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 September 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 (State or other jurisdiction or incorporation or organization) |
86-0824673 (I.R.S. Employer Identification No.) |
|
| 9360 Towne Centre Drive, San Diego, California (Address of principal executive offices) |
92121 (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 November 12, 2002 was 6,103,361.
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 in this quarterly report 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, except as otherwise required pursuant to the Company’s on-going reporting obligations under the Securities Exchange Act of 1934, as amended.
Trademarks
The Novatel Wireless logo, “Minstrel”, “Merlin”, “Sage”, “Lancer 3W” and “Expedite” are trademarks of Novatel Wireless, Inc. “Minstrel” and “Sage” 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
| September 30, | December 31, | |||||||||||
| 2002 | 2001 | |||||||||||
ASSETS |
(unaudited) | |||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 6,633,000 | $ | 29,229,000 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $305,000
(2002) and $294,000 (2001) |
3,463,000 | 6,706,000 | ||||||||||
Accounts receivable — related parties |
291,000 | 778,000 | ||||||||||
Inventories |
5,380,000 | 6,470,000 | ||||||||||
Prepaid expenses and other |
806,000 | 2,194,000 | ||||||||||
Total current assets |
16,573,000 | 45,377,000 | ||||||||||
Property and equipment, net |
4,731,000 | 7,744,000 | ||||||||||
Intangible assets, net |
6,174,000 | 6,596,000 | ||||||||||
Other assets |
192,000 | 192,000 | ||||||||||
| $ | 27,670,000 | $ | 59,909,000 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 4,281,000 | $ | 12,321,000 | ||||||||
Accrued expenses |
1,513,000 | 2,261,000 | ||||||||||
Current portion of inventory purchase commitments |
4,983,000 | 11,749,000 | ||||||||||
Line of credit |
740,000 | 1,560,000 | ||||||||||
Restructuring accrual |
1,167,000 | 1,764,000 | ||||||||||
Deferred revenues |
982,000 | 336,000 | ||||||||||
Current portion of capital lease obligations |
154,000 | 159,000 | ||||||||||
Total current liabilities |
13,820,000 | 30,150,000 | ||||||||||
Long-term inventory purchase commitments |
4,000,000 | |||||||||||
Capital lease obligations, net of current portion |
57,000 | 171,000 | ||||||||||
Series A Redeemable Convertible preferred stock, 13,220 and 27,172
shares issued and outstanding in 2002 and 2001, respectively (Note 3) |
2,039,000 | 161,000 | ||||||||||
Commitments and contingencies (Note 8) |
||||||||||||
Stockholders’ equity: |
||||||||||||
Preferred stock, par value $.001, 15,000,000 shares authorized |
||||||||||||
Common stock, par value $.001, 350,000,000 shares authorized,
6,103,361 and 3,642,917 shares issued and outstanding in 2002 and
2001, respectively |
92,000 | 55,000 | ||||||||||
Additional paid-in capital |
228,374,000 | 208,649,000 | ||||||||||
Deferred stock compensation |
(2,203,000 | ) | (6,341,000 | ) | ||||||||
Accumulated deficit |
(214,509,000 | ) | (176,936,000 | ) | ||||||||
Total stockholders’ equity |
11,754,000 | 25,427,000 | ||||||||||
| $ | 27,670,000 | $ | 59,909,000 | |||||||||
See accompanying notes to unaudited consolidated financial statements.
2
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||||
Revenue |
$ | 5,905,000 | $ | 3,904,000 | $ | 20,909,000 | $ | 32,738,000 | ||||||||||||
Revenue — related parties |
236,000 | 3,647,000 | ||||||||||||||||||
Total revenue |
5,905,000 | 4,140,000 | 20,909,000 | 36,385,000 | ||||||||||||||||
Cost of revenue |
4,504,000 | 9,195,000 | 18,535,000 | 56,488,000 | ||||||||||||||||
Cost of revenue — related parties |
213,000 | 2,768,000 | ||||||||||||||||||
Total cost of revenue |
4,504,000 | 9,408,000 | 18,535,000 | 59,256,000 | ||||||||||||||||
Gross profit (loss) |
1,401,000 | (5,268,000 | ) | 2,374,000 | (22,871,000 | ) | ||||||||||||||
Operating costs and expenses: |
||||||||||||||||||||
Research and development |
2,718,000 | 4,537,000 | 10,726,000 | 16,212,000 | ||||||||||||||||
Sales and marketing |
989,000 | 2,281,000 | 3,684,000 | 10,369,000 | ||||||||||||||||
General and administrative |
1,141,000 | 2,186,000 | 4,558,000 | 6,457,000 | ||||||||||||||||
Restructuring charges |
694,000 | 919,000 | 1,303,000 | 4,819,000 | ||||||||||||||||
Amortization of deferred stock
compensation(*) |
637,000 | 2,401,000 | 3,082,000 | 9,039,000 | ||||||||||||||||
Total operating costs and expenses |
6,179,000 | 12,324,000 | 23,353,000 | 46,896,000 | ||||||||||||||||
Operating loss |
(4,778,000 | ) | (17,592,000 | ) | (20,979,000 | ) | (69,767,000 | ) | ||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
25,000 | 286,000 | 198,000 | 1,511,000 | ||||||||||||||||
Interest expense |
(149,000 | ) | (133,000 | ) | (436,000 | ) | (269,000 | ) | ||||||||||||
Other, net |
(2,000 | ) | ||||||||||||||||||
Net loss |
$ | (4,902,000 | ) | $ | (17,439,000 | ) | $ | (21,217,000 | ) | $ | (68,527,000 | ) | ||||||||
Net loss applicable to
common stockholders (Note 6) |
$ | (5,833,000 | ) | $ | (17,439,000 | ) | $ | (37,573,000 | ) | $ | (68,527,000 | ) | ||||||||
Weighted average shares
used in computation of
basic and diluted net
loss per common share |
5,238,794 | 3,636,745 | 4,715,948 | 3,621,117 | ||||||||||||||||
Basic and diluted net
