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 SEPTEMBER 30, 2004
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)
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 requirement for the past 90 days.
Yes __X__; No _____
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:
November 10, 2004: 15,691,488 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 September 30, 2004
INDEX
Page
----
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-11
Consolidated Balance Sheets 3
Consolidated Statements of Loss, Deficit and Comprehensive Loss 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis
or Plan of Operation 12-17
Item 3. Controls and Procedures 17
PART II OTHER INFORMATION 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits 18
Signatures 18
Certifications 19-21
PART I. FINANCIAL INFORMATION
WaveRider Communications Inc.
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars)
September 30, December 31,
2004 2003
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,051,290 $ 1,843,135
Restricted cash - 232,125
Accounts receivable, less allowance for doubtful accounts 1,408,484 1,921,975
Inventories 1,040,371 966,433
Note receivable - 20,698
Prepaid expenses and other assets 131,570 92,600
-------------------------------
Current assets 3,631,715 5,076,966
Property, plant and equipment, net 332,548 407,489
-------------------------------
$ 3,964,263 $ 5,484,455
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 2,142,544 $ 2,329,938
Deferred revenue 370,454 440,190
Current portion of obligation under capital lease 1,233 10,458
-------------------------------
Current liabilities 2,514,231 2,780,586
Convertible debentures 1,463,863 772,920
Obligation under capital lease 3,528 4,155
-------------------------------
Total liabilities 3,981,622 3,557,661
-------------------------------
Commitments and Contingencies (Note 10)
Shareholders' equity (deficit):
Preferred Stock, $0.01 par value per share:
issued and outstanding Nil shares at September 30, 2004 and
December 31, 2003 - -
Common Stock, $0.001 par value per share:
issued and outstanding - 15,691,488 shares at September 30, 2004
14,429,409 shares at December 31, 2003 15,691 14,429
Additional paid-in capital 88,730,869 77,725,383
Other equity 5,876,941 12,754,517
Accumulated other comprehensive loss (275,969) (305,236)
Accumulated deficit (94,364,891) (88,262,299)
-------------------------------
Total shareholders' equity (deficit) (17,359) 1,926,794
-------------------------------
$ 3,964,263 $ 5,484,455
===============================
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 Nine Months ended
September 30 September 30 September 30 September 30
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------------------------------------------------------------
CONSOLIDATED STATEMENT OF LOSS
REVENUE
Product revenue $ 2,271,435 $ 3,169,644 $ 5,925,002 $ 8,729,256
Service revenue 397,784 364,420 1,462,954 1,119,323
-------------- ------------ -------------- ------------
2,669,219 3,534,064 7,387,956 9,848,579
-------------- ------------ -------------- ------------
COST OF REVENUE
Product revenue 1,471,573 2,041,844 4,119,366 5,598,285
Service revenue 172,830 170,002 774,586 388,306
-------------- ------------ -------------- ------------
1,644,403 2,211,846 4,893,952 5,986,591
-------------- ------------ -------------- -----------
GROSS MARGIN 1,024,816 1,322,218 2,494,004 3,861,988
-------------- ------------ -------------- ------------
EXPENSES
Selling, general and administration 1,121,693 1,326,894 3,871,484 3,663,153
Research and development 521,436 450,870 1,376,230 883,465
Depreciation and amortization 53,364 119,173 242,087 384,573
Bad debt expense 18,975 1,256 35,715 1,256
-------------- ------------ -------------- ------------
1,715,468 1,898,193 5,525,516 4,932,447
-------------- ------------ -------------- ------------
LOSS FROM OPERATIONS (690,652) (575,975) (3,031,512) (1,070,459)
-------------- ------------ -------------- ------------
NON-OPERATING EXPENSES (INCOME)
Interest expense 1,215,270 403,721 2,891,669 441,374
Foreign exchange loss (gain) 32,345 (12,155) 182,442 (163,352)
Interest income (412) (5,952) (3,031) (9,627)
-------------- ------------ -------------- ------------
