at $1.00 stated value, 15,000,000 authorized,
681,000 and 752,000 Series A issued and outstanding at
September 30, 1999 and June 30, 1999, respectively ................. 681,000 752,000
Common stock, at $1.00 stated value, 40,000,000 shares
authorized; 19,829,526 and 17,816,075 shares issued
and outstanding at September 30, 1999 and June 30,
1999, respectively ................................................. 19,830,000 17,816,000
Common stock to be distributed ......................................... 243,000 243,000
Additional paid-in capital ............................................. 11,245,000 12,082,000
Accumulated deficit .................................................... (37,320,000) (35,067,000)
------------ ------------
Total stockholders' deficit ........................................ (5,321,000) (4,174,000)
------------ ------------
Total liabilities and stockholders' deficit ................................. $ 970,000 $ 1,771,000
============ ============
The accompanying notes are an integral part of the financial statements
3
U.S. WIRELESS DATA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended September 30,
1999 1998
As Restated
--------- -----------
Net revenues:
Product sales ............................................... $ 99,000 $ 166,000
Services .................................................... 45,000 195,000
------------ ------------
144,000 361,000
------------ ------------
Cost of revenues:
Product sales ............................................... 87,000 (82,000)
Services .................................................... 87,000 159,000
------------ ------------
174,000 77,000
------------ ------------
Gross (loss) profit ............................................. (30,000) 284,000
------------ ------------
Operating expenses:
Selling, general and administrative ......................... 1,118,000 2,476,000
Research and development .................................... 191,000 80,000
------------ ------------
Total operating expenses ................................. 1,309,000 2,556,000
------------ ------------
Loss from operations ............................................ (1,339,000) (2,272,000)
Interest expense ................................................ (221,000) (257,000)
Other income .................................................... 128,000 6,000
------------ ------------
Net loss ........................................................ (1,432,000) (2,523,000)
Preferred stock dividends ....................................... (850,000) (168,000)
------------ ------------
Net loss available to common stockholders ....................... $ (2,282,000) $ (2,691,000)
============ ============
Basic and diluted net loss per share, (after provision for
preferred stock dividends) ................................... $ (0.12) $ (0.22)
============ ============
Weighted average common shares outstanding - basic/diluted ...... 19,000,000 12,491,000
============ ============
The accompanying notes are an integral part of the financial statements
4
U.S. WIRELESS DATA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended September 30,
1999 1998
As Restated
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $(1,432,000) $(2,523,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ....................................... 37,000 59,000
Non-cash consulting services and other .............................. 352,000 1,084,000
Non-cash compensation expense-variable stock option ................. -- (266,000)
Gain on sale of merchant portfolio .................................. (124,000) --
Non-cash interest expense ........................................... 27,000 120,000
Changes in current assets and liabilities:
Accounts receivable .............................................. 95,000 (92,000)
Inventory ........................................................ 73,000 26,000
Other current assets ............................................. (16,000) (58,000)
Accounts payable ................................................. (156,000) (337,000)
Accrued liabilities .............................................. 396,000 198,000
----------- -----------
Net cash used in operating activities ............................ (748,000) (1,789,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment .......................... (29,000) (7,000)
Proceeds from sale of merchant portfolio ............................ 450,000 --
Processing units - deployed ......................................... -- (81,000)
(Increase) decrease in other assets ................................. (25,000) 10,000
----------- -----------
Net cash provided by (used in) investing activities .............. 396,000 (78,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............................. 100,000 26,000
Principal payment on borrowings ..................................... (25,000) (253,000)
Net proceeds from issuance of debt .................................. -- 1,186,000
Net proceeds from issuance of convertible debenture ................. -- 2,235,000
Redemption of Series A preferred stock .............................. -- (1,000,000)
----------- -----------
Net cash provided by financing activities ........................ 75,000 2,194,000
----------- -----------
Net (decrease) increase in cash ............................................. (277,000) 327,000
Cash at beginning of period ................................................. 425,000 4,000
----------- -----------
Cash at end of period ....................................................... $ 148,000 $ 331,000
=========== ===========
Supplemental disclosure of non-cash financing and investing activities:
1. Conversion of $450,000 accrued liability to 727,273 shares of common stock.
2. Conversion of $200,000 6% convertible debenture into 313,419 shares of
common stock.
