SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
Form 10-QSB/A
QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED JUNE 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:
August 03, 2005: 27,331,748 Common shares, $.001 par value.
Transitional Small Business Disclosure Format: (check one):
Yes _____; No __X__
Explanatory Note
The purpose of this Amendment No. 1 to the Quarterly Report on Form
10-QSB/A is to restate the Company's consolidated condensed financial statements
for the three and six months ended June 30, 2005 (the "Financial Statements")
and to modify the related disclosures. Please see Notes 1 and 8 to the Financial
Statements included in the amended Form 10-QSB.
The restatement arose from the Company's determination that it had not
accounted for certain provisions of the Convertible Debentures, entered into on
July 14, 2003, April 24, 2004 and November 15, 2004, as embedded derivatives. As
well, the Company has determined that, upon issuance of the first Convertible
Debenture, net-share settlement was no longer in the Company's control. As a
result, the fair value of the embedded derivatives and certain instruments
convertible or exercisable into common shares (notably the Company's Warrants)
should be recorded as a liability, with any changes in the fair value between
reporting dates recorded as derivative income or expense, as appropriate
This amended Form 10-QSB/A does not attempt to modify or update any
other disclosures set forth in the original Form 10-QSB, except as required to
reflect the effects of the restatement as described in Notes 1 and 8 to the
Financial Statements included in the amended Form 10-QSB/A. Additionally, this
amended Form 10-QSB/A, except for the restatement information, speaks as of the
filing date of the original Form 10-QSB and does not update or discuss any other
Company developments after the date of the original filing. All information
contained in this amended Form 10-QSB/A and the original Form 10-QSB is subject
to updating and supplementing as provided in the periodic reports that the
Company has filed and will file after the original filing date with the
Securities and Exchange Commission.
WAVERIDER COMMUNICATIONS INC.
FORM 10 - QSB/A
For the Period Ended June 30, 2005
INDEX
Page
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-10
Consolidated Balance Sheets 3
Consolidated Statements of Operations,
Deficit and Comprehensive Income (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
2
PART I. FINANCIAL INFORMATION
WaveRider Communications Inc.
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars)
June 30, December 31,
2005 2004
(Unaudited) (Audited)
(Restated) (Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 690,880 $ 1,291,822
Restricted cash 100,000 100,000
Accounts receivable, less allowance for doubtful accounts 1,402,220 1,056,103
Inventories 474,589 943,644
Prepaid expenses and other assets 157,708 150,940
------------- --------------
Current assets 2,825,397 3,542,509
Property, plant and equipment, net 220,425 295,063
------------- --------------
$ 3,045,822 $ 3,837,572
============= ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 2,021,115 $ 2,080,064
Deferred revenue 514,571 407,639
Derivative financial instruments 390,700 642,907
Current portion of obligations under capital lease 2,213 2,781
------------- --------------
Current liabilities 2,928,599 3,133,391
Convertible debentures, net of discount of $476,250 and $851,793 respectively 1,317,072 1,575,984
Obligations under capital lease 500 1,854
------------- --------------
Total liabilities 4,246,171 4,711,229
------------- --------------
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 - 25,425,748 shares at June 30, 2005 and
16,571,732 shares at December 31, 2004 25,425 16,572
Additional paid-in capital 86,417,665 85,873,368
Accumulated other comprehensive loss (320,017) (337,239)
Accumulated deficit (87,323,422) (86,426,358)
------------- --------------
Total shareholders' deficit (1,200,349) (873,657)
------------- --------------
$ 3,045,822 $ 3,837,572
============= ==============
See accompanying notes to financial statements.
