UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file Number: 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
| CANADA (Jurisdiction of incorporation) |
NOT APPLICABLE (I.R.S. Employer Identification No.) |
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(604) 207-6000
(Address and telephone number of
registrant's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The
number of outstanding shares of the Registrant's
common stock, no par value, at August 13, 2003 was 8,204,666.
MDSI Mobile Data Solutions Inc.
INDEX TO THE FORM 10-Q
For the quarterly period ended June 30, 2003
| |
|
Page No. |
||
|---|---|---|---|---|
| Part I—FINANCIAL INFORMATION | ||||
| ITEM 1. |
FINANCIAL STATEMENTS |
|||
Condensed Consolidated Balance Sheets |
1 |
|||
Condensed Consolidated Statements of Operations |
2 |
|||
Condensed Consolidated Statements of Cash Flows |
3 |
|||
Notes to Condensed Consolidated Financial Statements |
4 |
|||
ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
12 |
||
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
25 |
||
ITEM 4. |
CONTROLS AND PROCEDURES |
26 |
||
Part II—OTHER INFORMATION |
||||
ITEM 1. |
LEGAL PROCEEDINGS |
27 |
||
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
28 |
||
ITEM 5. |
OTHER INFORMATION |
28 |
||
ITEM 6. |
EXHIBITS AND REPORTS ON FORM 8-K |
29 |
||
SIGNATURES |
31 |
|||
| As at | ||||||
|---|---|---|---|---|---|---|
| June 30, | December 31, | |||||
| 2003 | 2002 | |||||
| ASSETS | ||||||
| CURRENT ASSETS | ||||||
| Cash and cash equivalents | $ 13,705,616 | $ 11,016,945 | ||||
| Accounts receivable, net | ||||||
| Trade (net of allowance for doubtful accounts $2,483,764; 2002 - $2,506,614) | 9,984,143 | 6,705,088 | ||||
| Unbilled | 3,415,088 | 5,347,993 | ||||
| Prepaid expenses and other assets | 1,013,275 | 1,552,236 | ||||
| 28,118,122 | 24,622,262 | |||||
| CAPITAL ASSETS, NET | 8,921,549 | 9,798,087 | ||||
| LONG TERM RECEIVABLE (note 6(a)) | 2,749,860 | 2,749,860 | ||||
| DEFERRED INCOME TAXES | 364,640 | 534,640 | ||||
| TOTAL ASSETS | $ 40,154,171 | $ 37,704,849 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
| CURRENT LIABILITIES | ||||||
| Accounts payable | $ 1,479,692 | $ 1,777,465 | ||||
| Accrued liabilities (note 5) | 4,101,023 | 3,300,113 | ||||
| Income taxes payable | 641,597 | 602,717 | ||||
| Deferred revenue | 10,404,850 | 7,503,613 | ||||
| Current obligations under capital lease | 1,896,817 | 2,073,906 | ||||
| 18,523,979 | 15,257,814 | |||||
| OBLIGATIONS UNDER CAPITAL LEASES | 1,301,155 | 1,913,538 | ||||
| 19,825,134 | 17,171,352 | |||||
| STOCKHOLDERS' EQUITY | ||||||
| Common stock | 44,285,544 | 44,208,511 | ||||
| Additional paid-up capital | 2,222,128 | 2,222,128 | ||||
| Deficit | (25,488,531 | ) | (25,207,038 | ) | ||
| Accumulated other comprehensive loss | (690,104 | ) | (690,104 | ) | ||
| 20,329,037 | 20,533,497 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 40,154,171 | $ 37,704,849 | ||||
Commitments and Contingencies (note 6)
See Notes to Condensed Consolidated Financial Statements
-1-
| Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| REVENUE | |||||||||
| Software and services | $ 8,341,170 | $ 4,885,062 | $ 16,191,829 | $ 10,692,155 | |||||
| Maintenance and support | 3,268,744 | 2,866,478 | 5,871,131 | 5,423,551 | |||||
| Third party products and services | 611,937 | 279,431 | 2,464,682 | 515,821 | |||||
| 12,221,851 | 8,030,971 | 24,527,642 | 16,631,527 | ||||||
| DIRECT COSTS | 5,638,356 | 3,490,743 | 11,566,460 | 7,121,062 | |||||
| GROSS PROFIT | 6,583,495 | 4,540,228 | 12,961,182 | 9,510,465 | |||||
| OPERATING EXPENSES | |||||||||
| Research and development | 1,418,925 | 1,498,948 | 2,697,951 | 2,958,983 | |||||
| Sales and marketing | 2,884,236 | 3,912,177 | 5,832,179 | 6,326,070 | |||||
| General and administrative | 1,612,857 | 1,529,565 | 3,182,923 | 3,194,007 | |||||
| Strategic expenses (note 8) | 825,120 | -- | 825,120 | -- | |||||
