SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
Form 10-QSB
QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
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 2, 2005: 29,592,443 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, 2005
INDEX
Page
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-10
Consolidated Balance Sheets 3
Consolidated Statements of Loss, Deficit and Comprehensive Loss 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis
or Plan of Operation 11-17
Item 3. Controls and Procedures 18
PART II OTHER INFORMATION 18
Item 5. Other Information 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,
2005 2004
(Unaudited) (Audited)
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 688,202 $ 1,291,822
Restricted cash - 100,000
Accounts receivable, net 1,607,325 1,056,103
Inventories 561,354 943,644
Prepaid expenses and other assets 103,184 145,805
------------- --------------
Current assets 2,960,065 3,537,374
Property, plant and equipment, net 209,662 295,063
------------- --------------
$ 3,169,727 $ 3,832,437
============= ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 2,248,492 $ 2,080,064
Deferred revenue 544,931 407,639
Current portion of convertible debentures, net of discounts of $131,870 318,130 -
Current portion of obligations under capital lease 2,013 2,781
------------- --------------
Current liabilities 3,113,566 2,490,484
Convertible debentures, net of discounts of $260,592 and $921,454 respectively 931,245 1,506,322
Obligations under capital lease - 1,854
------------- --------------
Total liabilities 4,044,811 3,998,660
------------- --------------
Commitments and Contingencies (Note 9)
Shareholders' deficit:
Preferred Stock, $0.01 par value per share:
issued and outstanding Nil shares in 2005 and 2004 - -
Common Stock, $0.001 par value per share:
issued and outstanding - 29,592,443 shares at September 30, 2005 and
16,571,732 shares at December 31, 2004 29,592 16,572
Additional paid-in capital 91,125,306 89,582,484
Other equity 4,673,429 5,134,928
Accumulated other comprehensive loss (322,477) (337,239)
Accumulated deficit (96,380,934) (94,562,968)
------------- --------------
Total shareholders' deficit (875,084) (166,223)
------------- --------------
$ 3,169,727 $ 3,832,437
============= ==============
See accompanying notes to financial statements.
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
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- ------------ -------------- ------------
CONSOLIDATED STATEMENTS OF LOSS
REVENUE
Product revenue $ 2,413,951 $ 2,271,435 $ 6,521,398 $ 5,925,002
Service revenue 595,543 397,784 1,408,240 1,462,954
-------------- ------------ -------------- ------------
3,009,494 2,669,219 7,929,638 7,387,956
-------------- ------------ -------------- ------------
COST OF REVENUE
Product revenue 1,596,489 1,445,226 4,445,459 4,052,247
Service revenue 340,089 199,177 789,495 841,705
-------------- ------------ -------------- ------------
1,936,578 1,644,403 5,234,954 4,893,952
-------------- ------------ -------------- ------------
GROSS MARGIN 1,072,916 1,024,816 2,694,684 2,494,004
-------------- ------------ -------------- ------------
EXPENSES
Selling, general and administration 1,051,346 1,121,693 3,105,720 3,871,484
Research and development 96,896 521,436 357,236 1,376,230
Depreciation and amortization 32,386 53,364 117,098 242,087
Bad debt expense - 18,975 18,599 35,715
-------------- ------------ -------------- ------------
1,180,628 1,715,468 3,598,653 5,525,516
-------------- ------------ -------------- ------------
LOSS FROM OPERATIONS (107,712) (690,652) (903,969) (3,031,512)
-------------- ------------ -------------- ------------
NON-OPERATING EXPENSES (INCOME)
Interest expense 156,432 1,267,017 910,908 2,368,087
Foreign exchange loss 2,738 32,345 12,377 182,442
Interest income (3,054) (412) (9,288) (3,031)
-------------- ------------ --------------- ------------
156,116 1,298,950 913,997 2,547,498
-------------- ------------ --------------- ------------
NET LOSS $ (263,828) $ (1,989,602) $ (1,817,966) $ (5,579,010)
============== ============ =============== ============
BASIC AND FULLY DILUTED LOSS PER SHARE $ (0.01) $ (0.13) $ (0.08) $ (0.38)
============== ============ =============== ============
Weighted Average Number of Common Shares 27,967,983 15,165,678 23,524,238 14,836,601
============== ============ ============== ============
CONSOLIDATED STATEMENTS OF DEFICIT
OPENING DEFICIT (96,117,106) (91,851,707) (94,562,968) (88,262,299)
NET LOSS FOR THE PERIOD (263,828) (1,989,602) (1,817,966) (5,579,010)
-------------- ------------ -------------- -------------
CLOSING DEFICIT $ (96,380,934) $(93,841,309) $ (96,380,934) $(93,841,309)
============== ============ =============== ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NET LOSS FOR THE PERIOD (263,828) (1,989,602) (1,817,966) (5,579,010)
OTHER COMPREHENSIVE INCOME
Cumulative translation adjustment (2,460) (34,182) 14,762 29,267
-------------- ------------- -------------- ------------
COMPREHENSIVE LOSS $ (266,288) $ (2,023,784) $ (1,803,204) $ (5,549,743)
============= ============ =============== ============
See accompanying notes to financial statements.