3
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS, DEFICIT AND COMPREHENSIVE INCOME (LOSS)
(in U.S. dollars)
Three Months ended Six Months ended
June 30 June 30 June 30 June 30
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Restated) (Restated) (Restated) (Restated)
CONSOLIDATED STATEMENT OF LOSS
REVENUE
Product revenue $ 2,362,598 $ 1,757,040 4,107,447 $ 3,653,567
Service revenue 417,983 655,476 812,697 1,065,170
-------------- ------------ -------------- ------------
2,780,581 2,412,516 4,920,144 4,718,737
-------------- ------------ -------------- ------------
COST OF REVENUE
Product revenue 1,646,941 1,389,254 2,848,970 2,607,021
Service revenue 228,872 377,425 449,406 642,528
-------------- ------------ -------------- ------------
1,875,813 1,766,679 3,298,376 3,249,549
-------------- ------------ -------------- -----------
GROSS MARGIN 904,768 645,837 1,621,768 1,469,188
-------------- ------------ -------------- ------------
EXPENSES
Selling, general and administration 1,043,643 1,477,161 2,054,373 2,749,791
Research and development 149,484 365,750 260,340 854,794
Depreciation and amortization 50,758 93,493 84,712 188,723
Bad debt expense 15,763 15,000 18,599 16,740
-------------- ------------ -------------- ------------
1,259,648 1,951,404 2,418,024 3,810,048
-------------- ------------ -------------- ------------
LOSS FROM OPERATIONS (354,880) (1,305,567) (796,256) (2,340,860)
-------------- ------------ -------------- ------------
NON-OPERATING EXPENSES (INCOME)
Interest expense 101,760 119,757 222,720 188,317
Derivative financial instrument (income) expense 1,482 (1,597,320) (125,317) (2,135,976)
Foreign exchange loss 672 121,801 9,639 150,097
Interest income (2,991) (522) (6,234) (2,619)
-------------- ------------ --------------- ------------
100,923 (1,356,284) 100,808 (1,800,181)
-------------- ------------- --------------- ------------
NET INCOME (LOSS) $ (455,803) $ 50,717 $ (897,064) $ (540,679)
============== ============ =============== ============
BASIC AND FULLY DILUTED INCOME (LOSS) PER SHARE $ (0.02) $ 0.00 $ (0.04) $ (0.04)
============== ============ =============== ============
Weighted Average Number of Common Shares 24,651,593 14,740,669 21,265,643 14,670,299
============== ============ ============== ============
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF DEFICIT
OPENING DEFICIT (86,867,619) (85,378,694) (86,426,358) (84,787,298)
NET INCOME (LOSS) FOR THE PERIOD (455,803) 50,717 (897,064) (540,679)
-------------- ------------ --------------- ------------
CLOSING DEFICIT $ (87,323,422) $(85,327,977) $ (87,323,422) $(85,327,977)
============== ============ =============== ============
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
NET INCOME (LOSS) FOR THE PERIOD (455,803) 50,717 (897,064) (540,679)
OTHER COMPREHENSIVE INCOME
Cumulative translation adjustment 10,758 69,628 17,222 63,449
-------------- ------------ -------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (445,045) $ 120,345 $ (879,842) $ (477,230)
============= ============ =============== ============
See accompanying notes to financial statements.
4
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. dollars)
Six months ended June 30
2005 2004
------------------------------------
(Unaudited) (Unaudited)
(Restated) (Restated)
OPERATIONS
Net loss $ (897,064) $ (540,679)
Items not involving cash
Depreciation and amortization 84,712 188,723
Unrealized foreign exchange loss 21,346 146,362
Non-cash financing charges 207,053 160,396
Derivative financial instruments income (125,317) (2,135,976)
Gain on disposal of fixed assets - (5,653)
Bad debt expense 18,599 16,740
Net changes in non-cash working capital items 122,785 (242,782)
------------------------------------
Net cash used in operating activities (567,886) (2,412,869)
-----------------------------------
INVESTING
Acquisition of property, plant and equipment (12,363) (137,758)
-----------------------------------
Net cash used in investing activities (12,363) (137,758)
-----------------------------------
FINANCING
Proceeds from sale of shares net of issuance fees 8,837 28,796
Proceeds from sale of convertible debentures net of issuance fees - 1,900,000
Proceeds from note receivable - 20,698
Payments on capital lease obligations (1,354) (8,881)
-----------------------------------
Net cash provided by financing activities 7,483 1,940,613
-----------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (28,176) (11,839)
------------------------------------
Decrease in cash and cash equivalents (600,942) (621,853)
Cash and cash equivalents, beginning of period 1,291,822 1,843,135
-----------------------------------
Cash and cash equivalents, end of period $ 690,880 $ 1,221,282
===================================
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest 966 1,798
See accompanying notes to financial statements.
