_________________
| |X| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2004 |
| |_| | 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 9, 2004 was 8,335,886
| |
|
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 |
10 |
||
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
21 |
||
ITEM 4. |
CONTROLS AND PROCEDURES |
23 |
||
Part II—OTHER INFORMATION |
||||
ITEM 1. |
LEGAL PROCEEDINGS |
24 |
||
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
24 |
||
ITEM 5. |
OTHER INFORMATION |
24 |
||
ITEM 6. |
EXHIBITS AND REPORTS ON FORM 8-K |
25 |
||
SIGNATURES |
27 |
|||
Part I — FINANCIAL INFORMATIONITEM
ITEM 1. FINANCIAL STATEMENTS
MDSI MOBILE DATA SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)
(Unaudited)
| As at | |||||
|---|---|---|---|---|---|
| June 30, | December 31, | ||||
| 2004 | 2003 | ||||
| ASSETS | |||||
| CURRENT ASSETS | |||||
| Cash and cash equivalents | $ 18,750,990 | $ 15,827,043 | |||
| Accounts receivable, net | |||||
| Trade (net of allowance for doubtful accounts $284,086; 2003 - $2,792,415) | 5,509,049 | 8,610,846 | |||
| Unbilled | 2,419,728 | 2,446,271 | |||
| Prepaid expenses and other assets | 1,090,194 | 1,838,425 | |||
| 27,769,961 | 28,722,585 | ||||
| CAPITAL ASSETS, NET | 7,227,679 | 7,990,457 | |||
| LONG TERM DEFERRED TAXES | 358,640 | 357,628 | |||
| TOTAL ASSETS | $ 35,356,280 | $ 37,070,670 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
| CURRENT LIABILITIES | |||||
| Accounts payable | $ 1,981,836 | $ 1,786,665 | |||
| Accrued liabilities (note 4) | 5,691,432 | 4,677,980 | |||
| Income taxes payable | 1,138,488 | 917,183 | |||
| Deferred revenue | 9,264,810 | 11,560,446 | |||
| Current obligations under capital lease | 1,035,959 | 1,204,269 | |||
| 19,112,525 | 20,146,543 | ||||
| OBLIGATIONS UNDER CAPITAL LEASES | 503,915 | 982,016 | |||
| TOTAL LIABILITIES | 19,616,440 | 21,128,559 | |||
| Commitments and Contingencies (note 5) | |||||
| STOCKHOLDERS' EQUITY | |||||
| Common stock | 44,711,878 | 44,329,182 | |||
| Additional paid-up capital | 2,357,128 | 2,222,128 | |||
| Deficit | (30,639,062 | ) | (29,919,095 | ) | |
| Accumulated other comprehensive loss | (690,104 | ) | (690,104 | ) | |
| 15,739,840 | 15,942,111 | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 35,356,280 | $ 37,070,670 | |||
See Notes to Condensed Consolidated Financial Statements
-1-
| Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| REVENUE | |||||||||
| Software and services | $ 7,250,212 | $ 7,379,187 | $ 14,731,926 | $ 14,592,620 | |||||
| Maintenance and support | 4,357,923 | 3,368,101 | 8,660,650 | 6,185,895 | |||||
| Third party products and services | 192,727 | 611,937 | 1,058,984 | 2,464,682 | |||||
| 11,800,862 | 11,359,225 | 24,451,560 | 23,243,197 | ||||||
| DIRECT COSTS | 4,822,554 | 5,638,356 | 11,412,543 | 11,566,460 | |||||
| GROSS PROFIT | 6,978,308 | 5,720,869 | 13,039,017 | 11,676,737 | |||||
| OPERATING EXPENSES | |||||||||
| Research and development | 1,597,346 | 1,418,925 | 3,132,690 | 2,697,951 | |||||
| Sales and marketing | 2,317,201 | 2,884,236 | 4,452,252 | 5,832,179 | |||||
| General and administrative | 1,971,260 | 1,612,857 | 3,724,321 | 3,182,923 | |||||
| Bad Debts Expense | 73,586 | -- | 73,586 | -- | |||||
| Strategic Expenses | 1,770,299 | 825,120 | 2,120,299 | 825,120 | |||||
| 7,729,692 | 6,741,138 | 13,503,148 | 12,538,173 | ||||||
| OPERATING LOSS | (751,384 | ) | (1,020,269 | ) | (464,131 | ) | (861,436 | ) | |
| OTHER (EXPENSE) INCOME | (11,220 | ) | (208,491 | ) | 214,898 | (461,110 | ) | ||
| LOSS FROM OPERATIONS BEFORE TAX PROVISION | (762,604 | ) | (1,228,760 | ) | (249,233 | ) | (1,322,546 | ) | |
| PROVISION FOR INCOME TAXES | 300,946 | 124,996 | 470,734 | 224,258 | |||||
| NET LOSS FOR THE PERIOD | (1,063,550 | ) | (1,353,756 | ) | (719,967 | ) | (1,546,804 | ) | |
| DEFICIT, BEGINNING OF PERIOD | (29,575,512 | ) | (26,469,400 | ) | (29,919,095 | ) | (26,276,352 | ) | |
| DEFICIT, END OF PERIOD | $(30,639,062 | ) | $(27,823,156 | ) | $(30,639,062 | ) | $(27,823,156 | ) | |
| Loss per common share | |||||||||
| Net Loss | |||||||||
| Basic | $ (0.13 | ) | $ (0.17 | ) | $ (0.09 | ) | $ (0.19 | ) | |
| Diluted | $ (0.13 | ) | $ (0.17 | ) | $ (0.09 | ) | $ (0.19 | ) | |
See Notes to Condensed Consolidated Financial Statements
-2-
| Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Net loss | $(1,063,550 | ) | $(1,353,756 | ) | $ (719,967 | ) | $(1,546,804 | ) | |
| Items not affecting cash: | |||||||||
| Depreciation | 695,915 | 771,853 | 1,274,976 | 1,502,614 | |||||
| Deferred income taxes | -- | 170,000 | (1,012 | ) | 170,000 | ||||
| Stock based compensation charge | -- | -- | 135,000 | -- | |||||
| Changes in non-cash operating | |||||||||
| working capital items (note 6) | 2,359,729 | 2,087,207 | 3,010,863 | 3,901,376 | |||||
| Net cash provided by operating | |||||||||
| activities | 1,992,094 | 1,675,304 | 3,699,860 | 4,027,186 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
| Issuance of Common Shares | 354,739 | 3,966 | 382,696 | 77,033 | |||||
| Repayment of capital leases | (282,211 | ) | (318,915 | ) | (646,411 | ) | (789,472 | ) | |
| Net cash provided by (used in) | |||||||||
| financing activities | 72,528 | (314,949 | ) | (263,715 | ) | (712,439 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
| Acquisition of capital assets | (187,437 | ) | (203,983 | ) | (512,198 | ) | (626,076 | ) | |
| Net cash used in investing activities | (187,437 | ) | (203,983 | ) | (512,198 | ) | (626,076 | ) | |