1,247,203 385,614 3,071,080 268,395
-------------- ------------ -------------- ------------
NET LOSS $ (1,937,855) $ (961,589) $ (6,102,592) $ (1,338,854)
============== ============ ============= ============
BASIC AND FULLY DILUTED LOSS PER SHARE $ (0.13) $ (0.07) $ (0.41) $ (0.11)
============== ============ ============== ============
Weighted Average Number of Common Shares 15,165,678 13,881,367 14,836,601 12,698,474
============== ============ ============== ============
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF DEFICIT
OPENING DEFICIT (92,427,036) (83,578,257) (88,262,299) (83,200,992)
NET LOSS FOR THE PERIOD (1,937,855) (961,589) (6,102,592) (1,338,854)
-------------- ------------ -------------- ------------
CLOSING DEFICIT $ (94,364,891) $(84,539,846) $ (94,364,891) $(84,539,846)
============== ============ ============== ============
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NET LOSS FOR THE PERIOD (1,937,855) (961,589) (6,102,592) (1,338,854)
OTHER COMPREHENSIVE INCOME/(LOSS)
Cumulative translation adjustment (34,182) (17,304) 29,267 (158,458)
--------------- ------------ -------------- ------------
COMPREHENSIVE LOSS $ (1,972,037) $ (978,893) $ (6,073,325) $ (1,497,312)
============= ============ ============== ============
See accompanying notes to financial statements.
4
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. dollars)
Nine months ended September 30
2004 2003
------------------------------------
(Unaudited) (Unaudited)
OPERATIONS
Net loss $ (6,102,592) $ (1,338,854)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 242,087 384,573
Unrealized foreign exchange loss (gain) 158,174 (183,866)
Compensatory stock options - 143,741
Non-cash financing charges 2,863,590 385,226
Gain on disposal of fixed assets (9,428) -
Bad debt expense 35,715 1,256
Net changes in working capital items 370,625 432,734
-----------------------------------
Net cash used in operating activities (2,441,829) (175,190)
------------------------------------
INVESTING
Cash received on acquisition of Avendo Wireless Inc. - 1,177,420
Acquisition of property, plant and equipment (161,324) (34,733)
------------------------------------
Net cash provided by (used in) investing activities (161,324) 1,142,687
------------------------------------
FINANCING
Proceeds from sale of shares net of issue fees 30,796 18,770
Proceeds from sale of convertible debentures net of issue fees 1,900,000 1,416,880
Proceeds from notes receivable 20,698 -
Payments on capital lease obligations (9,644) (1,240)
------------------------------------
Net cash provided by financing activities 1,941,850 1,434,410
-----------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (130,542) 147,063
-----------------------------------
Increase (decrease) in cash and cash equivalents (791,845) 2,548,970
Cash and cash equivalents, beginning of period 1,843,135 1,025,604
-----------------------------------
Cash and cash equivalents, end of period $ 1,051,290 $ 3,574,574
===================================
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,292 $ 3,064
Non-cash investing and financing activities
Issuance of 8,749,999 shares of common stock, 3,000,000 common stock purchase
warrants and 863,000 common stock options in connection with business combination - 2,845,506
Acquisition (disposal) of equipment under capital lease - 8,101
See accompanying notes to financial statements.
5
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (unaudited) and December 31, 2003 (audited)
1. GOING CONCERN
These consolidated financial statements are prepared on a going-concern
basis, which assumes that WaveRider Communications Inc. (the "Company")
will realize its assets and discharge its liabilities in the normal
course of business. The Company incurred a net loss of $6,102,592 for
the nine months ended September 30, 2004 (2003 - $1,338,854) and
reported an accumulated deficit at that date of $94,364,891 (2003 -
$84,539,846). In addition, the requirements to continue investing in
research and development activities to meet the Company's growth
objectives, without assurance of broad commercial acceptance of the
Company's products, lend significant doubt as to the ability of the
Company to continue normal business operations.