5
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 (unaudited) and December 31, 2004 (audited)
1. RESTATEMENT
The Company corrected its accounting for (a) derivative financial
instruments to conform to the requirements of Statements of Financial
Accounting Standards ("SFAS") No. 133, as amended, and Emerging Issues
Task Force ("EITF") No. 00-19 see note 8 and 9. Embedded conversion
features that meet the definition of derivative financial instruments
have, where applicable, been bifurcated from host instruments and, in
all instances, derivative financial instruments have been recorded as
liabilities and carried at fair value. Other instruments, such as
warrants, where physical or net-share settlement is not within the
Company's control are recorded as liabilities and carried at fair
value. Finally, instruments that were initially recorded as equity
were reclassified to liabilities at the time that the Company no
longer possessed the ability to settle the instruments on a physical
or net-share basis. Fair value adjustments resulted in a decrease in
net loss and loss per share in the amount of $371,652 and $0.01 per
share in the three months ended June 30, 2005 (2004 - $2,061,575 and
$0.03 per share) and $657,074 and $0.14 per share in the six months
ended June 30, 2005 (2004 - $3,048,729 and $0.20 per share).
2. 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 $897,064 for the
six months ended June 30, 2005 (2004 - $540,679) and reported an
accumulated deficit at that date of $87,323,422 (2004 - $85,327,977).
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.
3. BASIS OF PRESENTATION
The financial statements for the three and six months ended June 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 six months ended June 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.
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.
6
4. 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.
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 Six Months ended
June 30 June 30 June 30 June 30
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net loss, as reported $ (455,803) $ 50,717 $ (897,064) $ (540,679)
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 (3,007) (35,287) (111,747) (141,624)
---------------------------------------------------------------
Pro forma net loss $ (458,810) $ 15,430 $ (1,008,811) $ (682,303)
===============================================================
Basic and diluted loss per share,
as reported $ (0.02) $ 0.00 $ (0.04) $ (0.04)
===============================================================
Basic and diluted loss per share,
pro forma $ (0.02) $ 0.00 $ (0.05) $ (0.05)
===============================================================
6. ACCOUNTS RECEIVABLE
June December
30, 2005 31, 2004
(Unaudited) (Audited)
Accounts receivable - trade $ 1,485,831 $ 1,076,013
Other receivables - 14,977
Allowance for doubtful accounts (83,611) (34,887)
----------------------------
$ 1,402,220 $ 1,056,103
============================
7
7. INVENTORIES
June December
30, 2005 31, 2004
(Unaudited) (Audited)
Finished products $ 753,402 $ 1,239,278
Raw materials 36,558 314,777
Valuation allowance (315,371) (610,411)
-----------------------------
$ 474,589 $ 943,644
============================
8. DERIVATIVE FINANCIAL INSTRUMENTS
June December
30, 2005 31, 2004
(Unaudited) (Audited)
Warrant liability $ 32,036 $ 157,352
Embedded derivatives 358,664 485,555
----------------------------
$ 390,700 $ 642,907
============================
9. CONVERTIBLE DEBENTURES
During the quarter ended June 30, 2005, convertible debentures in an
aggregate nominal value of $160,670 were converted to 3,405,383 shares
of common stock.
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.
During the three and six months ended June 30, 2005, $207,053 and
$91,628, respectively, in non-cash financing expenses were charged to
the statement of loss. These expenses included those relating to
accretion of the convertible debentures and the amortization of
deferred financing expenses. At June 30, 2005, the face amount of
convertible debentures outstanding is $1,793,322 less unamortized
discounts of $476,250.
10. SHAREHOLDERS' EQUITY
a) Employee Stock Purchase Plan - During the second quarter of 2005,
employees purchased 173,267 shares of common stock for $8,837.
11. 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
June 30, 2005, the Company had awarded 595,208 options under the
Employee Stock Option (1997) Plan, 296,318 options under the 1999
Incentive and Nonqualified Stock Option Plan, 521,405 options under the
Employee Stock Option (2000) Plan and 530,000 options under the
Employee Stock Option (2002) Plan. . During the quarter ended June 30,
2005, the Company awarded to a new director options to purchase 50,000
shares of common stock, under the Employee Stock Option (2002) Plan, at
an exercise price of $0.07 per share.
8
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 second quarter of 2005, 282,271 shares of common
stock have been purchased under the Plan. As a result, the Company will
be required to seek approval and register additional shares.
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.
A letter of credit has been issued to the contract manufacturer in the
amount of $100,000 at June 30, 2005. The letter of credit secures the
Company's payment obligation under the Agreement and expires in
December 2005. The Company has pledged cash to the bank as collateral
in the same amount as the letter of credit. This pledge has been
classified as restricted cash.