loss per common share |
$ | (1.11 | ) | $ | (4.80 | ) | $ | (7.97 | ) | $ | (18.92 | ) | ||||||||
(*) Amortization of deferred stock compensation: |
||||||||||||||||||||
Cost of revenue |
25,000 | 425,000 | 342,000 | 675,000 | ||||||||||||||||
Research and development |
66,000 | 329,000 | 260,000 | 991,000 | ||||||||||||||||
Sales and marketing |
64,000 | 320,000 | 252,000 | 964,000 | ||||||||||||||||
General and administrative |
482,000 | 1,327,000 | 2,228,000 | 6,409,000 | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
3
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2002 | 2001 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (21,217,000 | ) | $ | (68,527,000 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
3,644,000 | 3,438,000 | ||||||||||
Provision for bad debt |
11,000 | 46,000 | ||||||||||
Non-cash charge for excess and obsolete inventory |
23,006,000 | |||||||||||
Compensation for stock options issued below fair value |
3,082,000 | 9,039,000 | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
3,232,000 | 4,877,000 | ||||||||||
Accounts receivable — related parties |
487,000 | 6,063,000 | ||||||||||
Inventories |
1,090,000 | (10,469,000 | ) | |||||||||
Prepaid expenses and other |
1,388,000 | 1,481,000 | ||||||||||
Other assets |
434,000 | |||||||||||
Accounts payable |
(8,040,000 | ) | (12,276,000 | ) | ||||||||
Accrued expenses |
(748,000 | ) | (5,206,000 | ) | ||||||||
Inventory purchase commitments |
(5,366,000 | ) | ||||||||||
Restructuring accrual |
(597,000 | ) | 2,990,000 | |||||||||
Deferred revenues |
646,000 | (1,466,000 | ) | |||||||||
Net cash used in operating activities |
(22,388,000 | ) | (46,570,000 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(106,000 | ) | (6,037,000 | ) | ||||||||
Purchase of intangible assets |
(868,000 | ) | ||||||||||
Capitalized software development costs |
(102,000 | ) | (1,698,000 | ) | ||||||||
Net cash used in investing activities |
(208,000 | ) | (8,603,000 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Repurchase of common stock |
(1,600,000 | ) | ||||||||||
Proceeds from exercise of stock options and warrants |
373,000 | 747,000 | ||||||||||
Offering costs for convertible and redeemable Series A preferred stock |
(232,000 | ) | ||||||||||
Net proceeds from issuance of common stock |
2,398,000 | |||||||||||
Proceeds from/(payments of) line of credit borrowings |
(820,000 | ) | 8,500,000 | |||||||||
Payments under capital lease obligations, net |
(119,000 | ) | (15,000 | ) | ||||||||
Net cash provided by financing activities |
0 | 9,232,000 | ||||||||||
Net decrease in cash and cash equivalents |
(22,596,000 | ) | (45,941,000 | ) | ||||||||
Cash and cash equivalents, beginning of period |
29,229,000 | 66,826,000 | ||||||||||
Cash and cash equivalents, end of period |
$ | 6,633,000 | $ | 20,885,000 | ||||||||
Supplemental disclosures of non-cash investing and financing activities: |
||||||||||||
Conversion of Series A Redeemable Convertible preferred stock into shares
of common stock |
$ | 14,246,000 | ||||||||||
Accretion of dividends on Series A Redeemable Convertible preferred stock |
941,000 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
| Nine Months Ended | ||||||||||
| September 30, | ||||||||||
| 2002 | 2001 | |||||||||
Amortization of offering costs for Series A Redeemable Convertible
preferred stock |
883,000 | |||||||||
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 |
14,532,000 | |||||||||
Common stock issued for settlement of inventory purchase commitments |
5,400,000 | |||||||||
Fixed assets retired against restructuring accrual |
365,000 | $ | 552,000 | |||||||
Supplemental disclosures of cash flow information: |
||||||||||
Cash paid during the period for: |
||||||||||
Interest |
$ | 84,000 | $ | 179,000 | ||||||
See accompanying notes to unaudited consolidated financial statements.
5
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 September 30, 2002 and for the nine month periods ended September 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 and Form 10-K/A 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 September 30, 2002.
On October 29, 2002, a 1:15 reverse stock split of the Company’s common stock (“common stock”) that had been approved by the Company’s stockholders became effective. All references in the consolidated financial statements to number of shares of common stock outstanding, price per share, and per share amounts have been retroactively restated to reflect the reverse stock split for all periods presented.
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
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, a company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company has not yet determined the impact, if any, of the adoption of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This new standard supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of this statement were to develop one accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale and to address significant implementation issues related to SFAS No. 121. SFAS No. 144 requires that all long-lived assets, including discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
In April 2002, the FASB issued SFAS 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 extingu