| 6,741,138 | 6,940,690 | 12,538,173 | 12,479,060 | ||||||
| OPERATING (LOSS) INCOME | (157,643 | ) | (2,400,462 | ) | 423,009 | (2,968,595 | ) | ||
| OTHER (EXPENSE) INCOME | (208,491 | ) | 86,032 | (461,110 | ) | 162,264 | |||
| LOSS FROM CONTINUING OPERATIONS | |||||||||
| BEFORE TAX PROVISION | (366,134 | ) | (2,314,430 | ) | (38,101 | ) | (2,806,331 | ) | |
| INCOME TAX EXPENSE (RECOVERY) FROM | |||||||||
| CONTINUING OPERATIONS | 137,644 | (688,919 | ) | 243,392 | (814,619 | ) | |||
| NET LOSS FROM CONTINUING OPERATIONS | (503,778 | ) | (1,625,511 | ) | (281,493 | ) | (1,991,712 | ) | |
| INCOME FROM DISCONTINUED OPERATIONS (note 2) | -- | 22,196 | -- | 108,612 | |||||
| NET LOSS FOR THE PERIOD | (503,778 | ) | (1,603,315 | ) | (281,493 | ) | (1,883,100 | ) | |
| DEFICIT, BEGINNING OF PERIOD | (24,984,753 | ) | (24,071,566 | ) | (25,207,038 | ) | (23,791,781 | ) | |
| DEFICIT, END OF PERIOD | $(25,488,531 | ) | $(25,674,881 | ) | $(25,488,531 | ) | $(25,674,881 | ) | |
| Loss per common share | |||||||||
| Loss from continuing operations | |||||||||
| Basic | $ (0.06 | ) | $ (0.18 | ) | $ (0.03 | ) | $ (0.23 | ) | |
| Diluted | $ (0.06 | ) | $ (0.18 | ) | $ (0.03 | ) | $ (0.23 | ) | |
| Net Loss | |||||||||
| Basic | $ (0.06 | ) | $ (0.18 | ) | $ (0.03 | ) | $ (0.21 | ) | |
| Diluted | $ (0.06 | ) | $ (0.18 | ) | $ (0.03 | ) | $ (0.21 | ) | |
See Notes to Condensed Consolidated Financial Statements
-2-
| Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Net loss from continuing operations | $ (503,778 | ) | $(1,625,511 | ) | $ (281,493 | ) | $(1,991,712 | ) | |
| Items not affecting cash: | |||||||||
| Depreciation | 771,853 | 763,613 | 1,502,614 | 1,437,204 | |||||
| Deferred income taxes | 170,000 | (170,000 | ) | 170,000 | (170,000 | ) | |||
| Changes in non-cash operating working | |||||||||
| capital items (note 7) | 1,237,229 | (301,352 | ) | 2,636,065 | (176,067 | ) | |||
| Net cash provided by (used in) operating activities | 1,675,304 | (1,333,250 | ) | 4,027,186 | (900,575 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
| Issuance of Common Shares | 3,966 | 26,912 | 77,033 | 239,076 | |||||
| Repayment of capital leases | (318,915 | ) | (466,096 | ) | (789,472 | ) | (974,896 | ) | |
| Net cash used by financing activities | (314,949 | ) | (439,184 | ) | (712,439 | ) | (735,820 | ) | |
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
| Acquisition of capital assets | (203,983 | ) | (474,516 | ) | (626,076 | ) | (685,410 | ) | |
| Net cash used in investing activities | (203,983 | ) | (474,516 | ) | (626,076 | ) | (685,410 | ) | |
| Net cash provided by (used for) Continuing operations | 1,156,372 | (2,246,950 | ) | 2,688,671 | (2,321,805 | ) | |||
| Net cash used for discontinued operations (note 2) | -- | (58,942 | ) | -- | (312,709 | ) | |||
| NET CASH INFLOW (OUTFLOW) | 1,156,372 | (2,305,892 | ) | 2,688,671 | (2,634,514 | ) | |||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 12,549,244 | 12,847,458 | 11,016,945 | 13,176,080 | |||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ 13,705,616 | $ 10,541,566 | $ 13,705,616 | $ 10,541,566 | |||||
During the year ended December 31, 2002 the Company entered into two capital lease arrangements for the gross amount of $2,922,078 for newly purchased capital assets. As a result of these arrangements the Company did not incur cash outlays to purchase these assets but will pay lease obligations with interest accruing at interest rates of up to 9.5% over terms of up to three years. Since these asset purchases in 2002 are non cash transactions, the gross amount of the leases have been excluded from both the Acquisition of Capital Assets and Proceeds from Capital Leases line items for the year ended December 31, 2002, and instead only the principal portion of repayments are included as repayment of capital leases in the period in which they are paid.