Development Contractors
The Company employs outside contractors to assist in the design and
development of its products. At June 30, 2005, the Company had entered
into development contracts with one of its contractors, in the amount
of $778,000, of which $545,000 was expensed up to June 30, 2005. The
contract calls for the payment of progress payments against specific
milestones over the course of the contracts.
Contract Supplier
During the first quarter of 2005, the Company entered into a purchase
agreement for the supply of filters. The agreement calls for a minimum
purchase of $123,000 over a one-year period. For the period ended June
30, 2005, the company purchased filters in the amount of $56,170.
Litigation
As at June 30, 2005, there are no litigation matters outstanding
against the Company.
9
12. 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 Six Months ended
June 30 June 30
2005 2004 2005 2004
----------------------------------------------------------------------------
Revenue by Region (Unaudited) (Unaudited) (Unaudited) (Unaudited)
United States $ 1,674,327 $ 1,263,456 $ 2,750,599 $ 2,420,571
Australia 850,147 812,123 1,612,864 1,539,578
Canada 154,448 220,529 318,421 429,928
Rest of World 101,659 116,408 238,260 328,660
----------------------------------------------------------------------------
$ 2,780,581 $ 2,412,516 $ 4,920,144 $ 4,718,737
============================================================================
As at June 30, 2005 (Unaudited)
Canada Australia Total
Property, plant and equipment $ 130,820 $ 89,605 $ 220,425
====================================================
As at December 31, 2004 (Audited)
Canada Australia Total
Property, plant and equipment $ 193,195 $ 101,868 $ 295,063
====================================================
13. COMPARATIVE FIGURES
Certain comparative amounts have been reclassified to correspond with
the current period's presentation.
14. SUBSEQUENT EVENTS
Conversions of convertible debentures subsequent to June 30, 2005 --
Subsequent to June 30, 2005, convertible debentures with an aggregate
nominal value of $77,255 were converted to 1,906,000 shares of common
stock.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for the three and six
months ended June 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 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 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.
11
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
With the introduction of two new products, the EUM3006 and EUM3005, in
February and June of 2005 respectively, we have experienced, and expect to
continue to experience, at least through the third quarter, both strong demand
for and constrained supply of these products.
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 JUNE 30, 2005 COMPARED TO THE THREE
MONTHS ENDED JUNE 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 June 30,
2005 2004 % Change
North America $ 1,829 $ 1,484 23.2%
Non-North America 952 929 2.5%
----------------------------------
Total revenues $ 2,781 $ 2,413 15.3%
==================================
Percentage of total revenue
North America 65.8% 61.5%
Non-North America 34.2% 38.5%
Total revenue increased 15.3% in Q2 2005 compared to Q2 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 Q2 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 strong sequential and 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.
12
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
June 30,
2005 2004
Product revenue
Gross margin $716 $368
Gross margin rate 30.3% 20.9%
Service revenue
Gross margin $189 $278
Gross margin rate 45.2% 42.4%
Total revenue
Gross margin $905 $646
Gross margin rate 32.5% 26.8%
Gross margins in Q2 2005 increased to 32.5% compared to 26.8% of revenue in
Q2 2004 and, in conjunction with the increase in quarterly revenue, total gross
margin dollars increased 40.1% compared to Q2 2004.
In Q2 2004, the Company recorded an additional inventory obsolescence
charge of $253,000, which reduced product margins by 14.4% and overall margins
by 10.5%. No similar provision was recorded in 2005. Service margins increased
as more of the service revenue was generated through higher margin extended
service agreements and less through subcontracted services.
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 $1,043,643 from
$1,477,161 in Q2 2004. Included in Q2 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 $149,484 in Q2 2005 from
$365,750 in Q2 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 802.16 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.
13
Depreciation and Amortization expense
Depreciation and amortization expense declined to $50,758 in Q2 2005
compared to $93,493 in Q2 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 $101,760 for the three months ended June 30,
2005 compared to $119,757 for the three months ended June 30, 2004. Included in
interest expense for the three months ended June 30, 2005 is $91,628 (2004 -
$103,848) of non-cash charges related to the accretion to face value of the
convertible debentures and amortization of deferred financing charges.