While the Company has a plan that it believes will allow it to achieve
profitability and cash flow positive operations it does intend to seek
additional working capital financing. If the Company fails to achieve
positive cash flow in the near term, the Company does not presently
have, in the absence of further financing, adequate cash to fund
ongoing operations. In the past, the Company has obtained financing
primarily through the sale of convertible securities. If the Company is
unable to either achieve its planned cash flow positive operations and
profitability or obtain significant additional financing, it will, in
all likelihood, be obliged to seek protection under the bankruptcy laws
in which event, the Company believes it is unlikely that its common
stock will have any value.
The ability of the Company to continue as a going concern is dependent
upon it achieving and maintaining profitable and cash flow positive
operations or securing additional external funding to meet its
obligations as they come due. Should the Company be unable to continue
as a going concern, assets and liabilities would require restatement on
a liquidation basis which would differ materially from the going
concern basis.
2. BASIS OF PRESENTATION
The financial statements for the three and nine months ended September
30, 2004 and 2003 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 nine months ended September 30,
2004, are not necessarily indicative of results of operations which
will be realized for the year ending December 31, 2004. The financial
statements should be read in conjunction with the Company's Form 10-KSB
for the year ended December 31, 2003.
On June 17, 2004, our directors approved a 1-for-10 reverse stock split
of our common stock, based on shareholder approval on September 4,
2003. The reverse stock split became effective on July 1, 2004. All
common stock information presented herein has been retroactively
restated to reflect the reverse stock split.
3. 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. Potential common shares that may be issued by the Company
relate to outstanding stock options and warrants (determined using the
treasury stock method) and convertible debentures. For all periods
presented, options, warrants and convertible debentures were
anti-dilutive and excluded from the net loss per share computation. As
a result, diluted loss per share is the same as basic loss per share.
4. ACQUISITION OF SUBSIDIARY
Effective July 2, 2003, the Company acquired Avendo Wireless Inc.
("Avendo"), a privately-held technology developer located in
Mississauga, Ontario, Canada.
6
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (unaudited) and December 31, 2003 (audited)
The pro forma effect of this transaction to reflect the acquisition as
having occurred on January 1, 2003, for the nine month period ended
September 30, 2003, is summarized as follows:
Pro forma consolidated revenue $ 9,848,579
============
Pro forma consolidated net loss $ (1,681,431)
============
Pro forma consolidated basic and diluted loss per share $ (0.13)
============
5. 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. 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 Nine Months ended
September 30 September 30 September 30 September 30
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------------------------------------------------------
Net loss, as reported $ (1,937,855) $ (961,589) $ (6,102,592) (1,338,854)
Add: Stock-based employee compensation
expense included in reported net loss - 46,557 - 143,741
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards (52,054) (207,535) (193,678) (838,513)
---------------------------------------------------------------
Pro forma net loss $ (1,989,909) $ (1,122,567) $ (6,296,270) $ (2,033,626)
===============================================================
Basic and diluted loss per share,
as reported $ (0.13) $ (0.07) $ (0.41) $ (0.11)
===============================================================
Basic and diluted loss per share,
pro forma $ (0.13) $ (0.08) $ (0.42) $ (0.16)
===============================================================
6. ACCOUNTS RECEIVABLE
September December
30, 2004 31, 2003
(Unaudited) (Audited)
-------------------------
Accounts receivable - trade $ 1,580,189 $ 1,925,336
Scientific research tax credit receivable - 215,966
Other receivables 35,667 23,739
Allowance for doubtful accounts (207,372) (243,066)
-------------------------
$ 1,408,484 $ 1,921,975
=========================
7
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (unaudited) and December 31, 2003 (audited)
7. INVENTORIES
September December
30, 2004 31, 2003
(Unaudited) (Audited)
-----------------------------
Finished products $ 1,263,844 $ 1,306,580
Raw materials 362,631 36,330
Valuation allowance (586,104) (376,477)
-----------------------------
$ 1,040,371 $ 966,433,
============================
8. CONVERTIBLE DEBENTURES
On April 23, 2004, the Company issued convertible debentures, at a 6%
discount, in the aggregate principal amount of $2,125,000 to Crescent
International Ltd. and Palisades Master Fund and received cash proceeds
of $2,000,000, before cash fees of $100,000. The debt is unsecured, has
no stated interest rate and matures in three years. In conjunction with
the convertible debentures, the Company issued Series S warrants to
purchase 268,715 shares of common stock at a price of $2.076 per share
with a term of five years. Based upon the relative fair value of the
underlying instruments, $1,710,988 of the total proceeds, net of costs,
was allocated to convertible debentures and $179,012 was allocated to
the Series S warrants.
