SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
Commission file number 0-25680
WAVERIDER COMMUNICATIONS INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 33-0264030
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
255 Consumers Road, Suite 500, Toronto, Ontario M2J 1R4
(Address of principal executive offices and Zip (Postal) Code)
(416) 502-3200
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: July 30, 2003
138,707,863 Common shares, $.001 par value.
Transitional Small Business Disclosure Format: (check one):
Yes _____; No __X__
WAVERIDER COMMUNICATIONS INC.
FORM 10 - QSB
For the Period Ended June 30, 2003
INDEX
Page
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 4-10
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis
or Plan of Operation 11-14
Item 3. Controls and Procedures 15
PART II OTHER INFORMATION 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 5. Other Information 15
Item 6. Reports on Form 8-K 16
Signatures 16
Certifications 17-19
2
PART I. FINANCIAL INFORMATION
WaveRider Communications Inc.
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars)
June 30, December 31,
2003 2002
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 880,255 $ 1,025,604
Accounts receivable, less allowance for doubtful accounts 1,487,740 1,395,970
Inventories 1,081,646 1,230,048
Note receivable 19,813 32,761
Prepaid expenses and other assets 87,992 75,362
------------ ------------
Current assets 3,557,446 3,759,745
Property, plant and equipment, net 603,522 885,475
------------ ------------
$ 4,160,968 $ 4,645,220
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,497,318 $ 2,708,268
Deferred revenue 380,151 259,235
Current portion of obligation under capital lease 16,077 12,094
------------ ------------
Current liabilities 2,893,546 2,979,597
Obligation under capital lease 12,490 6,004
------------ ------------
Total liabilities 2,906,036 2,985,601
------------ ------------
Commitments and Contingencies (Note 8)
Shareholders' equity:
Preferred Stock, $0.01 par value per share:
issued and outstanding 5,800 at June 30, 2003 and 16,700 shares
at December 31, 2002 58 167
Common Stock, $0.001 par value per share:
issued and outstanding - 129,957,864 shares at June 30, 2003
116,755,119 shares at December 31, 2002 129,958 116,755
Additional paid-in capital 72,407,943 72,397,489
Other equity 12,600,831 12,621,831
Deferred compensation (62,076) (173,260)
Accumulated other comprehensive loss (243,525) (102,371)
Accumulated deficit (83,578,257) (83,200,992)
------------ ------------
Total shareholders' equity 1,254,932 1,659,619
------------ ------------
$ 4,160,968 $ 4,645,220
============ ============
See accompanying notes to financial statements.
3
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF LOSS, DEFICIT AND COMPREHENSIVE LOSS
(in U.S. dollars)
Three Months ended Six Months ended
June 30 June 30 June 30 June 30
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
CONSOLIDATED STATEMENT OF LOSS
REVENUE
Product revenue $ 2,686,066 $ 2,295,940 $ 5,559,612 $ 3,862,875
Service revenue 450,088 327,489 754,903 780,312
------------- ------------- ------------- -------------
3,136,154 2,344,867 6,314,515 3,957,855
COST OF REVENUE
Product revenue $ 1,671,957 $ 1,599,025 $ 3,556,441 $ 2,685,638
Service revenue 99,501 86,227 218,305 151,347
------------- ------------- ------------- -------------
1,771,458 1,685,252 3,774,745 2,836,985
------------- ------------- ------------- -------------
GROSS MARGIN 1,364,696 659,615 2,539,770 1,120,870
------------- ------------- ------------- -------------
EXPENSES
Selling, general and administration 1,101,505 1,399,941 2,239,075 3,661,992
Employee stock based compensation 48,185 (43,500) 97,184 160,500
Research and development 275,992 479,657 432,595 815,765
Depreciation and amortization 117,646 282,672 265,401 553,092
Foreign exchange gain (80,374) (67,487) (151,197) (97,256)
Bad debt expense -- 13,731 -- 29,495
Interest expense 22,374 22,347 37,653 359,229
