UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2002 | |
| OR | |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) |
For the transition period from _________________ to _________________.
Commission file number: 0-31659
NOVATEL WIRELESS, INC.
| Delaware | 86-0824673 | |
| (State or other jurisdiction or incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
| 9360 Towne Centre Drive, San Diego, California | 92121 | |
| (Address of principal executive offices) | (zip code) |
Registrant’s telephone number, including area code: (858) 320-8800
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 [ ].
The number of shares of the Registrant’s common stock outstanding as of August 1, 2002 was 76,425,804.
As used in this report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “the Company” and “Novatel Wireless” refer to Novatel Wireless Inc., a Delaware corporation and its wholly-owned subsidiaries.
Forward Looking Statements
This report contains forward-looking statements based on our current expectations, assumptions, estimates and projections about Novatel Wireless and our industry. For this purpose, statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “estimates” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Actual results may differ materially from those indicated in such forward-looking statements. Novatel Wireless undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Trademarks
The Novatel Wireless logo, Minstrel, Minstrel III, Minstrel IIIc, Minstrel V, Minstrel Plus, Minstrel S, Minstrel 540, Merlin, Sage, Lancer, Lancer 3W, Contact, Expedite, MissionONE, NWI Direct and Viking are trademarks of Novatel Wireless. Minstrel, Sage and NWI Direct are registered with the U.S. Patent and Trademark Office. All other brands, products and company names mentioned herein are trademarks of their respective holders.
1
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
NOVATEL WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | ||||||||||
| 2002 | 2001 | ||||||||||
| (unaudited) | |||||||||||
ASSETS |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 7,895,000 | $ | 29,229,000 | |||||||
Accounts receivable, net of allowance for doubtful accounts of $306,000
(2002) and $294,000 (2001) |
9,105,000 | 6,706,000 | |||||||||
Accounts receivable — related parties |
501,000 | 778,000 | |||||||||
Inventories |
5,922,000 | 6,470,000 | |||||||||
Prepaid expenses and other |
1,201,000 | 2,194,000 | |||||||||
Total current assets |
24,624,000 | 45,377,000 | |||||||||
Property and equipment, net |
5,511,000 | 7,744,000 | |||||||||
Intangible assets, net |
6,417,000 | 6,596,000 | |||||||||
Other assets |
192,000 | 192,000 | |||||||||
| $ | 36,744,000 | $ | 59,909,000 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 7,702,000 | $ | 12,321,000 | |||||||
Accrued expenses |
2,198,000 | 2,261,000 | |||||||||
Current portion of inventory purchase commitments |
5,977,000 | 11,749,000 | |||||||||
Line of credit |
3,294,000 | 1,560,000 | |||||||||
Restructuring accrual |
1,106,000 | 1,764,000 | |||||||||
Deferred revenues |
586,000 | 336,000 | |||||||||
Current portion of capital lease obligations |
162,000 | 159,000 | |||||||||
Total current liabilities |
21,025,000 | 30,150,000 | |||||||||
Long-term inventory purchase commitments |
4,000,000 | ||||||||||
Capital lease obligations, net of current portion |
89,000 | 171,000 | |||||||||
Series A Redeemable Convertible preferred stock, 13,470 and 27,172
shares issued and outstanding in 2002 and 2001 |
1,369,000 | 161,000 | |||||||||
Commitments and contingencies (Note 7) |
|||||||||||
Stockholders’ equity: |
|||||||||||
Preferred stock, par value $.001, 15,000,000 shares authorized |
|||||||||||
Common stock, par value $.001, 350,000,000 shares authorized,
76,208,017 and 54,643,762 shares issued and outstanding in 2002 and
2001 |
76,000 | 55,000 | |||||||||
Additional paid-in capital |
225,702,000 | 208,649,000 | |||||||||
Deferred stock compensation |
(2,839,000 | ) | (6,341,000 | ) | |||||||
Accumulated deficit |
(208,678,000 | ) | (176,936,000 | ) | |||||||