| NET CASH INFLOW | 1,877,185 | 1,156,372 | 2,923,947 | 2,688,671 | |||||
| CASH AND CASH EQUIVALENTS, | |||||||||
| BEGINNING OF PERIOD | 16,873,805 | 12,549,244 | 15,827,043 | 11,016,945 | |||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ 18,750,990 | $ 13,705,616 | $ 18,750,990 | $ 13,705,616 | |||||
See Notes to Condensed Consolidated Financial Statements
-3-
| 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 of America 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. 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, 2003. |
| (b) | Use of estimates |
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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) | Revenue Recognition |
| We recognize revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions,” SOP 81-1, “Accounting for Performance of Construction-type and Certain Production-type Contracts,” the Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” and other authoritative accounting literature. We derive revenues from the following sources: license fees, professional services, maintenance and support fees and third party products and services. |
| We generally provide services with our supply agreements that include significant production, modification, and customisation of the software. These services are not separable and are essential to the functionality of the software, and as a result we account for these licence and service arrangements under SOP 81-1 using the percentage of completion method of contract accounting. |
| License Fees and Professional Services |
| Our supply agreements generally include multiple products and services, or “elements.” We use the residual method to recognize revenue when a supply agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence of the fair value of all undelivered elements exists. The fair value of the undelivered elements is determined based on the historical evidence of stand-alone sales, or renewal terms of these elements to customers. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee, which relates to the license and implementation services, is recognized as revenue on a percentage of completion basis. If evidence of the fair value of one or more undelivered elements does not exist, the total revenue is deferred and recognized when delivery of those elements occurs or when fair value is established. |
-4-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| (c) | Revenue recognition (continued) |
| We estimate the percentage of completion on contracts with fixed fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated man-days to complete the project. If we do not have a sufficient basis to measure progress towards completion, revenue is recognized when we receive final acceptance from the customer. When the total cost estimate for a project exceeds revenue, we accrue for the estimated losses immediately. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. |
| We are engaged on a continuous basis in the production and delivery of software under contractual agreements. As a result we have developed a history of being able to estimate costs to complete and the extent of progress toward completion of contracts, which supports the use of the percentage of completion method of contract accounting. |
| Professional services revenue primarily consists of consulting and customer training revenues, which are usually charged on a time and materials basis and are recognized as the services are performed. Revenue from certain fixed price contracts is recognized on a proportional performance basis, which involves the use of estimates related to total expected man-days of completing the contract derived from historical experience with similar contracts. If we do not have a sufficient basis to measure the progress towards completion, revenue is recognized when the project is completed or when we receive final acceptance from the customer. |
| Maintenance Revenue |
| Generally, maintenance is initially sold as an element of a master supply arrangement, with subsequent annual renewals, and is priced as a percentage of new software license fees. Maintenance revenue is recognized ratably over the term of the maintenance period, which typically is one year. Maintenance and support revenue includes software license updates that provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period. Product support services also include Internet and telephone access to technical support personnel. |
| Historically, we have provided a warranty phase during the supply agreement. Services provided during this warranty phase include elements of maintenance and support. As a result we defer a portion of the supply agreement fee, based on vendor specific objective evidence of the value of these services, and recognize the deferred amount as revenue pro rata over the warranty period. |
| Third party products and services |
| Revenue from sales of third party products and services is recognized on delivery of the products. Services are recognized on a percentage-complete basis. When software licenses are sold incorporating third-party products or sold with third-party products, we recognize as revenue the gross amount of sales of third-party product. The recognition of gross revenue is in accordance with criteria established in Emerging Issues Task Force Issue (EITF) No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. |