Interest income (1,860) (13,617) (3,675) (14,495)
------------- ------------- ------------- -------------
1,483,468 2,073,744 2,917,035 5,468,322
------------- ------------- ------------- -------------
NET LOSS $ (118,772) $ (1,414,129) $ (377,265) $ (4,347,452)
============= ============= ============= =============
BASIC AND FULLY DILUTED LOSS PER SHARE $ (0.001) $ (0.013) $ (0.003) $ (0.046)
============= ============= ============= =============
Weighted Average Number of Common Shares 125,011,540 110,182,830 120,991,298 94,826,431
============= ============= ============= =============
CONSOLIDATED STATEMENT OF DEFICIT
OPENING DEFICIT (83,459,485) (74,884,613) (83,200,992) (71,951,290)
NET LOSS FOR THE PERIOD (118,772) (1,414,129) (377,265) (4,347,452)
------------- ------------- ------------- -------------
CLOSING DEFICIT $ (83,578,257) $ (76,298,742) $ (83,578,257) $ (76,298,742)
============= ============= ============= =============
CONSOLIDATED STATEMENT OF ACCUMULATED COMPREHENSIVE INCOME
NET LOSS FOR THE PERIOD (118,772) (1,414,129) (377,265) (4,347,452)
OTHER COMPREHENSIVE INCOME/(LOSS)
Cumulative translation adjustment (91,919) 28,629 (141,154) 50,433
------------- ------------- ------------- -------------
COMPREHENSIVE LOSS $ (210,691) $ (1,385,500) $ (518,419) $ (4,297,019)
============= ============= ============= =============
See accompanying notes to financial statements.
4
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. dollars)
Six months ended June 30
2003 2002
----------- -----------
(Unaudited) (Unaudited)
OPERATIONS
Net loss $ (377,265) $(4,347,452)
Items not involving cash
Depreciation and amortization 265,401 553,092
Unrealized foreign exchange loss (gain) (164,346) 50,410
Compensatory stock options 97,184 --
Non-cash financing charges -- 263,607
Charges for shares released from escrow - 710,813
Compensatory shares released from escrow to employee -- 160,500
Non-employee stock options -- 21,569
Bad debt expense -- 29,495
Net changes in non-cash working capital items (86,937) (471,652)
----------- -----------
Net cash used in operating activities (265,963) (3,029,618)
----------- -----------
INVESTING
Disposal (Acquisition) of property, plant and equipment (19,252) 4,346
----------- -----------
Net cash provided by (used in) investing activities (19,252) 4,346
----------- -----------
FINANCING
Proceeds from sale of shares net of issue fees 16,548 4,357,962
Payment of consideration payable on business combination -- (105,256)
Repayment of promissory notes -- (432,500)
Payments on capital lease obligations (796) (64,471)
----------- -----------
Net cash provided by financing activities 15,752 3,755,735
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 124,114 (20,368)
----------- -----------
Increase (decrease) in cash and cash equivalents (145,349) 710,095
Cash and cash equivalents, beginning of period 1,025,604 2,244,625
----------- -----------
Cash and cash equivalents, end of period $ 880,255 $ 2,954,720
=========== ===========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest 1,136 22,414
Repayment premium on redemption of promissory notes -- 68,775
In the quarter ending June 30, 2003, the Company acquired equipment with a cost
of $8,101 under a capital lease obligation.
See accompanying notes to financial statements.
5
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and December 31, 2002
1. BASIS OF PRESENTATION
The Financial statements for the three and six months ended June 30, 2003 and
2002 include, in the opinion of Management, all adjustments (which consist only
of normal recurring adjustments) necessary to present fairly the results of
operations for such periods. Results of operations for the three and six months
ended June 30, 2003, are not necessarily indicative of results of operations
which will be realized for the year ending December 31, 2003. The financial
statements should be read in conjunction with the Company's Form 10-K for the
year ended December 31, 2002.