Total stockholders’ equity |
14,261,000 | 25,427,000 | |||||||||
| $ | 36,744,000 | $ | 59,909,000 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
2
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||||
Revenue |
$ | 7,731,000 | $ | 11,173,000 | $ | 15,004,000 | $ | 28,833,000 | ||||||||||||
Revenue — related parties |
1,335,000 | 3,411,000 | ||||||||||||||||||
Total revenue |
7,731,000 | 12,508,000 | 15,004,000 | 32,244,000 | ||||||||||||||||
Cost of revenue |
7,311,000 | 23,991,000 | 14,031,000 | 47,293,000 | ||||||||||||||||
Cost of revenue — related parties |
936,000 | 2,555,000 | ||||||||||||||||||
Total cost of revenue |
7,311,000 | 24,927,000 | 14,031,000 | 49,848,000 | ||||||||||||||||
Gross profit (loss) |
420,000 | (12,419,000 | ) | 973,000 | (17,604,000 | ) | ||||||||||||||
Operating costs and expenses: |
||||||||||||||||||||
Research and development |
3,860,000 | 5,054,000 | 8,008,000 | 11,676,000 | ||||||||||||||||
Sales and marketing |
1,277,000 | 3,453,000 | 2,696,000 | 8,088,000 | ||||||||||||||||
General and administrative |
2,106,000 | 1,884,000 | 3,416,000 | 4,271,000 | ||||||||||||||||
Restructuring charges |
360,000 | 609,000 | 3,900,000 | |||||||||||||||||
Amortization of deferred stock
compensation(*) |
1,102,000 | 3,319,000 | 2,445,000 | 6,638,000 | ||||||||||||||||
Total operating costs and expenses |
8,705,000 | 13,710,000 | 17,174,000 | 34,573,000 | ||||||||||||||||
Operating loss |
(8,285,000 | ) | (26,129,000 | ) | (16,201,000 | ) | (52,177,000 | ) | ||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
69,000 | 417,000 | 172,000 | 1,224,000 | ||||||||||||||||
Interest expense |
(146,000 | ) | (72,000 | ) | (287,000 | ) | (136,000 | ) | ||||||||||||
Other, net |
(2,000 | ) | (4,000 | ) | ||||||||||||||||
Net loss |
$ | (8,362,000 | ) | $ | (25,786,000 | ) | $ | (16,316,000 | ) | $ | (51,093,000 | ) | ||||||||
Net loss applicable to
common stockholders (Note 6) |
$ | (15,633,000 | ) | $ | (25,786,000 | ) | $ | (31,742,000 | ) | $ | (51,093,000 | ) | ||||||||
Weighted average shares
used in computation of
basic and diluted net
loss per common share |
74,102,506 | 54,290,863 | 66,752,896 | 52,995,366 | ||||||||||||||||
Basic and diluted net
loss per common share |
$ | (0.21 | ) | $ | (0.48 | ) | $ | (0.48 | ) | $ | (0.96 | ) | ||||||||
(*) Amortization of deferred
stock compensation: |
||||||||||||||||||||
Cost of revenue |
36,000 | 125,000 | 317,000 | 250,000 | ||||||||||||||||
Research and development |
97,000 | 331,000 | 194,000 | 662,000 | ||||||||||||||||
Sales and marketing |
94,000 | 322,000 | 188,000 | 644,000 | ||||||||||||||||
General and administrative |
875,000 | 2,541,000 | 1,746,000 | 5,082,000 | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
3
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2002 | 2001 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (16,316,000 | ) | $ | (51,093,000 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
2,589,000 | 2,258,000 | ||||||||||
Provision for bad debt |
12,000 | (31,000 | ) | |||||||||
Non-cash charge for excess and obsolete inventory |
19,000,000 | |||||||||||
Compensation for stock options issued below fair value |
2,446,000 | 6,638,000 | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
(2,411,000 | ) | 1,543,000 | |||||||||
Accounts receivable — related parties |
277,000 | 5,872,000 | ||||||||||
Inventories |
548,000 | (12,594,000 | ) | |||||||||
Prepaid expenses and other |
993,000 | 1,558,000 | ||||||||||
Other assets |
246,000 | |||||||||||
Accounts payable |
(4,619,000 | ) | (9,000,000 | ) | ||||||||
Accrued expenses |
(63,000 | ) | (2,001,000 | ) | ||||||||
Inventory purchase commitments |
(4,372,000 | ) | ||||||||||
Restructuring accrual |
(658,000 | ) | 3,035,000 | |||||||||
Deferred revenues |
250,000 | (1,491,000 | ) | |||||||||
Net cash used in operating activities |
(21,324,000 | ) | (36,060,000 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(76,000 | ) | (5,536,000 | ) | ||||||||
Purchase of intangible assets |
(848,000 | ) | ||||||||||
Capitalized software development costs |