3. Accretion on mandatory redeemable preferred stock of $778,000 plus $29,000
of accrued dividends.
The accompanying notes are an integral part of the financial statements
5
U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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. Certain amounts in the financial statements of the
prior period have been reclassified to conform to the current period
presentation for comparative purposes. 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.
Note 2 - THE COMPANY
U.S. Wireless Data, Inc. 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. USWD is a terminal-neutral, transport-neutral and
processor-neutral enabler of wireless transaction processing services
through the creation of what USWD calls Wireless Express Payment ServiceSM
(WEPSSM, "WEPS"). WEPS is a comprehensive and integrated suite of wireless
transport services and network technology designed to deliver payment
transactions securely and efficiently between a merchant's location and a
payment processor.
Note 3 - INVENTORY
September 30, 1999 June 30, 1999
------------------ -------------
Inventory consists of:
Raw material $ 165,000 $ 144,000
Finished goods 281,000 331,000
Lower of cost or market reserve (271,000) (260,000)
--------- ---------
$ 175,000 $ 215,000
========= =========
The Company has established a reserve against finished goods and raw
materials to reflect the estimated net realizable value of the inventory
as of September 30, 1999 and June 30, 1999.
Note 4 - FINANCIAL CONDITION AND LIQUIDITY
The Company continues to have difficulties due to its financial
condition and lack of liquidity. The Company has incurred recurring losses
from operations, has an accumulated deficit of approximately $37 million,
a net capital deficiency of $5,321,000 and negative working capital of
$3,391,000 at September 30, 1999, and has limited financial resources. The
Company had defaulted on certain obligations related to filing of a
registration statement on its 6% Convertible Subordinated Debentures, as
of January 18, 1999, which caused the debt to become due on demand
although this default was waived by the 6% Debenture holders as of May 6,
1999. As of October 10, 1999, a registration statement covering the common
stock underlying the Series B Preferred Stock, 6% Debentures and other
unregistered securities had not been declared effective, thereby entitling
holders of the Series B Preferred Stock to redeem their shares at $1.25
per share plus accrued penalties and dividends (approximately $2,600,000
as of September 30, 1999), and holders of the 6% Debentures to redeem the
$1,800,000 face amount at 120% of the face value plus accrued penalties
6
and interest (approximately $2,300,000 as of September 30, 1999). The
accrued interest and penalties are recorded in accrued liabilities. If the
holders of the Series B Preferred Stock and/or the holders of the 6%
Debentures redeem their securities; the Company would not currently be
able to fund such redemption. During the implementation of the new
business plan, the Company expects expenses to exceed revenues. The
implementation of USWD's business plan is dependent on a significant debt
or equity-financing event in the immediate future.
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. 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.
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 1998 and 1999 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' DEFICIT
The Company issued 846,722 restricted shares of common stock and
169,345 common stock purchase warrants for $500,000 in a private offering
during the first quarter of fiscal 2000, to fund operations. The warrants
are exercisable over a 5-year period at $1.50 per share.
On August 2, 1999, the Company entered into an exclusive financial
advisory agreement with an investment-banking firm to assist the Company
with a financing on a best efforts basis. The investment-banking firm has
no obligation to participate in the financing directly. The agreement
calls for the Company to issue warrants to the investment banking firm
equal to 2% of the shares issued in the offering that will be exercisable
for a period of five years at a price equal to 125% of the price at which
shares are issued in the offering. The Company has agreed to reimburse
the investment banking firm for reasonable out of pocket expenses
incurred up to a maximum of $100,000.
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 the 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, and 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
September 30, 1999, $188,000 of penalties was accrued as a charge to
interest expense. 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 for the first quarter
ended September 30, 1999 was $807,000. Dividends of approximately $29,000
related to the Series B Preferred Stock were accrued but not paid in the
first fiscal quarter.
7
In the first quarter of fiscal 2000, holders of the 6% Convertible
Debentures converted $200,000 of the debt to approximately 313,000 shares
of common stock per the specified conversion formula.
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 consulting firm requested that half the
$17,000 fee be paid in the form of a warrant. The Company expects to
issue an appropriately structured warrant as soon as practicable.