2. NET LOSS PER SHARE
Basic loss per share represents loss applicable to common stock divided by the
weighted average number of common shares outstanding during the period. Diluted
loss per share reflects additional common shares that would have been
outstanding if potential dilutive common shares had been issued, as well as any
adjustment to income that would result from the assumed conversion. Potential
common shares that may be issued by the Company relate to outstanding stock
options and warrants (determined using the treasury stock method) and preferred
stock. For all periods presented, options, warrants and preferred stock were
anti-dilutive and excluded from the net loss per share computation.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FASB FIN 46, Consolidation of Variable Interest Entities, requires consolidation
where there is a controlling financial interest in a variable interest entity,
previously referred to as a special-purpose entity. FIN 46 became effective
during the second quarter of our fiscal year 2003. There was no impact to our
financial position or results of operations.
4. STOCK OPTIONS
The Company applies SFAS No. 123, together with APB No. 25 as permitted under
SFAS No. 123, in accounting for its stock option plans. Accordingly, the Company
uses the intrinsic value method to measure the costs associated with the
granting of stock options to employees and this cost is accounted for as
compensation expense in the consolidated statements of loss over the option
vesting period or upon meeting certain performance criteria[smg4]. In accordance
with SFAS No. 123, the Company discloses the fair values of stock options issued
to employees. Stock options issued to outside consultants are valued at their
fair value and charged to the consolidated statements of loss in the period in
which the services are rendered. Fair values of stock options are determined
using the Black-Scholes option-pricing model.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", to the stock-based employee
compensation:
Three Months ended Six Months ended
June 30 June 30 June 30 June 30
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- -------------- ----------- -------------
Net loss, as reported $ (118,772) $ (1,414,129) $ (377,265) $ (4,347,452)
Add: Stock-based employee compensation
expense included in reported net loss 48,185 (43,500) 97,184 160,500
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards (253,397) (627,695) (630,978) (963,199)
------------ ------------- ---------- ------------
Pro forma net loss $ (323,984) $ (2,085,324) $ (911,059) $ (5,150,151)
============ ============= ========== ============
Basic and fully diluted loss per share,
as reported $ (0.001) $ (0.013) $ (0.003) $ (0.046)
============ ============= ========== ============
Basic and fully diluted loss per share,
pro forma $ (0.003) $ (0.019) $ (0.008) $ (0.054)
============ ============= ========== ============
6
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and December 31, 2002
5. ACCOUNTS RECEIVABLE
June December
30, 2003 31, 2002
------------ -----------
(Unaudited) (Audited)
Accounts receivable - trade $ 1,625,523 $ 1,494,622
Other receivables 13,956 113,572
Allowance for doubtful accounts (151,739) (212,224)
------------ -----------
$ 1,487,740 $ 1,395,970
============ ===========
6. INVENTORIES
June December
30, 2003 31, 2002
------------ -----------
(Unaudited) (Audited)
Finished products $ 1,050,154 $ 1,258,620
Raw materials 63,250 22,043
Valuation allowance (31,758) (50,615)
------------ -----------
$ 1,081,646 $ 1,230,048
============ ===========
7. SHAREHOLDERS' EQUITY
(a) Conversion of Preferred Stock - During the second quarter of 2003, 9,900
shares of the Series D 5% convertible preferred stock were converted to
11,867,524 shares of common stock.
(b) Exercise of Options - During the second quarter of 2003, employees exercised
options to purchase 58,333 shares of common stock for cash considerations of
$1,833.
(c) Purchase under Employee Stock Purchase Plan - During the second quarter of
2003, employees purchased 187,456 shares of common stock for cash consideration
of $14,340.
8. COMMITMENTS AND CONTINGENCIES
Employee Stock Option Agreements
The Company has four existing employee stock option plans -- the Employee Stock
Option (1997) Plan, the 1999 Incentive and Nonqualified Stock Option Plan, the
Employee Stock Option (2000) Plan and the Employee Stock Option (2002) Plan
which have authorized shares of 6,250,000, 3,000,000, 6,000,000 and 6,000,000
shares, respectively. Through June 30, 2003, the Company had awarded, net of
forfeitures, 5,828,617 options under the Employee Stock Option (1997) Plan,
2,262,550 options under the 1999 Incentive and Nonqualified Stock Option Plan,
4,424,674 options under the Employee Stock Option (2000) Plan and 2,375,000
options under the Employee Stock Option (2002) Plan.