The convertible debentures are initially convertible into shares of
common stock at $2.175. If, after September 23, 2004, the price of the
Company's common stock is less than $2.61, 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 93% 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
S 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 $474,377. 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.
In conjunction with this financing, certain anti-dilution provisions in
the Company's convertible debentures, issued July 14, 2003, and Series
R warrants were triggered. As a result, the set conversion price of the
convertible debentures was reset from $4.318 to $2.175 and the exercise
price of the Series R warrants was reset from $4.121 to $2.076. The
reset of the July 14, 2003 convertible debenture resulted in an
increase in the beneficial conversion feature in the amount of
$444,283. 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 remaining debt term. The
reset of the exercise price of the warrant resulted in an increase in
the fair value of the warrant, in the amount of $20,454.
During the quarter ended September 30, 2004, convertible debentures in
an aggregate nominal value of $212,279 were converted to 626,700 shares
of common stock. As a result of a decline in the conversion price from
the date of issue, the Company determined that there was an additional
beneficial conversion feature in the amount of $1,072,146. This amount
was recorded as other equity and as a reduction in the carrying amount
of the convertible debt. Upon conversion, an amount of $1,119,534,
being the prorated portion of the original beneficial conversion
feature amount and the additional beneficial conversion feature amount,
was transferred from other equity to paid in capital and common shares.
During the quarter ended June 30, 2004, convertible debentures in an
aggregate nominal value of $412,500 were converted to 360,663 shares of
common stock. As a result of a decline in the conversion price from the
date of issue, the Company determined that there was an additional
beneficial conversion feature in the amount of $464,148. This amount
was recorded as other equity and as a reduction in the carrying amount
of the convertible debt. Upon conversion, an amount of $554,093, being
the prorated portion of the original beneficial conversion feature
amount and the additional beneficial conversion feature amount, was
transferred from other equity to paid in capital and common shares.
8
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (unaudited) and December 31, 2003 (audited)
During the quarter ended March 31, 2004, convertible debentures in an
aggregate nominal value of $500,000 were converted to 216,550 shares of
common stock. As a result of a decline in the conversion price from the
date of issue, the Company determined that there was an additional
beneficial conversion feature in the amount of $318,229. This amount
was recorded as other equity and as a reduction in the carrying amount
of the convertible debt. Upon conversion, an amount of $419,147, being
the prorated portion of the original beneficial conversion feature
amount and the additional beneficial conversion feature amount, was
transferred from other equity to paid in capital and common shares.
During the three and nine months ended September 30, 2004, $1,206,997
and $2,863,590, respectively, in non-cash financing expenses were
charged to the statement of loss. These expenses included those
relating to accretion of the convertible debentures, the write-off of
the original and additional beneficial feature related to the converted
debentures and the amortization of deferred financing expenses.
9. SHAREHOLDERS' EQUITY
a) Return of options for cancellation - On May 1, 2004, the Executive
officers and Directors voluntarily returned options to purchase
436,450 shares of common stock for cancellation. As a result,
$7,269,718 was transferred from other equity to paid in capital
b) Employee Stock Purchase Plan - During the second quarter of 2004,
employees purchased 17,875 shares of common stock for $24,310.
c) Exercise of Options - During the third quarter of 2004, employees
exercised options to purchase 20,000 shares of common stock for
cash consideration of $2,000. During the second quarter of 2004,
employees exercised options to purchase 5,000 shares of common
stock for cash considerations of $500. During the first quarter of
2004, employees exercised options to purchase 15,382 shares of
common stock for cash considerations of $3,987.