(102,000 | ) | (649,000 | ) | ||||||||
Net cash used in investing activities |
(178,000 | ) | (7,033,000 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Repurchase of common stock |
(1,600,000 | ) | ||||||||||
Proceeds from exercise of stock options and warrants |
345,000 | 563,000 | ||||||||||
Offering costs for convertible and redeemable Series A preferred stock |
(232,000 | ) | ||||||||||
Proceeds from line of credit borrowings |
1,734,000 | 8,500,000 | ||||||||||
Payments under capital lease obligations |
(79,000 | ) | (124,000 | ) | ||||||||
Net cash provided by financing activities |
168,000 | 8,939,000 | ||||||||||
Net decrease in cash and cash equivalents |
(21,334,000 | ) | (34,154,000 | ) | ||||||||
Cash and cash equivalents, beginning of period |
29,229,000 | 66,826,000 | ||||||||||
Cash and cash equivalents, end of period |
$ | 7,895,000 | $ | 32,672,000 | ||||||||
Supplemental disclosures of non-cash investing and financing activities: |
||||||||||||
Conversion of Series A Redeemable Convertible preferred stock into shares
of common stock |
$ | 13,984,000 | ||||||||||
Accretion of dividends on Series A Redeemable Convertible preferred stock |
718,000 | |||||||||||
Amortization of offering costs for Series A Redeemable Convertible
preferred stock |
842,000 | |||||||||||
Deferred compensation adjustment for stock options cancelled |
1,056,000 | |||||||||||
Accretion of imputed value assigned to the beneficial conversion feature
on Series A Redeemable Convertible preferred stock and related common
stock warrants |
13,866,000 | |||||||||||
Common stock issued for settlement of inventory purchase commitments |
5,400,000 | |||||||||||
Fixed assets retired against restructuring accrual |
365,000 | $ | 516,000 | |||||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Interest |
$ | 27,000 | $ | 44,000 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
4
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The information contained herein has been prepared by Novatel Wireless, Inc. (the “Company”) in accordance with the rules of the Securities and Exchange Commission. The information at June 30, 2002 and for the six month periods ended June 30, 2002 and 2001 is unaudited. The consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented. These consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001. The results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year as a whole.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation. Certain reclassifications have been made to amounts included in the prior period’s financial statements to conform to the presentation for the quarter ended June 30, 2002.
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 amounts reported in the consolidated financial statements and related notes. Changes in those estimates may affect amounts reported in future periods.
2. Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002 (SFAS 145), which is effective for fiscal years beginning after May 15, 2002. SFAS 145 rescinds SFAS 4 and SFAS 64, which required that all gains and losses from extinguishment of debt be aggregated, and if material, classified as an extraordinary item. As a result, gains and losses from debt extinguishment are to be classified as extraordinary only if they meet the criteria set forth in Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 145 also requires that sale-leaseback accounting be used for capital lease modifications with economic effects similar to sale-leaseback transactions. The Company does not expect implementation to have a significant effect on its results of operation or consolidated financial condition.
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Restructuring Costs (SFAS 146). SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under SFAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company may not restate its previously issued financial statements and the new Statement grandfathers the accounting for liabilities that a company had previously recorded under EITF Issue 94-3.