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. dollars)
Nine months ended September 30
2005 2004
------------- -------------
(Unaudited) (Unaudited)
OPERATIONS
Net loss $ (1,817,966) $ (5,579,010)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 117,098 242,087
Unrealized foreign exchange loss 44,381 158,174
Non-cash financing charges 886,736 2,340,008
Gain on disposal of fixed assets (4,600) (9,428)
Bad debt expense 18,599 35,715
Net changes in working capital items 105,801 370,625
------------- -------------
Net cash used in operating activities (649,951) (2,441,829)
------------- -------------
INVESTING
Acquisition of property, plant and equipment (29,071) (161,324)
------------- -------------
Net cash used in investing activities (29,071) (161,324)
------------- -------------
FINANCING
Proceeds from sale of shares net of issue fees 8,837 30,796
Movement in restricted cash 100,000 -
Proceeds from sale of convertible debentures net of issue fees - 1,900,000
Proceeds from notes receivable - 20,698
Payments on capital lease obligations (2,054) (9,644)
------------- -------------
Net cash provided by financing activities 106,783 1,941,850
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (31,381) (130,542)
------------- -------------
Decrease in cash and cash equivalents (603,620) (791,845)
Cash and cash equivalents, beginning of period 1,291,822 1,843,135
------------- -------------
Cash and cash equivalents, end of period $ 688,202 $ 1,051,290
============== =============
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,396 $ 2,292
See accompanying notes to financial statements.
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (unaudited) and December 31, 2004 (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 $1,817,966 for
the nine months ended September 30, 2005 (2004 - $5,579,010) and
reported an accumulated deficit at that date of $96,380,934 (2004 -
$93,841,309). 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 long term plan that it believes will allow it
to achieve profitability and cash flow positive operations, it 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 obtain additional financing and achieve its
planned cash flow positive operations and profitability, 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, 2005 and 2004 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,
2005, are not necessarily indicative of results of operations which
will be realized for the year ending December 31, 2005. The financial
statements should be read in conjunction with the Company's Form 10-KSB
for the year ended December 31, 2004.
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. 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
2005 2004 2005 2004
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net loss, as reported $ (263,828) $ (1,989,602) $ (1,817,966) $ (5,579,010)
Add: Stock-based employee compensation
expense included in reported net loss - - - -
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards (103,543) (52,054) (215,290) (193,678)
------------- ------------- ------------- -----------
Pro forma net loss $ (367,371) $ (2,041,656) $ (2,033,256) $(5,772,688)
============= ============= ============== ============
Basic and diluted loss per share,
as reported $ (0.01) $ (0.13) $ (0.08) $ (0.38)
============= ============= ============== ============
Basic and diluted loss per share,
pro forma $ (0.01) $ (0.13) $ (0.09) $ (0.39)
============= ============= ============== ============
5. ACCOUNTS RECEIVABLE
September December
30, 2005 31, 2004
-------------- ------------
(Unaudited) (Audited)
Accounts receivable - trade $ 1,672,729 $ 1,076,013
Other receivables 18,207 14,977
Allowance for doubtful accounts (83,611) (34,887)
-------------- ------------
$ 1,607,325 $ 1,056,103
============================
6. INVENTORIES
September December
30, 2005 31, 2004
-------------- ------------
(Unaudited) (Audited)
Finished products $ 940,798 $ 1,239,278
Raw materials 10,723 314,777
Valuation allowance (390,167) (610,411)
-------------- ------------
$ 561,354 $ 943,644
============================
7. CONVERTIBLE DEBENTURES
During the quarter ended September 30, 2005, convertible debentures in
an aggregate nominal value of $151,485 were converted to 4,166,965
shares of common stock. Upon conversion, an amount of $41,448, being
the prorated portion of the original beneficial conversion feature
amount was transferred from other equity to paid in capital and common
shares.