10. 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
625,000, 300,000, 600,000 and 600,000 shares, respectively. Through
September 30, 2004, the Company had awarded 448,508 options under the
Employee Stock Option (1997) Plan, 35,886 options under the 1999
Incentive and Nonqualified Stock Option Plan, 297,023 options under the
Employee Stock Option (2000) Plan and 235,000 options under the
Employee Stock Option (2002) Plan.
Employee Stock Purchase Agreement
On July 7, 2000, the shareholders approved the establishment of the
Company's Employee Stock Purchase (2000) Plan, which has 300,000
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.
Through the end of the third quarter of 2004, 109,004 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. The Company
had suspended the plan for the current period pending the annual
meeting and the decision of the shareholders as to the proposed
corporate restructuring.
9
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (unaudited) and December 31, 2003 (audited)
Contract Manufacturers
The Company provides its contract manufacturers with ongoing production
forecasts to enable them to forecast and procure required parts. Under
the terms of the Agreements with the contract manufacturers, the
Company has committed to assume liability for all parts required to
manufacture the Company's forecast products for the next 13 weeks and
all final assembly costs for the forecast products for the next 4
weeks, on a rolling basis. Management believes that, should it be
necessary, they could find alternative contract manufacturers without
significant disruption to the business.
Development Contractors
The Company employs outside contractors to assist in the design and
development of its products. At September 30, 2004, the Company had
entered into development contracts with one of its contractors, in the
amount of $745,000, of which $397,000 was expensed in the nine months
ended September 30, 2004. The contract calls for the payment of
progress payments against specific milestones over the course of the
contracts.
Litigation
The Company has taken legal action against a former customer for
non-payment of an account, in the amount of approximately $185,000. In
response, the former customer has filed a countersuit alleging the
goods were defective and claiming damages for additional expenses and
lost profits. The Company believes that this countersuit is without
merit and intends to vigorously pursue its claim and defend itself from
the counterclaim.
11. SEGMENTED 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 Nine Months ended
September 30 September 30
2004 2003 2004 2003
----------------------------------------------------------------------------
Revenue by Region (Unaudited) (Unaudited) (Unaudited) (Unaudited)
United States $ 1,607,403 $ 2,330,810 $ 4,027,974 $ 6,785,053
Australia 789,572 549,162 2,329,150 1,669,532
Canada 161,113 519,916 591,041 961,530
Rest of World 111,131 134,176 439,791 432,464
----------------------------------------------------------------------------
$ 2,669,219 $ 3,534,064 $ 7,387,956 $ 9,848,579
============================================================================
10
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (unaudited) and December 31, 2003 (audited)
As at September 30, 2004 (Unaudited)
Canada Australia Total
Property, plant and equipment $ 226,610 $ 105,938 $ 332,548
====================================================
As at December 31, 2003 (Audited)
Canada Australia Total
Property, plant and equipment $ 308,163 $ 99,326 $ 407,489
====================================================
12. COMPARATIVE FIGURES
Certain comparative amounts have been reclassified, where appropriate, to
correspond with the current period's presentation
11
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 three and nine
months ended September 30, 2004.
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, extensive regulation of the data
communications industry by U.S. or foreign governments and, in particular,
imposing license requirements in the frequency bands of our products 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 four 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.
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 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, through tightening our
accounts receivable and inventory levels. 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 product cost
reductions or reduce inventory related costs, our gross margin percentage may
not improve as much as we have targeted, resulting in lower than expected
results of operations.
12
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2003.
Revenue
The following table presents our North American and non-North American
revenues and the approximate percentage of total revenues ($000's):
Three months ended September 30,
----------------------------------
2004 2003 % Change
-------- -------- --------
North America $ 1,768 $ 2,851 (37.0%)
Non-North America 901 683 31.8%
----------------------------------
Total revenues $ 2,669 $ 3,534 (24.5%)
==================================
Percentage of total revenue
North America 66.2% 80.7%
Non-North America 33.8% 19.3%
Total revenue declined 24.5% in Q3 2004 compared to Q3 2003. Total revenues
in North America have increased 19.2% in Q3 versus Q2 2004 but have declined
37.0% versus Q3 2003, mainly as a result of our major distributors not placing
stocking orders in Q3 and, the significant reduction in average selling prices
of our EUM. In addition, it is our view that new installations have been
hampered by the confusion in the market caused by the announcements surrounding
Wi-MAX, which increase our sales cycles, and by other competitive offerings.