7
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and December 31, 2002
Employee Stock Purchase Agreement
On July 7, 2000, the shareholders approved the establishment of the Company's
Employee Stock Purchase (2000) Plan, which has 3,000,000 authorized shares.
Under the terms of the plan, employees are eligible to purchase shares of the
Company's common stock at 85% of the lower of the closing price at the beginning
or ending date of each period. To the end of the second quarter of 2003, 757,579
shares of common stock have been purchased under the Plan. The offerings under
the plan run for six-month periods commencing May 1 and November 1.
Lease Commitments
During the second quarter of 2003, the Company extended its lease on its
principal office location for an additional five years until May 31, 2009. The
minimum monthly rent for the principal lease has been reduced to $7,500 per
month until February 2006 and $10,500 from March 2006 until May 2009. Prior to
the extension, the Company was committed to paying $12,900 in minimum monthly
rent for the principal lease through May 2004.
Litigation
As at June 30, 2003, there are no litigation matters outstanding against the
Company.
9. SEGMENT INFORMATION
Industry Segments
The Company operates in one industry segment: wireless data communications
products.
Geographic Segments
The Company operated in the following geographic segments;
Three Months ended Six Months ended
June 30 June 30
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue by Region (Unaudited) (Unaudited) (Unaudited) (Unaudited)
United States $ 2,117,240 $ 1,279,058 $ 4,454,243 $ 1,987,440
Australia 572,145 534,882 1,120,370 977,089
Canada 312,473 254,774 441,614 350,266
Rest of World 134,296 276,153 298,288 643,060
------------ ------------ ------------ ------------
$ 3,136,154 $ 2,344,867 $ 6,314,515 $ 3,957,855
============ ============ ============ ============
Six months ended June 30, 2003 (Unaudited)
Canada Australia Total
----------- ---------- -----------
Property, plant and equipment $ 498,383 $ 105,139 $ 603,522
=========== ========== ===========
Year ended December 31, 2002 (Audited)
Canada Australia Total
----------- ---------- -----------
Property, plant and equipment $ 790,009 $ 95,466 $ 885,475
=========== ========== ===========
8
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and December 31, 2002
10. COMPARATIVE FIGURES
Certain comparative amounts have been reclassified, where appropriate, to
correspond with the current period's presentation.
11. SUBSEQUENT EVENTS
(a) Effective July 2, 2003, the Company acquired Avendo Wireless Inc., a
privately-held technology developer located in Mississauga, Ontario, Canada. The
Company undertook this acquisition to gain control of Avendo's assets, which
include cash, net receivable, in-process wireless technologies and experienced
research and development team to aid in expanding and enhancing WaveRider's
non-line-of-sight wireless broadband products[smg6].
Avendo Wireless designs and develops advanced fixed broadband wireless
technology. Avendo's technology, when completed, is targeted to significantly
improve spectral efficiency resulting in the ability to operate in non line of
sight environments thereby providing the reliability needed to meet the needs of
leading equipment vendors and their customers. The ultimate outcome of the
development of this product cannot be determined at this time.
Under the terms of the acquisition, the Company issued 8,749,999 shares of
common stock and 3,000,000 common stock purchase warrants in exchange for all of
the issued and outstanding shares of Avendo and all outstanding long term debt.
The warrants are exercisable at $0.41per share for a five year period and
include a net share settlement feature. In addition, the Company issued to the
employees and advisors to Avendo 863,000 employee stock options, with an
exercise price of $0.39.