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 TRANSACTION
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 $351,000 for
the valuation of the shares.
LFC has agreed not to sell any USWD common stock during the term of
the consulting services.
Note 9 - 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 guarantee provision of the settlement
agreement allowed the former noteholders to recover the difference
between the guarantee price (which was $3.00 per share for all of the
shares that were still entitled to the guarantee as of its expiration
date) and the gross amount the noteholder receives upon a sale of the
shares. The guarantee was operative at any time during the one year
period commencing on the date the shares became saleable under SEC Rule
144. The Company was obligated to pay the amount due within thirty days
of receiving a demand, accompanied by documentation confirming the sale.
The guarantee expired as to all shares no later than June 19, 1999. Under
the "put" provision of the settlement agreement, the former noteholders
were entitled for 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 could "put" any shares remaining unsold by them at the
time back to USWD. Upon exercise of the "put," USWD was required to
either (1) purchase the shares for the "put" price (which was $3.00 per
share for all of the shares that were still entitled to the put as of its
expiration date), or (2) require the shareholder to sell the shares into
the market, with USWD 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 "put" expired as to all shares no later than June 24, 1999. 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. 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
which is subject to a final agreement prior to issuance of the shares.
The settlement expense may be adjusted at the date of share issuance.
Note 10 - SUBSEQUENT EVENTS
Between October 1 and November 1, 1999, the Company issued 404,040
restricted shares of common stock and 80,808 common stock purchase
warrants for $250,000 in a private offering, to fund operations. The
warrants are exercisable over a 5-year period at $1.50 per share. Common
stock and warrants for an additional $25,000 investment in the unit
placement will be issued before quarter end.
8
As of November 10, 1999, the registration statement covering the
shares of common stock underlying the Company's Series B Preferred Stock,
6% Debentures and various common stock purchase warrants (SEC File No.
333-81897) has not been declared effective. The holders of the Series B
Preferred Stock may require USWD to redeem the shares of Series B
Preferred Stock for $1.25 per share plus all accumulated dividends and
penalties (up to approximately $2,600,000 as of September 30, 1999).
Also, the holders of the 6% Debentures may require the Company to redeem
the current $1,800,000 face amount at 120% plus accrued interest and
penalties (up to approximately $2,300,000 as of September 30, 1999).
During the second quarter of fiscal 2000, as of November 1, 1999,
the Company issued 12,000 shares of common stock in conversion of 5,207
shares of Series A Preferred Stock.
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 included 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 has now repositioned itself as a device-neutral,
wireless carrier-neutral, merchant acquirer and front-end processor
neutral enabler of wireless transaction processing services through the
creation of what USWD calls Wireless Express Payment ServiceSM or WEPSSM
("WEPS").
USWD serves the transaction processing community by applying
wireless technology and value-added services to the transport and
translation of wirelessly generated electronic transactions. USWD's WEPS
technology provides the payment processor with fast and flexible
transaction processing tools and state-of-the-art on-line customer
service capabilities. USWD provides merchant acquirers, Independent Sales
Organizations ("ISOs") and third party 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.
Via WEPS, merchants can process payments as fast as cash, without the
cost and inconvenience of being tethered to a telephone line.
Revision of Business Plan
In fiscal year 1998, USWD entered into agreements with large
telecommunications carriers for direct distribution of 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 to merchants through GTE's and other telecommunications
9
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, 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 since they began.
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 would better be its
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.
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 has 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, it 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 and independent sales
organizations. The Company is also in the process of expanding its WEPS
offerings by adding to its roster of WEPS certified point-of-sale
devices.
WEPS Operational Overview
WEPS is a comprehensive and integrated suite of wireless transport
services and network technology designed to deliver payment transactions
securely and efficiently between a merchant's location and a payment
processor. WEPS technology includes the following key features:
o Internet-based account set-up with automated IP / Radio ID
provisioning and terminal activation / deactivation services;
o High-speed wireless packet data transport;
o Real-time authorization and capture;
o Message formatting and protocol conversion;
o Real-time remote terminal diagnostics;
o Ability to use WEPS certified wireless devices from various
terminal manufacturers;
o Second level customer support services;
o A customer attrition prevention program;
o WEPS certification lab for new terminals; and,
o WEPS training center for clients' customer service departments.