Non-North American revenues were mainly focused on our operating subsidiary
in Australia. WaveRider Australia has experienced a 33% increase in Australian
Dollar denominated revenues through an increase in sales of licensed microwave
products and service related revenues. The relative strength of the Australian
dollar versus the U.S. dollar has further enhanced Australian based revenues.
The Company's focus on the 900 MHz non-line of sight LMS product family had
allowed it to make 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. As a result, we are exposed to
potential significant swings when the focused market for our main product
experiences periods of weakness.
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.
Gross Margins
The following table presents our gross margin and the percentage of total
revenues ($000's):
Three months ended September 30,
--------------------------------
2004 2003
---- ----
Gross margin $1,025 $ 1,322
Gross margin rate 38.4% 37.4%
Gross margins in Q3 2004 increased to 38.4% compared to 37.4% of revenue in
Q3 2003 and 26.8% in Q2 2004. The Q2 2004 gross margins were significantly
impacted by product write-downs, which were not replicated in either Q3 2004 or
Q3 2003. Without these one time charges, Q2 2004 margins would have been in the
same range as Q3 2004.
13
The Company is actively involved in continuing to find product cost
savings, through economies of scale and product refinement. It expects that
future product cost 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 near current levels over the balance of
the fiscal year.
Selling, General and Administrative expenses
Selling, general and administrative expenses decreased to $1,121,693 from
$1,326,894 in Q3 2003, mainly due to a decline in compensation expense from
reduced commissions and other incentive pay, along with staff reductions. The
Company pays most of its operating expenses in either Canadian or Australian
dollars. The decline in exchange rate for U.S. dollars versus the Canadian and
Australian dollars, in Q3 2004 compared to Q3 2003, resulted in the increase in
reported expenses, which are likely to continue into Q4 2004.
Research and Development expenses
Research and development expenses increased to $521,436 in Q3 2004 from
$450,870 in Q3 2003. The increase was mainly due to new development programs
surrounding next generation modems based on the 802.16 standard and foreign
exchange fluctuations.
It is the Company's view that products based on the Wi-MAX standard will
not be generally available until late in 2005 or early 2006. It is our belief
that our current product technology will continue to provide technology
solutions until the next generation modems are developed.
Depreciation and Amortization expense
Depreciation and amortization expense declined to $53,364 compared to
$119,173 in Q3 2003. During the last three years, the Company has withheld
spending on new capital assets and does not plan any major capital acquisitions
through the balance of fiscal 2004.
Interest expense
Interest expense amounted to $1,215,270 for the three months ended
September 30, 2004 compared to $403,721 for the three months ended September 30,
2003. Included in interest expense for the three months ended September 30, 2004
is $1,206,997 of non-cash charges related to the accretion and conversion of
convertible debentures issued in July 2003 and April 2004. With the issuance of
the convertible debentures in July 2003 and April 2004, which are due July 2006
and April 2007 respectively, if not converted to common stock prior to maturity,
the Company will continue to incur non-cash financial expenses through the
accretion of the beneficial conversion feature included in the debentures.
Foreign Exchange
The Company incurred a foreign exchange loss for the three months ended
September 30, 2004 in the amount of $32,345 compared to a gain of $12,155 for
the three months ended September 30, 2003. The loss in the third quarter of 2004
is due to a recent strengthening of the U.S. dollar versus the Canadian and
Australian dollars after a number of quarters of significant declines. Near the
end of the quarter and subsequent to the end of the quarter, this trend has
reversed again and the Canadian and Australian dollars have again strengthened
against the U.S. dollar which could result in higher operating expenses but
foreign exchange gains in the fourth quarter of 2004.
14
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2003.