See Notes to Condensed Consolidated Financial Statements
-3-
MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Basis of presentation |
| These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and pursuant to the instructions of the United States Securities and Exchange Commission Form 10-Q and Article 10 of Regulation S-X. While these financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three and six month periods ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in the Annual Report of MDSI Mobile Data Solutions Inc. (the “Company” or “MDSI”) filed on Form 10-K for the year ended December 31, 2002. |
| (b) | Use of estimates |
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used for, but not limited to, the accounting for doubtful accounts, amortization, determination of the net recoverable value of assets, revenue recognized on long term contracts, taxes and contingencies. Actual results could differ from those estimates. |
| (c) | Reporting currency and other comprehensive income |
| The Company changed its reporting currency to the U.S. dollar effective January 1, 2000. The change in reporting currency was made to improve investors’ ability to compare the Company’s results with those of most other publicly traded businesses in the industry. These consolidated financial statements and those amounts previously reported in Canadian dollars have been translated from Canadian dollars to U.S. dollars by translating assets and liabilities at the rate in effect at the respective balance sheet date and revenues and expenses at the average rate for the reporting period. Any resulting foreign exchange gains and losses are recorded as a separate component of shareholder equity and described as accumulated other comprehensive income (loss). There was no other comprehensive income (loss) for any of the periods presented in this report. |
| (d) | Recently issued accounting standards |
| In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standard (SFAS) No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not anticipate that this will have a material impact on the Company’s financial statements. |
-4-
MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (d) | Recently issued accounting standards |
| In April 2003 FASB issued Statement No. 149 (“SFAS 149”), Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, it (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to the language used in FASB Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others and (4) amends certain other existing pronouncements. |
| SFAS 149 is effective for contracts entered into or modified after June 30, 2003, subject to certain exceptions, for hedging relationships designated after June 30, 2003. |
| The Company will adopt the provisions of SFAS 149 for any contracts entered into after June 30, 2003 and is not affected by Implementation Issues that would require earlier adoption. The Company is currently evaluating the effect that the adoption of SFAS 149 will have on its results of operations and financial condition. |
| In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not anticipate that the adoption of FIN 46 will have an material impact on the results of operations and financial condition of the Company. |
| In June 2002, the FASB issued SFAS No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 requires that the liability for a cost associated with an exit or disposal activity be recognized at its fair value when the liability is incurred. Under previous guidance, a liability for certain exit costs was recognized at the date that management committed to an exit plan, which was generally before the actual liability had been incurred. Adoption of this statement did not impact the Company’s financial statements for the three or six month period ended June 30, 2003. |
| In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. Although the disclosure provisions of FIN 45 previously were adopted by the Company, the recognition provisions of FIN 45 became effective as of January 1, 2003. The adoption of the recognition provisions of FIN 45 did not have a material impact on the Company’s results of operations or financial position. |
-5-
MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (e) | Stock-based compensation |