USWD is targeting large merchant acquirers and card processors for
this service. The initial response for WEPS from the targeted prospects
has been positive.
USWD has entered into twenty-two WEPS agreements with various
merchant acquirers, including Card Service International, Paymentech
Network Services, Westamerica Bank, and anticipates adding additional
agreements in the near future. The WEPS agreement allows the merchant
acquirer 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 merchant acquirer if and when the merchant
acquirer utilizes WEPS. A WEPS agreement is not a firm commitment by the
merchant acquirer to purchase any goods or service from USWD.
10
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.
USWD continues to work with several point-of-sale terminal
manufacturers and front-end processors as part of the ongoing process of
adding additional devices to the WEPS menu of offerings.
Implementation of USWD's business plan is dependent upon the
Company's ability to obtain adequate financing. See "Liquidity and
Capital Resources" in this section below.
Year 2000 Issues
USWD has completed a review of the potential impact of the Year
2000 ("Y2K") issue on USWD'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. USWD's internal business systems have been
evaluated, and with the exception of the accounting system, are Year 2000
compatible. USWD intends to replace the accounting software during the
fourth calendar quarter of 1999. The accounting software is a business
critical system; however, the cost of conversion is not expected to be
material. The engineering staff has made an assessment of USWD products
and determined that they are Y2K compliant. The specific entities
providing credit card processing services to USWD have been surveyed and
have active Y2K compliance projects underway. It is USWD's understanding
that these providers are or will be Y2K compliant on or before January 1,
2000. On a broader basis, USWD 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. USWD 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. 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
Net Revenue
Revenue of $144,000 for the first quarter of fiscal 2000 decreased
60% from revenue of $361,000 generated during the first quarter of fiscal
1999 as the Company continued the implementation of its new business
model. As noted in the overview section above, the Company has phased out
its direct offering of wireless credit card processing services and
terminals to merchants and is now marketing WEPS to merchant acquirers
and payment processors. The Company currently has 22 merchant acquirers
or payment processors under contract for WEPS. Billing for the new WEPS
service is minimal at this point since the Company is working on
installing the communications connectivity and integration of WEPS to the
respective payment processors designated under the recent WEPS agreements
with merchant acquirers. 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 revenue from this portfolio accounted for
approximately $85,000 of the decrease in services revenue between the two
periods. Product revenues decreased to $99,000 in the current quarter
from $166,000 in the prior period as the Company has begun implementing
its transition from one-time product sales revenues to a recurring
revenue model based on WEPS sales.
Gross (Loss) Profit
The Company recorded a gross loss of $30,000 in the first fiscal
quarter of 2000 compared to a profit of $284,000 in the first quarter of
fiscal 1999. The prior year 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 fiscal 2000 first quarter product
margin of 12% reflects several significantly discounted sales of USWD
terminals to resellers, including a special promotion on approximately 56
units utilized at a major public event. The services costs include
ongoing communications costs associated with the sale of merchant credit
card portfolio to PMT Services Inc. The Company has elected to continue
the services it provides to the merchants while it has been in discussion
with the buyer regarding the potential signing of a WEPS agreement
covering the underlying merchants. The imbalance in the services revenue
and cost structure is also impacted by initialization and transaction
costs for new or existing terminals that are not yet processing through
WEPS. The Company is working on these two issues and expects resolution
in the near term. Efforts have been underway to eliminate excess CDPD
addresses from the CDPD carrying cost. The Company expects the service
margins to improve as WEPS billing becomes a more predominant component
of the services offering in the future.
11
Operating Expenses
Selling, general and administrative expense decreased from
$2,476,000 in the first quarter of fiscal 1999 to $1,118,000 in the first
quarter of fiscal 2000. The decrease of $1,358,000 was primarily
attributable to a $732,000 decrease in non-cash consulting expense based
on the valuation of stock issued to the Company's investor relations firm
in the first quarter of each of the two years. A significant decrease in
headcount, related to the change in the business model, from 53 in
September 1998 to 23 in September 1999 resulted in decreased salary,
commission, benefit and severance expense of $329,000. Other operating
expenses categories resulted in a net decrease of $297,000 due primarily
to decreased travel, communication and support expense related to the
decrease in headcount, particularly in the sales organization, and a
decrease in professional services expense. The prior year amount included
a quarterly adjustment for a variable stock option resulting in a
$266,000 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 that
quarter.