During the quarter ended June 30, 2005, convertible debentures in an
aggregate nominal value of $160,670 were converted to 3,405,113 shares
of common stock. Upon conversion, an amount of $43,445, being the
prorated portion of the original beneficial conversion feature amount
was transferred from other equity to paid in capital and common shares.
During the quarter ended March 31, 2005, convertible debentures in an
aggregate nominal value of $473,784 were converted to 5,275,366 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 $299,568. This amount
was expensed and recorded as additional paid in capital. In addition,
an amount of $104,695, 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, 2005, $149,951 and
$886,736, 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
beneficial conversion feature related to the converted debentures and
the amortization of deferred financing expenses. At September 30, 2005,
the face amount of convertible debentures outstanding is $1,641,837
less unamortized beneficial conversion features of $277,326 and
unamortized discounts of $115,136.
The total beneficial conversion features recognized on the convertible
debentures has reached the cash proceeds received for the debentures.
Therefore, the Company will not be required to recognize any additional
beneficial conversion feature amounts upon conversion of the remaining
debentures. The Company will continue to amortize previously recognized
beneficial conversion feature amounts.
8. SHAREHOLDERS' EQUITY
a) Employee Stock Purchase Plan - During the second quarter of 2005,
employees purchased 173,267 shares of common stock for $8,837.
9. 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, 2005, the Company had awarded 592,808 options under the
Employee Stock Option (1997) Plan, 296,318 options under the 1999
Incentive and Nonqualified Stock Option Plan, 508,072 options under the
Employee Stock Option (2000) Plan and 530,000 options under the
Employee Stock Option (2002) Plan. During the quarter ended September
30, 2005, the Company did not award any new options.
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 2005, 282,271 shares of common
stock were purchased under the Plan. As a result, the Company is not
currently offering shares to its employees and will be required to seek
approval and register additional shares prior to opening a new plan
session.
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.
On August 31, 2005, the Company's wholly owned subsidiary, WaveRider
Communications (Canada) Inc., entered into a General Security Agreement
with our primary contract manufacturer. Under the terms of the
Agreement, WaveRider Communications (Canada) Inc. granted a security
interest over all of its properties and assets, as additional security
for the repayment and performance of its obligations under the ongoing
supply agreement.
On September 7, 2005, our primary contract manufacturer announced its
plans to close the manufacturing plant that produces our products. The
plant will be wound down over the coming months with final closure
taking place on or before March 31, 2006. We are working with the
contract manufacturer to transition our production to another of our
contract manufacturer's plants and do not anticipate any significant
manufacturing delays or shortages. However, any transition can result
in unexpected issues which could impact our ability to supply products
over the coming two quarters.
Development Contractors
The Company employs outside contractors to assist in the design and
development of its products. As at September 30, 2005, the Company had
entered into development contracts with one of its contractors, in the
amount of $395,000, of which $284,000 was expensed up to September 30,
2005. The contract calls for the payment of progress payments against
specific milestones over the course of the contracts.
Financial Consultants
On September 12, 2005, the Company entered into agreements with
consultants for business planning and financial advise and merger and
acquisition support. Under the terms of the Agreements the Company paid
a cash project fee of $20,000 and committed to issuing 300,000 shares
of common stock, upon the filing of a registration statement under SEC
Form S-8. Should the Company enter into a financial transaction with a
candidate identified by the consultants, a fee of six percent (6%) of
the total consideration will be payable to the consultants.
Litigation
As at September 30, 2005, there are no litigation matters outstanding
against the Company.