| On occasion, we utilize third-party consultants to assist in implementations or installations originated by the Company. In these cases, in accordance with criteria established in EITF 99-19 (as described above), the revenue for these implementations and installations is typically recognized on a gross basis. In these cases, we ultimately manage the engagement. |
-5-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| (d) | Recently issued accounting standards |
| In June 2004, the FASB issued an exposure draft of a proposed Statement, “Fair Value Measurements” to provide guidance on how to measure the fair value of financial and non-financial assets and liabilities when required by other authoritative accounting pronouncements. The proposed statement attempts to address concerns about the ability to develop reliable estimates of fair value and inconsistencies in fair value guidance provided by current US GAAP, by creating a framework that clarifies the fair value objective and its application in GAAP. In addition, the proposal expands disclosures required about the use of fair value to remeasure assets and liabilities. The standard would be effective for financial statements issued for fiscal years beginning after June 15, 2005. The Company is currently assessing the impact this standard will have on the Company’s consolidated financial statements. |
| In March 2004, the FASB ratified consensuses reached by the Emerging Issues Task Force (“EITF”) with respect to EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue No. 03-1 addresses recognition, measurement and disclosure of other-than-temporary impairment evaluations for securities within the scope of SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and equity securities that are not subject to the scope of SFAS No. 115 and are not accounted for under the equity method according to Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The recognition and measurement guidance is effective for reporting periods beginning after June 15, 2004. Disclosures for cost method investments are required to be included in annual financial statements prepared for fiscal years ending after June 15, 2004. The Company does not have any significant cost method investments and therefore adoption is not expected to have a significant impact on its consolidated financial statements. |
| In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”, which supercedes Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of Emerging Issues Task Force 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” SAB 104 also incorporated certain sections of the SEC’s “Revenue Recognition in Financial Statements – Frequently Asked Questions and Answers” document. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have an impact on the consolidated financial statements. |
| (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 Statement of Financial Accounting Standard No. 123 (SFAS 123) Accounting for Stock-based Compensation. |
| Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| Net loss for the period | $ (1,259,301 | ) | $ (1,705,430 | ) | $ (1,155,799 | ) | $ (2,242,934 | ) | |
| Basic and fully diluted loss | |||||||||
| per common share | $ (0.15 | ) | $ (0.21 | ) | $ (0.14 | ) | $ (0.27 | ) | |
-6-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| (e) | Stock-based compensation (continued) |
| Using the fair value method for stock-based compensation, additional compensation costs of approximately $195,751 would have been recorded for the three months ended June 30, 2004 (2003 — $351,674), and $435,832 would have been recorded for the six months ended June 30, 2004 (2003 — $696,130). 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 expected volatility of the Company’s share price of 47% and a weighted average annualized risk free interest rate at 1.1%. |
| 2. | SEGMENTED INFORMATION |
| The Company operates in a single business segment, the Field Service business segment. |
| The Company earned revenue from sales to customers in the following geographic locations: |
| Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| Canada | $ 482,454 | $ 539,429 | $ 966,621 | $ 812,866 | |||||
| United States | 6,585,757 | 5,975,850 | 13,517,075 | 11,281,187 | |||||
| Europe, Middle East and Africa | 4,605,520 | 4,698,362 | 9,661,177 | 10,722,178 | |||||
| Asia and other | 127,131 | 145,584 | 306,687 | 426,966 | |||||
| $11,800,862 | $11,359,225 | $24,451,560 | $23,243,197 | ||||||
| Major customers |
| During the three months ended June 30, 2004 revenue from two customers accounted for approximately 17.3% and 13.9% (2003 – 13.5% and 16.7%), respectively, of total revenue. During the six months ended June 30, 2004 revenue from two customers accounted for approximately 17.7% and 13.5% (2003 – 17.1% and 13.1%), respectively, of total revenue. |
| 3. | LOSS PER COMMON SHARE |
| Basic loss per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. In periods for which there is a reported net loss, potentially dilutive securities have been excluded from the calculation, as their effect would be anti-dilutive. |
-7-
| 3. | LOSS PER COMMON SHARE (continued) |
| The following table reconciles the number of shares utilized in the loss per common share calculations for the periods indicated: |
| Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| Basic weighted average shares outstanding | 8,280,528 | 8,202,814 | 8,251,554 | 8,194,129 | |||||
| Effect of dilutive securities; | |||||||||
| Stock options | -- | -- | -- | -- | |||||
| Diluted weighted average shares outstanding | 8,280,528 | 8,202,814 | 8,251,554 | 8,194,129 | |||||
| 4. |