Research and development expenses increased from $80,000 in the
first fiscal quarter of 1999 to $191,000 in the first quarter of 2000.
This increase was due to an increase in headcount and full time
consultants focused on the implementation of WEPS.
Interest Expense, Other Income and Preferred Stock Dividends
Interest expense of $221,000 in the quarter ended September 30,
1999 includes interest on the 6% Debentures, a $225,000 note payable and
$187,000 accrued for late effective registration penalties on the 6%
Debentures and Series B Preferred Stock. Interest expense of $257,000 for
the quarter ended September 30, 1998 included a $117,000 non-cash charge
to accrete a portion of the "in-the-money" conversion feature of the July
1998 6% Debenture financing and a $53,000 charge for the value of a
warrant issued in conjunction with a bridge financing from RBB Bank. The
balance of the interest expense was related to interest on the 6%
Debentures and other notes payable.
Other income of $128,000 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 preferred stock dividend for the first fiscal quarter of 2000
includes $778,000 to accrete the value of the preferred stock up to its
redemption value by the date at which mandatory redemption is available
to the holders. The balance of the preferred stock dividend amount
represents Series A and Series B Preferred Stock dividends that were
accrued but not paid in the first fiscal quarter. The prior year's amount
includes $113,000 related to the partial redemption of Series A Preferred
Stock plus accrued dividends.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
USWD continues to face significant challenges due to its financial
condition and lack of liquidity. While management is optimistic with its
medium and long term opportunities, USWD is constrained by its immediate
financial condition and requirement for increased liquidity. USWD has an
accumulated deficit of approximately $37 million since inception to
September 30, 1999, with a working capital deficit of approximately
$3,391,000, versus a deficit of $3,389,000 at year-end June 30, 1999. The
September 30, 1999 working capital deficit includes $1,800,000 of 6%
Convertible Debentures classified as short-term borrowings. The Company
has continued to operate at a loss subsequent to September 30, 1999.
The Company has defaulted on certain obligations which, among other
things, as of October 10, 1999 entitled the holders of the Company's
Series B Preferred Stock and 6% Debentures to redeem those securities for
cash plus applicable penalties, interest and dividends. The holders of
the Series B Preferred Stock may require USWD to redeem the shares of the
Series B Preferred Stock for $1.25 per share plus accrued penalties and
dividends (approximately $2,600,000 as of September 30, 1999). Also
holders of the 6% Debentures may require the Company to redeem the
$1,800,000 face amount at 120% of the face value plus accrued penalties
and interest (approximately $2,300,000 as of September 30, 1999).
12
The Company has financed its recent operations through borrowings
and private sales of securities. In fiscal 1999, USWD's cash flows from
financing activities were $4.5 million as compared to $4.5 million in
fiscal 1998. The fiscal 1999 financing activities consisted primarily of
$1.8 million from the sale of 6% Convertible Subordinated Debentures,
$3.0 million from the issuance of notes payable ($2.5 million
subsequently converted to common stock) $1.0 million from the sale of
Series B Cumulative Redeemable Convertible Preferred Stock and payment of
a related bridge loan, and the payment of $1.0 million for the redemption
of 833,000 shares of Series A Preferred Stock. The fiscal 1998 financing
activities consisted primarily of $1.2 million from the sale of common
stock repurchase rights, $2.6 million net proceeds from the issuance of
debt and $664,000 for the issuance of common stock. In fiscal 1999 and
1998, USWD used $3.9 and $3.7 million in cash from operating activities,
respectively. Cash used in operations principally resulted from net
losses partially offset by non-cash charges.
Most recently, the Company has financed its operations through the
private sale of units consisting of restricted common stock and common
stock purchase warrants. The Company received proceeds of $450,000 in the
fourth quarter of fiscal 1999 and $475,000 through November 1, 1999 of
the second quarter. Through November 1, 1999, the Company had issued
approximately 1,500,000 shares of common stock and 300,000 common stock
purchase warrants in this financing. USWD is continuing to work with key
vendors on payables. USWD 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.