10. 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
2005 2004 2005 2004
------------- -------------- -------------- ---------------
Revenue by Region (Unaudited) (Unaudited) (Unaudited) (Unaudited)
United States 1,846,997 $ 1,607,403 $ 4,597,596 $ 4,027,974
Australia 794,171 789,572 2,407,035 2,329,150
Canada 229,145 161,113 547,566 591,041
Rest of World 139,181 111,131 377,441 439,791
------------- -------------- -------------- ----------------
$ 3,009,494 $ 2,669,219 $ 7,929,638 $ 7,387,956
============= ============== =============== ================
As at September 30, 2005 (Unaudited)
Canada Australia Total
-------------- ------------- ------------
Property, plant and equipment $ 129,408 $ 80,254 $ 209,662
============== ============= ============
As at December 31, 2004 (Audited)
Canada Australia Total
-------------- ------------- ------------
Property, plant and equipment $ 193,195 $ 101,868 $ 295,063
============== ============= ============
11. COMPARATIVE FIGURES
Certain comparative amounts have been reclassified to correspond with
the current period's presentation.
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, 2005.
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 and data
network access products. Our products are designed to deliver efficient,
reliable, and cost-effective solutions; bringing both fixed and mobile
high-speed Internet and data access to markets around the world.
Our Last Mile Solution family of products are designed to provide 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 MobileWAN family of wireless systems are designed for rapid, field
deployable, mobile wireless access networking providing voice, video and data
services. Focused on the public security and worksite safety markets, the
MobileWAN delivers mobile broadband access without requiring a significant
investment in infrastructure and equipment. The system is a cost-effective
solution that can be deployed rapidly and is suitable for temporary or permanent
installations where high-speed voice, video or data services are required.
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 several 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 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.
Product supply issues
On September 7, 2005, our contract manufacturer announced its plans to
close the manufacturing plant that produces our products. The plant will be
wound down over the coming months with final closure taking place on or before
March 31, 2006. We are working with the contract manufacturer to transition our
production to another of our contract manufacturer's plants and do not
anticipate any significant manufacturing delays or shortages. However, any
transition can result in unexpected issues, which could impact our ability to
supply products over the coming two quarters.
Over the past several years, as the industry downturn continued, most
parts manufacturers reduced their production capacities, shutting down
production lines and reducing staffing levels. As a result, parts lead times
have lengthened and there are significantly fewer parts available in the
secondary or reseller markets. As a result, it has been difficult to react
quickly to increased demand and we are vulnerable to production delays resulting
from individual part shortages.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2004.
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,
2005 2004 % Change
North America $ 2,076 $ 1,768 17.4%
Non-North America 933 901 3.6%
----------------------------------
Total revenues $ 3,009 $ 2,669 12.7%
==================================
Percentage of total revenue
North America 69.0% 66.2%
Non-North America 31.0% 33.8%
Total revenue increased 12.7% in Q3 2005 compared to Q3 2004. The Company's
focus on the 900 MHz non-line of sight LMS product family had allowed us to make
gains in the North American market but has limited our 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.
Total revenues in North America have increased in Q3 2005 due to the
introduction of our integrated outdoor end-user modem, the EUM 3006, at the end
of February 2005 and the introduction of the latest generation indoor modem, the
EUM 3005, at the beginning of June 2005. The Company also experienced a
significant increase in our sales of base station units, the LMS4000 CCU, as our
customers expand their networks.
Non-North American revenues were mainly focused on our operating subsidiary
in Australia. Revenues in Australia have shown year on year growth during 2005
and are expected to continue to show growth, subject to changes in the foreign
exchange rate, as that subsidiary expands its ongoing service offerings.
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 we expect 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,
2005 2004
-------------------
Product revenue
Gross margin $818 $826
Gross margin rate 33.9% 36.4%
Service revenue
Gross margin $255 $199
Gross margin rate 42.9% 49.9%
Total revenue
Gross margin $1,073 $1,025
Gross margin rate 35.7% 38.4%
Gross margins in Q3 2005 declined to 35.7% compared to 38.4% of revenue in
Q3 2004. However, as a result of the increase in quarterly revenue, total gross
margin dollars increased by 4.7% compared to Q3 2004.