The transaction will be accounted for as a purchase and is summarized as
follows:
Cash on hand $ 1,177,420
Other current assets 245,378
Fixed assets 16,235
Current liabilities (64,690)
------------
Net assets received 1,374,343
Expenses incurred on acquisition (100,000)
Goodwill 2,748,583
------------
Total consideration received $ 4,022,926
============
Common stock issued on closing $ 3,412,500
Warrants issued on closing at fair value 416,647
Employee stock options issued on closing at fair value 193,779
------------
Total consideration given $ 4,022,926
============
The cash effect of this transaction is summarized
as follows:
Cash acquired on closing $ 1,177,420
============
9
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and December 31, 2002
Six Months ended June 30,
2003 2002
------------ -------------
Pro forma consolidated revenue $ 6,314,515 $ 3,957,855
============ =============
Pro forma consolidated net loss $ (719,841) $ (5,020,920)
============ =============
Pro forma consolidated basic and
fully diluted loss per share $ (0.006) $ (0.048)
============ =============
(b) On July 14, 2003, the Company issued convertible debentures, at a 6%
discount, in the aggregate principal amount of $1,600,000 to Crescent
International Ltd. and Palisades Master Fund L.P. and received cash proceeds of
$1,504,000, before cash fees of $87,120. The debt is unsecured, has no stated
interest rate and matures in three years. In conjunction with the convertible
debentures, the Company issued Series R warrants to purchase 1,019,108 shares of
common stock at a price of $.4121 per share with a term of five years. Based
upon the relative fair value of the underlying instruments, $1,038,336 of the
total proceeds, net of costs, was allocated to convertible debentures and
$134,459 was allocated to the Series R warrants.
The convertible debentures are initially convertible into shares of common stock
at $0.4318. If, after December 11, 2003, the price of the Company's common stock
is less than $0.5182, upon a request for conversion, the Company, at its option,
may either a) pay cash equal to 120% of the face value of the note or b) issue
conversion shares based on a conversion price equal to 95% of the average of the
lowest three Closing Bid Prices during the 20 Trading Day period immediately
preceding the Conversion Date, as defined in the agreement. The Series R
warrants also have a net share settlement feature. Based on the most beneficial
conversion terms given no changes other than the passage of time, the Company
has determined that there is a beneficial conversion feature equal to $322,937.
This amount has been recorded as additional paid in capital and a reduction in
the carrying amount of the convertible debt and will be amortized to interest
expense over the debt term.
10
ITEM 2.
Management's Discussion and Analysis or Plan of Operation.
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for the quarter ended
June 30, 2003.
Forward-Looking Information.
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of its management as well
as assumptions made by and information currently available to its management.
When used in this report, the words "anticipate", "believe", "estimate",
"expect", "intend", "plan", and similar expressions as they relate to the
Company or its management, are intended to identify forward-looking statements.
These statements reflect management's current view of the Company with respect
to future events and are subject to certain risks, uncertainties and
assumptions. Should any of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this report as anticipated, estimated or expected. The
Company's realization of its business aims could be materially and adversely
affected by any technical or other problems in, or difficulties with, planned
funding and technologies, third party technologies which render the Company's
technologies obsolete, the unavailability of required third party technology
licenses on commercially reasonable terms, the loss of key research and
development personnel, the inability or failure to recruit and retain qualified
research and development personnel, or the adoption of technology standards
which are different from technologies around which the Company's business
ultimately is built. The Company does not intend to update these forward-looking
statements.
Overview
We design, develop, market and support fixed wireless Internet access
products. Our products are designed to deliver efficient, reliable, and
cost-effective solutions; bringing high-speed Internet access to markets around
the world.
We are focused on providing the solution to the "last mile" problem
faced by traditional wired telecommunications services: how to profitably build
out a network that provides the level of services demanded by end users. In
medium to small markets, and in areas of the world with limited or no existing
telecommunications infrastructure, the cost to install or upgrade wired services
to provide the level of access customers expect can be prohibitive.
We believe that our fixed wireless Internet access products are faster
and less expensive to deploy than traditional wired services, with a lower
cost-per-user to install, deploy and manage.
Our wireless network products are designed to operate in the
license-free ISM radio spectrum, which facilitates a more rapid and low-cost
market introduction for service providers than for licensed or hardwire
solutions. Our products utilize direct sequence spectrum or DSS communications,
which ensures reliable, secure, low-interference communications.