Derivative instrument income (expense)
Derivative instrument income (expense) amounted to $(1,482) for the three
months ended June 30, 2005 compared to $1,597,320 for the three months ended
June 30, 2004. Derivative instrument income arises from fair value adjustments
for certain financial instruments, such as warrants to acquire common stock and
the embedded conversion features of the convertible debentures that are indexed
to the Company's common stock, and are classified as liabilities when either (a)
the holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of the Company. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when the
terms of the underlying contracts do not provide for net-cash settlement. Such
derivative financial instruments are initially recorded at fair value with
subsequent changes in the fair value charged (credited) to operations each
reporting period.
Foreign Exchange
The Company incurred a foreign exchange loss for the three months ended
June 30, 2005 in the amount of $672 compared to a loss for the three months
ended June 30, 2004 in the amount of $121,801. The foreign exchange losses are
due to a strengthening of the U.S. dollar versus the Canadian and Australian
dollars.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2004.
Revenue
The following table presents our North American and non-North American
revenues and the approximate percentage of total revenues ($000's):
Six months ended June 30,
2005 2004 % Change
North America $ 3,069 $ 2,851 7.7%
Non-North America 1,851 1,868 (0.9%)
-----------------------------------
Total revenues $ 4,920 $ 4,719 4.3%
==================================
Percentage of total revenue
North America 62.4% 60.4%
Non-North America 37.6% 39.6%
Total revenue increased 4.3% in the six months ended June 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.
14
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 strong sequential and 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):
Six months ended
June 30,
2005 2004
Product revenue
Gross margin $1,259 $1,047
Gross margin rate 30.6% 28.6%
Service revenue
Gross margin $363 $423
Gross margin rate 44.7% 39.7%
Total revenue
Gross margin $1,622 $1,469
Gross margin rate 33.0% 31.1%
Gross margins increased to 33.0% in 2005 compared to 31.1% of revenue in
2004 and, in conjunction with the increase in revenue, total gross margin
dollars increased 10.3% 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. Service margins increased as
more of the service revenue was generated through higher margin extended service
agreements and less through subcontracted services.
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 $2,054,374 in 2005
from $2,749,791 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.
15
Research and Development expenses
Research and development expenses declined to $260,340 in 2005 from
$854,794 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 802.16 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 $84,712 in 2005 compared
to $188,723 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 $222,720 for the six months ended June 30,
2005 compared to $188,317 for the six months ended June 30, 2004. Included in
interest expense for the six months ended June 30, 2005 is $207,053 (2004 -
$160,396) of non-cash charges related to the accretion to face value of the
convertible debentures and amortization of deferred financing charges.
Derivative instrument income (expense):
Derivative instrument income (expense) amounted to $125,317 for the six
months ended June 30, 2005 compared to $2,135,976 for the six months ended June
30, 2004. Derivative instrument income arises from fair value adjustments for
certain financial instruments, such as warrants to acquire common stock and the
embedded conversion features of the convertible debentures that are indexed to
the Company's common stock, and are classified as liabilities when either (a)
the holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of the Company. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when the
terms of the underlying contracts do not provide for net-cash settlement. Such
derivative financial instruments are initially recorded at fair value with
subsequently changes in the fair value charged to operations each reporting
period.
Foreign Exchange
The Company incurred a foreign exchange loss for the six months ended June
30, 2005 in the amount of $9,639 compared to a loss for the six months ended
June 30, 2004 in the amount of $150,097. 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 $492,885 of cash in operating activities during the six months
ended June 30, 2005 (2004 - $2,412,869). 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 to meet our current
and future financial commitments until we achieve positive cash flows from
operations.
The Company has determined that it does not control its ability to
physically or net-share settle certain financial instruments that are
convertible or exercisable into common stock. As a result, we have recorded our
warrants and the embedded derivatives associated with our convertible debentures
as liabilities. The Company has never net cash settled any conversions or
exercises of these instruments and does not currently expect to pay cash in
settlement of future conversions or exercises.
16
While we have a long-term plan that we believe will allow us to achieve
profitability and cash flow positive operations, Management believes that we
will have to raise additional funds in 2005 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 32 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.
17
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 June 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 June 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: January 23, 2006 /s/ Charles W. Brown
--------------------
Charles W. Brown
Chief Executive Officer
/s/ T. Scott Worthington
T. Scott
Worthington Chief
Financial Officer.
18