Revenue
The following table presents our North American and non-North American
revenues and the approximate percentage of total revenues ($000's):
Nine months ended September 30,
----------------------------------
2004 2003 % Change
---- ---- --------
North America $ 4,619 $ 7,747 (40.4%)
Non-North America 2,769 2,102 31.7%
----------------------------------
Total revenues $ 7,388 $ 9,849 (25.0%)
==================================
Percentage of total revenue
North America 62.5% 78.7%
Non-North America 37.5% 21.3%
Total revenue declined 25% in the nine months ended September 30, 2004
compared to 2003. Total revenues in North America have declined due to our major
distributors not placing stocking orders in 2004 and, the significant reduction
in average selling prices of our EUM. In addition, it is our view that new
installations have been hampered by confusion in the market caused by the
announcements surrounding Wi-MAX, which increase our sales cycles, and by other
competitive offerings.
Non-North American revenues were mainly focused on our operating subsidiary
in Australia. WaveRider Australia has experienced a 15% increase in Australian
Dollar denominated revenues through an increase in sales of licensed microwave
products and service related revenues. The relative strength of the Australian
dollar versus the U.S. dollar has further enhanced Australian based revenues.
The Company's focus on the 900 MHz non-line of sight LMS product family had
allowed it to make 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. As a result, we are exposed to
potential significant swings when the focused market for our main product
experiences periods of weakness.
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.
Gross Margins
The following table presents our gross margin and the percentage of total
revenues ($000's):
Nine months ended September 30,
-------------------------------
2004 2003
---- ----
Gross margin $2,494 $ 3,862
Gross margin rate 33.8% 39.2%
Gross margins in the nine months ended September 30, 2004 decreased to
33.8% compared to 39.2% of revenue during the same period in 2003 and, in
conjunction with the decrease in revenue, total gross margin dollars decreased
35.4% compared to 2003.
15
In August 2003, the Company was required to place a final order for the
processors, which are used in the current version of the Company's products, as
a result of an end of life announcement by the manufacturer. These processors
were delivered over the period from September 2003 through June 2004. As a
result of the decline in revenues that the Company has experienced, management
determined that the Company had an excess number of processors when compared to
current forecasts. As a result, the Company provided for an additional inventory
obsolescence charge of $253,000, included in cost of goods sold, in June 2004.
The Company is actively involved in continuing to find product cost
savings, through economies of scale and product refinement. It expects that
future product cost reductions will be offset by volume discounts offered to its
customers and competitive pricing pressures. As such, the Company expects that
gross margin percentages, after taking into account the one-time write-down of
processors, will be at or near current levels over the balance of the fiscal
year.
Selling, General and Administrative expenses
Selling, general and administrative expenses for the nine months ended
September 30, 2004 increased to $3,871,484 from $3,663,153 during the same
period in 2003. During Q2 2004, the Company incurred cost of approximately
$250,000 for the joint registration statement/proxy filed on form F-4 on July
20, 2004. These costs relate to legal, accounting and other costs in the
development and production of the document. In addition, the Company pays most
of its operating expenses in either Canadian or Australian dollars. The decline
in exchange rate for U.S. dollars versus the Canadian and Australian dollars, in
2004 compared to 2003, resulted in the increase in reported expenses.
Research and Development expenses
Research and development expenses increased to $1,376,230 in 2004 from
$883,465 in 2003. The increase was mainly due to the acquisition of Avendo
Wireless by the Company in July 2003, initiation of new development programs
surrounding next generation modems based on the 802.16 standard and foreign
exchange fluctuations.
It is the Company's view that products based on the Wi-MAX standard will
not be generally available until late in 2005 or early 2006. It is our belief
that our current product technology will continue to provide technology
solutions until the next generation modems are developed.
Depreciation and Amortization expense
Depreciation and amortization expense declined to $242,087 compared to
$384,573 in 2003. During the last three years, the Company has withheld spending
on new capital assets and does not plan any major capital acquisitions through
the balance of fiscal 2004.
Interest expense
Interest expense amounted to $2,891,669 for the nine months ended September
30, 2004 compared to $441,374 for the nine months ended September 30, 2003.