Market Environment and Strategic Direction
Over the past three years, the global telecommunications market deteriorated,
reflecting a significant reduction in capital spending by established service
providers and a lack of venture capital for new entrants. This trend is expected
to continue at least throughout 2003. Reasons for this market deterioration
include the economic slowdown in the technology sector, network overcapacity,
customer bankruptcies, network build-out delays and limited capital
availability. As a result, our sales and results of operations have been
significantly adversely affected.
During this prolonged sector downturn, we have concentrated on the things we can
control, such as working closely with our customers to get our products and
services established in a number of markets, significantly reducing our cost
structure, reducing our breakeven revenue level and improving our balance sheet.
However, if capital investment levels continue to decline, or if the
telecommunications market does not improve or improves at a slower pace than we
anticipate, our revenues and profitability will continue to be adversely
affected. In addition, if our sales volume and product mix does not improve, or
we do not continue to realize cost reductions or reduce inventory related
charges, our gross margin percentage may not improve as much as we have
targeted, resulting in lower than expected results of operations.
11
Liquidity and Capital Resources.
The Company has funded its operations for the most part through equity
financing and has had no line of credit or similar credit facility available to
it. The Company's outstanding shares of Common stock, par value $.001 per share,
are traded over-the-counter under the symbol "WAVC.OB" on the OTC Electronic
Bulletin Board by the National Association of Securities Dealers, Inc. The
Company must rely on its ability to raise money through equity financing to
pursue its business endeavors. The majority of funds raised have been allocated
to the development of the WaveRider(r) line of wireless data communications
products and the operations of the Company.
Subsequent to the end of the quarter, the Company issued convertible debentures,
in the aggregate principal amount of $1,600,000, for cash proceeds of
$1,504,000, less cash fees of $87,120. In addition, the Company entered into an
agreement to purchase Avendo Wireless Inc., through the issue of 8,749,999
shares of common stock and 3,000,000 common stock purchase warrants. Upon
acquisition, the Company received cash in the amount of $1,177,420 and other net
assets in the amount of $196,923.
Based on the Company's current plans and projections, Management believes that
the Company has the funds to meet its current and future financial commitments
until it achieves positive cash flows from operations.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments,
including those related to bad debts, inventories, investments, intangible and
other long-lived assets, income taxes, warranty obligations, product returns,
restructuring costs, litigation and contingencies. Management bases its
estimates and judgments on historical experience, current economic and industry
conditions and on various other factors that are believed to be reasonable under
the circumstances. This forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Current Activities
We currently have approximately 50 employees located in our head office
in Toronto, Ontario and our sales offices and subsidiaries in the United States,
Canada and Australia, as well as at our subsidiary, JetStream Internet Services
in Salmon Arm, British Columbia.
The majority of these employees are involved in the design, development
and marketing of our line of wireless data communications products.
12
Results of Operations
Revenue
The following table presents our North American and non-North American
revenues and the approximate percentage of total revenues ($000's):
Three months Six months
ended June 30, ended June 30,
----------------------------- ---------------------------
2003 2002 % Change 2003 2002 % Change
-------- -------- -------- ------- ------- --------
North America $ 2,430 $ 1,534 58.4% $ 4,896 $ 2,338 109.4%
Non-N.A. 706 811 (12.9%) 1,419 1,620 (12.4%)
-------- -------- -------- ------- ------- --------
Total revenues $ 3,136 $ 2,345 33.7% $ 6,315 $ 3,958 59.6%
======== ======== ======== ======= ======= ========
Percentage of total revenue
North America 77.5% 65.4% 77.5% 59.1%
Non-N.A. 22.5% 34.6% 22.5% 40.9%
Total revenue increased 33.7% in Q2 2003 compared to Q2 2002 but
declined 1.3% compared to Q1 2003. The Company's focus on the 900 MHz non-line
of sight LMS product family has allowed it to make strong gains in the North
American market but has limited its potential in a large part of the rest of the
world, where the 900 MHz band is not available on a license exempt basis. The
Company has taken initial steps to access the Caribbean, Latin American and
South American markets, which in most parts do provide license exempt
availability of 900 MHz spectrum, but expects that there will be relatively long
sales cycles in these markets.