With the introduction of two new products, the EUM3006 and EUM3005, the
Company has seen an increase in both our average selling price and our product
cost, resulting in higher absolute gross margins but a lower gross margin
percentage. As these products mature, we expect to continue to be actively
involved in finding cost savings, through economies of scale and product
refinement. We expect, however, that future cost reductions will be offset by
volume discounts offered to our customers and to competitive pricing pressures.
As such, the Company expects that gross margin percentages for product revenue
will be at or near current levels over the balance of the fiscal year.
Service revenue gross margins percentages were negatively affected by the
Company's use of subcontract labor for a major installation undertaken in the
third quarter. While use of outside contractors allows the Company to provide
larger scale installations and thereby increase overall gross margins it does
negatively impact gross margin percentages.
Selling, General and Administrative expenses
Selling, general and administrative expenses declined to $1,051,346 from
$1,121,693 in Q3 2004. The decline was mainly due to a reduction in compensation
expense and other discretionary expenses. The Company anticipates that selling,
general and administrative expenses, barring a significant change in foreign
exchange rates, will remain at or near the current levels for the balance of the
year.
Research and Development expenses
Research and development expenses declined to $96,896 in Q3 2005 from
$521,436 in Q3 2004. With the introduction of the EUM3006 in late February of
2005 and the EUM 3005 in June 2005, the Company focused on finalizing those
programs and getting the products into manufacturing, before continuing other
development programs.
The Company expects to increase its research and development spending over
the balance of the year as we continue our programs surrounding next generation
modems based on 802.XX and Wi-MAX standards and completion of our MobileWAN
product family, designed to provide rapid deployment mobile wireless access
networking solutions for voice, video and data services.
Depreciation and Amortization expense
Depreciation and amortization expense declined to $32,386 in Q3 2005
compared to $53,364 in Q3 2004. During the last several years, the Company has
withheld spending on new capital assets and does not plan any major capital
acquisitions through the balance of 2005.
Interest expense
Interest expense amounted to $156,432 in Q3 2005 compared to $1,267,017 in
Q3 2004. Included in interest expense for the three months ended September 30,
2005 is $149,951 (2004 - $1,258,744) of non-cash charges related to the
convertible debentures issued in July 2003, April 2004 and November 2004. With
the issuance of the convertible debentures in July 2003, April 2004 and November
2004, which are due July 2006, April 2007 and November 2007, respectively, the
Company will continue to incur non-cash financial expenses through the accretion
of the beneficial conversion feature included in the debentures and the
amortization of deferred financing costs.
Foreign Exchange
The Company incurred a foreign exchange loss for the three months ended
September 30, 2005 in the amount of $2,738 compared to a loss for the three
months ended September 30, 2004 in the amount of $32,345. The foreign exchange
losses are due to a strengthening of the U.S. dollar versus the Canadian and
Australian dollars.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2004.
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,
2005 2004 % Change
----------------------------------
North America $ 5,145 $ 4,619 11.4%
Non-North America 2,785 2,769 0.6%
----------------------------------
Total revenues $ 7,930 $ 7,388 7.3%
==================================
Percentage of total revenue
North America 64.9% 62.5%
Non-North America 35.1% 37.5%
Total revenue increased 7.3% in the nine months ended September 30, 2005
compared to 2004. The Company's focus on the 900 MHz non-line of sight LMS
product family had allowed us to make gains in the North American market but has
limited our 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.
Total revenues in North America have increased in 2005 due to the
introduction of our integrated outdoor end-user modem, the EUM 3006, at the end
of February 2005 and the introduction of the latest generation indoor modem, the
EUM 3005, at the beginning of June 2005. The Company also experienced a
significant increase in our sales of base station units, the LMS4000 CCU, as our
customers expand their networks.
Non-North American revenues were mainly focused on our operating subsidiary
in Australia. Revenues in Australia have shown year on year growth during 2005
and are expected to continue to show growth, subject to changes in the foreign
exchange rate, as that subsidiary expands its ongoing service offerings.