Included in interest expense for the nine months ended September 30, 2004 is
$2,863,590 of non-cash charges related to the accretion and conversion of
convertible debentures issued in July 2003 and April 2004. With the issuance of
the convertible debentures in July 2003 and April 2004, which are due July 2006
and April 2007 respectively, if not converted to common stock prior to maturity,
the Company will continue to incur non-cash financial expenses through the
accretion of the beneficial conversion feature included in the debentures.
Foreign Exchange
The Company incurred a foreign exchange loss for the nine months ended
September 30, 2004 in the amount of $182,442 compared to a gain of $163,352 for
the nine months ended September 30, 2003. The loss in 2004 is due to a recent
strengthening of the U.S. dollar versus the Canadian and Australian dollars
after a number of quarters of significant declines.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations for the most part through equity and
convertible debenture 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 under the symbol "WAVR" in the
over-the-counter market 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 and convertible debenture 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.
16
In April 2004, the Company issued convertible debentures, in the aggregate
principal amount of $2,125,000, for cash proceeds of $2,000,000, less cash fees
of $100,000.
While the Company has a plan that it believes will allow it to achieve
profitability and cash flow positive operations it does intend to seek
additional working capital financing. If the Company fails to achieve positive
cash flow in the near term, the Company does not presently have, in the absence
of further financing, adequate cash to fund ongoing operations. In the past, the
Company has obtained financing primarily through the sale of convertible
securities. If the Company is unable to either achieve its planned cash flow
positive operations and profitability or obtain significant additional
financing, it will, in all likelihood, be obliged to seek protection under the
bankruptcy laws in which event, the Company believes it is unlikely that its
common stock will have any value.
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 36 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.
ITEM 3.
Controls and Procedures
Disclosure controls and procedures are controls and other procedures
designed to ensure that we timely record, process, summarize and report the
information that we are required to disclose in the reports that we file or
submit with the SEC. These include controls and procedures designed to ensure
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
As required under the Sarbanes-Oxley Act of 2002, our Chief Executive
Officer and Chief Financial Officer conducted a review of our disclosure
controls and procedures as of the end of the period covered by this report. They
concluded, as of the evaluation date, that our disclosure controls and
procedures are effective.
During the three months ended September 30, 2004, there were no changes in
our internal control over financial reporting that have affected, or are
reasonably likely to affect, materially our internal control over financial
reporting.
17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its annual general meeting on September 27, 2004 in
Toronto, Canada. Notice of Meeting, dated August 20, 2004, was
distributed to all shareholders of record, effective July 30, 2003,
and filed with the Security and Exchange Commission on form 14A on
August 24, 2004. The meeting was subsequently adjourned and
reconvened on October 15, 2004.
b) Two matters were voted upon at the annual general meeting.
1. Mr. Gerry Chastelet, Mr. John Curry, Mr. Michael Milligan, Mr.
Cameron Mingay, Mr. Bruce Sinclair, and Mr. Dennis Wing were
elected as directors of the Company. The votes for the directors
were as follows:
Votes For Against or Withheld
Gerry Chastelet 12,303,501 275,572
John Curry 12,302,151 276,922
Michael Milligan 12,303,331 275,742
Cameron Mingay 12,301,130 277,943
Bruce Sinclair 12,179,574 399,500
Dennis Wing 12,302,715 276,358
2. The proposal that the stockholders approve a proposed agreement
and plan of merger, that would result in the shareholders
exchanging their common stock of WaveRider Communications Inc.
for common stock of WaveRider Communications (Canada) Inc., was
not approved. In order for the motion to pass, a majority of the
total voting power of the company voting in favor was needed.
This meant that a minimum of 7,522,395 votes in favor of the
proposal was required in order for the motion to be approved.
The votes received were as follows:
For - 4,208,426 Against - 354,573 Abstain - 17,114
Item 6. Exhibits
31.3 Certification from D. Bruce Sinclair
31.2 Certification from T. Scott Worthington
32.1 Certification pursuant to 18 U.S.C. ss.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: November 10, 2004 /s/ D. Bruce Sinclair
---------------------
D. Bruce Sinclair
Chief Executive Officer
/s/ T. Scott Worthington
------------------------
T. Scott
Worthington Chief
Financial Officer.
18