During the Q2 2003, the Company entered into a Distribution Agreement in
North America to complement its direct sales endeavors in this market. The
Company expects that over time sales through the distribution channel will
become a significant portion of the Company's revenues.
Total revenue increased 45% in Q2 2002 compared to Q1 2002 but declined
5% compared to Q2 2001. WaveRider increased its focus on North American sales
resulting in significant quarter on quarter growth with the growing acceptance
of the LMS network systems. Revenue in the United States increased 81% in Q2
2002 compared to Q1 2002 and 257% compared to Q2 2001. Revenue outside of North
America showed a marked decline due to the reduction in staff the Company
implemented in Q3 2001 and the loss of sales opportunities in the Middle East.
Gross Margins
The following table presents our gross margin and the percentage of total
revenues ($000's):
Three months Six months
ended June 30, ended June 30,
----------------------------- ---------------------------
2003 2002 % Change 2003 2002 % Change
-------- -------- -------- ------- ------- --------
Gross margin $ 1,365 $ 660 106.8% $ 2,540 $ 1,121 126.6%
Gross margin rate 43.5% 28.1% 40.2% 28.3%
Gross margins in Q2 2003 increased to 43.5% compared to 28.1% of revenue
in Q2 2002 and 37.0% of revenue in Q1 2003. In conjunction with the increase in
quarterly revenue, total gross margin dollars increased 107% compared to Q2 2002
and 16% compared to Q1 2003.
The increase in gross margin percentage and dollars was primarily due to
continued cost reductions in the LMS products and the introduction of the new
cost reduced customer premise unit, the EUM 3003. The Company is actively
involved in continuing to find cost savings, through economies of scale and
product refinement. However, it expects that future reductions will be offset by
volume discounts offered to its customers and competitive pricing pressures. As
such, the Company expects that gross margin percentages will be at or below
current levels over the balance of the fiscal year.
13
Gross Margin declined in Q2 2002 to 28.1% from 28.6% in Q1 2002 and
33.7% in Q2 2001. The declines are the result of the increased focus in North
America where competition has resulted in lower overall pricing.
Expenses
Selling, general and administrative expenses, including stock based
compensation, declined to $1,149,690 from $1,356,441 in Q2 2002 and $1,186,569
in Q1 2003. The decline in Q2 of 2003 was mainly due to the restructuring that
was undertaken in Q4 of 2002 and ongoing tight cost controls. As a result, the
Company has reduced its compensation costs and related staff expenses and
reduced its costs of professional services.
With the receipt of proceeds from the sale of the convertible debentures
in July 2003, the Company intends to increase its spending on sales and
marketing, both within North America and internationally. While the Company
intends to maintain tight cost controls, we believe that tactical spending in
advertising and marketing communications could provide access to additional
markets and potential customers.
Selling, general and administrative expenses, including stock based
compensation, decreased to $1,356,441 in Q2 2002 from $3,516,111 in the
corresponding period of 2001 and from $2,466,050 in Q1 2002. The decrease from
Q1 2002 was the result of: incurring expenses in Q1 2002 in the amount of
$936,382 related to the fair value of escrow shares; recovering $43,500 of these
expenses in Q2 2002 as a result of a reduction in the market price of the
Company's common stock; and, ongoing focus on control of discretionary spending.
The decline from prior year is the result of the significant staff reductions in
Q3 2001 and continued focus on discretionary spending.
As discussed in the Company's 10-K for 2002 and 2001, the Company moved
to a level of sustaining engineering for its NCL and LMS product families, with
Research and Development costs in Q2 2003 amounting to $275,992 compared to
$479,657 in Q2 2002 and Q1 2003 amounting to $156,602.
With the acquisition of Avendo Wireless in July 2003 and the funds
obtained in the acquisition and through the sale of the convertible debentures,
the Company intends to increase its focus on new product research and
development, to complement our continued focus on cost and capability
enhancements to our current product lines.
Research and Development costs in Q2 2002 amounting to $479,657,
compared to $1,322,960 for the corresponding quarter in 2001 and $336,108 in Q1
2002. The reduction was the result of the Company's move to sustaining
engineering and the reduction of both our staff and facilities.