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 we expect 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,
2005 2004
-------------------
Product revenue
Gross margin $2,076 $1,873
Gross margin rate 31.8% 31.6%
Service revenue
Gross margin $619 $621
Gross margin rate 43.9% 42.5%
Total revenue
Gross margin $2,695 $2,494
Gross margin rate 34.0% 33.8%
Gross margins remained relatively flat at 34.0% in 2005 compared 33.8% in
2004 but, in conjunction with the increase in revenue, total gross margin
dollars increased 8.0% compared to 2004.
In Q2 2004, the Company recorded an additional inventory obsolescence
charge of $253,000, which reduced product margins by 6.9% and overall margins by
5.4%. No similar provision was recorded in 2005.
With the introduction of two new products, the EUM3006 and EUM3005, the
Company has seen an increase in both our average selling price and our product
cost, resulting in higher absolute gross margins but a lower gross margin
percentage. As these products mature, we expect to continue to be actively
involved in finding cost savings, through economies of scale and product
refinement. We expect, however, that future cost reductions will be offset by
volume discounts offered to our customers and to 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 declined to $3,105,720 in 2005
from $3,871,484 in 2004. Included in 2004 expenses was a charge of $250,000
related to the joint registration statement/proxy filed on form F-4 on July 20,
2004. No similar amount was incurred in 2005. The remaining decline was mainly
due to a reduction in compensation expense and other discretionary expenses. The
Company anticipates that selling, general and administrative expenses, barring a
significant change in foreign exchange rates, will remain at or near the current
levels for the balance of the year.
Research and Development expenses
Research and development expenses declined to $357,236 in 2005 from
$1,376,230 in 2004. With the introduction of the EUM3006 in late February of
2005 and the EUM 3005 in June 2005, the Company focused on finalizing those
programs and getting the products into manufacturing, before continuing other
development programs.
The Company expects to increase its research and development spending over
the balance of the year as we continue our programs surrounding next generation
modems based on 802.XX and Wi-MAX standards and completion of our MobileWAN
product family, designed to provide rapid deployment mobile wireless access
networking solutions for voice, video and data services.
Depreciation and Amortization expense
Depreciation and amortization expense declined to $117,098 in 2005 compared
to $242,087 in 2004. During the last several years, the Company has withheld
spending on new capital assets and does not plan any major capital acquisitions
through the balance of fiscal 2005.
Interest expense
Interest expense amounted to $910,908 for the nine months ended September
30, 2005 compared to $2,368,087 for the nine months ended September 30, 2004.
Included in interest expense for the nine months ended September 30, 2005 is
$886,736 (2004 - $2,340,008) of non-cash charges related to the convertible
debentures issued in July 2003, April 2004 and November 2004. With the issuance
of the convertible debentures in July 2003, April 2004 and November 2004, which
are due July 2006, April 2007 and November 2007, respectively, the Company will
continue to incur non-cash financial expenses through the accretion of the
beneficial conversion feature included in the debentures and the amortization of
deferred financing costs.
Foreign Exchange
The Company incurred a foreign exchange loss for the nine months ended
September 30, 2005 in the amount of $12,377 compared to a loss for the nine
months ended September 30, 2004 in the amount of $182,442. The foreign exchange
losses are due to a strengthening of the U.S. dollar versus the Canadian and
Australian dollars.
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.
We used $649,951 of cash in operating activities during the nine months
ended September 30, 2005 (2004 - $2,441,829). We expect to continue to have
revenue and gross margin growth and to control cash expenditures through the
remainder of 2005. However, based on our long term plans and projections,
Management believes that we will have to raise additional funds in 2005 or early
2006 to meet our current and future financial commitments until we achieve
positive cash flows from operations.
In the past, the Company has obtained financing primarily through the sale
of convertible securities. If the Company is unable to obtain additional
financing and achieve its planned cash flow positive operations and
profitability, 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 30 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, 2005, 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.
PART II. OTHER INFORMATION
Item 5. Other Information
During the quarter ended September 30, 2005, we made no material changes
to the procedures by which shareholders may recommend nominees to our Board of
Directors, as described in our most recent proxy statement.
Item 6. Exhibits
31.1 Certification from Charles W. Brown
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 3, 2005 /s/ Charles W. Brown
--------------------
Charles W. Brown
Chief Executive Officer
/s/ T. Scott Worthington
------------------------
T. Scott Worthington
Chief Financial Officer