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 no later than June 19, 1999. The "put" expired
as to all shares no later than 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, which is subject to a final agreement prior to issuance of
the shares. The settlement expense may be adjusted at the date of share
issuance.
ITEM 2 - CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
During the fiscal quarter ended September 30, 1999, the Company
sold or issued the following equity securities without registering the
securities under the Securities Act of 1933, as amended (the "Act").
Between July 30 and September 2, 1999, the Company issued 846,722
restricted shares of common stock and 169,345 common stock purchase
warrants to four private investors in consideration of $550,000. The
warrants are exercisable over a 5-year period at $1.50 per share.
Between July 6 and September 2, 1999, the Company issued 163,306
shares of common stock to one investor pursuant to the conversion of
70,715 shares of Series A Preferred Stock plus accrued dividends.
Between July 15 and July 22, 1999, the Company issued 313,418
shares of common stock to two investors pursuant to the conversion of
$200,000 6% Debentures plus accrued interest.
On September 1, 1999, the Company issued 690,000 shares of common
stock to the Company's public relations firm in consideration of a
management contract effective July 1, 1999.
13
As to each of the foregoing transactions, the Company relied upon
the registration exemption contained in Section 4(2) of the Securities
Act of 1933, as amended (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 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 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 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
September 30, 1999, $188,000 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 has not
been declared effective. The holders of the Series B Preferred Stock may
require USWD to redeem the shares of Series B Preferred Stock for $1.25
per share plus accrued penalties and dividends (approximately $2,600,000
as of September 30, 1999), and holders of the 6% Debentures to redeem the
$1,800,000 face amount at 120% of the face value plus accrued penalties
and interest (approximately $2,300,000 as of September 30, 1999).
ITEM 5 - OTHER INFORMATION
On August 5, 1999, the Company's Board of Directors authorized the
issuance of non-qualified stock options to purchase up to 90,000 shares
of the Company's common stock to two outside directors of the Company
(45,000 options to each director), under the Company's 1992 Stock Option
Plan. The options have an exercise price of $1.25 per share and are
exercisable in full upon grant. The shares underlying the options were
inadvertently excluded in the calculation of security ownership as
disclosed in Item 11 of the Company's Annual Report on Form 10-KSB for
the year ended June 30, 1999. With these options included, the Item 11
beneficially owned shares of common stock for these two directors and the
officer/director group are as follows: Alvin Rice - 71,500 shares (less
than 1% of class), Chet Winter - 181,781 shares (1% of class), and all
directors and executive officers as a group - 3,323,043 shares or 15.1%
of class.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required by Item 601 of Regulation S-B
27 Financial Data Schedule
b) Reports on Form 8-K
On July 2, 1999, the Company filed a report on Form 8-K reporting
an event of June 24, 1999. The report contained disclosures under Item 5
- Other Events, relating to the filing of a Post-effective Amendment to
14
Registration Statement on Form SB-2 (SEC File No. 333-52625) originally
declared effective by the SEC on August 7, 1998. Amendment No. 1 was
filed to remove the balance of the unsold shares from registration. Also,
the Company reported the filing of a Registration Statement on Form SB-2
(SEC File No. 333-81897), to register a total of 16,805,920 shares of
common stock for issuance to the holders of its Series A Preferred Stock,
Series B Preferred Stock, 6% Convertible Subordinated Debentures and
various common stock purchase warrants.
On July 22 and 23, 1999, the Company filed two reports on Form 8-K
reporting an event of July 1, 1999. The reports contained disclosures
under Item 5 - Other Events, relating to the sale of a merchant credit
card portfolio. The Company also reported an agreement with Liviakis
Financial Communications, Inc. (LFC), a California based investor
relations and consulting firm, to provide the Company with public
relations and investor relations services through March 15, 2000.
On August 12 and 20, 1999, the Company filed two reports on Form
8-K reporting an event of August 5, 1999. The report contained
disclosures under Item 3 regarding a change in the Company's certifying
accountant.
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: November 11 , 1999 By: \s\ Dean M. Leavitt
------------------ ------------------------------
Chief Executive Officer
November 11, 1999 By: \s\ Robert E. Robichaud
------------------ ------------------------------
Chief Financial Officer
15