5
3. Recent Operational Developments
Operational Overview
The Company is subject to a number of risks and uncertainties associated with companies at a similar stage of maturity, has only a limited operating history and the revenue and income potential of our business and markets are unproven. Further, the markets for wireless Internet products and services are relatively new and rapidly evolving both technologically and competitively. Market demand for our products has not yet generated sufficient revenues to cover our operating costs. Consequently, the Company has recorded net losses in each period since its inception and had an accumulated deficit of $176.9 million at December 31, 2001 and $208.7 million at June 30, 2002. The Company incurred net losses of $18.5 million, $46.9 million, $90.9 million and $16.3 million and negative cash flows from operations of $5.2 million, $41.0 million, $55.3 million and $21.3 million for the years ended December 31, 1999, 2000 and 2001 and the six months ending June 30, 2002, respectively. The negative cash flows from operations in 2001 were funded primarily using the proceeds received from the Company’s initial public offering, which was completed in November 2000. The negative cash flows from operations in the six months ending June 30, 2002 were funded primarily using the proceeds received from the December 2001 equity issuance discussed below.
In December 2001, the Company successfully raised aggregate net proceeds of approximately $25.9 million, net of fees to the placement agent and offering costs, from the issuance of 27,172 shares of Series A Redeemable Convertible Preferred Stock (“Series A Preferred Stock”), which were initially convertible into 35,288,311 Common Shares (net of accumulated dividends thereon). Warrants to acquire 10,586,484 Common Shares (the “Investor Warrants”) were issued in conjunction with the Series A Preferred Stock shares. The Company’s cash balance at June 30, 2002 was $7.9 million.
The Company’s plans to reduce cash expenditures and costs consist of reductions in costs of revenue as well as reducing other operating expenses. The Company also plans to increase revenues with the recent introduction of GRPS and CDMA product lines. Management believes that the Company’s plans to increase revenues, aggressively collect our accounts receivable balances, decrease costs and carefully manage cash and the use of the Company’s line of credit, should result in sufficient cash to fund operations and satisfy the Company’s working capital requirements and anticipated capital expenditures through the end of 2002. The Company’s failure to generate significant revenue from new or existing products, whether due to lack of market acceptance, competition, technological change or otherwise, successfully collecting accounts receivable balances, or the inability to reduce manufacturing and/or operating costs, will further adversely impact the Company’s business, financial condition and results of operations.
The accompanying financial statements contemplate the realization of assets and satisfaction of liabilities in the normal course of business. There can be no assurance that the plans discussed above will be successful or that the Company will become profitable or generate positive cash flows. If the Company fails to significantly increase revenues, collect accounts receivable balances and reduce costs, it will continue to experience losses and negative cash flows from operations. Consequently, assets and liabilities might not be realized and settled in the normal course of business. The Company is currently evaluating additional financing alternatives. The Company cannot predict with any certainty as to if or when we obtain such additional financing, however, management currently believes such financing will occur in the 3rd or 4th Quarter of 2002. There can be no assurance that such financing will be available on acceptable terms or, at all.
Sanmina Settlement
In October 2001, Sanmina Corporation (now known as Sanmina-SCI Corporation) (“Sanmina”) filed suit against the Company in Santa Clara County Superior Court seeking approximately $27 million of claims for breach of contract under a contract manufacturing arrangement. The Company reached a settlement with Sanmina to end any and all disputes and litigation arising from the claims and signed a settlement agreement and mutual general release (the “Settlement”). Under the Settlement, which became effective on January 28, 2002, the Company made a cash payment to Sanmina of $1.3 million and issued to Sanmina 5,000,000 shares of common stock. As part of this issuance, the Company also granted to Sanmina the right to obligate the Company to repurchase up to 2,000,000 of the shares of common stock at a price of $0.80 per share. In addition, the Company agreed to take delivery of inventory held by Sanmina and make payments totaling $5 million throughout 2002 ($3 million of which was paid during the first two quarters of 2002) and $4 million throughout 2003 and up to an additional $2 million in the event the Company fails to make any of the agreed upon payments. Additionally, if the Company fails to make payments when due to Sanmina, the entire remaining balance owed will become due and payable, which would adversely
6
impact the Company’s financial position. Sanmina holds a second priority security interest in the Company’s assets in the amount