Depreciation and amortization expense declined to $117,646 in Q2 2003
compared to $282,672 in Q2 2002 and $147,755 in Q1 2003. During the last two
years, the Company has withheld spending on new capital assets and does not plan
any major capital acquisitions through the balance of fiscal 2003.
Depreciation and amortization expense declined to $282,672 in Q2 2002
from $854,434 in Q2 2001 and as a result of the change in accounting policy,
which ended the amortization of goodwill effective January 1, 2002.
Foreign exchange gain for the quarter increased to $80,374 from $67,487
in Q2 2002 and $70,823 in Q1 2003. The increase is due to the decline in the
U.S. dollar versus the Canadian and Australian dollars.
Interest expense amounted to $22,374 in Q2 2003 compared to $22,347 in
Q2 2002 and $15,279 in Q1 2003. Included in interest and other expenses in Q1
2002 was $263,607 related to the accretion of the promissory notes. Costs in Q2
2001 were the result of the costs of conversion of the promissory notes issued
in December 2000. With the issuance of the convertible debentures in July 2003,
the Company will incur financial expenses during the second half of 2003 through
the accretion of the beneficial conversion feature included in the debentures.
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Item 3. Controls and Procedures
As of the end of the period covered by this report on Form 10-QSB, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on this evaluation, the
Company's principal executive officer and principal financial officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information required to be included in the Company's
reports filed or submitted under the Securities Exchange Act of 1934.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
After the quarter ended June 30, 2003, on July 2, 2003, pursuant to an
Exchange Agreement, the Company acquired Avendo Wireless Inc., an Ontario
corporation. Under the terms of the agreement, the Company issued 8,749,999
shares of its common stock and warrants to purchase 3,000,000 shares of its
common stock at an exercise price of $0.41 per share in exchange for all of the
outstanding shares of common stock, preferred stock and debentures of Avendo.
These warrants are exercisable for five years. The Company has agreed to
register for resale these shares of common stock. In addition, the Company
issued options to purchase 863,000 shares of its common stock under its Employee
Stock Option (2000) Plan in exchange for all the outstanding options to purchase
shares of common stock of Avendo. This private placement was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
After the quarter ended June 30, 2003, on July 14, 2003, the Company
executed a Securities Purchase Agreement with Crescent International Ltd. and
Palisades Master Fund L.P. for the sale by the Company of $1,600,000 in
principal amount of convertible debentures for $1,504,000. The debentures
convert into common stock with a conversion price of $0.4318. The conversion
price is subject to adjustment if the average closing price of the common stock
of the Company is below $0.5182 for each of the 20 consecutive trading days
before the conversion date. In such a case, upon notification of conversion, the
Company has the option of issuing shares of common stock based on a conversion
price equal to 95% of the average of the lowest three closing prices during such
20 day period or paying cash equal to 120% of the principal amount being
converted. Under certain circumstances, the Company has the option to redeem all
of the debentures for cash. The Company also issued common stock purchase
warrants to purchase 1,019,108 shares of common stock at an exercise price of
$0.4121 per share. These warrants are exercisable for 5 years. The Company will
file a registration statement for the resale of the common stock upon conversion
of the debentures and exercise of the warrants. The net proceeds of this
offering will be used for general working capital purposes. In conjunction with
the transaction, the Company paid GreenLight (Switzerland) SA fees of $45,120
and legal costs of Crescent in the amount of $10,000. This private placement was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
Item 5. Other Information
Certification Under Sarbanes-Oxley Act
Our chief executive officer and chief financial officer have furnished to the
SEC the certification with respect to this Report that is required by Section
906 of the Sarbanes-Oxley Act of 2002.
15
Item 6. Exhibits and Reports on Form 8-K
Number Description
- ------ -----------
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Signatures:
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized,
WaveRider Communications Inc.
Date: July 31, 2003 /s/ D. Bruce Sinclair
-------------------------------
D. Bruce Sinclair
Chief Executive Officer
/s/ T. Scott Worthington
-------------------------------
T. Scott Worthington
Vice President and Chief Financial Officer
16