| The Company accounts for stock-based compensation using the intrinsic value based method whereby compensation cost is recorded for the excess, if any, of the quoted market price of the common share over the exercise price of the common stock option at the date granted. |
| The following pro forma financial information presents the net loss for the quarter and loss per common share had the Company adopted the fair value method pursuant to Statement of Financial Accounting Standard No. 123 (SFAS 123) Accounting for Stock-based Compensation. |
| Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| Net loss for the period | $ (727,834 | ) | $ (1,717,940 | ) | $ (722,388 | ) | $ (2,299,596 | ) | |
| Basic and fully diluted loss per | |||||||||
| common share | $ (0.09 | ) | $ (0.19 | ) | $ (0.09 | ) | $ (0.26 | ) | |
| Using the fair value method for stock-based compensation, additional compensation costs of approximately $224,056 would have been recorded for the three months ended June 30, 2003 (2002 — $114,625), and $440,894 would have been recorded for the six months ended June 30, 2003 (2002 — $307,884). This amount is determined using an option pricing model assuming no dividends are to be paid, an average vesting period of four years, average life of the option of 5 years, a weighted average annualized volatility of the Company’s share price of 73% and a weighted average annualized risk free interest rate at 2.7%. |
| 2. | DISCONTINUED OPERATIONS |
| During June 2002, MDSI adopted a plan for sale and entered into an agreement to sell its Hosting and IT Services business segment, Connectria Corporation (Connectria), to former Connectria shareholders who were both shareholders and employees of the Company. The transaction closed in July 2002. Pursuant to the terms of the agreement, the Company received from the former Connectria shareholders 824,700 shares of MDSI that had an approximate market value of $2.8 million and the cancellation of 103,088 previously issued stock options of MDSI as consideration for Connectria. In addition to the share consideration, a wholly-owned subsidiary of MDSI received a warrant allowing it to purchase up to 50,380 shares of Series A Nonvoting Preferred Stock of Connectria at a price of $50 per share exercisable for a period of five years. The Series A Nonvoting Preferred Stock of Connectria has a face value of $100 per share, bears a dividend of five percent per annum, bears a liquidation preference equal to the face value, may be redeemed at Connectria’s option at any time, and must be redeemed by Connectria upon a capital infusion of $10 million or greater. In addition MDSI has advanced to Connectria $500,000, consisting of a loan in the principal amount of $250,000 with a two year term, bearing interest at 5%, and $250,000 for prepaid hosting services. As at June 30, 2003 the entire amount of the prepaid hosting services has been amortized to income. The Company recognized a gain of $12,419 on the disposal of Connectria during the quarter ended June 30, 2002. Connectria represented a significant segment of the Company’s business. |
-6-
MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
| 2. | DISCONTINUED OPERATIONS (continued) |
| Summarized financial information of the discontinued operations is as follows: |
| Results of discontinued operations | Three months ended, | |||||
|---|---|---|---|---|---|---|
| June 30, 2003 | June 30, 2002 | |||||
| Revenues | $ -- | $ 2,417,890 | ||||
| Income before income taxes | -- | 22,196 | ||||
| Income tax | -- | -- | ||||
| -- | 22,196 | |||||
| Income on disposal net of income taxes | -- | -- | ||||
| Income from discontinued operations | $ -- | $ 22,196 | ||||
| Results of discontinued operations | Six months ended, | |||||
|---|---|---|---|---|---|---|
| June 30, 2003 | June 30, 2002 | |||||
| Revenues | $ -- | $ 5,058,101 | ||||
| Income before income taxes | -- | 108,612 | ||||
| Income tax | -- | -- | ||||
| -- | 108,612 | |||||
| Income on disposal | ||||||
| net of income taxes | -- | -- | ||||
| Income from discontinued operations | $ -- | $ 108,612 | ||||
| Cash flows of discontinued operations | Three months ended, | |||||
|---|---|---|---|---|---|---|
| June 30, 2003 | June 30, 2002 | |||||
| Operating activities | $ -- | $ 162,441 | ||||
| Investing activities | -- | (144,882) | ||||
| Financial activities | -- | (76,501) | ||||
| Cash used for discontinued operations | $ -- | $ (58,942) | ||||
| Cash flows of discontinued operations | Six months ended, | |||||
|---|---|---|---|---|---|---|